NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
1.
Organization and Summary of Significant Accounting Policies
Business
Pioneer Energy Services Corp. provides land-based drilling services and production services to a diverse group of oil and gas exploration and production companies in the United States and internationally in Colombia.
Our drilling services business segments provide contract land drilling services through
three
domestic divisions which are located in the Marcellus/Utica, Permian Basin and Eagle Ford, and Bakken regions, and internationally in Colombia.
We provide a comprehensive service offering which includes the drilling rig, crews, supplies and most of the ancillary equipment needed to operate our drilling rigs
. Our drilling rigs are equipped with 1,500 horsepower or greater drawworks, are
100%
pad-capable and offer the latest advancements in pad drilling. The following table summarizes our current rig fleet count and composition for each drilling services business segment:
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Multi-well, Pad-capable
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|
AC rigs
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SCR rigs
|
|
Total
|
|
Domestic drilling
|
16
|
|
|
—
|
|
|
16
|
|
International drilling
|
—
|
|
|
8
|
|
|
8
|
|
|
|
|
|
|
24
|
In July 2018, we entered into a three-year term contract for the construction of a new 1,500 horsepower, AC pad-optimal rig, which we expect to deploy in early 2019 to the Permian Basin.
Our
production services business segments provide a range of well, wireline and coiled tubing services
to a diverse group of exploration and production companies, with our operations concentrated in the major domestic onshore oil and gas producing regions in the Gulf Coast, Mid-Continent and Rocky Mountain states.
As of
December 31, 2018
,
the fleet count for each of our production services business segments are as follows:
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550 HP
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|
600 HP
|
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Total
|
|
Well servicing rigs, by horsepower (HP) rating
|
113
|
|
12
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Wireline services units
|
|
105
|
|
|
Coiled tubing services units
|
|
9
|
|
Basis of Presentation
The accompanying
consolidated
financial statements include the accounts of Pioneer Energy Services Corp. and our wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
The accompanying
consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
.
Use of Estimates
—
In preparing the accompanying
consolidated
financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows.
Our actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes in the near term relate to our estimates of certain variable revenues and amortization periods of certain deferred revenues and costs associated with drilling daywork contacts, our estimates of projected cash flows and fair values for impairment evaluations, our estimate of the valuation allowance for deferred tax assets, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance and our estimate of compensation related accruals.
Subsequent Events
—
In preparing the accompanying
consolidated
financial statements, we have reviewed events that have occurred after
December 31, 2018
, through the filing of this
Annual Report on
Form 10-K
, for inclusion as necessary.
Change in Accounting Principle and Recently Issued Accounting Standards
Changes to accounting principles generally accepted in the United States of America (“
U.S. GAAP
”) are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). We consider the applicability and impact of all ASUs. Any ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on our consolidated financial position and results of operations.
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•
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Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09, a comprehensive new revenue recognition standard that supersedes nearly all pre-existing revenue recognition guidance. The standard, and its related amendments, collectively referred to as ASC Topic 606, outlines a single comprehensive model for revenue recognition based on the core principle that a company will recognize revenue when promised goods or services are transferred to clients, in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.
|
We adopted this standard effective January 1, 2018 using the modified retrospective method, in which the standard has been applied to all contracts existing as of the date of initial application, with the cumulative effect of applying the standard recognized in retained earnings. Accordingly, revenues for reporting periods ending after January 1, 2018 are presented under ASC Topic 606, while prior period amounts have not been adjusted and continue to be reported under the previous revenue recognition guidance. In accordance with ASC Topic 606, we also adopted ASC Subtopic 340-40,
Other Assets and Deferred Costs, Contracts with Customers
, effective January 1, 2018, which requires that the incremental costs of obtaining or fulfilling a contract with a customer be recognized as an asset if the costs are expected to be recovered.
The adoption of these standards resulted in a cumulative effect adjustment of
$0.1 million
after applicable income taxes, which consists of the impact of the timing difference related to recognition of mobilization revenues and costs. Mobilization costs incurred are deferred and amortized over the expected period of benefit under ASC Subtopic 340-40, but were amortized over the initial contract term under the previous accounting guidance. The recognition of both mobilization revenues and costs begins when mobilization activity is completed under ASC Topic 606, but were recognized during the period of initial mobilization under the previous accounting guidance. Additionally, the opening balances of deferred mobilization costs were reclassified in accordance with ASC Subtopic 340-40, which requires classification of the entire deferred balance
according to the duration of the original contract to which it relates
, rather than bifurcating the asset into current and noncurrent portions.
For more information about the accounting under ASC Topic 606, and disclosures under the new standard, see Note
2
,
Revenue from Contracts with Customers
.
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•
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Leases.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which among other things, requires lessees to recognize substantially all leases on the balance sheet, with expense recognition that is similar to the current lease standard, and aligns the principles of lessor accounting with the principles of the FASB’s new revenue guidance (referenced above).
|
In July 2018, the FASB issued ASU No. 2018-11,
Leases: Targeted Improvements
, which provides an option to apply the guidance prospectively, and provides a practical expedient allowing lessors to combine the lease and non-lease components of revenues where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease. The practical expedient also allows a lessor to account for the combined lease and non-lease components under ASC Topic 606,
Revenue from Contracts with Customers
, when the non-lease component is the predominant element of the combined component. As a lessor, we expect to apply the practical expedient which would allow us to continue to recognize our revenues (both lease and service components) under ASC Topic 606, and continue to present them as one revenue stream in our consolidated statements of operations.
As a lessee, this standard will primarily impact our accounting for long-term real estate and office equipment leases, for which we will recognize a right-of-use asset and a corresponding lease liability on our consolidated balance sheet. We will apply this guidance prospectively, beginning January 1, 2019 and currently estimate the impact on our balance sheet to be approximately $10 million. We are nearing completion of our process to implement a lease accounting system for our leases, including the conversion of our existing lease data to the new system and implementing relevant internal controls and procedures.
Significant Accounting Policies and Detail of Account Balances
Cash and Cash Equivalents
— As of
December 31, 2018
, we had
$13.0 million
of cash and
$40.6 million
of cash equivalents, consisting of investments in
highly-liquid money-market mutual funds
. We had no cash equivalents at
December 31, 2017
.
Restricted Cash
— Our restricted cash balance reflects the
portion of net proceeds from the issuance
of our senior secured term loan which
are currently held in a restricted account until the completion of certain administrative tasks related to providing access rights to certain of our real property.
Revenue
—
Production services jobs are varied in nature, but typically represent a single performance obligation, either for a particular job, a series of distinct jobs, or a period of time during which we stand ready to provide services as our client needs them. Revenue is recognized for these services over time, as the services are performed.
Our drilling services business segments earn revenues by drilling oil and gas wells for our clients under daywork contracts.
Daywork contracts are comprehensive agreements under which we provide a comprehensive service offering, including the drilling rig, crew, supplies and most of the ancillary equipment necessary to operate the rig.
We account for our services provided under daywork contracts as a single performance obligation comprised of a series of distinct time increments which are satisfied over time. Accordingly, dayrate revenues are recognized in the period during which the services are performed.
All of our revenues are recognized net of sales taxes, when applicable.
For more information about the accounting under ASC Topic 606, see Note
2
,
Revenue from Contracts with Customers
.
