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EXCEL - IDEA: XBRL DOCUMENT - C&J Energy Services, Inc. | Financial_Report.xls |
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EX-31.2 - EX-31.2 - C&J Energy Services, Inc. | h84150exv31w2.htm |
EX-31.1 - EX-31.1 - C&J Energy Services, Inc. | h84150exv31w1.htm |
EX-32.2 - EX-32.2 - C&J Energy Services, Inc. | h84150exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
or
o | 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: 001-35255
C&J Energy Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-5673219 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
10375 Richmond Avenue, Suite 2000 Houston, Texas |
77042 | |
(Address of principal executive offices) | (Zip Code) |
Registrants
telephone number, including area code: (713) 260-9900
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 o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
The number of shares of the registrants common stock, par value $0.01 per share, outstanding
at August 26, 2011, was 51,886,574.
C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
TABLE OF CONTENTS
-i-
Table of Contents
C&J
ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands,
except share data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 7,634 | $ | 2,817 | ||||
Accounts receivable, net of allowance of $673
at June 30, 2011 and $509 at December 31, 2010 |
92,569 | 44,354 | ||||||
Inventories, net |
18,082 | 8,182 | ||||||
Prepaid and other current assets |
8,904 | 3,768 | ||||||
Deferred tax assets |
755 | 265 | ||||||
Total current assets |
127,944 | 59,386 | ||||||
Property, plant and equipment, net of accumulated depreciation of
$35,217 at June 30, 2011 and $27,712 as of December 31, 2010 |
152,354 | 88,395 | ||||||
Other assets: |
||||||||
Goodwill |
65,057 | 60,339 | ||||||
Intangible assets, net of accumulated amortization of $5,679 at
June 30, 2011 and $4,498 at December 31, 2010 |
27,891 | 5,768 | ||||||
Deposits on equipment under construction |
3,535 | 8,413 | ||||||
Deferred financing costs, net of accumulated amortization of
$117 at June 30, 2011 and $506 at December 31, 2010 |
2,801 | 3,190 | ||||||
Other noncurrent assets, net |
600 | 597 | ||||||
Total assets |
$ | 380,182 | $ | 226,088 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 40,563 | $ | 13,085 | ||||
Current portion of long-term debt |
| 27,222 | ||||||
Accrued expenses |
11,325 | 8,179 | ||||||
Accrued taxes |
649 | 6,525 | ||||||
Customer advances and deposits |
6,469 | 4,000 | ||||||
Other current liabilities |
33 | 33 | ||||||
Total current liabilities |
59,039 | 59,044 | ||||||
Long-term debt |
105,000 | 44,817 | ||||||
Deferred tax liabilities |
39,169 | 12,058 | ||||||
Deferred income |
707 | 723 | ||||||
Other long-term liabilities |
228 | | ||||||
Total liabilities |
204,143 | 116,642 | ||||||
Stockholders equity |
||||||||
Common stock, par value of $.01, 100,000,000 shares authorized,
47,499,074 issued and outstanding |
475 | 475 | ||||||
Additional paid-in capital |
82,558 | 78,288 | ||||||
Retained earnings |
93,006 | 30,683 | ||||||
Total stockholders equity |
176,039 | 109,446 | ||||||
Total liabilities and stockholders equity |
$ | 380,182 | $ | 226,088 | ||||
See accompanying notes to consolidated financial statements
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Table of Contents
C&J
ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands,
except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 182,171 | $ | 41,803 | $ | 309,375 | $ | 74,440 | ||||||||
Cost of sales |
110,068 | 27,118 | 180,116 | 50,294 | ||||||||||||
Gross profit |
72,103 | 14,685 | 129,259 | 24,146 | ||||||||||||
Selling, general and administrative expenses |
11,703 | 3,847 | 20,528 | 6,715 | ||||||||||||
(Gain)/loss on sale/disposal of assets |
17 | 1,599 | (73 | ) | 1,582 | |||||||||||
Operating income |
60,383 | 9,239 | 108,804 | 15,849 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(1,200 | ) | (6,580 | ) | (3,158 | ) | (9,578 | ) | ||||||||
Loss on early extinguishment of debt |
(7,605 | ) | | (7,605 | ) | | ||||||||||
Other income (expense), net |
(27 | ) | (4 | ) | (39 | ) | 43 | |||||||||
Total other expense, net |
(8,832 | ) | (6,584 | ) | (10,802 | ) | (9,535 | ) | ||||||||
Income before income taxes |
51,551 | 2,655 | 98,002 | 6,314 | ||||||||||||
Income tax expense |
18,313 | 938 | 35,679 | 2,354 | ||||||||||||
Net income |
$ | 33,238 | $ | 1,717 | $ | 62,323 | $ | 3,960 | ||||||||
Net income per common share (see Note 1): |
||||||||||||||||
Basic |
$ | 0.70 | $ | 0.04 | $ | 1.31 | $ | 0.09 | ||||||||
Diluted |
$ | 0.68 | $ | 0.04 | $ | 1.28 | $ | 0.08 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
47,499 | 46,323 | 47,499 | 46,323 | ||||||||||||
Diluted |
48,656 | 47,972 | 48,677 | 47,404 | ||||||||||||
See accompanying notes to consolidated financial statements
-2-
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C&J
ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders Equity
(Amounts in
thousands)
Retained | ||||||||||||||||||||
Common Stock | Additional | Earnings | ||||||||||||||||||
Number of | Amount, at | Paid-in | (Accumulated | |||||||||||||||||
Shares | $0.01 par value | Capital | Deficit) | Total | ||||||||||||||||
Balance, December 31, 2009 |
46,323 | $ | 463 | $ | 66,925 | $ | (1,589 | ) | $ | 65,799 | ||||||||||
Exercise of warrants |
1,176 | 12 | 10,729 | | 10,741 | |||||||||||||||
Stock-based compensation |
| | 634 | | 634 | |||||||||||||||
Net income |
| | | 32,272 | 32,272 | |||||||||||||||
Balance, December 31, 2010 |
47,499 | 475 | 78,288 | 30,683 | 109,446 | |||||||||||||||
Stock-based compensation
expense* |
| | 4,270 | | 4,270 | |||||||||||||||
Net income* |
| | | 62,323 | 62,323 | |||||||||||||||
Balance, June 30, 2011* |
47,499 | $ | 475 | $ | 82,558 | $ | 93,006 | $ | 176,039 | |||||||||||
* Unaudited
See accompanying notes to consolidated financial statements
-3-
Table of Contents
C&J
ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in
thousands)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash
flows from operating activities: |
||||||||
Net income |
$ | 62,323 | $ | 3,960 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
8,987 | 5,121 | ||||||
Deferred income taxes |
22,734 | 2,022 | ||||||
Provision for doubtful accounts, net of write-offs |
135 | 70 | ||||||
(Gain) loss on sale of assets |
(73 | ) | 1,582 | |||||
Loss on change in fair value of warrant liability |
| 6,250 | ||||||
Stock-based compensation expense |
4,270 | 65 | ||||||
Non cash paid in kind interest expense |
| 278 | ||||||
Amortization of deferred financing costs |
408 | 303 | ||||||
Write-off of deferred financing costs related to early
extinguishment of debt |
2,899 | | ||||||
Net effect of changes in assets and liabilities
related to operating accounts |
(36,926 | ) | (2,819 | ) | ||||
Cash provided by operating activities |
64,757 | 16,832 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of and deposits on property and equipment |
(65,130 | ) | (7,071 | ) | ||||
Payments
made to acquire Total E&S, Inc., net of cash acquired |
(27,225 | ) | | |||||
Proceeds from sale of property and equipment |
2,372 | 25 | ||||||
Cash used in investing activities |
(89,983 | ) | (7,046 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on revolving debt, net |
(3,100 | ) | (34,964 | ) | ||||
Proceeds from long-term debt |
119,850 | 65,000 | ||||||
Repayments of long-term debt |
(83,789 | ) | (28,059 | ) | ||||
Repayments of capital lease obligations |
| (27 | ) | |||||
Financing costs |
(2,918 | ) | (2,565 | ) | ||||
Cash provided by (used in) financing activities |
30,043 | (615 | ) | |||||
Net increase in cash and cash equivalents |
4,817 | 9,171 | ||||||
Cash and cash equivalents, beginning of period |
2,817 | 1,178 | ||||||
Cash and cash equivalents, end of period |
$ | 7,634 | $ | 10,349 | ||||
Supplemental cash flow disclosure: |
||||||||
Cash paid for interest |
$ | 2,609 | $ | 1,044 | ||||
Cash paid for taxes |
$ | 18,810 | $ | 238 | ||||
See accompanying notes to consolidated financial statements
-4-
Table of Contents
C&J
ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(Unaudited)
Note 1 Organization, Nature of Business and Summary of Significant Accounting Policies
C&J Energy Services, Inc. (C&J) was incorporated in Texas in 2006 and re-incorporated in
Delaware in 2010. C&J is a holding company and substantially all of its operations are conducted
through, and substantially all of its assets are held by, C&J Spec-Rent Services, Inc.
(Spec-Rent) and Total E&S, Inc. (Total). C&J owns 100% of the outstanding capital stock of
Spec-Rent, an Indiana corporation and, in April 2011, Spec-Rent acquired 100% of the outstanding
capital stock of Total, an Indiana corporation. C&J, Spec-Rent and Total are herein collectively
referred to as the Company and Spec-Rent and Total are herein collectively referred to as the
Subsidiaries.
The Company provides hydraulic fracturing, coiled tubing and pressure pumping services to oil
and natural gas exploration and production companies operating in basins in South Texas, East
Texas/North Louisiana and Western Oklahoma. The Company also manufactures equipment for companies
in the energy services industry as well as equipment to fulfill the Companys internal equipment
demands.
The nature of operations and the regions in which the Company operates are subject to changing
economic, regulatory and political conditions. The Company is vulnerable to near-term and long-term
changes in the demand for and prices of oil and natural gas and the related demand for oilfield
service operations.
Basis
of Presentation
The accompanying consolidated financial statements of the Company have not been audited by the
Companys independent registered public accounting firm, except that the consolidated balance sheet
at December 31, 2010 is derived from audited financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation
have been included. In preparing the accompanying consolidated financial statements, management has
made certain estimates and assumptions that affect reported amounts in the consolidated financial
statements and disclosures of contingencies.
These consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for interim financial information.
Accordingly, they do not include all of the information and notes required by accounting principles
generally accepted in the United States of America (U.S. GAAP) for complete financial statements.
Therefore, these consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto for the year ended December
31, 2010, which are included in the Companys final prospectus (Registration Statement No.
333-173177) dated July 28, 2011 and filed with the SEC pursuant to Rule 424(b)(4) under the
Securities Act (the Final Prospectus). The operating results for interim periods are not
necessarily indicative of results that may be expected for any other interim period or for the full
year.
Principles
of Consolidation
These consolidated financial statements include the accounts of C&J and the Subsidiaries. All
significant inter-company transactions and accounts have been eliminated upon consolidation.
Use of
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Estimates are used for, but
are not limited to, determining the following: allowance for doubtful accounts, recoverability of
long-lived assets and intangibles, useful lives used in depreciation and amortization, income taxes
and valuation allowances. The accounting estimates used in the preparation of the consolidated
financial statements may change as new events occur, as more experience is acquired, as additional
information is obtained and as the Companys operating environment changes.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the amount billed to customers and are ordinarily due upon
receipt. The Company provides an allowance for doubtful accounts, which is based upon a review of
outstanding receivables, historical collection information and existing economic conditions.
Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not
make the required payments at either the contractual due dates or in the future.
Inventories
Inventories for the Stimulation and Well Intervention Services segment consist of finished
goods, including spare parts to be used in maintaining equipment and general supplies and materials
for the segments operations. Inventories for the Equipment Manufacturing segment consist of
manufacturing parts and work-in-process. See Note 8 Segment Information for further discussion
regarding the Companys reportable segments.
Inventories are stated at the lower of cost (first-in, first-out basis) or market (net
realizable value) and appropriate consideration is given to deterioration, obsolescence and other
factors in evaluating net realizable value. Inventory consisted of the following (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Manufacturing parts |
$ | 3,257 | $ | | ||||
Work-in-process |
2,459 | | ||||||
Finished goods |
12,712 | 8,219 | ||||||
18,428 | 8,219 | |||||||
Inventory reserve |
(346 | ) | (37 | ) | ||||
$ | 18,082 | $ | 8,182 | |||||
Property,
Plant and Equipment
Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance
and repairs, which do not improve or extend the life of the related assets, are charged to
operations when incurred. Refurbishments and renewals are capitalized when the value of the
equipment is enhanced for an extended period. When property and equipment are sold or otherwise
disposed of, the asset account and related accumulated depreciation account are relieved, and any
gain or loss is included in operating income.
