10-Q 1 a2014q310q.htm 10-Q 2014 Q3 10Q

 
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
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-8182

PIONEER ENERGY SERVICES CORP.
(Exact name of registrant as specified in its charter)
_____________________________________________ 
TEXAS
 
74-2088619
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1250 NE Loop 410, Suite 1000
San Antonio, Texas
 
78209
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (855) 884-0575
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  x    No  o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  o
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
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
   (Do not check if a small 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 x

As of October 15, 2014, there were 63,804,243 shares of common stock, par value $0.10 per share, of the registrant outstanding.
 





PART 1. FINANCIAL INFORMATION
Item 1.
Financial Statements
PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
(audited)
 
(in thousands, except share data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,439

 
$
27,385

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
142,096

 
115,908

Unbilled receivables
44,830

 
49,535

Insurance recoveries
10,539

 
8,607

Income taxes and other
10,847

 
2,310

Deferred income taxes
38,472

 
13,092

Inventory
14,327

 
13,232

Prepaid expenses and other current assets
6,283

 
9,311

Total current assets
293,833

 
239,380

Property and equipment, at cost
1,807,981

 
1,724,124

Less accumulated depreciation
881,590

 
786,467

Net property and equipment
926,391

 
937,657

Intangible assets, net of accumulated amortization of $38.3 million and $32.8 million at September 30, 2014 and December 31, 2013, respectively
26,291

 
32,269

Noncurrent deferred income taxes
3,450

 
1,156

Other long-term assets
14,792

 
19,161

Total assets
$
1,264,757

 
$
1,229,623

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
66,168

 
$
43,718

Current portion of long-term debt
3,672

 
2,847

Deferred revenues
3,244

 
699

Accrued expenses:
 
 
 
Payroll and related employee costs
33,519

 
30,020

Insurance premiums and deductibles
12,029

 
10,940

Insurance claims and settlements
10,539

 
8,607

Interest
1,293

 
12,275

Other
11,015

 
11,727

Total current liabilities
141,479

 
120,833

Long-term debt, less current portion
460,060

 
499,666

Noncurrent deferred income taxes
117,674

 
84,636

Other long-term liabilities
4,669

 
6,055

Total liabilities
723,882

 
711,190

Commitments and contingencies (Note 8)

 

Shareholders’ equity:
 
 
 
Preferred stock, 10,000,000 shares authorized; none issued and outstanding

 

Common stock $.10 par value; 100,000,000 shares authorized; 63,796,447 and 62,534,636 shares outstanding at September 30, 2014 and December 31, 2013, respectively
6,411

 
6,275

Additional paid-in capital
470,695

 
456,812

Treasury stock, at cost; 316,682 and 219,304 shares at September 30, 2014 and December 31, 2013, respectively
(3,027
)
 
(1,895
)
Accumulated earnings
66,796

 
57,241

Total shareholders’ equity
540,875

 
518,433

Total liabilities and shareholders’ equity
$
1,264,757

 
$
1,229,623


See accompanying notes to condensed consolidated financial statements.

2




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Drilling services
$
128,117

 
$
131,033

 
$
373,627

 
$
402,357

Production services
145,150

 
112,946

 
398,486

 
319,646

Total revenues
273,267

 
243,979

 
772,113

 
722,003

Costs and expenses:
 
 
 
 
 
 
 
Drilling services
88,848

 
89,350

 
248,948

 
267,630

Production services
90,250

 
72,115

 
250,507

 
203,184

Depreciation and amortization
46,081

 
47,414

 
137,398

 
141,047

General and administrative
26,613

 
23,691

 
76,372

 
70,350

Gain on sale of fishing and rental services operations
(10,702
)
 

 
(10,702
)
 

Bad debt expense
19

 
35

 
456

 
453

Impairment charges
678

 
9,504

 
678

 
54,292

Total costs and expenses
241,787

 
242,109

 
703,657

 
736,956

Income (loss) from operations
31,480

 
1,870

 
68,456

 
(14,953
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(8,969
)
 
(12,324
)
 
(32,085
)
 
(36,117
)
Loss on extinguishment of debt

 

 
(22,482
)
 

Other
(131
)
 
610

 
4,560

 
(1,460
)
Total other expense
(9,100
)
 
(11,714
)
 
(50,007
)
 
(37,577
)
Income (loss) before income taxes
22,380

 
(9,844
)
 
18,449

 
(52,530
)
Income tax (expense) benefit
(9,927
)
 
3,614

 
(8,894
)
 
19,113

Net income (loss)
$
12,453

 
$
(6,230
)
 
$
9,555

 
$
(33,417
)
 
 
 
 
 
 
 
 
Income (loss) per common share—Basic
$
0.20

 
$
(0.10
)
 
$
0.15

 
$
(0.54
)
 
 
 
 
 
 
 
 
Income (loss) per common share—Diluted
$
0.19

 
$
(0.10
)
 
$
0.15

 
$
(0.54
)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Basic
63,451

 
62,325

 
62,960

 
62,158

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Diluted
65,876

 
62,325

 
65,167

 
62,158


See accompanying notes to condensed consolidated financial statements.

3




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine months ended September 30,
 
2014
 
2013
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
9,555

 
$
(33,417
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
137,398

 
141,047

Allowance for doubtful accounts
408

 
534

Gain on dispositions of property and equipment
(1,589
)
 
(865
)
Stock-based compensation expense
5,761

 
4,692

Amortization of debt issuance costs, discount and premium
2,193

 
2,309

Gain on sale of fishing and rental services operations
(10,702
)
 

Loss on extinguishment of debt
22,482

 

Impairment charges
678

 
54,292

Deferred income taxes
5,395

 
(21,153
)
Change in other long-term assets
8,247

 
(5,554
)
Change in other long-term liabilities
(1,385
)
 
(1,306
)
Changes in current assets and liabilities:
 
 
 
Receivables
(29,428
)
 
(21,353
)
Inventory
(1,094
)
 
(620
)
Prepaid expenses and other current assets
3,030

 
7,330

Accounts payable
11,802

 
(379
)
Deferred revenues
2,545

 
(2,973
)
Accrued expenses
(10,366
)
 
(12,509
)
Net cash provided by operating activities
154,930

 
110,075

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(120,738
)
 
(137,945
)
Proceeds from sale of fishing and rental services operations
15,090

 

Proceeds from sale of property and equipment
7,197

 
6,898

Net cash used in investing activities
(98,451
)
 
(131,047
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Debt repayments
(360,019
)
 
(25,868
)
Proceeds from issuance of debt
320,000

 
40,000

Debt issuance costs
(9,173
)
 
(13
)
Tender premium costs
(15,381
)
 

Proceeds from exercise of options
8,280

 
833

Purchase of treasury stock
(1,132
)
 
(628
)
Net cash provided by (used in) financing activities
(57,425
)
 
14,324

 
 
 
 
Net decrease in cash and cash equivalents
(946
)
 
(6,648
)
Beginning cash and cash equivalents
27,385

 
23,733

Ending cash and cash equivalents
$
26,439

 
$
17,085

 
 
 
 
Supplementary disclosure:
 
 
 
Interest paid
$
41,188

 
$
45,273

Income tax paid
$
3,475

 
$
2,508

 



See accompanying notes to condensed consolidated financial statements.