Trade and Unbilled Accounts Receivable
—
We record trade accounts receivable at the amount we invoice to our clients. These accounts do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable as of the balance sheet date. We determine the allowance based on the credit worthiness of our clients and general economic conditions. Consequently, an adverse change in those factors could affect our estimate of our allowance for doubtful accounts.
Our unbilled receivables represent revenues we have recognized in excess of amounts billed on drilling contracts and production services completed.
For more information, see Note
2
,
Revenue from Contracts with Customers
.
Other Receivables
— Our other receivables primarily consist of recoverable taxes related to our international operations, net income tax receivables, as well as proceeds receivable from asset sales.
Inventories
— Inventories primarily consist of drilling rig replacement parts and supplies held for use by our drilling operations in Colombia, and supplies held for use by our wireline and coiled tubing operations. Inventories are valued at the lower of cost (first in, first out or actual) or net realizable value.
Prepaid Expenses and Other Current Assets
—
Prepaid expenses and other current assets include items such as insurance, rent deposits, software subscriptions and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Prepaid expenses and other current assets also include deferred mobilization costs for short-term drilling contracts.
Property and Equipment
— Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated useful lives of the assets using the straight-line method. We record the same depreciation expense whether our equipment is idle or working. We charge our expenses for maintenance and repairs to operating costs. We capitalize expenditures for renewals and betterments to the appropriate property and equipment accounts. For more information, see Note
3
,
Property and Equipment
.
Other Noncurrent Assets
— Other noncurrent assets consist of deferred mobilization costs on long-term drilling contracts, cash deposits related to the deductibles on our workers’ compensation insurance policies, and deferred compensation plan investments.
Other Accrued Expenses
— Our other accrued expenses include accruals for items such as sales taxes, property taxes, withholding tax liability related to our international operations, and professional and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit.
Other Noncurrent Liabilities
— Our other noncurrent liabilities consist of the noncurrent portion of deferred mobilization revenues, the noncurrent portion of liabilities associated with our long-term compensation plans, and deferred lease liabilities.
Insurance Recoveries, Accrued Insurance Claims and Settlements, and Accrued Premiums and Deductibles —
We use a combination of self-insurance and third-party insurance for various types of coverage.
Our accrued premiums and deductibles include the premiums and estimated liability for the self-insured portion of costs associated with our health, workers’ compensation, general liability and auto liability insurance.
Our insurance recoveries receivables and our accrued liability for insurance claims and settlements represent our estimate of claims in excess of our deductible, which are covered and managed by our third-party insurance providers, some of which may ultimately be settled by the insurance provider in the long-term.
These are presented in our
consolidated
balance sheets as current due to the uncertainty in the timing of reporting and payment of claims.
For more information, see Note
10
,
Employee Benefit Plans and Insurance
.
Treasury Stock
— Treasury stock purchases are accounted for under the cost method whereby the cost of the acquired common stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of treasury stock shares are credited or charged to additional paid in capital using the average cost method.
Stock-based Compensation
—
We recognize compensation cost for our stock-based compensation awards based on the fair value estimated in accordance with ASC Topic 718,
Compensation—Stock Compensation,
and we recognize forfeitures when they occur.
For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
For more information, see Note
9
,
Equity Transactions and Stock-Based Compensation Plans
.
Income Taxes
— We follow the asset and liability method of accounting for income taxes, under which we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure our deferred tax assets and liabilities by using the enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. The effect of a change in tax rates on deferred tax assets and liabilities is reflected in income in the period of enactment. For more information, see Note
6
,
Income Taxes
.
Foreign Currencies
— Our functional currency for our foreign subsidiary in Colombia is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the period. Income statement accounts are translated at average rates for the period. Gains and losses from remeasurement of foreign currency financial statements into U.S. dollars and from foreign currency transactions are included in other income or expense.
Related-Party Transactions
— During each of the
years
ended
December 31, 2018
,
2017
and
2016
, the Company paid approximately
$0.2 million
for trucking and equipment rental services received from Gulf Coast Lease Service, which represented arms-length transactions. Gulf Coast Lease Service is owned and operated by the two sons of our former Senior Vice President of Well Servicing, Mr. Freeman, who also served as the President of Gulf Coast Lease Service, primarily in an advisory role to his sons, and for which he did not receive compensation from Gulf Coast Lease Service. Mr. Freeman retired from his role as Senior Vice President of Well Servicing in January 2019.
Comprehensive Income
— We have not reported comprehensive income due to the absence of items of other comprehensive income in the periods presented.
Reclassifications
—
Certain amounts in the
consolidated
financial statements for the prior year periods have been reclassified to conform to the current year’s presentation.
2
.
Revenue from Contracts with Customers
Our production services business segments earn revenues for well servicing, wireline services and coiled tubing services pursuant to master services agreements based on purchase orders or other contractual arrangements with the client. Production services jobs are generally short-term (ranging in duration from several hours to less than
30
days) and are charged at current market rates for the labor, equipment and materials necessary to complete the job.
Production services jobs are varied in nature, but typically represent a single performance obligation, either for a particular job, a series of distinct jobs, or a period of time during which we stand ready to provide services as our client needs them. Revenue is recognized for these services over time, as the services are performed.
Our drilling services business segments earn revenues by drilling oil and gas wells for our clients under daywork contracts.
Daywork contracts are comprehensive agreements under which we provide a comprehensive service offering, including the drilling rig, crew, supplies and most of the ancillary equipment necessary to operate the rig.
Contract modifications that extend the term of a dayrate contract are generally accounted for prospectively as a separate dayrate contract.
We account for our services provided under daywork contracts as a single performance obligation comprised of a series of distinct time increments which are satisfied over time. Accordingly, dayrate revenues are recognized in the period during which the services are performed.
With most drilling contracts, we also receive payments contractually designated for the mobilization and demobilization of drilling rigs and other equipment to and from the client’s drill site. Revenues associated with the mobilization and demobilization of our drilling rigs to and from the client’s drill site do not relate to a distinct good or service and are recognized ratably over the related contract term.
The amount of demobilization revenue that we ultimately collect is dependent upon the specific contractual terms, most of which include provisions for reduced (or no) payment for demobilization when, among other things, the contract is renewed or extended with the same client, or when the rig is subsequently contracted with another client prior to the termination of the current contract. Since revenues associated with demobilization activity are typically variable, at each period end, they are estimated at the most likely amount, and constrained when the likelihood of a significant reversal is probable. Any change in the expected amount of demobilization revenue is accounted for with the net cumulative impact of the change in estimate recognized in the period during which the revenue estimate is revised.
The upfront costs that we incur to mobilize the drilling rig to our client’s initial drilling site are capitalized and recognized ratably over the term of the related contract, including any contracted renewal or extension periods, which is our estimate of the period during which we expect to benefit from the cost of mobilizing the rig. Costs associated with the final demobilization at the end of the contract term are expensed when incurred, when the demobilization activity is performed.
We also act as a principal for certain reimbursable services and auxiliary equipment provided by us to our clients, for which we incur costs and earn revenues, many of which are variable, or dependent upon the activity that is actually performed each day under the related contract. Accordingly, reimbursements that we receive for out-of-pocket expenses are recorded as revenues and the out-of-pocket expenses for which they relate are recorded as operating costs during the period to which they relate within the series of distinct time increments.
