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EX-32 - EXHIBIT - KEY ENERGY SERVICES INCkegex329302014.htm
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EXCEL - IDEA: XBRL DOCUMENT - KEY ENERGY SERVICES INCFinancial_Report.xls

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________
Form 10-Q
 _____________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-08038
  _____________________________________________
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
  _____________________________________________
Maryland
 
04-2648081
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1301 McKinney Street, Suite 1800, Houston, Texas
 
77010
(Address of principal executive offices)
 
(Zip Code)
(713) 651-4300
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
  ____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 28, 2014, the number of outstanding shares of common stock of the registrant was 153,474,453.
 



KEY ENERGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2014
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These “forward-looking statements” are based on our current expectations, estimates and projections about Key Energy Services, Inc. and its wholly owned and controlled subsidiaries, our industry and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “predicts,” “expects,” “believes,” “anticipates,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties and not guarantees of performance. Future actions, events and conditions and future results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in this report, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 and “Part II - Item 1A. Risk Factors” in our Quarterly Reports Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014.
We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

2


PART I — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
57,392

 
$
28,306

Accounts receivable, net of allowance for doubtful accounts of $2,101 and $766, respectively
294,828

 
348,966

Inventories
42,363

 
32,335

Other current assets
87,782

 
96,546

Total current assets
482,365

 
506,153

Property and equipment
2,546,087

 
2,606,738

Accumulated depreciation
(1,299,543
)
 
(1,241,092
)
Property and equipment, net
1,246,544

 
1,365,646

Goodwill
601,839

 
624,875

Other intangible assets, net
27,456

 
41,146

Deferred financing costs, net
11,798

 
13,897

Other assets
36,644

 
35,753

TOTAL ASSETS
$
2,406,646

 
$
2,587,470

LIABILITIES AND EQUITY

 

Current liabilities:

 

Accounts payable
$
61,145

 
$
58,826

Other current liabilities
156,556

 
169,945

Current portion of long-term debt

 
3,573

Total current liabilities
217,701

 
232,344

Long-term debt
758,565

 
763,981

Workers' compensation, vehicular and health insurance liabilities
30,972

 
29,944

Deferred tax liabilities
250,843

 
284,453

Other non-current liabilities
27,009

 
25,655

Commitments and contingencies

 

Equity:

 

Common stock, $0.10 par value; 200,000,000 shares authorized, 153,558,770 and 152,331,006 shares issued and outstanding
15,356

 
15,233

Additional paid-in capital
958,981

 
953,306

Accumulated other comprehensive loss
(24,425
)
 
(15,414
)
Retained earnings
171,644

 
297,968

Total equity
1,121,556

 
1,251,093

TOTAL LIABILITIES AND EQUITY
$
2,406,646

 
$
2,587,470

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

3


Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
$
365,798

 
$
389,673

 
$
1,072,534

 
$
1,229,512

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Direct operating expenses
272,112

 
268,297

 
793,297

 
854,581

Depreciation and amortization expense
50,924

 
56,962

 
154,203

 
169,363

General and administrative expenses
65,224

 
52,665

 
175,971

 
173,646

Impairment expense
60,792

 

 
89,479

 

Operating income (loss)
(83,254
)
 
11,749

 
(140,416
)
 
31,922

Interest expense, net of amounts capitalized
13,417

 
13,814

 
40,397

 
41,602

Other (income) loss, net
348

 
(85
)
 
(2,454
)
 
(878
)
Loss before income taxes
(97,019
)
 
(1,980
)
 
(178,359
)
 
(8,802
)
Income tax benefit (expense)
34,790

 
(2,717
)
 
52,035

 
147

Net loss
(62,229
)
 
(4,697
)
 
(126,324
)
 
(8,655
)
Income attributable to noncontrolling interest

 
151

 

 
595

LOSS ATTRIBUTABLE TO KEY
$
(62,229
)
 
$
(4,848
)
 
$
(126,324
)
 
$
(9,250
)
Loss per share attributable to Key:
 
 
 
 
 
 
 
Basic and diluted
$
(0.41
)
 
$
(0.03
)
 
$
(0.82
)
 
$
(0.06
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
153,550

 
152,394

 
153,327

 
152,249

See the accompanying notes which are an integral part of these condensed consolidated financial statements.

4


Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
NET LOSS
$
(62,229
)
 
$
(4,697
)
 
$
(126,324
)
 
$
(8,655
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation income (loss)
(7,010
)
 
1,018

 
(9,011
)
 
(4,348
)
COMPREHENSIVE LOSS
(69,239
)
 
(3,679
)
 
(135,335
)
 
(13,003
)
Comprehensive (income) loss attributable to noncontrolling interest

 
(127
)
 

 
96

COMPREHENSIVE LOSS ATTRIBUTABLE TO KEY
$
(69,239
)
 
$
(3,806
)
 
$
(135,335
)
 
$
(12,907
)
See the accompanying notes which are an integral part of these condensed consolidated financial statements.

5


Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(126,324
)
 
$
(8,655
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation and amortization expense
154,203

 
169,363

Impairment expense
89,479

 

Bad debt expense
1,484

 
960

Accretion of asset retirement obligations
447

 
454

Loss from equity method investments
221

 
348

Amortization of deferred financing costs and premium
1,682

 
2,044

Deferred income tax benefit
(30,066
)
 
(10,402
)
Capitalized interest

 
(469
)
(Gain) loss on disposal of assets, net
3,760

 
(1,445
)
Share-based compensation
9,277

 
11,666

Excess tax expense from share-based compensation
1,240

 
1,846

Changes in working capital:

 

Accounts receivable
51,585

 
20,225

Other current assets
(3,410
)
 
8,592

Accounts payable, accrued interest and accrued expenses
(12,050
)
 
(61,924
)
Share-based compensation liability awards
(578
)
 
1,262

Other assets and liabilities
(14,866
)
 
23,153

Net cash provided by operating activities
126,084

 
157,018

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Capital expenditures
(108,120
)
 
(111,021
)
Proceeds from sale of fixed assets
12,288

 
7,530

Proceeds from notes receivable
3,990

 

