NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Key Energy Services, Inc., its wholly owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us” and “our”) provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States, and we have operations in Mexico, Colombia, Ecuador, the Middle East and Russia. In addition, we have a technology development and control systems business based in Canada.
Basis of Presentation
The consolidated financial statements included in this Annual Report on Form 10-K present our financial position, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”).
The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that our estimates are reasonable.
We have evaluated events occurring after the balance sheet date included in this Annual Report on Form 10-K for possible disclosure as a subsequent event. Management monitored for subsequent events through the date that these financial statements were issued.
On February 17, 2012, the Company announced its decision to sell its business and operations in Argentina (the “Argentina business”) and on September 14, 2012 completed the sale of the Argentina business. In accordance with applicable accounting requirements and guidance, the Company has reclassified and presented the Argentina business as a discontinued operation for the 2011 and 2012 periods.
Principles of Consolidation
Within our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. We eliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, we account for that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interest using the equity method.
Acquisitions
From time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations for acquisitions are included in our financial statements beginning on the date of acquisition and are accounted for using the acquisition method. For all business combinations (whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquired business, including goodwill, at their fair values; including contingent consideration. Final valuations of assets and liabilities are obtained and recorded as soon as practicable no later than one year from the date of the acquisition.
Revenue Recognition
We recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
•
|
Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completed customer purchase order, field ticket, supplier contract, or master service agreement.
|
|
|
|
|
•
|
Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement as evidenced by a field ticket or service log.
|
|
|
|
|
•
|
The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a field ticket.
|
|
|
|
|
•
|
Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined credit terms that have been granted in accordance with our credit policy.
|
We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmental taxing authorities.
We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value if they have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.
Cash and Cash Equivalents
We consider short-term investments with an original maturity of less than three months to be cash equivalents. At
December 31, 2013
, we have not entered into any compensating balance arrangements, but all of our obligations under our 2011 Credit Facility (as defined below) with a syndicate of banks of which JPMorgan Chase Bank, N.A. is the administrative agent were secured by most of our assets, including assets held by our subsidiaries, which includes our cash and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.
We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of
December 31, 2013
, accounts were guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000
and substantially all of our accounts held deposits in excess of the FDIC limits.
We believe that the cash held by our other foreign subsidiaries could be repatriated for general corporate use without material withholdings. From time to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts of our cash in deposit accounts with restrictions that limit our ability to withdraw those funds.
Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. We present the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
We establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or part of the outstanding balances. We regularly review accounts over
150
days past due from the invoice date for collectability and establish or adjust our allowance as necessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off the accounts receivable and the associated provision for uncollectible accounts.
From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self-insurance liability. We present these insurance receivables gross on our balance sheet as a component of other assets, separate from the corresponding liability.
Concentration of Credit Risk and Significant Customers
Our customers include major oil and natural gas production companies, independent oil and natural gas production companies, and foreign national oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended
December 31, 2013
, Chevron Texaco Exploration and Production accounted for
15%
of our consolidated revenue. During the year ended
December 31, 2012
, Pemex and Occidental Petroleum Corporation accounted for
12%
and
10%
of our consolidated revenue, respectively. No other customer accounted for more than 10% of our consolidated revenue in
2013
or
2012
. No single customer accounted for more than 10% of our consolidated revenue during the year ended
December 31, 2011
.
Receivables outstanding from Pemex were approximately
19%
and
31%
of our total accounts receivable as of
December 31, 2013
and
2012
, respectively. No other customer accounted for more than 10% of our total accounts receivable as of
December 31, 2013
and
2012
.
Inventories
Inventories, which consist primarily of equipment parts and spares for use in our operations and supplies held for consumption, are valued at the lower of average cost or market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated depreciable lives of the assets using the straight-line method. Depreciation expense for the years ended
December 31, 2013
,
2012
and
2011
was
$206.2 million
,
$190.5 million
and
$145.7 million
, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a value higher than the assets’ value as scrap. Salvage value approximates
10%
of an operational asset’s acquisition cost. When an operational asset is stacked or taken out of service, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is operable and whether the remaining depreciable life and salvage value should be adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When we dispose of an asset, a gain or loss is recognized.
As of
December 31, 2013
, the estimated useful lives of our asset classes are as follows:
|
|
|
|
|
|
Description
|
Years
|
|
Well service rigs and components
|
3-15
|
|
Oilfield trucks, vehicles and related equipment
|
5-10
|
|
Coiled tubing units and equipment
|
10-12
|
|
Fishing and rental tools, tubulars and pressure control equipment
|
3-10
|
|
Disposal wells
|
15-30
|
|
Furniture and equipment
|
3-7
|
|
Buildings and improvements
|
15-30
|
From time to time, we lease certain of our operating assets under capital lease obligations whose terms run from
55
to
60 months
. These assets are depreciated over their estimated useful lives or the term of the capital lease obligation, whichever is shorter.
A long-lived asset or asset group should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business based on the services provided, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We would record an impairment charge, reducing the net carrying value to an estimated fair value, if the asset group’s estimated future cash flows were less than its net carrying value. Events or changes in circumstance that cause us to evaluate our fixed assets for recoverability and possible impairment may include changes in market conditions, such as adverse movements in the prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use or physical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination of fair value for an asset group involves significant judgment and estimates. We did not identify any triggering events or record any asset impairments during
2013
,
2012
or
2011
.
Asset Retirement Obligations
We recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirement activities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability for the fair value of a conditional asset
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputs that we believe a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjust the cost for inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimating future cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of the cash flows change, such changes may have a material impact on our results of operations. See
“Note 11. Asset Retirement Obligations.”
Deposits
Due to capacity constraints on equipment manufacturers, we have been required to make advanced payments for certain oilfield service equipment and other items used in the normal course of business. As of
December 31, 2013
and
December 31, 2012
, deposits totaled
$1.5 million
and $
7.3 million
, respectively. Deposits as of
December 31, 2012
consisted primarily of payments made related to high demand long-lead time items.
Capitalized Interest
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized to depreciation expense over the useful life of the assets, and is included in the depreciation and amortization line in the accompanying consolidated statements of operations.
Deferred Financing Costs
Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest method over the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination of the gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. See
“Note 15. Long-term Debt,”
for further discussion.
Goodwill and Other Intangible Assets
Goodwill results from business combinations and represents the excess of the acquisition consideration over the fair value of the net assets acquired. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount we will perform the two-step goodwill impairment test. In the first step of the test, a fair value is calculated for each of our reporting units, and that fair value is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for the reporting unit, then the second step of the test is required.
The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fair value of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment is recorded. If the carrying value is in excess of the implied fair value, an impairment equal to the excess is recorded.
To assist management in the preparation and analysis of the valuation of our reporting units, we utilize the services of a third-party valuation consultant. The ultimate conclusions of the valuation techniques remain our sole responsibility. The determination of the fair value used in the test is heavily impacted by the market prices of our equity and debt securities, as well as the assumptions and estimates about our future activity levels, profitability and cash flows. We conduct our annual impairment test as of
October 1
of each year. For the annual test completed as of
October 1, 2013
, no impairment of our goodwill was indicated. See
“Note 9. Goodwill and Other Intangible Assets,”
for further discussion.
Internal-Use Software
We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the software’s estimated useful life, generally
five
to
seven
years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation
When estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss is probable and reasonably estimable.
Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. See
“Note 16. Commitments and Contingencies.”
Environmental
Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, and regulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. We record liabilities on an undiscounted basis when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See
“Note 16. Commitments and Contingencies.”
Self-Insurance
We are largely self-insured against physical damage to our equipment and automobiles as well as workers’ compensation claims. The accruals that we maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. To assist management with the liability amount for our self-insurance reserves, we utilize the services of a third party actuary. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See
“Note 16. Commitments and Contingencies.”
Income Taxes
We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, but which are deferred until future periods. Current taxes payable represent our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatments of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.
We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than
50%
) that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate. See
“Note 14. Income Taxes”
for further discussion of accounting for income taxes, changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.
Earnings Per Share
Basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See
“Note 10. Earnings Per Share.”
Share-Based Compensation
In the past, we have issued stock options, shares of restricted common stock, restricted stock units, stock appreciation rights (“SARs”), phantom shares and performance units to our employees as part of those employees’ compensation and as a retention tool. For our options, restricted shares and SARs, we calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. The valuation of our stock options and SARs requires us to estimate the expected term of award, which we estimated using the simplified method, as we did not have sufficient historical exercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stock option and SARs awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expected term of the award, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using our stock price on the grant date. Our phantom shares and performance units are treated as “liability” awards and carried at fair value at each balance sheet date, with changes in fair value recorded as a component of compensation expense and an offsetting liability on our consolidated balance sheet. We record share-based compensation as a component of general and administrative and direct operating expense for the applicable individual. See
“Note 20. Share-Based Compensation.”
Foreign Currency Gains and Losses
With respect to our operations in Russia, where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. dollar are included as a separate component of stockholders’ equity in other comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity. As of December 31, 2011, the functional currency for Mexico, Russia and Canada was the local currency and the functional currency for Colombia and the Middle East was the U. S. dollar. Due to significant changes in economic facts and circumstances, the functional currency for Mexico and Canada was changed to the U.S. dollar effective January 1, 2012. See
“Note 17. Accumulated Other Comprehensive Loss.”
From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functional currency. These transactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction. At the end of each month, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rates in effect at that time. Any adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recorded in the income or loss of the foreign subsidiary as a component of other income, net.
Comprehensive Income
We display comprehensive income (loss) and its components in our financial statements, and we classify items of comprehensive income by their nature in our financial statements and display the accumulated balance of other comprehensive income separately in our stockholders’ equity.
Leases
We lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine whether the lease should be accounted for as an operating lease or a capital lease.
We periodically incur costs to improve the assets that we lease under these arrangements. If the value of the leasehold improvements exceeds our threshold for capitalization, we record the improvement as a component of our property and equipment and amortize the improvement over the useful life of the improvement or the lease term, whichever is shorter.
Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. These increases may be the result of an inducement or “rent holiday” conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. We recognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating lease agreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such as moving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to us or on our behalf represent incentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement.
New Accounting Standards Adopted in this Report
There are no new accounting standards that have been adopted or not yet adopted in this report.
NOTE 2. ACQUISITIONS
2013 Acquisition of Noncontrolling Interests
Geostream.
On October 31, 2008, we acquired a
26%
interest Geostream, a limited liability company incorporated in the Russian Federation that provides a wide range of drilling, workover and reservoir engineering services for
$17.4 million
. On September 1, 2009, we acquired an additional
24%
interest for
$16.4 million
, which brought our total investment in Geostream to
50%
and provided us a controlling interest with representation on Geostream's board of directors. We accounted for the second investment as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the initial acquisition date, with the portion outside of our control forming a noncontrolling interest. On April 9, 2013, we completed the acquisition of the remaining
50%
noncontrolling interest in Geostream for
$14.6 million
. Geostream is now our wholly owned subsidiary. The acquisition was accounted for as an equity transaction. Therefore, our acquisition of the noncontrolling interest in Geostream in the second quarter of 2013 did not result in a gain or loss.
AlMansoori Key Energy Services, LLC.
On March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services, LLC (“AlMansoori”) to form the joint venture AlMansoori Key Energy Services, LLC, a joint venture under the laws of Abu Dhabi, UAE. The purpose of the joint venture was to engage in conventional workover and drilling services, coiled tubing services, fishing and rental services, rig monitoring services, pipe handling services and fluids, waste treatment and handling services. Although AlMansoori held a
51%
interest in the joint venture and we held a
49%
interest, we held
three
of the
five
board of directors seats and a controlling financial interest. In addition, profits and losses of the joint venture were shared on equal terms and in equal amounts with AlMansoori. Because the joint venture did not have sufficient resources to carry on its activities without our financial support, we determined it to be a variable interest entity of which we were the primary beneficiary. We consolidated the entity in our financial statements. On August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC and the acquisition of the underlying business for
$5.1 million
. The
$5.1 million
is expected to be paid in 2014 and is recorded in "other current liabilities" in our 2013 consolidated balance sheet. The acquisition of the
51%
noncontrolling interest in AlMansoori Key Energy Services, LLC was accounted for as an equity transaction therefore did not result in a gain or loss.
The effects of changes in our ownership interests in Geostream and AlMansoori Key Energy Services, LLC for the year ended December 31, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
Net loss attributable to Key
|
$
|
(21,768
|
)
|
|
Transfers from the noncontrolling interests
|
|
|
Increase in Key's paid-in capital for purchase of the 50% noncontrolling interest in Geostream
|
22,432
|
|
|
Decrease in Key's paid-in capital for purchase of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC
|
(2,888
|
)
|
|
Net transfers from noncontrolling interests
|
19,544
|
|
|
Change from net loss attributable to Key and transfers from noncontrolling interests
|
$
|
(2,224
|
)
|
2011 Acquisitions
Edge Oilfield Services, LLC (
“
Edge
”
).
On August 5, 2011, we completed the acquisition of Edge. We accounted for this acquisition as a business combination. The results of operations for Edge have been included in our consolidated financial statements from the acquisition date.
The total consideration for the acquisition was approximately $
305.9 million
consisting of approximately
7.5 million
shares of our common stock and approximately
$187.9 million
in cash, which included
$26.3 million
to reimburse Edge for growth capital expenditures incurred between March 1, 2011 and the date of closing, net of working capital adjustments of
$1.8 million
. We finalized the purchase accounting related to this acquisition as of June 30, 2012.
The following table summarizes the fair values of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
Cash
|
$
|
189,696
|
|
|
Key common stock
|
117,919
|
|
|
Consideration transferred
|
307,615
|
|
|
Working capital adjustment
|
(1,752
|
)
|
|
Total
|
$
|
305,863
|
|
The fair value of the
7.5 million
common shares issued was $
15.62
per share based on the closing price on the acquisition date (August 5, 2011).
The following table summarizes the fair values of the assets acquired and the liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
At August 5, 2011:
|
|
|
Cash and cash equivalents
|
$
|
886
|
|
|
Accounts receivable
|
21,124
|
|
|
Other current assets
|
234
|
|
|
Property and equipment
|
87,185
|
|
|
Intangible assets
|
49,310
|
|
|
Other long term assets
|
3,826
|
|
|
Total identifiable assets acquired
|
162,565
|
|
|
Current liabilities
|
19,406
|
|
|
Total liabilities assumed
|
19,406
|
|
|
Net identifiable assets acquired
|
143,159
|
|
|
Goodwill
|
162,704
|
|
|
Net assets acquired
|
$
|
305,863
|
|
Of the $
49.3 million
of acquired intangible assets, $
40.0 million
was assigned to customer relationships that will be amortized as the value of the relationships are realized using expected rates of
12.5%
,
30.0%
,
30.0%
,
11.0%
,
6.4%
,
3.8%
,
2.5%
,
1.7%
,
1.2%
and
0.8%
from 2011 through 2020. In addition, $
5.1 million
of acquired intangible assets was assigned to tradenames and are not subject to amortization. The remaining $
4.2 million
of acquired intangible assets was assigned to non-compete agreements that will be amortized on a straight-line basis over
38
months.