4




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Business
Pioneer Energy Services Corp. provides drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia. We also provide coiled tubing and wireline services offshore in the Gulf of Mexico.
Our Drilling Services Segment provides contract land drilling services with its fleet of 62 drilling rigs which are currently assigned to the following divisions:
Drilling Division
Rig Count
South Texas
14

West Texas
20

North Dakota
9

Utah
7

Appalachia
4

Colombia
8

 
62

As of September 30, 2014, 57 of our 62 drilling rigs are earning revenues under drilling contracts, 43 of which are under term contracts, and we are actively marketing all of our idle drilling rigs. All eight of our drilling rigs in Colombia are currently working under term contracts that extend through the end of 2014, but we are in discussions with Ecopetrol to extend our term contracts in Colombia. We are currently constructing five new-build 1,500 horsepower AC drilling rigs which we expect to deliver and begin operating under long-term drilling contracts in 2015, with the first two rigs to be deployed during the second quarter, two rigs in the third quarter, and the final rig by the end of the year.
In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with existing or potential clients. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed.
Our Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services and coiled tubing services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. As of September 30, 2014, we have a fleet of 112 well servicing rigs consisting of one hundred two 550 horsepower rigs and ten 600 horsepower rigs, all of which are currently operating or are being actively marketed. We currently provide wireline services and coiled tubing services with a fleet of 123 wireline units and 16 coiled tubing units. On September 17, 2014, we completed the disposition of our fishing and rental services operations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Energy Services Corp. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete

5




financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. We suggest that you read these condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2013.
In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to our recognition of revenues and costs for turnkey contracts, our estimate of the allowance for doubtful accounts, our determination of depreciation and amortization expenses, our estimates of fair value for impairment evaluations, our estimate of deferred taxes, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, and our estimate of compensation related accruals.
In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after September 30, 2014, through the filing of this Form 10-Q, for inclusion as necessary.
Drilling Contracts
Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed. Spot market contracts generally provide for the drilling of a single well and typically permit the client to terminate on short notice. During periods of high rig demand, or for our newly constructed rigs, we enter into longer-term drilling contracts. Currently, we have contracts with original terms of six months to four years in duration. As of September 30, 2014, we have 43 drilling rigs under term contracts, which if not renewed at the end of their terms, will expire as follows:
 
 
 
 
Term Contract Expiration by Period
 
 
Total
Term Contracts
 
Within
6 Months
 
6 Months
to 1 Year
 
1 Year to
18 Months
 
18 Months
to 2 Years
United States
 
35

 
23

 
4

 
4

 
4

Colombia
 
8

 
8

 

 

 

 
 
43

 
31

 
4

 
4

 
4

Unbilled Accounts Receivable
The asset “unbilled receivables” represents revenues we have recognized in excess of amounts billed on drilling contracts and production services completed but not yet invoiced. We typically invoice our clients at 15-day intervals during the performance of daywork drilling contracts and upon completion of the daywork contract. Turnkey and footage drilling contracts are invoiced upon completion of the contract.
Our unbilled receivables totaled $44.8 million at September 30, 2014, of which $0.2 million related to turnkey drilling contract revenues, $38.6 million represented revenue recognized but not yet billed on daywork drilling contracts in progress at September 30, 2014 and $6.0 million related to unbilled receivables for our Production Services Segment.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include items such as insurance, rent deposits and fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Prepaid expenses and other current assets also include the current portion of prepaid taxes in Colombia which are creditable against future income taxes and the current portion of deferred mobilization costs for certain drilling contracts that are recognized on a straight-line basis over the contract term.

6




Property and Equipment
During the nine months ended September 30, 2014, we had capital expenditures of $130.6 million. As of September 30, 2014 and December 31, 2013, capital expenditures incurred for property and equipment not yet placed in service was $67.5 million and $19.4 million, respectively. Capital expenditures during 2014 primarily relate to our five new-build drilling rigs which began construction during 2014, as well as unit additions to our production services fleets. During the nine months ended September 30, 2014 and 2013, we capitalized $0.3 million and $0.9 million, respectively, of interest costs incurred during the construction periods of new-build drilling rigs and other equipment.
We recorded gains on disposition of our property and equipment of $1.6 million and gains of $0.9 million for the nine months ended September 30, 2014 and 2013, respectively, in our drilling and production services costs and expenses. In February 2014, we completed the sale of our trucking assets for a sales price of $4.5 million which included a fleet of 40 trucks and related transportation equipment that we used to transport our drilling rigs to and from drilling sites. By owning our own trucks, we have historically been able to reduce the overall cost and downtime between rig moves. However, with the industry trend toward pad drilling, we have upgraded a number of our drilling rigs in recent years to equip them with walking or skidding systems, which enable the drilling rigs to move between wells in pad drilling, and thus operating our own trucking fleet has become less beneficial. The net book value of the trucking assets sold was $3.4 million, for which we recognized a total gain of $1.1 million. During the second quarter of 2013, we sold two mechanical drilling rigs that were previously idle in our East Texas division, for which we recognized an associated gain of approximately $0.8 million.
As of September 30, 2014, we have identified certain drilling equipment and real estate property which is currently held for sale. During the nine months ended September 30, 2014, we recorded impairment charges of $0.7 million to reduce the carrying value of these assets to their estimated fair value less costs to sell. The total value of this property, which is included in property and equipment in our condensed consolidated balance sheet, is approximately $0.5 million.
We recorded impairment charges on our property and equipment of $9.5 million for the nine months ended September 30, 2013. During the third quarter of 2013, we decided to place eight of our mechanical drilling rigs as held for sale, and we recognized an impairment loss of $9.2 million in order to reduce the carrying value of these assets to their estimated fair value, based on their sales price. The sales of all eight drilling rigs were completed in late October 2013 and we did not incur any additional gain or loss upon the sale of these rigs. We also recorded an impairment of $0.3 million during the third quarter of 2013 in association with our decision to sell certain production services equipment.
We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include significant declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified. For our Production Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for the individual reporting units (well servicing, wireline and coiled tubing). For our Drilling Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for individual drilling rig assets. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we would determine the fair value of the asset group. The amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of these assets. The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management judgment.
Technological advancements and trends in our industry also affect the demand for certain types of equipment. Demand has decreased for certain mechanical and /or lower horsepower drilling rigs, particularly in vertical markets, due to increased demand for drilling rigs that are able to drill horizontally. In addition, oil and gas exploration and production companies have increased the use of "pad drilling" in recent years which enables a series of horizontal wells to be drilled in succession by a walking or skidding drilling rig at a single pad-site location. Pad drilling has improved the productivity of exploration and production activities which could reduce the demand for drilling rigs, particularly those that do not have the ability to walk or skid and to drill horizontal wells. Our drilling rig fleet includes mechanical