Acquisition of the 50% noncontrolling interest in Geostream

 
(14,600
)
Net cash used in investing activities
(91,842
)
 
(118,091
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt
(3,573
)
 

Repayments of capital lease obligations

 
(392
)
Proceeds from borrowings on revolving credit facility
220,000

 
195,000

Repayments on revolving credit facility
(225,000
)
 
(210,000
)
Payment of deferred financing costs

 
(69
)
Repurchases of common stock
(2,239
)
 
(3,169
)
Excess tax expense from share-based compensation
(1,240
)
 
(1,846
)
Net cash used in financing activities
(12,052
)
 
(20,476
)
Effect of changes in exchange rates on cash
6,896

 
212

Net increase in cash and cash equivalents
29,086

 
18,663

Cash and cash equivalents, beginning of period
28,306

 
45,949

Cash and cash equivalents, end of period
$
57,392

 
$
64,612


See the accompanying notes which are an integral part of these condensed consolidated financial statements.

6


Key Energy Services, Inc. and Subsidiaries
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 rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States and have operations in Mexico, Colombia, Ecuador, the Middle East and Russia. In addition, we have a technology development and control systems business based in Canada.
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, 2013 balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 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 2013 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 nine months ended September 30, 2014 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.
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 2013 Form 10-K.
Accounting Standards Adopted or Not Yet Adopted in this Report
There are no new accounting standards that have been adopted in this report.
ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contract 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 is effective for interim and annual reporting periods beginning after December 15, 2016 and must be adopted using either a full retrospective method or a modified retrospective method. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

7


NOTE 3. ACQUISITION OF NONCONTROLLING INTERESTS
Geostream. On October 31, 2008, we acquired a 26% interest in OOO Geostream Services Group (“Geostream”) for $17.4 million. Geostream is a limited liability company incorporated in the Russian Federation that provides a wide range of drilling, workover and reservoir engineering services. On September 1, 2009, we acquired an additional 24% interest for $16.4 million, which brought our total investment in Geostream to 50% and provided us a controlling interest with representation on Geostream's board of directors. We accounted for the second investment as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the initial acquisition date, with the portion outside of our control forming a noncontrolling interest. On April 9, 2013, we completed the acquisition of the 50% noncontrolling interest in Geostream for $14.6 million. Geostream is now our wholly owned subsidiary. This acquisition of the 50% noncontrolling interest in Geostream was accounted for as an equity transaction. Therefore, our acquisition of the non-controlling interest in Geostream in the second quarter of 2013 did not result in a gain or loss.
AlMansoori Key Energy Services, LLC. On March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services, LLC (“AlMansoori”) to form the joint venture AlMansoori Key Energy Services, LLC, a joint venture under the laws of Abu Dhabi, UAE. The purpose of the joint venture was to engage in conventional workover and drilling services, coiled tubing services, fishing and rental services, rig monitoring services, pipe handling services and fluids, waste treatment and handling services. Although AlMansoori held a 51% interest in the joint venture and we held a 49% interest, we held three of the five board of directors seats and a controlling financial interest. In addition, profits and losses of the joint venture were shared on equal terms and in equal amounts with AlMansoori. Because the joint venture did not have sufficient resources to carry on its activities without our financial support, we determined it to be a variable interest entity of which we were the primary beneficiary. We consolidated the entity in our financial statements. On August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC and the acquisition of the underlying business for $5.1 million. The $5.1 million is expected to be paid in 2014 and is recorded in “Other current liabilities” in our consolidated balance sheet. The acquisition of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC was accounted for as an equity transaction and therefore did not result in a gain or loss.
NOTE 4. EQUITY
A reconciliation of the total carrying amount of our equity accounts for the nine months ended September 30, 2014 is as follows:
 
COMMON STOCKHOLDERS
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Noncontrolling Interest
 
Total
 
Number of Shares
 
Amount at Par
 
 
 
 
 
(in thousands)
Balance at December 31, 2013
152,331

 
$
15,233

 
$
953,306

 
$
(15,414
)
 
$
297,968

 
$

 
$
1,251,093

Foreign currency translation

 

 

 
(9,011
)
 

 

 
(9,011
)
Common stock purchases
(288
)
 
(29
)
 
(2,210
)
 

 

 

 
(2,239
)
Share-based compensation
1,516

 
152

 
9,125

 

 

 

 
9,277

Excess tax expense from share-based compensation

 

 
(1,240
)
 

 

 

 
(1,240
)
Net loss

 

 

 

 
(126,324
)
 

 
(126,324
)
Balance at September 30, 2014
153,559

 
$
15,356

 
$
958,981

 
$
(24,425
)
 
$
171,644

 
$

 
$
1,121,556



8


A reconciliation of the total carrying amount of our equity accounts for nine months ended September 30, 2013 is as follows:
 
COMMON STOCKHOLDERS
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Noncontrolling Interest
 
Total
 
Number of Shares
 
Amount at Par
 
 
 
 
 
(in thousands)
Balance at December 31, 2012
151,070

 
$
15,108

 
$
925,132

 
$
(6,148
)
 
$
319,736

 
$
33,504

 
$
1,287,332

Foreign currency translation

 

 

 
(3,657
)
 

 
(691
)
 
(4,348
)
Common stock purchases
(415
)
 
(42
)
 
(3,127
)
 

 

 

 
(3,169
)
Share-based compensation
1,702

 
170

 
11,496

 

 

 

 
11,666

Excess tax expense from share-based compensation

 

 
(1,846
)
 

 

 

 
(1,846
)
Acquisition of the 50% noncontrolling interest in Geostream (Note 3)


 

 
22,432

 
(4,350
)
 

 
(31,196
)
 
(13,114
)
Acquisition of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC (Note 3)

 

 
(2,888
)
 

 

 
(2,212
)
 
(5,100
)
Net income (loss)

 

 

 

 
(9,250
)
 
595

 
(8,655
)
Balance at September 30, 2013
152,357

 
$
15,236

 
$
951,199

 
$
(14,155
)
 
$
310,486

 
$

 
$
1,262,766

NOTE 5. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Other current assets:
 
 
 
