also have a Functional Support segment associated with managing all of our reportable operating segments. For a full description of our operating segments, see“Service OfferingsOfferings”” in“Item 1. BusinessBusiness.”.”
As of December 31, 2010, $59.4 million of letters of credit were outstanding under our revolving credit facility and we had $240.6 million of availability. On October 1, 2010, we borrowed $80.0 million under the credit facility to fund a portion of the purchase price of the OFS entities. Using a portion of the proceeds from the Patterson-UTI transaction, we subsequently repaid the entire balance of $167.8 million on October 4, 2010, bringing our total revolving facility borrowings outstanding to zero.
Cash Flows
During the year ended December 31, 2009,2010, we generated cash flows from operating activities of $184.8$129.8 million, compared to $367.2$184.8 million for the year ended December 31, 2008. Operating2009. These operating cash inflows for 2009 primarily relate to net income of $70.3 million, the collection of accounts receivable and receipt of a $53.2 million federal income tax refund, partially offset by our overall net loss for the period, as well as by cash paid against accounts payable and other liabilities. Our operating cash flow declined primarily as a result of lower net income for the period, which is attributableliabilities due to the decreaseincrease in our activity levels and pricing during 2009.activity.
Cash used in investing activities was $8.6 million and $110.6 million and $329.1 million for yearyears ended December 31, 20092010 and 2008,2009, respectively. Investing cash flows duringoutflows decreased from 2009 due to the year ended December 31, 2009 consisted primarilyproceeds from the sale of our pressure pumping and wireline businesses and the sale of six barge rigs. Offsetting these proceeds were increased capital expenditures and our second investment in Geostream, which were financed through cash on hand and cash generated by our operations. Investing cash flows declined from 2008 due to lower capital expenditures and lower net cash paid for acquisitions during the current period.acquisitions.
Cash used in financing activities was $127.5$100.2 million during the year ended December 31, 20092010, and $8.0$127.5 million for 2008.2009. Financing cash flowsoutflows during 20092010 consisted primarily of the net repayment of $100.0our revolving credit facility of $197.8 million, on the repayment of capital lease obligations, and the repayment of the $6.0 million outstanding principal balance of a related party note.
The cash flows from discontinued operations have not been separately identified in our Senior Secured Credit Facility duringconsolidated statements of cash flows for the second quarter, which was paid through the use of existing cash on hand and cash generated by our operations, and the lump sum repayment of a Related Party Note totaling $12.5 million in the fourth quarter. Financing cash outflows increased during the yearyears ended December 31, 2010, 2009 and 2008. We believe that the reduction in cash flows expected from discontinued operations will not have a material adverse impact on our liquidity or our ability to fund current or future operations and capital expenditures. We expect that the anticipated cash flows from the OFS businesses, will offset the reduction in cash flows from discontinued operations. Additionally, as we did not borrowused a portion of the net proceeds from the sale of the discontinued operations to pay down the outstanding balance on our Senior Secured Credit Facility, partially offsetwe improved our liquidity by lowerreducing our leverage and required interest payments. As such, we believe that the sale of our pressure pumping and wireline businesses will not have a significant adverse impact on our near-term liquidity or cash paid to repurchase our common stock as our share repurchase program expired on March 31, 2009.flows.
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The following table summarizes our cash flows for the year ended December 31, 20092010 and 2008:2009:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Net cash provided by operating activities | | $ | 184,837 | | | $ | 367,164 | | | $ | 129,805 | | | $ | 184,837 | |
Cash paid for capital expenditures | | | (128,422 | ) | | | (218,994 | ) | | | (180,310 | ) | | | (128,422 | ) |
Acquisitions, net of cash acquired | | | 12,007 | | | | (63,457 | ) | | | (86,688 | ) | | | 12,007 | |
Acquisition of Leader fixed assets | | | — | | | | (34,468 | ) | |
Investment in Geostream | | | — | | | | (19,306 | ) | |
Proceeds from sale of fixed assets | | | | 258,202 | | | | 5,580 | |
Other investing activities, net | | | 5,779 | | | | 7,151 | | | | 165 | | | | 199 | |
Repayments of capital lease obligations | | | (9,847 | ) | | | (11,506 | ) | | | (8,493 | ) | | | (9,847 | ) |
Repayments of long term debt | | | | (6,970 | ) | | | (16,552 | ) |
Borrowings on revolving credit facility | | | — | | | | 172,813 | | | | 110,000 | | | | — | |
Payments on revolving credit facility | | | (100,000 | ) | | | (35,000 | ) | | | (197,813 | ) | | | (100,000 | ) |
Repurchases of common stock | | | (488 | ) | | | (139,358 | ) | | | (3,098 | ) | | | (488 | ) |
Other financing activities, net | | | (17,140 | ) | | | 5,081 | | | | 6,169 | | | | (588 | ) |
Effect of changes in exchange rates on cash | | | (2,023 | ) | | | 4,068 | | | | (1,735 | ) | | | (2,023 | ) |
| | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | $ | (55,297 | ) | | $ | 34,188 | | |
Net increase (decrease) in cash and cash equivalents | | | $ | 19,234 | | | $ | (55,297 | ) |
| | | | | | | | | | |
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Debt Service
During the third quarter of 2009, we amended our Senior Secured Credit Facility to reduce total credit commitments under the facility from $400.0 million to $300.0 million. See “Senior Secured Credit Facility” below for further detail. At December 31, 2009,2010, our annual debt maturities foron our indebtedness, consisting only of our Senior Notes (defined below), borrowings under our Senior Secured Credit Facility, notes payable to related parties and other indebtedness at year-end, are as follows:
| | | | | | | | |
| | Principal Payments | | | Principal Payments | |
| | (In thousands) | | | (In thousands) | |
|
2010 | | $ | 3,044 | | |
2011 | | | 2,000 | | | $ | — | |
2012 | | | 89,813 | | | | — | |
2013 | | | — | | | | — | |
2014 | | | 425,000 | | | | 425,000 | |
2015 and thereafter | | | | — | |
| | | | | | |
Total principal payments | | $ | 519,857 | | |
Total | | | $ | 425,000 | |
| | | | | | |
Our revolving Senior Secured Credit Facility maturesWe have no maturities of debt in November 2012. In May 2009, we repaid $100.0 million on the outstanding balance of the revolving credit facility. In October 2009, we made principal payments totaling $14.5 million, plus accrued interest, related to the Related Party Notes. These payments represent a lump sum repayment of one Related Party Note totaling $12.5 million and a $2.0 million annual installment payment on the second Related Party Note.2011. Interest on our Senior Notes is due on June 1 and December 1 of each year. Our Senior Notes mature in December 2014. Interest paid on the Senior Notes during 20092010 was $35.6 million. Interest on the Senior Notes due in 2010for 2011 will be $35.6 million. We expect to fund interest payments from cash on hand and cash generated by operations. In October 2010, we repaid the outstanding principal balance of $167.8 million under our revolving credit facility with a portion of the proceeds from the sale of our pressure pumping and wireline businesses.
8.375% Senior Notes
On November 29, 2007, we issuedWe have $425.0 million of senior notes outstanding (the “Senior Notes”) that were issued in Senior NotesNovember 2007 under an indenture (the “Indenture”). The Senior Notes were priced at 100% of their face value to yield with an 8.375%. Net proceeds, after deducting initial purchasers’ fees and offering expenses, were approximately $416.1 million. coupon rate. The Senior Notes were registered as public debt effective August 22, 2008.
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The Senior Notes are general unsecured senior obligations of the Company. They rank effectively subordinate to all of our existing and future secured indebtedness. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. The Senior Notes mature on December 1, 2014.
On or after December 1, 2011, the Senior Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at the redemption prices (expressed as percentages of the principal amount redeemed) below, plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
| | | | | | | | |
Year | | Percentage | |
|
2011 | | | | | | | 104.19 | % |
2012 | | | | | | | 102.09 | % |
2013 | | | | | | | 100.00 | % |
In addition, at any time and from time to time before December 1, 2010, we have the option to redeem up to 35% of the aggregate principal amount of the outstanding Senior Notes at a redemption price of 108.375%, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings, provided that at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remains outstanding immediately after each such redemption. These redemptions must occur within 180 days of the date of the closing of the equity offering.
In addition, at any time and from time to time prior to December 1, 2011, we may, at our option, redeem all or a portion of the Senior Notes at a redemption price equal to 100% of the principal amount, plus the Applicable Premium (as defined in the Indenture) with respect to the Senior Notes and plus accrued and unpaid interest to the redemption date. If we experience a change of control, subject to certain exceptions, we must give holders of the Senior Notes the opportunity to sell to us their Senior Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.
We are subject to certain negative covenants under the Indenture governing the Senior Notes. The Indenture limits our ability to, among other things:
| | |
| • | sell assets; |
|
| • | pay dividends or make other distributions on capital stock or subordinated indebtedness; |
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| | |
| • | make investments; |
|
| • | incur additional indebtedness or issue preferred stock; |
|
| • | create certain liens; |
|
| • | enter into agreements that restrict dividends or other payments from our subsidiaries to us; |
|
| • | consolidate, merge or transfer all or substantially all of our assets; |
|
| • | engage in transactions with affiliates; and |
|
| • | create unrestricted subsidiaries. |
These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions in connection with the covenants of our Senior Secured Credit Facility. Substantially all of the covenants will terminate before the Senior Notes mature if one of two specified ratings agencies assigns the Senior Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2009,2010, the Senior Notes were below investment grade and have never been assigned investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit rating assigned to the Senior Notes later falls below an investment grade rating.
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On February 14, 2011, we commenced an any and all cash tender offer and consent solicitation with respect to the Senior Notes. The tender offer is scheduled to expire at 12:00 midnight, New York City time on March 14, 2011, unless extended or earlier terminated. Our obligation to accept for purchase and to pay for Senior Notes in the tender offer is conditioned on, among other things, the tender of Senior Notes representing at least a majority of the aggregate principal amount of Senior Notes outstanding on or prior to March 14, 2011 and our having received replacement financing on terms acceptable to us. We intend to fund the repurchase of the Senior Notes, plus all related fees and expenses, from the proceeds of one or more capital markets debt offerings and borrowings under our Senior Secured Credit Facility.
Senior Secured Credit Facility
We maintain a Senior Secured Credit Facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the administrative agents. We entered into the Senior Secured Credit Facility on November 29, 2007, simultaneously with the offering of the Senior Notes, and entered into an amendment (the “Amendment”) to the Senior Secured Credit Facility on October 27, 2009. As amended, theThe Senior Secured Credit Facility consists of a revolving credit facility, letter of creditsub-facility and swing line facility, up to an aggregate principal amount of $300.0 million, all of which will mature no later than November 29, 2012.
The Amendment we entered into in the fourth quarter of 2009 reduced the total credit commitments under the facility from $400.0 million to $300.0 million, effected by a pro rata reduction of the commitment of each lender under the facility. We have the ability to request increases in the total commitments under the facility by up to $100.0 million in the aggregate, with any such increases being subject to certain requirements as well as lenders’ approval. Pursuant to the Amendment, we also modified the applicable interest rates and some of the financial covenants, among other changes.
The interest rate per annum applicable to the Senior Secured Credit Facility (as amended) is, at our option, (i) LIBOR plus a margin of 350 to 450 basis points, depending on our consolidated leverage ratio, or, (ii) the base rate (defined as the higher of (x) Bank of America’s prime rate and (y) the Federal Funds rate plus 0.5%), plus a margin of 250 to 350 basis points, depending on our consolidated leverage ratio. Unused commitment fees on the facility range from 0.50% to 0.75%, depending upon our consolidated leverage ratio.
The Senior Secured Credit Facility contains certain financial covenants, which, among other things, require us to maintain certain financial ratios and limit our annual capital expenditures. In addition to covenants that impose restrictions on our ability to repurchase shares, have assets owned by domestic subsidiaries located outside the United States and other such limitations, the amended Senior Secured Credit Facility also requires:requires that:
| | |
| • | that our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; |
|
| • | that our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of the Senior |
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| | |
| | Secured Credit Facility, “EBITDA”) be no greater than (i) 2.50 to 1.00 for the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending December 31, 2010 and, (ii) thereafter, 2.00 to 1.00; |
| | |
| • | that we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least the following amounts during each corresponding period: |
| | |
from the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending June 30, 2010 | | 1.75 to 1.00 |
through the fiscal quarter ending September 30, 2010 | | 2.00 to 1.00 |
for the fiscal quarter ending December 31, 2010 | | 2.50 to 1.00 |
thereafter | | 3.00 to 1.00; |
| | |
| • | that we limit our capital expenditures (not including any made by foreign subsidiaries that are not wholly-owned) to (i) $135.0 million during fiscal year 2009 and $120.0 million during each subsequent fiscal year if our consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 3.50 to 1.00; or (ii) $250.0 million if our consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is equal to or less than 3.50 to 1.00, subject to certain adjustments; |
|
| • | that we only make acquisitions that either (i) are completed for equity consideration, without regard to leverage, or (ii) are completed for cash consideration, but only (A) if the consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is 2.75 to 1.00 or less, (x) there is an aggregate amount of $25.0 million in unused credit commitments under the facility and (y) we are in pro forma |
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| | |
| | compliance with the financial covenants contained in the credit agreement; and (B) if the consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 2.75 to 1.00, in addition to the requirements in subclauses (x) and (y) in clause (A) above, the cash amount paid with respect to acquisitions is limited to $25.0 million per fiscal year (subject to potential increase using amounts then available for capital expenditures and any net cash proceeds we receive after October 27, 2009 in connection with the issuance or sale of equity interests or the incurrence or issuance of certain unsecured debt securities that are identified as being used for such purpose); and |
| | |
| • | that we limit our investment in foreign subsidiaries (including by way of loans made by us and our domestic subsidiaries to foreign subsidiaries and guarantees made by us and our domestic subsidiaries of debt of foreign subsidiaries) to $75.0 million during any fiscal year or an aggregate amount after October 27, 2009 equal to (i) the greater of $200.0 million or 25% of our consolidated net worth, plus (ii) any net cash proceeds we receive after October 27, 2009, in connection with the issuance or sale of equity interests or the incurrence of certain unsecured debt securities that are identified as being used for such purpose. |
In addition, the amended Senior Secured Credit Facility contains certain affirmative covenants, including, without limitation, restrictions related to (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments; (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing the Senior Notes or other unsecured debt incurred pursuant to the sixth bullet point listed above; (viii) granting negative pledges other than to the lenders; (ix) changes in the nature of our business; (x) amending organizational documents, or amending or otherwise modifying any debt if such amendment or modification would have a material adverse effect, or amending the Senior Notes or any other unsecured debt incurred pursuant to the sixth bullet point listed above if the effect of such amendment is to shorten the maturity of the Senior Notes or such other unsecured debt; and (xi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions.
