CJ 2017 Annual Report

Direct Costs Direct costs decreased $575.9 million, or 37.8%, to $947.3 million for the year ended December 31, 2016, as compared to $1.5 billion for the year ended December 31, 2015. The decrease in direct costs was primarily due to the corresponding decrease in revenue which was negatively impacted by overall lower utilization levels across our Completion Services and Well Support Services segments resulting from the extremely competitive market environment caused by the severe decline in U.S. onshore drilling and completion activity as well as the unprecedented slowdown in well support services activity, and partially offset by the shorter period for the C&P Business from the date the Nabors Merger was closed to December 31, 2015, as noted above. As utilization fell in our Completion Services segment, we strategically stacked additional equipment, closed unprofitable facilities, reduced head count and aggressively cut costs in order to further lower our operational cost structure. Similarly, in our Well Support Services segment, we exited select service lines in certain basins, closed unprofitable facilities and further reduced head count. As a percentage of revenue, direct costs increased to 97.5% for the year ended December 31, 2016, up from 87.1% for the year ended December 31, 2015, primarily due to substantially lower pricing for our services due to competitive market conditions resulting from the rapid and sustained decline in commodity prices, partially offset by reductions to our cost structure, as noted above. Selling, General and Administrative Expenses ("SG&A") and Research and Development Expenses ("R&D") SG&A decreased $10.4 million, or 4.4%, to $229.3 million for the year ended December 31, 2016, as compared to $239.7 million for the year ended December 31, 2015. The decrease in SG&A was primarily due to a $32.1 million decrease in acquisition-related costs and a $12.6 million decrease in employee related costs as a result of headcount reductions. These amounts are partially offset by $30.4 million in costs related to the Chapter 11 Proceeding and related restructuring activities, by a $2.0 million increase in legal fees and settlements as a result of the Chapter 11 Proceeding and by the fact that SG&A associated with the C&P Business was only incurred from the closing of the Nabors Merger to December 31, 2015. We also incurred $7.7 million in R&D for the year ended December 31, 2016, as compared to $16.7 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 $58.9 million, or 21.3%, to $217.4 million for the year ended December 31, 2016 as compared to $276.4 million for the same period in 2015. The decrease in D&A was primarily the result of significant impairment charges recorded during 2015 and the first half of 2016 due to the steep decline in asset utilization levels related to the sustained downturn in the oil and gas industry. 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 during the third and fourth quarters of 2015 and throughout 2016. Based on our assessment, we recorded impairment expense of $436.4 million for the year ended December 31, 2016, 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. Impairment expense for the year ended December 31, 2015 was $791.8 million and consisted of $385.0 million of goodwill impairment within each of our Completion Services, Well Support Services and Other Services segments, $393.1 million of PP&E impairment related to the Completion Services and Other Services segments, and $13.7 million related to other intangible assets. 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. 51