All of our revenues are recognized net of sales taxes, when applicable.
Trade and Unbilled Accounts Receivable
We record trade accounts receivable at the amount we invoice to our clients. These accounts do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable as of the balance sheet date. We determine the allowance based on the credit worthiness of our clients and general economic conditions. Consequently, an adverse change in those factors could affect our estimate of our allowance for doubtful accounts.
Our production services terms generally provide for payment of invoices in 30 days. Our typical drilling contract provides for payment of invoices in 30 days. We generally do not extend payment terms beyond 30 days and have not extended payment terms beyond 90 days for any of our domestic contracts in the last three fiscal years. We review our allowance for doubtful accounts on a monthly basis. Balances more than 90 days past due are reviewed individually for collectability. We charge off account balances against the allowance after we have exhausted all reasonable means of collection and determined that the potential for recovery is remote. We do not have any off-balance sheet credit exposure related to our clients. The changes in our allowance for doubtful accounts consist of the following (amounts in thousands):
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Year ended December 31,
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|
|
2018
|
|
2017
|
|
2016
|
|
Balance at beginning of year
|
$
|
1,224
|
|
|
$
|
1,678
|
|
|
$
|
2,254
|
|
|
Increase (decrease) in allowance charged to expense
|
271
|
|
|
(197
|
)
|
|
404
|
|
|
Accounts charged against the allowance
|
(72
|
)
|
|
(257
|
)
|
|
(980
|
)
|
|
Balance at end of year
|
$
|
1,423
|
|
|
$
|
1,224
|
|
|
$
|
1,678
|
|
Our unbilled receivables represent revenues we have recognized in excess of amounts billed on drilling contracts and production services completed.
We typically bill our clients at
15
-day intervals during the performance of daywork drilling contracts and upon completion of the daywork contract. Our unbilled receivables as of
December 31, 2018
and
December 31, 2017
were as follows
(amounts in thousands):
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|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Daywork drilling contracts in progress
|
$
|
24,365
|
|
|
$
|
15,254
|
|
|
Production services
|
457
|
|
|
775
|
|
|
|
$
|
24,822
|
|
|
$
|
16,029
|
|
Though our typical drilling contract provides for payment of invoices in 30 days, the process for invoicing work performed in our international operations generally lengthens the billing cycle for those operations, which is the primary reason for the increase in unbilled revenues during 2018.
Contract Asset and Liability Balances and Contract Cost Assets
Contract asset and contract liability balances relate to demobilization and mobilization revenues, respectively. Demobilization revenue that we expect to receive is recognized ratably over the related contract term, but invoiced upon completion of the demobilization activity. Mobilization revenue, which is typically collected upon the completion of the initial mobilization activity, is deferred and recognized ratably over the related contract term. Contract asset and liability balances are netted at the contract level, with the net current and noncurrent portions separately classified in our
consolidated
balance sheets, and referred to herein as “deferred revenues.”
Contract cost assets represent the costs associated with the initial mobilization required in order to fulfill the contract, which are deferred and recognized ratably over the period during which we expect to benefit from the mobilization, or the period during which we expect to satisfy the performance obligations of the related contract. Contract cost assets are presented as either current or noncurrent,
according to the duration of the original contract to which it relates
, and referred to herein as “deferred costs.”
Our current and noncurrent deferred revenues and costs as of
December 31, 2018
and
January 1, 2018
were as follows
(amounts in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
January 1, 2018
|
|
Current deferred revenues
|
$
|
1,722
|
|
|
$
|
1,287
|
|
|
Current deferred costs
|
1,543
|
|
|
1,072
|
|
|
|
|
|
|
|
Noncurrent deferred revenues
|
$
|
437
|
|
|
$
|
564
|
|
|
Noncurrent deferred costs
|
679
|
|
|
1,177
|
|
The changes in deferred revenue and cost balances during the year ended
December 31, 2018
are primarily related to increased deferred mobilization revenue and cost balances for the deployment of
five
international rigs and
one
domestic rig under new term contracts in 2018, mostly offset by the amortization of deferred revenues and costs during the period. Amortization of deferred revenues and costs during the
years
ended
December 31, 2018
,
2017
and
2016
were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Amortization of deferred revenues
|
$
|
2,961
|
|
|
$
|
2,400
|
|
|
$
|
1,566
|
|
|
Amortization of deferred costs
|
2,855
|
|
|
4,953
|
|
|
2,813
|
|
As of December 31, 2018
, all but one of our
24
rigs are earning under daywork contracts,
13
of which are domestic term contracts
.
Our international drilling contracts are cancelable by our clients without penalty, although the contracts require 15 to 30 days notice and payment for demobilization services.
The spot contracts for our domestic drilling rigs are also terminable by our client with
30
days notice, but typically do not include a required payment for demobilization services. Revenues associated with the initial mobilization and/or demobilization of drilling rigs under cancelable contracts are deferred and recognized ratably over the anticipated duration of the original contract, which is the period during which we expect our client to benefit from the mobilization of the rig, and represents a separate performance obligation because the payment for mobilization and/or demobilization creates a material right to our client during the cancelable period, for which the transaction price is allocated to the optional goods and services expected to be provided.
Remaining Performance Obligations
We have elected to apply the practical expedients in ASC Topic 606 which allow entities to omit disclosure of (i) the transaction price allocated to the remaining performance obligations associated with short-term contracts, and (ii) the estimated variable consideration related to wholly unsatisfied performance obligations, or to distinct future time increments within a series of performance obligations. Therefore, we have not disclosed the remaining amount of fixed mobilization revenue (or estimated future variable demobilization revenue) associated with short-term contracts, and we have not disclosed an estimate of the amount of future variable dayrate drilling revenue. However, the amount of fixed mobilization revenue associated with remaining performance obligations is reflected in the net unamortized balance of deferred mobilization revenues, which is presented in both current and noncurrent portions in our
consolidated
balance sheet, and discussed in more detail in the section above entitled,
Contract Asset and Liability Balances and Contract Cost Assets
.
Disaggregation of Revenue
ASC Topic 606 requires disclosure of the disaggregation of revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. We believe the disclosure of revenues by operating segment achieves the objective of this disclosure requirement. See Note
11
,
Segment Information
, for the disaggregation of revenues by operating segment, which reflects the disaggregation of revenues by the type of services provided and by geography (international versus domestic).
Impact of ASC Topic 606 on Financial Statement Line Items and Disclosures
Our revenue recognition pattern under ASC Topic 606 is similar to revenue recognition under the previous accounting guidance, except for: (i) the timing of recognition of demobilization revenues which are estimated and recognized ratably over the term of the related contract under ASC Topic 606, and constrained when appropriate, but were previously not recognized until the activity was performed under previous guidance; (ii) the timing of recognition of mobilization revenues and costs which are recognized over the applicable amortization period beginning when the initial mobilization of the rig is completed, but which, under previous guidance, we recognized over the related contract term beginning when the initial mobilization activity commenced, (iii) the timing of recognition of mobilization costs which are deferred and recognized ratably over the expected period of benefit, but which, under previous guidance, we recognized ratably over the term of the initial contract; and (iv) presentation of mobilization costs which are presented as either current or noncurrent
according to the duration of the original contract to which it relates
under ASC Topic 606, but which we bifurcated and presented both current and noncurrent portions in separate line items under previous guidance.