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
The cost of property and equipment currently in service is depreciated over the estimated
useful lives of the related assets, which range from three to 25 years. Depreciation is computed
on a straight-line basis for financial reporting purposes.
Goodwill,
Intangible Assets and Amortization
Goodwill and other intangible assets with infinite lives are not amortized, but tested for
impairment annually or more frequently if circumstances indicate that impairment may exist.
Intangible assets with finite useful lives are amortized either on a straight-line basis over the
assets estimated useful life or on a basis that reflects the pattern in which the economic
benefits of the intangible assets are realized. No impairment was recorded in the periods
presented herein.
Revenue
Recognition
All revenue is recognized when persuasive evidence of an arrangement exists, the service is
complete or the equipment has been delivered to the customer, the amount is fixed or determinable
and collectability is reasonably assured, as follows:
Hydraulic Fracturing Revenue. The Company enters into arrangements with its customers
to provide hydraulic fracturing services, which can be either on a spot market basis or under term
contracts. The Company only enters into arrangements with customers for which it believes that
collectability is reasonably assured. Revenue is recognized and customers are invoiced upon the
completion of each job, which can consist of one or numerous fracturing stages. Once a job has been
completed to the customers satisfaction, a field ticket is written that includes charges for the
service performed and the chemicals and proppants consumed during the course of the service. The
field ticket also includes charges for the mobilization of the equipment to the location,
additional equipment used on the job, if any, and other miscellaneous consumables. Rates for
services performed on a spot market basis are based on an agreed-upon hourly spot market rate. With
respect to services performed under term contracts, customers are invoiced a monthly mandatory
payment based on a specified minimum number of hours of service per month as defined in the
contract, whether or not those services are actually utilized, upon the earlier of the passage of
time or completion of the job. To the extent customers utilize more than the contracted minimum
number of hours of service per month, they are invoiced for such excess at rates defined in the
contract upon the completion of each job.
Coiled Tubing and Pressure Pumping Revenue. The Company enters into arrangements to
provide coiled tubing and pressure pumping services to only those customers for which it believes
that collectability is reasonably assured. These arrangements are typically short-term in nature
and each job can last anywhere from a few hours to multiple days. Coiled tubing and pressure
pumping revenue is recognized upon completion of each days work based upon a completed field
ticket. The field ticket includes charges for the mobilization of the equipment to the location,
the service performed, the personnel on the job, additional equipment used on the job, if any, and
miscellaneous consumables used throughout the course of the service. The Company typically charges
the customer on an hourly basis for these services at agreed upon spot market rates.
Materials Consumed While Performing Services. The Company generates revenue from
chemicals and proppants that are consumed while performing hydraulic fracturing services. The
Company charges fees to its customers based on the amount of chemicals and proppants used in
providing these services. In addition, ancillary to coiled tubing and pressure pumping revenue, the
Company generates revenue from various fluids and supplies that are necessarily consumed during
those processes. The Company does not sell or otherwise charge a fee separate and apart from the
services it provides for any
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
of the materials consumed while performing hydraulic fracturing, coiled tubing or
pressure pumping services.
Equipment Manufacturing Revenue. The Company enters into arrangements to construct
equipment for only those customers for which the Company believes that collectability is reasonably
assured. Revenue is recognized and the customer is invoiced upon the completion and delivery of
each order to the customer.
Stock-Based
Compensation
The Company accounts for stock-based compensation cost based on grant date fair value by using
the Black-Scholes option-pricing model. The Company recognizes stock-based compensation cost on a
straight-line basis over the requisite service period. Further information regarding stock-based
compensation can be found in Note 5 Stock-Based Compensation.
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable, accrued warrants, notes payable and long-term debt. The recorded values of cash
and cash equivalents, accounts receivable, and accounts payable approximate their fair values based
on their short-term nature. The carrying values of notes payable and long-term debt approximate
their fair values, as interest approximates market rates. See Note 4 Fair Value of Financial
Instruments for further information regarding fair value of warrants.
Income
Taxes
Income taxes are provided for the tax effects of transactions reported in financial statements
and consist of taxes currently due plus deferred taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred income tax expense represents
the change during the period in the deferred tax assets and deferred tax liabilities.
The components of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Earnings
per Share
Basic earnings per share is based on the weighted average number of ordinary shares
outstanding during the applicable period. Diluted earnings per share is computed based on the
weighted average number of ordinary shares and ordinary share equivalents outstanding in the
applicable period, as if all potentially dilutive securities were converted into ordinary shares
(using the treasury stock method).
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
The following is a reconciliation of the components of the basic and diluted earnings per
share calculations for the applicable periods:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net income attributed to common
shareholders |
$ | 33,238 | $ | 1,717 | $ | 62,323 | $ | 3,960 | ||||||||
Denominator: |
||||||||||||||||
Weighted average common shares
outstanding |
47,499 | 46,323 | 47,499 | 46,323 | ||||||||||||
Effect of potentially dilutive common shares: |
||||||||||||||||
Warrants and stock options |
1,157 | 1,649 | 1,178 | 1,081 | ||||||||||||
Weighted average common shares
outstanding and assumed conversions |
48,656 | 47,972 | 48,677 | 47,404 | ||||||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.70 | $ | 0.04 | $ | 1.31 | $ | 0.09 | ||||||||
Diluted |
$ | 0.68 | $ | 0.04 | $ | 1.28 | $ | 0.08 | ||||||||
Potentially dilutive securities excluded as anti-
dilutive |
3,803 | | 3,726 | 324 | ||||||||||||
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010-09, Business Combinations: Disclosure of Supplementary Pro Forma
Information for Business Combinations (ASU 2010-29). ASU 2010-29 addresses diversity in the
interpretation of the pro forma revenue and earnings disclosure requirements for business
combinations. If a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The Company adopted ASU 2010-29 on January 1, 2011. This update had no
impact on the Companys financial position, results of operations or cash flows.
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Table of Contents
C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Note 2 Long-Term Debt
Debt consisted of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Senior Secured Revolving Credit Facility
maturing on April 19, 2016 |
$ | 105,000 | $ | | ||||
Senior Secured Credit Facility maturing on
June 1, 2013 |
| 47,039 | ||||||
Subordinated Term Loan maturing on June
30, 2014 |
| 25,000 | ||||||
105,000 | 72,039 | |||||||
Less: amount maturing within one year |
| 27,222 | ||||||
Long-term debt |
$ | 105,000 | $ | 44,817 | ||||
Senior Secured Credit Facility
On May 28, 2010, the Company entered into a senior credit facility with a financial
institution maturing on June 1, 2013 with maximum allowable indebtedness of $126.7 million and
principal installments of $2.5 million to be paid monthly, with any remaining balance due at
maturity. Under the terms of this facility, interest was payable monthly at a variable interest
rate determined from a pricing scale based on debt/EBITDA ratio, with a LIBOR floor of 1.5%. This
facility was retired on April 19, 2011 with funds received from the new Credit Facility (as defined
below) to pay down remaining principal and accrued interest. The Company wrote off approximately
$2.4 million in remaining deferred financing costs associated with the early extinguishment of this
facility.
Senior Secured Revolving Credit Facility
On April 19, 2011, the Company entered into a new five-year $200.0 million senior secured
revolving credit agreement (the Credit Facility) with Bank of America, N.A., as administrative
agent, swing line lender and L/C issuer, Comerica Bank, as L/C issuer and syndication agent, Wells
Fargo Bank, National Association, as documentation agent, and various lenders. Obligations under
the Credit Facility are guaranteed by the Companys Subsidiaries. The Credit Facility provides the
ability to borrow funds on a revolving basis for working capital needs and also provides for the
issuance of letters of credit. In addition, the Company may request additional commitments up to
$75.0 million through an incremental facility upon the satisfaction of certain conditions. Up to
the entire Credit Facility amount may be drawn as letters of credit, and the Credit Facility has a
sublimit of $15.0 million for swing line loans. As of June 30, 2011, $105.0 million was outstanding
under the Credit Facility. Subsequently, the Company repaid the entire outstanding balance under
the Credit Facility in connection with the IPO and, as such, as of the date of this Form 10-Q, no
amounts are outstanding under the Credit Facility leaving the entire $200.0 million available for
borrowing.
Outstanding loans bear interest at either LIBOR or a base rate, at the Companys election,
plus an applicable margin which, prior to the Companys delivery of a compliance certificate for
the three months ended June 30, 2011, was equal to 1.50% for base rate loans and 2.50% for LIBOR
loans, and thereafter,
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
the applicable base rate ranges from 1.25% to 2.00% and the applicable LIBOR
rate ranges from 2.25% to 3.00% based upon our Leverage Ratio. The Leverage Ratio is the ratio of
funded indebtedness to EBITDA for the Company and its Subsidiaries on a consolidated basis. As of
June 30, 2011, the weighted average interest rate was 2.8%.
All obligations under the credit facility are secured, subject to agreed upon exceptions, by a
first priority perfected security position on all real and personal property of the Company and its
Subsidiaries, as guarantors.
Voluntary prepayments are permitted under the terms of the Credit Facility at any time without
penalty or premium.
The Credit Facility provides for payment of certain fees and expenses, including (1) a fee on
the revolving loan commitments which varies depending on the Companys Leverage Ratio, (2) a letter
of credit fee on the stated amount of issued and undrawn letters of credit and a fronting fee to
the issuing lender, and (3) other customary fees, including an agency fee.
The Credit Facility contains, among other things, restrictions on the Companys ability to
consolidate or merge with other companies, conduct asset sales, incur additional indebtedness,
grant liens, issue guarantees, make investments, loans or advances, pay dividends, enter into
certain transactions with affiliates and to make capital expenditures in excess of $100.0 million
in any fiscal year, provided that up to $50.0 million of such amount in any fiscal year may be
rolled over to the subsequent fiscal year and up to $50.0 million of such amount may also be pulled
forward from the subsequent fiscal year. In addition, the capital expenditure restrictions do not
apply to, among other things, capital expenditures financed solely with proceeds from the issuance
of common equity interests or to normal replacement and maintenance capital expenditures.
The Credit Facility contains customary affirmative covenants including financial reporting,
governance and notification requirements. The Credit Facility requires us to maintain, measured on
a consolidated basis, (1) an Interest Coverage Ratio of not less than 3.00 to 1.00 and (2) a
Leverage Ratio of not greater than 3.25 to 1.00 as such terms are defined in the Credit Facility.
The Company was in compliance with all debt covenants as of June 30, 2011.
The Credit Facility provides that, upon the occurrence of events of default, obligations
thereunder may be accelerated and the lending commitments terminated. Such events of default
include, among other things, payment defaults to lenders, failure to meet covenants, material
inaccuracies of representations or warranties, cross defaults to other indebtedness, insolvency,
bankruptcy, ERISA and judgment defaults, and change in control, which includes (1) a change in
control under certain unsecured indebtedness issued by the Company or its Subsidiaries, (2) a
person or group other than certain permitted holders becoming the beneficial owner of 35% or more
of the Companys voting securities, or (3) the board of directors being comprised for a period of
18 consecutive months of individuals who were neither members at the beginning of such period nor
approved by individuals who were members at the beginning of such period.
Each loan and issuance of a letter of credit under the Credit Facility is subject to the
conditions that the representations and warranties in the loan documents remain true and correct in
all material respect and no default or event of default shall have occurred or be continuing at the
time of or immediately after such borrowing or extension of a letter of credit.
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Subordinated Term Loan
On May 28, 2010, the Company entered into a $25.0 million subordinated term loan with a
financial institution maturing on June 30, 2014. Under the term loan, interest was payable monthly
at a rate of LIBOR plus 13%, with a LIBOR floor of 1.0%. The term loan was retired on April 19,
2011 using funds received from the new Credit Facility to pay down remaining principal and accrued
interest. The Company incurred $4.7 million in early termination penalties as a result of the early
extinguishment and wrote off approximately $0.5 million in remaining deferred financing costs.
Note 3 Derivative Liabilities
The Derivatives and Hedging topic of the FASB Accounting Standards Codification (ASC) 815,
establishes accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. The guidance provides that an entity should
use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instruments contingent exercise and
settlement provisions. The topic also indicates that contracts issued or held by that reporting
entity that are both (1) indexed to its own stock and (2) classified in stockholders equity in its
statement of financial position should not be considered derivative instruments.
