CJ 2017 Annual Report

Direct Costs Direct costs increased $340.8 million, or 36.0%, to $1.3 billion for the year ended December 31, 2017, as compared to $947.3 million for the year ended December 31, 2016. The increase in direct costs was primarily due to the corresponding increase in revenue from our Completion Service segment. Revenue has been positively impacted by overall increased utilization levels across our Completion Services and Well Support Services segments resulting from the improved market environment. As a percentage of revenue, direct costs decreased to 78.6% for the year ended December 31, 2017, as compared to 97.5% for the year ended December 31, 2016. The decrease was primarily due to substantially improved pricing for our services due to the more favorable market conditions resulting from the increase in commodity prices. Selling, General and Administrative Expenses ("SG&A") and Research and Development Expenses ("R&D") SG&A increased $21.6 million, or 9.4%, to $250.9 million for the year ended December 31, 2017, as compared to $229.3 million for the year ended December 31, 2016. The increase in SG&A was primarily due to (i) a $40.8 million increase in compensation expense primarily as a result of (a) significant increases in operating performance throughout 2017 and (b) the reinstatement of certain previously reduced compensation programs during the first half of 2017, (ii) a $10.3 million increase in professional fee expense primarily as a result of efficiency initiatives within our finance and human resources departments, (iii) a $3.8 million increase in acquisition related costs related to the O-Tex acquisition and (iv) a $1.2 million increase in other general and administrative expenses, partially offset by (i) a $19.2 million reduction in costs related to our restructuring activities and Chapter 11 Proceeding during the corresponding prior year period, (ii) a $9.2 million reduction in integration related costs incurred in the corresponding prior year primarily related to the planned implementation of the new ERP system and (iii) a $6.1 million reduction in severance costs as a result of headcount reductions in the corresponding prior year period. We also incurred $6.4 million in R&D for the year ended December 31, 2017, as compared to $7.7 million for the corresponding prior year period. The decrease in R&D was primarily due to our cost control initiatives, which included scaling back our R&T business line and initiatives and delaying certain projects. Depreciation and Amortization Expense ("D&A") D&A decreased $76.8 million, or 35.3%, to $140.7 million for the year ended December 31, 2017 as compared to $217.4 million for the same period in 2016. The decrease in D&A was primarily due to a lower value of the asset base as a result of the estimated fresh start adjustments on the Fresh Start Reporting Date to our property, plant and equipment (" PP&E") and other intangible assets. Impairment Expense Due to the severe downturn in the oil and gas industry, and the resulting weakness in demand for our services, we determined that it was necessary to test goodwill for impairment and to test PP&E and other intangible assets for recoverability throughout 2016. Impairment expense for the year ended December 31, 2016 was $436.4 million, consisting of $314.3 million of goodwill impairment related to impairment of all remaining goodwill associated with our Well Support Services segment, along with $61.0 million related to other intangible assets and $61.1 million related to PP&E within each of our Completion Services, Well Support Services, and Other Services segments. Reorganization items Reorganization items of $55.3 million for the year ended December 31, 2016 are primarily related to professional fees of $41.2 million, contract termination settlements of $20.3 million and revisions of estimated claims of $0.8 million, partially offset by $5.2 million in related party settlements and $1.8 million in vendor claims adjustments in connection with our Chapter 11 Proceeding. Interest Expense, net Interest expense decreased $155.9 million, or 99.0%, to $1.5 million for the year ended December 31, 2017 from $157.5 million for the year ended December 31, 2016. The decrease is primarily due to the settlement of all outstanding borrowings of the Predecessor in accordance with the Restructuring Plan in addition to the prior year $91.9 million of 48