The fair value and gross contractual amount of accounts receivable acquired on August 5, 2011 was $
21.1 million
.
All of the goodwill acquired was assigned to our fishing and rental business, which is part of our U.S. reportable segment. We believe the goodwill recognized is attributable primarily to the acquired workforce and expansion of a growing service line. All of the goodwill is expected to be deductible for income tax purposes.
Transaction costs related to this acquisition were $
3.6 million
for the year ended December 31, 2011, and are included in general and administrative expenses in the 2011 consolidated statement of operations.
Included in our consolidated statements of operations for the year ended December 31, 2011, related to this acquisition are revenues of $
52.5 million
and operating income of $
14.7 million
from the acquisition date through December 31, 2011.
The following represents the pro forma consolidated income statement as if the Edge acquisition had been included in our consolidated results prior to 2011 for the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
2011
|
|
|
(unaudited)
(in thousands, except per share amounts)
|
|
REVENUES
|
$
|
1,803,768
|
|
|
COSTS AND EXPENSES:
|
|
|
Direct operating expenses
|
1,115,770
|
|
|
Depreciation and amortization expense(1)
|
176,298
|
|
|
General and administrative expenses(2)
|
227,652
|
|
|
Operating income
|
284,048
|
|
|
Loss on early extinguishment of debt
|
46,451
|
|
|
Interest expense, net of amounts capitalized
|
42,389
|
|
|
Other income, net
|
(7,585
|
)
|
|
Income from continuing operations before tax
|
202,793
|
|
|
Income tax expense(3)
|
(76,169
|
)
|
|
Income from continuing operations
|
126,624
|
|
|
Loss from discontinued operations, net of tax
|
(10,303
|
)
|
|
Net income
|
116,321
|
|
|
Loss attributable to noncontrolling interest
|
(806
|
)
|
|
INCOME ATTRIBUTABLE TO KEY
|
$
|
117,127
|
|
|
Earnings per share attributable to Key:
|
|
|
Basic
|
$
|
0.79
|
|
|
Diluted
|
$
|
0.79
|
|
|
Weighted average shares outstanding(4):
|
|
|
Basic
|
150,397
|
|
|
Diluted
|
150,705
|
|
|
|
|
|
(1)
|
Depreciation and amortization expense has been adjusted to reflect the additional expense that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied prior to 2011.
|
|
|
|
|
(2)
|
Transaction costs of $
3.6 million
have been removed as these costs would have occurred prior to 2011.
|
|
|
|
|
(3)
|
Income tax expense has been adjusted to reflect applicable corporate tax as if Edge had been acquired and converted from its LLC status prior to 2011.
|
|
|
|
|
(4)
|
Weighted average shares outstanding has been adjusted to reflect the issuance of shares in the Edge transaction as if the transaction occurred prior to 2011.
|
These unaudited pro forma results, based on assumptions deemed appropriate by management, have been prepared for informational purposes only and are not necessarily indicative of our results if the acquisition had occurred for the year ended December 2011. These amounts have been calculated after applying our accounting policies and adjusting the results of Edge as if these changes had been applied prior to 2011, together with the consequential tax effects.
Equity Energy Company (“EEC”).
In January 2011, we acquired, through purchase or lease,
10
saltwater disposal (“SWD”) wells from EEC for approximately
$14.3 million
. Most of these SWD wells are located in North Dakota. We accounted for this purchase as an asset acquisition.
NOTE 3. DISCONTINUED OPERATIONS
In September 2012, we completed the sale of our Argentina operations for approximately
$12.5 million
, net of transaction costs. The
$12.5 million
net proceeds from the sale of Argentina operations included
$2.0 million
received in cash and the balance in notes receivable which was comprised of three sets of non-interest bearing notes for a total of six notes. Of the first set of notes, originally due in September 2013, one note was paid in full and retired, and the second note was restructured with a maturity date of September 16, 2014, payable in thirteen monthly payments. The first four payments totaling
$0.6 million
, which includes the repayment of the first note, were received in the fourth quarter of 2013 and the remaining nine payments are expected to follow each month thereafter. The maturity dates, payment terms and balances of the remaining two sets of notes did not change. These notes are included in "Other current assets" in our condensed consolidated balance sheets.
In connection with the sale, we recognized a total loss of
$85.8 million
, which includes the noncash impairment charge of
$41.5
million recorded in the first quarter of 2012, and a write-off of
$51.9 million
cumulative translation adjustment previously recorded in accumulated other comprehensive loss during the third quarter of 2012. We are reporting the results of our Argentina operations in discontinued operations for all periods presented.
The following table presents the results of operations for the Argentina business sold in this transaction for the years ended December 31, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
REVENUES
|
$
|
75,815
|
|
|
$
|
117,672
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
Direct operating expenses
|
72,664
|
|
|
111,893
|
|
|
Depreciation and amortization expense
|
143
|
|
|
2,658
|
|
|
General and administrative expenses
|
11,232
|
|
|
14,769
|
|
|
Asset retirements and impairments
|
85,755
|
|
|
—
|
|
|
Operating loss
|
(93,979
|
)
|
|
(11,648
|
)
|
|
Interest expense, net of amounts capitalized
|
168
|
|
|
1,694
|
|
|
Other expense, net
|
3,725
|
|
|
3,159
|
|
|
Loss before taxes
|
(97,872
|
)
|
|
(16,501
|
)
|
|
Income tax benefit
|
4,304
|
|
|
5,820
|
|
|
Net loss
|
$
|
(93,568
|
)
|
|
$
|
(10,681
|
)
|
NOTE 4. SEVERANCE, CONTRACT TERMINATION AND MOBILIZATION COSTS
In the second quarter of 2013, we implemented a significant restructuring of our fluid management services and our corporate cost structure to better align them with current market conditions. As a result of this restructuring, we recognized approximately
$6.3 million
of severance expenses in the second quarter of 2013. The severance costs were based on obligations under our existing severance agreements. Furthermore, we recognized lease cancellation fees of
$1.9 million
primarily related to our fluid management services. Additionally, in our international business, due to customer spending reductions in Mexico, we began redeploying idle rigs from the North Region of Mexico to higher demand markets, incurring mobilization cost of
$2.3 million
. These costs are reflected in our consolidated statements of operations and include
$8.3 million
of direct operating expenses and
$2.2 million
of general and administrative expenses. On a segment basis,
$2.6 million
is associated with our U.S. operations,
$7.2 million
is associated with our international operations and the remaining
$0.7 million
is associated with our Functional Support segment. The restructuring activities were implemented in the second quarter of 2013 and were completed in the fourth quarter of 2013.
Presented below are the categories of the liabilities recorded in connection with our restructuring by segment and in consolidation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Lease Cancellation Fees
|
|
Mobilization Costs
|
|
Total
|
|
|
(in thousands)
|
|
U.S.
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Expense
|
746
|
|
|
1,630
|
|
|
218
|
|
|
2,594
|
|
|
Payment
|
(724
|
)
|
|
—
|
|
|
—
|
|
|
(724
|
)
|
|
Balance as of June 30, 2013
|
22
|
|
|
1,630
|
|
|
218
|
|
|
1,870
|
|
|
Payment
|
(22
|
)
|
|
(571
|
)
|
|
(218
|
)
|
|
(811
|
)
|
|
Balance as of September 30, 2013
|
—
|
|
|
1,059
|
|
|
—
|
|
|
1,059
|
|
|
Payment
|
—
|
|
|
(1,059
|
)
|
|
—
|
|
|
(1,059
|
)
|
|
Balance as of December 31, 2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Expense
|
4,843
|
|
|
307
|
|
|
2,077
|
|
|
7,227
|
|
|
Payment
|
(4,533
|
)
|
|
(307
|
)
|
|
(1,054
|
)
|
|
(5,894
|
)
|
|
Balance as of June 30, 2013
|
310
|
|
|
—
|
|
|
1,023
|
|
|
1,333
|
|
|
Payment
|
(310
|
)
|
|
—
|
|
|
(1,023
|
)
|
|
(1,333
|
)
|
|
Balance as of September 30, 2013
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Payment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance as of December 31, 2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Functional Support
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Expense
|
732
|
|
|
—
|
|
|
—
|
|
|
732
|
|
|
Payment
|
(732
|
)
|
|
—
|
|
|
—
|
|
|
(732
|
)
|
|
Balance as of June 30, 2013
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Payment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance as of September 30, 2013
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Payment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance as of December 31, 2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Expense
|
6,321
|
|
|
1,937
|
|
|
2,295
|
|
|
10,553
|
|
|
Payment
|
(5,989
|
)
|
|
(307
|
)
|
|
(1,054
|
)
|
|
(7,350
|
)
|
|
Balance as of June 30, 2013
|
332
|
|
|
1,630
|
|
|
1,241
|
|
|
3,203
|
|
|
Payment
|
(332
|
)
|
|
(571
|
)
|
|
(1,241
|
)
|
|
(2,144
|
)
|
|
Balance as of September 30, 2013
|
—
|
|
|
1,059
|
|
|
—
|
|
|
1,059
|
|
|
Payment
|
—
|
|
|
(1,059
|
)
|
|
—
|
|
|
(1,059
|
)
|
|
Balance as of December 31, 2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 5. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
(in thousands)
|
|
Other current assets:
|
|
|
|
|
Current deferred tax assets
|
$
|
11,707
|
|
|
$
|
20,026
|
|
|
Prepaid current assets
|
28,435
|
|
|
27,736
|
|
|
Reinsurance receivable
|
9,113
|
|
|
10,217
|
|
|
VAT asset
|
21,683
|
|
|
32,762
|
|
|
Other
|
25,608
|
|
|
10,092
|
|
|
Total
|
$
|
96,546
|
|
|
$
|
100,833
|
|
The table below presents comparative detailed information about other current liabilities at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
(in thousands)
|
|
Other current liabilities:
|
|
|
|
|
Accrued payroll, taxes and employee benefits
|
$
|
34,956
|
|
|
$
|
31,708
|
|
|
Accrued operating expenditures
|
36,573
|
|
|
42,137
|
|
|
Income, sales, use and other taxes
|
37,064
|
|
|
62,709
|
|
|
Self-insurance reserves
|
32,129
|
|
|
35,742
|
|
|
Accrued interest
|
15,285
|
|
|
15,301
|
|
|
Accrued insurance premiums
|
8,049
|
|
|
8,021
|
|
|
Other
|
5,889
|
|
|
5,012
|
|
|
Total
|
$
|
169,945
|
|
|
$
|
200,630
|
|
The table below presents comparative detailed information about other non-current accrued liabilities at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
(in thousands)
|
|
Other non-current accrued liabilities:
|
|
|
|
|
Asset retirement obligations
|
$
|
11,999
|
|
|
$
|
11,659
|
|
|
Environmental liabilities
|
6,176
|
|
|
4,539
|
|
|
Accrued rent
|
853
|
|
|
1,424
|
|
|
Accrued sales, use and other taxes
|
5,552
|
|
|
6,952
|
|
|
Other
|
1,075
|
|
|
3,347
|
|
|
Total
|
$
|
25,655
|
|
|
$
|
27,921
|
|
NOTE 6. OTHER INCOME, NET
The table below presents comparative detailed information about our other income and expense from continuing operations for the years ended
December 31, 2013
,
2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
Interest income
|
$
|
(220
|
)
|
|
$
|
(46
|
)
|
|
$
|
(26
|
)
|
|
Foreign exchange (gain) loss
|
834
|
|
|
(4,726
|
)
|
|
(3,058
|
)
|
|
Gain on sale of equity method investment
|
—
|
|
|
—
|
|
|
(4,783
|
)
|
|
Other, net
|
(1,417
|
)
|
|
(1,877
|
)
|
|
(1,110
|
)
|
|
Total
|
$
|
(803
|
)
|
|
$
|
(6,649
|
)
|
|
$
|
(8,977
|
)
|
NOTE 7. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The table below presents a rollforward of our allowance for doubtful accounts for the years ended
December 31, 2013
,
2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Charged to
Expense
|
|
Charged to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of
Period
|
|
|
(in thousands)
|
|
As of December 31, 2013
|
$
|
2,860
|
|
|
$
|
634
|
|
|
$
|
—
|
|
|
$
|
(2,728
|
)
|
|
$
|
766
|
|
|
As of December 31, 2012
|
8,013
|
|
|
1,299
|
|
|
6
|
|
|
(6,458
|
)
|
|
2,860
|
|
|
As of December 31, 2011
|
7,717
|
|
|
2,559
|
|
|
519
|
|
|
(2,782
|
)
|
|
8,013
|
|
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
|
(in thousands)
|
|
Major classes of property and equipment:
|
|
|
|
|
Oilfield service equipment
|
$
|
1,960,208
|
|
|
$
|
1,825,707
|
|
|
Disposal wells
|
87,681
|
|
|
86,970
|
|
|
Motor vehicles
|
304,244
|
|
|
306,161
|
|
|
Furniture and equipment
|
122,218
|
|
|
112,828
|
|
|
Buildings and land
|
86,085
|
|
|
69,158
|
|
|
Work in progress
|
46,302
|
|
|
127,754
|
|
|
Gross property and equipment
|
2,606,738
|
|
|
2,528,578
|
|
|
Accumulated depreciation
|
(1,241,092
|
)
|
|
(1,091,904
|
)
|
|
Net property and equipment
|
$
|
1,365,646
|
|
|
$
|
1,436,674
|
|
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. Capitalized interest for the years ended
December 31, 2013
,
2012
and
2011
was
$0.6 million
,
$1.3 million
, and
$1.7 million
, respectively.
As of
December 31, 2013
, we have no capital lease obligations. The carrying value of assets acquired under capital leases as of December 31, 2012 is as follows (in thousands):
|
|
|
|
|
|
|
|
Values of assets leased under capital lease obligations:
|
|
|
Well servicing equipment
|
$
|
249
|
|
|
Motor vehicles
|
37,827
|
|
|
Gross values
|
38,076
|
|
|
Accumulated depreciation
|
(33,692
|
)
|
|
Carrying value of leased assets
|
$
|
4,384
|
|
Depreciation of assets held under capital leases was
$1.9 million
,
$2.8 million
, and
$2.8 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
There were
no
asset impairment charges for the years ended
December 31, 2013
,
2012
and
2011
.