We may prepay the Senior Secured Credit Facility in whole or in part at any time without premium or penalty, subject to our obligation to reimburse the lenders for breakage and redeployment costs. In connection with
On February 11, 2011, we received a commitment, subject to customary conditions, including syndication on a best efforts basis, for a new $400.0 million senior secured revolving credit facility, up to $250 million of which may be used for letters of credit. Pursuant to the Amendment, we wrote off a proportionatecommitment, the new credit facility would contain an accordion feature to expand the new facility in an aggregate amount ofup to $100.0 million. We expect to enter into the unamortized deferred financing costs associated withnew credit facility on or before March 31, 2011. We expect the capacity reduction ofinterest rate provisions applicable to loans under the credit facility. During the year ended December 31, 2009, we recognized $0.5 millionnew facility to be more favorable than those contained in pre-tax charges in losses on extinguishment of debt associated with the write-off of unamortized deferred financing costs and capitalized $2.5 million in costs associated with the amendment of our existing Senior Secured Credit Facility.Facility, and that the covenants in the new credit facility will be substantially similar to such existing facility, except that we expect to be permitted greater flexibility in both domestic and foreign investments.
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The closing of the new credit facility, and any borrowings thereunder, will be subject to the satisfaction of a number of customary conditions. We cannot assure you that we will be able to enter into the new credit facility on terms acceptable to us in a timely manner or at all.
Related Party Notes Payable
On October 25, 2007,Concurrently with the sale of six barge rigs and related equipment in May 2010, we entered intorepaid the remaining $6.0 million outstanding under a note payable to a related party. This was the second of two notes payable with related parties (each, a “Related Party Note” and, collectively, the “Related Party Notes”). entered into on October 25, 2007. The first Related Party Note was an unsecured note in the amount of $12.5 million, whichand was due and paid in a lump-sum, together with accrued interest,repaid on October 25, 2009. The second Related Party Note iswas an unsecured note in the amount of $10.0 million and iswas payable in annual installments of $2.0 million, plus accrued interest, beginning October 25, 2008 through 2012. Each of the Related Party Notes bore or bears interest at the Federal Funds Rate adjusted annually on the anniversary date of October 25. The interest rate on the remaining outstanding Related Party Note at December 31, 2009 was 0.11%, and the outstanding principal amount was $6.0 million.
Capital Lease Agreements
We lease equipment, such as vehicles, tractors, trailers, frac tanks and forklifts, from financial institutions under master lease agreements. During the third quarter of 2010, we repaid $1.3 million of capital leases that we had incurred to acquire vehicles pursuant to the terms of the Patterson-UTI sale agreement. As of December 31, 2009,2010, there was approximately $14.3$6.1 million outstanding under such equipment leases.
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Off-Balance Sheet Arrangements
At December 31, 2009,2010, 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.
Contractual Obligations
Set forth below is a summary of our contractual obligations as of December 31, 2009.2010. The obligations we pay in future periods reflect certain assumptions, including variability in interest rates on our variable-rate obligations and the duration of our obligations, and actual payments in future periods may vary.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | | | Payments Due by Period | |
| | | | Less than 1 Year
| | 1-3 Years
| | 4-5 Years
| | After 5 Years
| | | | | Less than 1 Year
| | 1-3 Years
| | 4-5 Years
| | After 5 Years
| |
| | Total | | (2010) | | (2011-2013) | | (2014-2015) | | (2016+) | | | Total | | (2011) | | (2012-2014) | | (2015-2016) | | (2017+) | |
| | (In thousands) | | | (In thousands) | |
|
8.375% Senior Notes due 2014 | | $ | 425,000 | | | $ | — | | | $ | — | | | $ | 425,000 | | | $ | — | | | $ | 425,000 | | | $ | — | | | $ | 425,000 | | | $ | — | | | $ | — | |
Interest associated with 8.375% Senior Notes due 2014 | | | 178,073 | | | | 35,595 | | | | 106,883 | | | | 35,595 | | | | — | | | | 142,478 | | | | 35,595 | | | | 106,883 | | | | — | | | | — | |
Borrowings under Senior Secured Credit Facility | | | 87,813 | | | | — | | | | 87,813 | | | | — | | | | — | | |
Interest associated with Senior Secured Credit Facility(1) | | | 9,667 | | | | 3,276 | | | | 6,391 | | | | — | | | | — | | |
Commitment and availability fees associated with Senior Secured Credit Facility | | | 1,821 | | | | 607 | | | | 1,214 | | | | — | | | | — | | | | 3,465 | | | | 1,808 | | | | 1,657 | | | | — | | | | — | |
Notes payable — related party, excluding discount | | | 6,000 | | | | 2,000 | | | | 4,000 | | | | — | | | | — | | |
Interest associated with notes payable — related party(1) | | | 81 | | | | 42 | | | | 39 | | | | — | | | | — | | |
Capital lease obligations, excluding interest and executory costs | | | 14,313 | | | | 7,209 | | | | 7,104 | | | | — | | | | — | | | | 6,100 | | | | 3,979 | | | | 2,121 | | | | — | | | | — | |
Interest and executory costs associated with capital lease obligations(1) | | | 647 | | | | 308 | | | | 339 | | | | — | | | | — | | | | 635 | | | | 365 | | | | 270 | | | | — | | | | — | |
Other long-term indebtedness | | | 1,044 | | | | 1,044 | | | | — | | | | — | | | | — | | |
Interest associated with other long-term indebtedness(1) | | | 10 | | | | 10 | | | | — | | | | — | | | | — | | |
Non-cancelable operating leases | | | 24,533 | | | | 7,230 | | | | 11,684 | | | | 3,982 | | | | 1,637 | | | | 41,541 | | | | 15,827 | | | | 21,429 | | | | 3,661 | | | | 624 | |
Liabilities for uncertain tax positions | | | 3,232 | | | | 1,654 | | | | 1,432 | | | | 146 | | | | — | | | | 2,245 | | | | 942 | | | | 1,303 | | | | — | | | | — | |
Equity based compensation liability awards(2) | | | 2,912 | | | | 1,585 | | | | 1,327 | | | | — | | | | — | | | | 1,283 | | | | 666 | | | | 617 | | | | — | | | | — | |
Earnout payments(3) | | | 25,500 | | | | 500 | | | | 25,000 | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 780,646 | | | $ | 61,060 | | | $ | 253,226 | | | $ | 464,723 | | | $ | 1,637 | | | $ | 622,747 | | | $ | 59,182 | | | $ | 559,280 | | | $ | 3,661 | | | $ | 624 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Based on interest rates in effect at December 31, 2009.2010. |
|
(2) | | Based on our closing stock price at December 31, 2009. |
|
(3) | | Assumes performance targets are achieved.2010. |
We believe that our internally generated cash flows from operations and current reserves of cash and cash equivalents are sufficient to finance the majority of our cash requirements for current and future operations, budgeted capital expenditures and debt service for 2010. As we have historically done, we may, from time to time, access available funds under our Senior Secured Credit Facility to supplement our liquidity to meet cash requirements for day to day operations and times of peak needs throughout the year. Our planned capital expenditures as well as any acquisitions we choose to pursue, are expected to be financed through a
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combination of cash on hand, cash flow from operations and borrowings under our Senior Secured Credit Facility.
Debt Compliance
Our Senior Secured Credit Facility and Senior Notes contain numerous covenants that govern our ability to make domestic and international investments and to repurchase our stock. Even if we experience a more severe downturn in our business, we believe that the covenants related to our capital spending and our investments in our foreign subsidiaries are within our control. Therefore, we believe we can avoid a default of these covenants.
At December 31, 2009,2010, we were in compliance with all the financial covenants under the Senior Secured Credit Facility, as amended, and our Senior Notes. Based on management’s current projections, we expect to be in compliance with all the covenants under our Senior Secured Credit Facility and Senior Notes for the next twelve months. A breach of any of thethese covenants, ratios or tests under our debt could result in a default under our indebtedness. See“Item 1A. Risk FactorsFactors.”.”
Capital Expenditures
During the year ended December 31, 2009,2010, our capital expenditures totaled $128.4$180.3 million, mostlyprimarily related to the expansionpurchase of our operations in Mexico and Russia, drill strings and nitrogencoiled tubing units, for our rental operations, capitalized costs for new information systems, asset acquisitions for our fluids management operations, andthe addition of larger well service rigs, major maintenance of our existing fleet.fleet and equipment, and capitalized costs associated with our new ERP system. Our capital expenditures program is expected to total approximately $140.0$240.0 million during 2010,2011, focusing mainly on growth markets in the maintenance of our fleet.United States and abroad. Our capital expenditure program for 20102011 is subject to market conditions, including activity levels, commodity prices and industry capacity. Our focus for 20102011 will be the maximization of our current equipment fleet, but we may choose to increase our capital expenditures in 20102011 to increase market share or expand our presence into a new market. We currently anticipate funding our 20102011 capital expenditures through a combination of cash on hand, operating cash flow, and borrowings under our Senior Secured Credit Facility. Should our operating cash flows or activity levels prove to be insufficient to warrant our currently planned capital spending levels, management expects it will adjust our capital spending plans accordingly. We may also incur capital expenditures for strategic investments and acquisitions.
Geostream InvestmentAcquisitions
OFS
On September 1, 2009,During 2010, we acquired an additional 24% interest in Geostream for approximately $16.4 million. Geostream is ancertain subsidiaries, together with associated assets, from OFS, a privately-held oilfield services company in the Russian Federation providing drillingowned by ArcLight Capital Partners, LLC. These subsidiaries are oilfield services companies which provide well workover and workoverstimulation services andsub-surface engineeringas well as nitrogen pumping, coiled tubing, fluid handling and modeling in Russia. This was our second investment in Geostream pursuant to an agreement dated August 26, 2008, as amended. This second investment brings our total investment in Geostream to 50%. Upon acquiring the 50% interest, we also obtained majority representation on Geostream’s board of directorswellsite construction and therefore a controlling interest. The results of Geostream have been included in our consolidated financial statements since the acquisition date. As a result of this acquisition, we expect to expand our international presence in Russia where the wells are shallow and are suited to the services that we perform.preparation services.
The fair value of thetotal consideration transferred for the 50% interest in Geostream totaled approximately $35.0acquisition was 15.8 million which consistedshares of our common stock and a cash considerationpayment of $75.8 million, subject to certain working capital and other adjustments at closing. We registered the shares of common stock issued in the second investment on September 1, 2009 andtransaction under the fair valueSecurities Act of our previous equity interest. 1933, as amended, subject to certain conditions.
Other
In conjunction with the second investment, Geostream agreed to purchaseJanuary 2011, we acquired 10 SWD wells from us a customized suite of equipment, including two workover rigs, two drilling rigs, associated complementary support equipment, cementing equipment, and fishing toolsEquity Energy Company for approximately $23.0 million, a portion$14.3 million. Most of which will be financed by us. Concurrent with the second investment, Geostream paid us approximately $16.0 millionthese SWD wells are located in cash, representing a down payment on the equipment we will deliver to them. We began delivery of the equipment under the purchase agreement during the fourth quarter of 2009.North Dakota.
UnderWe anticipate that acquisitions of complementary companies, assets and lines of businesses will continue to play an important role in our business strategy. While there are currently no unannounced agreements or ongoing negotiations for the Geostream agreement, as amended, for a period not to exceed six years subsequent to October 31, 2008, we have the option to increase our ownership percentageacquisition of Geostream to 100%. However,
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if we have not acquired 100% of Geostream onany material businesses or before the end of the six-year period, we willassets, such transactions can be required to arrange an initial public offering for those shares.effected quickly and may occur at any time.
Critical Accounting Policies
Our Accounting Department is responsible for the development and application of our accounting policies and internal control procedures and reports to the Chief Financial Officer.
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The process and preparation of our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to make certain estimates, judgments and assumptions, which may affect the reported amounts of our assets and liabilities, disclosures of contingencies at the balance sheet date, the amounts of revenues and expenses recognized during the reporting period and the presentation of our statement of cash flows. We may record materially different amounts if these estimates, judgments and assumptions change or if actual results differ. However, we analyze our estimates, assumptions and judgments based on our historical experience and various other factors that we believe to be reasonable under the circumstances.
We have identified the following critical accounting policies that require a significant amount of estimation and judgment to accurately present our financial position, results of operations and cash flows:
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| • | Revenue recognition; |
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| • | Estimate of reserves for workers’ compensation, vehicular liability and other self-insurance; |
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| • | Contingencies; |
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| • | Income taxes; |
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| • | Estimates of depreciable lives; |
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| • | Valuation of indefinite-lived intangible assets; |
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| • | Valuation of tangible and finite-lived intangible assets; and |
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| • | Valuation of equity-based compensation. |
Revenue Recognition
We recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectibility is reasonably assured.
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| • | Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completed customer purchase order, field ticket, supplier contract, or master service agreement. |
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| • | Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement as evidenced by a field ticket or service log. |
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| • | The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a completed customer field ticket. |
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| • | Collectibility is reasonably assured when we screen our customers and provide goods and services to customers according to determined credit terms that have been granted in accordance with our credit policy. |
We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmental taxing authorities.
We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value if they have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.
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Workers’ Compensation, Vehicular Liability and Other Self-Insurance
Our operations expose our employees to hazards generally associated with the oilfield. Heavy lifting, moving equipment and slippery surfaces can cause or contribute to accidents involving our employees and third parties who may be present at a site. Environmental conditions in remote domestic oil and natural gas basins range from extreme cold to extreme heat, from heavy rain to blowing dust. Those conditions can also lead to or contribute to accidents. Our business activities involve the use of a significant number of fluid transport trucks, other oilfield vehicles and supporting rolling stock that move on public and private roads. Vehicle accidents are a significant risk for us. We also conduct limited contract drilling operations, which present additional hazards inherent in the drilling of wells, such as blowouts, explosions and fires, which could result in loss of hole, damaged equipment and personal injury. All of these hazards and accidents could result in damage to our property or a third party’s property or injury or death to our employees or third parties. Although we purchase insurance to protect against large losses, much of the risk is retained in the form of large deductibles or self-insured retentions.
As a contractor, we also enter into master service agreements with our customers. These agreements subject us to potential contractual liabilities common in the oilfield.
The occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet its indemnification or insurance obligations, could result in substantial losses. In addition, there can be no assurance that insurance will be available to cover any or all of these risks, or that, if available, it could be obtained without a substantial increase in premiums. It is possible that, in addition to higher premiums, future insurance coverage may be subject to higher deductibles and coverage restrictions.
Based on the risks discussed above, we estimate our liability arising out of potentially insured events, including workers’ compensation, employer’s liability, vehicular liability, and general liability, and record
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accruals in our consolidated financial statements. Reserves related to claims covered by insurance are based on the specific facts and circumstances of the insured event and our past experience with similar claims. Loss estimates for individual claims are adjusted based upon actual claim judgments, settlements and reported claims. The actual outcome of these claims could differ significantly from estimated amounts.
