NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Key Energy Services, Inc., and its wholly owned subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” 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 Russia, which we are attempting to sell. In addition, we have a technology development and control systems business based in Canada.
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed
December 31, 2016
balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016
(the “
2016
Form 10-K”). Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our
2016
Form 10-K.
The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the
three months ended
March 31, 2017
are not necessarily indicative of the results expected for the full year or any other interim period, due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.
On October 24, 2016, Key and certain of our domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware pursuant to a prepackaged plan of reorganization (“the Plan”). The Plan was confirmed by the Bankruptcy Court on December 6, 2016, and the Company emerged from the bankruptcy proceedings on December 15, 2016 (“the Effective Date”).
Upon emergence on the Effective Date, the Company adopted fresh start accounting which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the Consolidated Financial Statements on or after December 16, 2016 are not comparable with the Consolidated Financial Statements prior to that date.
References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to December 15, 2016. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on and prior to December 15, 2016.
We have evaluated events occurring after the balance sheet date included in this Quarterly Report on Form 10-Q and through the date on which the unaudited condensed consolidated financial statements were issued, for possible disclosure of a subsequent event.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The preparation of these unaudited condensed 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 may 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 the estimates used in the preparation of these interim financial statements are reasonable.
There have been no material changes or developments in our evaluation of accounting estimates and underlying assumptions or methodologies that we believe to be a “Critical Accounting Policy or Estimate” as disclosed in our
2016
Form 10-K.
Recent Accounting Developments
ASU 2016-18.
In November 2016, the FASB issued ASU No. 2016-18
Statement of Cash Flows (Topic 230), Restricted Cash
. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of this standard is not expected to have an impact on our consolidated financial statements.
ASU 2016-15
. In August 2016 the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)
, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of this standard on its consolidated financial statements.
ASU 2016-13.
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments,
that will change how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount. The amendments in this update will be effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018. The Company is evaluating the effect of this standard on our consolidated financial statements.
ASU 2016-09.
In March 2016, the FASB Issued ASU 2016-09
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
This standard changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the accounting guidance as of January 1, 2017 on a prospective basis. In accordance with the standard, the Company has made an election to account for forfeitures of equity awards as they occur. With the exception of excess tax benefits and deficiencies related to the vesting of share-based compensation now being recognized as an income tax expense or benefit on the income statement rather than additional paid in capital on the balance sheet, the adoption of this guidance did not have a material impact our consolidated financial statements.
ASU 2016-02.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which will replace the existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.
ASU 2014-09.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method. During a July 2015 meeting, the FASB affirmed a proposal to defer the effective date of the new revenue standard for all entities by one year. As a result, ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements, however, management believes that the impact to the financial statements will not be material.
NOTE 3. ASSETS HELD FOR SALE
In April 2015, we announced our decision to exit markets in which we participate outside of North America. Our strategy is to sell or relocate the assets of the businesses operating in these markets. During the fourth quarter of 2015, the
assets and related liabilities of our Russian business unit which is included in our International reporting segment met the criteria for assets held for sale. We recorded a
$0.2 million
impairment during the
three months ended
March 31, 2017
to reduce the carrying value of these assets to fair market value. We expect this sale to occur in the first half of 2017.