During 2009, the Company amended and restated the debt agreement associated with an
outstanding term loan. In conjunction with this amendment and restatement, the Company executed and
delivered a warrant agreement to the lender, whereby the lender (herein referred to as the
Warrant-Holder) earned warrants over the life of the term loan. Warrants began accumulating in
December 2009. The warrants had an exercise price of $0.01 per share and were exercisable upon the
settlement of the loan. The term loan was paid in full in October 2010 and the warrants ceased
accumulating at that time. The Warrant-Holder had accumulated 1,176,224 warrants as of the date of
loan termination and exercised them in full in December 2010.
Prior to the implementation of the derivatives and hedging topic, the warrants, when issued,
would have been classified as permanent equity because they met the exception and all of the
criteria in the FASB guidance covering accounting for derivative financial instruments indexed to,
and potentially settled in, a companys own stock. However, the agreements covering these warrants
contained an embedded conversion feature such that if the Company made certain equity offerings in
the future at a price lower than a price specified in the agreements, additional warrants would be
issuable to the Warrant-Holder.
The derivatives and hedging topic provides that an instruments strike price or the number of
shares used to calculate the settlement amount are not fixed if its terms provide for any potential
adjustment, regardless of the probability of such adjustment or whether such adjustment is in the
entitys control. If the instruments strike price or the number of shares used to calculate the
settlement amount are not fixed, the instrument (or embedded feature) is considered to be indexed
to an entitys stock if the only variables that could affect the settlement amount would be inputs to the fair value of a
fixed-for-fixed forward or option on equity shares.
Under the provisions of the Derivatives and Hedging topic, the embedded conversion feature in
the Companys warrants are not considered indexed to the Companys stock because future equity
offerings (or sales) of the Companys stock are not an input to the fair value of a
fixed-for-fixed option on equity shares. Accordingly, as of June 30, 2010, the warrants were
recognized as a liability in the Companys consolidated balance sheet.
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
The effect of these derivative instruments on the consolidated statements of operations
for the six months ended June 30, 2011 and 2010 was as follows (in thousands):
Six Months Ended June 30, | ||||||||||||
2011 | 2010 | |||||||||||
Location of | Amount of Loss | Amount of Loss | ||||||||||
Loss Recognized in | Recognized in | Recognized in | ||||||||||
Derivative not Designated | Operations on | Operations on | Operations on | |||||||||
as Hedging Instruments | Derivative | Derivative | Derivative | |||||||||
Equity contracts |
Interest expense | $ | | $ | 6,250 | |||||||
Total |
$ | | $ | 6,250 | ||||||||
Note 4 Fair Value of Financial Instruments
The Company follows the Fair Value Measurements topic of the FASB ASC 820, which defines fair
value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures
about fair value measurements. The provisions of this standard apply to other accounting
pronouncements that require or permit fair value measurements.
This guidance defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. Hierarchical levels, as defined in this guidance and directly related to the amount of
subjectivity associated with the inputs to fair valuations of these assets and liabilities are as
follows:
| Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | ||
| Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | ||
| Level 3 - Inputs that are both significant to the fair value measurement and unobservable. Unobservable inputs reflect the Companys judgment about assumptions market participants would use in pricing the asset or liabilitys estimated impact to quoted prices markets. |
The reported fair values for financial instruments that use Level 3 inputs to determine fair
value are based on the Black-Scholes option-pricing model. Accordingly, certain fair values may
not represent actual values of our financial instruments that could have been realized during the
periods presented.
For the six months ended June 30, 2010, the Company recorded derivative liabilities on its
balance sheet related to the warrants discussed in Note 3 Derivative Liabilities. The Company
used the Black-Scholes option-pricing model to determine the fair value of these warrants using the
following
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
assumptions: stock price of $5.85 per share, exercise price of $0.01, risk-free discount
rate of 1.59%, volatility of 75% and an expected life of 4.5 years.
Expected volatilities are based on comparable public company data. The risk-free rate is
based on the approximate U.S. Treasury yield rate in effect at the time of valuation. The
Companys calculation of stock price, included in the Black Scholes valuation model, involves the
use of different valuation techniques, including a combination of an income and/or market approach.
Determination of the fair value is a matter of judgment and often involves the use of significant
estimates and assumptions.
The warrants were exercised in December 2010. The final value of the warrants, upon exercise,
was determined based on the value of the underlying common stock included in a private offering of
the Companys common stock that occurred during December 2010 (approximately $10.00 per share).
A reconciliation of the Companys liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) is as follows (in thousands):
Level 3 | ||||
Balance December 31, 2009 |
$ | (336 | ) | |
Included in earnings as interest expense |
(6,250 | ) | ||
Balance June 30, 2010 |
$ | (6,586 | ) | |
The Company is not a party to any hedge arrangements, commodity swap agreements or any
other derivative financial instruments.
Note 5 Stock-Based Compensation
Prior to December 23, 2010, all options granted to the Companys employees were granted under
the C&J Energy Services, Inc. 2006 Stock Option Plan (the 2006 Plan). The 2006 Plan provided for
awards of incentive stock options, non-statutory stock options, restricted stock, and other stock
based awards to employees, officers, directors, consultants and advisors. Only non-qualified stock
options were awarded under the 2006 Plan. Options awarded under the 2006 Plan generally vested 20%
on the date of grant and another 20% on each of the first four anniversaries of the grant date.
However, two employees were given fully vested options on the date of grant. On December 23, 2010,
the 2006 Plan was amended to provide, among other things, that (1) no additional awards would be
granted under the 2006 Plan, (2) all awards outstanding under the 2006 Plan would continue to be
subject to the terms of the 2006 Plan, and (3) options to purchase all 237,927 shares awarded under
the 2006 Plan would immediately vest and become exercisable in connection with the completion of a
private placement of the Companys common stock that occurred in December 2010.
On December 23, 2010, the Company adopted the C&J Energy Services, Inc. 2010 Stock Option Plan
(the 2010 Plan). The Companys 2010 Plan permits the grant of non-statutory stock options and
incentive stock options to its employees, consultants and outside directors for up to 5,699,889
shares of common stock. Under the 2010 Plan, option awards are generally granted with an exercise
price equal to the market price of the Companys stock at the date of grant. Those option awards
generally vest over three years of continuous service with one-third vesting on the first, second,
and third anniversaries of the
options grant date. Certain option awards provide for accelerated vesting if there is a
change in control, as defined in the 2010 Plan.
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are based on comparable public company
data. The Company uses historical data to estimate employee termination and forfeiture rates of
the options within the valuation model. The expected term of options granted is derived using the
plain vanilla method due to the lack of history and volume of option activity at the Company. The
risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant.
The Companys calculation of stock price involves the use of different valuation techniques,
including a combination of an income and/or market approach. Determination of the fair value is a
matter of judgment and often involves the use of significant estimates and assumptions.
During the six months ended June 30, 2011, 514,335 options were granted under the 2010 Plan at
exercise prices ranging from $10.00 to $15.50 per share. The key input variables used in valuing
these options were: risk-free interest of 2.1% to 2.6%; dividend yield of zero; stock price
volatility of 75%; and expected option lives of five to six years. No stock options were granted
by the Company during the six months ended June 30, 2010.
As of June 30, 2011, the Company had 5,744,589 options outstanding to employees and
nonemployee directors, 1,907,318 of which were issued under the 2006 Plan and the remaining
3,837,271 were issued under the 2010 Plan. As of June 30, 2011 there were 1,862,618 shares
available for issuance under the 2010 Plan.
Note 6 Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited because the Company performs credit
evaluations, sets credit limits, and monitors the payment patterns of its customers. Cash balances
on deposits with financial institutions, at times, may exceed federally insured limits. The
Company monitors the institutions financial condition.
Note 7 Commitments and Contingencies
The Company has entered into certain take-or-pay contracts that guarantee a minimum level of
monthly revenue. The revenue related to these contracts is recognized on the earlier of the
passage of time under terms as defined by the respective contract or as the services are performed.
From time to time, the Company may be involved in claims and litigation arising in the
ordinary course of business. Because there are inherent uncertainties in the ultimate outcome of
such matters, it is presently not possible to determine the ultimate outcome of any potential
claims or litigation against the Company; however, management believes that the outcome of such
matters will not have a material adverse effect upon the Companys consolidated financial position,
results of operation or liquidity.
Note 8 Segment Information
In accordance with FASB ASC 280 Segment Reporting, the Company routinely evaluates whether or
not it has separate operating and reportable segments. Prior to April 2011, the Company determined
that it had one operating segment with three related service lines: hydraulic fracturing, coiled
tubing and pressure pumping. In reaching this conclusion, management considered the following: (1)
the Companys chief operating decision maker (CODM) evaluates performance and makes resource
allocation decisions as a single business as opposed to based on discrete service lines, (2) the
Companys business relies on a single infrastructure and uses one labor force that is available to
all service lines
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
provided, (3) the Companys marketing efforts focus on promoting an integrated
service package rather than distinct service offerings to discrete customers and (4) the Companys
compensation policy is determined with respect to overall performance rather than the performance
of individual services. Each of these factors contributed to managements conclusion that the
Company operated as a single segment prior to April 2011.
During the second quarter of 2011, the Company reevaluated whether or not it had more than one
operating segment and concluded that, with the acquisition of Total in April 2011, it now has two
operating and reportable segments: Stimulation and Well Intervention Services and Equipment
Manufacturing. This determination was made based on the following factors: (1) the Companys CODM
is currently managing these two segments as separate businesses, evaluating performance and making
resource allocation decisions distinctly, and expects to do so for the foreseeable future, and (2)
discrete financial information for each segment is available. The following is a brief description
of these segments:
Stimulation and Well Intervention Services. This business segment has three related service
lines providing hydraulic fracturing, coiled tubing and pressure pumping services, with a focus on
complex, technically demanding well completions.
Equipment Manufacturing. This business segment constructs equipment, provides equipment repair
services and oilfield parts and supplies for the Companys Stimulation and Well Intervention
Services segment as well as for third-party customers in the energy services industry.
The following tables set forth certain financial information with respect to the Companys
reportable segments. Included in Corporate and Other are intersegment eliminations and costs
associated with activities of a general corporate nature. Financial information for the comparable
2010 periods has not been presented because, as previously mentioned, the Company did not have
separate operating segments prior to the acquisition of Total in April 2011.
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Stimulation and | ||||||||||||||||
Well | ||||||||||||||||
Intervention | Equipment | Corporate and | ||||||||||||||
Services | Manufacturing | Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Three months ended June 30, 2011 |
||||||||||||||||
Revenue from external customers |
$ | 177,654 | $ | 4,517 | $ | | $ | 182,171 | ||||||||
Inter-segment revenues |
| 9,580 | (9,580 | ) | | |||||||||||
Adjusted EBITDA |
70,605 | 2,468 | (7,316 | ) | 65,757 | |||||||||||
Depreciation and amortization |
4,534 | 671 | 179 | 5,384 | ||||||||||||
Operating income (loss) |
66,081 | 1,797 | (7,495 | ) | 60,383 | |||||||||||
Capital expenditures |
36,344 | 1,028 | (2,026 | ) | 35,346 | |||||||||||
Six months ended June 30, 2011 |
||||||||||||||||
Revenue from external customers |
$ | 304,858 | $ | 4,517 | $ | | $ | 309,375 | ||||||||
Inter-segment revenues |
| 9,580 | (9,580 | ) | | |||||||||||
Adjusted EBITDA |
127,139 | 2,468 | (11,928 | ) | 117,679 | |||||||||||
Depreciation and amortization |
7,995 | 671 | 321 | 8,987 | ||||||||||||
Operating income (loss) |
119,256 | 1,797 | (12,249 | ) | 108,804 | |||||||||||
Capital expenditures |
65,428 | 1,028 | (1,326 | ) | 65,130 | |||||||||||
As of June 30, 2011 |
||||||||||||||||
Identifiable assets |
$ | 329,706 | $ | 46,695 | $ | 3,781 | $ | 380,182 |
Management evaluates segment performance and allocates resources based on earnings before
net interest expense, income taxes, depreciation and amortization, loss on early extinguishment of
debt and the net gain or loss on the disposal of assets (Adjusted EBITDA) because Adjusted EBITDA
is considered an important measure of each segments performance. In addition, management believes
that the disclosure of Adjusted EBITDA as a measure of each segments operating performance allows
investors to make a direct comparison to competitors, without regard to differences in capital and
financing structure. Investors should be aware, however, that there are limitations inherent in
using Adjusted EBITDA as a measure of overall profitability because it excludes significant expense
items. An improving trend in Adjusted EBITDA may not be indicative of an improvement in the
Companys profitability. To compensate for the limitations in utilizing Adjusted EBITDA as
operating measures, management also uses U.S. GAAP measures of performance, including operating
income and net income, to evaluate performance, but only with respect to the Company as a whole and
not on a segment basis.
