10-Q 1 keg10-q3312014.htm 10-Q KEG 10-Q 3/31/2014
 
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 March 31, 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 April 28, 2014, the number of outstanding shares of common stock of the registrant was 153,392,051.
 



KEY ENERGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 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 “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.
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)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,949

 
$
28,306

Accounts receivable, net of allowance for doubtful accounts of $1,212 and $766, respectively
320,722

 
348,966

Inventories
38,879

 
32,335

Other current assets
98,527

 
96,546

Total current assets
499,077

 
506,153

Property and equipment
2,625,702

 
2,606,738

Accumulated depreciation
(1,282,249
)
 
(1,241,092
)
Property and equipment, net
1,343,453

 
1,365,646

Goodwill
623,233

 
624,875

Other intangible assets, net
37,845

 
41,146

Deferred financing costs, net
13,198

 
13,897

Other assets
34,821

 
35,753

TOTAL ASSETS
$
2,551,627

 
$
2,587,470

LIABILITIES AND EQUITY

 

Current liabilities:

 

Accounts payable
$
64,671

 
$
58,826

Other current liabilities
151,299

 
169,945

Current portion of long-term debt

 
3,573

Total current liabilities
215,970

 
232,344

Long-term debt
763,843

 
763,981

Workers' compensation, vehicular and health insurance liabilities
30,112

 
29,944

Deferred tax liabilities
282,324

 
284,453

Other non-current liabilities
25,709

 
25,655

Commitments and contingencies

 

Equity:

 

Common stock, $0.10 par value; 200,000,000 shares authorized, 153,403,019 and 152,331,006 shares issued and outstanding
15,340

 
15,233

Additional paid-in capital
952,939

 
953,306

Accumulated other comprehensive loss
(20,679
)
 
(15,414
)
Retained earnings
286,069

 
297,968

Total equity
1,233,669

 
1,251,093

TOTAL LIABILITIES AND EQUITY
$
2,551,627

 
$
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
 
March 31,
 
2014
 
2013
REVENUES
$
356,141

 
$
428,449

COSTS AND EXPENSES:
 
 
 
Direct operating expenses
258,302

 
299,182

Depreciation and amortization expense
51,095

 
54,193

General and administrative expenses
52,866

 
63,245

Operating income (loss)
(6,122
)
 
11,829

Interest expense, net of amounts capitalized
13,554

 
13,804

Other income, net
(69
)
 
(1,223
)
Loss before income taxes
(19,607
)
 
(752
)
Income tax benefit
7,708

 
566

Net loss
(11,899
)
 
(186
)
Income attributable to noncontrolling interest

 
88

LOSS ATTRIBUTABLE TO KEY
$
(11,899
)
 
$
(274
)
Loss per share attributable to Key:
 
 
 
Basic and diluted
$
(0.08
)
 
$

Weighted average shares outstanding:
 
 
 
Basic and diluted
152,927

 
151,967

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
 
March 31,
 
2014
 
2013
NET LOSS
$
(11,899
)
 
$
(186
)
Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation loss
(5,265
)
 
(1,518
)
COMPREHENSIVE INCOME LOSS
(17,164
)
 
(1,704
)
Comprehensive loss attributable to noncontrolling interest

 
590

COMPREHENSIVE LOSS ATTRIBUTABLE TO KEY
$
(17,164
)
 
$
(1,114
)
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)
 
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(11,899
)
 
$
(186
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation and amortization expense
51,095

 
54,193

Bad debt expense
332

 
1,203

Accretion of asset retirement obligations
145

 
159

Loss from equity method investments
70

 
128

Amortization of deferred financing costs and premium
560

 
659

Deferred income tax benefit
(6,541
)
 
(377
)
Capitalized interest

 
(137
)
Gain on disposal of assets, net
(319
)
 

Share-based compensation
3,101

 
4,947

Excess tax benefit from share-based compensation
1,210

 
1,402

Changes in working capital:

 

Accounts receivable
27,519

 
(2,959
)
Other current assets
(5,292
)
 
(5,308
)
Accounts payable, accrued interest and accrued expenses
(15,046
)
 
(39,926
)
Share-based compensation liability awards
1,563

 
1,017

Other assets and liabilities
(804
)
 
4,747

Net cash provided by operating activities
45,694

 
19,562

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Capital expenditures
(28,525
)
 