These differences have not had a material impact on our
consolidated
financial position or results of operations as of and
during 2018
. Additionally, we have determined that any disclosures required by ASC Topic 606 which are not presented herein are either not applicable, or are not material.
Concentration of Clients
We derive a significant portion of our revenue from a limited number of major clients. For the years ended
December 31, 2018
,
2017
and
2016
, our drilling and production services to our top three clients accounted for approximately
20%
,
20%
, and
26%
, respectively, of our revenue.
3
.
Property and Equipment
The following table presents the estimated useful lives and costs of our assets by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Lives
|
|
Cost (amounts in thousands)
|
|
Drilling rigs and equipment
|
3 - 25
|
|
$
|
590,148
|
|
|
$
|
594,743
|
|
|
Well servicing rigs and equipment
|
3 - 20
|
|
252,589
|
|
|
244,747
|
|
|
Wireline units and equipment
|
1 - 10
|
|
144,171
|
|
|
142,224
|
|
|
Coiled tubing units and equipment
|
1 - 7
|
|
25,689
|
|
|
18,141
|
|
|
Vehicles
|
3 - 10
|
|
50,317
|
|
|
47,932
|
|
|
Office equipment
|
3 - 10
|
|
11,606
|
|
|
12,717
|
|
|
Buildings and improvements
|
3 - 40
|
|
23,610
|
|
|
24,013
|
|
|
Property and equipment not yet placed in service
|
—
|
|
17,718
|
|
|
6,751
|
|
|
Land
|
—
|
|
2,367
|
|
|
2,367
|
|
|
|
|
|
$
|
1,118,215
|
|
|
$
|
1,093,635
|
|
Capital Expenditures
— Our capital expenditures were
$72.9 million
,
$61.4 million
and
$32.6 million
during the
years
ended
December 31, 2018
,
2017
, and
2016
, respectively, which includes
$0.4 million
,
$0.4 million
and
$0.2 million
, respectively, of capitalized interest costs incurred in connection with the construction of a new domestic drilling rig which we expect to deploy in early 2019, and the expansion of our coiled tubing and well servicing fleets in 2018 and 2017, respectively.
Capital expenditures during
2018
primarily related to various routine expenditures to maintain our fleets and purchase new support equipment, expansion of our coiled tubing and wireline fleets, capital projects to upgrade and refurbish certain components of our international and domestic drilling rigs and begin construction of
one
new-build drilling rig, and vehicle fleet upgrades in all domestic business segments. Capital expenditures during 2017 primarily related to the acquisition of
20
well servicing rigs and expansion of our wireline fleet, upgrades to certain domestic drilling rigs, routine capital expenditures necessary to deploy assets that were previously idle, and other new drilling equipment and trucks. Capital expenditures during 2016 consisted primarily of routine expenditures to maintain our drilling and production services fleets, and expenditures for equipment ordered in 2014 before the market slowdown.
Capital expenditures incurred for property and equipment not yet placed in service as of
December 31, 2018
primarily related to approximately
$8.0 million
of costs for the construction of a new-build drilling rig, which is partially being constructed from spare components already in our fleet, various refurbishments and upgrades of drilling and production services equipment, and the purchase of other new ancillary equipment. At
December 31, 2017
, property and equipment not yet placed in service
primarily related to routine refurbishments on
one
international drilling rig in preparation for its deployment in 2018, installments on the purchase of
three
wireline units and
one
coiled tubing unit, and scheduled refurbishments on drilling and production services equipment.
Gain/Loss on Disposition of Property
— We recognized a net
gain
during the
year
ended
December 31, 2018
of
$3.1 million
on the disposition of various property and equipment,
primarily from the sale of drill pipe and collars, various coiled tubing equipment and fleet disposals, including
the sale of
five
coiled tubing units,
twelve
wireline units, and
two
drilling rigs which were designated as held for sale. During 2017, we recognized a net gain of
$3.6 million
on the disposition of property and equipment, including sales of
certain coiled tubing equipment and vehicles, as well as the loss of drill pipe in operation, for which we were reimbursed by the client, and the disposal of
three
cranes that were damaged.
During 2016, we recognized a net
gain
of
$1.9 million
on the disposition of property and equipment, including the sale of
three
SCR drilling rigs and other drilling equipment, the disposal of excess drill pipe and the disposition of damaged components from one of our AC drilling rigs.
Assets Held for Sale
—
As of
December 31, 2018
, our
consolidated
balance sheet reflects assets held for sale of
$3.6 million
, which primarily represents the fair value of
two
domestic SCR drilling rigs
,
spare drilling equipment that would support these rigs
and
three
coiled tubing units
. As of
December 31, 2017
, our consolidated balance sheet reflects assets held for sale of
$6.6 million
, which primarily represents the fair value of
three
domestic SCR drilling rigs,
one
domestic mechanical drilling rig,
spare drilling equipment that would support these rigs
,
two
wireline units,
one
coiled tubing unit and other spare equipment.
During the
years
ended
December 31, 2018
,
2017
and
2016
, we recognized impairment charges of
$4.4 million
,
$1.9 million
, and
$12.8 million
, respectively,
to reduce the carrying values of assets which were classified as held for sale, to their estimated fair values, based on expected sales prices
which are classified as Level 3 inputs as defined by ASC Topic 820,
Fair Value Measurements and Disclosures
.
Impairments
—
In accordance with ASC Topic 360,
Property, Plant and Equipment
, we monitor all indicators of potential impairments, and
we evaluate for potential impairment of long-lived assets when indicators of impairment are present, which may include, among other things, significant adverse changes in industry trends (including revenue rates, utilization rates, oil and natural gas market prices, and industry rig counts).
In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of the assets grouped at the lowest level that independent cash flows can be identified. We perform an impairment evaluation and estimate future undiscounted cash flows for each of our reporting units separately, which are our domestic drilling services, international drilling services, well servicing, wireline services and coiled tubing services segments.
If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group, and the amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of the assets.
Due to lower than anticipated operating results in 2016 and 2017 and a decline in our projected cash flows for the coiled tubing reporting unit, we performed an impairment analysis of our coiled tubing long-lived assets at September 30, 2016 and again at June 30, 2017, which indicated that our projected net undiscounted cash flows associated with the coiled tubing reporting unit were in excess of the net carrying value of the assets at both dates and thus no impairment was present.
Due to adverse factors affecting our well servicing operations, including increased competition and labor shortages in certain well servicing markets, and lower than anticipated utilization, all of which contributed to a decline in our projected cash flows for the well servicing reporting unit, we performed an impairment analysis of this reporting unit at September 30, 2018.
As a result of this analysis, we concluded that this reporting unit was not at risk of impairment because the sum of the estimated future undiscounted net cash flows for our well servicing reporting unit was significantly in excess of the carrying amount.
We used an income approach to estimate the fair value of our reporting units.
The most significant inputs used in our impairment analysis include the projected utilization and pricing of our services, as well as the estimated proceeds upon any future sale or disposal of the assets, all of which are classified as Level 3 inputs as defined by ASC Topic 820,
Fair Value Measurements and Disclosures
.