As required under Regulation G of the Securities and Exchange Act of 1934, included below is a
reconciliation of Adjusted EBITDA (a non-GAAP financial measure) to net income, which is the
nearest comparable U.S. GAAP financial measure (in thousands).
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C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended | Six Months Ended | |||||||
June 30, 2011 | June 30, 2011 | |||||||
Adjusted EBITDA |
$ | 65,757 | $ | 117,679 | ||||
Interest expense, net |
(1,200 | ) | (3,158 | ) | ||||
Loss on early extinguishment of debt |
(7,605 | ) | (7,605 | ) | ||||
Provision for income taxes |
(18,313 | ) | (35,679 | ) | ||||
Depreciation and amortization |
(5,384 | ) | (8,987 | ) | ||||
Gain (loss) on disposal of assets |
(17 | ) | 73 | |||||
Net income |
$ | 33,238 | $ | 62,323 | ||||
Note 9 Subsequent Events
On July 28, 2011, the Companys Form S-1 relating to its initial public offering (the IPO)
of 13,225,000 shares of its common stock was declared effective by the SEC. The IPO closed on
August 3, 2011, at which time the Company issued and sold 4,300,000 shares and the selling
stockholders named in the Final Prospectus sold 8,925,000 shares, including 1,725,000 shares sold
by certain of the selling stockholders pursuant to the full exercise of the underwriters option to
purchase additional shares. The Company received cash proceeds of approximately $116.0 million from
this transaction, net of underwriting discounts and commissions. As of August 26, 2011,
approximately $3.1 million in costs associated with this offering had been incurred.
These costs, which amounted to $2.2 million as of June 30, 2011,
were included in Prepaid and other current assets on the consolidated
balance sheet.
The Company
did not receive any proceeds from the sale of shares by the selling stockholders.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this Form 10-Q) includes certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Forward-looking statements include those that express a belief, expectation or
intention, as well as those that are not statements of historical fact. Forward-looking statements
include information regarding our future plans and goals and our current expectations with respect
to, among other things:
| our future revenues, income and operating performance; | ||
| our ability to improve our margins; | ||
| operating cash flows and availability of capital; | ||
| the timing and success of future acquisitions and other special projects; | ||
| future capital expenditures; and | ||
| our ability to finance equipment, working capital and capital expenditures. |
Our forward-looking statements are generally accompanied by words such as estimate,
project, predict, believe, expect, anticipate, potential, plan, goal or other terms
that convey the uncertainty of future events or outcomes. The forward-looking statements in this
Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these
statements unless required by law, and we caution you not to rely on them unduly. Forward-looking
statements are not assurances of future performance and involve risks and uncertainties. We have
based these forward-looking statements on our current expectations and assumptions about future
events. While our management considers these expectations and assumptions to be reasonable, they
are inherently subject to significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many of which are
beyond our control. These risks, contingencies and uncertainties include, but are not limited to,
the following:
| a sustained decrease in domestic spending by the oil and natural gas exploration and production industry; |
| a decline in or substantial volatility of crude oil and natural gas commodity prices; |
| delay in or failure of delivery of our new fracturing fleets or future orders of specialized equipment; |
| the loss of or interruption in operations of one or more key suppliers; |
| overcapacity and competition in our industry; |
| the incurrence of significant costs and liabilities in the future resulting from our failure to comply, or our compliance with, new or existing environmental regulations or an accidental release of hazardous substances into the environment; |
| the loss of, or inability to attract new, key management personnel; | ||
| the loss of, or failure to pay amounts when due by, one or more significant customers; |
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| unanticipated costs, delays and other difficulties in executing our long-term growth strategy; |
| a shortage of qualified workers; |
| operating hazards inherent in our industry; |
| accidental damage to or malfunction of equipment; |
| an increase in interest rates; |
| the potential inability to comply with the financial and other covenants in our debt agreements as a result of reduced revenues and financial performance or our inability to raise sufficient funds through assets sales or equity issuances should we need to raise funds through such methods; |
| the potential failure to establish and maintain effective internal control over financial reporting; and |
| our inability to operate effectively as a publicly traded company. |
These and other important factors that could affect our operating results and performance are
described in (1) Risk Factors in Part II, Item 1A of this Form 10-Q, Managements Discussion and
Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Form 10-Q, and
elsewhere within this Form 10-Q, (2) our final prospectus dated July 29, 2011 and filed with the
SEC pursuant to Rule 424(b)(4) under the Securities Act (File No. 333-173177) (the Final
Prospectus), (3) our reports and registration statements filed from time to time with the SEC and
(4) other announcements we make from time to time. Should one or more of the risks or uncertainties
described above or in this Quarterly Report on Form 10-Q or in the documents incorporated by
reference herein occur, or should underlying assumptions prove incorrect, our actual results,
performance, achievements or plans could differ materially from those expressed or implied in any
forward-looking statements.
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Item 2. Managements 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 the unaudited consolidated financial statements and the related
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated
financial statements and notes thereto and Managements Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 2010 included in our final
prospectus (Registration Statement No. 333-173177) dated July 29, 2011 and filed with the SEC
pursuant to Rule 424(b)(4) under the Securities Act (the Final Prospectus).
This section contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those discussed in any forward-looking statement because
of various factors, including those described in the sections titled Cautionary Note Regarding
Forward-Looking Statements and Risk Factors of this Quarterly Report on Form 10-Q.
Overview
We are a rapidly growing independent provider of premium hydraulic fracturing and coiled
tubing services with a focus on complex, technically demanding well completions. We have
historically operated in what we believe to be some of the most geologically challenging basins in
South Texas, East Texas/North Louisiana and Western Oklahoma. We are in the process of acquiring
additional hydraulic fracturing fleets and are evaluating opportunities with existing and new
customers to expand our operations into new areas throughout the United States with similarly
demanding completion and stimulation requirements.
We are a Delaware corporation. Our principal executive offices are located at 10375 Richmond
Avenue, Suite 2000, Houston, Texas 77042 and our main telephone number is (713) 260-9900. Our
website is available at www.cjenergy.com. We make available free of charge through our website all
reports filed with the SEC and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with the SEC. Information available on or through our
website is not a part of or incorporated into this or any other report.
How We Generate Our Revenues
We seek to differentiate our services from those of our competitors by providing customized
solutions for our customers most challenging well completions. We believe our customers value the
experience, technical expertise, high level of customer service and demonstrated operational
efficiencies that we bring to projects.
We have entered into term contracts with EOG Resources (executed April 2010), Penn Virginia
(executed May 2010), Anadarko Petroleum (executed August 2010), EXCO Resources (executed August
2010) and Plains Exploration (executed March 2011) for the provision of hydraulic fracturing
services. We began service under the Penn Virginia, EOG Resources, Anadarko Petroleum, EXCO
Resources and Plains Exploration contracts in July 2010, August 2010, February 2011, April 2011 and
August 2011, respectively. Our existing hydraulic fracturing fleets (Fleets 1, 2, 3, 4 and 5) are
dedicated through mid-2012, mid-2012, early 2013, mid-2014 and mid-2013, respectively, to producers
operating in the Eagle Ford, Haynesville and Granite Wash basins. We are scheduled to take delivery
of Fleets 6, 7 and 8 in the fourth quarter of 2011, the first half of 2012 and the second half of
2012, respectively. We are seeking to deploy each of these new fleets under term contracts similar
to our existing term contracts.
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Our revenues are derived primarily from three sources:
| monthly payments for the committed hydraulic fracturing fleets under term contracts as well as prevailing market rates for spot market work, together with associated charges or handling fees for chemicals and proppants that are consumed during the fracturing process; | ||
| prevailing market rates for coiled tubing, pressure pumping and other related well stimulation services, together with associated charges for stimulation fluids, nitrogen and coiled tubing materials; and | ||
| sales of manufactured equipment, parts and supplies and repair services provided through our recently acquired subsidiary, Total E&S, Inc. (Total), a manufacturer of hydraulic fracturing, coiled tubing, pressure pumping and other equipment used in the energy services industry. |
Hydraulic Fracturing. Approximately 80% of our revenues for the six months ended June 30,
2011 were derived from hydraulic fracturing services. Our term contracts generally range from one
year to three years. Under the term contacts, our customers are obligated to pay us on a monthly
basis for a specified number of hours of service, whether or not those services are actually
utilized. To the extent customers utilize more than the specified contract minimums, we will be
paid a pre-agreed amount for the provision of such additional services. Our term contracts restrict
the ability of the customer to terminate or require our customers to pay us a lump-sum early
termination fee, generally representing all or a significant portion of the remaining economic
value of the contracts to us.
Although our term contracts provide us some visibility on anticipated future minimum asset
utilization, our term contracts do not provide us with sufficient certainty to present backlog
information on an ongoing basis. Unlike long-term contracts for equipment or services at fixed
prices or on a day rate or turnkey basis, where future revenue or earnings can be reliably
forecasted based on the dollar amount of backlog believed to be firm, future revenues generated
from our term contracts are subject to a number of variables that prevent us from providing similar
information with any degree of certainty. Under our term contracts, we derive revenues from:
| mandatory monthly payments for a specified minimum number of hours of service per month; | ||
| pre-agreed amounts for each hour of service in excess of the contracted minimum number of hours of service per month; and | ||
| pre-agreed service charges for chemicals and proppant materials that are consumed during the fracturing process. |
Given these variables, revenues from our term contracts vary substantially from
customer-to-customer and from month-to-month depending on the number of hours of services actually
provided and chemicals and proppant materials consumed. Generally, when we exceed the number of
hours of service included in our base monthly rate, we consume more chemicals and proppants and
provide additional pumping and related services to complete the project, each of which will
significantly impact our revenues. Mandatory monthly payments under our term contracts have
historically accounted for less than half of our total revenues.
Although we have entered into term contracts for each of our hydraulic fracturing fleets, we
also have the flexibility to pursue spot market projects. Our term contracts allow us to supplement
monthly contract revenue by deploying equipment on short-term spot market jobs on those days when
the contract customer does not require our services or is not entitled to our services under the
applicable term contract.
We charge prevailing market prices per hour for spot market work. We may also charge fees for
set up
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and mobilization of equipment depending on the job. Generally, these fees and other charges
vary depending on the equipment and personnel required for the job and market conditions in the
region in which the services are performed. We also source chemicals and proppants that are
consumed during the fracturing process and we charge our customers a fee for materials consumed in
the process, or we charge our customers a handling fee for chemicals and proppants supplied by the
customer. Materials charges reflect the cost of the materials plus a markup and are based on the
actual quantity of materials used in the fracturing process. We believe our ability to provide
services in the spot market allows us to take advantage of any favorable pricing that may exist in
this market and allows us to develop new customer relationships.
Coiled Tubing and Pressure Pumping. Our coiled tubing, pressure pumping and other
related well intervention services are provided in the spot market at prevailing prices per hour.
We may also charge fees for set up and mobilization of equipment depending on the job. The set-up
charges and hourly rates are determined by a competitive bid process and vary with the type of
service to be performed, the equipment and personnel required for the job and market conditions in
the region in which the service is performed. We also charge customers for the materials, such as
stimulation fluids, nitrogen and coiled tubing materials, that we use in each job. Materials
charges reflect the cost of the materials plus a markup and are based on the actual quantity of
materials used for the project.
Equipment Manufacturing. Our equipment manufacturing business constructs equipment primarily
for the energy services industry, including hydraulic fracturing pumps, coiled tubing units,
pressure pumping units and other equipment. This business also provides equipment repair services
and oilfield parts and supplies to the energy services industry.