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of our goodwill for the years ended
December 31, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Total
|
|
|
(in thousands)
|
|
December 31, 2011
|
$
|
595,049
|
|
|
$
|
27,724
|
|
|
$
|
622,773
|
|
|
Purchase price allocation adjustments, net
|
2,407
|
|
|
—
|
|
|
2,407
|
|
|
Impact of foreign currency translation
|
—
|
|
|
1,301
|
|
|
1,301
|
|
|
December 31, 2012
|
597,456
|
|
|
29,025
|
|
|
626,481
|
|
|
Impact of foreign currency translation
|
—
|
|
|
(1,606
|
)
|
|
(1,606
|
)
|
|
December 31, 2013
|
$
|
597,456
|
|
|
$
|
27,419
|
|
|
$
|
624,875
|
|
The components of our other intangible assets as of
December 31, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
(in thousands)
|
|
Noncompete agreements:
|
|
|
|
|
Gross carrying value
|
$
|
9,332
|
|
|
$
|
9,332
|
|
|
Accumulated amortization
|
(7,104
|
)
|
|
(5,022
|
)
|
|
Net carrying value
|
$
|
2,228
|
|
|
$
|
4,310
|
|
|
Patents, trademarks and tradename:
|
|
|
|
|
Gross carrying value
|
$
|
14,039
|
|
|
$
|
14,689
|
|
|
Accumulated amortization
|
(223
|
)
|
|
(410
|
)
|
|
Net carrying value
|
$
|
13,816
|
|
|
$
|
14,279
|
|
|
Customer relationships and contracts:
|
|
|
|
|
Gross carrying value
|
$
|
100,271
|
|
|
$
|
100,481
|
|
|
Accumulated amortization
|
(78,926
|
)
|
|
(62,143
|
)
|
|
Net carrying value
|
$
|
21,345
|
|
|
$
|
38,338
|
|
|
Developed technology:
|
|
|
|
|
Gross carrying value
|
$
|
7,583
|
|
|
$
|
7,583
|
|
|
Accumulated amortization
|
(3,826
|
)
|
|
(3,605
|
)
|
|
Net carrying value
|
$
|
3,757
|
|
|
$
|
3,978
|
|
|
Customer backlog:
|
|
|
|
|
Gross carrying value
|
$
|
779
|
|
|
$
|
779
|
|
|
Accumulated amortization
|
(779
|
)
|
|
(779
|
)
|
|
Net carrying value
|
$
|
—
|
|
|
$
|
—
|
|
|
Total:
|
|
|
|
|
Gross carrying value
|
$
|
132,004
|
|
|
$
|
132,864
|
|
|
Accumulated amortization
|
(90,858
|
)
|
|
(71,959
|
)
|
|
Net carrying value
|
$
|
41,146
|
|
|
$
|
60,905
|
|
Amortization expense for our intangible assets with determinable lives was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
Noncompete agreements
|
$
|
2,082
|
|
|
$
|
3,827
|
|
|
$
|
4,154
|
|
|
Patents and trademarks
|
40
|
|
|
309
|
|
|
202
|
|
|
Customer relationships and contracts
|
16,726
|
|
|
18,941
|
|
|
15,830
|
|
|
Developed technology
|
221
|
|
|
221
|
|
|
883
|
|
|
Customer backlog
|
—
|
|
|
—
|
|
|
162
|
|
|
Total intangible asset amortization expense
|
$
|
19,069
|
|
|
$
|
23,298
|
|
|
$
|
21,231
|
|
Of our intangible assets at
December 31, 2013
,
$13.6 million
are indefinite-lived tradenames and not subject to amortization. These tradenames are tested for impairment annually using a relief from royalty method. The weighted average remaining amortization periods and expected amortization expense for the next five years for our definite lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining
amortization
period (years)
|
|
Expected Amortization Expense
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
|
|
(in thousands)
|
|
Noncompete agreements
|
0.8
|
|
$
|
1,670
|
|
|
$
|
284
|
|
|
$
|
207
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
Patents and trademarks
|
4.4
|
|
40
|
|
|
40
|
|
|
40
|
|
|
40
|
|
|
17
|
|
|
Customer relationships and contracts
|
6.0
|
|
7,896
|
|
|
5,060
|
|
|
3,437
|
|
|
2,441
|
|
|
1,120
|
|
|
Developed technology
|
17.0
|
|
346
|
|
|
371
|
|
|
371
|
|
|
371
|
|
|
371
|
|
|
Total intangible asset amortization expense
|
|
|
$
|
9,952
|
|
|
$
|
5,755
|
|
|
$
|
4,055
|
|
|
$
|
2,919
|
|
|
$
|
1,508
|
|
Certain of our goodwill and intangible assets are denominated in Russian Rubles and, as such, the values of these assets are subject to fluctuations associated with changes in exchange rates. Additionally, certain of these assets are also subject to purchase accounting adjustments. Purchase accounting adjustments in 2012 relate to the reduction of fixed assets acquired from Edge in 2011. We do not believe the impact of these purchase accounting adjustments is material to our consolidated financial statements for the year ended
December 31, 2012
.
We have historically evaluated our goodwill for impairment one level below the reporting segment level, at the reporting unit level, annually as of December 31 or more frequently if impairment indicators arose in accordance with Accounting Standards Codification (ASC) Topic 350. In the third quarter of 2013, we changed the date of our annual assessment of goodwill impairment to October 1 of each year. The change in the assessment date does not delay, accelerate, avoid or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. We believe that the change in date aligns with the our planning cycle, which should create a synergy and allow the goodwill impairment analysis to be embedded with the projection of future results for business planning purposes. We believe this will enhance the quality of the goodwill impairment analysis. Also, the change in date allows us more time to identify and respond to any issues noted in the analysis before finalization of SEC filings, which will improve the quality of financial reporting. As such, the Company has prospectively applied the change in annual goodwill impairment testing date beginning in the fourth quarter of 2013.
We performed our qualitative analysis of goodwill impairment as of
October 1, 2013
. Based on this analysis, our Canadian reporting unit did not have a triggering event that would indicate it was “more likely than not” that the carrying value of this reporting unit was higher than its fair value. However, we determined it was necessary to perform the first step of the goodwill impairment test for our rig-based services, coiled tubing services, fishing and rental services, fluid management services and Russian reporting units. Under the first step of the goodwill impairment test, we compared the fair value of each reporting unit to its carrying amount, including goodwill. Based on the results of step 1, the fair value of our rig-based services, fluid management services, coiled tubing services, fishing and rental services and our Russian reporting units exceeded their carrying value by
11%
,
4%
,
19%
,
21%
and
86%
, respectively. A key assumption in our model was our forecast of increased revenue for 2014 for rig-based services, fluid management services and fishing and rental services, followed by nominal revenue increases through 2018. We anticipate our coiled tubing services and Russian reporting units to have increased revenue in future years. Potential events that could affect this assumption include the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies in Russia, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry. Other possible factors that could affect this assumption are the ability to acquire and deploy additional assets and deployment of these assets into the region. Because the fair value of the reporting units exceeded their carrying values, we determined that no impairment of our goodwill associated with our reporting units existed as of
October 1, 2013
and that step two of the impairment test was not required.
NOTE 10. EARNINGS PER SHARE
The following table presents our basic and diluted earnings per share (“EPS
”
) for the years ended
December 31, 2013
,
2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
|
(in thousands, except per share amounts)
|
|
Basic EPS Calculation:
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to Key
|
$
|
(21,768
|
)
|
|
$
|
101,190
|
|
|
$
|
112,142
|
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
(93,568
|
)
|
|
(10,681
|
)
|
|
Income (loss) attributable to Key
|
$
|
(21,768
|
)
|
|
$
|
7,622
|
|
|
$
|
101,461
|
|
|
Denominator
|
|
|
|
|
|
|
Weighted average shares outstanding
|
152,271
|
|
|
151,106
|
|
|
145,909
|
|
|
Basic earnings (loss) per share from continuing operations attributable to Key
|
$
|
(0.14
|
)
|
|
$
|
0.67
|
|
|
$
|
0.77
|
|
|
Basic loss per share from discontinued operations
|
—
|
|
|
(0.62
|
)
|
|
(0.07
|
)
|
|
Basic earnings (loss) per share attributable to Key
|
$
|
(0.14
|
)
|
|
$
|
0.05
|
|
|
$
|
0.70
|
|
|
Diluted EPS Calculation:
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to Key
|
$
|
(21,768
|
)
|
|
$
|
101,190
|
|
|
$
|
112,142
|
|
|
Loss from discontinued operations, net of tax
|
—
|
|
|
(93,568
|
)
|
|
(10,681
|
)
|
|
Income (loss) attributable to Key
|
$
|
(21,768
|
)
|
|
$
|
7,622
|
|
|
$
|
101,461
|
|
|
Denominator
|
|
|
|
|
|
|
Weighted average shares outstanding
|
152,271
|
|
|
151,106
|
|
|
145,909
|
|
|
Stock options
|
—
|
|
|
19
|
|
|
201
|
|
|
Warrants
|
—
|
|
|
—
|
|
|
48
|
|
|
Stock appreciation rights
|
—
|
|
|
—
|
|
|
59
|
|
|
Total
|
152,271
|
|
|
151,125
|
|
|
146,217
|
|
|
Diluted earnings (loss) per share from continuing operations attributable to Key
|
$
|
(0.14
|
)
|
|
$
|
0.67
|
|
|
$
|
0.76
|
|
|
Diluted loss per share from discontinued operations
|
—
|
|
|
(0.62
|
)
|
|
(0.07
|
)
|
|
Diluted earnings (loss) per share attributable to Key
|
$
|
(0.14
|
)
|
|
$
|
0.05
|
|
|
$
|
0.69
|
|
Stock options, warrants and SARs are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock awards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding. The diluted earnings per share calculation for the year ended
December 31, 2013
exclude the potential exercise of
1.7 million
stock options and
0.3 million
SARs due to net losses from continuing operations.
December 31, 2012
and
2011
excludes the potential exercise of
2.0 million
and
1.3 million
stock options, respectively, because the effect would be anti-dilutive due to the exercise prices exceeding the average price of our stock. The diluted earnings per share calculation for the year ended
December 31, 2012
also excluded the potential exercise of
0.4 million
SARs, because the effects of such exercises on earnings per share would be anti-dilutive. None of our SARs were anti-dilutive for the year ended December 31, 2011.
There have been no material changes in share amounts subsequent to the balance sheet date that would have a material impact on the earnings per share calculation for the year ended
December 31, 2013
. However, we issued
0.9 million
shares of restricted stock on January 30, 2014.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 11. ASSET RETIREMENT OBLIGATIONS
In connection with our well servicing activities, we operate a number of SWD facilities. Our operations involve the transportation, handling and disposal of fluids in our SWD facilities that are by-products of the drilling process. SWD facilities used in connection with our fluid hauling operations are subject to future costs associated with the retirement of these properties. As a result, we have incurred costs associated with the proper storage and disposal of these materials.
Annual accretion of the assets associated with the asset retirement obligations was
$0.6 million
for the years ended
December 31, 2013
,
2012
and
2011
. A summary of changes in our asset retirement obligations is as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
$
|
11,928
|
|
|
Additions
|
—
|
|
|
Costs incurred
|
(251
|
)
|
|
Accretion expense
|
594
|
|
|
Disposals
|
(612
|
)
|
|
Balance at December 31, 2012
|
11,659
|
|
|
Additions
|
174
|
|
|
Costs incurred
|
(135
|
)
|
|
Accretion expense
|
604
|
|
|
Disposals
|
(303
|
)
|
|
Balance at December 31, 2013
|
$
|
11,999
|
|
NOTE 12. EQUITY METHOD INVESTMENTS
IROC Energy Services Corp.
In April 2011, we sold all of our equity interest (approximately
8.7 million
shares) in IROC Energy Services Corp., an Alberta-based oilfield services company, for
$12.0 million
, net of fees. We recorded a net gain on this sale of
$4.8 million
(including the write-off of the cumulative translation adjustment of
$1.1 million
, net of tax) during the second quarter of 2011, as the proceeds received exceeded the carrying value of our investment.
Other
As of
December 31, 2013
, we have other equity method investments that are not material on a combined basis.
NOTE 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of
December 31, 2013
and
2012
.
Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities.
These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Notes receivable — Argentina operations sale
|
$
|
12,355
|
|
|
$
|
12,355
|
|
|
$
|
12,955
|
|
|
$
|
12,955
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
6.75% Senior Notes
|
$
|
675,000
|
|
|
$
|
690,390
|
|
|
$
|
675,000
|
|
|
$
|
680,510
|
|
|
8.375% Senior Notes
|
3,573
|
|
|
3,627
|
|
|
3,573
|
|
|
3,656
|
|
|
Credit Facility revolving loans
|
85,000
|
|
|
85,000
|
|
|
165,000
|
|
|
165,000
|
|
Notes receivable
—
Argentina operations sale.
The fair value of these notes are based upon the quoted market Treasury rates as of the dates indicated. The carrying values of these items approximate their fair values due to the maturity dates rapidly approaching, thus giving way to discount rates that are similar.
6.75%
Senior Notes due 2021.
The fair value of these notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of
December 31, 2013
was
$675.0 million
, and the fair value was
$690.4 million
(
102.3%
of carrying value).
8.375%
Senior Notes due 2014.
The fair value of these notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of
December 31, 2013
was
$3.6 million
and the fair value was
$3.6 million
(
101.5%
of carrying value).
Credit Facility Revolving Loans.
Because of their variable interest rates, the fair values of the revolving loans borrowed under our 2011 Credit Facility approximate their carrying values. The carrying and fair values of these loans as of
December 31, 2013
were
$85.0 million
.
