KEY ENERGY SERVICES INC - FORM 10-Q - November 9, 2017

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EX-32 - EXHIBIT 32 - KEY ENERGY SERVICES INCkegex329302017.htm
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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, 2017
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)
  _____________________________________________
Delaware
 
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨  
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨    (Do not check if a smaller reporting company)
  
Smaller reporting company
 
ý
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. No  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No ¨
As of November 3, 2017, the number of outstanding shares of common stock of the registrant was 20,109,885.
 


KEY ENERGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2017
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 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 are 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, 2016 and in the other reports we file with the Securities and Exchange Commission.
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.
Important factors that may affect our expectations, estimates or projections include, but are not limited to, the following:
•
conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;
•
volatility in oil and natural gas prices;
•
our ability to implement price increases or maintain pricing on our core services;
•
risks that we may not be able to reduce, and could even experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;
•
industry capacity;
•
asset impairments or other charges;
•
the periodic low demand for our services and resulting operating losses and negative cash flows;
•
our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;
•
significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations, specifically those relating to hydraulic fracturing, as well as climate change legislation or initiatives;

2

•
our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;
•
our ability to incur debt or long-term lease obligations;
•
our ability to implement technological developments and enhancements;
•
severe weather impacts on our business, including from hurricane activity;
•
our ability to successfully identify, make and integrate acquisitions and our ability to finance future growth of our operations or future acquisitions;
•
our ability to achieve the benefits expected from disposition transactions;
•
the loss of one or more of our larger customers;
•
our ability to generate sufficient cash flow to meet debt service obligations;
•
the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt, including our ability to comply with covenants under our debt agreements;
•
an increase in our debt service obligations due to variable rate indebtedness;
•
our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue and/or operating income and our inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Key as a whole or for geographic regions and/or business segments individually);
•
our ability to respond to changing or declining market conditions, including our ability to reduce the costs of labor, fuel, equipment and supplies employed and used in our businesses;
•
our ability to maintain sufficient liquidity;
•
adverse impact of litigation; and
•
other factors affecting our business described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in the other reports we file with the Securities and Exchange Commission.

3

PART I — FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
77,657

 
$
90,505

Restricted cash
8,700

 
24,707

Accounts receivable, net of allowance for doubtful accounts of $1,251 and $168, respectively
69,693

 
71,327

Inventories
19,846

 
22,269

Other current assets
17,418

 
25,762

Total current assets
193,314

 
234,570

Property and equipment
407,536

 
408,716

Accumulated depreciation
(64,829
)
 
(3,565
)
Property and equipment, net
342,707

 
405,151

Intangible assets, net
477

 
520

Other non-current assets
14,607

 
17,740

TOTAL ASSETS
$
551,105

 
$
657,981

LIABILITIES AND EQUITY

 

Current liabilities:

 

Accounts payable
$
11,967

 
$
10,357

Current portion of long-term debt
2,500

 
2,500

Other current liabilities
82,383

 
103,938

Total current liabilities
96,850

 
116,795

Long-term debt
243,610

 
245,477

Workers’ compensation, vehicular and health insurance liabilities
26,545

 
23,313

Other non-current liabilities
28,488

 
29,779

Commitments and contingencies

 

Equity:

 

Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued
—

 
—

Common stock, $0.01 par value; 100,000,000 shares authorized, 20,109,885 and 20,096,462 shares issued and outstanding
201

 
201

Additional paid-in capital
263,917

 
252,421

Accumulated other comprehensive loss
—

 
239

Retained deficit
(108,506
)
 
(10,244
)
Total equity
155,612

 
242,617

TOTAL LIABILITIES AND EQUITY
$
551,105

 
$
657,981

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 Operations
(in thousands, except per share data)
(unaudited)
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
REVENUES
$
110,653

 
 
$
102,406

 
$
319,885

 
 
$
308,506

COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
Direct operating expenses
87,115

 
 
96,071

 
237,981

 
 
276,088

Depreciation and amortization expense
21,114

 
 
33,467

 
63,325

 
 
105,075

General and administrative expenses
37,168

 
 
42,456

 
98,498

 
 
129,604

Impairment expense
—

 
 
40,000

 
187

 
 
40,000

Operating loss
(34,744
)
 
 
(109,588
)
 
(80,106
)
 
 
(242,261
)
Interest expense, net of amounts capitalized
8,090

 
 
21,120

 
23,672

 
 
64,061

Other (income) loss, net
(4,578
)
 
 
154

 
(5,779
)
 
 
(665
)
Reorganization items, net
60

 
 
—

 
1,501

 
 
—

Loss before income taxes
(38,316
)
 
 
(130,862
)
 
(99,500
)
 
 
(305,657
)
Income tax benefit
96

 
 
110

 
1,238

 
 
489

NET LOSS
$
(38,220
)
 
 
$
(130,752
)
 
$
(98,262
)
 
 
$
(305,168
)
Loss per share:
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(1.90
)
 
 
$
(0.81
)
 
$
(4.89
)
 
 
$
(1.90
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic and diluted
20,106

 
 
160,846

 
20,101

 
 
160,626

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 Comprehensive Income
(in thousands)
(unaudited)
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
NET LOSS
$
(38,220
)
 
 
$
(130,752
)
 
$
(98,262
)
 
 
$
(305,168
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation income (loss)
(1,257
)
 
 
(156
)
 
(239
)
 
 
1,458

COMPREHENSIVE LOSS
$
(39,477
)
 
 
$
(130,908
)
 
$
(98,501
)
 
 
$
(303,710
)
See the accompanying notes which are an integral part of these condensed consolidated financial statements.

6

Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Successor
 
 
Predecessor
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
$
(98,262
)
 
 
$
(305,168
)
Adjustments to reconcile net loss to net cash used in operating activities:

 
 

Depreciation and amortization expense
63,325

 
 
105,075

Impairment expense
187

 
 
40,000

Bad debt expense
631

 
 
1,674

Accretion of asset retirement obligations
146

 
 
431

Loss from equity method investments
560

 
 
105

Amortization and write-off of deferred financing costs and premium
358

 
 
3,901

Deferred income tax benefit
(27
)
 
 
(501
)
Loss (gain) on disposal of assets, net
(26,987
)
 
 
5,011

Share-based compensation
11,581

 
 
3,652

Excess tax expense from share-based compensation
—

 
 
3,164

Changes in working capital:

 
 

Accounts receivable
1,084

 
 
50,240

Other current assets
10,920

 
 
3,589

Accounts payable, accrued interest and accrued expenses
(19,943
)
 
 
(3,983
)
Share-based compensation liability awards
—

 
 
(227
)
Other assets and liabilities
7,794

 
 
(11,772
)
Net cash used in operating activities
(48,633
)
 
 
(104,809
)
CASH FLOWS FROM INVESTING ACTIVITIES:

 
 

Capital expenditures
(9,610
)
 
 
(7,420
)
Proceeds from sale of assets
31,844

 
 
13,376

Net cash provided by investing activities
22,234

 
 
5,956

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of long-term debt
(1,875
)
 
 
(24,548
)
Restricted cash
16,007

 
 
(18,605
)
Payment of deferred financing costs
(350
)
 
 
—

Repurchases of common stock
(85
)
 
 
(165
)
Excess tax expense from share-based compensation
—

 
 
(3,164
)
Net cash provided by (used in) financing activities
13,697

 
 
(46,482
)
Effect of changes in exchange rates on cash
(146
)
 
 
(1,908
)
Net decrease in cash and cash equivalents
(12,848
)
 
 
(147,243
)
Cash and cash equivalents, beginning of period
90,505

 
 
204,354

Cash and cash equivalents, end of period
$
77,657

 
 
$
57,111


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

7

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 and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States. An important component of the Company’s growth strategy is to make acquisitions that will strengthen its core services or presence in selected markets, and the Company also makes strategic divestitures from time to time. The Company expects that the industry in which it operates will experience consolidation, and the Company expects to explore opportunities and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or further dispositions or other transactions, although there can be no assurance that any such activities will be consummated.
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed December 31, 2016 balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2016 Form 10-K.
The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results expected for the full year or any other interim period, due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.
On October 24, 2016, Key and certain of our domestic subsidiaries filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware pursuant to a prepackaged plan of reorganization (“the Plan”). The Plan was confirmed by the Bankruptcy Court on December 6, 2016, and the Company emerged from the bankruptcy proceedings on December 15, 2016 (“the Effective Date”).
Upon emergence on the Effective Date, the Company adopted fresh start accounting which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the Consolidated Financial Statements on or after December 16, 2016 are not comparable with the Consolidated Financial Statements prior to that date.
References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to December 15, 2016. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on and prior to December 15, 2016.
We have evaluated events occurring after the balance sheet date included in this Quarterly Report on Form 10-Q and through the date on which the unaudited condensed consolidated financial statements were issued, for possible disclosure of a subsequent event.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The preparation of these unaudited condensed consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates may also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available.

8

Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that the estimates used in the preparation of these interim financial statements are reasonable.
There have been no material changes or developments in our evaluation of accounting estimates and underlying assumptions or methodologies that we believe to be a “Critical Accounting Policy or Estimate” as disclosed in our 2016 Form 10-K.
Recent Accounting Developments
ASU 2016-18. In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of this standard is not expected to have an impact on our consolidated financial statements.
ASU 2016-15. In August 2016 the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15), that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of this standard on its consolidated financial statements.
ASU 2016-13. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments that will change how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount. The amendments in this update will be effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018. The Company is evaluating the effect of this standard on our consolidated financial statements.
ASU 2016-09. In March 2016, the FASB Issued ASU 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the accounting guidance as of January 1, 2017 on a prospective basis. We have elected to account for forfeitures of equity awards as they occur. The adoption of this guidance did not have a material impact our consolidated financial statements, with the exception of excess tax benefits and tax deficiencies now being recognized as income tax expense or benefit on the income statement rather than as additional paid in capital on the balance sheet and their classification on the statement of cash flow as operating activity rather than financing activity,
ASU 2016-02. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will replace the existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.
ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method. We plan to adopt the standard January 1, 2018 applying the full retrospective method. We have assembled a team to scope the project, identify relevant revenue streams and understand the revenue recognition implications of the new guidance. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements, however, management’s preliminary assessment is that the impact to the financial statements will not be material.