How We Manage Costs and Maintain Our Equipment
The principal expenses involved in conducting our business are product and material
costs, the costs of acquiring, maintaining and repairing our equipment, labor expenses and fuel
costs. Additionally, we incur freight costs to deliver and stage our hydraulic fracturing fleets to
the worksite. We maintain and repair all equipment we use in our operations. We primarily purchase
our equipment, including engines, transmissions, radiators, motors and pumps, from third-party
vendors. Our acquisition of Total in April 2011 has provided us with greater control over the costs
of, access to, and delivery of, equipment. Total has historically been one of our largest suppliers
of machinery and equipment and is currently constructing the hydraulic fracturing pumps for all
three of our on-order fleets. We believe the acquisition of Total provides several strategic
advantages, including a significant reduction in our exposure to third-party supply chain
constraints, shorter cycle times for the delivery of new equipment and replacement parts, a
reduction in and greater control of the cost of new equipment, and enhanced operational control of
our service offering. Furthermore, the acquisition of Total is expected to help minimize downtime
by enhancing our capabilities for maintenance and repair of our hydraulic fracturing equipment.
Depreciation costs represented approximately 2.5% and 6.2% of our revenues for the six months
ended June 30, 2011 and 2010, respectively. Direct labor costs represented approximately 8.7% and
13.5% of our revenues for the six months ended June 30, 2011 and 2010, respectively. Other costs,
including proppant, chemical and freight costs, represented approximately 33.2% and 32.3% of our
revenues for the six months ended June 30, 2011 and 2010, respectively. We also incur significant
fuel costs in connection with the operation of our hydraulic fracturing fleets and the
transportation of our equipment and products.
How We Manage Our Operations
Our management team uses a variety of tools to monitor and manage our operations in the
following four areas: (1) asset utilization, (2) equipment maintenance performance, (3) customer
satisfaction and (4) safety performance.
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Asset Utilization. We measure our activity levels by the total number of jobs completed
by each of our hydraulic fracturing fleets and coiled tubing units on a monthly basis. By
consistently monitoring the activity level, pricing and relative performance of each of our fleets
and units, we can more efficiently allocate our personnel and equipment to maximize revenue
generation. During the three months ended June 30, 2011, we completed 856
fracturing stages, generated average revenue per fracturing
stage of $175,888 and averaged monthly revenue per unit of horsepower of
$371. During the first quarter of 2011, we completed 633 fracturing
stages, generated average revenue per fracturing stage of
$165,717 and averaged monthly revenue per unit of horsepower of $383.
Additionally, our hydraulic fracturing fleets were nearly 100%
utilized during both the first and second quarters of the year based on available working days per month, which excludes scheduled maintenance days.
During the three months ended June 30, 2011, we completed 819
coiled tubing jobs compared to 638 for the first quarter of 2011.
Equipment Maintenance Performance. Preventative maintenance on our equipment is an
important factor in our profitability. If our equipment is not maintained properly, our repair
costs may increase and, during periods of high activity, our ability to operate efficiently could
be significantly diminished due to having trucks and other equipment out of service. Our
maintenance crews perform regular inspections and preventative maintenance on each of our trucks
and other mechanical equipment. Our management monitors the performance of our maintenance crews at
each of our service centers by reviewing ongoing inspection and maintenance activity and monitoring
the level of maintenance expenses as a percentage of revenue. A rising level of maintenance
expenses as a percentage of revenue at a particular service center can be an early indication that
our preventative maintenance schedule is not being followed. In this situation, management can take
corrective measures to help reduce maintenance expenses as well as ensure that maintenance issues
do not interfere with operations. Our repair and maintenance costs represented approximately 6.8%
and 6.6% of our revenues for the six months ended June 20, 2011 and 2010, respectively.
Customer Satisfaction. Upon completion of each job, we encourage our customers to
provide feedback on their satisfaction level. Customers evaluate our performance under various
criteria and comment on their overall satisfaction level. This feedback gives our management
valuable information from which to identify performance issues and trends. Our management also uses
this information to evaluate our position relative to our competitors in the various markets in
which we operate.
Safety Performance. Maintaining a strong safety record is a critical component of our
operational success. Many of our larger customers have safety standards we must satisfy before we
can perform services for them. We maintain a safety database so that our customers can review our
historical safety record. Our management also uses this safety database to identify negative trends
in operational incidents so that appropriate measures can be taken to maintain and enhance our
safety standards.
Our Challenges
We face many challenges and risks in the industry in which we operate. Although many
factors contributing to these risks are beyond our ability to control, we continuously monitor
these risks, and we have taken steps to mitigate them to the extent practicable. In addition, we
believe that we are well positioned to capitalize on the current growth opportunities available in
the hydraulic fracturing market. However, we may be unable to capitalize on our competitive
strengths to achieve our business objectives and, consequently, our results of operations may be
adversely affected. Please read the sections titled Cautionary Note Regarding Forward-Looking
Statements and Risk Factors of this Form 10-Q for additional information about the risks we
face.
Equipment Supply. The overall number of hydraulic fracturing equipment suppliers in
the industry in which we operate is limited, and there has historically been high demand for this
equipment.
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This limited capacity of supply increases the risk of delay and failure to timely deliver both
our on-order equipment and any future equipment that may be necessary to grow of our business. We
expect to take delivery of three new hydraulic fracturing fleets, Fleets 6, 7 and 8, in the fourth
quarter of 2011, in the first half of 2012 and in the second half of 2012, respectively. To
mitigate the risk of a potential delay in equipment delivery, we actively monitor the progression
of the production schedule of our on-order equipment. Our recent acquisition of Total, a
significant supplier of our new on-order hydraulic fracturing equipment, has provided us with added
monitoring capabilities and control over access to, and delivery of, new fracturing equipment.
Hydraulic Fracturing Legislation and Regulation. Legislation has been introduced before
Congress in the last few sessions to provide for federal regulation of hydraulic fracturing and to
require disclosure of the chemicals used in the fracturing process. Although the federal
legislation did not pass, if similar federal legislation is introduced and becomes law in the
future, the legislation could establish an additional level of regulation that could lead to
operational delays or increased operating costs. The federal Environmental Protection Agency (EPA)
also recently proposed rules that would establish new air emission controls for oil and natural gas
production and natural gas processing operations. Among other controls, the rules would require
operators to use green completions for hydraulic fracturing, meaning operators would have to
recover rather than vent the gas and natural gas liquids that come to the surface during completion
of the fracturing process. In addition, various state and local governments have implemented, or
are considering, increased regulatory oversight of hydraulic fracturing, and Texas has adopted
legislation that requires disclosure of information regarding the substances used in the hydraulic
fracturing process to the Railroad Commission of Texas and the public.
The adoption of new laws or regulations imposing reporting obligations on, or otherwise
limiting or regulating, the hydraulic fracturing process could make it more difficult to complete
oil and natural gas wells in shale formations, increase our and our customers costs of compliance,
and adversely affect the hydraulic fracturing services that we render for our exploration and
production customers. In addition, if hydraulic fracturing becomes regulated at the federal level
as a result of federal legislation or regulatory initiatives by the EPA, fracturing activities
could become subject to additional permitting or regulatory requirements, and also to attendant
permitting delays and potential increases in cost, which could adversely affect our business and
results of operations.
Financing Future Growth. Historically, we have funded our growth through bank debt, capital
contributions and borrowings from our stockholders, and cash generated from our business. The
successful execution of our growth strategy depends on our ability to raise capital as needed to,
among other things, finance the purchase of additional hydraulic fracturing fleets. If we are
unable to generate sufficient cash flows or to obtain additional capital on favorable terms or at
all, we may be unable to sustain or increase our current level of growth in the future. However, we
believe we are well positioned to finance our future growth. On April 19, 2011, we entered into a
new five-year $200.0 million senior secured revolving credit facility, which increased the amount
of funds we are permitted to borrow by $48.3 million and increased the amount of borrowings we can
incur in a given fiscal year for capital expenditures by $60.0 million. In addition, our cash flows
from operations have continued to increase dramatically, with cash flows from operations during the
six months ended June 30, 2011 increasing by $47.9 million from the same period in 2010. We believe
that our cash flows from operations and available borrowings under our credit agreement will be
sufficient to allow us to sustain or increase our current growth through at least 2012.
Recent Developments
Initial Public Offering. On July 28, 2011, our registration statement on Form S-1 (File No.
333-173177) relating to the IPO of 13,225,000 shares of our common stock was declared effective by
the SEC. The IPO closed on August 3, 2011, at which time we issued and sold 4,300,000 shares and
selling stockholders sold 8,925,000 shares, including 1,725,000 shares sold by certain of the
selling stockholders pursuant to the full exercise of the underwriters option to purchase
additional shares, at a price to the
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public of $29.00 per share. We received cash proceeds of approximately $116.0 million from
this transaction, net of underwriting discounts and commissions. As of August 26, 2011, we had
incurred costs of approximately $3.1 million related to the offering. We did not receive any
proceeds from the sale of shares by the selling stockholders.
Acquisition of Total E&S, Inc. On April 28, 2011, we acquired Total, a manufacturer of
hydraulic fracturing, coiled tubing, pressure pumping and other equipment used in the energy
services industry and one of our largest suppliers of machinery and equipment. Total is
constructing the hydraulic fracturing pumps for all three of our on-order fleets. The aggregate
purchase price of the acquisition of approximately $33.0 million included $23.0 million in cash to
the sellers and $10.0 million in repayment of the outstanding debt and accrued interest of Total.
In exchange for the consideration, we acquired net working capital assets with an estimated value
of approximately $6.9 million, including $5.4 million in cash and cash equivalents. We funded $25.0
million of the purchase price and debt repayment with borrowings under our credit facility and
funded the remainder with cash on hand. Total is an Indiana corporation and is located in Granbury,
Texas.
Following our acquisition of Total, we acquired approximately 10 acres of property adjacent to
Totals current facility and began construction of an approximate 36,000 square feet manufacturing
facility. We currently expect our new facility to be operational by December 2011. The total cost
of construction of the facility is expected to be approximately $1.6 million. By significantly
increasing Totals manufacturing capacity, we expect to further increase its ability to service us
and existing and future third-party customers.
Outlook
Demand for hydraulic fracturing services has increased significantly over the last two
years in the markets in which we operate and we have made substantial investments in the
acquisition of additional fracturing fleets in order to capitalize on the market opportunity, which
has led to significant growth in our business. We believe the following trends impacting our
industry have increased the demand for our services and will continue to support the sustained
growth that we have experienced to date:
| increased drilling in unconventional resource basins, particularly liquids-rich formations, through the application of horizontal drilling and completion technologies; | ||
| improved drilling efficiencies increasing the number of horizontal feet per day requiring completion services; | ||
| increased hydraulic fracturing intensity, particularly with increasingly longer laterals and a greater number of fracturing stages, in more demanding and technically complex formations; and | ||
| tight supply of hydraulic fracturing equipment resulting from increased attrition of existing equipment and supply chain constraints. |
Results of Operations
Our results of operations are driven primarily by four interrelated variables: (1) drilling
and stimulation activities of our customers, (2) the prices we charge for our services, (3) cost of
products, materials and labor and (4) our service performance. Because we typically pass the cost
of raw materials, such as proppants and chemicals, onto our customers in our term contracts, our
profitability is not materially impacted by changes in the costs of these materials. To a large
extent, the pricing environment for our services will dictate our level of profitability. To
mitigate the volatility in utilization and pricing
for the services we offer, we have entered into term contracts covering each of our five
existing fleets and intend to do the same with our three on-order hydraulic fracturing fleets.
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In the near term, we expect that our revenues and results of operations will be
positively impacted by: (1) the addition and deployment of Fleet 2 in July 2010; (2) the addition
and deployment of Fleet 3 in January 2011; (3) the addition and deployment of Fleet 4 in April
2011; (4) the addition and deployment of Fleet 5 in August 2011 and (5) the acquisition of Total in
April 2011. We also expect to take delivery of and deploy Fleets 6, 7 and 8 in the fourth quarter
of 2011, the first half of 2012 and the second half of 2012, respectively. Each of our fleets is,
or is expected to be, deployed under a term contract. We expect that our results of operations in
2011 compared to 2010 will be significantly impacted by the dramatic growth of our asset base over
the last twelve months.