(37,144
)
Proceeds from sale of fixed assets
1,174

 
374

Proceeds from sale of assets held for sale
600

 

Restricted funds held in escrow

 
(14,615
)
Net cash used in investing activities
(26,751
)
 
(51,385
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt
(3,573
)
 

Repayments of capital lease obligations

 
(264
)
Proceeds from borrowings on revolving credit facility
70,000

 
95,000

Repayments on revolving credit facility
(70,000
)
 
(65,000
)
Payment of deferred financing costs

 
(46
)
Repurchases of common stock
(2,151
)
 
(2,462
)
Excess tax expense from share-based compensation
(1,210
)
 
(1,402
)
Net cash provided by (used in) financing activities
(6,934
)
 
25,826

Effect of changes in exchange rates on cash
634

 
(52
)
Net increase (decrease) in cash and cash equivalents
12,643

 
(6,049
)
Cash and cash equivalents, beginning of period
28,306

 
45,949

Cash and cash equivalents, end of period
$
40,949

 
$
39,900


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 three months ended March 31, 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 or not yet adopted in this report.

7


NOTE 3. ACQUISITION OF NONCONTROLLING INTERESTS

Geostream. On October 31, 2008, we acquired a 26% interest in OOO Geostream Services Group (“Geostream”), a limited liability company incorporated in the Russian Federation that provides a wide range of drilling, workover and reservoir engineering services for $17.4 million. On September 1, 2009, we acquired an additional 24% interest for $16.4 million, which brought our total investment in Geostream to 50% and provided us a controlling interest with representation on Geostream's board of directors. We accounted for the second investment as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the initial acquisition date, with the portion outside of our control forming a noncontrolling interest. On April 9, 2013, we completed the acquisition of the 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 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 three months ended March 31, 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

 

 

 
(5,265
)
 

 

 
(5,265
)
Common stock purchases
(276
)
 
(28
)
 
(2,123
)
 

 

 

 
(2,151
)
Share-based compensation
1,348

 
135

 
2,966

 

 

 

 
3,101

Tax benefits from share-based compensation

 

 
(1,210
)
 

 

 

 
(1,210
)
Net loss

 

 

 

 
(11,899
)
 

 
(11,899
)
BALANCE AT MARCH 31, 2014
153,403

 
$
15,340

 
$
952,939

 
$
(20,679
)
 
$
286,069

 
$

 
$
1,233,669


A reconciliation of the total carrying amount of our equity accounts for the three months ended March 31, 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

 

 

 
(840
)
 

 
(678
)
 
(1,518
)
Common stock purchases
(299
)
 
(31
)
 
(2,431
)
 

 

 

 
(2,462
)
Share-based compensation
1,580

 
158

 
3,415

 

 

 

 
3,573

Tax benefits from share-based compensation

 

 
(1,402
)
 

 

 

 
(1,402
)
Net income (loss)

 

 

 

 
(274
)
 
88

 
(186
)
BALANCE AT MARCH 31, 2013
152,351

 
$
15,235

 
$
924,714

 
$
(6,988
)
 
$
319,462

 
$
32,914

 
$
1,285,337


8



NOTE 5. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Other current assets:
 
 
 
Deferred tax assets
$
15,755

 
$
11,707

Prepaid current assets
26,695

 
28,435

Reinsurance receivable
9,389

 
9,113

VAT asset
21,279

 
21,683

Other
25,409

 
25,608

Total
$
98,527

 
$
96,546


The table below presents comparative detailed information about other non-current assets at March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Other non-current assets:
 
 
 
 Deferred tax assets
$
22,292

 
$
22,313

 Reinsurance receivable
9,788

 
9,397

 Deposits
1,355

 
1,533

 Equity method investments
965

 
962

 Other
421

 
1,548

Total
$
34,821

 
$
35,753

The table below presents comparative detailed information about other current liabilities at March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Other current liabilities:
 
 
 
Accrued payroll, taxes and employee benefits
$
34,273

 
$
34,956

Accrued operating expenditures
38,255

 
36,573

Income, sales, use and other taxes
30,613

 
37,064

Self-insurance reserve
31,964

 
32,129

Accrued interest
3,861

 
15,285

Accrued insurance premiums
4,801

 
8,049

Share-based compensation and other liabilities
7,532

 
5,889

Total
$
151,299

 
$
169,945


9


The table below presents comparative detailed information about other non-current liabilities at March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Other non-current liabilities:
 
 
 