NOTE 14. INCOME TAXES
The components of our income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
Current income tax (expense) benefit:
|
|
|
|
|
|
|
Federal and state
|
$
|
(8,515
|
)
|
|
$
|
(16,165
|
)
|
|
$
|
28,291
|
|
|
Foreign
|
(350
|
)
|
|
(5,189
|
)
|
|
(796
|
)
|
|
|
(8,865
|
)
|
|
(21,354
|
)
|
|
27,495
|
|
|
Deferred income tax (expense) benefit:
|
|
|
|
|
|
|
Federal and state
|
(4,870
|
)
|
|
(32,729
|
)
|
|
(89,421
|
)
|
|
Foreign
|
16,799
|
|
|
(3,269
|
)
|
|
(2,191
|
)
|
|
|
11,929
|
|
|
(35,998
|
)
|
|
(91,612
|
)
|
|
Total income tax (expense) benefit
|
$
|
3,064
|
|
|
$
|
(57,352
|
)
|
|
$
|
(64,117
|
)
|
The sources of our income or loss from continuing operations before income taxes and noncontrolling interest were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
Domestic income
|
$
|
29,086
|
|
|
$
|
129,865
|
|
|
$
|
160,755
|
|
|
Foreign (loss) income
|
(53,323
|
)
|
|
30,164
|
|
|
14,698
|
|
|
Total income (loss)
|
$
|
(24,237
|
)
|
|
$
|
160,029
|
|
|
$
|
175,453
|
|
We made federal income tax payments of
$30.0 million
,
$5.1 million
and
$53.2 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. We made state income tax payments of
$2.9 million
,
$2.9 million
and
$7.6 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. We made foreign tax payments of
$2.3 million
,
$5.2 million
and
$2.9 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. For the years ended
December 31, 2013
,
2012
and
2011
, tax benefit (expense) allocated to stockholders’ equity for compensation expense for income tax purposes in excess of amounts recognized for financial reporting purposes was
$1.8 million
,
$4.1 million
and
$4.9 million
, respectively. In addition, we received federal income tax refunds of
$25.1 million
,
$16.7 million
and
$26.2 million
during the years ended
December 31, 2013
,
2012
and
2011
, respectively.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income tax expense differs from amounts computed by applying the statutory federal rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income tax computed at Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State taxes
|
(6.0
|
)%
|
|
2.5
|
%
|
|
2.7
|
%
|
|
Meals and entertainment
|
(7.7
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
Foreign rate difference
|
(8.0
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
Other
|
(0.7
|
)%
|
|
(1.7
|
)%
|
|
(1.3
|
)%
|
|
Effective income tax rate
|
12.6
|
%
|
|
35.8
|
%
|
|
36.4
|
%
|
As of
December 31, 2013
and
2012
, our deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss and tax credit carryforwards
|
$
|
36,860
|
|
|
$
|
16,026
|
|
|
Capital loss carryforwards
|
21,417
|
|
|
21,417
|
|
|
Self-insurance reserves
|
16,217
|
|
|
18,167
|
|
|
Allowance for doubtful accounts
|
199
|
|
|
965
|
|
|
Accrued liabilities
|
8,981
|
|
|
10,794
|
|
|
Share-based compensation
|
7,759
|
|
|
11,377
|
|
|
Other
|
(392
|
)
|
|
261
|
|
|
Total deferred tax assets
|
91,041
|
|
|
79,007
|
|
|
Valuation allowance for deferred tax assets
|
(22,248
|
)
|
|
(22,248
|
)
|
|
Net deferred tax assets
|
68,793
|
|
|
56,759
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment
|
(269,167
|
)
|
|
(248,902
|
)
|
|
Intangible assets
|
(48,807
|
)
|
|
(42,553
|
)
|
|
Other
|
(1,252
|
)
|
|
(1,856
|
)
|
|
Total deferred tax liabilities
|
(319,226
|
)
|
|
(293,311
|
)
|
|
Net deferred tax liability, net of valuation allowance
|
$
|
(250,433
|
)
|
|
$
|
(236,552
|
)
|
The December 31, 2013 net deferred tax liability balance is comprised of
$284.5 million
long-term deferred tax liability, less
$11.7 million
current deferred tax asset and
$22.3 million
long-term deferred tax asset. The December 31, 2012 net deferred liability balance is comprised of
$259.5 million
long-term deferred tax liability, less
$20.0 million
current deferred tax asset and
$2.9 million
long-term deferred tax asset.
In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxable income for this determination. To fully realize the deferred income tax assets related to our federal net operating loss carryforwards that do not have a valuation allowance due to Section 382 limitations, we would need to generate future federal taxable income of approximately
$0.1 million
over the next
five
years. With certain exceptions noted below, we believe that after considering all the available objective evidence, both positive and negative, historical and prospective, with greater weight given to the historical evidence, it is more likely than not that these assets will be realized.
We estimate that as of
December 31, 2013
,
2012
and
2011
, we have available
$2.4 million
,
$2.8 million
and
$79.3 million
, respectively, of federal net operating loss carryforwards. Approximately
$2.4 million
of our net operating losses as of
December 31, 2013
are subject to a
$5,000
annual Section 382 limitation and expire in 2016 through 2018. The gross deferred tax asset associated with our federal net operating loss carryforward at
December 31, 2013
is
$0.8 million
. Due to annual limitations under Sections 382 and 383, management believes that we will not be able to utilize all available carryforwards
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
prior to their ultimate expiration. At
December 31, 2013
and
2012
, we had a valuation allowance of
$0.8 million
related to the deferred tax asset associated with our remaining federal net operating loss carryforwards that will expire before utilization due to Section 382 limitations.
We estimate that as of
December 31, 2013
,
2012
and
2011
, we have available approximately
$64.9 million
,
$44.4 million
and
$73.3 million
, respectively, of state net operating loss carryforwards that will expire between 2014 to 2032. The deferred tax asset associated with our remaining state net operating loss carryforwards at
December 31, 2013
is
$3.3 million
, net of federal tax benefit. Management believes that it is more likely than not that we will be able to utilize all available state carryforwards prior to their ultimate expiration.
We estimate that as of
December 31, 2013
,
2012
and
2011
, we have available approximately
$117.6 million
,
$34.4 million
, and
$39.6 million
, respectively, of foreign net operating loss carryforwards that will expire between 2020 and 2030. The gross deferred tax asset associated with our foreign net operating loss carryforwards at
December 31, 2013
is
$32.7 million
. Management believes that it is more likely than not that we will be able to utilize the net operating loss carryforwards prior to their ultimate expiration in all foreign jurisdictions in which we currently operate.
The Company recognized a valuation allowance of
$21.4 million
as of
December 31, 2013
against the deferred tax asset associated with the capital loss carryforward. The capital loss carryforward will expire in 2017.
We did not provide for U.S. income taxes or withholding taxes on unremitted earnings of our Mexico, Canada, Colombia, Ecuador and the Middle East subsidiaries, as these earnings are considered permanently reinvested because the cash flow generated by these businesses is needed to fund additional equipment and working capital requirements. Furthermore, we did not provide for U.S. income taxes on unremitted earnings of our other foreign subsidiaries as our tax basis in these foreign subsidiaries exceeded the book basis.
We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. We are currently under audit by the Internal Revenue Service for the tax year ended December 31, 2010 and 2011. Our other significant filings are in Mexico, which have been examined through 2008.
As of
December 31, 2013
,
2012
and
2011
, we had
$0.9 million
,
$1.2 million
and
$1.8 million
, respectively, of unrecognized tax benefits which, if recognized, would impact our effective tax rate. We have accrued
$0.4 million
,
$0.3 million
and
$0.6 million
for the payment of interest and penalties as of
December 31, 2013
,
2012
and
2011
, respectively. We believe that it is reasonably possible that
$0.4 million
of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2014 as a result of a lapse of the statute of limitations and settlement of an open audit.
We recognized a net tax benefit of
$0.5 million
in
2013
for expirations of statutes of limitations.
The following table presents the gross activity during
2013
and
2012
related to our liabilities for uncertain tax positions (in thousands):
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
$
|
2,080
|
|
|
Additions based on tax positions related to the current year
|
205
|
|
|
Reductions for tax positions from prior years
|
(692
|
)
|
|
Settlements
|
—
|
|
|
Balance at December 31, 2012
|
1,593
|
|
|
Additions based on tax positions related to the current year
|
251
|
|
|
Reductions for tax positions from prior years
|
(473
|
)
|
|
Settlements
|
—
|
|
|
Balance at December 31, 2013
|
$
|
1,371
|
|
Tax Legislative Changes
The Small Business Jobs Act of 2010.
The Small Business Jobs Act of 2010 extended the first-year bonus depreciation deduction of
50%
of the adjusted basis of qualified property acquired and placed in service during 2010 and increased the deduction to
100%
of the adjusted basis of qualified property acquired and placed in service after September 8, 2010 and before January 1, 2012. We had
$199.9 million
of qualifying additions in 2011 resulting in bonus tax depreciation of
$199.9 million
. In 2012 we had
$201.8 million
of qualifying additions resulting in bonus depreciation of
$100.9 million
.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 15. LONG-TERM DEBT
The components of our long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
(in thousands)
|
|
6.75% Senior Notes due 2021
|
$
|
675,000
|
|
|
$
|
675,000
|
|
|
8.375% Senior Notes due 2014
|
3,573
|
|
|
3,573
|
|
|
Senior Secured Credit Facility revolving loans due 2016
|
85,000
|
|
|
165,000
|
|
|
Net unamortized premium on debt
|
3,981
|
|
|
4,537
|
|
|
Capital lease obligations
|
—
|
|
|
393
|
|
|
Total debt
|
767,554
|
|
|
848,503
|
|
|
Less current portion
|
(3,573
|
)
|
|
(393
|
)
|
|
Total long-term debt and capital leases
|
$
|
763,981
|
|
|
$
|
848,110
|
|
8.375% Senior Notes due 2014
On November 29, 2007, we issued
$425.0 million
aggregate principal amount of
8.375%
Senior Notes due 2014 (the “2014 Notes”). On March 4, 2011, we repurchased
$421.3 million
aggregate principal amount of our 2014 Notes at a purchase price of
$1,090
per
$1,000
principal amount. On March 15, 2011, we repurchased an additional
$0.1 million
aggregate principal amount at a purchase price of
$1,060
per
$1,000
principal amount. In connection with the repurchase of the 2014 Notes, we incurred a loss of
$44.3 million
on the early extinguishment of debt related to the premium paid on the tender, the payment of related fees and the write-off of unamortized loan fees. Interest on the remaining
$3.6 million
aggregate principal amount of 2014 Notes outstanding is payable on June 1 and December 1 of each year.
6.75% Senior Notes due 2021
We issued
$475.0 million
aggregate principal amount of
6.75%
Senior Notes due 2021 (the “Initial 2021 Notes”) on March 4, 2011 and issued an additional
$200.0 million
aggregate principal amount of the 2021 Notes (the “Additional 2021 Notes” and, together with the Initial 2021 Notes, the “2021 Notes”) in a private placement on March 8, 2012 under an indenture dated March 4, 2011 (the “Base Indenture”), as supplemented by a first supplemental indenture dated March 4, 2011 and amended by a further supplemental indenture dated March 8, 2012 (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”). We used the net proceeds to repay senior secured indebtedness under our revolving bank credit facility. We capitalized
$4.6 million
of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.
On March 5, 2013, we completed an offer to exchange the
$200.0 million
in aggregate principal amount of unregistered Additional 2021 Notes for an equal principal amount of such notes registered under the Securities Act of 1933. All of the 2021 Notes are treated as a single class under the Indenture and as of the closing of the exchange offer, bear the same CUSIP and ISIN numbers.
The 2021 Notes are general unsecured senior obligations and are effectively subordinated to all of our existing and future secured indebtedness. The 2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2021 Notes is payable on March 1 and September 1 of each year. The 2021 Notes mature on
March 1, 2021
.
On or after
March 1, 2016
, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at the redemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of the years indicated below:
|
|
|
|
|
|
|
Year
|
Percentage
|
|
2016
|
103.375
|
%
|
|
2017
|
102.250
|
%
|
|
2018
|
101.125
|
%
|
|
2019 and thereafter
|
100.000
|
%
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At any time and from time to time before
March 1, 2014
, we may on any one or more occasions redeem up to
35%
of the aggregate principal amount of the outstanding 2021 Notes at a redemption price of
106.750%
of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from any one or more equity offerings provided that (i) at least
65%
of the aggregate principal amount of the 2021 Notes remains outstanding immediately after each such redemption and (ii) each such redemption shall occur within
180
days of the date of the closing of such equity offering.
In addition, at any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at a redemption price equal to
100%
of the principal amount plus a premium with respect to the 2021 Notes plus accrued and unpaid interest to the redemption date. The premium is the excess of (i) the present value of the redemption price of
103.375%
of the principal amount, plus all remaining scheduled interest payments due through March 1, 2016 discounted at the treasury rate plus
0.5%
over (ii) the principal amount of the note. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes, in whole or in part, at a purchase price equal to
101%
of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.
We are subject to certain negative covenants under the Indenture. The Indenture limits our ability to, among other things:
|
|
|
|
•
|
incur additional indebtedness and issue preferred equity interests;
|
|
|
|
|
•
|
pay dividends or make other distributions or repurchase or redeem equity interests;
|
|
|
|
|
•
|
make loans and investments;
|
|
|
|
|
•
|
enter into sale and leaseback transactions;
|
|
|
|
|
•
|
sell, transfer or otherwise convey assets;
|
|
|
|
|
•
|
enter into transactions with affiliates;
|
|
|
|
|
•
|
enter into agreements restricting subsidiaries’ ability to pay dividends;
|
|
|
|
|
•
|
designate future subsidiaries as unrestricted subsidiaries; and
|
|
|
|
|
•
|
consolidate, merge or sell all or substantially all of the applicable entities’ assets.
|
These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions relating to the covenants of our 2011 Credit Facility discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the 2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of
December 31, 2013
, the 2021 Notes were below investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit rating assigned to the 2021 Notes later falls below investment grade. We were in compliance with these covenants at
December 31, 2013
.
Senior Secured Credit Facility
We are party to a
$550.0 million
senior secured revolving bank credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank and DnB NOR Bank ASA, as Co-Documentation Agent (as amended, our “2011 Credit Facility
”
), which is an important source of liquidity for us. Our 2011 Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility, all of which will mature no later than March 31, 2016. The maximum amount that we may borrow under the facility may be subject to limitation due to the operation of the covenants contained in the facility. Our 2011 Credit Facility allows us to request increases in the total commitments under the facility by up to
$100.0 million
in the aggregate in part or in full anytime during the term of our 2011 Credit Facility, with any such increases being subject to compliance with the restrictive covenants in our 2011 Credit Facility and in the Indenture, as well as lender approval.
We capitalized
$4.9 million
of financing costs in connection with the execution of our 2011 Credit Facility and an additional
$1.4 million
related to a subsequent amendment that will be amortized over the term of the debt.
The interest rate per annum applicable to the 2011 Credit Facility is, at our option, (i) adjusted LIBOR plus the applicable margin or (ii) the higher of (x) JPMorgan’s prime rate, (y) the Federal Funds rate plus
0.5%
and (z) one-month adjusted LIBOR plus
1.0%
, plus in each case the applicable margin for all other loans. The applicable margin for LIBOR loans ranges from
225 to 300
basis points, and the applicable margin for all other loans ranges from
125 to 200
basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility equal
0.50%
.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our 2011 Credit Facility contains certain financial covenants, which, among other things, limit our annual capital expenditures, restrict our ability to repurchase shares and require us to maintain certain financial ratios. The financial ratios require that:
|
|
|
|
•
|
our ratio of consolidated funded indebtedness to total capitalization be no greater than
45%
;
|
|
|
|
|
•
|
our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of our 2011 Credit Facility, “EBITDA”) be no greater than
2.00
to
1.00
;
|
|
|
|
|
•
|
we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of the last day of any fiscal quarter of at least 2.00 to 1.00;
|
|
|
|
|
•
|
we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least
3.00
to
1.00
; and
|
|
|
|
|
•
|
we limit our capital expenditures and investments in foreign subsidiaries to
$250.0 million
per fiscal year, if the consolidated total leverage ratio exceeds
3.00
to
1.00
.
|
In addition, our 2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event of default exists under our 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed
4.00
to
1.00
, we are in compliance with other financial covenants and we have at least
$25.0 million
of availability under our 2011 Credit Facility); (vi) dividends and other distributions to, and redemptions and repurchases from, equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming or repurchasing subordinated (contractually or structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements; (xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (xiv) changes in the nature of business; (xv) amending organizational documents; and (xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions.