7




and lower horsepower rigs that are currently working, but which may have reduced utilization if demand for vertical drilling continues to soften. We performed an impairment evaluation on the mechanical and lower horsepower drilling rigs in our fleet that are currently idle. In order to estimate our future undiscounted cash flows from the use and eventual disposition of these assets, we incorporated probabilities of selling these rigs in the near term, versus working them through the end of their remaining useful lives. Our analysis led us to conclude that no impairment presently exists for these drilling rigs. If the demand for vertical drilling continues to soften and these remaining mechanical and lower horsepower rigs become idle for an extended amount of time, then the probability of a near term sale may increase, which would likely result in an impairment charge, based on the current market value of these drilling rigs. Although we believe the assumptions and estimates used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions.
Intangible Assets
Substantially all of our intangible assets were recorded in connection with the acquisitions of production services businesses and are subject to amortization. We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include significant declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified. For our Production Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for the individual reporting units (well servicing, wireline and coiled tubing). If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we would determine the fair value of the asset group. The amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of these assets. The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management judgment.
Due to several significant adverse factors affecting our coiled tubing services reporting unit, including increased competition in certain coiled tubing markets, turnover of key personnel and lower than anticipated utilization, all of which contributed to a decline in our projected cash flows for the coiled tubing reporting unit, we performed an impairment analysis of our long-lived tangible and intangible assets as of June 30, 2013. We determined that the sum of the estimated future undiscounted net cash flows for our coiled tubing services reporting unit was less than the carrying amount at June 30, 2013. We then performed a valuation of the assets which resulted in a non-cash impairment charge of $3.1 million to reduce our intangible asset carrying value of client relationships. This impairment charge did not have an impact on our liquidity or debt covenants; however, it was a reflection of the increased competition in certain coiled tubing markets where we operate and a decline in our projected cash flows for the coiled tubing reporting unit.
The most significant inputs used in our impairment analysis include the projected utilization and pricing of our coiled tubing services, which are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures. An increase of 1% in either the utilization or pricing assumptions would have resulted in a decrease to our impairment charge for our long-lived intangible assets of approximately $1 million. Similarly, a decrease of 1% in either of these assumptions would have led to an approximate $1 million increase to our impairment charge. Although we believe the assumptions and estimates used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating fair values and performing the impairment test are inherently uncertain and require management judgment.
Our impairment analysis did not result in any impairment charges to our coiled tubing tangible long-lived assets, substantially all of which was related to the 13 coiled tubing units owned at June 30, 2013. As discussed further below, we also recorded a non-cash impairment charge to reduce the carrying value of goodwill to zero.

8




Due to continued increases in competition in certain coiled tubing markets and lower than anticipated operating results, we performed another impairment analysis of our long-lived tangible and intangible assets as of December 31, 2013. We determined that the sum of the estimated future undiscounted net cash flows for our coiled tubing services reporting unit was in excess of the carrying amount and concluded that no impairment existed as of December 31, 2013. The future undiscounted cash flows used in our impairment analysis include projected increases in utilization and pricing from what we have historically experienced. If we fail to meet the projected increases in utilization and pricing for our coiled tubing services, or in the event of significant unfavorable changes in the forecasted cash flows or key assumptions used in our analysis, the most significant of these being the projected utilization and pricing of our coiled tubing services, then we may incur a future impairment. Our coiled tubing services' operating results for the nine months ended September 30, 2014 are meeting our projections.
Goodwill
Goodwill results from business acquisitions and represents the excess of acquisition costs over the fair value of the net assets acquired. In connection with the acquisition of the production services business from Go-Coil, we recorded $41.7 million of goodwill at December 31, 2011, all of which was allocated to the coiled tubing services reporting unit within our Production Services Segment.
We perform a qualitative assessment of goodwill annually as of December 31 or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include a significant adverse change in the economic or business climate, a significant adverse change in legal factors, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel and the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of. In addition, these circumstances could lead to our net book value exceeding our market capitalization which is another indicator of a potential impairment of goodwill.
If our qualitative assessment of goodwill indicates a possible impairment, we test for goodwill impairment using a two-step process. First, the fair value of each reporting unit with goodwill is compared to its carrying value to determine whether an indication of impairment exists. Second, if impairment is indicated, then the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination on the impairment test date. The amount of impairment for goodwill is measured as the excess of the carrying value of the reporting unit over its fair value.
When estimating fair values of a reporting unit for our goodwill impairment test, we use an income approach which provides an estimated fair value based on the reporting unit’s anticipated cash flows that are discounted using a weighted average cost of capital rate. The primary assumptions used in the income approach are estimated cash flows and weighted average cost of capital. Estimated cash flows are primarily based on projected revenues, operating costs and capital expenditures and are discounted at a rate that is based on our weighted average cost of capital and estimated industry average rates for cost of capital. To ensure the reasonableness of the estimated fair value of our reporting units, we consider current industry market multiples and we perform a reconciliation of our total market capitalization to the total estimated fair value of all our reporting units.
Due to several significant adverse factors affecting our coiled tubing services reporting unit, including increased competition in certain coiled tubing markets, turnover of key personnel and lower than anticipated utilization, all of which contributed to a decline in our projected cash flows for the coiled tubing reporting unit, we performed an impairment analysis of our goodwill as of June 30, 2013. We determined that the fair value of our coiled tubing services reporting unit was less than its carrying value, including goodwill, and therefore, we performed the second step of the goodwill impairment test which led us to conclude that there would be no remaining implied fair value attributable to goodwill. Accordingly, we recorded a non-cash impairment charge of $41.7 million to reduce the carrying value of our goodwill to zero. This impairment charge did not have an impact on our liquidity or debt covenants; however, it was a reflection of the increased competition in certain coiled tubing markets where we operate and a decline in our projected cash flows for the coiled tubing reporting unit.

9




The most significant inputs used in our impairment analysis include the projected utilization and pricing of our coiled tubing services and the weighted average cost of capital (discount rate) used in order to calculate the discounted cash flows for the reporting unit. These inputs are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures. We assumed a 13% discount rate to estimate the fair value of the coiled tubing services reporting unit. A decrease in this assumption of 5% would have resulted in a decrease to our goodwill impairment charge of approximately $3.5 million. An increase of 1% in either the utilization or pricing assumptions would have resulted in a decrease to our goodwill impairment charge of approximately $2 million or $3 million, respectively. Although we believe the assumptions and estimates used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating fair values of reporting units and performing the goodwill impairment test are inherently uncertain and require management judgment.
Other Long-Term Assets
Other long-term assets consist of noncurrent prepaid taxes in Colombia which are creditable against future income taxes, debt issuance costs net of amortization, cash deposits related to the deductibles on our workers’ compensation insurance policies and the long-term portion of deferred mobilization costs.
Other Current Liabilities
Our other accrued expenses include accruals for items such as property tax, sales tax, professional and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Our other accrued expenses also consist of the current portion of the Colombian net equity tax.
Other Long-Term Liabilities
Our other long-term liabilities consist of the noncurrent portion of liabilities associated with our long-term compensation plans, deferred mobilization revenues, and other deferred liabilities.
Recently Issued Accounting Standards
Discontinued Operations. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Discontinued Operations (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update, among other things, raises the threshold for a disposal to qualify for discontinued operations accounting and requires additional disclosures about disposals. We chose early adoption of this guidance beginning July 1, 2014.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The standard outlines a single comprehensive model for revenue recognition based on the core principle that a company will recognize revenue when promised goods or services are transferred to clients, in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. We are required to apply this new standard beginning with our first quarterly filing in 2017. We are currently evaluating the potential impact of this guidance, but at this time, do not expect that the adoption of this new standard will have a material effect on our financial position or results of operations.
Reclassifications
Certain amounts in the financial statements for the prior years have been reclassified to conform to the current year’s presentation.