Results for the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
The following table summarizes the change in our results of operations for the three months
ended June 30, 2011 when compared to the three months ended June 30, 2010 (in thousands):
Three Months Ended June 30, | ||||||||||||
2011 | 2010 | $ Change | ||||||||||
Revenue |
$ | 182,171 | $ | 41,803 | $ | 140,368 | ||||||
Cost of Sales |
110,068 | 27,118 | 82,950 | |||||||||
Gross profit |
72,103 | 14,685 | 57,418 | |||||||||
Selling, general and administrative expenses |
11,703 | 3,847 | 7,856 | |||||||||
Loss on disposal of assets |
17 | 1,599 | (1,582 | ) | ||||||||
Operating income |
60,383 | 9,239 | 51,144 | |||||||||
Other income (expense): |
||||||||||||
Interest expense, net |
(1,200 | ) | (6,580 | ) | 5,380 | |||||||
Loss on early extinguishment of debt |
(7,605 | ) | | (7,605 | ) | |||||||
Other income (expense), net |
(27 | ) | (4 | ) | (23 | ) | ||||||
Total other expenses, net |
(8,832 | ) | (6,584 | ) | (2,248 | ) | ||||||
Income (loss) before income taxes |
51,551 | 2,655 | 48,896 | |||||||||
Provision (benefit) for income taxes |
18,313 | 938 | 17,375 | |||||||||
Net (loss) income |
$ | 33,238 | $ | 1,717 | $ | 31,521 | ||||||
Revenue
Revenue increased $140.4 million, or 336%, to $182.2 million for the three months ended June
30, 2011 as compared to $41.8 million for the same period in 2010. This increase was primarily due
to the deployment of additional hydraulic fracturing equipment in our Stimulation and Well
Intervention Services segment. Fleet 2, which was deployed in the third quarter of 2010,
contributed $33.0 million of revenue in the second quarter of 2011; Fleet 3, which was deployed
early in the first quarter of 2011, contributed $37.3 million of revenue in the second quarter of
2011; and Fleet 4, which was deployed early in the second quarter of 2011, contributed $28.3
million of revenue in the second quarter of 2011. In addition, we experienced increased utilization
of our equipment across all service lines as well as improved pricing for our services. We
continued to benefit from increased horizontal drilling and completion-related activity in
unconventional resource plays, which enabled us to obtain higher revenues for our hydraulic
fracturing services due to the complexity of the work performed in these areas. Our Equipment
Manufacturing segment, which we added with the acquisition of Total in April 2011, contributed $4.5
million of revenue during the second quarter of 2011.
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Cost of Sales
Cost of sales increased $83.0 million, or 306%, to $110.1 million for the three months
ended June 30, 2011 compared to $27.1 million for the same period in 2010. As a percentage of
revenue, cost of sales decreased to 60% for the three months ended June 30, 2011 from 65% for the
same period in 2010 due primarily to the significant increase in revenue in the second quarter of
2011 compared to the same period in the prior year.
Selling, General and Administrative Expenses (SG&A)
SG&A increased $7.9 million, or 204%, to $11.7 million for the three months ended June 30,
2011 as compared to $3.8 million for the same period in 2010. The increase primarily related to
$2.7 million in higher payroll and personnel costs associated with the continued hiring of
personnel to support our growth and $2.3 million in higher long-term and short-term incentive
costs. We also incurred $1.2 million in increased SG&A costs associated with the acquisition of
Total in April 2011.
Interest Expense
Interest expense decreased by $5.4 million, or 82%, to $1.2 million for the three months ended
June 30, 2011 as compared to $6.6 million for the same period in 2010. This decrease was due
primarily to charges of $4.8 million incurred in the second quarter of 2010 in connection with the
change in fair value of our warrant liability. The warrants were exercised in December 2010. Also
contributing to the decrease was $0.5 million in lower interest expense due to lower interest rates
and $0.1 million in lower amortization of financing costs.
Loss on Early Extinguishment of Debt
We incurred $7.6 million in costs associated with the early extinguishment of our previous
senior credit facility and subordinated term loan during the three months ended June 30, 2011.
These costs consisted of $4.7 million in early termination penalties on the subordinated term loan
and $2.9 million related to accelerated recognition of deferred financing costs on the previous
senior credit facility and subordinated term loan. Immediately following these extinguishments, we
entered into a new $200.0 million senior secured revolving credit facility. Please read
"Description of Our Indebtedness below for further discussion.
Income Taxes
We recorded a tax provision of $18.3 million for the three months ended June 30, 2011, at an
effective rate of 35.5%, compared to a tax provision of $0.9 million for the three months ended
June 30, 2010, at an effective rate of 35.3%. The increase was due to our increase in net income.
Results for the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
The following table summarizes the change in our results of operations for the six months
ended June 30, 2011 when compared to the six months ended June 30, 2010 (in thousands):
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Six Months Ended June 30, | ||||||||||||
2011 | 2010 | $ Change | ||||||||||
Revenue |
$ | 309,375 | $ | 74,440 | $ | 234,935 | ||||||
Cost of Sales |
180,116 | 50,294 | 129,822 | |||||||||
Gross profit |
129,259 | 24,146 | 105,113 | |||||||||
Selling, general and administrative expenses |
20,528 | 6,715 | 13,813 | |||||||||
(Gain)/loss on disposal of assets |
(73 | ) | 1,582 | (1,655 | ) | |||||||
Operating income |
108,804 | 15,849 | 92,955 | |||||||||
Other income (expense): |
||||||||||||
Interest expense, net |
(3,158 | ) | (9,578 | ) | 6,420 | |||||||
Loss on early extinguishment of debt |
(7,605 | ) | | (7,605 | ) | |||||||
Other income (expense) |
(39 | ) | 43 | (82 | ) | |||||||
Total other expenses |
(10,802 | ) | (9,535 | ) | (1,267 | ) | ||||||
Income (loss) before income taxes |
98,002 | 6,314 | 91,688 | |||||||||
Provision (benefit) for income taxes |
35,679 | 2,354 | 33,325 | |||||||||
Net (loss) income |
$ | 62,323 | $ | 3,960 | $ | 58,363 | ||||||
Revenue
Revenue increased $234.9 million, or 316%, to $309.4 million for the six months ended June 30,
2011 as compared to $74.4 million for the same period in 2010. This increase was primarily due to
the deployment of additional hydraulic fracturing equipment in our Stimulation and Well
Intervention Services segment. Fleet 2, which was deployed in the third quarter of 2010,
contributed $62.4 million of revenue in the six months ended June 30, 2011; Fleet 3, which was
deployed early in the first quarter of 2011, contributed $65.5 million of revenue in the six months
ended June 30, 2011; and Fleet 4, which was deployed early in the second quarter of 2011,
contributed $28.3 million of revenue in the six months ended June 30, 2011. In addition, we
experienced increased utilization of our equipment across all service lines as well as improved
pricing for our services. We continued to benefit from increased horizontal drilling and
completion-related activity in unconventional resource plays, which enabled us to obtain higher
revenues for our hydraulic fracturing services due to the complexity of the work performed in these
areas. Our Equipment Manufacturing segment, which we added with the acquisition of Total in April
2011, contributed $4.5 million of revenue during the first half of 2011.
Cost of Sales
Cost of sales increased $129.8 million, or 258%, to $180.1 million for the six months ended
June 30, 2011 as compared to $50.3 million for the same period in 2010. As a percentage of revenue,
cost of sales decreased to 58% for the six months ended June 30, 2011 from 68% for the same period
in 2010 due primarily to the significant increase in our revenues from 2010 to 2011.
Selling, General and Administrative Expenses (SG&A)
SG&A increased $13.8 million, or 206%, to $20.5 million for the six months ended June 30, 2011
as compared to $6.7 million for the same period in 2010. The increase primarily related to $4.8
million in higher long-term and short-term incentive costs and $4.5 million in higher payroll and
personnel costs associated with the continued hiring of personnel to support our growth. We also
incurred $1.2 million in increased SG&A costs associated with the acquisition of Total and $0.5
million in increased professional fees.
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Interest Expense
Interest expense decreased by $6.4 million, or 67%, to $3.2 million for the six months ended
June 30, 2011 as compared to $9.6 million for the same period in 2010. This decrease was due
primarily to charges of $6.3 million incurred in the six months ended June 30, 2010 in connection
with the change in fair value of our warrant liability. The warrants were exercised in December
2010.
Loss on Early Extinguishment of Debt
We incurred $7.6 million in costs associated with the early extinguishment of our previous
senior credit facility and subordinated term loan during the six months ended June 30, 2011. These
costs consisted of $4.7 million in early termination penalties on the subordinated term loan and
$2.9 million related to accelerated recognition of deferred financing costs on the previous senior
credit facility and subordinated term loan. Immediately following these extinguishments, we entered
into a new $200.0 million senior secured revolving credit facility. Please read Description of
Our Indebtedness below for further discussion.
Income Taxes
We recorded a tax provision of $35.7 million for the six months ended June 30, 2011, at an
effective rate of 36.4%, compared to a tax provision of $2.4 million for the six months ended June
30, 2010, at an effective rate of 37.3%. The increase was due to our increase in net income.
Liquidity and Capital Resources
Our primary sources of liquidity to date have been capital contributions and borrowings from
stockholders, borrowings under our credit facilities and cash flows from operations. Our primary
use of capital has been the acquisition and maintenance of equipment. During 2009, we spent
significantly less on capital expenditures than we had in previous years. Our capital expenditures
increased in 2010 and we anticipate capital expenditures will continue to increase through 2012.
We have ordered three new hydraulic fracturing fleets, Fleets 6, 7 and 8, which are scheduled for
delivery in the fourth quarter of 2011, the first half of 2012 and the second half of 2012,
respectively. Fleet 6 has an aggregate cost of approximately $33 million, of which approximately
$1.9 million had been funded as of August 26, 2011. Fleet 7 has an aggregate cost of
approximately $26 million, of which approximately $1.0 million had been funded as of August
26, 2011; and Fleet 8 has an aggregate cost of approximately $26 million, of which approximately
$0.6 million had been funded as of August 26, 2011. We intend to fund Fleets 6, 7 and 8
through a combination of cash flows from operations, proceeds from our IPO and borrowings under our
credit facility.
On April 19, 2011, we entered into a five-year $200.0 million revolving credit facility,
which we refer to as the credit facility. Proceeds from the closing of the credit facility were
used to repay $49.6 million of indebtedness outstanding under our previous revolving credit
facility and $29.9 million of indebtedness, accrued interest and early termination penalties under
our subordinated term loan. The majority of proceeds we received from our IPO were used to pay
down all amounts outstanding under our credit facility and, as such, we have no balance outstanding
as of August 26, 2011.
We continually monitor potential capital sources, including equity and debt financings, in
order to meet our planned capital expenditures and liquidity requirements. Our ability to fund
operating cash flow shortfalls, if any, and to fund planned 2011 and 2012 capital expenditures will
depend upon our future operating performance, and more broadly, on the availability of equity and
debt financing, which will be affected by prevailing economic conditions in our industry and
financial, business and other factors, some of which are beyond our control. Based on our existing
operating performance, we believe our cash flows
and existing capital coupled with borrowings available under our credit facility will be
adequate to meet operational and capital expenditure needs for the next 12 months.
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Our credit facility contains covenants that require us to maintain an interest coverage ratio,
to maintain a Leverage Ratio and to satisfy certain other conditions. These covenants are subject
to a number of exceptions and qualifications set forth in the credit agreement that evidences such
credit facility. We are currently in compliance with these covenants. Please read Description of
Our Indebtedness elsewhere in this Form 10-Q. In addition, our credit facility contains covenants
that limit our ability to make capital expenditures in excess of $100.0 million in any fiscal year,
provided that up to $50.0 million of such amount in any fiscal year may be rolled over to the
subsequent fiscal year, and up to $50.0 million of such amount may also be pulled forward from the
subsequent fiscal year. The capital expenditure restrictions do not apply to capital expenditures
financed with proceeds from the issuance of common equity interests or to maintenance capital
expenditures. The credit facility also restricts our ability to incur additional debt or sell
assets, make certain investments, loans and acquisitions, guarantee debt, grant liens, enter into
transactions with affiliates, engage in other lines of business and pay dividends and
distributions.
Capital Requirements
The energy services business is capital-intensive, requiring significant investment to expand,
upgrade and maintain equipment. Our capital requirements have consisted primarily of, and we
anticipate will continue to be:
| growth capital expenditures, such as those to acquire additional equipment and other assets or upgrade existing equipment to grow our business; and | ||
| maintenance capital expenditures, which are capital expenditures made to extend the useful life of partially or fully depreciated assets. |
We continually monitor new advances in hydraulic fracturing equipment and down-hole
technology, as well as technologies that may complement our existing businesses, and commit capital
funds to upgrade and purchase additional equipment to meet our customers needs. Assuming the
timely delivery of Fleet 6 in the fourth quarter of 2011, we expect our total 2011 capital
expenditures to be approximately $120 million, of which
$80.7 million has been spent
as of August 26, 2011. The remainder of capital expenditures for 2011 include the purchase of
Fleet 6, three new coil tubing units, and maintenance capital expenditures.