Asset retirement obligations
$
12,144

 
$
11,999

Environmental liabilities
6,119

 
6,176

Accrued rent
707

 
853

Accrued sales, use and other taxes
5,394

 
5,552

Other
1,345

 
1,075

Total
$
25,709

 
$
25,655

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

 
$
27,419

 
$
624,875

Impact of foreign currency translation

 
(1,642
)
 
(1,642
)
March 31, 2014
$
597,456

 
$
25,777

 
$
623,233

The components of our other intangible assets as of March 31, 2014 and December 31, 2013 are as follows:
 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Noncompete agreements:
 
 
 
Gross carrying value
$
9,332

 
$
9,332

Accumulated amortization
(7,624
)
 
(7,104
)
Net carrying value
1,708

 
2,228

Patents, trademarks and tradename:

 

Gross carrying value
13,385

 
14,039

Accumulated amortization
(234
)
 
(223
)
Net carrying value
13,151

 
13,816

Customer relationships and contracts:

 

Gross carrying value
100,023

 
100,271

Accumulated amortization
(80,739
)
 
(78,926
)
Net carrying value
19,284

 
21,345

Developed technology:

 

Gross carrying value
7,583

 
7,583

Accumulated amortization
(3,881
)
 
(3,826
)
Net carrying value
3,702

 
3,757

Customer Backlog:
 
 
 
Gross carrying value
779

 
779

Accumulated amortization
(779
)
 
(779
)
Net carrying value

 

Total:
 
 
 
Gross carrying value
131,102

 
132,004

Accumulated amortization
(93,257
)
 
(90,858
)
Net carrying value
$
37,845

 
$
41,146


10



Of our intangible assets at March 31, 2014, $13.0 million is an indefinite-lived tradename and 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
0.5
 
$
1,145

 
$
308

 
$
255

 
$

 
$

 
$

Patents and trademarks
4.2
 
30

 
40

 
40

 
40

 
17

 

Customer relationships and contracts
5.7
 
5,905

 
5,038

 
3,414

 
2,418

 
1,120

 
820

Developed technology
16.8
 
166

 
221

 
221

 
221

 
221

 
221

Total expected intangible asset amortization expense
 
 
$
7,246

 
$
5,607

 
$
3,930

 
$
2,679

 
$
1,358

 
$
1,041

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 March 31, 2014 and 2013, respectively.
NOTE 7. LONG-TERM DEBT
As of March 31, 2014 and December 31, 2013, the components of our long-term debt were as follows:
 
March 31, 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
85,000

 
85,000

Net unamortized premium on debt
3,843

 
3,981

Total debt
763,843

 
767,554

Less current portion

 
(3,573
)
Long-term debt
$
763,843

 
$
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.
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.

11


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 March 31, 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 March 31, 2014.
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

12


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 0.50%.
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 these covenants as of March 31, 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 March 31, 2014, we had borrowings of $85.0 million outstanding under the revolving credit facility, $51.1 million of letters of credit outstanding with borrowing capacity of $170.0 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 2.88% and 2.68% for the three-month periods ended March 31, 2014 and March 31, 2013, respectively.
Letter of Credit Facility
On November 7, 2013, we entered into an uncommitted, unsecured $15.0 million letter of credit facility to be used solely for the issuances of performance letters of credit. As of March 31, 2014, $2.0 million of letters of credit were outstanding under the facility.

13


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:
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Interest income
$
(18
)
 
$
(11
)
Foreign exchange (gain) loss
1,366

 
(925
)
Other, net
(1,417
)
 
(287
)
Total
$
(69
)
 
$
(1,223
)
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 on continuing operations for the three months ended March 31, 2014 and 2013 were 39.3% and 75.3%, 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, 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 March 31, 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 tax expense of less than $0.1 million for the three-month periods ended March 31, 2014 and 2013 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 March 31, 2014 and December 31, 2013, respectively. We believe that it is reasonably possible that $0.5 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 months ended March 31, 2014 and 2013.
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 approximated. We have $0.7 million of other liabilities related to litigation that is deemed probable and reasonably estimated as of March 31, 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.
During the second and third quarter of 2013, three lawsuits with similar allegations of violations of California's wage and hour laws were filed in California. The lawsuits allege failure to pay overtime, failure to pay minimum wages, improper payroll deductions, failure to pay final wages in a timely manner, and violations of the California meal and break period laws, among other claims. We intend to vigorously investigate and defend these actions; however, because these cases are in the early stages, we cannot predict the outcome of these lawsuits at this time and, accordingly, cannot estimate any possible loss or range of loss.