The following assets and related liabilities are classified as held for sale on our
March 31, 2017
condensed consolidated balance sheet (in thousands):
|
|
|
|
|
Current assets:
|
|
Cash and cash equivalents
|
$
|
1,844
|
|
Accounts receivable
|
1,068
|
|
Inventories
|
216
|
|
Other current assets
|
198
|
|
Total current assets
|
3,326
|
|
Property and equipment, net
|
493
|
|
Total assets
|
$
|
3,819
|
|
Current liabilities:
|
|
Accounts payable
|
$
|
232
|
|
Total current liabilities
|
232
|
|
Net Assets
|
$
|
3,587
|
|
NOTE 4. EQUITY
A reconciliation of the total carrying amount of our equity accounts for the
three
months ended
March 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Other Comprehensive Income
|
|
Retained Deficit
|
|
Total
|
|
Number of Shares
|
|
Amount at Par
|
|
|
|
Balance at December 31, 2016
|
20,096
|
|
|
$
|
201
|
|
|
$
|
252,421
|
|
|
$
|
239
|
|
|
$
|
(10,244
|
)
|
|
$
|
242,617
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
1,233
|
|
|
—
|
|
|
1,233
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
4,024
|
|
|
—
|
|
|
—
|
|
|
4,024
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(46,859
|
)
|
|
(46,859
|
)
|
Balance at March 31, 2017
|
20,096
|
|
|
$
|
201
|
|
|
$
|
256,445
|
|
|
$
|
1,472
|
|
|
$
|
(57,103
|
)
|
|
$
|
201,015
|
|
NOTE 5. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Other current assets:
|
|
|
|
Prepaid current assets
|
$
|
10,694
|
|
|
$
|
10,291
|
|
Reinsurance receivable
|
8,078
|
|
|
7,922
|
|
Current assets held for sale
|
3,326
|
|
|
3,667
|
|
Other
|
2,942
|
|
|
3,882
|
|
Total
|
$
|
25,040
|
|
|
$
|
25,762
|
|
The table below presents comparative detailed information about other non-current assets at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Other non-current assets:
|
|
|
|
Reinsurance receivable
|
$
|
8,547
|
|
|
$
|
8,393
|
|
Deposits
|
1,323
|
|
|
8,292
|
|
Equity method investments
|
579
|
|
|
560
|
|
Non-current assets held for sale
|
493
|
|
|
360
|
|
Other
|
133
|
|
|
135
|
|
Total
|
$
|
11,075
|
|
|
$
|
17,740
|
|
The table below presents comparative detailed information about other current liabilities at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Other current liabilities:
|
|
|
|
Accrued payroll, taxes and employee benefits
|
$
|
15,975
|
|
|
$
|
23,224
|
|
Accrued operating expenditures
|
12,888
|
|
|
16,669
|
|
Income, sales, use and other taxes
|
8,716
|
|
|
10,748
|
|
Self-insurance reserve
|
33,917
|
|
|
35,484
|
|
Accrued interest
|
6,294
|
|
|
1,419
|
|
Accrued insurance premiums
|
1,469
|
|
|
2,347
|
|
Unsettled legal claims
|
5,195
|
|
|
5,398
|
|
Accrued severance
|
167
|
|
|
2,219
|
|
Current liabilities held for sale
|
232
|
|
|
371
|
|
Other
|
4,887
|
|
|
6,059
|
|
Total
|
$
|
89,740
|
|
|
$
|
103,938
|
|
The table below presents comparative detailed information about other non-current liabilities at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Other non-current liabilities:
|
|
|
|
Asset retirement obligations
|
$
|
8,900
|
|
|
$
|
9,035
|
|
Environmental liabilities
|
3,275
|
|
|
3,446
|
|
Accrued sales, use and other taxes
|
16,892
|
|
|
16,735
|
|
Other
|
578
|
|
|
528
|
|
Total
|
$
|
29,645
|
|
|
$
|
29,744
|
|
NOTE 6. INTANGIBLE ASSETS
The components of our other intangible assets as of
March 31, 2017
and
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Trademark:
|
|
|
|
Gross carrying value
|
520
|
|
|
520
|
|
Accumulated amortization
|
(14
|
)
|
|
—
|
|
Net carrying value
|
506
|
|
|
520
|
|
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 (in thousands)
|
|
Remainder
of 2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
Trademark
|
8.8
|
|
43
|
|
|
58
|
|
|
58
|
|
|
58
|
|
|
58
|
|
|
58
|
|
Amortization expense for our intangible assets was less than
$0.1 million
and
$0.5 million
for the
three months ended
March 31, 2017
and
2016
, respectively.
NOTE 7. DEBT
As of
March 31, 2017
and
December 31, 2016
, the components of our debt were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Term Loan Facility due 2021
|
$
|
249,375
|
|
|
$
|
250,000
|
|
Unamortized debt issuance costs
|
(2,252
|
)
|
|
(2,023
|
)
|
Total
|
247,123
|
|
|
247,977
|
|
Less current portion
|
(2,500
|
)
|
|
(2,500
|
)
|
Long-term debt
|
$
|
244,623
|
|
|
$
|
245,477
|
|
ABL Facility
On December 15, 2016, the Company and Key Energy Services, LLC, as borrowers (the “ABL Borrowers”), entered into the ABL Facility with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”), Bank of America, N.A., as administrative agent for the lenders, and Bank of America, N.A. and Wells Fargo Bank, National Association, as co-collateral agents for the lenders. The ABL Facility provides for aggregate initial commitments from the ABL Lenders of
$100 million
, and matures on
June 15, 2021
.