The assumptions we use in the evaluation for impairment are inherently uncertain and require management judgment.
Although we believe the assumptions and estimates used in our impairment analysis are reasonable, different assumptions and estimates could materially impact the analysis and resulting conclusions.
If commodity prices remain at current levels for an extended period of time, or if the demand for any of our services decreases below what we are currently projecting, our estimated cash flows may decrease, and if any of the foregoing were to occur, we could incur impairment charges on the related assets.
4
.
Debt
Our debt consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Senior secured term loan
|
$
|
175,000
|
|
|
$
|
175,000
|
|
|
Senior notes
|
300,000
|
|
|
300,000
|
|
|
|
475,000
|
|
|
475,000
|
|
|
Less unamortized discount (based on imputed interest rate of 10.46%)
|
(2,668
|
)
|
|
(3,387
|
)
|
|
Less unamortized debt issuance costs
|
(7,780
|
)
|
|
(9,948
|
)
|
|
|
$
|
464,552
|
|
|
$
|
461,665
|
|
Senior Secured Term Loan
Our senior secured term loan (the “Term Loan”) entered into on
November 8, 2017
provided for one drawing in the amount of
$175 million
, net of a
2%
original issue discount.
Proceeds from the issuance of the Term Loan were used to repay the entire outstanding balance under our previous credit facility, plus fees and accrued and unpaid interest, as well as the fees and expenses associated with entering into the Term Loan and ABL Facility, which is further described below.
The remainder
of the proceeds are available to be used for other general corporate purposes.
The Term Loan is not subject to amortization payments of principal
. Interest on the principal amount accrues at the LIBOR rate or the base rate as defined in the agreement, at our option, plus an applicable margin of
7.75%
and
6.75%
, respectively.
The Term Loan is set to mature on
November 8, 2022
, or earlier, subject to certain circumstances as described in the agreement, and including an earlier maturity date if the outstanding balance of the Senior Notes exceeds
$15.0 million
on
December 14, 2021
, at which time the Term Loan would then mature
. However, the Term Loan may be prepaid, at our option, at any time, in whole or in part, subject to a minimum of
$5 million
, and subject to a declining call premium as defined in the agreement.
The Term Loan contains a financial covenant requiring the ratio of (i) the net orderly liquidation value of our fixed assets (based on appraisals obtained as required by our lenders), on a consolidated basis, in which the lenders under the Term Loan maintain a first priority security interest, plus proceeds of asset dispositions not required to be used to effect a prepayment of the Term Loan to (ii) the outstanding principal amount of the Term Loan, to be at least equal to
1.50
to 1.00 as of any
June 30
or
December 31
of any calendar year through maturity.
The Term Loan contains customary mandatory prepayments from the proceeds of certain transactions including certain asset dispositions and debt issuances
, and has additional customary restrictions
that, among other things, and subject to certain exceptions, limit our ability to
:
|
|
|
|
•
|
incur or permit liens on assets;
|
|
|
|
|
•
|
make investments and acquisitions;
|
|
|
|
|
•
|
consolidate or merge with another company;
|
|
|
|
|
•
|
engage in asset sales; and
|
|
|
|
|
•
|
pay dividends or make distributions.
|
In addition, the Term Loan contains customary events of default, upon the occurrence and during the continuation of any of which the applicable margin would increase by
2%
per year
, including without limitation:
|
|
|
|
•
|
material breaches of representations or warranties;
|
|
|
|
|
•
|
event of default under, or acceleration of, other material indebtedness;
|
|
|
|
|
•
|
bankruptcy or insolvency;
|
|
|
|
|
•
|
material judgments against us;
|
|
|
|
|
•
|
failure of any security document supporting the Term Loan; and
|
Our obligations under the Term Loan are guaranteed by our wholly-owned domestic subsidiaries, and are secured by substantially all of our domestic assets, in each case, subject to certain exceptions and permitted liens.
Asset-based Lending Facility
In addition to entering into the Term Loan, on
November 8, 2017
, we also entered into a senior secured revolving asset-based credit facility (the “ABL Facility”) providing for borrowings in the aggregate principal amount of up to
$75 million
, subject to a borrowing base and including a
$30 million
sub-limit for letters of credit
.
The ABL Facility bears interest, at our option, at the LIBOR rate or the base rate as defined in the ABL Facility, plus an applicable margin ranging from
1.75%
to
3.25%
, based on average availability on the ABL Facility.
The ABL Facility requires a commitment fee due monthly based on the average monthly unused amount of the commitments of the lenders, a fronting fee due for each letter of credit issued, and a monthly letter of credit fee due based on the average undrawn amount of letters of credit outstanding during such period.
The ABL Facility is generally set to mature 90 days prior to the maturity of the Term Loan, subject to certain circumstances, including the future repayment, extinguishment or refinancing of our Term Loan and/or Senior Notes prior to their respective maturity dates.
Availability under the ABL Facility is determined by reference to a borrowing base as defined in the agreement, generally comprised of a percentage of our accounts receivable and inventory.
We have not drawn upon the ABL Facility
to date. As of
December 31, 2018
, we had
$9.7 million
in committed letters of credit, which, after borrowing base limitations, resulted in borrowing availability of
$49.0 million
.
Borrowings available
under the ABL Facility are available for general corporate purposes, and there are no limitations on our ability to access the borrowing capacity provided there is no default and compliance with the covenants under the ABL Facility is maintained.
Additionally, if our availability under the ABL Facility is less than
15%
of the maximum amount (or
$11.25 million
), we are required to maintain a minimum fixed charge coverage ratio, as defined in the ABL Facility, of at least
1.00
to 1.00, measured on a trailing 12 month basis.
The ABL Facility also contains customary restrictive covenants which, subject to certain exceptions, limit, among other things, our ability to
:
|
|
|
|
•
|
declare dividends and make other distributions;
|
|
|
|
|
•
|
issue or sell certain equity interests;
|
|
|
|
|
•
|
optionally prepay, redeem or repurchase certain of our subordinated indebtedness;
|
|
|
|
|
•
|
make loans or investments (including acquisitions);
|
|
|
|
|
•
|
incur additional indebtedness or modify the terms of permitted indebtedness;
|
|
|
|
|
•
|
change our business or the business of our subsidiaries;
|
|
|
|
|
•
|
merge, consolidate, reorganize, recapitalize, or reclassify our equity interests;
|
|
|
|
|
•
|
enter into certain types of transactions with affiliates.
|
Our obligations under the ABL Facility are guaranteed by us and our domestic subsidiaries, subject to certain exceptions, and are secured by (i) a first-priority perfected security interest in all inventory and cash, and (ii) a second-priority perfected security in substantially all of our tangible and intangible assets, in each case, subject to certain exceptions and permitted liens.
Senior Notes
In
2014
, we issued
$300 million
of unregistered senior notes at face value, with a coupon interest rate of
6.125%
that are due in
2022
(the “Senior Notes”). The Senior Notes will mature on
March 15, 2022
with interest due semi-annually in arrears on
March 15
and
September 15
of each year. We have the option to redeem the Senior Notes, in whole or in part, in each case at the redemption price specified in the Indenture dated
March 18, 2014
(the “Indenture”) plus any accrued and unpaid interest and any additional interest (as defined in the Indenture) thereon to the date of redemption.