9

NOTE 3. ASSETS HELD FOR SALE
In April 2015, we announced our decision to exit markets in which we participate outside of North America. Our strategy was to sell or relocate the assets of the businesses operating in these markets. During the fourth quarter of 2015, the assets and related liabilities of our Russian business unit, which were included in our International reporting segment, met the criteria for assets held for sale. The sale of our Russian business unit was completed in the third quarter of 2017.
NOTE 4. EQUITY
A reconciliation of the total carrying amount of our equity accounts for the nine months ended September 30, 2017 is as follows (in thousands):
 
COMMON STOCKHOLDERS
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Retained Deficit
 
Total
 
Number of Shares
 
Amount at Par
 
 
 
Balance at December 31, 2016 (Successor)
20,096

 
$
201

 
$
252,421

 
$
239

 
$
(10,244
)
 
$
242,617

Foreign currency translation
—

 
—

 
—

 
(239
)
 
—

 
(239
)
Common stock purchases
—

 
—

 
(85
)
 
—

 
—

 
(85
)
Share-based compensation
13

 
—

 
11,581

 
—

 
—

 
11,581

Net loss
—

 
—

 
—

 
—

 
(98,262
)
 
(98,262
)
Balance at September 30, 2017 (Successor)
20,109

 
$
201

 
$
263,917

 
$
—

 
$
(108,506
)
 
$
155,612

NOTE 5. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Other current assets:
 
 
 
Prepaid current assets
$
5,069

 
$
10,291

Reinsurance receivable
9,451

 
7,922

Current assets held for sale
—

 
3,667

Other
2,898

 
3,882

Total
$
17,418

 
$
25,762

The table below presents comparative detailed information about other non-current assets at September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Other non-current assets:
 
 
 
 Reinsurance receivable
$
8,110

 
$
8,393

 Deposits
1,331

 
8,292

 Equity method investments
—

 
560

 Non-current assets held for sale
—

 
360

 Other
5,166

 
135

Total
$
14,607

 
$
17,740


10

The table below presents comparative detailed information about other current liabilities at September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Other current liabilities:
 
 
 
Accrued payroll, taxes and employee benefits
$
16,219

 
$
23,224

Accrued operating expenditures
10,313

 
16,669

Income, sales, use and other taxes
11,105

 
10,748

Self-insurance reserve
26,994

 
35,484

Accrued interest
6,586

 
1,419

Accrued insurance premiums
127

 
2,347

Unsettled legal claims
10,686

 
5,398

Accrued severance
250

 
2,219

Current liabilities held for sale
—

 
371

Other
103

 
6,059

Total
$
82,383

 
$
103,938

The table below presents comparative detailed information about other non-current liabilities at September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Other non-current liabilities:
 
 
 
Asset retirement obligations
$
8,891

 
$
9,035

Environmental liabilities
2,075

 
3,446

Accrued sales, use and other taxes
17,321

 
16,735

Deferred tax liabilities
—

 
35

Other
201

 
528

Total
$
28,488

 
$
29,779

NOTE 6. INTANGIBLE ASSETS
The components of our other intangible assets as of September 30, 2017 and December 31, 2016 are as follows (in thousands):
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Trademark:
 
 
 
Gross carrying value
520

 
520

Accumulated amortization
(43
)
 
—

Net carrying value
477

 
520

The weighted average remaining amortization periods and expected amortization expense for the next five years for our definite lived intangible assets are as follows:
 
Weighted
average
remaining
amortization
period (years)
 
Expected amortization expense (in thousands)
 
Remainder
of 2017
 
2018
 
2019
 
2020
 
2021
 
2022
Trademarks
8.3
 
15

 
58

 
58

 
58

 
58

 
58

Amortization expense for our intangible assets was less than $0.1 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and less than $0.1 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.

11

NOTE 7. DEBT
As of September 30, 2017 and December 31, 2016, the components of our debt were as follows (in thousands):
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Term Loan Facility due 2021
$
248,125

 
$
250,000

Unamortized debt issuance costs
(2,015
)
 
(2,023
)
Total
246,110

 
247,977

Less current portion
(2,500
)
 
(2,500
)
Long-term debt
$
243,610

 
$
245,477

ABL Facility
On December 15, 2016, the Company and Key Energy Services, LLC, as borrowers (the “ABL Borrowers”), entered into the ABL Facility with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”), Bank of America, N.A., as administrative agent for the lenders (the “Administrative Agent”) and Bank of America, N.A. and Wells Fargo Bank, National Association, as co-collateral agents for the lenders. The ABL Facility provides for aggregate initial commitments from the ABL Lenders of $80 million, which, on February 3, 2017 was increased to $100 million, and matures on June 15, 2021.
The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x) $35 million and (y) 25% of the commitments. The amount that may be borrowed under the ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the ABL Facility.
Borrowings under the ABL Facility will bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.5% to 4.5% depending on the Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) an applicable margin that varies from 1.50% to 3.50% depending on the Borrowers’ fixed charge coverage ratio at such time. In addition, the ABL Facility provides for unused line fees of 1.00% to 1.25% per year, depending on utilization, letter of credit fees and certain other factors.
The ABL Facility may in the future be guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABL Borrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the Administrative Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).
The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs.
The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods, with a fixed charge coverage ratio of 1.00 to 1.00.
As of September 30, 2017, we have no borrowings outstanding and $33.7 million of letters of credit outstanding with borrowing capacity of $26.5 million available subject to covenant constraints under our ABL Facility.
Term Loan Facility
On December 15, 2016, the Company entered into the Term Loan Facility among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “Term Loan Lenders”) and Cortland Capital Market Services LLC and Cortland Products Corp., as agent for the Lenders. The Term Loan Facility had an initial outstanding principal amount of $250 million.

12

The Term Loan Facility will mature on December 15, 2021, although such maturity date may, at the Company’s request, be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility. Borrowings under the Term Loan Facility will bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or, with the consent of the Term Loan Lenders, 12 months, plus 10.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Funds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 9.25%.
The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together with the Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted or will grant, as applicable, to the agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assets and the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).
The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certain circumstances as provided in the Term Loan Facility. If a prepayment is made prior to the first anniversary of the loan, such prepayment must be made with make-whole amount with the calculation of the make-whole amount as specified in the Term Loan Facility. If a prepayment is made after the first anniversary of the loan but prior to the second anniversary, such prepayment must be made at 106% of the principle amount, if a prepayment is made after the second anniversary but prior to the third anniversary, such prepayment must be made at 103% of the principle amount. After the third anniversary, if a prepayment is made, no prepayment premium is due. The Company is required to make principal payments in the amount of $625,000 per quarter commencing with the quarter ending March 31, 2017. In addition, pursuant to the Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, and upon certain change of control transactions, subject in each case to certain exceptions.
The Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The Term Loan Facility also contains financial covenants requiring that the Company maintain an asset coverage ratio of at least 1.35 to 1.0 and that Liquidity (as defined in the Term Loan Facility) must not be less than $37.5 million (of which at least $20.0 million must be in cash or cash equivalents held in deposit accounts) as of the last day of any fiscal quarter, subject to certain exceptions and cure rights.
The weighted average interest rates on the outstanding borrowings under the Term Loan Facility for the three and nine month periods ended September 30, 2017 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2017
Term Loan Facility
11.53
%
 
11.40
%
NOTE 8. OTHER (INCOME) LOSS
The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “other (income) loss, net” for the periods indicated (in thousands):
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
Interest income
$
(182
)
 
 
$
(104
)
 
$
(534
)
 
 
$
(371
)
Foreign exchange (gain) loss
(15
)
 
 
351

 
(29
)
 
 
1,112

Other, net
(4,381
)
 
 
(93
)
 
(5,216
)
 
 
(1,406
)
Total
$
(4,578
)
 
 
$
154

 
$
(5,779
)
 
 
$
(665
)

13

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 for the three months ended September 30, 2017 and 2016 were 0.3% and 0.1%, respectively, and 1.2% and 0.2% for the nine months ended September 30, 2017 and 2016, respectively. The variance between our effective rate and the U.S. statutory rate is due to the mix of pre-tax profit between the U.S. and international taxing jurisdictions with varying statutory rates, the impact of permanent differences, and other tax adjustments, such as valuation allowances against deferred tax assets, and tax expense or benefit recognized for uncertain tax positions.    
We continued recording income taxes using a year-to-date effective tax rate method for the three- and nine-month periods ended September 30, 2017. The use of this method was based on our expectations at September 30, 2017 that a small change in our estimated ordinary income could result in a large change in the estimated annual effective tax rate. We will re-evaluate our use of this method each quarter until such time as a return to the annualized effective tax rate method is deemed appropriate.
The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. Due to the history of losses in recent years and the continued challenges affecting the oil and gas industry, management continues to believe it is more likely than not that we will not be able to realize our net deferred tax assets.  No release of our deferred tax asset valuation allowance was made during the three or nine months ended September 30, 2017.
As of September 30, 2017, we had $0.3 million of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We record interest and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of less than $0.1 million for the payment of interest and penalties as of September 30, 2017. We believe that it is reasonably possible that $0.2 million of our currently remaining unrecognized tax positions may be recognized in the next twelve months as a result of a lapse of statute of limitations and settlement of ongoing audits.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items, if any. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. We have $10.7 million of other liabilities related to litigation that is deemed probable and reasonably estimable as of September 30, 2017. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded.
In November 2015, the Santa Barbara County District Attorney filed a criminal complaint against two former employees and Key, specifically alleging three counts of violations of California Labor Code section 6425(a) against Key. The complaint sought unspecified penalties against Key related to an October 12, 2013 accident which resulted in the death of one Key employee at a drilling site near Santa Maria, California. An arraignment was held on February 10, 2016, where Key and its former employees pleaded not guilty to all charges.
On or about January 10, 2017, Key entered into a settlement with the Santa Barbara County District Attorney. Key agreed to plead no contest to one felony count (Count 2), a violation of California Labor Code 6425(a). The Santa Barbara County District Attorney also agreed to recommend total restitution, fines, fees, and surcharges not to exceed $450,000. The court dismissed the remaining charges (Counts 1 and 3) against Key. The parties agreed to postpone sentencing in the matter until January 20, 2018.  The parties agreed that if Key pays all of the total restitution, fines, fees, and surcharges by January 20, 2018, the Santa Barbara County District Attorney will not object to Key withdrawing its plea to a felony count on Count 2 and entering a plea to a misdemeanor.