The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of
85%
of the value of eligible accounts receivable plus (b)
80%
of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x)
$35 million
and (y)
25%
of the Commitments. The amount that may be borrowed under the ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the ABL Facility.
Borrowings under the ABL Facility will bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from
2.5%
to
4.5%
depending on the Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus
0.50%
or (z) 30-day LIBOR, plus
1.0%
plus (b) an applicable margin that varies from
1.50%
to
3.50%
depending on the Borrowers’ fixed charge coverage ratio at such time. In addition, the ABL Facility provides for unused line fees of
1.00%
to
1.25%
per year, depending on utilization, letter of credit fees and certain other factors.
The ABL Facility may in the future be guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABL Borrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the Administrative Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).
The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs.
The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and
the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods, with a fixed charge coverage ratio of
1.00
to 1.00.
As of
March 31, 2017
, we have
no
borrowings outstanding and
$35.4 million
in letters of credit outstanding with borrowing capacity of
$26.1 million
available subject to covenant constraints under our ABL Facility.
Term Loan Facility
On December 15, 2016, the Company entered into the Term Loan Facility among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “Term Loan Lenders”) and Cortland Capital Market Services LLC and Cortland Products Corp., as agent for the Lenders. The Term Loan Facility had an initial outstanding principal amount of
$250 million
.
The Term Loan Facility will mature on
December 15, 2021
, although such maturity date may, at the Company’s request, be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility. Borrowings under the Term Loan Facility will bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or, with the consent of the Term Loan Lenders, 12 months, plus
10.25%
or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Funds rate, plus
0.50%
and (z) 30-day LIBOR, plus
1.0%
plus (b)
9.25%
.
The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together with the Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted or will grant, as applicable, to the agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assets and the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).
The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certain circumstances as provided in the Term Loan Facility. If a prepayment is made prior to the first anniversary of the loan, such prepayment must be made with make-whole amount with the calculation of the make-whole amount as specified in the Term Loan Facility. If a prepayment is made after the first anniversary of the loan but prior to the second anniversary, such prepayment must be made at
106%
of the principle amount, if a prepayment is made after the second anniversary but prior to the third anniversary, such prepayment must be made at
103%
of the principle amount. After the third anniversary, if a prepayment is made, no prepayment premium is due. The Company is required to make principal payments in the amount of
$625,000
per quarter commencing with the quarter ending March 31, 2017. In addition, pursuant to the Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, and upon certain change of control transactions, subject in each case to certain exceptions.
The Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The Term Loan Facility also contains financial covenants requiring that the Company maintain an asset coverage ratio of at least
1.35
to 1.0 and that Liquidity (as defined in the Term Loan Facility) must not be less than
$37.5 million
(of which at least
$20.0 million
must be in cash or cash equivalents held in deposit accounts) as of the last day of any fiscal quarter, subject to certain exceptions and cure rights.
The weighted average interest rates on the outstanding borrowings under the Term Loan Facility for the three months ended
March 31, 2017
was as follows:
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
Term Loan Facility
|
11.27
|
%
|
NOTE 8.
OTHER INCOME
The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “
other income, net
” for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Three Months Ended March 31, 2017
|
|
|
Three Months Ended March 31, 2016
|
Interest income
|
|
$
|
(198
|
)
|
|
|
$
|
(132
|
)
|
Foreign exchange gain
|
|
(9
|
)
|
|
|
(252
|
)
|
Other, net
|
|
(33
|
)
|
|
|
(847
|
)
|
Total
|
|
$
|
(240
|
)
|
|
|
$
|
(1,231
|
)
|
NOTE 9. INCOME TAXES
We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. Our effective tax rates were
0.6%
and
0.3%
for the
three months ended
March 31, 2017
and
2016
, respectively. The variance between our effective rate and the U.S. statutory rate is due to the mix of pre-tax profit between the U.S. and international taxing jurisdictions with varying statutory rates, the impact of permanent differences, including goodwill impairment expense, and other tax adjustments, such as valuation allowances against deferred tax assets and tax expense or benefit recognized for uncertain tax positions.