14


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, 2014 and December 31, 2013, we have recorded $62.1 million of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $19.2 million and $18.5 million of insurance receivables as of March 31, 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 March 31, 2014 and December 31, 2013, we have recorded $6.1 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.
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:
 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands, except per share amounts)
Basic and Diluted EPS Calculation:
 
 
 
Numerator
 
 
 
Loss attributable to Key
$
(11,899
)
 
$
(274
)
Denominator
 
 

Weighted average shares outstanding
152,927

 
151,967

Basic and diluted loss per share attributable to Key
$
(0.08
)
 
$

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 loss per share calculations for the three months ended March 31, 2014 and March 31, 2013 exclude the potential exercise of 1.4 million and 1.8 million stock options, respectively, and 0.3 million and 0.4 million SARs, respectively, due to the loss attributable to Key. No events occurred after March 31, 2014 that would materially affect the number of weighted average shares outstanding.
NOTE 12. SHARE-BASED COMPENSATION
We recognized employee share-based compensation expense of $3.1 million and $6.0 million during the three months ended March 31, 2014 and 2013, respectively, and the related income tax benefit recognized was $1.2 million and $2.2 million for the same periods. We did not capitalize any share-based compensation during the three months ended March 31, 2014 and 2013.
The unrecognized compensation cost related to our unvested restricted stock as of March 31, 2014 is estimated to be $16.1 million and is expected to be recognized over a weighted-average period of 1.6 years. We do not have unrecognized cost related to our unvested stock options as of March 31, 2014. No phantom stock was outstanding as of March 31, 2014.

15


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 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 March 31, 2014, the fair value of outstanding performance units was $8.2 million, and is being accreted to compensation expense over the vesting terms of the awards. As of March 31, 2014, the unrecognized compensation cost related to our unvested performance units is estimated to be $5.5 million and is expected to be recognized over a weighted-average period of 1.4 years.
NOTE 13. 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 $8.8 million and $6.6 million for the three-month periods ended March 31, 2014 and 2013, respectively. Receivables outstanding from Anadarko were approximately $3.4 million and $4.9 million as of March 31, 2014 and December 31, 2013, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.
NOTE 14. 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 March 31, 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.

16


 
 
March 31, 2014
 
December 31, 2013
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
Notes receivable - Argentina operations sale
 
$
11,755

 
$
11,755

 
$
12,355

 
$
12,355

Financial liabilities:
 

 

 

 

6.75% Senior Notes
 
$
675,000

 
$
705,375

 
$
675,000

 
$
690,390

8.375% Senior Notes
 

 

 
3,573

 
3,627

Credit Facility revolving loans
 
85,000

 
85,000

 
85,000

 
85,000

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 March 31, 2014 was $675.0 million, and the fair value was $705.4 million (104.5% 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 2013 Credit Facility approximate their carrying values. The carrying and fair values of these loans as of March 31, 2014 were $85.0 million.
NOTE 15. 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.

17


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 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. In addition, we have a technology development and control systems business based in Canada. Also, we operated in Argentina prior to the sale of that business in the third quarter of 2012. We are reporting the results of our former Argentina business as discontinued operations for all periods presented. We provide rig-based services such as the maintenance, workover, recompletion of existing oil wells, completion of newly-drilled wells and plugging and abandonment of wells at the end of their useful lives in each of our international markets.
In addition, in Mexico we provide drilling, coiled tubing, wireline, 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.

18


Functional Support Segment
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, 2014 and 2013 (in thousands):
As of and for the three months ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
U.S.
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
 
$
324,044

 
$
32,097

 
$

 
$

 
$
356,141

Intersegment revenues
 
235

 
2,221

 
542

 
(2,998
)
 

Depreciation and amortization
 
40,703

 
7,904

 
2,488

 

 
51,095

Other operating expenses
 
247,684

 
34,684

 
28,800

 

 
311,168

Operating income (loss)
 
35,657

 
(10,491
)
 
(31,288
)
 

 
(6,122
)
Interest expense, net of amounts capitalized
 

 
2

 
13,552

 

 
13,554

Income (loss) before income taxes
 
36,422

 
(11,948
)
 
(44,081
)
 

 
(19,607
)
Long-lived assets(1)
 