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 September 30, 2017 and December 31, 2016, we have recorded $53.5 million and $58.7 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $17.6 million and $16.3 million of insurance receivables as of September 30, 2017 and December 31, 2016, respectively. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.
Environmental Remediation Liabilities
For environmental reserve matters, including remediation efforts for current locations and those relating to previously disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. As of September 30, 2017 and December 31, 2016, we have recorded $2.1 million and $3.4 million, respectively, for our environmental remediation liabilities. We believe that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.
NOTE 11. LOSS PER SHARE
Basic loss per share is determined by dividing net loss attributable to Key by the weighted average number of common shares actually outstanding during the period. Diluted loss per common share is based on the increased number of shares that would be outstanding assuming conversion of potentially dilutive outstanding securities using the treasury stock and “as if converted” methods.
The components of our loss per share are as follows (in thousands, except per share amounts):
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
Basic and Diluted EPS Calculation:
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
Net loss
$
(38,220
)
 
 
$
(130,752
)
 
$
(98,262
)
 
 
$
(305,168
)
Denominator
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
20,106

 
 
160,846

 
20,101

 
 
160,626

Basic and diluted loss per share
$
(1.90
)
 
 
$
(0.81
)
 
$
(4.89
)
 
 
$
(1.90
)
Restricted stock units (“RSUs”), stock options, stock appreciation rights (“SARs”) and warrants are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock awards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding.
The company has issued potentially dilutive instruments such as RSUs, stock options, SARs and warrants. However, the company did not include these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive. The following table shows potentially dilutive instruments (in thousands):
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
RSUs
641

 
 
60

 
641

 
 
60

Stock options
645

 
 
301

 
645

 
 
812

SARs
—

 
 
240

 
—

 
 
240

Warrants
1,838

 
 
—

 
1,838

 
 
—

Total
3,124

 
 
601

 
3,124

 
 
1,112


15

No events occurred after September 30, 2017 that would materially affect the number of weighted average shares outstanding.
NOTE 12. SHARE-BASED COMPENSATION
We recognized employee share-based compensation expense of $2.5 million and $0.5 million during the three months ended September 30, 2017 and 2016, respectively. We recognized employee share-based compensation expense of $10.9 million and $3.4 million during the nine months ended September 30, 2017 and 2016, respectively. Our employee share-based awards vest in equal installments over a four-year period. Additionally, we recognized share-based compensation expense related to our outside directors of $0.1 million and zero during the three months ended September 30, 2017 and 2016, respectively. We recognized share-based compensation expense related to our outside directors of $0.6 million and zero during the nine months ended September 30, 2017 and 2016, respectively. The unrecognized compensation cost related to our unvested share-based awards as of September 30, 2017 is estimated to be $12.3 million and is expected to be recognized over a weighted-average period of 1.7 years.
We recognized compensation expense related to our stock options of $0.8 million and zero during the three months ended September 30, 2017 and 2016, respectively. We recognized compensation expense related to our stock options of $2.7 million and zero during the nine months ended September 30, 2017 and 2016, respectively. Our employee stock options vest in equal installments over a four-year period. The unrecognized compensation cost related to our unvested stock options as of September 30, 2017 is estimated to be $4.2 million and is expected to be recognized over a weighted-average period of 1.7 years.
NOTE 13. TRANSACTIONS WITH RELATED PARTIES
The Company has purchased equipment and services from a few affiliates of certain directors. The dollar amounts related to these related party activities are not material to the Company’s condensed consolidated financial statements.
NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.
Term Loan Facility due 2021. Because the variable interest rates of these loans approximate current market rates, the fair values of the loans borrowed under this facility approximate their carrying values.
NOTE 15. SEGMENT INFORMATION
Our reportable business segments are U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services and International. We also have a “Functional Support” segment associated with overhead and other costs in support of our reportable segments. Our U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services operate geographically within the United States. The International reportable segment includes our former operations in Canada, Mexico and Russia. During the third quarter of 2017, second quarter of 2017 and the fourth quarter of 2016, we completed the sale of our businesses in Russia, Canada and Mexico, respectively. We evaluate the performance of our segments based on gross margin measures. All inter-segment sales pricing is based on current market conditions.
U.S. Rig Services
Our U.S. Rig Services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives. We also provide specialty drilling services to oil and natural gas producers with certain of our larger rigs that are capable of providing conventional and horizontal drilling services. Our rigs encompass various sizes and capabilities, allowing us to service all types of wells. Many of our rigs are outfitted with our proprietary KeyView® technology, which captures and reports well site operating data and provides safety control systems. We believe that this technology allows our customers and our crews to better monitor well site operations, improves efficiency and safety, and adds value to the services that we offer.
The completion and recompletion services provided by our rigs prepare wells for production, whether newly drilled, or recently extended through a workover operation. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. Completion services vary by well and our work may take a few days to several weeks to perform, depending on the nature of the completion.
The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores

16

into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
Maintenance services provided with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services are generally less complicated than completion and workover related services and require less time to perform.
Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.
Fluid Management Services
We provide transportation and well-site storage services for various fluids utilized in connection with drilling, completions, workover and maintenance activities. We also provide disposal services for fluids produced subsequent to well completion. These fluids are removed from the well site and transported for disposal in saltwater disposal wells owned by us or a third party. In addition, we operate a fleet of hot oilers capable of pumping heated fluids used to clear soluble restrictions in a wellbore. Demand and pricing for these services generally correspond to demand for our well service rigs.
Coiled Tubing Services
Coiled Tubing Services involve the use of a continuous metal pipe spooled onto a large reel which is then deployed into oil and natural gas wells to perform various applications, such as wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Coiled tubing is also used for a number of horizontal well applications such as milling temporary isolation plugs that separate frac zones, and various other pre- and post-hydraulic fracturing well preparation services.
Fishing and Rental Services
We offer a full line of fishing services and rental equipment designed for use in providing drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, pumps, power swivels, reversing units, foam air units, proppants, oil and natural gas. We sold our well testing assets and our frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids in the second quarter of 2017.
Demand for our fishing and rental services is closely related to capital spending by oil and natural gas producers, which is generally a function of oil and natural gas prices.
International
In April 2015, we announced our decision to exit markets in which we participate outside of North America. During the third quarter of 2017, second quarter of 2017 and the fourth quarter of 2016, we completed the sale of our businesses in Russia, Canada and Mexico, respectively. We provided rig-based services such as the maintenance, workover, recompletion of existing oil wells, completion of newly-drilled wells and plugging and abandonment of wells at the end of their useful lives in each of our international markets. In addition, in Mexico we provided drilling, coiled tubing, wireline and project management and consulting services. Our Canadian business was focused on the development of hardware and software related to oilfield service equipment controls, data acquisition and digital information flow.
Functional Support
Our Functional Support segment includes unallocated overhead costs associated with administrative support for our U.S. and International reporting segments.

17

Financial Summary
The following tables set forth our unaudited segment information as of and for the three and nine months ended September 30, 2017 and 2016 (in thousands):
Successor company as of and for the three months ended September 30, 2017
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
$
61,933

 
$
20,713

 
$
12,499

 
$
14,177

 
$
1,331

 
$
—

 
$
—

 
$
110,653

Intersegment revenues
135

 
249

 
27

 
846

 
—

 
—

 
(1,257
)
 
—

Depreciation and amortization
8,009

 
5,350

 
1,259

 
5,855

 
234

 
407

 
—

 
21,114

Other operating expenses
54,426

 
22,625

 
9,386

 
10,688

 
2,225

 
24,933

 
—

 
124,283

Operating income (loss)
(502
)
 
(7,262
)
 
1,854

 
(2,366
)
 
(1,128
)
 
(25,340
)
 
—

 
(34,744
)
Reorganization items, net
—

 
—

 
—

 
—

 
—

 
60

 
—

 
60

Interest expense, net of amounts capitalized
—

 
—

 
—

 
—

 
—

 
8,090

 
—

 
8,090

Income (loss) before income taxes
(495
)
 
(7,249
)
 
1,854

 
(2,355
)
 
3,212

 
(33,283
)
 
—

 
(38,316
)
Long-lived assets(1)
166,993

 
78,718

 
19,856

 
68,200

 
7

 
56,462

 
(32,445
)
 
357,791

Total assets
287,305

 
41

 
38,450

 
363,879

 
10,117

 
(77,212
)
 
(71,475
)
 
551,105

Capital expenditures
1,288

 
735

 
37

 
124

 
119

 
71

 
—

 
2,374


Predecessor company as of and for the three months ended September 30, 2016
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
$
59,137

 
$
18,969

 
$
7,146

 
$
14,078

 
$
3,076

 
$
—

 
$
—

 
$
102,406

Intersegment revenues
293

 
203

 
—

 
1,194

 
34

 
—

 
(1,724
)
 