We are largely self-insured foragainst physical damage to our equipment and automobiles.automobiles as well as workers’ compensation claims. Our accruals that we maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. Changes in our assumptions and estimates could potentially have a negative impact on our earnings.
Contingencies
We are periodically required to record other loss contingencies, which relate to lawsuits, claims, proceedings and tax-related audits in the normal course of our operations, on our consolidated balance sheet. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We periodically review our loss contingencies to ensure that we have recorded appropriate liabilities recorded on the balance sheet. We adjust these liabilities based on estimates and judgments made by management with respect to the likely outcome of these matters, including the effect of any applicable insurance coverage for litigation matters. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in management’s plans or intentions, the outcome of legal proceedings, settlements or other factors. Actual results could vary materially from these reserves.
We record liabilities when environmental assessment indicates that site remediation efforts are probable and the costs can be reasonably estimated. We measure environmental liabilities based, in part, on relevant past experience, currently enacted laws and regulations, existing technology, site-specific costs and cost-sharing arrangements. Recognition of any joint and several liability is based upon our best estimate of our final pro-rata share of such liability or the low amount in a range of estimates. These assumptions involve the
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judgments and estimates of management, and any changes in assumptions or new information could lead to increases or decreases in our ultimate liability, with any such changes recognized immediately in earnings.
We record legal obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incur the liability. Significant judgment is involved in estimating our future cash flows associated with such obligations, as well as the ultimate timing of the cash flows. If our estimates on the amount or timing of the cash flows change, the change may have a material impact on our results of operations.
Income Taxes
We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, yet deferred until future periods. Current taxes payable represent our liability related to our income tax return for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.
We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized in
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future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate.
If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material negative impacts on our earnings. See“Note 12.14. Income TaxesTaxes”” in“Item 8. Financial Statements and Supplementary Data,”,” for further discussion of accounting for our income taxes, changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.
Estimates of Depreciable Lives
We use the estimated depreciable lives of our long-lived assets, such as rigs, heavy-duty trucks and trailers, to compute depreciation expense, to estimate future asset retirement obligations and to conduct impairment tests. We base the estimates of our depreciable lives on a number of factors, such as the environment in which the assets operate, industry factors including forecasted prices and competition, and the assumption that we provide the appropriate amount of capital expenditures while the asset is in operation to maintain economical operation of the asset and prevent untimely demise to scrap. The useful lives of our intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or other expectations.
We depreciate our operational assets over their depreciable lives to their salvage value, which is 10% of the acquisition cost. We recognize a gain or loss upon ultimate disposal of the asset based on the difference
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between the carrying value of the asset on the disposal date and any proceeds we receive in connection with the disposal.
We periodically analyze our estimates of the depreciable lives of our fixed assets to determine if the depreciable periods and salvage value continue to be appropriate. We also analyze useful lives and salvage value when events or conditions occur that could shorten the remaining depreciable life of the asset. We review the depreciable periods and salvage values for reasonableness, given current conditions. As a result, our depreciation expense is based upon estimates of depreciable lives of the fixed assets, the salvage value and economic factors, all of which require management to make significant judgments and estimates. If we determine that the depreciable lives should be different than originally estimated, depreciation expense may increase or decrease and impairments in the carrying values of our fixed assets may result, which could negatively impact our earnings.
Valuation of Indefinite-Lived Intangible Assets
We periodically review our intangible assets not subject to amortization, including our goodwill, to determine whether an impairment of those assets may exist. These tests must be made on at least an annual basis, or more often if circumstances indicate that the assets may be impaired. These circumstances include, but are not limited to, significant adverse changes in the business climate.
The test for impairment of indefinite-lived intangible assets is a two step test. In the first step, a fair value is calculated for each of our reporting units, and that fair value is compared to the current carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no potential impairment, and the second step is not performed. If the carrying value exceeds the fair value of the reporting unit, then the second step is required.
The second step of the test for impairment compares the implied fair value of the reporting unit’s goodwill to its current carrying value. The implied fair value of the reporting unit’s goodwill is determined in
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the same manner as the amount of goodwill that would be recognized in a business combination, with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment charge is recorded. If the carrying value of the reporting unit’s goodwill is in excess of its implied fair value, an impairment charge equal to the excess is recorded.
We conduct our annual impairment test for goodwill and other intangible assets not subject to amortization as of December 31 of each year. In determining the fair value of our reporting units, we use a weighted-average approach of three commonly used valuation techniques — a discounted cash flow method, a guideline companies method, and a similar transactions method. We assign a weight to the results of each of these methods based on the facts and circumstances that are in existence for that testing period. During 2009, because of our international expansion in Russia, acquisitions we made in prior years, and the overall economic downturn that affected all companies’ stock prices and market valuation, weWe assigned more weight to the discounted cash flow method. We also weighted the discounted cash flow method more heavily in 2008 for similar reasons. In prior years, we had assigned more weight to the guideline companies method.
In addition to the estimates made by management regarding the weighting of the various valuation techniques, the creation of the techniques themselves requires that we make significant estimates and assumptions. The discounted cash flow method, which was assigned the highest weight by management during the current year, requires us to make assumptions about future cash flows, future growth rates, tax rates in future periods, book-tax differences in the carrying value of our assets in future periods, and discount rates. The assumptions about future cash flows and growth rates are based on our current budgets for future periods, as well as our strategic plans, the beliefs of management about future activity levels, and analysts’ expectations about our revenues, profitability and cash flows in future periods. The assumptions about our future tax rates and book-tax differences in the carrying value of our assets in future periods are based on the assumptions about our future cash flows and growth rates, and management’s knowledge of and beliefs about tax law and practice in current and future periods. The assumptions about discount rates include an assessment of the specific risk associated with each reporting unit being tested, and were developed with the assistance of a third-party valuation consultant, who reviewed our estimates, assumptions and calculations. The ultimate conclusions of the valuation techniques remain our responsibility.
While this test is required on an annual basis, it can also be required more frequently based on changes in external factors or other triggering events, such as an impairment test of our long-lived assets. We
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conducted our most recent annual test for impairment of our goodwill and other indefinite-lived intangible assets as of December 31, 2009.2010. On that date, our reporting units for the purposes of impairment testing were rig services, fluid management services, coiled tubing services, fishing and rental services and our Russian and Canadian reporting units. We have $301.7 million of goodwill in our rig services reporting unit, had $298.6$21.1 million of goodwill in our fluid management services reporting unit, had $18.6$91.3 million in our coiled tubing services reporting unit, $24.6 million of goodwill and AMI had $4.1in our Russian reporting unit, $4.2 million of goodwill. Our pressure pumping services,goodwill related to our Canadian reporting unit and $4.7 million of goodwill in our fishing and rental services and wireline services reporting units didunit. We also have intangible assets that are not have any goodwill, because either allamortized of the goodwill for those$8.7 million related to our Russian reporting units had been impaired in prior periods or the reporting unit had been created entirely through organic growth. The $24.8 million of goodwill associated with our acquisition of Geostream was not included in this annual assessment due to the specific nature of the transaction giving rise to the goodwill and the recent nature of the fair value assessment in connection with the acquisition. unit.
Based on the results of our annual test, the fair value of all our reporting units that have goodwill substantially exceeded their carrying values. Because the fair value of thosethe reporting units substantially exceeded their carrying values, we determined that no potential for impairment of our goodwill associated with those reporting units existed as of December 31, 2009,2010, and that step two of the impairment test was not required.
In the fourth quarter of 2010, we changed the date of our annual goodwill impairment assessment for our Russian reporting unit from September 30 to December 31. This constitutes a change in the method of applying an accounting principle that we believe is preferable. The change was made to align the testing of our Russian reporting unit with the testing date of the remaining reporting units. This change is preferable as it also aligns the timing of our annual Russian goodwill impairment test with our planning and budgeting process, which will allow us to utilize updated forecasts in our discounted cash flow models which are used in the determination of the fair value of the reporting units. We performed our annual goodwill impairment test for our Russian reporting unit on September 30, 2010 and no indicators of impairment were noted. We retested the Russian reporting unit on December 31, 2010 and concluded that the fair value of the Russian reporting unit substantially exceeded its carrying value. A key assumption in our model is that revenue related to this reporting unit will increase in future years based on growth and pricing increases. Potential events that could affect this assumption are the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies in the Russian Federation, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry. Other possible events that could affect this assumption are the ability to acquire additional assets and deployment of these assets into the region. As this test concluded that the fair value of the Russian reporting unit exceeded its carrying value, the second step of the goodwill impairment test was not required.
As noted above, the determination of the fair value of our reporting units is heavily dependent upon certain estimates and assumptions that we make about our reporting units. While the estimates and assumptions that we made regarding our reporting units for our 20092010 annual test indicated that the fair values of the reporting units exceeded their carrying values and we believe that our estimates and assumptions are reasonable, it is possible that changes in those estimates and assumptions could impact the determination of the fair value of our reporting units. Discount rates we use in future periods could change substantially if the
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cost of debt or equity were to significantly increase or decrease, or if we chose different comparable companies in determining the appropriate discount rate for our reporting units. Additionally, our future projected cash flows for our reporting units could significantly impact the fair value of our reporting units, and if our current projections about our future activity levels, pricing, and cost structure are inaccurate, the fair value of our reporting units could change materially. If the current recovery in the overall economy is temporary in nature or if there is a significant and rapid adverse change in our business in the near- or mid-term for any of our reporting units, our current estimates of the fair value of our reporting units could decrease significantly, leading to possible impairment charges in future periods. Based on our current knowledge and beliefs, we do not feel that material adverse changes to our current estimates and assumptions such that our reporting units would fail step one of the impairment test are reasonably possible.
As discussed in “Note 7. Goodwill and Other Intangible Assets” in “Item 8. Financial Statements and Supplementary Data,” during the third quarter of 2009, we identified a triggering event that required us to test our goodwill for impairment on an interim basis. As a result of that test, we determined that the goodwill associated with our fishing and rental services reporting unit was impaired, and recorded a pre-tax charge of $0.5 million to write off the goodwill associated with that reporting unit.
Valuation of Tangible and Finite-Lived Intangible Assets
Our fixed assets and finite-lived intangibles are tested for potential impairment when circumstances or events indicate a possible impairment may exist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, but are not limited to, an adverse change in market
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conditions, a significant decrease in benefits being derived from an acquired business, or a significant disposal of a particular asset or asset class.
If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairment test, we make judgments, estimates and assumptions regarding long-term forecasts or revenues and expenses relating to the assets subject to review. Market conditions, energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on the estimates we use to determine whether our assets are impaired. If the results of the analysis indicate that the carrying value of the assets being tested for impairment are not recoverable, then we record an impairment charge to write the carrying value of the assets down to their fair value. Using different judgments, assumptions or estimates, we could potentially arrive at a materially different fair value for the assets being tested for impairment, which may result in an impairment charge.
As discussed in “Note 6. Property, Plant and Equipment” in “Item 8. Financial Statements and Supplementary Data,” during the third quarter of 2009 we retired a portion of our U.S. rig fleet and associated support equipment. We identified this as a trigger event that required us to test our well servicing fixed assets for impairment. Based on our analysis, the expected undiscounted cash flows for these assets exceeded their carrying value, and no indication of impairment existed, and we do not feel that material adverse changes in our estimates or assumptions such that our well servicing assets’ carrying value exceeded their fair value is reasonably possible.
However, during the third quarter of 2009, due to continuing market overcapacity, continued and prolonged depression of natural gas prices, decreased activity levels from our major customer base related to stimulation work and consecutive quarterly operating losses, we determined that events and changes in circumstances occurred indicating that the carrying value of the assets in our Production Services segment may not have been recoverable. We performed an assessment of the fair value of these asset groups using an expected present value technique based on undiscounted cash flows. We used discounted cash flow models involving assumptions based on the utilization of the equipment, revenues, expenses, capital expenditures and working capital requirements. Our discounted cash flow projections were based on financial forecasts and were discounted using a discount rate of 14%. Based on this assessment, the fair value of our pressure pumping assets was less than their carrying value, and this resulted in the recording of a pre-tax impairment charge of $93.4 million during the third quarter of 2009.
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The impairment tests for our well servicing and pressure pumping assets also triggered an interim test of our goodwill and indefinite-lived intangible assets for potential impairment during the third quarter of 2009. We did not identify any trigger events causing us to test our tangible and finite-lived intangible assets for impairment during the first, second, or fourth quarters of 2009.2010.
Valuation of Equity-Based Compensation
We have granted stock options, stock-settled stock appreciation rights (“SARs”), restricted stock (“RSAs”), and phantom shares (“Phantom Shares”)and performance units to our employees and non-employee directors. The option and SAR awards we grant are fair valued using a Black-Scholes option model on the grant date and are amortized to compensation expense over the vesting period of the option award, net of estimated and actual forfeitures. Compensation related to RSAs is based on the fair value of the award on the grant date and is recognized based on the vesting requirements that have been satisfied during the period. Phantom Sharesshares are accounted for at fair value, and changes in the fair value of these awards are recorded as compensation expense during the period. Performance units provide a cash incentive award, the unit value of which is determined with reference to our common stock. The performance units are measured based on two performance periods. At the end of each performance period, 100%, 50%, or 0% of an individual’s performance units for that period will vest, based on the relative placement of our total shareholder return within a peer group consisting of Key and five other companies. See“Note 18.20. Share-Based CompensationCompensation”” in“Item 8. Financial Statements and Supplementary DataData”” for further discussion of the various award types and our accounting for our equity-based compensation.
In utilizing the Black-Scholes option pricing model to determine fair values of awards, certain assumptions are made which are based on subjective expectations, and are subject to change. A change in one or more of these assumptions would impact the expense associated with future grants. These key assumptions include the volatility in the price of our common stock, the risk-free interest rate and the expected life of awards.
We did not grant any stock options during the year ended December 31, 2010. We used the following weighted average assumptions in the Black-Scholes option pricing model for determining the fair value of our stock option grants during the years ended December 31, 2009 2008 and 2007:2008:
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| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
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Risk-free interest rate | | | 2.21 | % | | | 2.86 | % | | | 4.41 | % | | | n/a | | | | 2.21 | % | | | 2.86 | % |
Expected life of options, years | | | 6 | | | | 6 | | | | 6 | | | | n/a | | | | 6 | | | | 6 | |
Expected volatility of the Company’s stock price | | | 53.70 | % | | | 36.86 | % | | | 39.49 | % | | | n/a | | | | 53.70 | % | | | 36.86 | % |
Expected dividends | | | none | | | | none | | | | none | | | | n/a | | | | none | | | | none | |
We calculate the expected volatility for our stock option grants by measuring the volatility of our historical stock price for a period equal to the expected life of the option and ending at the time the option was granted. We determine the risk-free interest rate based upon the interest rate on a U.S. Treasury Bill with a term equal to the expected life of the option at the time the option was granted. In estimating the expected lives of our stock options and SARs, we have elected to use the simplified method. During the time that we did not have current financial statements filed with the SEC, our options were legally restricted from being exercised; therefore we believe that we do not have access to sufficient historical exercise data to appropriately
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provide a reasonable basis upon which to estimate the expected term of stock option awards. The expected life is less than the term of the option as option holders, in our experience, exercise or forfeit the options during the term of the option.