We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to year-to-date ordinary income or loss. Management believes the use of the annual effective tax rate method to be appropriate for prior interim reporting periods. However, we adopted a year-to-date effective tax rate method for recording income taxes for the three-month period ended
March 31, 2017
. The adoption of this method was based on our expectations at
March 31, 2017
that a small change in our estimated annual ordinary income could result in a large change in the estimated annual effective tax rate. We will re-evaluate our use of this method each quarter until such time a return to the annualized effective tax rate method is deemed appropriate.
The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. Due to the history of losses in recent years and the continued challenges affecting the oil and gas industry, management continues to believe it is more likely than not that we will not be able to realize our net deferred tax assets. There has been
no
change in our position, and no release of our net deferred tax asset valuation allowance was made during the three months ended
March 31, 2017
.
As of
March 31, 2017
, we had
$0.3 million
of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of less than
$0.1 million
for the payment of interest and penalties as of
March 31, 2017
. We believe that it is reasonably possible that
$0.2 million
of our currently remaining unrecognized tax positions may be recognized in the next twelve months as a result of a lapse of statute of limitations and settlement of ongoing audits.
NOTE 10. COMMITMENTS AND CONTINGENCIES
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 our need for the 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. We have
$5.2 million
of other liabilities related to litigation that is deemed probable and reasonably estimable as of
March 31, 2017
. 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.
In November 2015, the Santa Barbara County District Attorney filed a criminal complaint against two former employees and Key, specifically alleging three counts of violations of California Labor Code section 6425(a) against Key. The complaint sought unspecified penalties against Key related to an October 12, 2013 accident which resulted in the death of one Key employee at a drilling site near Santa Maria, California. An arraignment was held on February 10, 2016, where Key and its former employees pleaded not guilty to all charges.
On or about January 10, 2017, Key entered into a settlement with the Santa Barbara County District Attorney. Key agreed to plead no contest to one felony count (Count 2), a violation of California Labor Code 6425(a). The Santa Barbara County District Attorney also agreed to recommend total restitution, fines, fees, and surcharges not to exceed $450,000. The court dismissed the remaining charges (Counts 1 and 3) against Key. The parties agreed to postpone sentencing in the matter until January 20, 2018. The parties agreed that if Key pays all of the total restitution, fines, fees, and surcharges by January 20, 2018, the Santa Barbara County District Attorney will not object to Key withdrawing its plea to a felony count on Count 2 and entering a plea to a misdemeanor.
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, vehicle 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
March 31, 2017
and
December 31, 2016
, we have recorded
$57.6 million
and
$58.7 million
, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had
$16.6 million
and $
16.3 million
of insurance receivables as of
March 31, 2017
and
December 31, 2016
, respectively. 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 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
March 31, 2017
and
December 31, 2016
, we have recorded
$3.3 million
and
$3.4 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.
NOTE 11. LOSS PER SHARE
Basic loss per share is determined by dividing net loss attributable to Key by the weighted average number of common shares actually outstanding during the period. Diluted loss per common share is based on the increased number of shares that would be outstanding assuming conversion of potentially dilutive outstanding securities using the treasury stock and “as if converted” methods.
The components of our loss per share are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Three Months Ended March 31, 2017
|
|
|
Three Months Ended March 31, 2016
|
Basic and Diluted EPS Calculation:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net loss
|
|
$
|
(46,859
|
)
|
|
|
$
|
(81,614
|
)
|
Denominator
|
|
|
|
|
|
Weighted average shares outstanding
|
|
20,096
|
|
|
|
160,047
|
|
Basic and diluted loss per share
|
|
$
|
(2.33
|
)
|
|
|
$
|
(0.51
|
)
|
Stock options, stock appreciation rights (“SARs”) and warrants 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 company has issued potentially dilutive instruments such as
restricted stock units (“RSUs”), stock options, SARs and warrants
. However, the company did not include these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive. The following table shows potentially dilutive instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Three Months Ended March 31, 2017
|
|
|
Three Months Ended March 31, 2016
|
RSUs
|
|
677
|
|
|
|
62
|
|
Stock options
|
|
677
|
|
|
|
812
|
|
SARs
|
|
—
|
|
|
|
240
|
|
Warrants
|
|
1,838
|
|
|
|
—
|
|
Total
|
|
3,192
|
|
|
|
1,114
|
|
No
events occurred after
March 31, 2017
that would materially affect the number of weighted average shares outstanding.