—

Depreciation and amortization
14,602

 
5,867

 
2,683

 
6,623

 
1,719

 
1,973

 
—

 
33,467

Impairment expense
—

 
—

 
—

 
—

 
40,000

 
—

 
—

 
40,000

Other operating expenses
53,539

 
26,327

 
8,835

 
14,406

 
5,746

 
29,674

 
—

 
138,527

Operating loss
(9,004
)
 
(13,225
)
 
(4,372
)
 
(6,951
)
 
(44,389
)
 
(31,647
)
 
—

 
(109,588
)
Interest expense, net of amounts capitalized
—

 
—

 
—

 
—

 
—

 
21,120

 
—

 
21,120

Loss before income taxes
(8,986
)
 
(13,216
)
 
(4,372
)
 
(6,938
)
 
(44,711
)
 
(52,639
)
 
—

 
(130,862
)
Long-lived assets(1)
450,384

 
111,697

 
45,705

 
106,055

 
10,334

 
160,835

 
(115,326
)
 
769,684

Total assets
1,304,552

 
241,422

 
114,259

 
467,392

 
33,145

 
(840,066
)
 
(325,083
)
 
995,621

Capital expenditures
521

 
865

 
—

 
954

 
—

 
13

 
—

 
2,353


18


Successor company as of and for the nine months ended September 30, 2017
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
$
184,026

 
$
57,475

 
$
27,005

 
$
45,808

 
$
5,571

 
$
—

 
$
—

 
$
319,885

Intersegment revenues
235

 
887

 
49

 
2,472

 
—

 
—

 
(3,643
)
 
—

Depreciation and amortization
23,228

 
16,627

 
3,956

 
17,655

 
791

 
1,068

 
—

 
63,325

Impairment expense
—

 
—

 
—

 
—

 
187

 
—

 
—

 
187

Other operating expenses
163,564

 
58,274

 
23,155

 
16,902

 
9,373

 
65,211

 
—

 
336,479

Operating income (loss)
(2,766
)
 
(17,426
)
 
(106
)
 
11,251

 
(4,780
)
 
(66,279
)
 
—

 
(80,106
)
Reorganization items, net
—

 
—

 
—

 
—

 
—

 
1,501

 
—

 
1,501

Interest expense, net of amounts capitalized
—

 
—

 
—

 
—

 
—

 
23,672

 
—

 
23,672

Income (loss) before income taxes
(2,605
)
 
(17,485
)
 
(94
)
 
11,485

 
(74
)
 
(90,727
)
 
—

 
(99,500
)
Long-lived assets(1)
166,993

 
78,718

 
19,856

 
68,200

 
7

 
56,462

 
(32,445
)
 
357,791

Total assets
287,305

 
41

 
38,450

 
363,879

 
10,117

 
(77,212
)
 
(71,475
)
 
551,105

Capital expenditures
5,956

 
1,828

 
216

 
654

 
475

 
481

 
—

 
9,610

Predecessor company as of and for the nine months ended September 30, 2016
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support(2)
 
Reconciling
Eliminations
 
Total
Revenues from external customers
$
169,627

 
$
61,230

 
$
24,294

 
$
43,773

 
$
9,582

 
$
—

 
$
—

 
$
308,506

Intersegment revenues
737

 
733

 
43

 
3,448

 
284

 
—

 
(5,245
)
 
—

Depreciation and amortization
44,278

 
17,725

 
8,574

 
21,385

 
6,067

 
7,046

 
—

 
105,075

Impairment expense
—

 
—

 
—

 
—

 
40,000

 
—

 
—

 
40,000

Other operating expenses
154,393

 
70,557

 
32,298

 
42,127

 
17,865

 
88,452

 
—

 
405,692

Operating loss
(29,044
)
 
(27,052
)
 
(16,578
)
 
(19,739
)
 
(54,350
)
 
(95,498
)
 
—

 
(242,261
)
Interest expense, net of amounts capitalized
—

 
—

 
—

 
—

 
—

 
64,061

 
—

 
64,061

Loss before income taxes
(29,011
)
 
(27,003
)
 
(16,455
)
 
(19,719
)
 
(54,986
)
 
(158,483
)
 
—

 
(305,657
)
Long-lived assets(1)
450,384

 
111,697

 
45,705

 
106,055

 
10,334

 
160,835

 
(115,326
)
 
769,684

Total assets
1,304,552

 
241,422

 
114,259

 
467,392

 
33,145

 
(840,066
)
 
(325,083
)
 
995,621

Capital expenditures
1,025

 
2,885

 
101

 
2,470

 
711

 
228

 
—

 
7,420

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

19

NOTE 16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The senior notes of the Predecessor Company were registered securities. As a result of these registered securities, we are required to present the following condensed consolidating financial information pursuant to SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Our ABL Facility and Term Loan Facility of the Successor Company are not registered securities, so the presentation of condensed consolidating financial information is not required for the Successor period. The following is our condensed consolidated statement of operations and statement of cash flows for the Predecessor periods (in thousands):
CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS
 
 
Predecessor
 
 
Three Months Ended September 30, 2016
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
99,332

 
$
3,110

 
$
(36
)
 
$
102,406

Direct operating expense
 
—

 
92,643

 
3,456

 
(28
)
 
96,071

Depreciation and amortization expense
 
—

 
32,347

 
1,120

 
—

 
33,467

General and administrative expense
 
417

 
39,738

 
2,301

 
—

 
42,456

Impairment expense
 
—

 
19,597

 
20,403

 
—

 
40,000

Operating loss
 
(417
)
 
(84,993
)
 
(24,170
)
 
(8
)
 
(109,588
)
Interest expense, net of amounts capitalized
 
21,120

 
—

 
—

 
—

 
21,120

Other (income) loss, net
 
(636
)
 
375

 
325

 
90

 
154

Loss before income taxes
 
(20,901
)
 
(85,368
)
 
(24,495
)
 
(98
)
 
(130,862
)
Income tax benefit
 
—

 
—

 
110

 
—

 
110

Net loss
 
$
(20,901
)
 
$
(85,368
)
 
$
(24,385
)
 
$
(98
)
 
$
(130,752
)
CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS
 
 
Predecessor
 
 
Nine Months Ended September 30, 2016
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
298,926

 
$
9,866

 
$
(286
)
 
$
308,506

Direct operating expense
 
—

 
265,869

 
10,481

 
(262
)
 
276,088

Depreciation and amortization expense
 
—

 
101,557

 
3,518

 
—

 
105,075

General and administrative expense
 
815

 
121,427

 
7,362

 
—

 
129,604

Impairment expense
 
—

 
19,597

 
20,403

 
—

 
40,000

Operating loss
 
(815
)
 
(209,524
)
 
(31,898
)
 
(24
)
 
(242,261
)
Interest expense, net of amounts capitalized
 
64,061

 
—

 
—

 
—

 
64,061

Other (income) loss, net
 
(1,926
)
 
281

 
657

 
323

 
(665
)
Loss before income taxes
 
(62,950
)
 
(209,805
)
 
(32,555
)
 
(347
)
 
(305,657
)
Income tax (expense) benefit
 
(12
)
 
—

 
501

 
—

 
489

Net loss
 
$
(62,962
)
 
$
(209,805
)
 
$
(32,054
)
 
$
(347
)
 
$
(305,168
)


20

CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF CASH FLOWS
 
 
Predecessor
 
 
Nine Months Ended September 30, 2016
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
—

 
$
(108,229
)
 
$
3,420

 
$
—

 
$
(104,809
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 


Capital expenditures
 
—

 
(7,073
)
 
(347
)
 
—

 
(7,420
)
Intercompany notes and accounts
 
—

 
92,033

 
—

 
(92,033
)
 
—

Other investing activities, net
 
—

 
13,376

 
—

 
—

 
13,376

Net cash provided by (used in) investing activities
 
—

 
98,336

 
(347
)
 
(92,033
)
 
5,956

Cash flows from financing activities:
 
 
 
 
 
 
 

 
 
Repayments of long-term debt
 
(24,548
)
 
—

 
—

 
—

 
(24,548
)
Restricted stock
 
(18,605
)
 
—

 
—

 
—

 
(18,605
)
Repurchases of common stock
 
(165
)
 
—

 
—

 
—

 
(165
)
Intercompany notes and accounts
 
(92,033
)
 
—

 
—

 
92,033

 
—

Other financing activities, net
 
(3,164
)
 
—

 
—

 
—

 
(3,164
)
Net cash used in financing activities
 
(138,515
)
 
—

 
—

 
92,033

 
(46,482
)
Effect of changes in exchange rates on cash
 
—

 
—

 
(1,908
)
 
—

 
(1,908
)
Net increase (decrease) in cash and cash equivalents
 
(138,515
)
 
(9,893
)
 
1,165

 
—

 
(147,243
)
Cash and cash equivalents at beginning of period
 
191,065

 
10,024

 
3,265

 
—

 
204,354

Cash and cash equivalents at end of period
 
$
52,550

 
$
131

 
$
4,430

 
$
—

 
$
57,111


21

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW    
Key Energy Services, Inc., and its wholly owned subsidiaries provide a full range of well services to major oil companies and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services, and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States. We formerly had operations in Russia, which were sold in the third quarter of 2017. An important component of the Company’s growth strategy is to make acquisitions that will strengthen its core services or presence in selected markets, and the Company also makes strategic divestitures from time to time. The Company expects that the industry in which it operates will experience consolidation, and the Company expects to explore opportunities and engage in discussions regarding these opportunities, which could include mergers, consolidations or acquisitions or further dispositions or other transactions, although there can be no assurance that any such activities will be consummated.
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of and for the nine months ended September 30, 2017 and 2016, included elsewhere herein, and the audited consolidated financial statements and notes thereto included in our 2016 Form 10-K and Part 1A. Risk Factors of our 2016 Form 10-K.
We provide information regarding five business segments: U.S. Rig Services, Fluid Management Services, Coiled Tubing Services, Fishing and Rental Services and International. We also have a “Functional Support” segment associated with managing our U.S. and International business segments. See “Note 15. Segment Information” in “Item 1. Financial Statements” of Part I of this report for a summary of our business segments.
PERFORMANCE MEASURES
The Baker Hughes U.S. rig count data, which is publicly available on a weekly basis, is often used as an indicator of overall Exploration and Production (“E&P”) company spending and broader oilfield activity. In assessing overall activity in the U.S. onshore oilfield service industry in which we operate, we believe that the Baker Hughes U.S. land drilling rig count is the best available barometer of E&P companies’ capital spending and resulting activity levels. Historically, our activity levels have been highly correlated with U.S. onshore capital spending by our E&P company customers as a group.
 