We were in compliance with these covenants at
December 31, 2013
. We may prepay our 2011 Credit Facility in whole or in part at any time without premium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs. As of
December 31, 2013
, we had borrowings of
$85.0 million
under the revolving credit facility and
$54.1 million
of letters of credit outstanding, leaving
$410.9 million
of undrawn borrowing capacity, subject to covenant compliance, under our 2011 Credit Facility. For the years ended
December 31, 2013
and
2012
, the weighted average interest rates on the outstanding borrowings under our 2011 Credit Facility was
2.76%
and
2.71%
, respectively.
Letter of Credit Facility
On November 7, 2013, we entered into an uncommitted, unsecured
$15.0 million
letter of credit facility to be used solely for the issuances of performance letters of credit. As of
December 31, 2013
,
$4.8 million
of letters of credit were outstanding leaving
$10.2 million
of unused borrowing capacity under the facility.
Long-Term Debt Principal Repayment and Interest Expense
Presented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of
December 31, 2013
:
|
|
|
|
|
|
|
|
|
Principal Amount of Long-Term Debt
|
|
|
(in thousands)
|
|
2014
|
$
|
3,573
|
|
|
2015
|
—
|
|
|
2016
|
85,000
|
|
|
2017
|
—
|
|
|
2018
|
—
|
|
|
Thereafter
|
675,000
|
|
|
Total long-term debt
|
$
|
763,573
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest expense for the years ended
December 31, 2013
,
2012
and
2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
Cash payments
|
$
|
51,705
|
|
|
$
|
46,767
|
|
|
$
|
32,204
|
|
|
Commitment and agency fees paid
|
1,799
|
|
|
1,450
|
|
|
1,456
|
|
|
Amortization of premium on debt
|
(556
|
)
|
|
(463
|
)
|
|
—
|
|
|
Amortization of deferred financing costs
|
2,800
|
|
|
2,695
|
|
|
2,150
|
|
|
Net change in accrued interest
|
63
|
|
|
4,431
|
|
|
6,774
|
|
|
Capitalized interest
|
(607
|
)
|
|
(1,314
|
)
|
|
(1,735
|
)
|
|
Net interest expense
|
$
|
55,204
|
|
|
$
|
53,566
|
|
|
$
|
40,849
|
|
As of
December 31, 2013
,
2012
and
2011
, the weighted average interest rates of our variable rate debt was
2.88%
,
2.70%
and
2.72%
, respectively.
Deferred Financing Costs
A summary of deferred financing costs including cost capitalized, amortized, and written off in the determination of the loss on extinguishment of debt for the years ended
December 31, 2013
and
2012
are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
$
|
14,771
|
|
|
Capitalized costs
|
4,552
|
|
|
Amortization
|
(2,695
|
)
|
|
Balance at December 31, 2012
|
16,628
|
|
|
Capitalized costs
|
69
|
|
|
Amortization
|
(2,800
|
)
|
|
Balance at December 31, 2013
|
$
|
13,897
|
|
NOTE 16. COMMITMENTS AND CONTINGENCIES
Operating Lease Arrangements
We lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2021, with varying payment dates throughout each month. In addition, we have a number of leases scheduled to expire during 2014.
As of
December 31, 2013
, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Lease Payments
|
|
2014
|
$
|
18,723
|
|
|
2015
|
12,095
|
|
|
2016
|
9,383
|
|
|
2017
|
3,608
|
|
|
2018
|
2,261
|
|
|
Thereafter
|
4,065
|
|
|
Total
|
$
|
50,135
|
|
We are also party to a significant number of month-to-month leases that are cancelable at any time. Operating lease expense was
$23.9 million
,
$24.4 million
, and
$26.6 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation
Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and the need for disclosure of these items, if any. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. As of
December 31, 2013
, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is
$0.3 million
. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded. Our liabilities related to litigation matters that were deemed probable and reasonably estimable as of
December 31, 2012
were
$0.8 million
.
During the second and third quarter of 2013,
three
lawsuits with similar allegations of violations of California's wage and hour laws were filed in California. The lawsuits allege failure to pay overtime, failure to pay minimum wages, improper payroll deductions, failure to pay final wages in a timely manner, and violations of the California meal and break period laws, among other claims. We intend to vigorously investigate and defend these actions; however, because these cases are in the very early stages, we cannot predict the outcome of these lawsuits at this time and, accordingly, cannot estimate any possible loss or range of loss.
Patent Settlement
In June 2011, we agreed to accept
$5.5 million
in damages, which was paid in full in July 2011, related to the settlement of a KeyView® system patent infringement lawsuit. We recognized related legal fees and other expenses of
$1.4 million
during the year ended December 31, 2011. The settlement amount was recorded in general and administrative expenses on the consolidated statement of operations. The resolution of this matter did not have a material effect on our results of operations for the year ended December 31, 2011.
Tax Audits
We are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As of
December 31, 2013
and
2012
, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of prior audits. While we believe we have fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates.
Self-Insurance Reserves
We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation, vehicular liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As of
December 31, 2013
and
2012
, we have recorded
$62.1 million
and
$69.4 million
, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately
$18.5 million
and
$20.6 million
of insurance receivables as of
December 31, 2013
and
2012
, respectively. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.
Environmental Remediation Liabilities
For environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. As of
December 31, 2013
and
2012
, we have recorded $
6.2 million
and
$4.5 million
, respectively, for our environmental remediation liabilities. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.
We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties to comply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 17. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of our accumulated other comprehensive loss are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Foreign currency translation loss
|
$
|
(15,414
|
)
|
|
$
|
(6,148
|
)
|
|
Accumulated other comprehensive loss
|
$
|
(15,414
|
)
|
|
$
|
(6,148
|
)
|
Upon the completion of the sale of our Argentina operations on September 14, 2012, the accumulated foreign currency translation balance related to Argentina was reversed out of our accumulated other comprehensive loss and recorded as part of our 2012 loss from discontinued operations.
The local currency is the functional currency for our operations in Russia. As of December 31, 2011, the functional currency for Mexico, Russia and Canada was the local currency and the functional currency for Colombia and the Middle East was the U.S. dollar. Due to significant changes in economic facts and circumstances, the functional currency for Mexico and Canada was changed to the U.S. dollar effective January 1, 2012. The cumulative translation gains and losses resulting from translating financial statements from the functional currency to U.S. dollars are included in other comprehensive income and accumulated in stockholders’ equity until a partial or complete sale or liquidation of our net investment in the entity.
The table below summarizes the conversion ratios used to translate the financial statements and the cumulative currency translation gains and losses, net of tax, for each currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican Peso
|
|
Canadian Dollar
|
|
Russian Rouble
|
|
Total
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
Conversion ratio
|
|
13.06 : 1
|
|
|
1.07 : 1
|
|
|
32.77 : 1
|
|
|
n/a
|
|
|
Cumulative translation adjustment
|
|
$
|
(1,815
|
)
|
|
$
|
(752
|
)
|
|
$
|
(12,847
|
)
|
|
$
|
(15,414
|
)
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
Conversion ratio
|
|
13.01 : 1
|
|
|
1:00 : 1
|
|
|
30.44 : 1
|
|
|
n/a
|
|
|
Cumulative translation adjustment
|
|
$
|
(1,815
|
)
|
|
$
|
(752
|
)
|
|
$
|
(3,581
|
)
|
|
$
|
(6,148
|
)
|
NOTE 18. EMPLOYEE BENEFIT PLANS
We maintain a 401(k) plan as part of our employee benefits package. We match
100%
of employee contributions up to
4%
of the employee’s salary, which vest immediately, into our 401(k) plan, subject to maximums of
$10,200
and
$10,000
for the years ended
December 31, 2013
and
2012
, respectively. Our matching contributions were
$10.4 million
and
$10.7 million
for the years ended
December 31, 2013
and
2012
, respectively. We do not offer participants the option to purchase shares of our common stock through a 401(k) plan fund.
NOTE 19. STOCKHOLDERS’ EQUITY
Common Stock
As of
December 31, 2013
and
2012
, we had
200,000,000
shares of common stock authorized with a par value of
$0.10
per share, of which
152,331,006
shares were issued and outstanding at
December 31, 2013
and
151,069,609
shares were issued and outstanding at
December 31, 2012
. During
2013
,
2012
and
2011
, no dividends were declared or paid. Under the terms of the 2014 Notes, the 2021 Notes and our 2011 Credit Facility, we must meet certain financial covenants before we may pay dividends. We currently do not intend to pay dividends.
Tax Withholding
We repurchase shares of restricted common stock that have been previously granted to certain of our employees, pursuant to an agreement under which those individuals are permitted to sell shares back to us in order to satisfy the minimum income tax withholding requirements related to vesting of these grants. We
repurchased a total of
416,101
shares,
482,951
shares and
383,884
shares for an aggregate cost of
$3.2 million
,
$7.5 million
and
$5.7 million
during
2013
,
2012
and
2011
, respectively, which represented the fair market value of the shares based on the price of our stock on the dates of purchase.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 20. SHARE-BASED COMPENSATION
2012 Incentive Plan
On May 17, 2012, our stockholders approved the 2012 Equity and Cash Incentive Plan (the “2012 Incentive Plan”). The 2012 Incentive Plan is administered by our board of directors or a committee designated by our board of directors (the “Committee”). Our board of directors or the Committee (the “Administrator”) will have the power and authority to select Participants (as defined below) in the 2012 Incentive Plan and grant Awards (as defined below) to such Participants pursuant to the terms of the 2012 Incentive Plan. The 2012 Incentive Plan expires May 17, 2022.
Subject to adjustment, the total number of shares of our common stock that will be available for the grant of Awards under the 2012 Incentive Plan may not exceed
4,000,000
shares; however, for purposes of this limitation, any stock subject to an Award that is canceled, forfeited, expires or otherwise terminates without the issuance of stock, is settled in cash, or is exchanged with the Administrator's permission, prior to the issuance of stock, for an Award not involving stock, will again become available for issuance under the 2012 Incentive Plan. However, the full number of SARs granted that are to be settled by the issuance of stock will count against the plan limit described above, regardless of the number of shares of stock actually issued upon settlement of the stock appreciation rights. Shares of stock surrendered or withheld in payment of the exercise price of an option and shares of stock withheld by the Company to satisfy tax withholding obligations will count against the plan limit described above. Subject to adjustment, no Participant will be granted, during any one year period, options to purchase common stock and/or SARs with respect to more than
500,000
shares of common stock. Stock available for distribution under the 2012 Incentive Plan will be authorized and unissued shares, treasury shares or shares we reacquire in any manner.
Awards may be in the form of stock options (incentive stock options and nonqualified stock options), restricted stock, restricted stock units, performance compensation awards and SARs (collectively, "Awards"). Awards may be granted to employees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expected to become employees, directors or consultants following the grant date of the Award (“Participants”). However, incentive stock options may be granted only to employees.
Our board of directors at any time, and from time to time, may amend or terminate the 2012 Incentive Plan. However, except as provided otherwise in the 2012 Incentive Plan, no amendment will be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. Further, if the exercise price of an option, including an incentive stock option, exceeds the fair market value of our common stock on a given date, the Committee has the authority to reduce the exercise price of such option to a new exercise price that is no less than the then-current fair market value of our common stock; provided that such action shall first have been approved by a vote of our stockholders. The Administrator at any time, and from time to time, may amend the terms of any one or more Awards; however, if the amendment would constitute an impairment of the rights under any Award, we must request the consent of the Participant and the Participant must consent in writing. It is expressly contemplated that the board may amend the 2012 Incentive Plan in any respect our board of directors deem necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder relating to incentive stock options and/or to bring the 2012 Incentive Plan and/or Awards granted under it into compliance therewith. As of
December 31, 2013
, there were
1.6 million
shares available for grant under the 2012 Incentive Plan.
2009 Incentive Plan
On
June 4, 2009
, our stockholders approved the 2009 Equity and Cash Incentive Plan (the “2009 Incentive Plan”). The 2009 Incentive Plan is administered by our board of directors or the applicable Committee designated by the board. The Administrator will have the power and authority to select Participants in the 2009 Incentive Plan and to grant Awards to such Participants pursuant to the terms of the 2009 Incentive Plan. The 2009 Incentive Plan expires
June 4, 2019
.
Subject to adjustment, the total number of shares of our common stock available for the grant of Awards under the 2009 Incentive Plan may not exceed
4,000,000
shares; however, for purposes of this limitation, any stock subject to an Award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuance under the 2009 Incentive Plan. Subject to adjustment, no Participant will be granted, during any one year period, options to purchase common stock and/or SARs with respect to more than
500,000
shares of common stock. Stock available for distribution under the 2009 Incentive Plan will come from authorized and unissued shares or shares we reacquire in any manner. All awards under the 2009 Incentive Plan are granted at fair market value on the date of issuance.
Awards may be granted to employees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expected to become employees, directors or consultants following the grant date of the
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Award (“Participants”). However, incentive stock options may be granted only to employees. Vesting periods may be set at the board’s discretion but are generally set at
two
to
four
years. Awards to our directors are generally not subject to vesting.
Our board of directors at any time, and from time to time, may amend or terminate the 2009 Incentive Plan. However, no repricing of stock options is permitted unless approved by our stockholders, and, except as provided otherwise in the 2009 Incentive Plan, no other amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of
December 31, 2013
, there were
0.6 million
shares available for grant under the 2009 Incentive Plan.
2007 Incentive Plan
On
December 6, 2007
, our stockholders approved the 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”). The 2007 Incentive Plan is substantially similar to the 2009 Incentive Plan except for certain differences related to treatment of Awards at retirement and transferability of Awards at death. The 2007 Incentive Plan expires
December 6, 2017
.
Subject to adjustment, the total number of shares of our common stock that are available for the grant of Awards under the 2007 Incentive Plan may not exceed
4,000,000
shares; however, for purposes of this limitation,
any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuance under the 2007 Incentive Plan.
Our board of directors at any time, and from time to time, may amend or terminate the 2007 Incentive Plan. However, except as provided otherwise in the 2007 Incentive Plan, no amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of
December 31, 2013
, there were
0.3 million
shares available for grant under the 2007 Incentive Plan.