Deferred tax assets
$
20,860

 
$
11,707

Prepaid current assets
21,009

 
28,435

Reinsurance receivable
9,548

 
9,113

VAT asset
20,789

 
21,683

Other
15,576

 
25,608

Total
$
87,782

 
$
96,546

The table below presents comparative detailed information about other non-current assets at September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Other non-current assets:
 
 
 
 Deferred tax assets
$
23,660

 
$
22,313

 Reinsurance receivable
9,923

 
9,397

 Deposits
1,449

 
1,533

 Equity method investments
971

 
962

 Other
641

 
1,548

Total
$
36,644

 
$
35,753


9


The table below presents comparative detailed information about other current liabilities at September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Other current liabilities:
 
 
 
Accrued payroll, taxes and employee benefits
$
43,750

 
$
34,956

Accrued operating expenditures
39,812

 
36,573

Income, sales, use and other taxes
30,387

 
37,064

Self-insurance reserve
32,105

 
32,129

Accrued interest
3,876

 
15,285

Accrued insurance premiums
1,163

 
8,049

Share-based compensation and other liabilities
5,463

 
5,889

Total
$
156,556

 
$
169,945

The table below presents comparative detailed information about other non-current liabilities at September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Other non-current liabilities:
 
 
 
Asset retirement obligations
$
12,369

 
$
11,999

Environmental liabilities
5,860

 
6,176

Accrued rent
412

 
853

Accrued sales, use and other taxes
5,360

 
5,552

Other
3,008

 
1,075

Total
$
27,009

 
$
25,655

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows:
 
U.S.
 
International
 
Total
 
(in thousands)
December 31, 2013
$
597,456

 
$
27,419

 
$
624,875

Goodwill impairment

 
(22,437
)
 
(22,437
)
Impact of foreign currency translation

 
(599
)
 
(599
)
September 30, 2014
$
597,456

 
$
4,383

 
$
601,839


10


The components of our other intangible assets as of September 30, 2014 and December 31, 2013 are as follows:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Noncompete agreements:
 
 
 
Gross carrying value
$
5,110

 
$
9,332

Accumulated amortization
(4,444
)
 
(7,104
)
Net carrying value
666

 
2,228

Patents, trademarks and tradenames:

 

Gross carrying value
12,612

 
14,039

Accumulated amortization and impairment
(5,598
)
 
(223
)
Net carrying value
7,014

 
13,816

Customer relationships and contracts:

 

Gross carrying value
99,750

 
100,271

Accumulated amortization
(84,422
)
 
(78,926
)
Net carrying value
15,328

 
21,345

Developed technology:

 

Gross carrying value
8,485

 
7,583

Accumulated amortization
(4,037
)
 
(3,826
)
Net carrying value
4,448

 
3,757

Customer Backlog:
 
 
 
Gross carrying value
779

 
779

Accumulated amortization
(779
)
 
(779
)
Net carrying value

 

Total:
 
 
 
Gross carrying value
126,736

 
132,004

Accumulated amortization and impairment
(99,280
)
 
(90,858
)
Net carrying value
$
27,456

 
$
41,146


Of our intangible assets at September 30, 2014, $6.9 million are indefinite-lived tradenames and patents which are not subject to amortization. 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
 
Remainder
of 2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
 
 
(in thousands)
Noncompete agreements
2.0
 
$
116

 
$
305

 
$
245

 
$

 
$

 
$

Trademarks
3.7
 
10

 
40

 
40

 
40

 
17

 

Customer relationships and contracts
5.2
 
1,967

 
5,031

 
3,408

 
2,414

 
1,120

 
820

Developed technology
16.3
 
100

 
401

 
401

 
401

 
401

 
311

Total expected intangible asset amortization expense
 
 
$
2,193

 
$
5,777

 
$
4,094

 
$
2,855

 
$
1,538

 
$
1,131

Certain of our goodwill and other intangible assets are denominated in Russian Rubles and, as such, the values of these assets are subject to fluctuations associated with changes in exchange rates. Amortization expense for our intangible assets was $2.6 million and $4.8 million for the three months ended September 30, 2014 and 2013, respectively, and $7.8 million and $14.5 million for the nine months ended September 30, 2014 and 2013, respectively.

11


We perform an analysis of goodwill impairment on an annual basis unless an event occurs that triggers additional interim testing. Deterioration in the capital investment climate in Russia as a result of geopolitical events occurring during the second quarter of 2014 was determined to be a triggering event. This triggering event required us to perform testing for possible goodwill impairment of our Russian business reporting unit which is included in our International reporting segment. Our analysis concluded that Russia's $22.4 million of goodwill is fully impaired, and that $6.3 million of Russia's tradename intangible assets is impaired as well. We concluded that there is no impairment to Russia's other long-lived assets.
In addition, the decline in market value of our common stock in comparison to the carrying value of our assets during the third quarter of 2014 was determined to be a triggering event. This triggering event required us to perform testing for possible goodwill impairment in our U.S. Segment, and our step one testing indicated there may be an impairment in our U.S. fishing and rental business reporting unit. No impairment was indicated in our other U.S. business reporting units. Step two of the goodwill impairment testing for the fishing and rental business reporting unit was performed preliminarily during the third quarter of 2014 and, while our preliminary analysis concluded that that there was no impairment of goodwill, it did indicate that there was an impairment of fixed assets. Step two testing will be completed in the fourth quarter of 2014 and any adjustment to the amount recorded, which could differ materially, will be recorded in the fourth quarter of 2014. See “Note 7. Impairment of Fixed Assets” for further discussion.
NOTE 7. IMPAIRMENT OF FIXED ASSETS
The decline in market value of our common stock in comparison to the carrying value of our assets during the third quarter of 2014 was determined to be a triggering event. This triggering event required us to perform step one of the goodwill impairment test to identify potential impairment. Our step one testing indicated potential impairment in our fishing and rental services business reporting unit which required us to perform step two of the goodwill impairment test to determine the amount of impairment, if any. Our preliminary step two testing performed during the third quarter of 2014, using a discounted cash flow model to determine fair value, concluded that certain assets, primarily frac stack and well testing assets, were impaired. As a result, we recorded an estimated pre-tax charge of $60.8 million in the third quarter of 2014. Our preliminary step two testing also indicated no impairment of goodwill in our fishing and rental services business reporting unit. Step two testing will be completed in the fourth quarter of 2014 and any adjustment to the amount recorded, which may be material, will be recorded in the fourth quarter of 2014.
NOTE 8. LONG-TERM DEBT
As of September 30, 2014 and December 31, 2013, the components of our long-term debt were as follows:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
6.75% Senior Notes due 2021
$
675,000