10




2.     Sale of Fishing and Rental Services Operations
On September 17, 2014, we entered into an asset sales agreement with Basic Energy Services L.P. ("Basic") for the sale of our fishing and rental services (“F&R”) operations for total consideration of $16.1 million, subject to certain adjustments. The sales price consisted of $15.1 million of cash received at closing and $1.0 million to be held in escrow for a period of 180 days for potential claims due to Basic. Under the terms of the sales agreement, Basic purchased two real estate locations and all F&R tools and equipment for which we had a total net book value of $4.3 million at the date of sale. Basic also purchased certain other assets and assumed certain liabilities related to our F&R operations. In addition, Basic offered employment to the F&R employees and we agreed to provide transition services to Basic after the close of the transaction. We recognized a $10.7 million gain on the sale of our F&R operations, net of costs directly attributable to the sale. Net of income taxes, the gain was $6.6 million. Cash proceeds from the sale were used to repay long-term debt obligations.
For the nine months ended September 30, 2014, F&R operations represented approximately 1% of our consolidated revenues and approximately 1% of our consolidated pretax income. Total assets for F&R at the date of sale represented less than 1% of our total assets as of September 30, 2014. The sale of the F&R operations does not represent a strategic shift for our company and will not have a significant effect on our operating results. Therefore, the F&R operations does not represent discontinued operations based on the criteria of ASU No. 2014-08, "Discontinued Operations."
Balance sheet information for the F&R operations is as follows (amounts in thousands):
 
December 31, 2013
Current assets
$
1,877

Property and equipment, less accumulated depreciation
6,132

   Total assets
$
8,009

 
 
Current liabilities
$
919

Long term liabilities
1,452

   Total liabilities
$
2,371

Statement of operations information for the F&R operations is as follows (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
2014
 
2013
 
2014
 
2013
Revenues
$
2,603

 
$
3,072

 
$
7,828

 
$
9,627

Operating costs
1,686

 
2,082

 
5,097

 
6,217

F&R margin
$
917

 
$
990

 
$
2,731

 
$
3,410

 
 
 
 
 
 
 
 
Income (loss) before income taxes
$
52

 
$
(51
)
 
$
(162
)
 
$
238


11




3.     Debt
Our debt consists of the following (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
Senior secured revolving credit facility
$
40,000

 
$
80,000

Senior notes
423,645

 
419,586

Other
87

 
2,927

 
463,732

 
502,513

Less current portion
(3,672
)
 
(2,847
)
 
$
460,060

 
$
499,666

Senior Secured Revolving Credit Facility
We have a credit agreement, as amended on September 22, 2014, with Wells Fargo Bank, N.A. and a syndicate of lenders which provides for a senior secured revolving credit facility, with sub-limits for letters of credit and swing-line loans, of up to an aggregate principal amount of $350 million, all of which matures on September 22, 2019 (the “Revolving Credit Facility”). In addition, at our request, and with the lenders' consent, the aggregate commitments of the lenders under the Revolving Credit Facility may be increased up to an additional $100 million provided that no default exists, all representations and warranties are true and correct, and compliance with financial covenants as set forth in the Revolving Credit Facility is met immediately prior to and after giving effect thereto. The Revolving Credit Facility contains customary mandatory prepayments from the proceeds of certain asset dispositions or debt issuances, which are applied to reduce outstanding revolving and swing-line loans and letter of credit exposure, but in no event will reduce the borrowing availability under the Revolving Credit Facility to less than $350 million.
Borrowings under the Revolving Credit Facility bear interest, at our option, at the LIBOR rate or at the bank prime rate, plus an applicable per annum margin that ranges from 2.0% to 3.0% and 1.0% to 2.0%, respectively. The LIBOR margin and bank prime rate margin currently in effect are 2.25% and 1.25%, respectively. The Revolving Credit Facility requires a commitment fee due quarterly based on the average daily unused amount of the commitments of the lenders, a fronting fee due for each letter of credit issued, and a quarterly letter of credit fee due based on the average undrawn amount of letters of credit outstanding during such period.
Our obligations under the Revolving Credit Facility are secured by substantially all of our domestic assets (including equity interests in Pioneer Global Holdings, Inc. and 65% of the outstanding equity interests of any first-tier foreign subsidiaries owned by Pioneer Global Holdings, Inc., but excluding any equity interest in, and any assets of, Pioneer Services Holdings, LLC) and are guaranteed by certain of our domestic subsidiaries, including Pioneer Global Holdings, Inc. Borrowings under the Revolving Credit Facility are available for acquisitions, working capital and other general corporate purposes.
As of September 30, 2014, we had $40.0 million outstanding under our Revolving Credit Facility and $14.0 million in committed letters of credit, which resulted in borrowing availability of $296.0 million under our Revolving Credit Facility. There are no limitations on our ability to access this borrowing capacity provided there is no default, all representations and warranties are true and correct, and compliance with financial covenants under the Revolving Credit Facility is maintained. At September 30, 2014, we were in compliance with our financial covenants under the Revolving Credit Facility. Our total consolidated leverage ratio was 1.9 to 1.0, our senior consolidated leverage ratio was 0.2 to 1.0, and our interest coverage ratio was 5.8 to 1.0. The financial covenants contained in our Revolving Credit Facility include the following:
A maximum total consolidated leverage ratio that cannot exceed 4.00 to 1.00;
A maximum senior consolidated leverage ratio, which excludes unsecured and subordinated debt, that cannot exceed 2.50 to 1.00;
A minimum interest coverage ratio that cannot be less than 2.50 to 1.00; and
If our senior consolidated leverage ratio is greater than 2.00 to 1.00 at the end of any fiscal quarter, our minimum asset coverage ratio cannot be less than 1.00 to 1.00.

12




The Revolving Credit Facility does not restrict capital expenditures or repurchases of capital stock as long as (a) no event of default exists under the Revolving Credit Facility or would result from such capital expenditures or repurchases of capital stock, (b) after giving effect to such capital expenditures or repurchases of capital stock there is availability under the Revolving Credit Facility equal to or greater than $25 million and (c) the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is less than 2.00 to 1.00. In addition, the repurchase of capital stock requires, on a pro-forma basis, compliance with the maximum total leverage ratio and minimum interest coverage ratio as set forth in the Revolving Credit Facility, both before and after giving effect to such repurchase. If the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is equal to or greater than 2.00 to 1.00, then capital expenditures are limited to $100 million for the fiscal year. The capital expenditure threshold may be increased by any unused portion of the capital expenditure threshold from the immediate preceding fiscal year up to $30 million.
At September 30, 2014, our senior consolidated leverage ratio was not greater than 2.00 to 1.00 and therefore, we were not subject to the capital expenditure threshold restrictions listed above.
The Revolving Credit Facility has additional restrictive covenants that, among other things, limit the incurrence of additional debt, investments, liens, dividends, acquisitions, prepayments of indebtedness, asset dispositions, mergers and consolidations, transactions with affiliates, hedging contracts, sale leasebacks and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, judgment defaults in excess of specified amounts, failure of any guaranty or security document supporting the credit agreement and change of control.
On September 22, 2014, the Revolving Credit Facility was amended to increase the amount of unsecured debt that we could incur, allowing us to use additional borrowings under the Revolving Credit Facility for the redemption of the remaining $125.0 million aggregate principal amount of our 2010 and 2011 Senior Notes, as described in the following section.
Senior Notes
On March 11, 2010, we issued $250 million of unregistered senior notes with a coupon interest rate of 9.875% that are due in 2018 (the “2010 Senior Notes”). The 2010 Senior Notes were sold with an original issue discount of $10.6 million that was based on 95.75% of their face value, which will result in an effective yield to maturity of approximately 10.677%. On March 11, 2010, we received $234.8 million of net proceeds from the issuance of the 2010 Senior Notes after deductions were made for the $10.6 million of original issue discount and $4.6 million for underwriters’ fees and other debt offering costs. The net proceeds were used to repay a portion of the borrowings outstanding under our Revolving Credit Facility.
On November 21, 2011, we issued $175 million of unregistered Senior Notes (the “2011 Senior Notes”). The 2011 Senior Notes have the same terms and conditions as the 2010 Senior Notes. The 2011 Senior Notes were sold with an original issue premium of $1.8 million that was based on 101% of their face value, which will result in an effective yield to maturity of approximately 9.66%. On November 21, 2011, we received $172.7 million of net proceeds from the issuance of the 2011 Senior Notes, including the original issue premium, and after $4.1 million of deductions were made for underwriters' fees and other debt offering costs. A portion of the net proceeds were used to fund the acquisition of the coiled tubing business in December 2011.
The 2010 and 2011 Senior Notes mature on March 15, 2018 with interest due semi-annually in arrears on March 15 and September 15 of each year. We have the option to redeem the 2010 and 2011 Senior Notes, in whole or in part, at any time (on or after March 15, 2014) in each case at the redemption price specified in the Indenture dated March 11, 2010 (the “2010 and 2011 Indenture”) plus any accrued and unpaid interest and any additional interest thereon to the date of redemption.