 
WTI Cushing Oil(1)
 
NYMEX Henry
Hub Natural Gas(1)
 
Average Baker
Hughes U.S. Land
Drilling Rigs(2)
2017:
 
 
 
 
 
 
First Quarter
 
$
51.60

 
$
3.02

 
729

Second Quarter
 
$
48.07

 
$
3.07

 
878

Third Quarter
 
$
48.18

 
$
2.95

 
927

 
 
 
 
 
 
 
2016:
 
 
 
 
 
 
First Quarter
 
$
33.35

 
$
1.99

 
524

Second Quarter
 
$
45.46

 
$
2.15

 
398

Third Quarter
 
$
44.85

 
$
2.88

 
461

Fourth Quarter
 
$
49.14

 
$
3.04

 
567

(1)
Represents the average of the monthly average prices for each of the periods presented. Source: EIA and Bloomberg
(2)
Source: www.bakerhughes.com
Internally, we measure activity levels for our well servicing operations primarily through our rig and trucking hours. Generally, as capital spending by E&P companies increases, demand for our services also rises, resulting in increased rig and trucking services and more hours worked. Conversely, when activity levels decline due to lower spending by E&P companies, we generally provide fewer rig and trucking services, which results in fewer hours worked.

22

In the U.S., our rig activity occurs primarily on weekdays during daylight hours. Accordingly, we track U.S. rig activity on a “per U.S. working day” basis. Key’s U.S. working days per quarter, which exclude national holidays, are indicated in the table below. Our domestic trucking activity tends to occur on a 24/7 basis, as did our international rig activity prior to the sale of our international operations. Accordingly, we track our international rig activity and our domestic trucking activity on a “per calendar day” basis. The following table presents our quarterly rig and trucking hours from 2016 through the third quarter of 2017:
 
 
Rig Hours
 
Trucking Hours
 
Key’s U.S. 
Working Days(1)
2017:
 
U.S.
 
International
 
Total
 
 
 
 
First Quarter
 
165,968

 
2,462

 
168,430

 
179,215

 
64

Second Quarter
 
163,966

 
1,701

 
165,667

 
185,398

 
63

Third Quarter
 
161,725

 
2,937

 
164,662

 
197,319

 
63

Total 2017
 
491,659

 
7,100

 
498,759

 
561,932

 
190

 
 
 
 
 
 
 
 
 
 
 
2016:
 
 
 
 
 
 
 
 
 
 
First Quarter
 
153,417

 
5,715

 
159,132

 
217,429

 
63

Second Quarter
 
144,587

 
6,913

 
151,500

 
199,527

 
64

Third Quarter
 
163,206

 
6,170

 
169,376

 
198,362

 
64

Fourth Quarter
 
169,087

 
4,341

 
173,428

 
192,049

 
61

Total 2016
 
630,297

 
23,139

 
653,436

 
807,367

 
252

(1)
Key’s U.S. working days are the number of weekdays during the quarter minus national holidays.
MARKET AND BUSINESS CONDITIONS AND OUTLOOK
Our core businesses depend on our customers’ willingness to make expenditures to produce, develop and explore for oil and natural gas. Industry conditions are influenced by numerous factors, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, and political instability in oil producing countries and available supply of and demand for the services we provide. Oil and natural gas prices began a rapid and substantial decline in the fourth quarter of 2014. Depressed commodity price conditions persisted and worsened during 2015 and into 2016. As a result, the Baker Hughes U.S. rig count and the AESC well service rig count, along with demand for our products and services declined substantially, and the prices we are able to charge our customers for our products and services also declined substantially. While we sought to anticipate activity declines and reshaped our organizational and cost structure to mitigate the negative impact of these declines, we have continued to experience negative operating results and cash flows from operations. In 2017, oil prices recovered off the lows of 2016 and spurred an increase in the Baker Hughes U.S. rig count and related well completion activity, however, the same magnitude of activity increase did not occur in our principal Rig Services business, as measured by the AESC well service rig count, as oil and gas producer’s production maintenance spending has not recovered to the same extent as new well drilling and completion spending.
While we saw continued improvement in demand and pricing for our services, particularly those driven by the completion of oil and natural gas wells, through the first nine months of 2017, continued uncertainty around the stability of oil prices dampened the pace of improvement in well services activity particularly as it relates to our customers spending for the maintenance of existing oil and gas wells. We believe that a stabilization of oil prices at a price attractive to our customers will be necessary for the demand and associated pricing of our services related to conventional well maintenance work to improve significantly. Additionally, we believe that continued aging of horizontal wells and customers choosing to increase production through return accretive regular well maintenance in these horizontal wells will strengthen demand for and increase the price of our services over the next several years. With increased demand for oilfield services broadly, however, the demand for qualified employees will also increase, which may impact our ability to meet the needs of our customers or offset price increases realized due to inflation in labor costs.
RESULTS OF OPERATIONS
The following tables set forth consolidated results of operations and financial information by operating segment and other selected information of the Successor Company and the Predecessor Company for the periods ending September 30, 2017 and 2016, respectively. Upon emergence on the Effective Date, the Company adopted fresh start accounting which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the Consolidated Financial Statements on or after December 16, 2016 are not comparable with the Consolidated Financial Statements prior to that date. While the comparison of these periods is not presented according

23

to GAAP and no comparable GAAP measures are presented, management believes that providing this financial information is the most relevant and useful method for making comparisons between the periods.
The following table shows our consolidated results of operations for the three and nine months ended September 30, 2017 and 2016, respectively (in thousands):
 
Successor
 
 
Predecessor
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
REVENUES
$
110,653

 
 
$
102,406

 
$
319,885

 
 
$
308,506

COSTS AND EXPENSES:
 
 
 
 
 

 
 

Direct operating expenses
87,115

 
 
96,071

 
237,981

 
 
276,088

Depreciation and amortization expense
21,114

 
 
33,467

 
63,325

 
 
105,075

General and administrative expenses
37,168

 
 
42,456

 
98,498

 
 
129,604

Impairment expense
—

 
 
40,000

 
187

 
 
40,000

Operating loss
(34,744
)
 
 
(109,588
)
 
(80,106
)
 
 
(242,261
)
Interest expense, net of amounts capitalized
8,090

 
 
21,120

 
23,672

 
 
64,061

Other (income) loss, net
(4,578
)
 
 
154

 
(5,779
)
 
 
(665
)
Reorganization items, net
60

 
 
—

 
1,501

 
 
—

Loss before income taxes
(38,316
)
 
 
(130,862
)
 
(99,500
)
 
 
(305,657
)
Income tax benefit
96

 
 
110

 
1,238

 
 
489

NET LOSS
$
(38,220
)
 
 
$
(130,752
)
 
$
(98,262
)
 
 
$
(305,168
)
Consolidated Results of Operations — Three Months Ended September 30, 2017 and 2016
Revenues
Our revenues for the three months ended September 30, 2017 increased $8.2 million, or 8.1%, to $110.7 million from $102.4 million for the three months ended September 30, 2016, due to an increase in spending from our customers as they react to improving commodity prices, particularly in our Coiled Tubing segment. Internationally, we had lower revenue primarily due to a decrease in customer activity in Russia and due to the sale during the third quarter of 2017 of these operations. See “Segment Operating Results — Three Months Ended September 30, 2017 and 2016” below for a more detailed discussion of the change in our revenues.
Direct Operating Expenses
Our direct operating expenses decreased $9.0 million, to $87.1 million (78.7% of revenues), for the three months ended September 30, 2017, compared to $96.1 million (93.8% of revenues) for the three months ended September 30, 2016. The decrease is primarily related to a decrease in insurance costs and repair and maintenance expense as we took steps to reduce our cost structure.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $12.4 million, or 36.9%, to $21.1 million during the three months ended September 30, 2017, compared to $33.5 million for the three months ended September 30, 2016. The decrease is primarily attributable to the reduction of property, plant and equipment due to the implementation of fresh start accounting in the fourth quarter of 2016.
General and Administrative Expenses
General and administrative expenses decreased $5.3 million, to $37.2 million (33.6% of revenues), for the three months ended September 30, 2017, compared to $42.5 million (41.5% of revenues) for the three months ended September 30, 2016. The decrease is primarily due to a $13.1 million decrease in professional fees related to our 2016 corporate restructuring partially offset by a $11.6 million increase in legal settlement accruals.