We are not required to recalculate the fair value of our stock option grants estimated using the Black-Scholes option pricing model after the initial calculation unless the original option grant terms are modified. However, a 10 percent increase in our expected volatility and risk-free rate at the grant date would have increased our compensation expense for the year ended December 31, 2009 by less than $0.1 million.
New Accounting Standards Adopted in this Report
SFAS 141(R).ASU2009-16. In December 2007,2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised 2007),Business Combinations(“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial
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statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from previous practice resulting from SFAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions of SFAS 141(R) on January 1, 2009, but did not consummate any business combinations during the three months ended March 31, 2009. SFAS 141(R) may have an impact on our consolidated financial statements in the future. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of any acquisitions consummated after the effective date.
SFAS 160. In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We adopted the provisions of SFAS 160 on January 1, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
SFAS 165. In May 2009, the FASB issued SFAS No. 165,Subsequent Events(“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosing of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 does not significantly change the types of subsequent events that an entity reports, but it requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for interim or annual reporting requirements ending after June 15, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
ASU2009-01. In June 2009, the FASB issued Accounting Standards Update (“ASU”)2009-01,2009-16,The FASB Accounting Standards CodificationTransfers and the Hierarchy of Generally Accepted Accounting PrinciplesServicing (Topic 860) — a replacement of FASB Statement No. 162(“ASU2009-01”). ASU2009-01 established the Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification supersedes all prior non-SEC accounting and reporting standards. Following ASU2009-01, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU2009-01 also modifies the existing hierarchy of GAAP to include only two levels — authoritative and non-authoritative. ASU2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and early adoption was not permitted. The adoption of this standard did not have an impact on our financial position, results of operations or cash flows.
ASU2009-05. In August 2009, the FASB issued ASU2009-05,Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value(“ASU2009-05”). ASU2009-05 addresses concerns in situations where there may be a lack of observable market information to measure the fair value of a liability, and provides clarification in circumstances where a quoted market price in an active market for an identical liability is not available. In these cases, reporting entities should measure fair value using a valuation technique that uses the quoted price of the identical liability when that liability is traded as an asset,
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quoted prices for similar liabilities, or another valuation technique, such as an income or market approach. ASU2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU2009-05 is effective for the first reporting period subsequent to August 2009 and the adoption of this update did not have a material impact on our financial position, results of operations, or cash flows.
Accounting Standards Not Yet Adopted in this Report
SFAS 166. In June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets an amendment. ASU2009-16 revises the provisions of former FASB Statement No. 140(“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, — a Replacementand requires more disclosure regarding transfers of FASB Statement 125(“SFAS 140”), removesfinancial assets. ASU2009-16 also eliminates the concept of a “qualifying special purpose entity” from SFAS 140 and removesentity,” changes the exception from applying FASB Interpretation (“FIN”) No. 46(R),Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51(“FIN 46(R)”) to qualifying special purpose entities. SFAS 166 is effectiverequirements for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on ourderecognizing financial position, results of operations or cash flows.
SFAS 167. In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R)(“SFAS 167”). SFAS 167 amends the scope of FIN 46(R) to include entities previously considered qualifying special-purpose entities by FIN 46(R), as the concept of a qualifying special-purpose entity was eliminated in SFAS 166. This standard shifts the guidance for determining which enterprise in a Variable Interest Entity consolidates that entity from a quantitative consideration of who is the primary beneficiary to a qualitative focus of which entity has the power to direct activities and the obligation to absorb losses. This standard is to be effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
ASU2009-13. In October 2009, the FASB issued ASU2009-13,Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force(“ASU2009-13”). ASU2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires an entity to use vendor-specific objective evidence (“VSOE”) or third-party evidence of a selling price to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU2009-13, multiple-deliverable arrangements will be separated in more circumstances than under current guidance. ASU2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis,assets, and increases the disclosure requirements related to anabout transfers of financial assets and a reporting entity’s multiple-deliverable revenue arrangements. ASU2009-13 must be prospectively applied to all revenue arrangements entered into or materially modifiedcontinuing involvement in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented.transferred financial assets. We expect to adoptadopted the provisions of ASU2009-132009-16 on January 1, 20112010 and do not believe that the adoption of this standard willdid not have a material impacteffect on our financial position, results of operations, or cash flows.
ASU2009-14. In October 2009, the FASB issued ASU2009-14,Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force(“ASU2009-14”). ASU2009-14 was issued to address concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more than incidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separate deliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current
51
accounting model does not appropriately reflect the economics of the underlying transactions and that more software-enabled products now fall or will fall within the scope of the current guidance than originally intended. ASU2009-14 changes the current accounting model for revenue arrangements that include both tangible products and software elements to exclude those where the software components are essential to the tangible products’ core functionality. In addition, ASU2009-14 also requires that hardware components of a tangible product containing software components always be excluded from the software revenue recognition guidance, and provides guidance on how to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded from the scope of software revenue recognition guidance. ASU2009-14 also provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU2009-14 was issued concurrently with ASU2009-13 and also requires entities to provide the disclosures required by ASU2009-13 that are included within the scope of ASU2009-14. ASU2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may also elect, but are not required, to adopt ASU2009-14 retrospectively to prior periods, and must adopt ASU2009-14 in the same period and using the same transition methods that it uses to adopt ASU2009-13. We expect to adopt the provisions of ASU2009-14 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position,condition, results of operations, or cash flows.
ASU2009-17. In December 2009, the FASB issued ASU2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU2009-17 replaces the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1)(i) the obligation to absorb losses of the entity or (2)(ii) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. ASU2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities. The provisions of ASU2009-17 are to be applied beginning in the first fiscal period beginning after November 15, 2009. We will adoptadopted ASU2009-17 on January 1, 2010 and do not anticipate that the adoption of this standard willdid not have a material effect on our financial position, results of operations, or cash flows.
ASU2010-02. In January 2010, the FASB issued ASU2010-02,Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope Clarification. ASU2010-02 clarifies that the scope of previous guidance in the accounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assets that is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. ASU2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of any continuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The provisions of ASU2010-02 will beare effective for us for the first reporting period beginning after December 13, 2009. We will adoptadopted the provisions of ASU2010-02 on January 1, 2010 and do not anticipate that the adoption of this standard willdid not have a material impact on our financial position, results of operations, or cash flows.
ASU2010-06. In January 2010, the FASB issued ASU2010-06,Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures About Fair Value Measurements. ASU2010-06 clarifies the requirements for certain disclosures around fair value measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosure requirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during the period, along with the reason for those transfers, and (ii) and separate presentation of information about
52
purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs.
47
ASU2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. We will adoptadopted the provisions of ASU2010-06 on January 1, 2010 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU2010-09. In February 2010, the FASB issued ASU2010-09,Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This update provides amendments to Subtopic855-10 as follows: (i) an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or anover-the-counter-market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued; (ii) the glossary of Topic 855 is amended to include the definition of SEC filer. An SEC filer is an entity that is required to file or furnish its financial statements with either the SEC or, with respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section; (iii) an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated; (iv) the glossary of Topic 855 is amended to remove the definition of public entity. The definition of a public entity in Topic 855 was used to determine the date through which subsequent events should be evaluated; and (v) the scope of the reissuance disclosure requirements is refined to include revised financial statements only. The term revised financial statements is added to the glossary of Topic 855. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of U.S. generally accepted accounting principles. We adopted the provisions of ASU2010-09 on March 1, 2010 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
Accounting Standards Not Yet Adopted in this Report
ASU2009-13. In October 2009, the FASB issued ASU2009-13,Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force(“ASU2009-13”). ASU2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires an entity to use Vendor-Specific Objective Evidence (“VSOE”) or third-party evidence of a selling price to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU2009-13, multiple-deliverable arrangements will be separated in more circumstances than under current guidance. ASU2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU2009-13 must be prospectively applied to all revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We adopted the provisions of ASU2009-13 on January 1, 2011 and do not expectbelieve that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-14. In October 2009, the FASB issued ASU2009-14,Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force(“ASU2009-14”). ASU2009-14 was issued to address concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more than incidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separate deliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current accounting model does not appropriately reflect the economics of the underlying transactions and that more software-enabled products now fall or will fall within the scope of the current guidance than originally intended. ASU2009-14 changes the current accounting model for revenue arrangements that include both tangible products and software elements to exclude those where the software components are essential to the tangible products’
48
core functionality. In addition, ASU2009-14 also requires that hardware components of a tangible product containing software components always be excluded from the software revenue recognition guidance, and provides guidance on how to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded from the scope of software revenue recognition guidance. ASU2009-14 also provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU2009-14 was issued concurrently with ASU2009-13 and also requires entities to provide the disclosures required by ASU2009-13 that are included within the scope of ASU2009-14. ASU2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may also elect, but are not required, to adopt ASU2009-14 retrospectively to prior periods, and must adopt ASU2009-14 in the same period and using the same transition methods that it uses to adopt ASU2009-13. We adopted the provisions of ASU2009-14 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-13. In April 2010, the FASB issued ASUNo. 2010-13,Compensation — Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This ASU codifies the consensus reached in EITF IssueNo. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. ASU2010-13 will be effective for fiscal years beginning on or after December 15, 2010, and early adoption is permitted. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. We adopted the provisions of ASU2010-13 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-28. In December 2010, the FASB issued ASUNo. 2010-28,Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU reflects the decision reached in EITF IssueNo. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. We adopted the provisions of ASU2010-28 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-29. In December 2010, the FASB issued ASU2010-29,Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision reached in EITF IssueNo. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior
49
annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We adopted the provisions of ASU2010-29 on January 1, 2011 and the adoption of this standard may result in additional disclosures, but it will not have a material impact on our financial position, results of operations, or cash flows.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates, foreign currency exchange rates and equity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risks through regular operating and financing activities, and may, on a limited basis, use derivative financial instruments to manage this risk. To the extent that we use such derivative financial instruments, we will use them only as risk management tools and not for speculative investment purposes.
Interest Rate Risk
As of December 31, 2009,2010, we had outstanding $425.0 million of 8.375% Senior Notes due 2014. These notes are fixed-rate obligations, and as such do not subject us to risks associated with changes in interest rates. Borrowings under our Senior Secured Credit Facility and our capital lease obligations and our Related Party Notes all bear interest at variable interest rates, and therefore expose us to interest rate risk. As of December 31, 2009,2010, the weighted average interest rate on our outstanding variable-rate debt obligations was 3.24%1.78%. A hypothetical 10% increase in that rate would increase the annual interest expense on those instruments by approximately $0.4less than $0.1 million.
Foreign Currency Risk
As of December 31, 2009,2010, we conduct operations in Argentina, Mexico, Colombia, the Russian Federation,Middle East, Russia and Argentina. We also ownhave a Canadian subsidiariessubsidiary and have equity-method investments in two Canadian companies. The functional currency is the local currency for all of these entities, except Colombia and the Middle East, and as such we are exposed to the risk of changes in the exchange rates between the U.S. Dollar and the local currencies. For balances denominated in our foreign subsidiaries’ local currency, changes in the value of the subsidiaries’ assets and liabilities due to changes in exchange rates are deferred and accumulated in other comprehensive income until we liquidate our investment. For balances denominated in currencies other than the local currency, our foreign subsidiaries must remeasure the balance at the end of each period to an equivalent amount of local currency, with changes reflected in earnings during the period. A hypothetical 10% decrease in the average value of the U.S. Dollar relative to the value of the local currencies for our Argentinean, Mexican, Russian and Canadian subsidiaries and our Canadian investments would decrease our net income by approximately $0.2$3.8 million.
Equity Risk
Certain of our equity-based compensation awards’ fair values are determined based upon the price of our common stock on the measurement date. Any increase in the price of our common stock would lead to a corresponding increase in the fair value of those awards. A 10% increase in the price of our common stock from its value at December 31, 20092010 would increase annual compensation expense recognized on these awards by approximately $0.1 million.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Key Energy Services, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page |
|
| | | 5552 | |
| | | 53 | |
Consolidated Balance Sheets | | | 54 | |
Consolidated Statements of Operations | | | 55 | |
Consolidated Statements of Comprehensive Income | | | 56 | |
Statements of Cash Flows | | | 57 | |
Stockholders’ Equity | | | 58 | |
| | | 59 | |
| | | 60 | |
| | | 61 | |
| | | 62 | |
5451
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Key Energy Services, Inc.
We have audited the accompanying consolidated balance sheets of Key Energy Services, Inc. (a Maryland corporation) and Subsidiaries as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009.2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Key Energy Services, Inc. and Subsidiaries as of December 31, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20092010 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Key Energy Services, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 26, 2010,25, 2011 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.
Houston, Texas
February 26, 201025, 2011
5552
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Key Energy Services, Inc.
We have audited Key Energy Services, Inc. (a Maryland corporation) and Subsidiaries’ internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). Key Energy Services, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Reportingappearing under Item 9A. Our responsibility is to express an opinion on Key Energy Services, Inc. and Subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Key Energy Services, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets, statements of operations, comprehensive income, stockholders’ equity, and cash flows of Key Energy Services, Inc. and Subsidiaries and our report dated February 26, 2010,25, 2011 expressed an unqualified opinion on those consolidated financial statements.