13




In order to reduce our overall interest expense and lengthen the overall maturity of our senior indebtedness, on March 4, 2014, we announced a tender offer for up to an aggregate principal amount of $300 million of our 2010 and 2011 Senior Notes, to be funded by proceeds from the issuance of our 2014 Senior Notes, which is further described below. The tender offer for our 2010 and 2011 Senior Notes expired on March 31, 2014, at which time we had received valid tenders with respect to approximately $99.5 million of the 2010 and 2011 Senior Notes. The holders of the $99.5 million of 2010 and 2011 Senior Notes tendered received the total consideration of $1,055.08 for each $1,000 principal amount, the premium portion of which totaled approximately $5.5 million, which was recorded as loss on debt extinguishment during the three months ended March 31, 2014. Additionally, we wrote off $1.2 million related to the net unamortized discount and $1.2 million of unamortized debt costs associated with the $99.5 million of notes tendered, for a total loss on extinguishment of $7.9 million.
On April 1, 2014, we announced the redemption of $200.5 million in aggregate principal amount of the 2010 and 2011 Senior Notes (the "Redemption") which occurred on May 1, 2014 (the "Redemption Date") at a redemption price equal to 104.938% of the principal amount thereof, plus accrued and unpaid interest on the notes redeemed to, but not including, the Redemption Date. The redemption of these notes was primarily funded by the remaining net proceeds from the issuance of our 2014 Senior Notes described below, and through cash on hand. Upon redemption, we recognized a loss on debt extinguishment of approximately $14.6 million during the three months ended June 30, 2014, which included the redemption premium of $9.9 million, $2.4 million of net unamortized discount and $2.3 million of unamortized debt issuance costs associated with the Redemption.
On September 23, 2014, we announced the redemption of the remaining $125.0 million in aggregate principal amount of the 2010 and 2011 Senior Notes (the "Final Redemption") which will occur on October 23, 2014 (the "Final Redemption Date") at a redemption price equal to 104.938% of the principal amount thereof, plus accrued and unpaid interest on the notes redeemed through, but not including, the Final Redemption Date. The redemption of these 2010 and 2011 Senior Notes will be primarily funded by proceeds from our Revolving Credit Facility and through cash on hand. We will recognize a loss on debt extinguishment of approximately $8.8 million during the three months ending December 31, 2014, which includes the redemption premium of $6.2 million, $1.3 million of net unamortized discount and $1.3 million of unamortized debt issuance costs associated with the Final Redemption.
On March 18, 2014, we issued $300 million of unregistered senior notes with a coupon interest rate of 6.125% that are due in 2022 (the “2014 Senior Notes”). The 2014 Senior Notes were sold at 100% of their face value. On March 18, 2014, we received $293.9 million of net proceeds from the issuance of the 2014 Senior Notes after deductions were made for the $6.1 million for underwriters’ fees and other debt offering costs. The net proceeds were used to fund the tender and redemption of 2010 and 2011 Senior Notes in March and May 2014.
The 2014 Senior Notes will mature on March 15, 2022 with interest due semi-annually in arrears on March 15 and September 15 of each year. We have the option to redeem the 2014 Senior Notes, in whole or in part, at any time on or after March 15, 2017 in each case at the redemption price specified in the Indenture dated March 18, 2014 (the “2014 Indenture”) plus any accrued and unpaid interest and any additional interest (as defined in the 2014 Indenture) thereon to the date of redemption. Prior to March 15, 2017, we may also redeem the 2014 Senior Notes, in whole or in part, at a “make-whole” redemption price specified in the 2014 Indenture, plus any accrued and unpaid interest and any additional interest thereon to the date of redemption. In addition, prior to March 15, 2017, we may, on one or more occasions, redeem up to 35% of the aggregate principal amount of the 2014 Senior Notes at a redemption price equal to 106.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the 2014 Senior Notes remains outstanding after the occurrence of such redemption and that the redemption occurs within 120 days of the date of the closing of such equity offering.
In accordance with a registration rights agreement with the holders of our 2010 Senior Notes, 2011 Senior Notes and 2014 Senior Notes (collectively, the "Senior Notes"), we filed exchange offer registration statements on Form S-4 with the Securities and Exchange Commission that became effective on September 2, 2010, June 8, 2012 and October 2, 2014, respectively. These exchange offer registration statements enabled the holders of our Senior Notes to exchange their senior notes for publicly registered notes with substantially identical terms. References to the “Senior Notes” herein include the senior notes issued in the exchange offers.