24

Impairment Expense
There were no impairments recorded in the three months ended September 30, 2017. During the three months ended September 30, 2016, we recorded a $40.0 million impairment to reduce the carrying value of the assets and related liabilities of our Mexican business unit, which was at the time being held for sale, to fair market value.
Interest Expense, Net of Amounts Capitalized
Interest expense decreased $13.0 million, or 61.7%, to $8.1 million for the three months ended September 30, 2017, compared to $21.1 million for the same period in 2016. The decrease is primarily related to the elimination of the Predecessor Company’s senior secured notes in connection with our emergence from voluntary reorganization.
Other (Income) Loss, Net
During the quarter ended September 30, 2017, we recognized other income, net, of $4.6 million, compared to other loss, net, of $0.2 million for the quarter ended September 30, 2016. Our foreign exchange loss relates to U.S. dollar-denominated transactions in our foreign businesses and fluctuations in exchange rates between local currencies and the U.S. dollar.
The following table summarizes the components of other (income) loss, net for the periods indicated:
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2017
 
 
Three Months Ended September 30, 2016
Interest income
$
(182
)
 
 
$
(104
)
Foreign exchange (gain) loss
(15
)
 
 
351

Other, net
(4,381
)
 
 
(93
)
Total
$
(4,578
)
 
 
$
154

Reorganization Items, Net
Reorganization item expenses were $0.1 million for the three months ended September 30, 2017, and there were no reorganization item expenses for the same period in 2016. Reorganization items consist of professional fees incurred in connection with our emergence from voluntary reorganization.
Income Tax Benefit
We recorded an income tax benefit of $0.1 million on a pre-tax loss of $38.3 million in the three months ended September 30, 2017, compared to an income tax benefit of $0.1 million on a pre-tax loss of $130.9 million in the three months ended September 30, 2016. Our effective tax rate was 0.3% for the three months ended September 30, 2017, compared to 0.1% for the three months ended September 30, 2016. Our effective tax rates for such periods differ from the U.S. statutory rate of 35% due to a number of factors, including the mix of profit and loss between domestic and international taxing jurisdictions and the impact of permanent items, including expenses subject to statutorily imposed limitations such as meals and entertainment expenses, that affect book income but do not affect taxable income and discrete tax adjustments, such as valuation allowances against deferred tax assets and tax expense or benefit recognized for uncertain tax positions.

25

Segment Operating Results — Three Months Ended September 30, 2017 and 2016
The following table shows operating results for each of our segments for the three months ended September 30, 2017 and 2016 (in thousands):
Successor company as of and for the three months ended September 30, 2017
 
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support
 
Total
Revenues from external customers
 
$
61,933

 
$
20,713

 
$
12,499

 
$
14,177

 
$
1,331

 
$
—

 
$
110,653

Operating expenses
 
62,435

 
27,975

 
10,645

 
16,543

 
2,459

 
25,340

 
145,397

Operating loss
 
(502
)
 
(7,262
)
 
1,854

 
(2,366
)
 
(1,128
)
 
(25,340
)
 
(34,744
)
Predecessor company as of and for the three months ended September 30, 2016
 
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support
 
Total
Revenues from external customers
 
$
59,137

 
$
18,969

 
$
7,146

 
$
14,078

 
$
3,076

 
$
—

 
$
102,406

Operating expenses
 
68,141

 
32,194

 
11,518

 
21,029

 
47,465

 
31,647

 
211,994

Operating loss
 
(9,004
)
 
(13,225
)
 
(4,372
)
 
(6,951
)
 
(44,389
)
 
(31,647
)
 
(109,588
)
U.S. Rig Services
Revenues for our U.S. Rig Services segment increased $2.8 million, or 4.7%, to $61.9 million for the three months ended September 30, 2017, compared to $59.1 million for the three months ended September 30, 2016. The increase for this segment is primarily due to an increase in completion and production spending from our customers as they react to improving commodity prices.
Operating expenses for our U.S. Rig Services segment were $62.4 million during the three months ended September 30, 2017, which represented a decrease of $5.7 million, or 8.4%, compared to $68.1 million for the same period in 2016. These expenses decreased primarily as a result of reduced depreciation expense and a decrease in employee compensation on a per hour basis as we took steps to reduce our cost structure.
Fluid Management Services
Revenues for our Fluid Management Services segment increased $1.7 million, or 9.2%, to $20.7 million for the three months ended September 30, 2017, compared to $19.0 million for the three months ended September 30, 2016. The increase for this segment is primarily due to an increase in spending from our customers as they react to improving commodity prices.
Operating expenses for our Fluid Management Services segment were $28.0 million during the three months ended September 30, 2017, which represented a decrease of $4.2 million, or 13.1%, compared to $32.2 million for the same period in 2016. These expenses decreased primarily as a result of a decrease in employee compensation costs and equipment expense as we took steps to reduce our cost structure.
Coiled Tubing Services
Revenues for our Coiled Tubing Services segment increased $5.4 million, or 74.9%, to $12.5 million for the three months ended September 30, 2017, compared to $7.1 million for the three months ended September 30, 2016. The increase for this segment is primarily due to an increase in drilling and completion spending from our customers as they react to improving commodity prices.
Operating expenses for our Coiled Tubing Services segment were $10.6 million during the three months ended September 30, 2017, which represented a decrease of $0.9 million, or 7.6%, compared to $11.5 million for the same period in 2016. These expenses decreased primarily as a result of reduced depreciation expense and a decrease in employee compensation costs and equipment expense as we took steps to reduce our cost structure.
Fishing and Rental Services
Revenues for our Fishing and Rental Services segment increased $0.1 million, or 0.7%, to $14.2 million for the three months ended September 30, 2017, compared to $14.1 million for the three months ended September 30, 2016. The increase for this segment is primarily due to an increase in completion and production spending from our customers as they react to improving commodity prices.

26

Operating expenses for our Fishing and Rental Services segment were $16.5 million during the three months ended September 30, 2017, which represented a decrease of $4.5 million, or 21.3%, compared to $21.0 million for the same period in 2016. These expenses decreased primarily as a result of reduced depreciation expense and a decrease in and a decrease in employee compensation on a per hour basis as we took steps to reduce our cost structure.
International
Revenues for our International segment decreased $1.7 million, or 56.7%, to $1.3 million for the three months ended September 30, 2017, compared to $3.1 million for the three months ended September 30, 2016. The decrease was primarily attributable to lower customer activity in Russia and due to the sale during the third quarter of 2017 of these operations and our exit from operations in Mexico which was sold in 2016.
Operating expenses for our International segment decreased $45.0 million, or 94.8%, to $2.5 million for the three months ended September 30, 2017, compared to $47.5 million for the three months ended September 30, 2016. These expenses decreased primarily as a result of a decrease in employee compensation costs and equipment expense primarily related to the exit from operations in Mexico and Russia and a $40.0 million impairment to reduce the carrying value of the assets and related liabilities of our Mexican business unit, which was sold in 2016, to fair market value.
Functional Support
Operating expenses for Functional Support, which represent expenses associated with managing our U.S. and International reporting segments, decreased $6.3 million, or 19.9%, to $25.3 million (22.9% of consolidated revenues) for the three months ended September 30, 2017 compared to $31.6 million (30.9% of consolidated revenues) for the same period in 2016. The decrease is primarily due to decrease of $13.1 million in professional fees related to the 2016 corporate restructuring.
Consolidated Results of Operations — Nine Months Ended September 30, 2017 and 2016
Revenues
Our revenues for the nine months ended September 30, 2017 increased $11.4 million, or 3.7%, to $319.9 million from $308.5 million for the nine months ended September 30, 2016, due to an increase in spending from our customers as they react to improving commodity prices. Internationally, we had lower revenue as a result of the sale our operations in Mexico, a decrease in activity in Russia and the sale during the third quarter of 2017 of our Russian operations. See “Segment Operating Results — Nine Months Ended September 30, 2017 and 2016” below for a more detailed discussion of the change in our revenues.
Direct Operating Expenses
Our direct operating expenses decreased $38.1 million, to $238.0 million (74.4% of revenues), for the nine months ended September 30, 2017, compared to $276.1 million (89.5% of revenues) for the nine months ended September 30, 2016. The decrease is primarily related to a $21.0 million gain on the sale of certain assets and a decrease in employee compensation costs, fuel expense and repair and maintenance expense as we took steps to reduce our cost structure.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $41.8 million, or 39.7%, to $63.3 million during the nine months ended September 30, 2017, compared to $105.1 million for the nine months ended September 30, 2016. The decrease is primarily attributable to the reduction of property, plant and equipment due to the implementation of fresh start accounting in the fourth quarter of 2016.
General and Administrative Expenses
General and administrative expenses decreased $31.1 million, to $98.5 million (30.8% of revenues), for the nine months ended September 30, 2017, compared to $129.6 million (42.0% of revenues) for the nine months ended September 30, 2016. The decrease is primarily due to a $20.9 million decrease in professional fees related to our 2016 corporate restructuring and lower employee compensation costs due to reduced staffing levels and a reduction in wages partially offset by a $11.6 million increase in legal settlement accruals.

27

Impairment Expense
During the nine months ended September 30, 2017, we recorded a $0.2 million impairment to reduce the carrying value of the assets and related liabilities of our Russian business unit, which was sold in the third quarter of 2017, to fair market value. During the nine months ended September 30, 2016, we recorded a $40.0 million impairment to reduce the carrying value of the assets and related liabilities of our Mexican business unit, which was sold in 2016, to fair market value.
Interest Expense, Net of Amounts Capitalized
Interest expense decreased $40.4 million, or 63.0%, to $23.7 million for the nine months ended September 30, 2017, compared to $64.1 million for the same period in 2016. The decrease is primarily related to the elimination of the Predecessor Company’s senior secured notes in connection with our emergence from voluntary reorganization.
Other Income, Net
During the nine months ended September 30, 2017, we recognized other income, net, of $5.8 million, compared to other income, net, of $0.7 million for the nine months ended September 30, 2016. Our foreign exchange loss relates to U.S. dollar-denominated transactions in our foreign locations and fluctuations in exchange rates between local currencies and the U.S. dollar.
The following table summarizes the components of other income, net for the periods indicated (in thousands):
 
Successor
 
 
Predecessor
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
Interest income
$
(534
)
 
 
$
(371
)
Foreign exchange (gain) loss
(29
)
 
 
1,112

Other, net
(5,216
)
 
 
(1,406
)
Total
$
(5,779
)
 