NOTE 12. SHARE-BASED COMPENSATION
We recognized employee share-based compensation expense of
$2.8 million
and
$2.4 million
during the
three months ended
March 31, 2017
and
2016
, respectively. Additionally, we recognized share-based compensation expense related to our outside directors of
$0.3 million
and
zero
during the
three months ended
March 31, 2017
and
2016
, respectively. Our employee share-based awards vest in equal installments over a four-year period. The unrecognized compensation cost related to our unvested share-based awards as of
March 31, 2017
is estimated to be
$19.2 million
and is expected to be recognized over a weighted-average period of
2.2 years
.
We recognized compensation expense related to our stock options of
$0.9 million
and
zero
during the
three months ended
March 31, 2017
and
2016
, respectively. Our employee stock options vest in equal installments over a four-year period. The unrecognized compensation cost related to our unvested stock options as of
March 31, 2017
is estimated to be
$6.4 million
and is expected to be recognized over a weighted-average period of
2.2 years
.
NOTE 13. TRANSACTIONS WITH RELATED PARTIES
The Company has purchased equipment and services from a few affiliates of certain directors. The dollar amounts related to these related party activities are not material to the Company’s condensed consolidated financial statements.
NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
Term Loan Facility due 2021
. Because the variable interest rates of these loans approximate current market rates, the fair values of the loans borrowed under this facility approximate their carrying values.
NOTE 15. SEGMENT INFORMATION
Our reportable business segments are U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services and International. We also have a “Functional Support” segment associated with overhead and other costs in support of our reportable segments. Our U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services operate geographically within the United States. The International reportable segment includes our current and former operations in Mexico and Russia. Our Canadian subsidiary is also reflected in our International reportable segment. During the fourth quarter of 2016, we completed the sale of our business in Mexico and we are currently in discussions to sell our business in Russia. We evaluate the performance of our segments based on gross margin measures. All inter-segment sales pricing is based on current market conditions.
U.S. Rig Services
Our U.S. Rig 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. 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 saltwater disposal 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 fishing services and rental equipment designed for use in providing 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, foam air units, 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 closely related to capital spending by oil and natural gas producers, which is generally a function of oil and natural gas prices.
International
In April 2015, we announced our decision to exit markets in which we participate outside of North America. During the fourth quarter of 2016, we completed the sale of our business in Mexico and we are currently in discussions to sell our business in Russia. We provided 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 provided drilling, coiled tubing, wireline and project management and consulting services. We also have a technology development and control systems business based in Canada which is focused on the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.
Functional Support
Our Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reporting segments.