14




The Senior Notes have a total carrying value of $423.6 million, which represents the $425.0 million total face value outstanding net of the $1.7 million unamortized portion of original issue discount and $0.3 million unamortized portion of original issue premium.
If we experience a change of control (as defined in the 2010 and 2011 Indenture and the 2014 Indenture (collectively, the "Indentures")), we will be required to make an offer to each holder of the Senior Notes to repurchase all or any part of the Senior Notes at a purchase price equal to 101% of the principal amount of each Senior Note, plus accrued and unpaid interest, if any to the date of repurchase. If we engage in certain asset sales, within 365 days of such sale we will be required to use the net cash proceeds from such sale, to the extent we do not reinvest those proceeds in our business, to make an offer to repurchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, plus accrued and unpaid interest to the repurchase date.
The Indentures, among other things, limit our ability and the ability of certain of our subsidiaries to:
pay dividends on stock, repurchase stock, redeem subordinated indebtedness or make other restricted payments and investments;
incur, assume or guarantee additional indebtedness or issue preferred or disqualified stock;
create liens on our or their assets;
enter into sale and leaseback transactions;
sell or transfer assets;
pay dividends, engage in loans, or transfer other assets from certain of our subsidiaries;
consolidate with or merge with or into, or sell all or substantially all of our properties to any other person;
enter into transactions with affiliates; and
enter into new lines of business.
We were in compliance with these covenants as of September 30, 2014. The Senior Notes are not subject to any sinking fund requirements. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing domestic subsidiaries and by certain of our future domestic subsidiaries. (See Note 9, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements.)
Other Debt
Our other debt consists of a capital lease obligation for equipment with monthly payments due through November 2016.
Debt Issuance Costs
Costs incurred in connection with the Revolving Credit Facility were capitalized and are being amortized using the straight-line method over the term of the Revolving Credit Facility which matures in September 2019. Costs incurred in connection with the issuance of our Senior Notes were capitalized and are being amortized using the straight-line method (which approximates the use of the interest method) over the term of the Senior Notes which mature in March 2018 and 2022.
Capitalized debt costs related to the issuance of our long-term debt were $8.9 million and $7.5 million as of September 30, 2014 and December 31, 2013, respectively. We recognized $1.5 million and $1.6 million of associated amortization during the nine months ended September 30, 2014 and 2013, respectively, which excludes the $3.5 million of debt costs recognized as loss on extinguishment of debt. In September 2014, we recognized additional amortization expense related to the write-off of $0.1 million of debt issuance costs representing the portion of unamortized debt issuance costs associated with one syndicate lender that is no longer participating in the Revolving Credit Facility as amended on September 22, 2014.

15




4.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value.
At September 30, 2014 and December 31, 2013, our financial instruments consist primarily of cash, trade and other receivables, trade payables and long-term debt. The carrying value of cash, trade and other receivables, and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.
The fair value of our long-term debt is estimated using a discounted cash flow analysis, based on rates that we believe we would currently pay for similar types of debt instruments. This discounted cash flow analysis is based on inputs defined by ASC Topic 820 as level 2 inputs, which are observable inputs for similar types of debt instruments. The following table presents the supplemental fair value information about long-term debt at September 30, 2014 and December 31, 2013 (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt
$
463,732

 
$
468,656

 
$
502,513

 
$
538,074

5.
Earnings Per Common Share
The following table presents a reconciliation of the numerators and denominators of the basic income per share and diluted income per share computations (amounts in thousands, except per share data):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Basic
 
 
 
 
 
 
 
Net income (loss)
$
12,453

 
$
(6,230
)
 
$
9,555

 
$
(33,417
)
 
 
 
 
 
 
 
 
Weighted-average shares
63,451

 
62,325

 
62,960

 
62,158

 
 
 
 
 
 
 
 
Income (loss) per common share—Basic
$
0.20

 
$
(0.10
)
 
$
0.15

 
$
(0.54
)
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Net income (loss)
$
12,453

 
$
(6,230
)
 
$
9,555

 
$
(33,417
)
 
 
 
 
 
 
 
 
Weighted-average shares
 
 
 
 
 
 
 
Outstanding
63,451

 
62,325

 
62,960

 
62,158

Diluted effect of outstanding stock options, restricted stock and restricted stock unit awards
2,425

 

 
2,207

 

 
65,876

 
62,325

 
65,167

 
62,158

 
 
 
 
 
 
 
 
Income (loss) per common share—Diluted
$
0.19

 
$
(0.10
)
 
$
0.15

 
$
(0.54
)
Potentially dilutive stock options, restricted stock and restricted stock unit awards representing a total of 735,624 and 1,692,549 shares of common stock for the three and nine months ended September 30, 2014, respectively, and 5,510,520 and 5,467,291 for the three and nine months ended September 30, 2013, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect.

16




6.
Stock-Based Compensation Plans
We grant stock option and restricted stock awards with vesting based on time of service conditions. We also grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. We recognize compensation cost for stock option, restricted stock and restricted stock unit awards based on the fair value estimated in accordance with ASC Topic 718, Compensation—Stock Compensation. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the compensation expense recognized for stock option, restricted stock and restricted stock unit awards during the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Stock option awards
$
311

 
$
412

 
$
964

 
$
1,359

Restricted stock awards
127

 
157

 
421

 
420

Restricted stock unit awards
1,496

 
1,059

 
4,376

 
2,913

 
$
1,934

 
$
1,628

 
$
5,761

 
$
4,692

Stock Options
We grant stock option awards which generally become exercisable over a three-year period and expire ten years after the date of grant. Our stock-based compensation plans require that all stock option awards have an exercise price that is not less than the fair market value of our common stock on the date of grant. We issue shares of our common stock when vested stock option awards are exercised.
We estimate the fair value of each option grant on the date of grant using a Black-Scholes option pricing model. There were no stock options granted during the three months ended September 30, 2014 or 2013. The following table summarizes the assumptions used in the Black-Scholes option pricing model based on a weighted-average calculation for the nine months ended September 30, 2014 and 2013:
 
Nine months ended September 30,
 
2014
 
2013
Expected volatility
66
%
 
66
%
Risk-free interest rates
1.7
%
 
1.0
%
Expected life in years
5.49

 
5.53

Options granted
221,440
 
220,656
Grant-date fair value
$4.87
 
$4.36
The assumptions used in the Black-Scholes option pricing model are based on multiple factors, including historical exercise patterns of homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and volatility of our stock price. As we have not declared dividends since we became a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an optionee actually realizes will be at or near the value we have estimated using the Black-Scholes options-pricing model.
During the three and nine months ended September 30, 2014, 690,877 and 906,277 stock options were exercised at a weighted-average exercise price of $9.70 and $9.14, respectively. During the three and nine months ended September 30, 2013, 11,600 and 174,467 stock options were exercised at a weighted-average exercise price of $3.84 and $4.77, respectively. We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of our stock on the date of exercise over the exercise price of the options. In accordance with ASC Topic 718, we reported all excess tax benefits resulting from the exercise of stock options as financing cash flows in our condensed consolidated statement of cash flows.

17




Restricted Stock
Historically, we have generally granted restricted stock awards that vest over a three-year period with a fair value based on the closing price of our common stock on the date of the grant. However, beginning in 2013, we began granting restricted stock awards with a vesting period of one year. When restricted stock awards are granted, or when restricted stock unit awards are converted to restricted stock, shares of our common stock are considered issued, but subject to certain restrictions. We did not grant any restricted stock awards during the three months ended September 30, 2014 or 2013. During the nine months ended September 30, 2014 and 2013, we granted 32,100 and 61,248 shares of restricted stock awards, with a weighted-average grant-date fair value of $14.33 and $7.57, respectively.
Restricted Stock Units
We grant restricted stock unit awards with vesting based on time of service conditions only (“time-based RSUs”), and we grant restricted stock unit awards with vesting based on time of service, which are also subject to performance and market conditions (“performance-based RSUs”). Shares of our common stock are issued to recipients of restricted stock units only when they have satisfied the applicable vesting conditions.
The following table summarizes the number and weighted-average grant-date fair value of the restricted stock unit awards granted during the three and nine months ended September 30, 2014 and 2013:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Time-based RSUs:
 
 
 
 
 
 
 
Time-based RSUs granted
13,330

 

 
360,665

 
406,027

Weighted-average grant-date fair value
$
13.73

 
$

 
$
8.64

 
$
7.59

 
 
 
 
 
 
 
 
Performance-based RSUs:
 
 
 
 
 
 
 
Performance-based RSUs granted

 