 
$
(665
)
Reorganization Items, Net
Reorganization item expenses were $1.5 million for the nine months ended September 30, 2017, and there were no reorganization item expenses for the same period in 2016. Reorganization items consist of professional fees incurred in connection with our emergence from voluntary reorganization.
Income Tax Benefit
We recorded an income tax benefit of $1.2 million on a pre-tax loss of $99.5 million for the nine months ended September 30, 2017, compared to an income tax benefit of $0.5 million on a pre-tax loss of $305.7 million for the same period in 2016. Our effective tax rate was 1.2% for the nine months ended September 30, 2017, compared to 0.2% for the nine months ended September 30, 2016. Our effective tax rates for such periods differ from the U.S. statutory rate of 35% due to a number of factors, including the mix of profit and loss between domestic and international taxing jurisdictions and the impact of permanent items, including expenses subject to statutorily imposed limitations such as meals and entertainment expenses, that affect book income but do not affect taxable income and discrete tax adjustments, such as valuation allowances against deferred tax assets and tax expense or benefit recognized for uncertain tax positions.
Segment Operating Results — Nine Months Ended September 30, 2017 and 2016
The following table shows operating results for each of our segments for the nine months ended September 30, 2017 and 2016 (in thousands):
Successor company as of and for the nine months ended September 30, 2017
 
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support
 
Total
Revenues from external customers
 
$
184,026

 
$
57,475

 
$
27,005

 
$
45,808

 
$
5,571

 
$
—

 
$
319,885

Operating expenses
 
186,792

 
74,901

 
27,111

 
34,557

 
10,351

 
66,279

 
399,991

Operating loss
 
(2,766
)
 
(17,426
)
 
(106
)
 
11,251

 
(4,780
)
 
(66,279
)
 
(80,106
)

28

Predecessor company as of and for the nine months ended September 30, 2016
 
 
U.S. Rig Services
 
Fluid Management Services
 
Coiled Tubing Services
 
Fishing and Rental Services
 
International
 
Functional
Support
 
Total
Revenues from external customers
 
$
169,627

 
$
61,230

 
$
24,294

 
$
43,773

 
$
9,582

 
$
—

 
$
308,506

Operating expenses
 
198,671

 
88,282

 
40,872

 
63,512

 
63,932

 
95,498

 
550,767

Operating loss
 
(29,044
)
 
(27,052
)
 
(16,578
)
 
(19,739
)
 
(54,350
)
 
(95,498
)
 
(242,261
)
U.S. Rig Services
Revenues for our U.S. Rig Services segment increased $14.4 million, or 8.5%, to $184.0 million for the nine months ended September 30, 2017, compared to $169.6 million for the nine months ended September 30, 2016. The increase for this segment is primarily due to an increase in completion and production spending from our customers as they react to improving commodity prices.
Operating expenses for our U.S. Rig Services segment were $186.8 million for the nine months ended September 30, 2017, which represented a decrease of $11.9 million, or 6.0%, compared to $198.7 million for the same period in 2016. These expenses decreased primarily as a result of a decrease in depreciation expense and a decrease in employee compensation costs and equipment expense as we took steps to reduce our cost structure.
Fluid Management Services
Revenues for our Fluid Management Services segment decreased $3.8 million, or 6.1%, to $57.5 million for the nine months ended September 30, 2017, compared to $61.2 million for the nine months ended September 30, 2016. The decrease for this segment is primarily due to our exit from unprofitable locations.
Operating expenses for our Fluid Management Services segment were $74.9 million for the nine months ended September 30, 2017, which represented a decrease of $13.4 million, or 15.2%, compared to $88.3 million for the same period in 2016. These expenses decreased primarily due to a decrease in equipment expense and employee compensation costs as we took steps to reduce our cost structure and as a result of lower activity levels.
Coiled Tubing Services
Revenues for our Coiled Tubing Services segment increased $2.7 million, or 11.2%, to $27.0 million for the nine months ended September 30, 2017, compared to $24.3 million for the nine months ended September 30, 2016. The increase for this segment is primarily due an increase in drilling and completion spending from our customers as they react to improving commodity prices.
Operating expenses for our Coiled Tubing Services segment were $27.1 million for the nine months ended September 30, 2017, which represented a decrease of $13.8 million, or 33.7%, compared to $40.9 million for the same period in 2016. These expenses decreased primarily due to reduced depreciation expense and a decrease in employee compensation costs, repair and maintenance expense and fuel costs as we took steps to reduce our cost structure and as a result of lower activity levels.
Fishing and Rental Services
Revenues for our Fishing and Rental Services segment increased $2.0 million, or 4.6%, to $45.8 million for the nine months ended September 30, 2017, compared to $43.8 million for the nine months ended September 30, 2016. The increase for this segment is primarily due to an increase in completion and production spending from our customers as they react to improving commodity prices.
Operating expenses for our Fishing and Rental Services segment were $34.6 million for the nine months ended September 30, 2017, which represented a decrease of $29.0 million, or 45.6%, compared to $63.5 million for the same period in 2016. These expenses decreased primarily due to a $21.0 million gain on the sale of certain assets, as a result of reduced depreciation expense and a decrease in employee compensation on a per hour basis as we took steps to reduce our cost structure.
International
Revenues for our International segment decreased $4.0 million, or 41.9%, to $5.6 million for the nine months ended September 30, 2017, compared to $9.6 million for the nine months ended September 30, 2016. The decrease was primarily attributable the exit of operations in Mexico and a decrease in activity in Russia and the sale during the third quarter of 2017 of our Russian operations.
Operating expenses for our International segment decreased $53.6 million, or 83.8%, to $10.4 million for the nine months ended September 30, 2017, compared to $63.9 million for the nine months ended September 30, 2016. These expenses decreased primarily as a result of a decrease in employee compensation costs and equipment expense, related to our exit from operations in

29

Mexico and Russia and a $40.0 million impairment to reduce the carrying value of the assets and related liabilities of our Mexican business unit, which was sold in 2016, to fair market value.
Functional Support
Operating expenses for Functional Support, which represent expenses associated with managing our U.S. and International reporting segments, decreased $29.2 million, or 30.6%, to $66.3 million (20.7% of consolidated revenues) for the nine months ended September 30, 2017 compared to $95.5 million (31.0% of consolidated revenues) for the same period in 2016. The decrease is primarily due to lower employee compensation costs due to reduced staffing levels and reduction in wages, a $5.0 million FCPA settlement accrual and a decrease of $20.9 million in professional fees related to the 2016 corporate restructuring.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition and Liquidity
As of September 30, 2017, we had total liquidity of $104.2 million which consists of $77.7 million cash and cash equivalents and $26.5 million of borrowing capacity available under our ABL Facility. This compares to total liquidity of $118.2 million which consists of $90.5 million cash and cash equivalents and $27.7 million of borrowing capacity available under our ABL Facility as of December 31, 2016. Our working capital was $99.0 million as of September 30, 2017, compared to $120.3 million as of December 31, 2016. Our working capital decreased from the prior year end primarily as a result of a decrease in restricted cash, accounts receivable and other current assets partially offset by a decrease in other current liabilities. As of September 30, 2017, we had no borrowings outstanding and $33.7 million in committed letters of credit outstanding under our ABL Facility.
The following table summarizes our cash flows for the nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Successor
 
 
Predecessor
 
 
Nine Months Ended September 30, 2017
 
 
Nine Months Ended September 30, 2016
Net cash used in operating activities
 
$
(48,633
)
 
 
$
(104,809
)
Cash paid for capital expenditures
 
(9,610
)
 
 
(7,420
)
Proceeds received from sale of fixed assets
 
31,844

 
 
13,376

Repayments of long-term debt
 
(1,875
)
 
 
(24,548
)
Restricted cash
 
16,007

 
 
(18,605
)
Payment of deferred financing costs
 
(350
)
 
 
—

Other financing activities, net
 
(85
)
 
 
(3,329
)
Effect of exchange rates on cash
 
(146
)
 
 
(1,908
)
Net decrease in cash and cash equivalents
 
$
(12,848
)
 
 
$
(147,243
)
Cash used in operating activities was $48.6 million for the nine months ended September 30, 2017 compared to cash used in operating activities of $104.8 million for the nine months ended September 30, 2016. Cash used in operating activities for the nine months ended September 30, 2017 was primarily related to net loss adjusted for noncash items and decrease in accrued liabilities. Cash used in operating activities for the nine months ended September 30, 2016 was primarily related to net loss adjusted for noncash items partially offset by a decrease in accounts receivable.
Cash provided by investing activities was $22.2 million for the nine months ended September 30, 2017 compared to cash provided by investing activities of $6.0 million for the nine months ended September 30, 2016. Cash inflows during these periods consisted primarily of proceeds from sales of fixed assets. Cash outflows during these periods consisted primarily of capital expenditures. Our capital expenditures primarily relate to maintenance of our equipment.
Cash provided by financing activities was $13.7 million for the nine months ended September 30, 2017 compared to cash used in financing activities of $46.5 million for the nine months ended September 30, 2016. Overall financing cash inflows for the nine months ended September 30, 2017 primarily relate to the decrease in restricted cash. Overall financing cash outflows for the nine months ended September 30, 2016 primarily relate to the increase in restricted cash and repayment of long-term debt.
Sources of Liquidity and Capital Resources
We believe that our internally generated cash flows from operations, current reserves of cash and availability under our ABL Facility are sufficient to finance our cash requirements for current and future operations, budgeted capital expenditures, debt service and other obligations for the next twelve months.