In accordance with a registration rights agreement with the holders of our Senior Notes, we filed an exchange offer registration statement on Form S-4 with the Securities and Exchange Commission that became effective on
October 2, 2014
. The exchange offer registration statement enabled the holders of our Senior Notes to exchange their senior notes for publicly registered notes with substantially identical terms. References to the “Senior Notes” herein include the senior notes issued in the exchange offer.
If we experience a change of control (as defined in the Indenture), we will be required to make an offer to each holder of the Senior Notes to repurchase all or any part of the Senior Notes at a purchase price equal to
101%
of the principal amount of each Senior Note, plus accrued and unpaid interest, if any, to the date of repurchase. If we engage in certain asset sales, within 365 days of such sale we will be required to use the net cash proceeds from such sale, to the extent we do not reinvest those proceeds in our business, to make an offer to repurchase the Senior Notes at a price equal to
100%
of the principal amount of each Senior Note, plus accrued and unpaid interest to the repurchase date.
The Indenture,
among other things, limits us and certain of our subsidiaries, subject to certain exceptions, in our ability to
:
|
|
|
|
•
|
pay dividends on stock, repurchase stock, redeem subordinated indebtedness or make other restricted payments and investments;
|
|
|
|
|
•
|
incur, assume or guarantee additional indebtedness or issue preferred or disqualified stock;
|
|
|
|
|
•
|
create liens on our or their assets
;
|
|
|
|
|
•
|
enter into sale and leaseback transactions;
|
|
|
|
|
•
|
sell or transfer assets;
|
|
|
|
|
•
|
borrow, pay dividends, or transfer other assets from certain of our subsidiaries;
|
|
|
|
|
•
|
consolidate with or merge with or into, or sell all or substantially all of our properties to any other person;
|
|
|
|
|
•
|
enter into transactions with affiliates; and
|
|
|
|
|
•
|
enter into new lines of business.
|
The Senior Notes are not subject to any sinking fund requirements.
The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing domestic subsidiaries and by certain of our future domestic subsidiaries.
(See Note
14
,
Guarantor/Non-Guarantor Condensed Consolidated Financial Statements
.)
Debt Issuance Costs and Original Issue Discount
Costs incurred in connection with the issuance of our Senior Notes were capitalized and are being amortized using the effective interest method over the term of the Senior Notes which mature in
March 2022
. The original issue discount and costs incurred in connection with the issuance of the Term Loan were capitalized and are being amortized using the effective interest method over the expected term of the agreement. Costs incurred in connection with the ABL Facility were capitalized and are being amortized using the straight-line method over the expected term of the agreement.
Loss on Extinguishment of Debt
We recognized
$1.5 million
of loss on extinguishment of debt during 2017 for the write off of the unamortized debt issuance costs associated with the retirement of our previous credit agreement, which provided for a senior secured revolving credit facility up to an aggregate commitment amount of
$150 million
and was set to mature in
March 2019
. In connection with our entry into the Term Loan in November 2017, all indebtedness outstanding under the previous credit facility was repaid, together with related costs and expenses, and the previous credit facility was retired. During 2016, we recognized
$0.3 million
of loss on extinguishment of debt associated with the amendment of our previous credit facility which resulted in reduced borrowing capacity.
5
.
Leases
We lease our corporate office in San Antonio, Texas, and we
conduct our business operations through
29
other
regional offices
. Our regional
operating locations typically include
regional offices, storage and maintenance yards and personnel housing sufficient to support our operations in the area
. We lease most of these properties, as well as office and other equipment, under non-cancelable and month to month operating leases, many of which contain renewal options and some of which contain escalation clauses. We recognize rent expense on a straight-line basis for our leases with escalating payments.
Rent expense under operating leases, including rental exit costs, was
$5.4 million
,
$4.8 million
and
$5.0 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Future lease obligations required under non-cancelable operating leases as of
December 31, 2018
were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
$
|
3,318
|
|
|
2020
|
2,032
|
|
|
2021
|
1,721
|
|
|
2022
|
1,407
|
|
|
2023
|
1,110
|
|
|
Thereafter
|
1,738
|
|
|
|
$
|
11,326
|
|
6
.
Income Taxes
The jurisdictional components of loss before income taxes consist of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Domestic
|
$
|
(53,230
|
)
|
|
$
|
(76,078
|
)
|
|
$
|
(122,277
|
)
|
|
Foreign
|
6,127
|
|
|
(3,243
|
)
|
|
(16,846
|
)
|
|
Loss before income taxes
|
$
|
(47,103
|
)
|
|
$
|
(79,321
|
)
|
|
$
|
(139,123
|
)
|
The components of our income tax expense (benefit) consist of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
(183
|
)
|
|
$
|
(81
|
)
|
|
$
|
(219
|
)
|
|
State
|
586
|
|
|
146
|
|
|
(95
|
)
|
|
Foreign
|
967
|
|
|
978
|
|
|
1,189
|
|
|
|
1,370
|
|
|
1,043
|
|
|
875
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
—
|
|
|
(5,417
|
)
|
|
(12,500
|
)
|
|
State
|
537
|
|
|
143
|
|
|
902
|
|
|
Foreign
|
1
|
|
|
28
|
|
|
(9
|
)
|
|
|
538
|
|
|
(5,246
|
)
|
|
(11,607
|
)
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
$
|
1,908
|
|
|
$
|
(4,203
|
)
|
|
$
|
(10,732
|
)
|
The difference between the income tax benefit and the amount computed by applying the federal statutory income tax rate to loss before income taxes consists of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Expected tax expense (benefit)
|
$
|
(9,892
|
)
|
|
$
|
(27,762
|
)
|
|
$
|
(48,693
|
)
|
|
Valuation allowance:
|
|
|
|
|
|
|
Valuation allowance on operations
|
5,885
|
|
|
24,265
|
|
|
38,324
|
|
|
Impact of tax law changes on valuation allowance
|
(1,692
|
)
|
|
(25,564
|
)
|
|
—
|
|
|
Change in tax rate
|
1,692
|
|
|
20,147
|
|
|
516
|
|
|
State income taxes
|
972
|
|
|
339
|
|
|
(3,033
|
)
|
|
Foreign currency translation loss
|
1,038
|
|
|
599
|
|
|
838
|
|
|
Net tax benefits and nondeductible expenses in foreign jurisdictions
|
1,412
|
|
|
1,493
|
|
|
407
|
|
|
GILTI tax
|
634
|
|
|
—
|
|
|
—
|
|
|
Incentive stock options
|
757
|
|
|
1,297
|
|
|
97
|
|
|
Nondeductible expenses for tax purposes
|
829
|
|
|
796
|
|
|
386
|
|
|
Expiration of capital loss
|
—
|
|
|
—
|
|
|
641
|
|
|
Other, net
|
273
|
|
|
187
|
|
|
(215
|
)
|
|
Income tax expense (benefit)
|
$
|
1,908
|
|
|
$
|
(4,203
|
)
|
|
$
|
(10,732
|
)
|
Income tax expense (benefit) was allocated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Continuing operations
|
$
|
1,908
|
|
|
$
|
(4,203
|
)
|
|
$
|
(10,732
|
)
|
|
Shareholders’ equity
|
—
|
|
|
—
|
|
|
2,287
|
|
|
|
$
|
1,908
|
|
|
$
|
(4,203
|
)
|
|
$
|
(8,445
|
)
|
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The components of our deferred income tax assets and liabilities were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
Domestic net operating loss carryforward
|
$
|
96,777
|
|
|
$
|
94,598
|
|
|
Interest expense deduction limitation carryforward
|
2,495
|
|
|
—
|
|
|
Foreign net operating loss carryforward
|
9,582
|
|
|
11,619
|
|
|
Intangibles
|
14,875
|
|
|
18,058
|
|
|
Property and equipment
|
5,291
|
|
|
9,280
|
|
|
Employee benefits and insurance claims accruals
|
5,374
|
|
|
5,652
|
|
|
Employee stock-based compensation
|
3,271
|
|
|
3,753
|
|
|
Accounts receivable reserve
|
325
|
|
|
284
|
|
|
Inventory
|
236
|
|
|
295
|
|
|
Accrued expenses
|
190
|
|
|
—
|
|
|
Deferred revenue
|
560
|
|
|
316
|
|
|
|
138,976
|
|
|
143,855
|
|
|
Valuation allowance
|
(62,639
|
)
|
|
(59,766
|
)
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Accrued expenses
|
(419
|
)
|
|
(112
|
)
|
|
Property and equipment
|
(79,606
|
)
|
|
(87,128
|
)
|
|
|
|
|
|
|
Net deferred tax liabilities
|
$
|
(3,688
|
)
|
|
$
|
(3,151
|
)
|
As of
December 31, 2018
, we had
$96.8 million
and
$9.6 million
of deferred tax assets related to domestic and foreign net operating losses, respectively, that are available to reduce future taxable income.