1,635,709

 
311,286

 
282,931

 
(177,376
)
 
2,052,550

Total assets
 
2,841,405

 
474,533

 
(258,378
)
 
(505,933
)
 
2,551,627

Capital expenditures, excluding acquisitions
 
23,960

 
1,874

 
2,691

 


28,525

 
As of and for the three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
U.S.
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
 
$
346,072

 
$
82,377

 
$

 
$

 
$
428,449

Intersegment revenues
 
8,601

 
1,519

 
124

 
(10,244
)
 

Depreciation and amortization
 
44,790

 
6,500

 
2,903

 

 
54,193

Other operating expenses
 
263,007

 
64,003

 
35,417

 

 
362,427

Operating income (loss)
 
38,275

 
11,874

 
(38,320
)
 

 
11,829

Interest expense, net of amounts capitalized
 
1

 
49

 
13,754

 

 
13,804

Income (loss) before income taxes
 
38,209

 
13,056

 
(52,017
)
 

 
(752
)
Long-lived assets(1)
 
1,701,593

 
339,485

 
272,990

 
(168,885
)
 
2,145,183

Total assets
 
2,593,050

 
544,236

 
85,141

 
(461,126
)
 
2,761,301

Capital expenditures, excluding acquisitions
 
23,310

 
10,967

 
2,867

 

 
37,144

(1)
Long lived assets include fixed assets, goodwill, intangibles and other assets.
(2)
Functional Support is geographically located in the United States.

19


NOTE 16. 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
 
 
March 31, 2014
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
(unaudited)
Assets:
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
62,058

 
$
376,446

 
$
60,573

 
$

 
$
499,077

Property and equipment, net
 

 
1,223,635

 
111,255

 
8,563

 
1,343,453

Goodwill
 

 
597,457

 
25,776

 

 
623,233

Deferred financing costs, net
 
13,198

 

 

 

 
13,198

Intercompany notes and accounts receivable and investment in subsidiaries
 
3,378,038

 
1,399,382

 
33,077

 
(4,810,497
)
 

Other assets
 

 
33,654

 
39,012

 

 
72,666

TOTAL ASSETS
 
$
3,453,294

 
$
3,630,574

 
$
269,693

 
$
(4,801,934
)
 
$
2,551,627

Liabilities and equity:
 

 

 

 

 
 
Current liabilities
 
$
12,303

 
$
174,864

 
$
28,803

 
$

 
$
215,970

Long-term debt and capital leases, less current portion
 
763,843

 

 

 

 
763,843

Intercompany notes and accounts payable
 
1,162,648

 
2,675,274

 
108,602

 
(3,946,524
)
 

Deferred tax liabilities
 
279,647

 
4,643

 
(1,966
)
 

 
282,324

Other long-term liabilities
 
1,200

 
54,657

 
(36
)
 

 
55,821

Equity
 
1,233,653

 
721,136

 
134,290

 
(855,410
)
 
1,233,669

TOTAL LIABILITIES AND EQUITY
 
$
3,453,294

 
$
3,630,574

 
$
269,693

 
$
(4,801,934
)
 
$
2,551,627



20


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 March 31, 2014
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Revenues
 
$

 
$
330,475

 
$
32,511

 
$
(6,845
)
 
$
356,141

Direct operating expense
 

 
236,658

 
24,471

 
(2,827
)
 
258,302

Depreciation and amortization expense
 

 
47,763

 
3,109

 
223

 
51,095

General and administrative expense
 
236

 
49,548

 
6,902

 
(3,820
)
 
52,866

Operating loss
 
(236
)
 
(3,494
)
 
(1,971
)
 
(421
)
 
(6,122
)
Interest expense, net of amounts capitalized
 
13,552

 

 
2

 

 
13,554

Other (income) loss, net
 
(671
)
 
(724
)
 
1,309

 
17

 
(69
)
Loss before income taxes
 
(13,117
)
 
(2,770
)
 
(3,282
)
 
(438
)
 
(19,607
)
Income tax (expense) benefit
 

 
5,971

 
(479
)
 
2,216

 
7,708

Net loss
 
(13,117
)
 
3,201

 
(3,761
)
 
1,778

 
(11,899
)
Income attributable to noncontrolling interest
 

 

 

 

 

LOSS ATTRIBUTABLE TO KEY
 
$
(13,117
)
 
$
3,201

 
$
(3,761
)
 