Stock Option Awards
Stock option awards granted under our incentive plans have a maximum contractual term of
ten years
from the date of grant. Shares issuable upon exercise of a stock option are issued from authorized but unissued shares of our common stock. The following tables summarize the stock option activity (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Fair Value
|
|
Outstanding at beginning of period
|
1,820
|
|
|
$
|
14.04
|
|
|
$
|
5.91
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Exercised
|
(4
|
)
|
|
$
|
3.87
|
|
|
$
|
1.67
|
|
|
Cancelled or expired
|
(444
|
)
|
|
$
|
13.93
|
|
|
$
|
5.65
|
|
|
Outstanding at end of period
|
1,372
|
|
|
$
|
14.10
|
|
|
$
|
6.00
|
|
|
Exercisable at end of period
|
1,372
|
|
|
$
|
14.10
|
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Fair Value
|
|
Outstanding at beginning of period
|
2,137
|
|
|
$
|
13.87
|
|
|
$
|
5.84
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Exercised
|
(114
|
)
|
|
$
|
9.76
|
|
|
$
|
4.83
|
|
|
Cancelled or expired
|
(203
|
)
|
|
$
|
14.68
|
|
|
$
|
5.91
|
|
|
Outstanding at end of period
|
1,820
|
|
|
$
|
14.04
|
|
|
$
|
5.91
|
|
|
Exercisable at end of period
|
1,820
|
|
|
$
|
14.04
|
|
|
$
|
5.91
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Fair Value
|
|
Outstanding at beginning of period
|
2,816
|
|
|
$
|
13.52
|
|
|
$
|
5.72
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Exercised
|
(647
|
)
|
|
$
|
12.29
|
|
|
$
|
5.31
|
|
|
Cancelled or expired
|
(32
|
)
|
|
$
|
13.89
|
|
|
$
|
5.86
|
|
|
Outstanding at end of period
|
2,137
|
|
|
$
|
13.87
|
|
|
$
|
5.84
|
|
|
Exercisable at end of period
|
2,126
|
|
|
$
|
13.92
|
|
|
$
|
5.87
|
|
The following tables summarize information about the stock options outstanding at
December 31, 2013
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
Number of
Options
Outstanding
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Fair Value
|
|
Range of exercise prices:
|
|
|
|
|
|
|
|
|
$3.87 - $9.37
|
4.92
|
|
6
|
|
|
$
|
4.01
|
|
|
$
|
1.72
|
|
|
$9.38 - $13.10
|
1.48
|
|
335
|
|
|
$
|
11.92
|
|
|
$
|
5.95
|
|
|
$13.11 - $15.05
|
3.59
|
|
995
|
|
|
$
|
14.82
|
|
|
$
|
6.04
|
|
|
$15.06 - $19.42
|
4.47
|
|
36
|
|
|
$
|
16.18
|
|
|
$
|
6.07
|
|
|
|
|
|
1,372
|
|
|
$
|
14.10
|
|
|
$
|
6.00
|
|
|
Aggregate intrinsic value (in thousands)
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
Number of
Options
Exercisable
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Fair Value
|
|
Range of exercise prices:
|
|
|
|
|
|
|
|
|
|
$3.87 - $9.37
|
|
|
|
6
|
|
|
$
|
4.01
|
|
|
$
|
1.72
|
|
|
$9.38 - $13.10
|
|
|
|
335
|
|
|
$
|
11.92
|
|
|
$
|
5.95
|
|
|
$13.11 - $15.05
|
|
|
|
995
|
|
|
$
|
14.82
|
|
|
$
|
6.04
|
|
|
$15.06 - $19.42
|
|
|
|
36
|
|
|
$
|
16.18
|
|
|
$
|
6.07
|
|
|
|
|
|
|
1,372
|
|
|
$
|
14.10
|
|
|
$
|
6.00
|
|
|
Aggregate intrinsic value (in thousands)
|
|
|
|
$
|
24
|
|
|
|
|
|
We did not grant any stock options during the years ended
December 31, 2013
,
2012
and
2011
. No stock options vested during the year ended
December 31, 2013
. We recognized
zero
, less than
$0.1 million
and less than
$0.1 million
in pre-tax expense related to stock options for the years ended
December 31, 2013
,
2012
and
2011
, respectively. We recognized tax benefits of
zero
, less than
$0.1 million
and less than
$0.1 million
, related to our stock options for the years ended
December 31, 2013
,
2012
and
2011
, respectively. All of the stock option awards were vested as of December 31, 2012. The weighted average remaining contractual term for stock option awards exercisable as of
December 31, 2013
is
3.1
years. The intrinsic value of the options exercised for the years ended
December 31, 2013
,
2012
and
2011
was less than
$0.1 million
,
$0.6 million
and
$3.0 million
, respectively. Cash received from the exercise of options for the year ended
December 31, 2013
, was less than $0.1 million with
zero
associated tax benefits.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common Stock Awards
The total fair market value of all common stock awards granted during the years ended
December 31, 2013
,
2012
and
2011
was
$15.7 million
,
$14.9 million
and
$18.4 million
, respectively.
The following tables summarize information for the years ended
December 31, 2013
,
2012
and
2011
about the common share awards that we have issued (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
Outstanding
|
|
Weighted Average
Issuance Price
|
|
Vested
|
|
Weighted Average
Issuance Price
|
|
Shares at beginning of period
|
6,160
|
|
|
$
|
8.87
|
|
|
4,383
|
|
|
$
|
6.12
|
|
|
Shares issued during period(1)
|
2,062
|
|
|
$
|
7.59
|
|
|
475
|
|
|
$
|
6.92
|
|
|
Previously issued shares vesting during period
|
—
|
|
|
$
|
—
|
|
|
1,094
|
|
|
$
|
12.13
|
|
|
Shares cancelled during period
|
(386
|
)
|
|
$
|
9.64
|
|
|
—
|
|
|
$
|
—
|
|
|
Shares repurchased during period
|
(416
|
)
|
|
$
|
7.51
|
|
|
(416
|
)
|
|
$
|
7.51
|
|
|
Shares at end of period
|
7,420
|
|
|
$
|
8.55
|
|
|
5,536
|
|
|
$
|
7.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
Outstanding
|
|
Weighted Average
Issuance Price
|
|
Vested
|
|
Weighted Average
Issuance Price
|
|
Shares at beginning of period
|
5,874
|
|
|
$
|
8.78
|
|
|
2,876
|
|
|
$
|
6.27
|
|
|
Shares issued during period(1)
|
1,106
|
|
|
$
|
13.50
|
|
|
153
|
|
|
$
|
10.29
|
|
|
Previously issued shares vesting during period
|
—
|
|
|
$
|
—
|
|
|
1,837
|
|
|
$
|
7.98
|
|
|
Shares cancelled during period
|
(337
|
)
|
|
$
|
13.13
|
|
|
—
|
|
|
$
|
—
|
|
|
Shares repurchased during period
|
(483
|
)
|
|
$
|
15.42
|
|
|
(483
|
)
|
|
$
|
15.42
|
|
|
Shares at end of period
|
6,160
|
|
|
$
|
8.87
|
|
|
4,383
|
|
|
$
|
6.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
Outstanding
|
|
Weighted Average
Issuance Price
|
|
Vested
|
|
Weighted Average
Issuance Price
|
|
Shares at beginning of period
|
5,027
|
|
|
$
|
7.98
|
|
|
1,913
|
|
|
$
|
8.41
|
|
|
Shares issued during period(1)
|
1,370
|
|
|
$
|
13.43
|
|
|
101
|
|
|
$
|
1.18
|
|
|
Previously issued shares vesting during period
|
—
|
|
|
$
|
—
|
|
|
1,246
|
|
|
$
|
5.99
|
|
|
Shares cancelled during period
|
(139
|
)
|
|
$
|
9.43
|
|
|
—
|
|
|
$
|
—
|
|
|
Shares repurchased during period
|
(384
|
)
|
|
$
|
14.68
|
|
|
(384
|
)
|
|
$
|
14.68
|
|
|
Shares at end of period
|
5,874
|
|
|
$
|
8.78
|
|
|
2,876
|
|
|
$
|
6.27
|
|
|
|
|
|
(1)
|
Includes
288,780
shares,
153,063
shares and
99,999
shares of common stock issued to our non-employee directors that vested immediately upon issuance during
2013
,
2012
and
2011
, respectively.
|
For common stock grants that vest immediately upon issuance, we record expense equal to the fair market value of the shares on the date of grant. For common stock awards that do not immediately vest, we recognize compensation expense ratably over the graded vesting period of the grant, net of estimated and actual forfeitures. For the years ended
December 31, 2013
,
2012
and
2011
, we recognized
$13.8 million
,
$13.3 million
and
$15.6 million
, respectively, of pre-tax expense from continuing operations associated with common stock awards, including common stock grants to our outside directors. In connection with the expense related to common stock awards recognized during the year ended
December 31, 2013
, we recognized tax benefits of
$5.2 million
. Tax benefits for the years ended
December 31, 2012
and
2011
were
$4.2 million
and
$6.0 million
, respectively. For the unvested common stock awards outstanding as of
December 31, 2013
, we anticipate that we will recognize
$8.8 million
of pre-tax expense over the next
0.9 years
.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Performance Units
On January 21, 2013, the Compensation Committee of the board of directors adopted the Performance Unit Award Agreement (the “2012 PU Award Agreement”) under the 2012 Incentive Plan and the 2013 Performance Unit Plan (the “2013 PU Plan”). We believe that the 2013 PU Plan and 2012 PU Award Agreement will enable us to obtain and retain employees who will contribute to our long term success by aligning the interests of our executives with the interests of our stockholders by providing compensation that is linked directly to increases in share value.
In January 2013, we issued
0.4 million
performance units to our executive officers under the 2012 Incentive Plan with such material terms as set forth in the 2012 PU Award Agreement. In February 2013, we issued
0.2 million
performance units to certain other employees under the 2013 PU Plan. The performance units are measured based on
two
performance periods from January 1, 2013 to December 31, 2013 and from January 1, 2014 to December 31, 2014. One half of the performance units are measured based on the first performance period, and the other half are measured based on the second performance period. The number of performance units that may be earned by a participant is determined at the end of each performance period based on the relative placement of Key's total stockholder return for that period within the peer group, as follows:
|
|
|
|
|
|
|
|
|
|
|
Company Placement for the Performance Period
|
|
Percentile Ranking in
Peer Group
|
|
Performance Units Earned as
a Percentage of Target
|
|
First
|
|
100
|
%
|
|
200
|
%
|
|
Second
|
|
91
|
%
|
|
180
|
%
|
|
Third
|
|
82
|
%
|
|
160
|
%
|
|
Fourth
|
|
73
|
%
|
|
140
|
%
|
|
Fifth
|
|
64
|
%
|
|
120
|
%
|
|
Sixth
|
|
55
|
%
|
|
100
|
%
|
|
Seventh
|
|
45
|
%
|
|
75
|
%
|
|
Eighth
|
|
36
|
%
|
|
50
|
%
|
|
Ninth
|
|
27
|
%
|
|
25
|
%
|
|
Tenth
|
|
18
|
%
|
|
—
|
%
|
|
Eleventh
|
|
9
|
%
|
|
—
|
%
|
|
Twelfth
|
|
—
|
%
|
|
—
|
%
|
If any performance units vest for a given performance period, the award holder will be paid a cash amount equal to the vested percentage of the performance units multiplied by the closing stock price of our common stock on the last trading day of the performance period. We account for the performance units as a liability-type award as they are settled in cash. As of
December 31, 2013
, the fair value of outstanding performance units was
$2.2 million
, and is being accreted to compensation expense over the vesting terms of the awards. As of
December 31, 2013
, the unrecognized compensation cost related to our unvested performance units is estimated to be
$1.1 million
and is expected to be recognized over a weighted-average period of
1.0
years.
Phantom Share Plan
In December 2006, we announced the implementation of a “Phantom Share Plan,” in which certain of our employees were granted “Phantom Shares.” Phantom Shares vest ratably over a
four
-year period and convey the right to the grantee to receive a cash payment on the anniversary date of the grant equal to the fair market value of the Phantom Shares vesting on that date. Grantees are not permitted to defer this payment to a later date. The Phantom Shares are a “liability” type award and we account for these awards at fair value. We recognize compensation expense related to the Phantom Shares based on the change in the fair value of the awards during the period and the percentage of the service requirement that has been performed, net of estimated and actual forfeitures, with an offsetting liability recorded on our consolidated balance sheets. We recognized pre-tax compensation benefit from continuing operation, associated with the Phantom Shares of
zero
, less than
$0.1 million
and
$0.3 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. As of
December 31, 2013
, no Phantom Shares were outstanding.
We recognized income tax benefit associated with the Phantom Shares of
zero
, less than
$0.1 million
and
$0.1 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. During
2013
, there were no cash payments related to the Phantom Shares.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Appreciation Rights
In August 2007, we issued approximately
587,000
SARs to our executive officers. Each SAR has a
ten
-year term from the date of grant. The vesting of all outstanding SAR awards was accelerated during the fourth quarter of 2008. Upon the exercise of a SAR, the recipient will receive an amount equal to the difference between the exercise price and the fair market value of a share of our common stock on the date of exercise, multiplied by the number of shares of common stock for which the SAR was exercised. All payments will be made in shares of our common stock. Prior to exercise, the SAR does not entitle the recipient to receive any shares of our common stock and does not provide the recipient with any voting or other stockholders’ rights. We account for these SARs as equity awards and recognize compensation expense ratably over the vesting period of the SAR based on their fair value on the date of issuance, net of estimated and actual forfeitures. We did not recognize any expense associated with these awards during
2013
,
2012
and
2011
. We did not forfeit any SARs during
2013
. As of
December 31, 2013
,
0.3 million
SARs remained unexercised.
NOTE 21. TRANSACTIONS WITH RELATED PARTIES
Employee Loans and Advances
From time to time, we have made certain retention loans and relocation loans to employees other than executive officers. The retention loans are forgiven over various time periods so long as the employee continues their employment with us. The relocation loans are repaid upon the employee selling their prior residence. As of
December 31, 2013
and
2012
, we did not have any employee loans and advances outstanding.
Transactions with Affiliates
In October 2010, we acquired certain subsidiaries, together with associated assets, from OFS Energy Services, LLC (“OFS”), an oilfield services company owned by ArcLight Capital Partners, LLC. At the time of the acquisition, OFS conducted business with companies owned by a former owner and employee of an OFS subsidiary that we purchased. Subsequent to the acquisition, we continued to provide services to these companies. The prices charged to these companies for our services are at rates that are equivalent to the prices charged to our other customers in the U.S. market. As of
December 31, 2013
and
2012
, our receivables from these related parties totaled less than
$0.1 million
and
$0.2 million
, respectively. Revenues from these customers for the years ended
December 31, 2013
,
2012
and
2011
were
$0.1 million
,
$2.7 million
and
$2.7 million
, respectively.
We provide services to an exploration and production company owned by one of our former employees. The prices charged to this company for these services are at rates that are an average of the prices charged to other customers in the California market where the services are provided. As of
December 31, 2013
and
2012
, our receivables from this company totaled less than
$0.1 million
and
$0.2 million
, respectively. Revenues from this company totaled
$1.1 million
,
$5.1 million
and
$5.2 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively.
Board of Director Relationships
A member of our board of directors is the Executive Vice President, General Counsel and Chief Administrative Officer of Anadarko Petroleum Corporation (“Anadarko”), which is one of our customers. Sales to Anadarko were
$41.2 million
,
$37.0 million
and
$37.2 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. Receivables outstanding from Anadarko were
$4.9 million
and
$3.5 million
as of
December 31, 2013
and
2012
, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.