In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
In performing this analysis as of
December 31, 2018
in accordance with ASC Topic 740,
Income Taxes
, we assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets.
A significant piece of negative evidence evaluated is the cumulative loss incurred during previous years
.
Such negative evidence limits the ability to consider other positive evidence that is subjective, such as projections for taxable income in future years.
Because we are in a net deferred tax asset position, we recognize
a benefit only to the extent that reversals of deferred income tax liabilities are expected to generate taxable income in each relevant jurisdiction in future periods which would offset our deferred tax assets.
Our domestic federal net operating losses generated through 2017 have a 20 year carryforward period and can be used to offset future domestic taxable income until their expiration, beginning in
2030
,
with the latest expiration in
2037
. Losses generated after 2017 have an unlimited carryforward period and are limited in usage to 80% of taxable income (pursuant to the Tax Reform Act mentioned below). The majority of our foreign net operating losses generated through 2016 have an indefinite carryforward period, while losses generated after 2016 have a carryforward period of 12 years.
As of
December 31, 2018
,
we have a valuation allowance that fully offsets our foreign and domestic federal deferred tax assets
. We also have net operating loss carryforwards in many of the states that we operate in. Most of these are filed on a unitary or combined basis. These states have carryover periods between 5 and 20 years, with most being 15 or 20. We have determined that a valuation allowance should be recorded against some of the state benefits through
December 31, 2018
.
The valuation allowance
is the primary factor causing our effective tax rate to be significantly lower than the statutory rate
.
The amount of the deferred tax asset considered realizable, however, would increase if cumulative losses are no longer present and additional weight is given to subjective evidence in the form of projected future taxable income.
We have no unrecognized tax benefits relating to ASC Topic 740 and no unrecognized tax benefit activity during the year ended
December 31, 2018
. We record interest and penalty expense related to income taxes as interest and other expense, respectively. At
December 31, 2018
, no interest or penalties have been or are required to be accrued. Our open tax years are
2015
and forward for our federal and most state income tax returns in the United States and
2013
and forward for our income tax returns in Colombia. Net operating losses generated in years prior to our open years and carried forward are
available for adjustment and subject to the statute of limitation provisions of such year when the net operating losses are utilized.
Recently Enacted Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was enacted. The legislation significantly changes U.S. tax law by, among other things, permanently reducing the U.S. corporate income tax rate from a maximum of 35% to a flat rate of
21%
, repealing the alternative minimum tax (AMT), implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries, limiting the current deductibility of net interest expense in excess of 30% of adjusted taxable income, and limiting net operating losses generated after 2017 to 80% of taxable income.
As a result of the reduction in the U.S. corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017 and recognized a
$20.1 million
tax expense in 2017, which was fully offset by a
$20.1 million
reduction of the valuation allowance.
Due to the repeal of the AMT, for the year ended December 31, 2017, we reduced the valuation allowance by
$5.2 million
to remove the effects of AMT on the realizability of our deferred tax assets in future years. In addition, we reversed the valuation allowance on the AMT credit carryforward of
$0.2 million
that will now be refundable through 2021 and has been reclassified from a deferred tax asset to a noncurrent receivable.
Territorial Tax System
—
To minimize tax base erosion with a territorial tax system, beginning in 2018, the Tax Reform Act provides for a new global intangible low-taxed income (GILTI) provision. Under the GILTI provision, certain foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets are included in U.S. taxable income. We are now subject to GILTI, and we have elected to treat the GILTI tax as a period expense rather than to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.
Limitation on Interest Expense Deduction
—
The new limitation on interest expense resulted in a
$11.4 million
disallowance for the
year
ended
December 31, 2018
; however, this adjustment is offset fully by our net operating loss carry forwards. The disallowed interest has an indefinite carry forward period and any limitations on the utilization of this interest expense carryforward have been factored into our valuation allowance analysis.
Limitation on Future Net Operating Losses Deduction
—
Net operating losses generated after 2017 are carried forward indefinitely and are limited to 80% of taxable income. Net operating losses generated prior to 2018 continue to be carried forward for 20 years and have no 80% limitation on utilization.
Mandatory Repatriation
— The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017. Because we had an accumulated foreign deficit at December 31, 2017, we did not record a tax liability from the mandatory repatriation provision of the Tax Reform Act. We do not intend to distribute earnings in a taxable manner, and therefore, we intend to limit any potential distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100% dividends received deduction provided for in the Tax Reform Act. As a result, we have not recognized a deferred tax liability on our investment in foreign subsidiaries.
International Tax Reform
On December 28, 2018, the Colombian government enacted a new tax reform bill that decreases the general corporate tax rate from 33% to 30% by 2022, phases out the presumptive tax system by 2021, increases withholding tax rates on payments abroad for various services, and taxes indirect transfers of Colombian assets, among other things. Deferred tax assets and liabilities were adjusted to the new tax rates; however, the adjustments to the valuation allowance fully offset the impact to tax expense.
|
|
|
|
7
.
|
Fair Value of Financial Instruments
|
The FASB’s Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures
, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value. Our financial instruments consist primarily of cash and cash equivalents, trade and other receivables, trade payables, phantom stock unit awards and long-term debt.
The carrying value of cash and cash equivalents, trade and other receivables, and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments. At
December 31, 2018
and
December 31, 2017
, the aggregate estimated fair value of our phantom stock unit awards was
$5.1 million
and
$6.1 million
, respectively, for which the vested portion recognized as a liability in our
consolidated
balance sheets at both period ends was
$3.6 million
. The phantom stock unit awards, and the measurement of fair value for these awards, are described in more detail in Note
9
,
Equity Transactions and Stock-Based Compensation Plans
.