Historically, we have grown through organic expansion. We plan to continue to monitor the
economic environment and demand for our services and adjust our business strategy as necessary.
Financial Condition and Cash Flows
The net cash provided by or used in our operating, investing and financing activities is
summarized below (in thousands):
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flow provided by (used in): |
||||||||
Operating activities |
$ | 64,757 | $ | 16,832 | ||||
Investing activities |
(89,983 | ) | (7,046 | ) | ||||
Financing activities |
30,043 | (615 | ) | |||||
Change in cash and cash equivalents |
$ | 4,817 | $ | 9,171 | ||||
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Cash Provided by Operating Activities
Net cash provided by operating activities increased $47.9 million for the six months ended
June 30, 2011 as compared to the same period in 2010. This increase was primarily due to higher net
income and deferred tax expense, partially offset by a decrease related to working capital changes
related to accounts receivable, accounts payable and income taxes payable. Accounts receivable and
accounts payable were both higher due to the increase in our activity levels. Income taxes payable
were lower due to substantial payments made in June 2011 for federal income tax purposes.
Cash Flows Used in Investing Activities
Net cash used in investing activities increased $82.9 million for the six months ended June
30, 2011 as compared to the same period in 2010. This increase was due primarily to higher capital
expenditures related to the growth of our hydraulic fracturing services business, which doubled in
size from two fleets at the end of 2010 to four fleets early in the second quarter of 2011. For the
six months ended June 30, 2011 we spent $48.9 million related to our hydraulic fracturing fleet
expansion. Cash used in investing activities also increased during 2011 by $27.2 million as a
result of our acquisition of Total.
Cash Flows Provided by (Used in) Financing Activities
Net cash provided by financing activities was $30.0 million for the six months ended June 30,
2011 as compared to net cash used in financing activities of $0.6 million for the same period in
2010. The increase was primarily due to net borrowings under our credit facility during the first
half of 2011 to fund our capital spending program and the acquisition of Total.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K,
as of June 30, 2011.
Description of Our Indebtedness
Senior Secured Credit Agreement. On April 19, 2011, we entered into a new five-year $200.0
million senior secured revolving credit agreement with Bank of America, N.A., as administrative
agent, swing line lender and L/C issuer, Comerica Bank, as L/C issuer and syndication agent, Wells
Fargo Bank, National Association, as documentation agent, and various lenders. Our obligations
under our credit facility are guaranteed by our subsidiaries C&J Spec-Rent Services, Inc. and Total
(the Subsidiaries). Our credit facility enables us to borrow funds on a revolving basis for
working capital needs and also provides for the issuance of letters of credit. In addition, we may
request additional commitments of up to $75.0 million through an incremental facility upon the
satisfaction of certain conditions. Up to the entire credit facility amount may be drawn as letters
of credit, and the credit facility has a sublimit of $15.0 million for swing line loans. Currently,
there are not amounts outstanding under our credit facility, leaving the entire $200.0 million
available for borrowing.
Loans under our credit facility are denominated in U.S. dollars and will mature on April 19,
2016. Outstanding loans bear interest at either LIBOR or a base rate, at our election, plus an
applicable margin which, prior to our delivery of a compliance certificate for the quarter ended
June 30, 2011, was equal to 1.50% for base rate loans and 2.50% for LIBOR loans. Thereafter, the
applicable base rate ranges from 1.25% to 2.00% and the applicable LIBOR rate ranges from 2.25% to
3.00% based upon our Leverage Ratio. The Leverage Ratio is the ratio of funded indebtedness to
EBITDA for us and our subsidiaries on a consolidated basis. As of June 30, 2011, the weighted
average interest rate under our credit facility was 2.8%.
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All obligations under our credit facility are secured, subject to agreed upon exceptions, by a
first priority perfected security position on all real and personal property of us and our
Subsidiaries, as guarantors.
Voluntary prepayments are permitted under the terms of our credit facility at any time without
penalty or premium.
Our credit facility provides for payment of certain fees and expenses, including (1) a fee on
the revolving loan commitments which varies depending on our Leverage Ratio, (2) a letter of credit
fee on the stated amount of issued and undrawn letters of credit and a fronting fee to the issuing
lender, and (3) other customary fees, including an agency fee.
Our credit facility contains, among other things, restrictions on our and our guarantors
ability to consolidate or merge with other companies, conduct asset sales, incur additional
indebtedness, grant liens, issue guarantees, make investments, loans or advances, pay dividends,
enter into certain transactions with affiliates and to make capital expenditures in excess of
$100.0 million in any fiscal year, provided that up to $50.0 million of such amount in any fiscal
year may be rolled over to the subsequent fiscal year and up to $50.0 million of such amount may
also be pulled forward from the subsequent fiscal year. The capital expenditure restrictions do not
apply to, among other things, capital expenditures financed solely with proceeds from the issuance
of common equity interests or to normal replacement and maintenance capital expenditures.
Our credit facility contains customary affirmative covenants including financial reporting,
governance and notification requirements. Our credit facility requires us to maintain, measured on
a consolidated basis, (1) an Interest Coverage Ratio of not less than 3.00 to 1.00 and (2) a
Leverage Ratio of not greater than 3.25 to 1.00 as such terms are defined in our credit facility.
We are currently in compliance with all debt covenants.
Our credit facility provides that, upon the occurrence of events of default, our obligations
thereunder may be accelerated and the lending commitments terminated. Such events of default
include, among other things, payment defaults to lenders, failure to meet covenants, material
inaccuracies of representations or warranties, cross defaults to other indebtedness, insolvency,
bankruptcy, ERISA and judgment defaults, and change in control, which includes (1) a change in
control under certain unsecured indebtedness issued by us or our Subsidiaries, (2) a person or
group other than certain permitted holders becoming the beneficial owner of 35% or more of our
voting securities, or (3) our board of directors being comprised for a period of 18 consecutive
months of individuals who were neither members at the beginning of such period nor approved by
individuals who were members at the beginning of such period.
Each loan and issuance of a letter of credit under the credit facility is subject to the
conditions that the representations and warranties in the loan documents remain true and correct in
all material respects and no default or event of default shall have occurred or be continuing at
the time of or immediately after such borrowing or extension of a letter of credit.
Critical Accounting Policies
The selection and application of accounting policies is an important process that has
developed as our business activities have evolved and as the accounting standards have developed.
Accounting standards generally do not involve a selection among alternatives, but involve the
implementation and interpretation of existing standards, and the use of judgment applied to the
specific set of circumstances existing in our business. We make every effort to properly comply
with all applicable standards on or before their adoption, and we believe the proper implementation
and consistent application of the accounting standards are critical.
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Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, expenses and related
disclosures. We base our estimates and assumptions on historical experience and on various other
factors that we believe to be reasonable under the circumstances. We evaluate our estimates and
assumptions on an ongoing basis. The results of our analysis form the basis for making assumptions
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Our actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies involve significant areas of
managements judgments and estimates in the preparation of our consolidated financial statements.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost less
accumulated depreciation. Maintenance and repairs, which do not improve or extend the life of the
related assets, are charged to operations when incurred. Refurbishments and renewals are
capitalized when the value of the equipment is enhanced for an extended period. When property and
equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation
account are relieved, and any gain or loss is included in operating income. The cost of property
and equipment currently in service is depreciated over the estimated useful lives of the related
assets, which range from three to 25 years. Depreciation is computed on a straight-line basis for
financial reporting purposes. Depreciation expense charged to operations was $4.3 million and $2.2
million for the three months ended June 30, 2011 and 2010, respectively. Depreciation expense was
$7.5 million and $4.4 million for the six months ended June 30, 2011 and 2010, respectively.
Goodwill, Intangible Assets and Amortization. Goodwill and other intangible assets with
infinite lives are not amortized, but tested for impairment annually or more frequently if
circumstances indicate that impairment may exist. Intangible assets with finite useful lives are
amortized either on a straight-line basis over the assets estimated useful life or on a basis that
reflects the pattern in which the economic benefits of the intangible assets are realized. The
impairment test requires the allocation of goodwill and all other assets and liabilities to
reporting units. We perform impairment tests on the carrying value of goodwill for each of our
reporting units at least annually. Our annual impairment tests involve the use of different
valuation techniques, including a combination of the income and market approach, to determine the
fair value of each reporting unit. Determining the fair value of a reporting unit is a matter of
judgment and often involves the use of significant estimates and assumptions. If the fair value of
the reporting unit is less than its carrying value, an impairment loss is recorded to the extent
that the implied fair value of the reporting units goodwill is less than its carrying value. For
the six months ended June 30, 2011 and 2010, there were no indicators of impairment. Significant
and unanticipated changes to these assumptions could require an additional provision for impairment
in a future period.
Impairment of Long-Lived Assets. We assess the impairment of our long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Such
indicators include changes in our business plans, a change in the physical condition of a
long-lived asset or the extent or manner in which it is being used, or a severe or sustained
downturn in the oil and natural gas industry.
Recoverability is assessed by using undiscounted future net cash flows of assets grouped at
the lowest level for which there are identifiable cash flows independent of the cash flows of other
groups of assets. If the undiscounted future net cash flows are less than the carrying amount of
the asset, the asset is deemed impaired. The amount of the impairment is measured as the difference
between the carrying value and the fair value of the asset.
We make estimates and judgments about future undiscounted cash flows and fair values. Although
our cash flow forecasts are based on assumptions that are consistent with our plans, there is a
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significant degree of judgment involved in determining the cash flows attributable to a
long-lived asset over its estimated remaining useful life. Our estimates of anticipated cash flows
could be reduced significantly in the future and as a result, the carrying amounts of our
long-lived assets could be subject to impairment charges in the future.
Revenue Recognition. All revenue is recognized when persuasive evidence of an arrangement
exists, the service is complete or the equipment has been delivered to the customer, the amount is
fixed or determinable and collectability is reasonably assured, as follows:
Hydraulic Fracturing Revenue. We enter into arrangements with our customers to
provide hydraulic fracturing services, which can be either on a spot market basis or under term
contracts. We only enter into arrangements with customers for which we believe that collectability
is reasonably assured. Revenue is recognized and customers are invoiced upon the completion of each
job, which can consist of one or numerous fracturing stages. Once a job has been completed to the
customers satisfaction, a field ticket is written that includes charges for the service performed
and the chemicals and proppants consumed during the course of the service. The field ticket also
includes charges for the mobilization of the equipment to the location, additional equipment used
on the job, if any, and other miscellaneous consumables. Rates for services performed on a spot
market basis are based on an agreed-upon hourly spot market rate. With respect to services
performed under term contracts, customers are invoiced a monthly mandatory payment based on a
specified minimum number of hours of service per month as defined in the contract, whether or not
those services are actually utilized, upon the earlier of the passage of time or completion of the
job. To the extent customers utilize more than the contracted minimum number of hours of service
per month, they are invoiced for such excess at rates defined in the contract upon the completion
of each job.
Coiled Tubing and Pressure Pumping Revenue. We enter into arrangements to provide
coiled tubing and pressure pumping services to only those customers for which we believe that
collectability is reasonably assured. These arrangements are typically short-term in nature and
each job can last anywhere from a few hours to multiple days. Coiled tubing and pressure pumping
revenue is recognized upon completion of each days work based upon a completed field ticket. The
field ticket includes charges for the mobilization of the equipment to the location, the service
performed, the personnel on the job, additional equipment used on the job, if any, and
miscellaneous consumables used throughout the course of the service. We typically charge the
customer on an hourly basis for these services at agreed upon spot market rates.
Materials Consumed While Performing Services. We generate revenue from chemicals and
proppants that are consumed while performing hydraulic fracturing services. We charge fees to our
customers based on the amount of chemicals and proppants used in providing these services. In
addition, ancillary to coiled tubing and pressure pumping revenue, we generate revenue from various
fluids and supplies that are necessarily consumed during those processes. We do not sell or
otherwise charge a fee separate and apart from the services we provide for any of the materials
consumed while performing hydraulic fracturing, coiled tubing or pressure pumping services.
Equipment Manufacturing Revenue. We enter into arrangements to construct equipment for
only those customers for which the Company believes that collectability is reasonably assured.
Revenue is recognized and the customer is invoiced upon the completion and delivery of each order
to the customer.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are stated at
the amount billed to customers and are ordinarily due upon receipt. We provide an allowance for
doubtful accounts, which is based upon a review of outstanding receivables, historical collection
information and existing economic conditions. Provisions for doubtful accounts are recorded when it
is deemed probable that the customer will not make the required payments at either contractual due
dates or in the future. The allowance for doubtful accounts totaled $0.7 million at June 30, 2011
and $0.5 million at December 31,
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2010. Bad debt expense was $70,000 and $57,500 for the three months ended June 30, 2011 and
2010, respectively, and $137,500 and $70,000 for the six months ended June 30, 2011 and 2010,
respectively.