Houston, Texas
February 26, 201025, 2011
5653
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands, except
| | | (In thousands, except
| |
| | share amounts) | | | share amounts) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 37,394 | | | $ | 92,691 | | | $ | 56,628 | | | $ | 37,394 | |
Accounts receivable, net of allowance for doubtful accounts of $5,441 and $11,468 | | | 214,662 | | | | 377,353 | | |
Accounts receivable, net of allowance for doubtful accounts of $7,791 and $5,441 | | | | 261,818 | | | | 214,662 | |
Inventories | | | 27,452 | | | | 34,756 | | | | 23,516 | | | | 23,478 | |
Prepaid expenses | | | 14,212 | | | | 15,513 | | | | 20,478 | | | | 14,212 | |
Deferred tax assets | | | 25,323 | | | | 26,623 | | | | 32,046 | | | | 25,323 | |
Income taxes receivable | | | 50,025 | | | | 4,848 | | | | 847 | | | | 50,025 | |
Other current assets | | | 15,064 | | | | 7,338 | | | | 18,687 | | | | 15,064 | |
Assets held for sale | | | | — | | | | 3,974 | |
| | | | | | | | | | |
Total current assets | | | 384,132 | | | | 559,122 | | | | 414,020 | | | | 384,132 | |
| | | | | | | | | | |
Property and equipment, gross | | | 1,728,174 | | | | 1,858,307 | | | | 1,832,443 | | | | 1,647,718 | |
Accumulated depreciation | | | (863,566 | ) | | | (806,624 | ) | | | (895,699 | ) | | | (853,449 | ) |
| | | | | | | | | | |
Property and equipment, net | | | 864,608 | | | | 1,051,683 | | | | 936,744 | | | | 794,269 | |
| | | | | | | | | | |
Goodwill | | | 346,102 | | | | 320,992 | | | | 447,609 | | | | 346,102 | |
Other intangible assets, net | | | 41,048 | | | | 42,345 | | | | 58,151 | | | | 41,048 | |
Deferred financing costs, net | | | 10,421 | | | | 10,489 | | | | 7,806 | | | | 10,421 | |
Equity-method investments | | | 5,203 | | | | 24,220 | | | | 5,940 | | | | 5,203 | |
Other assets | | | 12,896 | | | | 8,072 | | | | 22,666 | | | | 12,896 | |
Noncurrent assets held for sale | | | | — | | | | 70,339 | |
| | | | | | | | | | |
TOTAL ASSETS | | $ | 1,664,410 | | | $ | 2,016,923 | | | $ | 1,892,936 | | | $ | 1,664,410 | |
| | | | | | | | | | |
| LIABILITIES AND EQUITY | Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 46,086 | | | $ | 46,185 | | | $ | 56,310 | | | $ | 46,086 | |
Accrued liabilities | | | 130,517 | | | | 197,116 | | | | 217,249 | | | | 130,517 | |
Accrued interest | | | 3,014 | | | | 4,368 | | | | 4,097 | | | | 3,014 | |
Current portion of capital lease obligations | | | 7,203 | | | | 9,386 | | | | 3,979 | | | | 7,203 | |
Current portion of notes payable — related parties, net of discount | | | 1,931 | | | | 14,318 | | | | — | | | | 1,931 | |
Current portion of long-term debt | | | 1,018 | | | | 2,000 | | | | — | | | | 1,018 | |
| | | | | | | | | | |
Total current liabilities | | | 189,769 | | | | 273,373 | | | | 281,635 | | | | 189,769 | |
| | | | | | | | | | |
Capital lease obligations, less current portion | | | 7,110 | | | | 13,763 | | | | 2,121 | | | | 7,110 | |
Notes payable — related parties, less current portion | | | 4,000 | | | | 6,000 | | | | — | | | | 4,000 | |
Long-term debt, less current portion | | | 512,839 | | | | 613,828 | | | | 425,000 | | | | 512,839 | |
Workers’ compensation, vehicular and health insurance liabilities | | | 40,855 | | | | 43,151 | | | | 30,110 | | | | 40,855 | |
Deferred tax liabilities | | | 146,980 | | | | 188,581 | | | | 144,309 | | | | 146,980 | |
Other non-current accrued liabilities | | | 19,717 | | | | 17,495 | | | | 27,958 | | | | 19,717 | |
Commitments and contingencies | | | | | | | | | | | | | | | | |
Equity: | | | | | | | | | | | | | | | | |
Common stock, $0.10 par value; 200,000,000 shares authorized, 123,993,480 and 121,305,289 shares issued and outstanding | | | 12,399 | | | | 12,131 | | |
Common stock, $0.10 par value; 200,000,000 shares authorized, 141,656,426 and 123,993,480 shares issued and outstanding | | | | 14,166 | | | | 12,399 | |
Additional paid-in capital | | | 608,223 | | | | 601,872 | | | | 775,601 | | | | 608,223 | |
Accumulated other comprehensive loss | | | (50,763 | ) | | | (46,550 | ) | | | (51,334 | ) | | | (50,763 | ) |
Retained earnings | | | 137,158 | | | | 293,279 | | | | 210,653 | | | | 137,158 | |
| | | | | | | | | | |
Total equity attributable to common stockholders | | | 707,017 | | | | 860,732 | | | | 949,086 | | | | 707,017 | |
Noncontrolling interest | | | 36,123 | | | | — | | | | 32,717 | | | | 36,123 | |
| | | | | | | | | | |
Total equity | | | 743,140 | | | | 860,732 | | | | 981,803 | | | | 743,140 | |
| | | | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | $ | 1,664,410 | | | $ | 2,016,923 | | | $ | 1,892,936 | | | $ | 1,664,410 | |
| | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
5754
Key Energy Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
|
REVENUES | | $ | 1,078,665 | | | $ | 1,972,088 | | | $ | 1,662,012 | | | $ | 1,153,684 | | | $ | 955,699 | | | $ | 1,624,446 | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
Direct operating expenses | | | 779,457 | | | | 1,250,327 | | | | 985,614 | | | | 835,012 | | | | 675,942 | | | | 1,005,850 | |
Depreciation and amortization expense | | | 169,562 | | | | 170,774 | | | | 129,623 | | | | 137,047 | | | | 149,233 | | | | 149,607 | |
General and administrative expenses | | | 178,696 | | | | 257,707 | | | | 230,396 | | | | 198,271 | | | | 172,140 | | | | 246,345 | |
Asset retirements and impairments | | | 159,802 | | | | 75,137 | | | | — | | | | — | | | | 97,035 | | | | 26,101 | |
Interest expense, net of amounts capitalized | | | 39,069 | | | | 41,247 | | | | 36,207 | | | | 41,959 | | | | 39,405 | | | | 42,622 | |
Other, net | | | (120 | ) | | | 2,840 | | | | 4,232 | | | | (2,697 | ) | | | (834 | ) | | | 2,552 | |
| | | | | | | | | | | | | | |
Total costs and expenses, net | | | 1,326,466 | | | | 1,798,032 | | | | 1,386,072 | | | | 1,209,592 | | | | 1,132,921 | | | | 1,473,077 | |
| | | | | | | | | | | | | | |
(Loss) income before taxes and noncontrolling interest | | | (247,801 | ) | | | 174,056 | | | | 275,940 | | |
(Loss) income from continuing operations before income taxes and noncontrolling interest | | | | (55,908 | ) | | | (177,222 | ) | | | 151,369 | |
Income tax benefit (expense) | | | 91,125 | | | | (90,243 | ) | | | (106,768 | ) | | | 20,512 | | | | 65,974 | | | | (81,900 | ) |
| | | | | | | | | | | | | | |
Net (Loss) Income | | | (156,676 | ) | | | 83,813 | | | | 169,172 | | |
(Loss) income from continuing operations before noncontrolling interest | | | | (35,396 | ) | | | (111,248 | ) | | | 69,469 | |
Income (loss) from discontinued operations, net of tax (expense) benefit of ($73,790), $25,151 and ($8,343), respectively | | | | 105,745 | | | | (45,428 | ) | | | 14,344 | |
| | | | | | | | | | | | | | |
Noncontrolling interest | | | (555 | ) | | | (245 | ) | | | (117 | ) | |
Net income (loss) | | | | 70,349 | | | | (156,676 | ) | | | 83,813 | |
Loss attributable to noncontrolling interest | | | | (3,146 | ) | | | (555 | ) | | | (245 | ) |
| | | | | | | | | | | | | | |
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | | $ | 73,495 | | | $ | (156,121 | ) | | $ | 84,058 | |
| | | | | | | | | | | | | | |
(Loss) earnings per share attributable to common stockholders: | | | | | | | | | | | | | |
(Loss) earnings per share from continuing operations attributable to Key: | | | | | | | | | | | | | |
Basic | | $ | (1.29 | ) | | $ | 0.68 | | | $ | 1.29 | | | $ | (0.25 | ) | | $ | (0.91 | ) | | $ | 0.56 | |
Diluted | | $ | (1.29 | ) | | $ | 0.67 | | | $ | 1.27 | | | $ | (0.25 | ) | | $ | (0.91 | ) | | $ | 0.56 | |
Earnings (loss) per share from discontinued operations attributable to Key: | | | | | | | | | | | | | |
Basic | | | $ | 0.82 | | | $ | (0.38 | ) | | $ | 0.12 | |
Diluted | | | $ | 0.82 | | | $ | (0.38 | ) | | $ | 0.11 | |
Earnings (loss) per share attributable to Key: | | | | | | | | | | | | | |
Basic | | | $ | 0.57 | | | $ | (1.29 | ) | | $ | 0.68 | |
Diluted | | | $ | 0.57 | | | $ | (1.29 | ) | | $ | 0.67 | |
| | |
(Loss) income from continuing operations | | | | (35,396 | ) | | | (111,248 | ) | | | 69,469 | |
Loss attributable to noncontrolling interest | | | | (3,146 | ) | | | (555 | ) | | | (245 | ) |
| | | | | | | | |
(Loss) income from continuing operations attributable to Key | | | $ | (32,250 | ) | | $ | (110,693 | ) | | $ | 69,714 | |
| | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 121,072 | | | | 124,246 | | | | 131,194 | | | | 129,368 | | | | 121,072 | | | | 124,246 | |
Diluted | | | 121,072 | | | | 125,565 | | | | 133,551 | | | | 129,368 | | | | 121,072 | | | | 125,565 | |
See the accompanying notes which are an integral part of these consolidated financial statements
55
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (In thousands) | |
|
(Loss) income from continuing operations | | $ | (35,396 | ) | | $ | (111,248 | ) | | $ | 69,469 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Foreign currency translation loss, net of tax of $(129), $(347), and $(952) | | | (831 | ) | | | (4,243 | ) | | | (8,561 | ) |
Deferred gain (loss) from available for sale investments, net of tax of $0, $0 and $0 | | | — | | | | 30 | | | | (8 | ) |
| | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax | | | (831 | ) | | | (4,213 | ) | | | (8,569 | ) |
| | | | | | | | | | | | |
Comprehensive income (loss) from continuing operations, net of tax | | | (36,227 | ) | | | (115,461 | ) | | | 60,900 | |
Comprehensive income (loss) from discontinued operations | | | 105,745 | | | | (45,428 | ) | | | 14,344 | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | | 69,518 | | | | (160,889 | ) | | | 75,244 | |
| | | | | | | | | | | | |
Comprehensive loss attributable to noncontrolling interest | | | (3,406 | ) | | | (416 | ) | | | (316 | ) |
| | | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 72,924 | | | $ | (160,473 | ) | | $ | 75,560 | |
| | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
56
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (In thousands) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income (loss) | | $ | 70,349 | | | $ | (156,676 | ) | | $ | 83,813 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization expense | | | 143,805 | | | | 169,562 | | | | 170,774 | |
Asset retirements and impairments | | | — | | | | 159,802 | | | | 75,137 | |
Bad debt expense | | | 3,849 | | | | 3,295 | | | | 37 | |
Accretion of asset retirement obligations | | | 526 | | | | 533 | | | | 594 | |
(Income) loss from equity-method investments | | | (396 | ) | | | 1,057 | | | | (160 | ) |
Amortization of deferred financing costs and discount | | | 2,615 | | | | 2,182 | | | | 2,115 | |
Deferred income tax (benefit) expense | | | (12,370 | ) | | | (41,257 | ) | | | 29,747 | |
Capitalized interest | | | (3,789 | ) | | | (4,335 | ) | | | (6,514 | ) |
(Gain) loss on disposal of assets, net | | | (153,822 | ) | | | 401 | | | | (641 | ) |
Loss on early extinguishment of debt | | | — | | | | 472 | | | | — | |
Loss on sale of available for sale investments, net | | | — | | | | 30 | | | | — | |
Share-based compensation | | | 12,111 | | | | 6,381 | | | | 24,233 | |
Excess tax benefits from share-based compensation | | | (2,069 | ) | | | (580 | ) | | | (1,733 | ) |
Changes in working capital: | | | | | | | | | | | | |
Accounts receivable | | | (26,448 | ) | | | 168,824 | | | | (34,943 | ) |
Other current assets | | | 36,731 | | | | 461 | | | | (15,622 | ) |
Accounts payable and accrued expenses | | | 61,671 | | | | (126,949 | ) | | | 46,375 | |
Share-based compensation liability awards | | | 1,297 | | | | 646 | | | | (516 | ) |
Other assets and liabilities | | | (4,255 | ) | | | 988 | | | | (5,532 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 129,805 | | | | 184,837 | | | | 367,164 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Capital expenditures | | | (180,310 | ) | | | (128,422 | ) | | | (218,994 | ) |
Proceeds from sale of fixed assets | | | 258,202 | | | | 5,580 | | | | 7,961 | |
Investment in Geostream Services Group | | | — | | | | — | | | | (19,306 | ) |
Acquisitions, net of cash acquired of $539, $28,362, and $2,017, respectively | | | (86,688 | ) | | | 12,007 | | | | (99,011 | ) |
Dividend from equity-method investments | | | 165 | | | | 199 | | | | — | |
Proceeds from sale of short-term investments | | | — | | | | — | | | | 276 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (8,631 | ) | | | (110,636 | ) | | | (329,074 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Repayments of long-term debt | | | (6,970 | ) | | | (16,552 | ) | | | (3,026 | ) |
Repayments of capital lease obligations | | | (8,493 | ) | | | (9,847 | ) | | | (11,506 | ) |
Borrowings on revolving credit facility | | | 110,000 | | | | — | | | | 172,813 | |
Repayments on revolving credit facility | | | (197,813 | ) | | | (100,000 | ) | | | (35,000 | ) |
Repurchases of common stock | | | (3,098 | ) | | | (488 | ) | | | (139,358 | ) |
Proceeds from exercise of stock options and warrants | | | 4,100 | | | | 1,306 | | | | 6,688 | |
Payment of deferred financing costs | | | — | | | | (2,474 | ) | | | (314 | ) |
Excess tax benefits from share-based compensation | | | 2,069 | | | | 580 | | | | 1,733 | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (100,205 | ) | | | (127,475 | ) | | | (7,970 | ) |
| | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | (1,735 | ) | | | (2,023 | ) | | | 4,068 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 19,234 | | | | (55,297 | ) | | | 34,188 | |
| | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | 37,394 | | | | 92,691 | | | | 58,503 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 56,628 | | | $ | 37,394 | | | $ | 92,691 | |
| | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
57
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | COMMON STOCKHOLDERS | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | | | | | | | |
| | Common Stock | | | Additional
| | | Other
| | | | | | | | | | |
| | Number of
| | | Amount
| | | Paid-in
| | | Comprehensive
| | | Retained
| | | Noncontrolling
| | | | |
| | Shares | | | at par | | | Capital | | | Loss | | | Earnings | | | Interest | | | Total | |
| | (In thousands) | |
|
BALANCE AT DECEMBER 31, 2007 | | | 131,143 | | | $ | 13,114 | | | $ | 704,644 | | | $ | (37,981 | ) | | $ | 209,221 | | | $ | 251 | | | $ | 889,249 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (8,569 | ) | | | — | | | | — | | | | (8,569 | ) |
Common stock purchases | | | (11,183 | ) | | | (1,118 | ) | | | (135,291 | ) | | | — | | | | — | | | | — | | | | (136,409 | ) |
Deconsolidation of AFTI | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) |
Exercise of stock options | | | 757 | | | | 76 | | | | 6,612 | | | | — | | | | — | | | | — | | | | 6,688 | |
Exercise of warrants | | | 160 | | | | 16 | | | | (16 | ) | | | — | | | | — | | | | — | | | | — | |
Share-based compensation | | | 428 | | | | 43 | | | | 24,190 | | | | — | | | | — | | | | — | | | | 24,233 | |