A former member of our board of directors who resigned in May 2011 is a member and managing director of the general partner of the indirect majority owner of one of our customers. Sales to this customer were
$0.4 million
,
$0.4 million
and
$1.0 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively. Receivables outstanding from this customer were less than
$0.1 million
as of
December 31, 2013
and
2012
. Transactions with this customer are made on terms consistent with other customers.
A member of our board of directors serves on the United States Advisory Board of the Alexander Proudfoot practice of Management Consulting Group PLC (“Proudfoot”), which provided consulting services related to our general and administrative cost restructuring initiative. Payments to Proudfoot were
zero
,
$1.9 million
and
$4.1 million
for the years ended
December 31, 2013
,
2012
and
2011
, respectively.
NOTE 22. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
(in thousands)
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
Sale of Argentina operations/Notes receivable
|
$
|
—
|
|
|
$
|
12,955
|
|
|
$
|
—
|
|
|
Common stock issued in acquisition
|
—
|
|
|
—
|
|
|
117,919
|
|
|
Asset retirement obligations
|
174
|
|
|
—
|
|
|
741
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
53,504
|
|
|
$
|
48,217
|
|
|
$
|
35,354
|
|
|
Cash paid for taxes
|
35,239
|
|
|
13,148
|
|
|
63,680
|
|
|
Tax refunds
|
26,361
|
|
|
18,681
|
|
|
27,206
|
|
Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, and commitment and agency fees paid.
NOTE 23. SEGMENT INFORMATION
Our operating segments are U.S. and International. We also have a “Functional Support” segment associated with managing each of our reportable operating segments. Our domestic rig-based services, fluid management services, fishing and rental services, and coiled tubing services (formerly intervention services) are aggregated within our U.S. reportable segment. Our international rig-based services business and our Canadian technology development group are aggregated within our International reportable segment. We evaluate the performance of our operating segments based on revenue and income measures. All inter-segment sales pricing is based on current market conditions. The following is a description of the segments:
U.S. Segment
Rig-Based Services
Our rig-based services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of wells with depths up to
20,000
feet. Many of our rigs are outfitted with our proprietary KeyView
®
technology, which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews to better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.
The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through a workover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of the completion.
The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services are generally less complicated than completion and workover related services and require less time to perform.
Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.
Fluid Management Services
We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in SWDs wells owned by us or a third party. In addition, we operate a fleet of hot oilers capable of pumping heated fluids used to clear soluble restrictions in a wellbore. Demand and pricing for these services generally correspond to demand for our well service rigs.
Coiled Tubing Services
Coiled tubing services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post- hydraulic fracturing well preparation services.
Fishing and Rental Services
We offer a full line of services and rental equipment designed for use in providing both onshore and offshore drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk
®
pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units and foam air units.
As a result of the 2011 acquisition of Edge, our rental inventory also includes frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids, proppants, oil and natural gas. We also provide well testing services.
Demand for our fishing and rental services is also closely related to capital spending by oil and natural gas producers, which is generally a function of oil and natural gas prices.
International Segment
Our International segment includes operations in Mexico, Colombia, Ecuador, the Middle East and Russia. In addition, we have a technology development and control systems business based in Canada. Also, prior to the sale of our Argentina business in the third quarter of 2012, we operated in Argentina. We are reporting the results of our Argentina business as discontinued operations for the 2011 and 2012 periods. We provide rig-based services such as the maintenance, workover, recompletion of existing oil wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of their useful lives in each of our international markets.
In addition, in Mexico we provide drilling, coiled tubing, wireline and project management and consulting services. Our work in Mexico also requires us to provide third party services which varies in scope by project.
In the Middle East, we operate in the Kingdom of Bahrain and Oman. On August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC, a joint venture formed under the laws of Abu Dhabi, UAE, and the acquisition of the underlying business for
$5.1 million
. See
“Note 2. Acquisitions”
for further discussion.
Our Russian operations provide drilling, workover, and reservoir engineering services. On April 9, 2013, we completed the acquisition of the remaining
50%
noncontrolling interest in Geostream for
$14.6 million
. We now own
100%
of Geostream. See
“Note 2. Acquisitions”
for further discussion.
Our technology development and control systems business based in Canada is focused on the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.
Functional Support Segment
Our Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reporting segments.
The following table presents our segment information as of and for the years ended
December 31, 2013
,
2012
and
2011
(in thousands):
As of and for the year ended
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Functional
Support(2)
|
|
Reconciling
Eliminations
|
|
Total
|
|
Revenues from external customers
|
$
|
1,376,969
|
|
|
$
|
214,707
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,591,676
|
|
|
Intersegment revenues
|
10,630
|
|
|
8,715
|
|
|
509
|
|
|
(19,854
|
)
|
|
—
|
|
|
Depreciation and amortization
|
181,976
|
|
|
30,227
|
|
|
13,094
|
|
|
—
|
|
|
225,297
|
|
|
Other operating expenses
|
1,002,661
|
|
|
211,137
|
|
|
122,417
|
|
|
—
|
|
|
1,336,215
|
|
|
Operating income (loss)
|
192,332
|
|
|
(26,657
|
)
|
|
(135,511
|
)
|
|
—
|
|
|
30,164
|
|
|
Interest expense, net of amounts capitalized
|
1
|
|
|
62
|
|
|
55,141
|
|
|
—
|
|
|
55,204
|
|
|
Income (loss) from continuing operations before tax
|
192,539
|
|
|
(26,795
|
)
|
|
(189,981
|
)
|
|
—
|
|
|
(24,237
|
)
|
|
Long-lived assets(1)
|
1,637,969
|
|
|
333,273
|
|
|
301,032
|
|
|
(190,957
|
)
|
|
2,081,317
|
|
|
Total assets
|
2,785,299
|
|
|
497,938
|
|
|
(181,940
|
)
|
|
(513,827
|
)
|
|
2,587,470
|
|
|
Capital expenditures, excluding acquisitions
|
125,518
|
|
|
19,541
|
|
|
19,078
|
|
|
—
|
|
|
164,137
|
|
As of and for the year ended
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Functional
Support(2)
|
|
Reconciling
Eliminations
|
|
Total
|
|
Revenues from external customers
|
$
|
1,626,768
|
|
|
$
|
333,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,960,070
|
|
|
Intersegment revenues
|
43,867
|
|
|
6,273
|
|
|
15
|
|
|
(50,155
|
)
|
|
—
|
|
|
Depreciation and amortization
|
182,502
|
|
|
19,643
|
|
|
11,638
|
|
|
—
|
|
|
213,783
|
|
|
Other operating expenses
|
1,158,925
|
|
|
250,667
|
|
|
129,749
|
|
|
—
|
|
|
1,539,341
|
|
|
Operating income (loss)
|
285,341
|
|
|
62,992
|
|
|
(141,387
|
)
|
|
—
|
|
|
206,946
|
|
|
Interest expense, net of amounts capitalized
|
17
|
|
|
172
|
|
|
53,377
|
|
|
—
|
|
|
53,566
|
|
|
Income (loss) from continuing operations before tax
|
285,846
|
|
|
68,036
|
|
|
(193,853
|
)
|
|
—
|
|
|
160,029
|
|
|
Long-lived assets(1)
|
1,724,239
|
|
|
334,329
|
|
|
286,369
|
|
|
(173,143
|
)
|
|
2,171,794
|
|
|
Total assets
|
2,513,688
|
|
|
541,882
|
|
|
153,665
|
|
|
(447,647
|
)
|
|
2,761,588
|
|
|
Capital expenditures, excluding acquisitions
|
248,023
|
|
|
171,095
|
|
|
28,042
|
|
|
—
|
|
|
447,160
|
|
As of and for the year ended
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Functional
Support(2)
|
|
Reconciling
Eliminations
|
|
Total
|
|
Revenues from external customers
|
$
|
1,530,087
|
|
|
$
|
199,124
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,729,211
|
|
|
Intersegment revenues
|
7,870
|
|
|
9,481
|
|
|
707
|
|
|
(18,058
|
)
|
|
—
|
|
|
Depreciation and amortization
|
142,257
|
|
|
13,515
|
|
|
11,174
|
|
|
—
|
|
|
166,946
|
|
|
Other operating expenses
|
1,030,224
|
|
|
146,688
|
|
|
131,577
|
|
|
—
|
|
|
1,308,489
|
|
|
Operating (loss) income
|
357,606
|
|
|
38,921
|
|
|
(142,751
|
)
|
|
—
|
|
|
253,776
|
|
|
Interest expense, net of amounts capitalized
|
37
|
|
|
18
|
|
|
40,794
|
|
|
—
|
|
|
40,849
|
|
|
Loss on early extinguishment of debt
|
—
|
|
|
—
|
|
|
46,451
|
|
|
—
|
|
|
46,451
|
|
|
Income (loss) from continuing operations before tax
|
358,072
|
|
|
41,936
|
|
|
(224,555
|
)
|
|
—
|
|
|
175,453
|
|
|
Long-lived assets(1)
|
1,851,148
|
|
|
223,034
|
|
|
233,739
|
|
|
(309,364
|
)
|
|
1,998,557
|
|
|
Total assets
|
2,330,061
|
|
|
414,780
|
|
|
394,864
|
|
|
(540,585
|
)
|
|
2,599,120
|
|
|
Capital expenditures, excluding acquisitions
|
298,342
|
|
|
45,045
|
|
|
15,710
|
|
|
—
|
|
|
359,097
|
|
|
|
|
|
(1)
|
Long lived assets include: fixed assets, goodwill, intangibles and other assets.
|
|
|
|
|
(2)
|
Functional Support is geographically located in the United States.
|
NOTE 24. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Set forth below is unaudited summarized quarterly information for the two most recent years covered by these consolidated financial statements (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Year Ended December 31, 2013:
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
428,449
|
|
|
$
|
411,390
|
|
|
$
|
389,673
|
|
|
$
|
362,164
|
|
|
Direct operating expenses
|
299,182
|
|
|
287,102
|
|
|
268,297
|
|
|
259,881
|
|
|
Loss from continuing operations
|
(186
|
)
|
|
(3,772
|
)
|
|
(4,697
|
)
|
|
(12,518
|
)
|
|
Net loss
|
(186
|
)
|
|
(3,772
|
)
|
|
(4,697
|
)
|
|
(12,518
|
)
|
|
Loss attributable to Key
|
(274
|
)
|
|
(4,128
|
)
|
|
(4,848
|
)
|
|
(12,518
|
)
|
|
Loss per share
(1)
:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
—
|
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Year Ended December 31, 2012:
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
486,751
|
|
|
$
|
515,997
|
|
|
$
|
490,851
|
|
|
$
|
466,471
|
|
|
Direct operating expenses
|
311,497
|
|
|
343,996
|
|
|
335,799
|
|
|
317,553
|
|
|
Income from continuing operations
|
33,481
|
|
|
31,699
|
|
|
23,190
|
|
|
14,307
|
|
|
Net (loss) income
|
2,576
|
|
|
29,245
|
|
|
(37,019
|
)
|
|
14,307
|
|
|
Income (loss) attributable to Key
|
3,190
|
|
|
29,041
|
|
|
(38,094
|
)
|
|
13,485
|
|
|
Earnings (loss) per share(1):
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
0.02
|
|
|
0.19
|
|
|
(0.25
|
)
|
|
0.09
|
|
|
|
|
|
(1)
|
Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual earnings per common share.
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 25. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Our 2021 Notes are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly owned. The guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information.