 
$
675,000

8.375% Senior Notes due 2014

 
3,573

Senior Secured Credit Facility revolving loans due 2016
80,000

 
85,000

Net unamortized premium on debt
3,565

 
3,981

Total debt
758,565

 
767,554

Less current portion

 
(3,573
)
Long-term debt
$
758,565

 
$
763,981

8.375% Senior Notes due 2014
On February 25, 2014, we redeemed the $3.6 million aggregate principal amount and paid $0.1 million accrued interest of 8.375% Senior Notes due 2014 (the “2014 Notes”) pursuant to the indenture dated as of November 29, 2007 (as supplemented, the “Indenture”). The 2014 Notes were general unsecured senior obligations and were subordinate to all of our existing and future secured indebtedness. The 2014 Notes were jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2014 Notes was payable on June 1 and December 1 of each year.

12


6.75% Senior Notes due 2021
We issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “Initial 2021 Notes”) on March 4, 2011 and issued an additional $200.0 million aggregate principal amount of the 2021 Notes (the “Additional 2021 Notes” and together with the Initial 2021 Notes, the “2021 Notes”) in a private placement on March 8, 2012 under an indenture dated March 4, 2011 (the “Base Indenture”), as supplemented by a first supplemental indenture dated March 4, 2011 and amended by a further supplemental indenture dated March 8, 2012 (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”). We used the net proceeds to repay senior secured indebtedness under our revolving bank credit facility. We capitalized $4.6 million of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.
On March 5, 2013, we completed an offer to exchange the $200.0 million in aggregate principal amount of unregistered Additional 2021 Notes for an equal principal amount of such notes registered under the Securities Act of 1933. All of the 2021 Notes are treated as a single class under the Indenture and as of the closing of the exchange offers bear the same CUSIP and ISIN numbers.
The 2021 Notes are general unsecured senior obligations and are effectively subordinated to all of our existing and future secured indebtedness. The 2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the 2021 Notes is payable on March 1 and September 1 of each year. The 2021 Notes mature on March 1, 2021.
On or after March 1, 2016, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at the redemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of the years indicated below:
Year
Percentage
2016
103.375
%
2017
102.250
%
2018
101.125
%
2019 and thereafter
100.000
%
At any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at a redemption price equal to 100% of the principal amount plus a premium with respect to the 2021 Notes plus accrued and unpaid interest to the redemption date. The premium is the excess of (i) the present value of the redemption price of 103.375% of the principal amount, plus all remaining scheduled interest payments due through March 1, 2016 discounted at the treasury rate plus 0.5% over (ii) the principal amount of the note. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.
We are subject to certain negative covenants under the Indenture. The Indenture limits our ability to, among other things:
incur additional indebtedness and issue preferred equity interests;
pay dividends or make other distributions or repurchase or redeem equity interests;
make loans and investments;
enter into sale and leaseback transactions;
sell, transfer or otherwise convey assets;
create liens;
enter into transactions with affiliates;
enter into agreements restricting subsidiaries’ ability to pay dividends;
designate future subsidiaries as unrestricted subsidiaries; and
consolidate, merge or sell all or substantially all of the applicable entities’ assets.
These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions relating to the covenants of our 2011 Credit Facility discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the 2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of September 30, 2014, the 2021 Notes were rated below investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the investment rating assigned to the 2021 Notes later falls below investment grade. We were in compliance with these covenants as of September 30, 2014.

13


Senior Secured Credit Facility
We are party to a $550.0 million senior secured revolving bank credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and Capital One, N.A., Wells Fargo Bank, N.A., Credit Agricole Corporate and Investment Bank and DnB NOR Bank ASA, as Co-Documentation Agent (as amended, the “2011 Credit Facility”), which is an important source of liquidity for us. The 2011 Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility, all of which will mature no later than March 31, 2016.
The maximum amount that we may borrow under the facility may be subject to limitation due to the operation of the covenants contained in the facility. The 2011 Credit Facility allows us to request increases in the total commitments under the facility by up to $100.0 million in the aggregate in part or in full anytime during the term of the 2011 Credit Facility, with any such increases being subject to compliance with the restrictive covenants in the 2011 Credit Facility and in the Indenture governing our 2021 Senior Notes, as well as lender approval.
We capitalized $4.9 million of financing costs in connection with the execution of the 2011 Credit Facility and an additional $1.4 million related to a subsequent amendment that will be amortized over the term of the debt.
The interest rate per annum applicable to the 2011 Credit Facility is, at our option, (i) adjusted LIBOR plus the applicable margin or (ii) the higher of (x) JPMorgan’s prime rate, (y) the Federal Funds rate plus 0.5% and (z) one-month adjusted LIBOR plus 1.0%, plus in each case the applicable margin for all other loans. The applicable margin for LIBOR loans ranges from 225 to 300 basis points, and the applicable margin for all other loans ranges from 125 to 200 basis points, depending upon our consolidated total leverage ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility equal 0.5%.
The 2011 Credit Facility contains certain financial covenants, which, among other things, limit our annual capital expenditures, restrict our ability to repurchase shares and require us to maintain certain financial ratios. The financial ratios require that:
our ratio of consolidated funded indebtedness to total capitalization be no greater than 45%;
our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of the 2011 Credit Facility, “EBITDA”) be no greater than 2.00 to 1.00;
we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of the last day of any fiscal quarter of at least 2:00 to 1:00;
we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least 3.00 to 1.00; and
we limit our capital expenditures and investments in foreign subsidiaries to $250.0 million per fiscal year, if the consolidated total leverage ratio exceeds 3.00 to 1.00.
In addition, the 2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event of default exists under the 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with other financial covenants and we have at least $25.0 million of availability under the 2011 Credit Facility); (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming or repurchasing subordinated (contractually or structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements; (xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (xiv) changes in the nature of business; (xv) amending organizational documents; and (xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions.
We were in compliance with covenants of the 2011 Credit Facility as of September 30, 2014. We may prepay the 2011 Credit Facility in whole or in part at any time without premium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs. As of September 30, 2014, we had borrowings of $80.0 million outstanding under the revolving credit facility, $49.1 million of letters of credit outstanding with borrowing capacity of $162.2 million available considering covenant constraints under our 2011 Credit Facility. The weighted average interest rates on the outstanding borrowings under the 2011 Credit Facility were 3.01% and 2.81% for the three-month periods ended September 30, 2014 and September 30, 2013, respectively, and the weighted average interest rates on the outstanding borrowings under the 2011 Credit Facility were 2.92% and 2.72% for nine months ended September 30, 2014 and September 30, 2013, respectively.