Financial Summary
The following tables set forth our unaudited segment information as of and for the three months ended
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company as of and for the three months ended March 31, 2017
|
|
U.S. Rig Services
|
|
Fluid Management Services
|
|
Coiled Tubing Services
|
|
Fishing and Rental Services
|
|
International
|
|
Functional
Support(2)
|
|
Reconciling
Eliminations
|
|
Total
|
Revenues from external customers
|
$
|
60,291
|
|
|
$
|
17,895
|
|
|
$
|
5,341
|
|
|
$
|
15,855
|
|
|
$
|
2,070
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,452
|
|
Intersegment revenues
|
46
|
|
|
284
|
|
|
22
|
|
|
920
|
|
|
—
|
|
|
—
|
|
|
(1,272
|
)
|
|
—
|
|
Depreciation and amortization
|
7,324
|
|
|
5,808
|
|
|
1,413
|
|
|
5,950
|
|
|
525
|
|
|
281
|
|
|
—
|
|
|
21,301
|
|
Impairment expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187
|
|
|
—
|
|
|
—
|
|
|
187
|
|
Other operating expenses
|
55,054
|
|
|
19,024
|
|
|
6,213
|
|
|
13,782
|
|
|
3,658
|
|
|
20,571
|
|
|
—
|
|
|
118,302
|
|
Operating loss
|
(2,087
|
)
|
|
(6,937
|
)
|
|
(2,285
|
)
|
|
(3,877
|
)
|
|
(2,300
|
)
|
|
(20,852
|
)
|
|
—
|
|
|
(38,338
|
)
|
Reorganization items, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,340
|
|
|
—
|
|
|
1,340
|
|
Interest expense, net of amounts capitalized
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,710
|
|
|
—
|
|
|
7,710
|
|
Loss before income taxes
|
(2,091
|
)
|
|
(7,165
|
)
|
|
(2,278
|
)
|
|
(3,674
|
)
|
|
(2,242
|
)
|
|
(29,698
|
)
|
|
—
|
|
|
(47,148
|
)
|
Long-lived assets(1)
|
172,549
|
|
|
92,019
|
|
|
23,766
|
|
|
85,764
|
|
|
1,344
|
|
|
130,686
|
|
|
(110,481
|
)
|
|
395,647
|
|
Total assets
|
295,921
|
|
|
11,638
|
|
|
35,129
|
|
|
348,879
|
|
|
142,599
|
|
|
6,683
|
|
|
(236,603
|
)
|
|
604,246
|
|
Capital expenditures
|
2,026
|
|
|
118
|
|
|
—
|
|
|
27
|
|
|
116
|
|
|
153
|
|
|
—
|
|
|
2,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company as of and for the three months ended March 31, 2016
|
|
U.S. Rig Services
|
|
Fluid Management Services
|
|
Coiled Tubing Services
|
|
Fishing and Rental Services
|
|
International
|
|
Functional
Support(2)
|
|
Reconciling
Eliminations
|
|
Total
|
Revenues from external customers
|
$
|
58,988
|
|
|
$
|
22,670
|
|
|
$
|
9,531
|
|
|
$
|
16,283
|
|
|
$
|
3,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
111,088
|
|
Intersegment revenues
|
245
|
|
|
309
|
|
|
40
|
|
|
987
|
|
|
140
|
|
|
—
|
|
|
(1,721
|
)
|
|
—
|
|
Depreciation and amortization
|
14,905
|
|
|
5,880
|
|
|
2,986
|
|
|
7,182
|
|
|
2,237
|
|
|
2,562
|
|
|
—
|
|
|
35,752
|
|
Other operating expenses
|
50,449
|
|
|
23,062
|
|
|
12,694
|
|
|
13,113
|
|
|
6,439
|
|
|
31,086
|
|
|
—
|
|
|
136,843
|
|
Operating loss
|
(6,366
|
)
|
|
(6,272
|
)
|
|
(6,149
|
)
|
|
(4,012
|
)
|
|
(5,060
|
)
|
|
(33,648
|
)
|
|
—
|
|
|
(61,507
|
)
|
Interest expense, net of amounts capitalized
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,584
|
|
|
—
|
|
|
21,584
|
|
Loss before income taxes
|
(6,362
|
)
|
|
(6,268
|
)
|
|
(6,076
|
)
|
|
(4,014
|
)
|
|
(4,497
|
)
|
|
(54,643
|
)
|
|
—
|
|
|
(81,860
|
)
|
Long-lived assets(1)
|
482,588
|
|
|
123,400
|
|
|
52,113
|
|
|
120,984
|
|
|
53,894
|
|
|
174,785
|
|
|
(135,972
|
)
|
|
871,792
|
|
Total assets
|
1,323,797
|
|
|
262,688
|
|
|
131,421
|
|
|
482,133
|
|
|
175,044
|
|
|
(737,293
|
)
|
|
(411,744
|
)
|
|
1,226,046
|
|
Capital expenditures
|
140
|
|
|
820
|
|
|
101
|
|
|
1,084
|
|
|
364
|
|
|
192
|
|
|
—
|
|
|
2,701
|
|
|
|
(1)
|
Long-lived assets include fixed assets, intangibles and other non-current assets.
|
|
|
(2)
|
Functional Support is geographically located in the United States.