Tax benefits from share-based compensation | | | — | | | | — | | | | 1,733 | | | | — | | | | — | | | | — | | | | 1,733 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 84,058 | | | | (245 | ) | | | 83,813 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2008 | | | 121,305 | | | | 12,131 | | | | 601,872 | | | | (46,550 | ) | | | 293,279 | | | | — | | | | 860,732 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (4,213 | ) | | | — | | | | (7 | ) | | | (4,220 | ) |
Common stock purchases | | | (72 | ) | | | (7 | ) | | | (481 | ) | | | — | | | | — | | | | — | | | | (488 | ) |
Exercise of stock options | | | 418 | | | | 42 | | | | 1,264 | | | | — | | | | — | | | | — | | | | 1,306 | |
Issuance of warrants | | | — | | | | — | | | | 367 | | | | — | | | | — | | | | — | | | | 367 | |
Share-based compensation | | | 2,342 | | | | 233 | | | | 5,781 | | | | — | | | | — | | | | — | | | | 6,014 | |
Tax benefits from share-based compensation | | | — | | | | — | | | | (580 | ) | | | — | | | | — | | | | — | | | | (580 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (156,121 | ) | | | (555 | ) | | | (156,676 | ) |
Purchase of Geostream | | | — | | | | — | | | | — | | | | — | | | | — | | | | 36,685 | | | | 36,685 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2009 | | | 123,993 | | | | 12,399 | | | | 608,223 | | | | (50,763 | ) | | | 137,158 | | | | 36,123 | | | | 743,140 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (571 | ) | | | — | | | | (260 | ) | | | (831 | ) |
Common stock purchases | | | (302 | ) | | | (30 | ) | | | (3,068 | ) | | | — | | | | — | | | | — | | | | (3,098 | ) |
Exercise of stock options and warrants | | | 507 | | | | 50 | | | | 4,050 | | | | — | | | | — | | | | — | | | | 4,100 | |
Issuance of shares in acquisition | | | 15,807 | | | | 1,581 | | | | 152,382 | | | | — | | | | — | | | | — | | | | 153,963 | |
Share-based compensation | | | 1,651 | | | | 166 | | | | 11,945 | | | | — | | | | — | | | | — | | | | 12,111 | |
Tax benefits from share-based compensation | | | — | | | | — | | | | 2,069 | | | | — | | | | — | | | | — | | | | 2,069 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 73,495 | | | | (3,146 | ) | | | 70,349 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2010 | | | 141,656 | | | $ | 14,166 | | | $ | 775,601 | | | $ | (51,334 | ) | | $ | 210,653 | | | $ | 32,717 | | | $ | 981,803 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
58
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | (In thousands) | |
|
Net (Loss) Income | | $ | (156,676 | ) | | $ | 83,813 | | | $ | 169,172 | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | | |
Foreign currency translation loss, net of tax of $(347), $(952), and $0 | | | (4,243 | ) | | | (8,561 | ) | | | (1,281 | ) |
Net deferred loss from cash flow hedges, net of tax of $0, $0, and $(115) | | | — | | | | — | | | | (213 | ) |
Deferred gain (loss) from available for sale investments, net of tax of $0, $0 and $(97) | | | 30 | | | | (8 | ) | | | (203 | ) |
| | | | | | | | | | | | |
Total other comprehensive loss, net of tax | | | (4,213 | ) | | | (8,569 | ) | | | (1,697 | ) |
| | | | | | | | | | | | |
Comprehensive (loss) income, net of tax | | | (160,889 | ) | | | 75,244 | | | | 167,475 | |
Comprehensive loss attributable to noncontrolling interest | | | (416 | ) | | | (316 | ) | | | (119 | ) |
| | | | | | | | | | | | |
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (160,473 | ) | | $ | 75,560 | | | $ | 167,594 | |
| | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
59
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | | | | (In thousands) | | | | |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | |
Adjustments to reconcile (loss) income attributable to common stockholders to net cash provided by operating activities: | | | | | | | | | | | | |
Noncontrolling interest | | | (555 | ) | | | (245 | ) | | | (117 | ) |
Depreciation and amortization expense | | | 169,562 | | | | 170,774 | | | | 129,623 | |
Asset retirements and impairments | | | 159,802 | | | | 75,137 | | | | — | |
Bad debt expense | | | 3,295 | | | | 37 | | | | 3,675 | |
Accretion of asset retirement obligations | | | 533 | | | | 594 | | | | 585 | |
Loss (income) from equity-method investments | | | 1,057 | | | | (160 | ) | | | (387 | ) |
Amortization of deferred financing costs and discount | | | 2,182 | | | | 2,115 | | | | 1,680 | |
Deferred income tax (benefit) expense | | | (41,257 | ) | | | 29,747 | | | | 24,613 | |
Capitalized interest | | | (4,335 | ) | | | (6,514 | ) | | | (5,296 | ) |
Loss (gain) on disposal of assets, net | | | 401 | | | | (641 | ) | | | 1,752 | |
Loss on early extinguishment of debt | | | 472 | | | | — | | | | 9,557 | |
Loss on sale of available for sale investments, net | | | 30 | | | | — | | | | — | |
Share-based compensation | | | 6,381 | | | | 24,233 | | | | 9,355 | |
Excess tax benefits from share-based compensation | | | (580 | ) | | | (1,733 | ) | | | (3,401 | ) |
Changes in working capital: | | | | | | | | | | | | |
Accounts receivable | | | 168,824 | | | | (34,943 | ) | | | (48,387 | ) |
Other current assets | | | 461 | | | | (15,622 | ) | | | (15,578 | ) |
Accounts payable, accrued interest and accrued expenses | | | (126,949 | ) | | | 46,375 | | | | (1,360 | ) |
Cash paid for legal settlement with former chief executive officer | | | — | | | | — | | | | (21,200 | ) |
Share-based compensation liability awards | | | 646 | | | | (516 | ) | | | 3,701 | |
Other assets and liabilities | | | 988 | | | | (5,532 | ) | | | (8,185 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 184,837 | | | | 367,164 | | | | 249,919 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Capital expenditures | | | (128,422 | ) | | | (218,994 | ) | | | (212,560 | ) |
Proceeds from sale of fixed assets | | | 5,580 | | | | 7,961 | | | | 8,427 | |
Investment in Geostream Services Group | | | — | | | | (19,306 | ) | | | — | |
Acquisitions, net of cash acquired of $28,362, $2,017, and $2,154, respectively | | | 12,007 | | | | (99,011 | ) | | | (160,278 | ) |
Dividend from equity-method investments | | | 199 | | | | — | | | | — | |
Cash paid for short-term investments | | | — | | | | — | | | | (121,613 | ) |
Proceeds from sale of short-term investments | | | — | | | | 276 | | | | 183,177 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (110,636 | ) | | | (329,074 | ) | | | (302,847 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Repayments of long-term debt | | | (16,552 | ) | | | (3,026 | ) | | | (396,000 | ) |
Proceeds from long-term debt | | | — | | | | — | | | | 425,000 | |
Repayments of capital lease obligations | | | (9,847 | ) | | | (11,506 | ) | | | (11,316 | ) |
Borrowings on revolving credit facility | | | — | | | | 172,813 | | | | 50,000 | |
Repayments on revolving credit facility | | | (100,000 | ) | | | (35,000 | ) | | | — | |
Repayments of debt assumed in acquisitions | | | — | | | | — | | | | (17,435 | ) |
Repurchases of common stock | | | (488 | ) | | | (139,358 | ) | | | (30,454 | ) |
Proceeds from exercise of stock options | | | 1,306 | | | | 6,688 | | | | 13,444 | |
Payment of deferred financing costs | | | (2,474 | ) | | | (314 | ) | | | (13,400 | ) |
Excess tax benefits from share-based compensation | | | 580 | | | | 1,733 | | | | 3,401 | |
| | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (127,475 | ) | | | (7,970 | ) | | | 23,240 | |
| | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | (2,023 | ) | | | 4,068 | | | | (184 | ) |
| | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (55,297 | ) | | | 34,188 | | | | (29,872 | ) |
| | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | 92,691 | | | | 58,503 | | | | 88,375 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 37,394 | | | $ | 92,691 | | | $ | 58,503 | |
| | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | COMMON STOCKHOLDERS | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | | | | | | | |
| | Common Stock | | | Additional
| | | Other
| | | | | | | | | | |
| | Number of
| | | Amount
| | | Paid-in
| | | Comprehensive
| | | Retained
| | | Noncontrolling
| | | | |
| | Shares | | | at par | | | Capital | | | Loss | | | Earnings | | | Interest | | | Total | |
| | (In thousands) | |
|
BALANCE AT DECEMBER 31, 2006 | | | 131,624 | | | $ | 13,162 | | | $ | 711,798 | | | $ | (36,284 | ) | | $ | 39,932 | | | $ | — | | | $ | 728,608 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (1,697 | ) | | | — | | | | — | | | | (1,697 | ) |
Common stock purchases | | | (2,414 | ) | | | (241 | ) | | | (33,161 | ) | | | — | | | | — | | | | — | | | | (33,402 | ) |
Purchase of AFTI | | | — | | | | — | | | | — | | | | — | | | | — | | | | 368 | | | | 368 | |
Exercise of stock options | | | 1,598 | | | | 159 | | | | 13,285 | | | | — | | | | — | | | | — | | | | 13,444 | |
Exercise of warrants | | | 23 | | | | 2 | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | |
Share-based compensation | | | 312 | | | | 32 | | | | 9,323 | | | | — | | | | — | | | | — | | | | 9,355 | |
Tax benefits from share-based compensation | | | — | | | | — | | | | 3,401 | | | | — | | | | — | | | | — | | | | 3,401 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 169,289 | | | | (117 | ) | | | 169,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2007 | | | 131,143 | | | | 13,114 | | | | 704,644 | | | | (37,981 | ) | | | 209,221 | | | | 251 | | | | 889,249 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (8,569 | ) | | | — | | | | — | | | | (8,569 | ) |
Common stock purchases | | | (11,183 | ) | | | (1,118 | ) | | | (135,291 | ) | | | — | | | | — | | | | — | | | | (136,409 | ) |
Deconsolidation of AFTI | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) |
Exercise of stock options | | | 757 | | | | 76 | | | | 6,612 | | | | — | | | | — | | | | — | | | | 6,688 | |
Exercise of warrants | | | 160 | | | | 16 | | | | (16 | ) | | | — | | | | — | | | | — | | | | — | |
Share-based compensation | | | 428 | | | | 43 | | | | 24,190 | | | | — | | | | — | | | | — | | | | 24,233 | |
Tax benefits from share-based compensation | | | — | | | | — | | | | 1,733 | | | | — | | | | — | | | | — | | | | 1,733 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 84,058 | | | | (245 | ) | | | 83,813 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2008 | | | 121,305 | | | | 12,131 | | | | 601,872 | | | | (46,550 | ) | | | 293,279 | | | | — | | | | 860,732 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (4,213 | ) | | | — | | | | (7 | ) | | | (4,220 | ) |
Common stock purchases | | | (72 | ) | | | (7 | ) | | | (481 | ) | | | — | | | | — | | | | — | | | | (488 | ) |
Exercise of stock options | | | 418 | | | | 42 | | | | 1,264 | | | | — | | | | — | | | | — | | | | 1,306 | |
Issuance of warrants | | | — | | | | — | | | | 367 | | | | — | | | | — | | | | — | | | | 367 | |
Share-based compensation | | | 2,342 | | | | 233 | | | | 5,781 | | | | — | | | | — | | | | — | | | | 6,014 | |
Tax benefits from share-based compensation | | | — | | | | — | | | | (580 | ) | | | — | | | | — | | | | — | | | | (580 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (156,121 | ) | | | (555 | ) | | | (156,676 | ) |
Purchase of Geostream | | | — | | | | — | | | | — | | | | — | | | | — | | | | 36,685 | | | | 36,685 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2009 | | | 123,993 | | | $ | 12,399 | | | $ | 608,223 | | | $ | (50,763 | ) | | $ | 137,158 | | | $ | 36,123 | | | $ | 743,140 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
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Key Energy Services, Inc. and Subsidiaries
| |
NOTE 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Key Energy Services, Inc., its wholly-owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,”“us” and “our”) provide a completefull range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies, includingcompanies. Our services include rig-based and coiledtubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, pressure pumping services,and fishing and rental services and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States, and have operations based in Mexico, ArgentinaColombia, the Middle East, Russia and the Russian Federation. We also ownArgentina. In addition, we have a technology development companygroup based in Canada and have equityownership interests in two oilfield service companies based in Canada.
Basis of Presentation
The consolidated financial statements included in this Annual Report onForm 10-K present our financial position, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”).
The preparation of these 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 also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that our estimates are reasonable.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. We now presentpresentation. As a result of the income statement line items related to gainssale of our pressure pumping and losses on the early extinguishment of debt, interest income, net gains and losses on disposal of assets, and other income and expense as the single line item “Other, net” on our consolidated statements of operations. Detail for these items is now providedwireline businesses in “Note 4. Other Income and Expense” of these notes. Additionally,2010, we now show the non-current portionresults of operations of these businesses as discontinued operations for all periods presented. Prior to the sale, the businesses sold to Patterson-UTI Energy, Inc. (“Patterson-UTI”) were reported as part of our notesProduction Services segment and accounts receivable from related parties as a component of other non-current assets and are disclosedwere based entirely in “Note 19. Transactions with Related Parties.” In prior years, these amounts were presented as a separate component of non-current assets on our consolidated balance sheet. As discussed in “Note 21. Segment Information,” during the first quarter of 2009 we changed our reportable segments due to a reorganization of our U.S. operations to realign both our management structure and resources. Financial information for prior years has been recast to reflect the change in segments. None of the reclassifications andThese presentation changes discussed above impacteddid not impact our consolidated net income, earnings per share, total current assets, total assets or total stockholders’ equity.
We have evaluated events occurring after the balance sheet date included in this Annual Report onForm 10-K for possible disclosure as a subsequent event. Management monitored for subsequent events through the date that these financial statements were available to be issued. No subsequentSubsequent events that were identified by management that required disclosure.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)disclosure are described in“Note 26. Subsequent Events” of these financial statements.
Principles of Consolidation
Within our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. We eliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, we account for that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interest using the equity method.