14


Letter of Credit Facility
On November 7, 2013, we entered into an uncommitted, unsecured $15.0 million letter of credit facility to be used solely for the issuances of performance letters of credit. As of September 30, 2014, $3.0 million of letters of credit were outstanding under the facility.
NOTE 9. OTHER (INCOME) LOSS
The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “Other (income) loss, net” for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Interest income
$
(12
)
 
$
(34
)
 
$
(60
)
 
$
(129
)
Foreign exchange (gain) loss
1,118

 
(60
)
 
1,107

 
413

Other, net
(758
)
 
9

 
(3,501
)
 
(1,162
)
Total
$
348

 
$
(85
)
 
$
(2,454
)
 
$
(878
)
NOTE 10. 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 for the three months ended September 30, 2014 and 2013 were 35.9% and 137.2%, respectively, and 29.2% and 1.7% for the nine months ended September 30, 2014 and 2013, respectively. Excluding the impact of non-deductible goodwill and tradename impairment expense, our effective tax rates for the three month and nine month periods ended September 30, 2014, were 35.9% and 34.8%, respectively. Our effective tax rate varies 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 discrete tax adjustments, such as tax expense or benefit recognized for uncertain tax positions. The variance between our effective rate and the U.S. statutory rate reflects international profits and losses subject to varying statutory rates, the impact of permanent items, mainly non-deductible expenses such as fines and penalties, and expenses subject to statutorily imposed limitations such as meals and entertainment expenses, plus the impact of state income taxes.
As of September 30, 2014 and December 31, 2013, we had $0.9 million of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We recognized a tax expense of less than $0.1 million and a tax benefit of $0.1 million for the three months ended September 30, 2014 and 2013, respectively, related to these items. We have substantially concluded all U.S. federal and state tax matters through the year ended December 31, 2009.
We record interest and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of $0.1 million and $0.4 million for the payment of interest and penalties as of September 30, 2014 and December 31, 2013, respectively. We believe that it is reasonably possible that $0.4 million of our currently remaining unrecognized tax positions, each of which is individually insignificant, may be recognized in the next twelve months as a result of a lapse of statute of limitations and settlement of ongoing audits. No release of our deferred tax asset valuation allowance was made during the three or nine months ended September 30, 2014 and 2013.
NOTE 11. 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 $0.1 million of other liabilities related to litigation that is deemed probable and reasonably estimated as of September 30, 2014. 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.
Between May of 2013 and June of 2014, five lawsuits (four class actions and one enforcement action) were filed in California involving alleged violations of California's wage and hour laws. In general, the lawsuits allege failure to pay wages, including overtime and minimum wages, failure to pay final wages upon employment terminations in a timely manner, failure

15


to reimburse reasonable and necessary business expenses, failure to provide wage statements consistent with California law, and violations of the California meal and break period laws, among other claims. We intend to vigorously investigate and defend these actions. Because these cases are in relatively early stages, and we have not yet briefed class certification issues, we cannot predict the outcome of these lawsuits at this time. Accordingly, we cannot estimate any possible loss or range of loss.
As previously disclosed, a special committee of our Board of Directors is investigating possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) involving business activities of our operations in Russia and an allegation involving our Mexico operations that, if true, could potentially constitute a violation of certain of our policies, including our Code of Business Conduct, the FCPA and other applicable laws. The special committee’s investigations, which also include a review of certain aspects of the Company’s operations in Colombia, as well as our other international locations, are ongoing. We are fully cooperating with investigations by the SEC and the Department of Justice (“DOJ”). At this time we are unable to predict the ultimate resolution of these matters with these agencies and, accordingly, cannot estimate any possible loss or range of loss.
In August 2014, two class action lawsuits were filed in the U.S. District Court Southern District of Texas Houston Division, individually and on behalf of all other persons similarly situated against the Company and certain officers of the Company, alleging violations of federal securities laws, specifically, violations of Section 10(b) and Rule 10(b)-5, Section 20(a) of the Exchange Act. The lawsuits are as follows: Sean Cady, Individually and on Behalf of All Other Persons Similarly Situated v. Key Energy Services, Inc., Richard J. Alario, and J. Marshall Dodson, No. 4:14-cv-2368, filed on August 15, 2014; and Ian W. Davidson, Individually and on Behalf of All Other Persons Similarly Situated v. Key Energy Services, Inc., Richard J. Alario, and J. Marshall Dodson, No. 4.14-cv-2403, filed on August 21, 2014. Both lawsuits allege that, during the period July 25, 2013 to July 17, 2014, the defendants failed to disclose (1) that the Company’s production for Petróleos Mexicanos (“Pemex”) was in decline; (2) that the Company engaged in improper conduct related to its operations in Russia; and (3) that the Company’s business practices in Russia were in violation of the FCPA. Because these cases are in early stages, we cannot predict the outcome of these lawsuits at this time. Accordingly, we cannot estimate any possible loss or range of loss.
In addition, in a letter dated September 4, 2014, a purported shareholder of the Company demanded that the Board commence an independent internal investigation into and legal proceedings against each member of the Board, a former member of the Board and certain officers of the Company for alleged violations of Maryland and/or federal law. The letter alleges that the Board and senior officers breached their fiduciary duties to the Company, including the duty of loyalty and due care, by (i) improperly accounting for goodwill, (ii) causing the Company to potentially violate the FCPA, resulting in an investigation by the SEC, (iii) causing the Company to engage in improper conduct related to the Company’s Russia operations; and (iv) making false statements regarding, and failing to properly account for, certain contracts with Pemex. As described in the letter, the purported shareholder believes that the legal proceedings should seek recovery of damages in an unspecified amount allegedly sustained by the Company. The Board of Directors is reviewing the demand letter. We cannot predict the outcome of this matter.
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 September 30, 2014 and December 31, 2013, we have recorded $63.1 million and $62.1 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $19.5 million and $18.5 million of insurance receivables as of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013, we have recorded $5.9 million and $6.2 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.