|
NOTE 16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The senior notes of the Predecessor company were registered securities. As a result of these registered securities, we are required to present the following condensed consolidating financial information pursuant to SEC Regulation S-X Rule 3-10, “
Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
Our ABL Facility and Term Loan Facility of the Successor Company are not registered securities, so the presentation of condensed consolidating financial information is not required for the Successor period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS
|
|
|
Predecessor
|
|
|
Three Months Ended March 31, 2016
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
Revenues
|
|
$
|
—
|
|
|
$
|
107,472
|
|
|
$
|
3,756
|
|
|
$
|
(140
|
)
|
|
$
|
111,088
|
|
Direct operating expense
|
|
—
|
|
|
86,807
|
|
|
3,923
|
|
|
(132
|
)
|
|
90,598
|
|
Depreciation and amortization expense
|
|
—
|
|
|
34,534
|
|
|
1,218
|
|
|
—
|
|
|
35,752
|
|
General and administrative expense
|
|
193
|
|
|
43,598
|
|
|
2,454
|
|
|
—
|
|
|
46,245
|
|
Operating loss
|
|
(193
|
)
|
|
(57,467
|
)
|
|
(3,839
|
)
|
|
(8
|
)
|
|
(61,507
|
)
|
Interest expense, net of amounts capitalized
|
|
21,584
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,584
|
|
Other income, net
|
|
(645
|
)
|
|
(143
|
)
|
|
(558
|
)
|
|
115
|
|
|
(1,231
|
)
|
Loss before income taxes
|
|
(21,132
|
)
|
|
(57,324
|
)
|
|
(3,281
|
)
|
|
(123
|
)
|
|
(81,860
|
)
|
Income tax (expense) benefit
|
|
(6
|
)
|
|
—
|
|
|
252
|
|
|
—
|
|
|
246
|
|
Net loss
|
|
$
|
(21,138
|
)
|
|
$
|
(57,324
|
)
|
|
$
|
(3,029
|
)
|
|
$
|
(123
|
)
|
|
$
|
(81,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF CASH FLOWS
|
|
|
Predecessor
|
|
|
Three Months Ended March 31, 2016
|
|
|
Parent
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in thousands)
|
Net cash provided by (used in) operating activities
|
|
$
|
—
|
|
|
$
|
(31,902
|
)
|
|
$
|
1,838
|
|
|
$
|
—
|
|
|
$
|
(30,064
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
—
|
|
|
(2,701
|
)
|
|
—
|
|
|
—
|
|
|
(2,701
|
)
|
Intercompany notes and accounts
|
|
—
|
|
|
21,596
|
|
|
—
|
|
|
(21,596
|
)
|
|
—
|
|
Other investing activities, net
|
|
—
|
|
|
7,435
|
|
|
—
|
|
|
—
|
|
|
7,435
|
|
Net cash provided by investing activities
|
|
—
|
|
|
26,330
|
|
|
—
|
|
|
(21,596
|
)
|
|
4,734
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
(787
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(787
|
)
|
Restricted stock
|
|
(18,605
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,605
|
)
|
Repurchases of common stock
|
|
(143
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(143
|
)
|
Intercompany notes and accounts
|
|
(21,596
|
)
|
|
—
|
|
|
—
|
|
|
21,596
|
|
|
—
|
|
Other financing activities, net
|
|
(2,508
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,508
|
)
|
Net cash used in financing activities
|
|
(43,639
|
)
|
|
—
|
|
|
—
|
|
|
21,596
|
|
|
(22,043
|
)
|
Effect of changes in exchange rates on cash
|
|
—
|
|
|
—
|
|
|
(1,277
|
)
|
|
—
|
|
|
(1,277
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
(43,639
|
)
|
|
(5,572
|
)
|
|
561
|
|
|
—
|
|
|
(48,650
|
)
|
Cash and cash equivalents at beginning of period
|
|
191,065
|
|
|
10,024
|
|
|
3,265
|
|
|
—
|
|
|
204,354
|
|
Cash and cash equivalents at end of period
|
|
$
|
147,426
|
|
|
$
|
4,452
|
|
|
$
|
3,826
|
|
|
$
|
—
|
|
|
$
|
155,704
|
|