30

At September 30, 2017, our annual debt maturities for our 2021 Term Loan Facility were as follows (in thousands):
 
 
Year
Principal
Payments
2017
$
625

2018
2,500

2019
2,500

2020
2,500

2021 and thereafter
240,000

Total principal payments
$
248,125

ABL Facility
On December 15, 2016, the Company and Key Energy Services, LLC, as borrowers (the “ABL Borrowers”), entered into the ABL Facility with the financial institutions party thereto from time to time as lenders (the “ABL Lenders”), Bank of America, N.A., as administrative agent for the lenders (the “Administrative Agent”) and Bank of America, N.A. and Wells Fargo Bank, National Association, as co-collateral agents for the lenders. The ABL Facility provides for aggregate initial commitments from the ABL Lenders of $80 million, which, on February 3, 2017 was increased to $100 million, and matures on June 15, 2021.
The ABL Facility provides the ABL Borrowers with the ability to borrow up to an aggregate principal amount equal to the lesser of (i) the aggregate revolving commitments then in effect and (ii) the sum of (a) 85% of the value of eligible accounts receivable plus (b) 80% of the value of eligible unbilled accounts receivable, subject to a limit equal to the greater of (x) $35 million and (y) 25% of the commitments. The amount that may be borrowed under the ABL Facility is subject to increase or reduction based on certain segregated cash or reserves provided for by the ABL Facility. In addition, the percentages of accounts receivable and unbilled accounts receivable included in the calculation described above is subject to reduction to the extent of certain bad debt write-downs and other dilutive items provided in the ABL Facility.
Borrowings under the ABL Facility bear interest, at the ABL Borrowers’ option, at a per annum rate equal to (i) LIBOR for 30, 60, 90, 180, or, with the consent of the ABL Lenders, 360 days, plus an applicable margin that varies from 2.50% to 4.50% depending on the Borrowers’ fixed charge coverage ratio at such time or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the federal funds rate, plus 0.50% or (z) 30-day LIBOR, plus 1.0% plus (b) an applicable margin that varies from 1.50% to 3.50% depending of the Borrowers’ fixed charge coverage ratio at such time. In addition, the ABL Facility provides for unused line fees of 1.00% to 1.25% per year, depending on utilization, letter of credit fees and certain other factors.
The ABL Facility may in the future be guaranteed by certain of the Company’s existing and future subsidiaries (the “ABL Guarantors,” and together with the ABL Borrowers, the “ABL Loan Parties”). To secure their obligations under the ABL Facility, each of the ABL Loan Parties has granted or will grant, as applicable, to the Administrative Agent a first-priority security interest for the benefit of the ABL Lenders in its present and future accounts receivable, inventory and related assets and proceeds of the foregoing (the “ABL Priority Collateral”). In addition, the obligations of the ABL Loan Parties under the ABL Facility are secured by second-priority liens on the Term Priority Collateral (as described below under “Term Loan Facility”).
The revolving loans under the ABL Facility may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs.
The ABL Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the ABL Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The ABL Facility also contains a requirement that the ABL Borrowers comply, during certain periods with a fixed charge coverage ratio of 1.00 to 1.00.
As of September 30, 2017, we have no borrowings outstanding under the ABL Facility and $33.7 million of letters of credit outstanding with borrowing capacity of $26.5 million available subject to covenant constraints under our ABL Facility.
Term Loan Facility
On December 15, 2016, the Company entered into the Term Loan Facility among the Company, as borrower, certain subsidiaries of the Company named as guarantors therein, the financial institutions party thereto from time to time as Lenders (collectively, the “Term Loan Lenders”) and Cortland Capital Market Services LLC and Cortland Products Corp., as agent for the Lenders. The Term Loan Facility had an outstanding principal amount of $250 million as of the Effective Date.
The Term Loan Facility will mature on December 15, 2021, although such maturity date may, at the Company’s request, be extended by one or more of the Term Loan Lenders pursuant to the terms of the Term Loan Facility. Borrowings under the Term Loan Facility bear interest, at the Company’s option, at a per annum rate equal to (i) LIBOR for one, two, three, six, or, with

31

the consent of the Term Loan Lenders, 12 months, plus 10.25% or (ii) a base rate equal to the sum of (a) the greatest of (x) the prime rate, (y) the Federal Funds rate, plus 0.50% and (z) 30-day LIBOR, plus 1.0% plus (b) 9.25%.
The Term Loan Facility is guaranteed by certain of the Company’s existing and future subsidiaries (the “Term Loan Guarantors,” and together with the Company, the “Term Loan Parties”). To secure their obligations under the Term Loan Facility, each of the Term Loan Parties has granted or will grant, as applicable, to the Agent a first-priority security interest for the benefit of the Term Loan Lenders in substantially all of each Term Loan Party’s assets other than certain excluded assets and the ABL Priority Collateral (the “Term Priority Collateral”). In addition, the obligations of the Term Loan Parties under the Term Loan Facility are secured by second-priority liens on the ABL Priority Collateral (as described above under “ABL Facility”).
The loans under the Term Loan Facility may be prepaid at the Company’s option, subject to the payment of a prepayment premium in certain circumstances as provided in the Term Loan Facility. If a prepayment is made prior to the first anniversary of the loan, such prepayment must be made with make-whole amount with the calculation of the make-whole amount as specified in the Term Loan Facility. If a prepayment is made after the first anniversary of the loan but prior to the second anniversary, such prepayment must be made at 106% of the principle amount, if a prepayment is made after the second anniversary but prior to the third anniversary, such prepayment must be made at 103% of the principle amount. After the third anniversary, if a prepayment is made, no prepayment premium is due. The Company is required to make principal payments in the amount of $625,000 per quarter, which principal payments commenced with the quarter ended March 31, 2017. In addition, pursuant to the Term Loan Facility, the Company must prepay or offer to prepay, as applicable, term loans with the net cash proceeds of certain debt incurrences and asset sales, excess cash flow, and upon certain change of control transactions, subject in each case to certain exceptions.
The Term Loan Facility contains certain affirmative and negative covenants, including covenants that restrict the ability of the Term Loan Parties to take certain actions including, among other things and subject to certain significant exceptions, the incurrence of debt, the granting of liens, the making of investments, entering into transactions with affiliates, the payment of dividends and the sale of assets. The Term Loan Facility also contains financial covenants requiring that the Company maintain an asset coverage ratio of at least 1.35 to 1.0 and that Liquidity (as defined in the Term Loan Facility) must not be less than $37.5 million (of which at least $20.0 million must be in cash or cash equivalents held in deposit accounts) as of the last day of any fiscal quarter, subject to certain exceptions and cure rights.
Debt Compliance
At September 30, 2017, we were in compliance with all the financial covenants under our ABL Facility and the Term Loan Facility. Based on management’s current projections, we expect to be in compliance with all the covenants under our ABL Facility and Term Loan Facility for the next twelve months. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness.
Capital Expenditures
During the nine months ended September 30, 2017, our capital expenditures totaled $9.6 million, primarily related to the ongoing maintenance of our equipment. Our capital expenditure plan for 2017 contemplates spending between $10 million and $15 million, subject to market conditions. This is primarily related to equipment replacement needs, including ongoing replacements to our rig services fleet. Our capital expenditure program for 2017 is subject to market conditions, including activity levels, commodity prices, industry capacity and specific customer needs as well as cash flows. Our focus for 2017 will be the maximization of our current equipment fleet, but we may choose to increase our capital expenditures in 2017 to expand our presence in a market. We currently anticipate funding our 2017 capital expenditures through a combination of cash on hand, operating cash flow, proceeds from sales of assets and borrowings under our ABL Facility. Should our operating cash flows or activity levels prove to be insufficient to fund our currently planned capital spending levels, management expects that it will adjust our capital spending plans accordingly. We may also incur capital expenditures for strategic investments and acquisitions.
Off-Balance Sheet Arrangements
At September 30, 2017 we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in our 2016 Form 10-K. More detailed information concerning market risk can be found in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2016 Form 10-K.

32

ITEM 4.     CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, management concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of 2017 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

33

PART II — OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are subject to various suits and claims that have arisen in the ordinary course of business. We do not believe that the disposition of any of our ordinary course litigation will result in a material adverse effect on our consolidated financial position, results of operations or cash flows. For additional information on legal proceedings, see “Note 10. Commitments and Contingencies” in “Item 1. Financial Statements” of Part I of this report, which is incorporated herein by reference.
In November 2015, the Santa Barbara County District Attorney filed a criminal complaint against two former employees and Key, specifically alleging three counts of violations of California Labor Code section 6425(a) against Key. The complaint sought unspecified penalties against Key related to an October 12, 2013 accident which resulted in the death of one Key employee at a drilling site near Santa Maria, California. An arraignment was held on February 10, 2016, where Key and its former employees pleaded not guilty to all charges.
On or about January 10, 2017, Key entered into a settlement with the Santa Barbara County District Attorney. Key agreed to plead no contest to one felony count (Count 2), a violation of California Labor Code 6425(a). The Santa Barbara County District Attorney also agreed to recommend total restitution, fines, fees, and surcharges not to exceed $450,000. The court dismissed the remaining charges (Counts 1 and 3) against Key. The parties agreed to postpone sentencing in the matter until January 20, 2018.  The parties agreed that if Key pays all of the total restitution, fines, fees, and surcharges by January 20, 2018, the Santa Barbara County District Attorney will not object to Key withdrawing its plea to a felony count on Count 2 and entering a plea to a misdemeanor.
ITEM 1A.
RISK FACTORS
Reference is made to Part I, Item 1A. Risk Factors of the 2016 Form 10-K for information concerning risk factors.
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During the three months ended September 30, 2017, we repurchased the shares shown in the table below to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees:
Period
 
Number of
Shares Purchased
 

Average Price
Paid per Share(1)
July 1, Period to July 31, Period
 
—

 
$
—

August 1, Period to August 31, Period
 
2,432

 
12.83

September 1, Period to September 30, Period
 
—

 
—

Total
 
2,432

 
$
12.83

(1)
The price paid per share with respect to the tax withholding repurchases was determined using the closing prices on the applicable vesting date.
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
The Exhibit Index, which follows the signature pages to this report and is incorporated by reference herein, sets forth a list of exhibits to this report.

34

EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
3.1
  
 
 
3.2
  
 
 
31.1*
  
 
 
31.2*
  
 
 
32**
  
 
 
101*
  
Interactive Data File.
 
 
*
Filed herewith
 
 
**
Furnished herewith



35

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:
November 9, 2017
 
 
By:
/s/ J. MARSHALL DODSON
 
 
 
 
 
J. Marshall Dodson
 
 
 
 
 
Senior Vice President and Chief Financial Officer
(As duly authorized officer and Principal Financial Officer)

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