16


NOTE 12. 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:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Basic and Diluted EPS Calculation:
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
Loss attributable to Key
$
(62,229
)
 
$
(4,848
)
 
$
(126,324
)
 
$
(9,250
)
Denominator
 
 
 
 
 
 
 
Weighted average shares outstanding
$
153,550

 
$
152,394

 
$
153,327

 
152,249

Basic and diluted loss per share attributable to Key
$
(0.41
)
 
$
(0.03
)
 
$
(0.82
)
 
$
(0.06
)
Stock options, warrants and stock appreciation rights (“SARs”) are included in the computation of diluted loss per share using the treasury stock method. Restricted stock awards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding. The diluted earnings per share calculations for the three months ended September 30, 2014 exclude the potential exercise of 1.3 million stock options and 0.3 million SARs and for the nine months ended September 30, 2014 exclude the potential exercise of 1.4 million stock options and 0.3 million SARs as they would be anti-dilutive given the net loss attributable to Key. The diluted earnings per share calculations for the three months ended September 30, 2013 exclude the potential exercise of 1.6 million stock options and 0.3 million SARs and for the nine months ended September 30, 2013 exclude the potential exercise of 1.7 million stock options and 0.3 million SARs as they would be anti-dilutive given the net loss attributable to Key. No events occurred after September 30, 2014 that would materially affect the number of weighted average shares outstanding.
NOTE 13. SHARE-BASED COMPENSATION
We recognized employee share-based compensation expense of less than $0.1 million and $3.0 million during the three months ended September 30, 2014 and 2013, respectively, and the related income tax expense recognized was less than $0.1 million and $1.1 million for the same periods. We recognized employee share-based compensation expense of $7.1 million and $11.2 million during the nine months ended September 30, 2014 and 2013, respectively, and the related income tax expense recognized was $2.3 million and $4.1 million, respectively, for the same period. We did not capitalize any share-based compensation during the three and nine months ended September 30, 2014 and 2013.
The unrecognized compensation cost related to our unvested restricted stock as of September 30, 2014 is estimated to be $11.0 million and is expected to be recognized over a weighted-average period of 1.1 years. We do not have unrecognized cost related to our unvested stock options as of September 30, 2014. No phantom stock was outstanding as of September 30, 2014.
During May 2014, we issued 197,865 shares of common stock to our outside directors under the Key Energy Services, Inc. 2014 Equity and Cash Incentive Plan that was approved by our stockholders on May 15, 2014. These shares vested immediately and we recognized $1.6 million of expense related to these awards. Additionally, during May 2013, we recognized $1.8 million of expense related to similar awards.
On January 30, 2014, the Compensation Committee of the Board of Directors adopted the 2014 Performance Unit Plan (the “2014 PU Plan”) and granted performance units pursuant to the Performance Award Agreement (“2012 PU Award Agreement”) under the Key Energy Services, Inc. 2012 Equity and Cash Incentive Plan (the “2012 Plan”). We believe that the 2014 PU Plan and 2012 PU Award Agreement will enable us to obtain and retain employees who will contribute to our long term success by aligning the interests of our executives with the interests of our stockholders by providing compensation that is linked directly to increases in share value.
In January 2014, we issued 0.5 million performance units to our executive officers under the 2012 Plan with such material terms as set forth in the 2012 PU Award Agreement. In February 2014, we issued 0.1 million performance units to certain other employees under the 2014 PU Plan. The performance units are measured based on two performance periods from January 1, 2014 to December 31, 2014 and from January 1, 2015 to December 31, 2015. One half of the performance units are

17


measured based on the first performance period, and the other half are measured based on the second performance period. The number of performance units that may be earned by a participant is determined at the end of each performance period based on the relative placement of Key’s total stockholder return for that period within the peer group, as follows:
Company Placement for the Performance Period
 
Percentile Ranking in
Peer Group
 
Performance Units Earned as
a Percentage of Target
First
 
100
%
 
200
%
Second
 
91
%
 
180
%
Third
 
82
%
 
160
%
Fourth
 
73
%
 
140
%
Fifth
 
64
%
 
120
%
Sixth
 
55
%
 
100
%
Seventh
 
45
%
 
75
%
Eighth
 
36
%
 
50
%
Ninth
 
27
%
 
25
%
Tenth
 
18
%
 
0
%
Eleventh
 
9
%
 
0
%
Twelfth
 
0
%
 
0
%
If any performance units vest for a given performance period, the award holder will be paid a cash amount equal to the vested percentage of the performance units multiplied by the closing stock price of our common stock on the last trading day of the performance period. We account for the performance units as a liability-type award as they are settled in cash. As of September 30, 2014, the fair value of outstanding performance units was $1.4 million, and is being accreted to compensation expense over the vesting terms of the awards. As of September 30, 2014, the unrecognized compensation cost related to our unvested performance units is estimated to be $0.9 million and is expected to be recognized over a weighted-average period of 1.2 years.
NOTE 14. TRANSACTIONS WITH RELATED PARTIES
Board of Director Relationships
A member of our board of directors is the Executive Vice President, General Counsel and Chief Administrative Officer of Anadarko Petroleum Corporation (“Anadarko”), which is one of our customers. Sales to Anadarko were approximately $8.1 million and $12.0 million for the three months ended September 30, 2014 and 2013, respectively, and $26.2 million for each of the nine months ended September 30, 2014 and 2013. Receivables outstanding from Anadarko were approximately $3.5 million and $4.9 million as of September 30, 2014 and December 31, 2013, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.
NOTE 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of September 30, 2014 and December 31, 2013.
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.
 