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Key Energy Services, Inc. and Subsidiaries
As further discussedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We apply Accounting Standards Codification (“ASC”)No. 810-10,Consolidation of Variable InterestEntities (revised December 2003)— an Interpretation of ARB No. 51(“ASC810-10”) when determining whether or not to consolidate a Variable Interest Entity (“VIE”).ASC 810-10 requires that an equity investor in “Note 2. Acquisitions,” in September 2009, we acquired an additional 24%a VIE have significant equity at risk (generally a minimum of 10%) and hold a controlling interest, in OOO Geostream Services Group (“Geostream”), bringing our total investment in Geostream to 50%. Prior to the acquisitionevidenced by voting rights, and absorb a majority of the additional interest, we accounted for our ownership in Geostream usingentity’s expected losses, receive a majority of the entity’s expected returns, or both. If the equity method. In connection withinvestor is unable to evidence these characteristics, the acquisition ofentity that retains these ownership characteristics will be required to consolidate the additional interest, we obtained majority representation on Geostream’s board of directors and a controlling interest. We accounted for this acquisition as a business combination achieved in stages. Since the acquisition date, we have consolidated the assets, liabilities, results of operations and cash flows of Geostream into our consolidated financial statements, with the portion of Geostream remaining outside of our control reflected as a noncontrolling interest in our consolidated financial statements.VIE.
Acquisitions
From time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations for acquisitions are included in our financial statements beginning on the date of acquisition. Acquisitions made after January 1, 2009acquisition and are accounted for using the acquisition method. The acquisition method differs from previous accounting guidance related to business combinations by expanding the scope of what constitutes a “business” and must therefore be accounted for as a business combination. For all business combinations (whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquired business, including goodwill, at their fair values; including contingent consideration is recognized at its fair value on the acquisition date, and for certain arrangements, changes in fair value must be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs must be expensed rather than treated as part of the cost of the acquisition. The acquisition method also establishes new disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.consideration. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year after the date of the acquisition. Acquisitions through December 31, 2008 are accounted for using the purchase method of accounting and the purchase price is allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition.
Revenue Recognition
We recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectibility is reasonably assured.
| | |
| • | Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completed customer purchase order, field ticket, supplier contract, or master service agreement. |
|
| • | Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement as evidenced by a field ticket or service log. |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a completed customer field ticket. |
|
| • | Collectibility is reasonably assured when we screen our customers to determine credit terms and provide goods and services to customers according to determined credit terms that have been granted credit in accordance with our credit policy. |
We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmental taxing authorities.
We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value if they have standalone value to our customer, they have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.
Cash and Cash Equivalents
We consider short-term investments with an original maturity of less than three months to be cash equivalents. At December 31, 2009,2010, we have not entered into any compensating balance arrangements, but all of our obligations under our senior credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the administrative agents (the “Senior Secured Credit Facility”) were secured by most of our assets, including assets held by our subsidiaries, which includes our
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cash and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.
We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2009,2010, accounts were guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per account and substantially all of our accounts held deposits in excess of the FDIC limits.
Cash and cash equivalents held by our Russian subsidiaryand Middle East subsidiaries are subject to a noncontrolling interest. Weinterest and cannot be repatriated; absent these amounts, we believe that the cash held by our wholly-owned foreign subsidiaries could be repatriated for general corporate use without material withholdings. From time to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts of our cash in deposit accounts with restrictions that limit our ability to withdraw those funds. As of December 31, 2009, the amount of our cash restricted under such arrangements was $0.8 million.
Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. We present the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
We establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or part of the outstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectibility and establish or adjust our allowance as necessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off the accounts receivable againstand the associated allowanceprovision for uncollectible accounts.
From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self insurance liability. We present these insurance receivables gross on our balance sheet as a component of accounts receivable, separate from the corresponding liability.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of Credit Risk and Significant Customers
Our customers include major oil and natural gas production companies, independent oil and natural gas production companies, and foreign national oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.
During the year ended December 31, 2010, no single customer accounted for 10% or more of our consolidated revenues. During the year ended December 31, 2009, revenues from one of the customers of our Well Servicing segment were approximately 11% percent of our consolidated revenues. No other single customer accounted for more than 10% or more of our consolidated revenues for the year ended December 31, 2009. During the years ended December 31, 2008 and 2007 noNo single customer accounted for more than 10% or more of our consolidated revenues.revenues during the year ended December 31, 2008. Receivables outstanding from one of the customers of our Well Servicing segment were approximately 25% of our total accounts receivable as of December 31, 2009. No single customer accounted for more than 10% of our total accounts receivable as of December 31, 2010 and 2008.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories, which consist primarily of equipment parts for use in our well servicing operations, sand and chemicals for our pressure pumping operations and supplies held for consumption, are valued at the lower of average cost or market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated depreciable lives of the assets using the straight-line method. Depreciation expense for the years ended December 31, 2010, 2009 and 2008 and 2007 was $156.3$125.8 million, $153.2$135.3 million and $124.7$132.0 million, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a fair value higher than the assets’ value as scrap. Salvage value approximates 10% of an operational asset’s acquisition cost. When an operational asset is stacked or taken out of service, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is no longer operable and whether the remaining depreciable life and salvage value should be adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When we dispose of an asset, gain or loss is recognized.
As of December 31, 2009,2010, the estimated useful lives of our asset classes are as follows:
| | | | |
Description | | Years | |
|
Well service rigs and components | | | 3-15 | |
Oilfield trucks pressure pumping equipment, and related equipment | | | 7-127-10 | |
Motor vehiclesWell intervention units and equipment | | | 3-510-12 | |
Fishing and rental tools | | | 4-10 | |
Disposal wells | | | 15-30 | |
Furniture and equipment | | | 3-7 | |
Buildings and improvements | | | 15-30 | |
We lease certain of our operating assets under capital lease obligations whose terms run from 55 to 60 months. These assets are depreciated over their estimated useful lives or the term of the capital lease obligation, whichever is shorter.
A long-lived asset or asset group isshould be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business based on the services provided, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the asset group’s estimated future cash flows are less than its net carrying value, weWe would record an impairment charge, reducing the net carrying value to an estimated fair value, if the asset group’s estimated future cash flows were less than its net carrying value. Events or changes in circumstance that
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cause us to evaluate our fixed assets for potentialrecoverability and possible impairment may include changes in market conditions, such as adverse movements in the prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use or physical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination of fair value for an asset group involves significant judgment and estimates. As discussed in“Note 6.7. Property and Equipment,”,” during the third quarter of 2009 we identified a triggering event that required us to test our long-lived assets for potential impairment. As a result of those tests, we determined that the equipment for our pressure pumping operations was impaired. We did not identify any triggering events or record any asset impairments during 2010.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Asset Retirement Obligations
We recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirement activities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputs that we believe a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjust the cost for inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimating future cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of the cash flows change, such changes may have a material impact on our results of operations. See“Note 9.10. Asset Retirement ObligationsObligations.”.”
Capitalized Interest
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized to depreciation expense over the useful life of the assets. Itassets, and is included in the depreciation and amortization line in the accompanying consolidated statements of operations.
Deferred Financing Costs
Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest method over the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination of the gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations.
Goodwill and Other Intangible Assets
Goodwill results from business combinations and represents the excess of the acquisition consideration over the fair value of the net assets acquired. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The test for impairment of indefinite-lived intangibles is a two step test. In the first step of the test, a fair value is calculated for each of our reporting units, and that fair value is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for the reporting unit, then the second step of the test is required.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fair value of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment is recorded. If the carrying value is in excess of the implied fair value, an impairment equal to the excess is recorded.
To assist management in the preparation and analysis of the valuation of our reporting units, we utilize the services of a third-party valuation consultant, who reviews our estimates, assumptions and calculations.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The ultimate conclusions of the valuation techniques remain our sole responsibility. We conduct our annual impairment test on December 31 of each year. For the annual test completed as of December 31, 2009, no impairment of our goodwill was indicated. As discussed in “Note 7. Goodwill and Other Intangible Assets,” our tests for the potential impairment of our long-lived assets during the third quarter of 2009 constituted an event that required us to test our goodwill for potential impairment on an interim basis. As a result of that test, we determined that $0.5 million of goodwill in our Production Services segment was impaired and recorded a charge to reduce the goodwill to zero. We do not currently expect that additional tests would result in additional charges, but theThe determination of the fair value used in the test is heavily impacted by the market prices of our equity and debt securities, as well as the assumptions and estimates about our future activity levels, profitability and cash flows. We conduct our annual impairment test on December 31 of each year. For the annual test completed as of December 31, 2010, no impairment of our goodwill was indicated. See“Note 8. Goodwill and Other Intangible Assets,”for further discussion.
In the fourth quarter of 2010, we changed the date of our annual goodwill impairment assessment for our Russian reporting unit from September 30 to December 31. This constitutes a change in the method of applying an accounting principle that we believe is preferable. The change was made to align the testing of our Russian reporting unit with the testing date of our other reporting units. This change is preferable as it also aligns the timing of our annual Russian goodwill impairment test with our planning and budgeting process, which will allow us to utilize updated forecasts in our discounted cash flow models which are used in the determination of the fair value of the reporting units. Also, the November and December months are the contract tendering periods in Russia providing current information on anticipated activity. This change in accounting principle has no effect on our current or prior period financial statements. We performed our annual goodwill impairment test for our Russian reporting unit on September 30, 2010 and no indicators of impairment were noted. We retested the Russian reporting unit on December 31, 2010 and no impairment of our goodwill was indicated.
Internal-Use Software
We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over itsthe software’s estimated useful life, generally five years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred.
Litigation
When estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss is probable and reasonably estimable.
Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where we conduct business in the continental United States, we are often subject to jury verdicts or other outcomes that may be favorable to plaintiffs. We are also exposed to litigation in foreign locations where we operate. 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. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is able to be estimated. See“Note 14.16. Commitments and ContingenciesContingencies.”.”
Environmental
Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, and regulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. We record liabilities on an undiscounted basis when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See“Note 14.16. Commitments and ContingenciesContingencies.”.”
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Self Insurance
We are largely self-insured foragainst physical damage caused byto our equipment and vehicles in the course of our operations.automobiles as well as workers’ compensation claims. The accruals that we maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. To assist management with the liability amount for our self insurance reserves, we utilize the services of a third party actuary. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See“Note 14.16. Commitments and ContingenciesContingencies.”.”
Income Taxes
We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, but which are deferred until future periods. Current taxes payable represent our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatments of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.
We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate.
See“Note 12.14. Income TaxesTaxes”” for further discussion of accounting for income taxes, changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.
Earnings Per Share
Basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See“Note 8.9. Earnings Per ShareShare.”.”
Share-Based Compensation
In the past, we have issued stock options, shares of restricted common stock, stock appreciation rights (“SARs”), and phantom shares and performance units to our employees as part of those employees’ compensation and as a retention
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and as a retention tool. For our options, restricted shares and SARs, we calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. The valuation of our stock options and SARs requires us to estimate the expected term of award, which we estimate using the simplified method, as we do not currently have sufficient historical exercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stock option and SAR awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expected term of the award, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using our stock price on the grant date. Our phantom shares and performance units are treated as “liability” awards and carried at fair value on each balance sheet date, with changes in fair value recorded as a component of compensation expense and an offsetting liability on our consolidated balance sheet. We record share-based compensation as a component of general and administrative expense. See“Note 18.20. Share-Based CompensationCompensation.”.”
Foreign Currency Gains and Losses
For our international locations in Argentina, Mexico, the Russian Federation and Canada, where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. Dollar are included as a separate component of stockholders’ equity in other comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity.
From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functional currency. These transactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction. At the end of each month, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rates in effect at that time. Any adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recorded in the income or loss of the foreign subsidiary as a component of other income and expense. See“Note 15.17. Accumulated Other Comprehensive LossLoss.”.”
Comprehensive Income
We display comprehensive income and its components in our financial statements, and we classify items of comprehensive income by their nature in our financial statements and display the accumulated balance of other comprehensive income separately in our stockholders’ equity.
Leases
We lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine whether the lease should be accounted for as an operating lease or a capital lease.
We periodically incur costs to improve the assets that we lease under these arrangements. WeIf the value of the leasehold improvements exceeds our threshold for capitalization, we record the improvement as a component of our property and equipment and amortize the improvement over the useful life of the improvement or the lease term, whichever is shorter.
Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. These increases may be the result of an inducement or “rent holiday”
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conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. We recognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating lease agreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such as moving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us or on our behalf represent incentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement.
New Accounting Standards Adopted in this Report
SFAS 141(R).ASU2009-16. In December 2007,2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised 2007),Accounting Standards Update (“ASU”)2009-16,Business CombinationsTransfers and Servicing (Topic 860) — Accounting for Transfers of Financial Assets(“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from previous practice resulting from SFAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adoptedASU2009-16 revises the provisions of SFAS 141(R) on January 1, 2009, but did not consummate any business combinations duringformer FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,and requires more disclosure regarding transfers of financial assets. ASU2009-16 also eliminates the three months ended March 31, 2009. SFAS 141(R) may have an impact on our consolidated financial statements in the future. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of any acquisitions consummated after the effective date.
SFAS 160. In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidationconcept of a subsidiary. It clarifies that“qualifying special purpose entity,” changes the requirements for derecognizing financial assets, and increases disclosure requirements about transfers of financial assets and a noncontrolling interestreporting entity’s continuing involvement in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidatedtransferred financial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.assets. We adopted the provisions of SFAS 160ASU2009-16 on January 1, 2010 and the adoption of this standard did not have a material effect on our financial condition, results of operations, or cash flows.
ASU2009-17. In December 2009, the FASB issued ASU2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.ASU2009-17 replaces the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. ASU2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities. The provisions of ASU2009-17 are to be applied beginning in the first fiscal period beginning after November 15, 2009. We adopted ASU2009-17 on January 1, 2010 and the adoption of this standard did not have a material effect on our financial position, results of operations, or cash flows.
ASU2010-02. In January 2010, the FASB issued ASU2010-02,Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope Clarification.ASU2010-02 clarifies that the scope of previous guidance in the accounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assets that is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. ASU2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of any continuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The provisions of ASU2010-02 are effective for the first reporting period beginning after December 13, 2009. We adopted the provisions of ASU2010-02 on January 1, 2010 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
SFAS 165.ASU2010-06. In May 2009,January 2010, the FASB issued SFAS No. 165,ASU2010-06,Subsequent Events(“SFAS 165”). SFAS 165 establishes general standards of accounting forFair Value Measurements and disclosing of events that occur afterDisclosures (Topic 820) — Improving Disclosures About Fair Value Measurements.ASU2010-06 clarifies the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 does not significantly change the types of subsequent events that an entity reports, but it requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for interim or annual reporting requirements ending after June 15, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
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requirements for certain disclosures around fair value measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosure requirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during the period, along with the reason for those transfers, and (ii) and separate presentation of information about purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs. ASU2009-01. In June 2009, the FASB issued Accounting Standards Update (“ASU”)2009-01,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162(“ASU2009-01”). ASU2009-01 established the Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification supersedes all prior non-SEC accounting and reporting standards. Following ASU2009-01, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU2009-01 also modifies the existing hierarchy of GAAP to include only two levels — authoritative and non-authoritative. ASU2009-012010-06 is effective for financial statements issued for interim and annual reporting periods endingbeginning after SeptemberDecember 15, 2009,2009. We adopted the provisions of ASU2010-06 on January 1, 2010 and early adoption was not permitted. Thethe adoption of this standard did not have ana material impact on our financial position, results of operations, or cash flows.