$
1,778

 
$
(11,899
)

21


CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS
 
 
Three Months Ended March 31, 2013
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Revenues
 
$
124

 
$
405,384

 
$
43,490

 
$
(20,549
)
 
$
428,449

Direct operating expense
 

 
286,042

 
30,483

 
(17,343
)
 
299,182

Depreciation and amortization expense
 

 
52,057

 
2,136

 

 
54,193

General and administrative expense
 
254

 
57,821

 
8,852

 
(3,682
)
 
63,245

Operating income (loss)
 
(130
)
 
9,464

 
2,019

 
476

 
11,829

Interest expense, net of amounts capitalized
 
13,891

 
(136
)
 
49

 

 
13,804

Other (income) loss, net
 
(898
)
 
(1,169
)
 
37

 
807

 
(1,223
)
Income (loss) before income taxes
 
(13,123
)
 
10,769

 
1,933

 
(331
)
 
(752
)
Income tax (expense) benefit
 
1,248

 
(883
)
 
201

 

 
566

Net income (loss)
 
(11,875
)
 
9,886

 
2,134

 
(331
)
 
(186
)
Income attributable to noncontrolling interest
 

 

 
88

 

 
88

INCOME (LOSS) ATTRIBUTABLE TO KEY
 
$
(11,875
)
 
$
9,886

 
$
2,046

 
$
(331
)
 
$
(274
)

CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31, 2014
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net cash provided by operating activities
 
$

 
$
44,278

 
$
1,416

 
$

 
$
45,694

Cash flows from investing activities:
 

 

 

 

 
 
Capital expenditures
 

 
(26,912
)
 
(1,613
)
 

 
(28,525
)
Intercompany notes and accounts
 

 
(19,651
)
 

 
19,651

 

Other investing activities, net
 


 
1,774

 

 

 
1,774

Net cash used in investing activities
 

 
(44,789
)
 
(1,613
)
 
19,651

 
(26,751
)
Cash flows from financing activities:
 

 

 

 

 
 
Repayments of long-term debt
 
(3,573
)
 

 

 

 
(3,573
)
Proceeds from borrowings on revolving credit facility
 
70,000

 

 

 

 
70,000

Repayments on revolving credit facility
 
(70,000
)
 

 

 

 
(70,000
)
Repurchases of common stock
 
(2,151
)
 

 

 

 
(2,151
)
Intercompany notes and accounts
 
19,651

 

 

 
(19,651
)
 

Other financing activities, net
 
(1,210
)
 

 

 

 
(1,210
)
Net cash provided by (used in) financing activities
 
12,717

 

 

 
(19,651
)
 
(6,934
)
Effect of changes in exchange rates on cash
 

 

 
634

 

 
634

Net increase (decrease) in cash and cash equivalents
 
12,717

 
(511
)
 
437

 

 
12,643

Cash and cash equivalents at beginning of period
 
23,115

 
788

 
4,403

 

 
28,306

Cash and cash equivalents at end of period
 
$
35,832

 
$
277

 
$
4,840

 
$

 
$
40,949




22


CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31, 2013
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
Net cash provided by operating activities
 
$

 
$
17,509

 
$
2,053

 
$

 
$
19,562

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 


Capital expenditures
 

 
(33,410
)
 
(3,734
)
 

 
(37,144
)
Intercompany notes and accounts
 

 
29,505

 

 
(29,505
)
 

Other investing activities, net
 

 
(14,241
)
 

 

 
(14,241
)
Net cash used in investing activities
 

 
(18,146
)
 
(3,734
)
 
(29,505
)
 
(51,385
)
Cash flows from financing activities:
 
 
 
 
 
 
 

 
 
Repayment of capital lease obligations
 

 
(264
)
 

 

 
(264
)
Proceeds from borrowings on revolving credit facility
 
95,000

 

 

 

 
95,000

Repayments on revolving credit facility
 
(65,000
)
 

 

 

 
(65,000
)
Payment of deferred financing costs
 
(46
)
 

 

 

 
(46
)
Repurchases of common stock
 
(2,462
)
 

 

 

 
(2,462
)
Intercompany notes and accounts
 
(29,505
)
 

 

 
29,505

 

Other financing activities, net
 
(1,402
)
 

 

 

 
(1,402
)
Net cash provided by (used in) financing activities
 
(3,415
)
 
(264
)
 

 
29,505

 
25,826