 
September 30, 2014
 
December 31, 2013
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
Notes receivable - Argentina operations sale
 
$
8,365

 
$
8,365

 
$
12,355

 
$
12,355

Financial liabilities:
 

 

 

 

6.75% Senior Notes
 
$
675,000

 
$
658,058

 
$
675,000

 
$
690,390

8.375% Senior Notes
 

 

 
3,573

 
3,627

Credit Facility revolving loans
 
80,000

 
80,000

 
85,000

 
85,000


18


Notes receivable — Argentina operations sale. The fair value of these notes receivable are based upon the quoted market Treasury rates as of the dates indicated. The carrying values of these items approximate their fair values due to the maturity dates rapidly approaching, thus giving way to discount rates that are similar.
6.75% Senior Notes due 2021. The fair value of these notes are based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of September 30, 2014 was $675.0 million, and the fair value was $658.1 million (97.5% of carrying value).
8.375% Senior Notes due 2014. At December 31, 2013 the fair value of our 2014 Notes was based upon the quoted market prices for those securities as of the dates indicated. These notes were redeemed in February 2014.
Credit Facility Revolving Loans. Because of their variable interest rates, the fair values of the revolving loans borrowed under our 2011 Credit Facility approximate their carrying values. The carrying and fair values of these loans as of September 30, 2014 were $80.0 million.
NOTE 16. SEGMENT INFORMATION
Our operating segments are U.S. and International. We also have a “Functional Support” segment associated with managing each of our reportable operating segments. Our domestic rig services, fluid management services, fishing and rental services, and coiled tubing services are aggregated within our U.S. reportable segment. Our international rig services business and our Canadian technology development group are aggregated within our International reportable segment. We evaluate the performance of our operating segments based on revenue and income measures. All inter-segment sales pricing is based on current market conditions. The following is a description of the segments:
U.S. Segment
Rig-Based Services
Our rig-based services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView® technology, which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews to better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.
The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through a workover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of the completion.
The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services are generally less complicated than completion and workover related services and require less time to perform.
Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.

19


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 services and rental equipment designed for use in providing both onshore and offshore drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units, 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 Segment
Our International segment includes operations in Mexico, Colombia, Ecuador, the Middle East and Russia. We provide rig-based services such as the maintenance, workover, recompletion of existing oil wells, completion of newly-drilled wells and plugging and abandonment of wells at the end of their useful lives in each of our international markets. In addition, we have a technology development and control systems business based in Canada.
In addition, in Mexico we provide drilling, coiled tubing, wireline, project management and consulting services. Our work in Mexico also requires us to provide third party services that vary in scope by project.
In the Middle East, we operate in the Kingdom of Bahrain and Oman. On August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC, a joint venture formed under the laws of Abu Dhabi, UAE, and the acquisition of the underlying business for $5.1 million. See “Note 3. Acquisition of Noncontrolling Interests” for further discussion.
Our Russian operations provide drilling, workover, and reservoir engineering services. On April 9, 2013, we completed the acquisition of the 50% noncontrolling interest in Geostream, a limited liability company incorporated in the Russian Federation, for $14.6 million. We now own 100% of Geostream. See “Note 3. Acquisition of Noncontrolling Interests” for further discussion.
Our technology development and control systems business based in Canada is focused on the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.
Functional Support Segment
Our Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reporting segments.

20


Financial Summary
The following tables set forth our unaudited segment information as of and for the three and nine months ended September 30, 2014 and 2013 (in thousands):
As of and for the three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
U.S.
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
 
$
339,848

 
$
25,950

 
$

 
$

 
$
365,798

Intersegment revenues
 
(396
)
 
2,343

 
361

 
(2,308
)
 

Depreciation and amortization
 
40,357

 
7,689

 
2,878

 

 
50,924

Impairment expense
 
60,792

 

 

 

 
60,792

Other operating expenses
 
266,103

 
27,517

 
43,716

 

 
337,336

Operating loss
 
(27,404
)
 
(9,256
)
 
(46,594
)
 

 
(83,254
)
Interest expense, net of amounts capitalized
 

 
1

 
13,416

 

 
13,417

Income (loss) before income taxes
 
(27,047
)
 
(10,274
)
 
(59,698
)
 

 
(97,019
)
Long-lived assets(1)
 
1,551,120

 
260,706

 
274,946

 
(162,491
)
 
1,924,281

Total assets
 
2,924,255

 
415,678

 
(430,217
)
 
(503,070
)
 
2,406,646

Capital expenditures, excluding acquisitions
 
36,156

 
831

 
1,704

 


38,691

 
As of and for the three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
U.S.
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
 
$
345,115

 
$
44,558

 
$

 
$

 
$
389,673

Intersegment revenues
 
272

 
1,788

 
1,439

 
(3,499
)
 

Depreciation and amortization
 
45,551

 
8,440

 
2,971

 

 
56,962

Other operating expenses
 
247,567

 
43,430

 
29,965

 

 
320,962

Operating income (loss)
 
51,997

 
(7,312
)
 
(32,936
)
 

 
11,749

Interest expense, net of amounts capitalized
 

 

 
13,814

 

 
13,814

Income (loss) before income taxes
 
52,042

 
(7,336
)
 
(46,686
)
 

 
(1,980
)
Long-lived assets(1)
 
1,646,396

 
327,328

 
302,825

 
(193,919
)
 
2,082,630

Total assets
 
2,740,094

 
525,472

 
(72,943
)
 
(508,576
)
 
2,684,047

Capital expenditures, excluding acquisitions
 
29,443

 
2,290

 
6,711

 

 
38,444

As of and for the nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
U.S.
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
 
$
988,407

 
$
84,127

 
$

 
$

 
$
1,072,534

Intersegment revenues
 
38

 
7,111

 
1,446

 
(8,595
)
 