The fair value of our Senior Notes is estimated based on recent observable market prices for our debt instruments, which are defined by ASC Topic 820 as Level 2 inputs. The fair value of our Term Loan is based on estimated market pricing for our debt instrument, which is defined by ASC Topic 820 as using Level 3 inputs which are unobservable and therefore more likely to be affected by changes in assumptions. The following table presents supplemental fair value information and carrying value for our debt, net of discount and debt issuance costs (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Hierarchy Level
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Senior notes
|
2
|
|
$
|
296,988
|
|
|
$
|
186,750
|
|
|
$
|
296,181
|
|
|
$
|
243,948
|
|
|
Senior secured term loan
|
3
|
|
167,564
|
|
|
$
|
175,875
|
|
|
165,484
|
|
|
171,613
|
|
|
|
|
|
$
|
464,552
|
|
|
$
|
362,625
|
|
|
$
|
461,665
|
|
|
$
|
415,561
|
|
|
|
|
|
8
.
|
Earnings (Loss) Per Common Share
|
The following table presents a reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Numerator (both basic and diluted):
|
|
|
|
|
|
|
Net loss
|
$
|
(49,011
|
)
|
|
$
|
(75,118
|
)
|
|
$
|
(128,391
|
)
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average shares (denominator for basic earnings (loss) per share)
|
77,957
|
|
|
77,390
|
|
|
65,452
|
|
|
Dilutive effect of outstanding stock options, restricted stock and restricted stock unit awards
|
—
|
|
|
—
|
|
|
—
|
|
|
Denominator for diluted earnings (loss) per share
|
77,957
|
|
|
77,390
|
|
|
65,452
|
|
|
Loss per common share - Basic
|
$
|
(0.63
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(1.96
|
)
|
|
Loss per common share - Diluted
|
$
|
(0.63
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(1.96
|
)
|
|
Potentially dilutive securities excluded as anti-dilutive
|
4,722
|
|
|
5,116
|
|
|
4,953
|
|
9
.
Equity Transactions and Stock-Based Compensation Plans
Equity Transactions
On
May 22, 2018
, we filed a registration statement that permits us to sell equity or debt in one or more offerings up to a total dollar amount of
$300 million
.
As of
December 31, 2018
,
the entire
$300 million
under the shelf registration statement is available for equity or debt offerings, subject to the limitations imposed by our Term Loan, ABL Facility and Senior Notes.
Stock-based Compensation Plans
We have stock-based award plans that are administered by the Compensation Committee of our Board of Directors, which selects persons eligible to receive awards and determines the number, terms, conditions and other provisions of the awards.
At
December 31, 2018
, the total shares available for future grants to employees and directors under existing plans were
2,390,057
, which excludes
awards we grant in the form of phantom stock unit awards which are expected to be paid in cash
. In
January 2019
, our Board of Directors approved the grant of the following awards:
|
|
|
|
|
|
|
|
|
|
Vesting Period
|
|
Number of Shares or Units
|
|
Restricted stock unit awards
|
3 years
|
|
870,648
|
|
Performance-based phantom stock unit awards
|
39 months
|
|
2,467,776
|
|
|
Time-based phantom stock unit awards
|
3 years
|
|
810,648
|
|
We grant stock option and restricted stock awards with vesting based on time of service conditions. We grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. We grant phantom stock unit awards with vesting based on time of service, performance and market conditions, which are classified as liability awards under ASC Topic 718,
Compensation—Stock Compensation
since we expect to settle the awards in cash when they become vested.
We recognize compensation cost for our stock-based compensation awards based on the fair value estimated in accordance with ASC Topic 718,
Compensation—Stock Compensation,
and we recognize forfeitures when they occur.
For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the stock-based compensation expense recognized, by award type, and the compensation expense recognized for phantom stock unit awards during the
years
ended
December 31, 2018
,
2017
and
2016
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Stock option awards
|
$
|
443
|
|
|
$
|
974
|
|
|
$
|
766
|
|
|
Restricted stock awards
|
460
|
|
|
461
|
|
|
421
|
|
|
Restricted stock unit awards
|
3,541
|
|
|
2,914
|
|
|
2,757
|
|
|
|
$
|
4,444
|
|
|
$
|
4,349
|
|
|
$
|
3,944
|
|
|
|
|
|
|
|
|
|
Phantom stock unit awards
|
$
|
46
|
|
|
$
|
1,609
|
|
|
$
|
1,971
|
|
The following table summarizes the unrecognized compensation cost (amounts in thousands) to be recognized and the weighted-average period remaining (in years) over which the compensation cost is expected to be recognized, by award type, as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Period Remaining
|
|
Unrecognized Compensation Cost
|
|
Stock options
|
0.26
|
|
$
|
156
|
|
|
Restricted stock awards
|
0.38
|
|
174
|
|
|
Restricted stock unit awards
|
1.11
|
|
3,132
|
|
|
Phantom stock unit awards (based on fair value as of December 31, 2018)
|
2.65
|
|
1,484
|
|
|
|
|
|
$
|
4,946
|
|
Stock Options
We grant stock option awards which generally become exercisable over a
three
-year period and expire
ten
years after the date of grant. Our stock-based compensation plans require that all stock option awards have an exercise price that is not less than the fair market value of our common stock on the date of grant. We issue shares of our common stock when vested stock option awards are exercised.
We estimate the fair value of each option grant on the date of grant using a Black-Scholes option pricing model.
There were no stock options granted during the year ended December 31, 2018.
The following table summarizes the assumptions used in the Black-Scholes option pricing model based on a weighted-average calculation for the options granted during the
years
ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
Expected volatility
|
76
|
%
|
|
70
|
%
|
|
Risk-free interest rates
|
2.1
|
%
|
|
1.5
|
%
|
|
Expected life in years
|
5.86
|
|
|
5.70
|
|
|
Grant-date fair value
|
$4.28
|
|
$0.80
|
The assumptions used in the Black-Scholes option pricing model are based on multiple factors, including historical exercise patterns of homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and volatility of our stock price. As we have not declared dividends since we became a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an optionee actually realizes will be at or near the value we have estimated using the Black-Scholes options-pricing model.
The following table summarizes our stock option activity from
December 31, 2017
through
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Weighted-Average
Remaining
Contract Term in Years
|
|
Aggregate Intrinsic Value (in thousands)
(1)
|
|
Outstanding stock options as of December 31, 2017
|
4,269,910
|
|
$6.78
|
|
|
|
|
|
Forfeited
|
(527,000)
|
|
15.43
|
|
|
|
|
|
Exercised
|
(3,000)
|
|
3.84
|
|
|
|
|
|
Outstanding stock options as of December 31, 2018
|
3,739,910
|
|
$5.56
|
|
4.0
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable as of December 31, 2018
|
3,259,125
|
|
$5.91
|
|
3.5
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(1) Intrinsic value is the amount by which the market price of our common stock exceeds the exercise price of the stock options.
|
The following table presents the aggregate intrinsic value of stock options exercised during the
years
ended
December 31, 2018
,
2017
and
2016
(amounts in thousands):