 
321,606

 
346,731

Weighted-average grant-date fair value
$

 
$

 
$
9.90

 
$
8.34

Our time-based RSUs generally vest over a three-year period, with fair values based on the closing price of our common stock on the date of grant.
Our performance-based RSUs generally cliff vest after 39 months from the date of grant and are granted at a target number of issuable shares, for which the final number of shares of common stock is adjusted based on our actual achievement levels that are measured against predetermined performance conditions. The number of shares of common stock awarded will be based upon the Company’s achievement in certain performance conditions, as compared to a predefined peer group, over the performance period, generally three years.
Approximately one-third of the performance-based RSUs granted during 2011, 2012 and 2013, and half of the performance-based RSUs granted during 2014, are subject to a market condition based on total shareholder return, and therefore the fair value of these awards is measured using a Monte Carlo simulation model. Compensation expense for awards with a market condition is reduced only for estimated forfeitures; no adjustment to expense is otherwise made, regardless of the number of shares issued. The remaining performance-based RSUs are subject to performance conditions, based on EBITDA and return on capital employed, and therefore the fair value is based on the closing price of our common stock on the date of grant, applied to the estimated number of shares that will be awarded. Compensation expense ultimately recognized for awards with performance conditions will be equal to the fair value of the restricted stock unit award based on the actual outcome of the service and performance conditions.
In April 2014, we determined that 116.6% of the target number of shares granted during 2011 were actually earned based on the Company’s achievement of certain performance measures, as compared to the predefined peer group, over the performance period from January 1, 2011 through December 31, 2013. The performance-based RSUs granted during 2011 vested and were converted to common stock at the end of April 2014.

18




As of September 30, 2014, we estimated that our actual achievement level for the performance-based RSUs granted during 2012, 2013 and 2014 will be approximately 140%, 100% and 110% of the predetermined performance conditions, respectively.
7.
Segment Information
We have two operating segments referred to as the Drilling Services Segment and the Production Services Segment which is the basis management uses for making operating decisions and assessing performance.
Drilling Services Segment—Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies with its fleet of 62 drilling rigs which are currently assigned to the following divisions:
Drilling Division
Rig Count
South Texas
14

West Texas
20

North Dakota
9

Utah
7

Appalachia
4

Colombia
8

 
62

Production Services SegmentOur Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services and coiled tubing services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. As of September 30, 2014, we have a fleet of 112 well servicing rigs consisting of one hundred two 550 horsepower rigs and ten 600 horsepower rigs. We provide wireline services and coiled tubing services with a fleet of 123 wireline units and 16 coiled tubing units. On September 17, 2014, we completed the disposition of our fishing and rental services operations.
The following tables set forth certain financial information for our two operating segments and corporate as of and for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
 
As of and for the three months ended September 30, 2014
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
789,103

 
$
411,777

 
$
63,877

 
$
1,264,757

Revenues
$
128,117

 
$
145,150

 
$

 
$
273,267

Operating costs
88,848

 
90,250

 

 
179,098

Segment margin
$
39,269

 
$
54,900

 
$

 
$
94,169

Depreciation and amortization
$
28,728

 
$
16,993

 
$
360

 
$
46,081

Capital expenditures
$
36,249

 
$
16,265

 
$
151

 
$
52,665

 
As of and for the three months ended September 30, 2013
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
818,161

 
$
401,609

 
$
31,831

 
$
1,251,601

Revenues
$
131,033

 
$
112,946

 
$

 
$
243,979

Operating costs
89,350

 
72,115

 

 
161,465

Segment margin
$
41,683

 
$
40,831

 
$

 
$
82,514

Depreciation and amortization
$
30,993

 
$
16,127

 
$
294

 
$
47,414

Capital expenditures
$
17,417

 
$
9,661

 
$
357

 
$
27,435


19




 
As of and for the nine months ended September 30, 2014
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
789,103

 
$
411,777

 
$
63,877

 
$
1,264,757

Revenues
$
373,627

 
$
398,486

 
$

 
$
772,113

Operating costs
248,948

 
250,507

 

 
499,455

Segment margin
$
124,679

 
$
147,979

 
$

 
$
272,658

Depreciation and amortization
$
86,936

 
$
49,478

 
$
984

 
$
137,398

Capital expenditures
$
76,888

 
$
53,094

 
$
596

 
$
130,578

 
As of and for the nine months ended September 30, 2013
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
818,161

 
$
401,609

 
$
31,831

 
$
1,251,601

Revenues
$
402,357

 
$
319,646

 
$

 
$
722,003

Operating costs
267,630

 
203,184

 

 
470,814

Segment margin
$
134,727

 
$
116,462

 
$

 
$
251,189

Depreciation and amortization
$
92,080

 
$
48,139

 
$
828

 
$
141,047

Capital expenditures
$
64,761

 
$
35,895

 
$
1,489

 
$
102,145

The following table reconciles the segment profits reported above to income (loss) from operations as reported on the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Segment margin
$
94,169

 
$
82,514

 
$
272,658

 
$
251,189

Depreciation and amortization
(46,081
)
 
(47,414
)
 
(137,398
)
 
(141,047
)
General and administrative
(26,613
)
 
(23,691
)
 
(76,372
)
 
(70,350
)
Gain on sale of fishing and rental services operations
10,702

 

 
10,702

 

Bad debt expense
(19
)
 
(35
)
 
(456
)
 
(453
)
Impairment charges
(678
)
 
(9,504
)
 
(678
)
 
(54,292
)
Income (loss) from operations
$
31,480

 
$
1,870

 
$
68,456

 
$
(14,953
)
The following table sets forth certain financial information for our international operations in Colombia as of and for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
 
As of and for the three months ended September 30,
 
As of and for the nine months
ended September 30,
 
2014
 
2013
 
2014
 
2013
Identifiable assets
$
150,287

 
$
153,287

 
$
150,287

 
$
153,287

Revenues
$
22,904

 
$
29,959

 
$
70,595

 
$
91,361

Identifiable assets for our international operations in Colombia include five drilling rigs that are owned by our Colombia subsidiary and three drilling rigs that are owned by one of our domestic subsidiaries and leased to our Colombia subsidiary.

20




8.
Commitments and Contingencies
In connection with our operations in Colombia, our foreign subsidiaries have obtained bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. We have guaranteed payments of $41.9 million relating to our performance under these bonds as of September 30, 2014.

The Colombian government is expected to enact a new net-worth tax for all Colombian entities by year end. The proposed tax is expected to be calculated based on an entity’s net equity as of January 1, 2015, and is expected to be assessed annually from 2015 through 2018. Based on our estimate of our Colombian operation's forecasted net equity, we believe our net-worth tax obligation will be approximately $2 million each year from 2015 through 2018. The proposed net worth tax is not expected to be deductible for income tax purposes, which is similar to the net equity tax enacted in 2011.
Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations.
9.
Guarantor/Non-Guarantor Condensed Consolidated Financial Statements
Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all existing domestic subsidiaries, except for Pioneer Services Holdings, LLC. The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Notes, the guarantees or the Indenture.
In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary will pay the holders of its debt and other liabilities, including its trade creditors, before it will be able to distribute any of its assets to us. In the future, any non-U.S. subsidiaries, immaterial subsidiaries and subsidiaries that we designate as unrestricted subsidiaries under the Indenture will not guarantee the Senior Notes. As of September 30, 2014, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of the guarantee arrangements, we are presenting the following condensed consolidated balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries.