Depreciation and amortization
 
122,001

 
23,388

 
8,814

 

 
154,203

Impairment expense
 
60,792

 
28,687

 

 

 
89,479

Other operating expenses
 
773,221

 
88,645

 
107,402

 

 
969,268

Operating income (loss)
 
32,393

 
(56,593
)
 
(116,216
)
 

 
(140,416
)
Interest expense, net of amounts capitalized
 
(1
)
 
29

 
40,369

 

 
40,397

Income (loss) before income taxes
 
34,667

 
(57,511
)
 
(155,515
)
 

 
(178,359
)
Long-lived assets(1)
 
1,551,120

 
260,706

 
274,946

 
(162,491
)
 
1,924,281

Total assets
 
2,924,255

 
415,678

 
(430,217
)
 
(503,070
)
 
2,406,646

Capital expenditures, excluding acquisitions
 
96,462

 
4,501

 
7,157

 

 
108,120



21


As of and for the nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
U.S.
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
 
$
1,052,885

 
$
176,627

 
$

 
$

 
$
1,229,512

Intersegment revenues
 
8,734

 
5,983

 
1,586

 
(16,303
)
 

Depreciation and amortization
 
137,825

 
22,403

 
9,135

 

 
169,363

Other operating expenses
 
769,695

 
160,668

 
97,864

 

 
1,028,227

Operating income (loss)
 
145,365

 
(6,444
)
 
(106,999
)
 

 
31,922

Interest expense, net of amounts capitalized
 
1

 
64

 
41,537

 

 
41,602

Income (loss) before income taxes
 
145,461

 
(6,042
)
 
(148,221
)
 

 
(8,802
)
Long-lived assets(1)
 
1,646,396

 
327,328

 
302,825

 
(193,919
)
 
2,082,630

Total assets
 
2,740,094

 
525,472

 
(72,943
)
 
(508,576
)
 
2,684,047

Capital expenditures, excluding acquisitions
 
79,412

 
15,453

 
16,156

 

 
111,021

(1)
Long lived assets include fixed assets, goodwill, intangibles and other assets.
(2)
Functional Support is geographically located in the United States.
NOTE 17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Our 2021 Notes are guaranteed by virtually all our domestic subsidiaries, all of which are wholly owned. The guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information pursuant to SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
CONDENSED CONSOLIDATING UNAUDITED BALANCE SHEETS
 
 
September 30, 2014
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
64,414

 
$
356,406

 
$
61,545

 
$

 
$
482,365

Property and equipment, net
 

 
1,136,242

 
110,302

 

 
1,246,544

Goodwill
 

 
597,458

 
4,381

 

 
601,839

Deferred financing costs, net
 
11,798

 

 

 

 
11,798

Intercompany notes and accounts receivable and investment in subsidiaries
 
3,227,598

 
1,420,405

 
38,537

 
(4,686,540
)
 

Other assets
 

 
51,635

 
12,465

 

 
64,100

TOTAL ASSETS
 
$
3,303,810

 
$
3,562,146

 
$
227,230

 
$
(4,686,540
)
 
$
2,406,646

Liabilities and equity:
 

 

 

 

 
 
Current liabilities
 
$
11,456

 
$
179,813

 
$
26,432

 
$

 
$
217,701

Long-term debt and capital leases, less current portion
 
758,565

 

 

 

 
758,565

Intercompany notes and accounts payable
 
1,162,648

 
2,690,370

 
123,954

 
(3,976,972
)
 

Deferred tax liabilities
 
248,414

 
4,570

 
(2,141
)
 

 
250,843

Other long-term liabilities
 
1,188

 
56,612

 
181

 

 
57,981

Equity
 
1,121,539

 
630,781

 
78,804

 
(709,568
)
 
1,121,556

TOTAL LIABILITIES AND EQUITY
 
$
3,303,810

 
$
3,562,146

 
$
227,230

 
$
(4,686,540
)
 
$
2,406,646



22


CONDENSED CONSOLIDATING BALANCE SHEETS
 
 
December 31, 2013
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
50,321

 
$
398,188

 
$
57,644

 
$

 
$
506,153

Property and equipment, net
 

 
1,244,216

 
121,430

 

 
1,365,646

Goodwill
 

 
597,457

 
27,418

 

 
624,875

Deferred financing costs, net
 
13,897

 

 

 

 
13,897

Intercompany notes and accounts receivable and investment in subsidiaries
 
3,421,607

 
1,364,174

 
12,939

 
(4,798,720
)
 

Other assets
 

 
34,278

 
42,621

 

 
76,899

TOTAL ASSETS
 
$
3,485,825

 
$
3,638,313

 
$
262,052

 
$
(4,798,720
)
 
$
2,587,470

Liabilities and equity:
 

 

 

 

 
 
Current liabilities
 
$
26,097

 
$
182,497

 
$
23,750

 
$

 
$
232,344

Long-term debt and capital leases, less current portion
 
763,981

 

 

 

 
763,981

Intercompany notes and accounts payable
 
1,162,648

 
2,667,943

 
97,050

 
(3,927,641
)
 

Deferred tax liabilities
 
280,828

 
4,643

 
(1,819
)
 
801

 
284,453

Other long-term liabilities
 
1,195

 
54,486

 
(82
)
 

 
55,599

Equity
 
1,251,076

 
728,744

 
143,153

 
(871,880
)
 
1,251,093

TOTAL LIABILITIES AND EQUITY
 
$
3,485,825

 
$
3,638,313

 
$
262,052

 
$
(4,798,720
)
 
$
2,587,470


CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS
 
 
Three Months Ended September 30, 2014
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Revenues
 
$

 
$
340,496

 
$
30,163

 
$
(4,861
)
 
$
365,798

Direct operating expense
 

 
252,747

 
21,115

 
(1,750
)
 
272,112

Depreciation and amortization expense
 

 
47,451

 
3,473

 

 
50,924

General and administrative expense
 
231

 
62,660

 
5,391

 
(3,058
)
 
65,224

Impairment expense
 

 
60,792

 

 

 
60,792

Operating income (loss)
 
(231
)
 
(83,154
)
 
184

 
(53
)
 
(83,254
)