Stock-Based Compensation. We recognize compensation expense related to stock-based awards,
based on the grant date estimated fair value. We amortize the fair value of stock options on a
straight-line basis over the requisite service period of the award, which is generally the vesting
period. The determination of the fair value of stock options was estimated using the Black-Scholes
option-pricing model and required the use of highly subjective assumptions. The Black-Scholes
option-pricing model requires inputs such as the expected term of the grant, expected volatility
and risk-free interest rate. Further, the forfeiture rate also affects the amount of aggregate
compensation that we are required to record as an expense.
We estimate our forfeiture rate based on an analysis of our actual forfeitures and will
continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture
experience, analysis of employee turnover and other factors. Quarterly changes in the estimated
forfeiture rate can have a significant effect on reported stock-based compensation expense, as the
cumulative effect of adjusting the rate for all expense amortization is recognized in the period
the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously
estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based
compensation expense recognized in the consolidated financial statements. If a revised forfeiture
rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result
in an increase to the stock-based compensation expense recognized in the consolidated financial
statements.
We will continue to use judgment in evaluating the expected term, volatility and forfeiture
rate related to our stock-based compensation on a prospective basis and will incorporate these
factors into our option-pricing model.
Each of these inputs is subjective and generally requires significant management judgment. If,
in the future, we determine that another method for calculating the fair value of our stock options
is more reasonable, or if another method for calculating these input assumptions is prescribed by
authoritative guidance, and, therefore, should be used to estimate expected volatility or expected
term, the fair value calculated for our employee stock options could change significantly. Higher
volatility and longer expected terms generally result in an increase to stock-based compensation
expense determined at the date of grant.
Income Taxes. Income taxes are provided for the tax effects of transactions reported in
financial statements and consist of taxes currently due plus deferred taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the deferred tax assets
and deferred tax liabilities.
The components of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
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Effective January 1, 2009, we adopted guidance issued by the Financial Accounting Standards
Board Accounting Standards Codification (FASB ASC) Topic 740, Income Taxes, in accounting for
uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing
the minimum recognition threshold an income tax position is required to meet before being
recognized in the financial statements and applies to all income tax positions. Each income tax
position is assessed using a two step process. A determination is first made as to whether it is
more likely than not that the income tax position will be sustained, based upon technical merits,
upon examination by the taxing authorities. If the income tax position is expected to meet the more
likely than not criteria, the benefit recorded in the financial statements equals the largest
amount that is greater than 50% likely to be realized upon its ultimate settlement. We did not
recognize any uncertain tax positions upon adoption of the guidance and had no uncertain tax
positions as of June 30, 2011, and December 31, 2010. Management believes there are no tax
positions taken or expected to be taken in the next twelve months that would significantly change
our unrecognized tax benefits.
We will record income tax related interest and penalties, if applicable, as a component of the
provision for income tax expense. However, there were no amounts recognized relating to interest
and penalties in the consolidated statements of operations for the three and six months ended June
30, 2011, and 2010, respectively. The tax years that remain open to examination by the major taxing
jurisdictions to which we are subject range from 2007 to 2010. We have identified our major taxing
jurisdictions as the United States of America and Texas. None of our federal or state tax returns
are currently under examination.
We are subject to the Texas Margin Tax, which is determined by applying a tax rate to a base
that considers both revenue and expenses. It is considered an income tax and is accounted for in
accordance with the provisions of the FASB ASC Topic 740, Income Taxes.
Recently Adopted Accounting Pronouncements
In December 2010, the FASB issued ASU No. 2010-09, Business Combinations: Disclosure of
Supplementary Pro Forma Information for Business Combinations or ASU 2010-29. ASU 2010-29
addresses diversity in the interpretation of pro forma revenue and earnings disclosure requirements
for business combinations. If a public entity presents comparative financial statements, the entity
should disclose revenue and earnings of the combined entity as though the business combination that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The Company adopted ASU 2010-29 on January 1, 2011. This update had no
impact on our financial position, results of operations or cash flows.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in market risk from the information provided in
Managements Discussion and Analysis of Financial Condition and Results of
OperationsQuantitative and Qualitative Disclosures About Market Risk in the Final Prospectus.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable
assurance that the information required to be disclosed by us in our reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to
our management, including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this Form 10-Q. Based upon that evaluation, our principal
executive officer and principal financial officer concluded that our disclosure controls and
procedures were effective as of June 30, 2011.
Changes in Internal Control over Financial Reporting
No changes in our system of internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarterly period ended June 30,
2011 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various legal proceedings and claims incidental to or arising in the
ordinary course of our business. Our management does not expect the outcome in any of these known
legal proceedings, individually or collectively, to have a material adverse effect on our
consolidated financial condition or results of operations.
Item 1A. Risk Factors
In addition to the information set forth in this Form 10-Q, including under the section titled
Cautionary Note Regarding Forward-Looking Statements, please see the information set forth under
Risk Factors of the Final Prospectus for a detailed discussion of the risk factors affecting us.
As of the date of this Form 10-Q, there have been no material changes to the risk factors disclosed
in the Final Prospectus.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
On July 14, 2011, we issued and sold an aggregate of 87,500 shares of our common stock to our
Chief Financial Officer at a price of $1.43 per share for a total of approximately $0.1 million
upon his exercise of options previously granted to him under the C&J Energy Services, Inc.s 2006
Stock Option Plan. No underwriters were involved in this sale of securities. This sale of
securities was made in reliance upon the exemption from the registration requirements contained in
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions pursuant to
compensatory benefit plans and contracts relating to compensation.
(b) Use of Proceeds from Public Offering of Common Stock
Our IPO of common stock was effected through a Registration Statement on Form S-1 (File No.
333-173177), which was declared effective by the SEC on July 28, 2011. Goldman, Sachs & Co., J.P.
Morgan Securities LLC, Citigroup Global Markets Inc., Wells Fargo Securities, LLC, Simmons &
Company International and Tudor, Pickering, Holt & Co. Securities, Inc. acted as underwriters for
the offering. Goldman, Sachs & Co., J.P. Morgan Securities LLC and Citigroup Global Markets Inc.
acted as the co-managers for the offering. Under the Form S-1, we registered the offer and sale of
an aggregate of 13,225,000 shares of our common stock, 4,300,000 shares of which were issued and
sold by us and 8,925,000 shares of which were sold by the selling stockholders named in the Form
S-1, including 1,725,000 shares sold by certain of the selling stockholders pursuant to the full
exercise of the underwriters option to purchase additional shares. The IPO closed on August 3,
2011, and at that time we issued and sold all of the shares that were registered.
The shares were sold at a price to the public of $29.00 per share and we received cash
proceeds of approximately $116.0 million from this transaction, net of underwriting discounts and
commissions. We did not receive any proceeds from the sale of shares by the selling stockholders.
We paid to the underwriters underwriting discounts and commissions totaling approximately $8.7
million, and we incurred additional costs of approximately $3.1 million in connection with the
offering, which amounted to total fees and costs of approximately $11.8 million. Thus, the net
offering proceeds to us, after deducting underwriting discounts and commissions and offering costs,
were approximately $113.0 million. No offering costs were paid directly or indirectly to any of our
directors or officers (or their associates) or persons owning 10% or more of any class of our
equity securities or to any other affiliates, other than reimbursement of legal expenses for
selling stockholders.
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We used $105.0 million of the net proceeds that we received from the IPO to repay all
outstanding indebtedness under our credit facility; we used the remaining $8.0 million in net
proceeds to partially fund the purchase price of our three on-order hydraulic fracturing fleets.
Item 6. Exhibits
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.
1.1
|
Underwriting Agreement, dated July 28, 2011, by and among C&J Energy Services, Inc., C&J Spec Rent Services, Inc., Total E&S, Inc., the Selling Stockholders named therein and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (incorporated herein by reference to Exhibit 1.1 to the C&J Energy Services, Inc.s Current Report on Form 8-K, filed on August 3, 2011 (File No. 001-35255)) | |
3.1
|
Amended and Restated Certificate of Incorporation of C&J Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the C&J Energy Services, Incs Registration Statement on Form S-1, dated March 30, 2011 (Registration No. 333-173177)) | |
3.2
|
Amended and Restated Bylaws of C&J Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the C&J Energy Services, Incs Registration Statement on Form S-1, dated March 30, 2011 (Registration No. 333-173177)) | |
10.1
|
Credit Agreement, dated as of April 19, 2011, among C&J Energy Services, Inc. as Borrower, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Comerica Bank as L/C Issuer and Syndication Agent, Wells Fargo Bank, National Association as Documentation Agent, and the Other Lenders party thereto (incorporated herein by reference to Exhibit 10.18 to Amendment No. 1 to the C&J Energy Services, Inc.s Registration Statement on Form S-1/A, dated May 12, 2011 (Registration No. 333-173177)) | |
10.2
|
First Amendment to the Amended and Restated Stockholders Agreement of C&J Energy Services, Inc. dated as of May 12, 2011 (incorporated herein by reference to Exhibit 10.16 to Amendment No. 2 to the C&J Energy Services, Incs Registration Statement on Form S-1/A, dated May 18, 2011 (Registration No. 333-173177)) | |
10.3
|
Second Amendment to Amended and Restated Stockholders Agreement of C&J Energy Services, Inc. dated July 14, 2011 (incorporated herein by reference to Exhibit 10.19 to the C&J Energy Services, Incs Registration Statement on Form S-1, dated July 18, 2011 (Registration No. 333-173177)) | |
* 31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
* 31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
**
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | |
** 32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 | |
§101.INS
|
XBRL Instance Document | |
§101.SCH
|
XBRL Taxonomy Extension Schema Document |
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§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 in accordance with Item 601(b)(32) of Regulation S-K. | |
§ | Furnished with this Form 10-Q. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act except as expressly set forth by specific reference in such filing. |
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Table of Contents
SIGNATURES
Pursuant to the requirements 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.
C&J ENERGY SERVICES, INC. |
||||
Date: August 31, 2011 | By: | /s/ Randall C. McMullen, Jr. | ||
Randall C. McMullen, Jr. | ||||
Executive Vice President, Chief Financial Officer and Treasurer |
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Table of Contents
EXHIBIT INDEX
1.1
|
Underwriting Agreement, dated July 28, 2011, by and among C&J Energy Services, Inc., C&J Spec Rent Services, Inc., Total E&S, Inc., the Selling Stockholders named therein and Goldman, Sachs & Co. and J.P. Morgan Securities LLC (incorporated herein by reference to Exhibit 1.1 to the C&J Energy Services, Inc.s Current Report on Form 8-K, filed on August 3, 2011 (File No. 001-35255)) | |
3.1
|
Amended and Restated Certificate of Incorporation of C&J Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the C&J Energy Services, Incs Registration Statement on Form S-1, dated March 30, 2011 (Registration No. 333-173177)) | |
3.2
|
Amended and Restated Bylaws of C&J Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the C&J Energy Services, Incs Registration Statement on Form S-1, dated March 30, 2011 (Registration No. 333-173177)) | |
10.1
|
Credit Agreement, dated as of April 19, 2011, among C&J Energy Services, Inc. as Borrower, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Comerica Bank as L/C Issuer and Syndication Agent, Wells Fargo Bank, National Association as Documentation Agent, and the Other Lenders party thereto (incorporated herein by reference to Exhibit 10.18 to Amendment No. 1 to the C&J Energy Services, Inc.s Registration Statement on Form S-1/A, dated May 12, 2011 (Registration No. 333-173177)) | |
10.2
|
First Amendment to the Amended and Restated Stockholders Agreement of C&J Energy Services, Inc. dated as of May 12, 2011 (incorporated herein by reference to Exhibit 10.16 to Amendment No. 2 to the C&J Energy Services, Incs Registration Statement on Form S-1/A, dated May 18, 2011 (Registration No. 333-173177)) | |
10.3
|
Second Amendment to Amended and Restated Stockholders Agreement of C&J Energy Services, Inc. dated July 14, 2011 (incorporated herein by reference to Exhibit 10.19 to the C&J Energy Services, Incs Registration Statement on Form S-1, dated July 18, 2011 (Registration No. 333-173177)) | |
* 31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
* 31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
** 32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | |
** 32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 as adopted by 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 |
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