21




CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
September 30, 2014
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
19,127

 
(3,123
)
 
10,435

 

 
$
26,439

Receivables, net of allowance
482

 
161,329

 
47,443

 
(942
)
 
208,312

Intercompany receivable (payable)
(24,814
)
 
54,821

 
(30,007
)
 

 

Deferred income taxes
27,713

 
9,221

 
1,538

 

 
38,472

Inventory

 
7,846

 
6,481

 

 
14,327

Prepaid expenses and other current assets
1,177

 
2,607

 
2,499

 

 
6,283

Total current assets
23,685

 
232,701

 
38,389

 
(942
)
 
293,833

Net property and equipment
4,141

 
832,285

 
90,715

 
(750
)
 
926,391

Investment in subsidiaries
893,383

 
120,931

 

 
(1,014,314
)
 

Intangible assets, net of accumulated amortization
83

 
26,208

 

 

 
26,291

Noncurrent deferred income taxes
79,178

 

 
3,450

 
(79,178
)
 
3,450

Other long-term assets
11,628

 
1,595

 
1,569

 

 
14,792

Total assets
$
1,012,098

 
$
1,213,720

 
$
134,123

 
$
(1,095,184
)
 
$
1,264,757

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
826

 
$
60,489

 
$
4,853

 

 
$
66,168

Current portion of long-term debt
3,645

 
27

 

 

 
3,672

Deferred revenues

 
1,101

 
2,143

 

 
3,244

Accrued expenses
5,584

 
57,871

 
5,882

 
(942
)
 
68,395

Total current liabilities
10,055

 
119,488

 
12,878

 
(942
)
 
141,479

Long-term debt, less current portion
460,000

 
60

 

 

 
460,060

Noncurrent deferred income taxes

 
196,852

 

 
(79,178
)
 
117,674

Other long-term liabilities
418

 
3,937

 
314

 

 
4,669

Total liabilities
470,473

 
320,337

 
13,192

 
(80,120
)
 
723,882

Total shareholders’ equity
541,625

 
893,383

 
120,931

 
(1,015,064
)
 
540,875

Total liabilities and shareholders’ equity
$
1,012,098

 
$
1,213,720

 
$
134,123

 
$
(1,095,184
)
 
$
1,264,757

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
28,368

 
$
(2,059
)
 
$
1,076

 
$

 
$
27,385

Receivables, net of allowance
905

 
125,979

 
49,476

 

 
176,360

Intercompany receivable (payable)
(24,837
)
 
52,671

 
(27,834
)
 

 

Deferred income taxes
1,143

 
8,005

 
3,944

 

 
13,092

Inventory

 
7,415

 
5,817

 

 
13,232

Prepaid expenses and other current assets
1,013

 
7,094

 
1,204

 

 
9,311

Total current assets
6,592

 
199,105

 
33,683

 

 
239,380

Net property and equipment
4,531

 
846,632

 
87,244

 
(750
)
 
937,657

Investment in subsidiaries
939,091

 
120,630

 

 
(1,059,721
)
 

Intangible assets, net of accumulated amortization
75

 
32,194

 

 

 
32,269

Noncurrent deferred income taxes
78,486

 

 
1,156

 
(78,486
)
 
1,156

Other long-term assets
7,513

 
2,009

 
9,639

 

 
19,161

Total assets
$
1,036,288

 
$
1,200,570

 
$
131,722

 
$
(1,138,957
)
 
$
1,229,623

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
757

 
$
37,797

 
$
5,164

 
$

 
$
43,718

Current portion of long-term debt

 
2,847

 

 

 
2,847

Deferred revenues

 
699

 

 

 
699

Accrued expenses
16,368

 
51,739

 
5,462

 

 
73,569

Total current liabilities
17,125

 
93,082

 
10,626

 

 
120,833

Long-term debt, less current portion
499,586

 
80

 

 

 
499,666

Noncurrent deferred income taxes

 
163,122

 

 
(78,486
)
 
84,636

Other long-term liabilities
394

 
5,195

 
466

 

 
6,055

Total liabilities
517,105

 
261,479

 
11,092

 
(78,486
)
 
711,190

Total shareholders’ equity
519,183

 
939,091

 
120,630

 
(1,060,471
)
 
518,433

Total liabilities and shareholders’ equity
$
1,036,288

 
$
1,200,570

 
$
131,722

 
$
(1,138,957
)
 
$
1,229,623


22




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)

 
Three months ended September 30, 2014
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
250,363

 
$
22,904

 
$

 
$
273,267

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
160,105

 
18,993

 

 
179,098

Depreciation and amortization
358

 
42,250

 
3,473

 

 
46,081

General and administrative
7,110

 
18,665

 
976

 
(138
)
 
26,613

Gain on sale of fishing and rental services operations

 
(10,702
)
 

 

 
(10,702
)
Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt expense

 
19

 

 

 
19

Impairment charges

 
678

 

 

 
678

Total costs and expenses
7,468

 
209,800

 
24,657

 
(138
)
 
241,787

Income (loss) from operations
(7,468
)
 
40,563

 
(1,753
)
 
138

 
31,480

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
21,908

 
(3,742
)
 

 
(18,166
)
 

Interest expense
(8,943
)
 
(22
)
 
(4
)
 

 
(8,969
)
Other
1,322

 
707

 
(2,022
)
 
(138
)
 
(131
)
Total other income (expense)
14,287

 
(3,057
)
 
(2,026
)
 
(18,304
)
 
(9,100
)
Income (loss) before income taxes
6,819

 
37,506

 
(3,779
)
 
(18,166
)
 
22,380

Income tax (expense) benefit
5,634

 
(15,598
)
 
37

 

 
(9,927
)
Net income (loss)
$
12,453

 
$
21,908

 
$
(3,742
)
 
$
(18,166
)
 
$
12,453

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
214,020

 
$
29,959

 
$

 
$
243,979

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
139,166

 
22,299

 

 
161,465

Depreciation and amortization
294

 
43,794

 
3,326

 

 
47,414

General and administrative
7,052

 
15,905

 
872

 
(138
)
 
23,691

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt expense

 
35

 

 

 
35

Impairment charges

 
9,504

 

 

 
9,504

Total costs and expenses
7,346

 
207,189

 
27,712

 
(138
)
 
242,109

Income (loss) from operations
(7,346
)
 
6,831

 
2,247

 
138

 
1,870

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
6,377

 
1,845

 

 
(8,222
)
 

Interest expense
(12,320
)
 
(13
)
 
9

 

 
(12,324
)
Other
3

 
568

 
177

 
(138
)
 
610

Total other income (expense)
(5,940
)
 
2,400

 
186

 
(8,360
)
 
(11,714
)
Income (loss) before income taxes
(13,286
)
 
9,231

 
2,433

 
(8,222
)
 
(9,844
)
Income tax (expense) benefit
7,056

 
(2,854
)
 
(588
)
 

 
3,614

Net income (loss)
$
(6,230
)
 
$
6,377

 
$
1,845

 
$
(8,222
)
 
$
(6,230
)
 
 
 
 
 
 
 
 
 
 




23




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)


 
Nine months ended September 30, 2014
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
701,518

 
$
70,595

 
$

 
$
772,113

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
448,945

 
50,510

 

 
499,455

Depreciation and amortization
983

 
126,093

 
10,322