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
50,321
|
|
|
$
|
398,188
|
|
|
$
|
57,644
|
|
|
$
|
—
|
|
|
$
|
506,153
|
|
|
Property and equipment, net
|
—
|
|
|
1,244,216
|
|
|
121,430
|
|
|
—
|
|
|
1,365,646
|
|
|
Goodwill
|
—
|
|
|
597,457
|
|
|
27,418
|
|
|
—
|
|
|
624,875
|
|
|
Deferred financing costs, net
|
13,897
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,897
|
|
|
Intercompany notes and accounts receivable and investment in subsidiaries
|
3,421,607
|
|
|
1,364,174
|
|
|
12,939
|
|
|
(4,798,720
|
)
|
|
—
|
|
|
Other assets
|
—
|
|
|
34,278
|
|
|
42,621
|
|
|
—
|
|
|
76,899
|
|
|
TOTAL ASSETS
|
$
|
3,485,825
|
|
|
$
|
3,638,313
|
|
|
$
|
262,052
|
|
|
$
|
(4,798,720
|
)
|
|
$
|
2,587,470
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
26,097
|
|
|
$
|
182,497
|
|
|
$
|
23,750
|
|
|
$
|
—
|
|
|
$
|
232,344
|
|
|
Long-term debt and capital leases, less current portion
|
763,981
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
763,981
|
|
|
Intercompany notes and accounts payable
|
1,162,648
|
|
|
2,667,943
|
|
|
97,050
|
|
|
(3,927,641
|
)
|
|
—
|
|
|
Deferred tax liabilities
|
280,828
|
|
|
4,643
|
|
|
(1,819
|
)
|
|
801
|
|
|
284,453
|
|
|
Other long-term liabilities
|
1,195
|
|
|
54,486
|
|
|
(82
|
)
|
|
—
|
|
|
55,599
|
|
|
Equity
|
1,251,076
|
|
|
728,744
|
|
|
143,153
|
|
|
(871,880
|
)
|
|
1,251,093
|
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
3,485,825
|
|
|
$
|
3,638,313
|
|
|
$
|
262,052
|
|
|
$
|
(4,798,720
|
)
|
|
$
|
2,587,470
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
66,435
|
|
|
$
|
469,049
|
|
|
$
|
54,310
|
|
|
$
|
—
|
|
|
$
|
589,794
|
|
|
Property and equipment, net
|
—
|
|
|
1,329,379
|
|
|
107,295
|
|
|
—
|
|
|
1,436,674
|
|
|
Goodwill
|
—
|
|
|
597,458
|
|
|
29,023
|
|
|
—
|
|
|
626,481
|
|
|
Deferred financing costs, net
|
16,628
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,628
|
|
|
Intercompany notes and accounts receivable and investment in subsidiaries
|
3,298,679
|
|
|
1,108,231
|
|
|
(20,371
|
)
|
|
(4,386,539
|
)
|
|
—
|
|
|
Other assets
|
8,068
|
|
|
39,696
|
|
|
44,247
|
|
|
—
|
|
|
92,011
|
|
|
TOTAL ASSETS
|
$
|
3,389,810
|
|
|
$
|
3,543,813
|
|
|
$
|
214,504
|
|
|
$
|
(4,386,539
|
)
|
|
$
|
2,761,588
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
46,632
|
|
|
$
|
226,773
|
|
|
$
|
31,691
|
|
|
$
|
—
|
|
|
$
|
305,096
|
|
|
Long-term debt and capital leases, less current portion
|
848,110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
848,110
|
|
|
Intercompany notes and accounts payable
|
947,700
|
|
|
2,590,398
|
|
|
14,138
|
|
|
(3,552,236
|
)
|
|
—
|
|
|
Deferred tax liabilities
|
258,528
|
|
|
6,781
|
|
|
(746
|
)
|
|
(5,110
|
)
|
|
259,453
|
|
|
Other long-term liabilities
|
1,528
|
|
|
60,068
|
|
|
1
|
|
|
—
|
|
|
61,597
|
|
|
Equity
|
1,287,312
|
|
|
659,793
|
|
|
169,420
|
|
|
(829,193
|
)
|
|
1,287,332
|
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
3,389,810
|
|
|
$
|
3,543,813
|
|
|
$
|
214,504
|
|
|
$
|
(4,386,539
|
)
|
|
$
|
2,761,588
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Revenues
|
$
|
148
|
|
|
$
|
1,494,683
|
|
|
$
|
161,536
|
|
|
$
|
(64,691
|
)
|
|
$
|
1,591,676
|
|
|
Direct operating expense
|
—
|
|
|
1,046,376
|
|
|
118,028
|
|
|
(49,942
|
)
|
|
1,114,462
|
|
|
Depreciation and amortization expense
|
—
|
|
|
214,334
|
|
|
10,963
|
|
|
—
|
|
|
225,297
|
|
|
General and administrative expense
|
1,077
|
|
|
202,599
|
|
|
33,336
|
|
|
(15,259
|
)
|
|
221,753
|
|
|
Operating (loss) income
|
(929
|
)
|
|
31,374
|
|
|
(791
|
)
|
|
510
|
|
|
30,164
|
|
|
Interest expense, net of amounts capitalized
|
55,747
|
|
|
(606
|
)
|
|
63
|
|
|
—
|
|
|
55,204
|
|
|
Other (income) expense, net
|
(3,616
|
)
|
|
(1,126
|
)
|
|
316
|
|
|
3,623
|
|
|
(803
|
)
|
|
Income (loss) from continuing operations before taxes
|
(53,060
|
)
|
|
33,106
|
|
|
(1,170
|
)
|
|
(3,113
|
)
|
|
(24,237
|
)
|
|
Income tax (expense) benefit
|
(13,385
|
)
|
|
15,456
|
|
|
993
|
|
|
—
|
|
|
3,064
|
|
|
Income (loss) from continuing operations
|
(66,445
|
)
|
|
48,562
|
|
|
(177
|
)
|
|
(3,113
|
)
|
|
(21,173
|
)
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income (loss)
|
(66,445
|
)
|
|
48,562
|
|
|
(177
|
)
|
|
(3,113
|
)
|
|
(21,173
|
)
|
|
Income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
595
|
|
|
—
|
|
|
595
|
|
|
INCOME (LOSS) ATTRIBUTABLE TO KEY
|
$
|
(66,445
|
)
|
|
$
|
48,562
|
|
|
$
|
(772
|
)
|
|
$
|
(3,113
|
)
|
|
$
|
(21,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Revenues
|
$
|
15
|
|
|
$
|
1,867,198
|
|
|
$
|
165,248
|
|
|
$
|
(72,391
|
)
|
|
$
|
1,960,070
|
|
|
Direct operating expense
|
—
|
|
|
1,254,087
|
|
|
117,293
|
|
|
(62,535
|
)
|
|
1,308,845
|
|
|
Depreciation and amortization expense
|
—
|
|
|
205,755
|
|
|
8,028
|
|
|
—
|
|
|
213,783
|
|
|
General and administrative expense
|
1,046
|
|
|
216,069
|
|
|
24,853
|
|
|
(11,472
|
)
|
|
230,496
|
|
|
Operating income (loss)
|
(1,031
|
)
|
|
191,287
|
|
|
15,074
|
|
|
1,616
|
|
|
206,946
|
|
|
Interest expense, net of amounts capitalized
|
54,690
|
|
|
(1,292
|
)
|
|
170
|
|
|
(2
|
)
|
|
53,566
|
|
|
Other income, net
|
(5,500
|
)
|
|
(1,474
|
)
|
|
(3,142
|
)
|
|
3,467
|
|
|
(6,649
|
)
|
|
Income (loss) from continuing operations before taxes
|
(50,221
|
)
|
|
194,053
|
|
|
18,046
|
|
|
(1,849
|
)
|
|
160,029
|
|
|
Income tax expense
|
(48,893
|
)
|
|
(3,385
|
)
|
|
(5,073
|
)
|
|
(1
|
)
|
|
(57,352
|
)
|
|
Income (loss) from continuing operations
|
(99,114
|
)
|
|
190,668
|
|
|
12,973
|
|
|
(1,850
|
)
|
|
102,677
|
|
|
Loss from discontinued operations
|
—
|
|
|
—
|
|
|
(93,568
|
)
|
|
—
|
|
|
(93,568
|
)
|
|
Net income (loss)
|
(99,114
|
)
|
|
190,668
|
|
|
(80,595
|
)
|
|
(1,850
|
)
|
|
9,109
|
|
|
Income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
1,487
|
|
|
—
|
|
|
1,487
|
|
|
INCOME (LOSS) ATTRIBUTABLE TO KEY
|
$
|
(99,114
|
)
|
|
$
|
190,668
|
|
|
$
|
(82,082
|
)
|
|
$
|
(1,850
|
)
|
|
$
|
7,622
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Revenues
|
$
|
707
|
|
|
$
|
1,660,801
|
|
|
$
|
106,289
|
|
|
$
|
(38,586
|
)
|
|
$
|
1,729,211
|
|
|
Direct operating expense
|
—
|
|
|
1,036,071
|
|
|
76,140
|
|
|
(27,021
|
)
|
|
1,085,190
|
|
|
Depreciation and amortization expense
|
—
|
|
|
160,884
|
|
|
6,062
|
|
|
—
|
|
|
166,946
|
|
|
General and administrative expense
|
1,178
|
|
|
211,207
|
|
|
18,550
|
|
|
(7,636
|
)
|
|
223,299
|
|
|
Operating income (loss)
|
(471
|
)
|
|
252,639
|
|
|
5,537
|
|
|
(3,929
|
)
|
|
253,776
|
|
|
Loss on early extinguishment of debt
|
46,451
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,451
|
|
|
Interest expense, net of amounts capitalized
|
42,551
|
|
|
(1,713
|
)
|
|
13
|
|
|
(2
|
)
|
|
40,849
|
|
|
Other (income) expense, net
|
(6,351
|
)
|
|
1,772
|
|
|
(638
|
)
|
|
(3,760
|
)
|
|
(8,977
|
)
|
|
Income (loss) from continuing operations before taxes
|
(83,122
|
)
|
|
252,580
|
|
|
6,162
|
|
|
(167
|
)
|
|
175,453
|
|
|
Income tax (expense) benefit
|
(61,130
|
)
|
|
(3,287
|
)
|
|
300
|
|
|
—
|
|
|
(64,117
|
)
|
|
Income (loss) from continuing operations
|
(144,252
|
)
|
|
249,293
|
|
|
6,462
|
|
|
(167
|
)
|
|
111,336
|
|
|
Loss from discontinued operations
|
—
|
|
|
—
|
|
|
(10,681
|
)
|
|
—
|
|
|
(10,681
|
)
|
|
Net income (loss)
|
(144,252
|
)
|
|
249,293
|
|
|
(4,219
|
)
|
|
(167
|
)
|
|
100,655
|
|
|
Loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
(806
|
)
|
|
—
|
|
|
(806
|
)
|
|
INCOME (LOSS) ATTRIBUTABLE TO KEY
|
$
|
(144,252
|
)
|
|
$
|
249,293
|
|
|
$
|
(3,413
|
)
|
|
$
|
(167
|
)
|
|
$
|
101,461
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
$
|
—
|
|
|
$
|
222,364
|
|
|
$
|
6,279
|
|
|
$
|
—
|
|
|
$
|
228,643
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(157,443
|
)
|
|
(6,694
|
)
|
|
—
|
|
|
(164,137
|
)
|
|
Acquisition of the 50% noncontrolling interest in Geostream
|
—
|
|
|
(14,600
|
)
|
|
—
|
|
|
—
|
|
|
(14,600
|
)
|
|
Intercompany notes and accounts
|
—
|
|
|
(68,597
|
)
|
|
—
|
|
|
68,597
|
|
|
—
|
|
|
Other investing activities, net
|
—
|
|
|
17,856
|
|
|
—
|
|
|
—
|
|
|
17,856
|
|
|
Net cash used in investing activities
|
—
|
|
|
(222,784
|
)
|
|
(6,694
|
)
|
|
68,597
|
|
|
(160,881
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
—
|
|
|
(393
|
)
|
|
—
|
|
|
—
|
|
|
(393
|
)
|
|
Proceeds from borrowings on revolving credit facility
|
220,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
220,000
|
|
|
Repayments on revolving credit facility
|
(300,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(300,000
|
)
|
|
Payment of deferred financing costs
|
(69
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(69
|
)
|
|
Repurchases of common stock
|
(3,196
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,196
|
)
|
|
Intercompany notes and accounts
|
68,597
|
|
|
—
|
|
|
—
|
|
|
(68,597
|
)
|
|
—
|
|
|
Other financing activities, net
|
(1,834
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,834
|
)
|
|
Net cash used in financing activities
|
(16,502
|
)
|
|
(393
|
)
|
|
—
|
|
|
(68,597
|
)
|
|
(85,492
|
)
|
|
Effect of changes in exchange rates on cash
|
—
|
|
|
—
|
|
|
87
|
|
|
—
|
|
|
87
|
|
|
Net decrease in cash and cash equivalents
|
(16,502
|
)
|
|
(813
|
)
|
|
(328
|
)
|
|
—
|
|
|
(17,643
|
)
|
|
Cash and cash equivalents at beginning of period
|
39,617
|
|
|
1,601
|
|
|
4,731
|
|
|
—
|
|
|
45,949
|
|
|
Cash and cash equivalents at end of period
|
$
|
23,115
|
|
|
$
|
788
|
|
|
$
|
4,403
|
|
|
$
|
—
|
|
|
$
|
28,306
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
$
|
—
|
|
|
$
|
349,208
|
|
|
$
|
20,452
|
|
|
$
|
—
|
|
|
$
|
369,660
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(430,045
|
)
|
|
(17,115
|
)
|
|
—
|
|
|
(447,160
|
)
|
|
Intercompany notes and accounts
|
676
|
|
|
49,926
|
|
|
—
|
|
|
(50,602
|
)
|
|
—
|
|
|
Other investing activities, net
|
(676
|
)
|
|
19,127
|
|
|
—
|
|
|
—
|
|
|
18,451
|
|
|
Net cash used in investing activities
|
—
|
|
|
(360,992
|
)
|
|
(17,115
|
)
|
|
(50,602
|
)
|
|
(428,709
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long term debt
|
205,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
205,000
|
|
|
Repayments of capital lease obligations
|
—
|
|
|
(1,959
|
)
|
|
—
|
|
|
—
|
|
|
(1,959
|
)
|
|
Proceeds from borrowings on revolving credit facility
|
275,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
275,000
|
|
|
Repayments on revolving credit facility
|
(405,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(405,000
|
)
|
|
Payment of deferred financing cost
|
(4,597
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,597
|
)
|
|
Repurchases of common stock
|
(7,519
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,519
|
)
|
|
Intercompany notes and accounts
|
(49,926
|
)
|
|
(676
|
)
|
|
—
|
|
|
50,602
|
|
|
—
|
|
|
Other financing activities, net
|
4,986
|
|
|
8,035
|
|
|
—
|
|
|
—
|
|
|
13,021
|
|
|
Net cash provided by financing activities
|
17,944
|
|
|
5,400
|
|
|
—
|
|
|
50,602
|
|
|
73,946
|
|
|
Effect of changes in exchange rates on cash
|
—
|
|
|
—
|
|
|
(4,391
|
)
|
|
—
|
|
|
(4,391
|
)
|
|
Net increase (decrease) in cash
|
17,944
|
|
|
(6,384
|
)
|
|
(1,054
|
)
|
|
—
|
|
|
10,506
|
|
|
Cash and cash equivalents at beginning of period
|
21,673
|
|
|
7,985
|
|
|
5,785
|
|
|
—
|
|
|
35,443
|
|
|
Cash and cash equivalents at end of period
|
$
|
39,617
|
|
|
$
|
1,601
|
|
|
$
|
4,731
|
|
|
$
|
—
|
|
|
$
|
45,949
|
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
$
|
—
|
|
|
$
|
187,597
|
|
|
$
|
708
|
|
|
$
|
—
|
|
|
$
|
188,305
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(345,215
|
)
|
|
(13,882
|
)
|
|
—
|
|
|
(359,097
|
)
|
|
Acquisitions, net of cash acquired
|
—
|
|
|
(187,058
|
)
|
|
—
|
|
|
—
|
|
|
(187,058
|
)
|
|
Intercompany notes and accounts
|
—
|
|
|
278,511
|
|
|
—
|
|
|
(278,511
|
)
|
|
—
|
|
|
Other investing activities, net
|
—
|
|
|
26,065
|
|
|
—
|
|
|
—
|
|
|
26,065
|
|
|
Net cash used in investing activities
|
—
|
|
|
(227,697
|
)
|
|
(13,882
|
)
|
|
(278,511
|
)
|
|
(520,090
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
(421,427
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(421,427
|
)
|
|
Payment of bond tender premium
|
(39,082
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39,082
|
)
|
|
Proceeds from long term debt
|
475,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
475,000
|
|
|
Repayments of capital lease obligations
|
—
|
|
|
(4,016
|
)
|
|
—
|
|
|
—
|
|
|
(4,016
|
)
|
|
Proceeds from borrowings on revolving credit facility
|
418,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
418,000
|
|
|
Repayments on revolving credit facility
|
(123,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(123,000
|
)
|
|
Payment of deferred financing cost
|
(16,485
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,485
|
)
|
|
Repurchases of common stock
|
(5,681
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,681
|
)
|
|
Intercompany notes and accounts
|
(278,511
|
)
|
|
—
|
|
|
—
|
|
|
278,511
|
|
|
—
|
|
|
Other financing activities, net
|
12,859
|
|
|
9,128
|
|
|
788
|
|
|
—
|
|
|
22,775
|
|
|
Net cash provided by financing activities
|
21,673
|
|
|
5,112
|
|
|
788
|
|
|
278,511
|
|
|
306,084
|
|
|
Effect of changes in exchange rates on cash
|
—
|
|
|
—
|
|
|
4,516
|
|
|
—
|
|
|
4,516
|
|
|
Net increase (decrease) in cash
|
21,673
|
|
|
(34,988
|
)
|
|
(7,870
|
)
|
|
—
|
|
|
(21,185
|
)
|
|
Cash and cash equivalents, beginning of period
|
—
|
|
|
42,973
|
|
|
13,655
|
|
|
—
|
|
|
56,628
|
|
|
Cash and cash equivalents, end of period
|
$
|
21,673
|
|
|
$
|
7,985
|
|
|
$
|
5,785
|
|
|
$
|
—
|
|
|
$
|
35,443
|
|