ASU2009-05.2010-09. In August 2009,February 2010, the FASB issued ASU2009-05,2010-09,Fair Value MeasurementsSubsequent Events (Topic 855): Amendments to Certain Recognition and Disclosures (Topic 820) — Measuring Liabilities at Fair ValueDisclosure Requirements.(“ASUThis update provides amendments to Subtopic2009-05”).855-10 ASUas follows: (i) an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an2009-05over-the-counter-market, addresses concerns in situations where there may be a lackincluding local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued; (ii) the glossary of observable market informationTopic 855 is amended to measureinclude the fair valuedefinition of a liability, and provides clarification in circumstances where a quoted market price inSEC filer. An SEC filer is an active market forentity that is required to file or furnish its financial statements with either the SEC or, with respect to an identical liability is not available. In these cases, reporting entities should measure fair value using a valuation technique that uses the quoted priceentity subject to Section 12(i) of the identical liability whenSecurities Exchange Act of 1934, as amended, the appropriate agency under that liabilitySection; (iii) an entity that is traded as an asset, quoted prices for similar liabilities, or another valuation technique, such as an income or market approach. ASU2009-05 also clarifies that when estimating the fair value of a liability, a reporting entitySEC filer is not required to disclose the date through which subsequent events have been evaluated; (iv) the glossary of Topic 855 is amended to remove the definition of public entity. The definition of a public entity in Topic 855 was used to determine the date through which subsequent events should be evaluated; and (v) the scope of the reissuance disclosure requirements is refined to include a separate input or adjustment to other inputs relatingrevised financial statements only. The term revised financial statements is added to the existenceglossary of Topic 855. Revised financial statements include financial statements revised either as a restriction that preventsresult of correction of an error or retrospective application of U.S. generally accepted accounting principles. We adopted the transferprovisions of the liability. ASU2009-052010-09 is effective for the first reporting period subsequent to August 2009on March 1, 2010 and the adoption of this updatestandard did not have a material impact on our financial position, results of operations, or cash flows.
Accounting Standards Not Yet Adopted in this Report
SFAS 166. In June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140(“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement 125(“SFAS 140”), removes the concept of a “qualifying special purpose entity” from SFAS 140 and removes the exception from applying FASB Interpretation (“FIN”) No. 46(R),Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51(“FIN 46(R)”) to qualifying special purpose entities. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
SFAS 167. In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R)(“SFAS 167”). SFAS 167 amends the scope of FIN 46(R) to include entities previously considered qualifying special-purpose entities by FIN 46(R), as the concept of a qualifying special-purpose entity was eliminated in SFAS 166. This standard shifts the guidance for determining which enterprise in a variable interest entity consolidates that entity from a quantitative consideration of who is the primary beneficiary to a qualitative focus of which entity has the power to direct activities and the obligation to absorb losses. This standard is to be effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
ASU2009-13. In October 2009, the FASB issued ASU2009-13,Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force(“ASU2009-13”). ASU2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires an entity to use vendor-specific objective evidenceVendor-Specific Objective Evidence (“VSOE”) or third-party evidence of a selling price to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU2009-13, multiple-deliverable arrangements will be separated in more circumstances than under current guidance. ASU2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU2009-13 must be prospectively applied to all revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We expect to adoptadopted the provisions of ASU2009-13 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-14. In October 2009, the FASB issued ASU2009-14,Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Force(“ASU2009-14”). ASU2009-14 was issued to address concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more than incidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separate deliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current accounting model does not appropriately reflect the economics of the underlying transactions and that more software-enabled products now fall or will fall within the scope of the current guidance than originally intended. ASU2009-14 changes the current accounting model for revenue arrangements that include both tangible products and software elements to exclude those where the software components are essential to the tangible products’ core functionality. In addition, ASU2009-14 also requires that hardware components of a tangible product containing software components always be excluded from the software revenue recognition guidance, and provides guidance on how to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded from the scope of software revenue recognition guidance. ASU2009-14 also provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU2009-14 was issued concurrently with ASU2009-13 and also requires entities to provide the disclosures required by ASU2009-13 that are included within the scope of ASU2009-14. ASU2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may also elect, but are not required, to adopt ASU2009-14 retrospectively to prior periods, and must adopt ASU2009-14 in the same period and using the same transition methods that it uses to adopt ASU2009-13. We expect to adoptadopted the provisions of ASU2009-14 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-17.2010-13. In December 2009, the FASB issued ASU2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU2009-17 replaces the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. ASU2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities.
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The provisions of ASU2009-17 are to be applied beginning in the first fiscal period beginning after November 15, 2009. We will adopt ASU2009-17 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material effect on our financial position, results of operations, or cash flows.
ASU2010-02. In JanuaryApril 2010, the FASB issued ASU2010-02,No. 2010-13,ConsolidationCompensation — Stock Compensation (Topic 810) — Accounting and Reporting for Decreases in Ownership718): Effect of Denominating the Exercise Price of a Subsidiary — A Scope Clarification. ASU2010-02 clarifies that the scope of previous guidanceShare-Based Payment Award in the accounting and disclosure requirements related to decreasesCurrency of the Market in ownershipWhich the Underlying Equity Security Trades. This ASU codifies the consensus reached in EITF IssueNo. 09-J, “Effect of Denominating the Exercise Price of a subsidiary applyShare-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments to (i)the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a subsidiary ormarket in which a groupsubstantial portion of assetsthe entity’s equity shares trades should not be considered to contain a condition that is not a businessmarket, performance, or nonprofit entity; (ii)service condition. Therefore, an entity would not classify such an award as a subsidiary that is a business or nonprofit entity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity.liability if it otherwise qualifies as equity. ASU2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of any continuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The provisions of ASU2010-022010-13 will be effective for us for the first reporting periodfiscal years beginning on or after December 13, 2009.15, 2010, and early adoption is permitted. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. We will adoptadopted the provisions of ASU2010-022010-13 on January 1, 20102011 and do not anticipatebelieve that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-06.2010-28. In JanuaryDecember 2010, the FASB issued ASU2010-06,No. 2010-28,Fair Value MeasurementsIntangibles — Goodwill and DisclosuresOther (Topic 820) — Improving Disclosures About Fair Value Measurements.350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU reflects the decision reached in EITF Issue2010-06No. 10-A. clarifiesThe amendments in this ASU modify Step 1 of the requirementsgoodwill impairment test for certain disclosures aroundreporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value measurementsof a reporting unit
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
below its carrying amount. For public entities, the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during the period, along with the reason for those transfers, and (ii) and separate presentation of information about purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs.amendments in this ASU2010-06 is are effective for fiscal years, and interim and annual reporting periods within those years, beginning after December 15, 2009.2010. Early adoption is not permitted. We will adoptadopted the provisions of ASU2010-062010-28 on January 1, 20102011 and do not anticipatebelieve that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-29. In December 2010, the FASB issued ASU2010-29,Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision reached in EITF IssueNo. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We adopted the provisions of ASU2010-29 on January 1, 2011 and the adoption of this standard may result in additional disclosures, but it will not have a material impact on our financial position, results of operations, or cash flows.
2010 Acquisitions
OFS Energy Services, LLC (“OFS”). In October 2010, we acquired certain subsidiaries, together with associated assets, owned by OFS, a privately-held oilfield services company of ArcLight Capital Partners, LLC. We accounted for this acquisition as a business combination. The results of operations for the acquired businesses have been included in our consolidated financial statements since the date of acquisition.
The total consideration for the acquisition was 15.8 million shares of our common stock and a cash payment of $75.8 million, subject to certain working capital and other adjustments at closing. We registered the shares of common stock issued in the transaction under the Securities Act of 1933, as amended, subject to certain conditions. OFS’ subsidiaries are oilfield services companies which provide well workover and stimulation services as well as nitrogen pumping, coiled tubing, fluid handling and wellsite construction and preparation services. This transaction complemented our existing rig and fluids management businesses, as well as significantly increased the number of coiled tubing units in our fleet. The OFS subsidiaries were incorporated into both our Well Servicing segment and Production Services segment. The acquisition-date fair value of the consideration transferred totaled $229.7 million which consisted of the following (in thousands):
| | | | |
Cash | | $ | 75,775 | |
Key common stock | | | 153,963 | |
| | | | |
Total | | $ | 229,738 | |
| | | | |
The fair value of the 15.8 million common shares issued was $9.74 per share based on the closing market price on the acquisition date (October 1, 2010).
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We are in the process of finalizing third-party valuations of the tangible and certain intangible assets; thus, the provisional measurements of tangible assets, intangible assets, goodwill and deferred income tax assets are preliminary and subject to change. Valuations are not complete as we continue to assess the fair values of the assets acquired and liabilities assumed.
| | | | |
| | (In thousands) | |
|
At October 1, 2010: | | | | |
Cash and cash equivalents | | $ | 539 | |
Acounts receivable | | | 23,384 | |
Other current assets | | | 1,372 | |
Property and equipment | | | 108,152 | |
Intangible assets | | | 20,988 | |
Deferred tax asset | | | 1,851 | |
| | | | |
Total identifiable assets acquired | | | 156,286 | |
| | | | |
Current liabilities | | | 18,498 | |
Other liabilities | | | 1,134 | |
| | | | |
Total liabilities assumed | | | 19,632 | |
| | | | |
Net identifiable assets acquired | | | 136,654 | |
| | | | |
Goodwill | | | 93,084 | |
| | | | |
Net assets acquired | | $ | 229,738 | |
| | | | |
Of the $21.0 million of acquired intangible assets, $20.0 million was preliminarily assigned to customer relationships that will be amortized as the value of the relationships are realized using rates of 31%, 18.7%, 14.1%, 10.6%, 7.9%, 5.9%, 4.5%, and 3.3% through 2018. The remaining $1.0 million of acquired intangible assets was assigned to non-compete agreements that will be amortized straight-line over 18 months. As noted above, the fair value of the acquired identifiable intangible assets is preliminary pending receipt of the final valuation for these assets.
The fair value of accounts receivable acquired on October 1, 2010 was $23.4 million, with the gross contractual amount being $25.4 million. The Company expects $2.0 million to be uncollectible.
For the goodwill acquired, $91.3 million was assigned to coiled tubing services, and $1.8 million was assigned to fluid management services. We believe the goodwill recognized is attributable primarily to the acquired workforce and expansion of a growing service line. All of the goodwill is expected to be deductible for income tax purposes. The fair value of the acquired goodwill is preliminary pending receipt of the final valuation.
We recognized $2.0 million of acquisition related costs that were expensed during the year ended December 31, 2010. These costs are included in the statements of operations in the line item “General and administrative expenses” for the year ended December 31, 2010. The Company also recognized $0.1 million in costs associated with issuing and registering the shares.
Included in our consolidated statements of operations for the year ended December 31, 2010, related to this acquisition are revenues of approximately $46.4 million and operating income of $14.6 million from the acquisition date to the period ended December 31, 2010.
71
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following represents the pro forma consolidated income statement as if the OFS acquisition had been included in the consolidated results of the Company as of January 1 for the years ended December 31, 2010 and 2009:
| | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | |
| | (Unaudited) | | | (Unaudited) | |
| | (In thousands, except per share amounts) | |
|
REVENUES | | $ | 1,277,260 | | | $ | 1,072,929 | |
COSTS AND EXPENSES: | | | | | | | | |
Direct operating expenses | | | 923,644 | | | | 768,945 | |
Depreciation and amortization expense | | | 147,584 | | | | 159,770 | |
General and administrative expenses | | | 205,708 | | | | 181,884 | |
Asset retirements and impairments | | | — | | | | 108,543 | |
Interest expense, net of amounts capitalized | | | 42,579 | | | | 43,084 | |
Other, net | | | (2,862 | ) | | | (602 | ) |
| | | | | | | | |
Total costs and expenses, net | | | 1,316,653 | | | | 1,261,624 | |
| | | | | | | | |
Loss from continuing operations before income taxes and noncontrolling interest | | | (39,393 | ) | | | (188,695 | ) |
| | | | | | | | |
Income tax benefit | | | 14,266 | | | | 69,617 | |
| | | | | | | | |
Loss from continuing operations | | | (25,127 | ) | | | (119,078 | ) |
Income (loss) from discontinued operations, net of tax (expense) benefit of ($73,790) and $25,151 | | | 105,745 | | | | (45,428 | ) |
| | | | | | | | |
Net income (loss) | | | 80,618 | | | | (164,506 | ) |
| | | | | | | | |
Loss attributable to noncontrolling interest | | | (3,146 | ) | | | (555 | ) |
| | | | | | | | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 83,764 | | | $ | (163,951 | ) |
| | | | | | | | |
Earnings (loss) per share attributable to Key: | | | | | | | | |
Basic | | $ | 0.59 | | | $ | (1.20 | ) |
Diluted | | $ | 0.59 | | | $ | (1.20 | ) |
Weighted average shares outstanding: | | | | | | | | |
Basic | | | 141,234 | | | | 136,879 | |
Diluted | | | 141,234 | | | | 136,879 | |
These unaudited pro forma results, based on assumptions deemed appropriate by management, have been prepared for informational purposes only and are not necessarily indicative of the company’s results if the acquisition had occurred on January 1, 2010 and 2009, respectively, for the twelve months ended December 31, 2010 and 2009. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of OFS as if these changes had been applied on January 1, together with the consequential tax effects.
Enhanced Oilfield Technologies, LLC (“EOT”). In December 2010, we acquired 100% of the equity interests in EOT, a privately-held oilfield technology company. We accounted for this acquisition as a business combination. The acquired business was still in the developmental stage at the time of acquisition; accordingly, there are no results of operations for EOT included in our consolidated financial statements for the year ended December 31, 2010.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The total consideration for the acquisition was a cash payment of $11.7 million at closing. EOT is an oilfield technology company which develops expandable liner hanger systems. This technology will complement our existing service offerings. The EOT assets were incorporated into our Production Services segment.
The following table summarizes the estimated fair values of the assets acquired at the acquisition date. We are in the process of performing third-party valuations of the intangible assets acquired; thus, the provisional measurements of intangible assets and goodwill are preliminary and subject to change.
| | | | |
| | (In thousands) | |
|
At December 15, 2010: | | | | |
Intangible assets | | $ | 7,000 | |
| | | | |
Total identifiable assets acquired | | | 7,000 | |
| | | | |
Total liabilities assumed | | | — | |
| | | | |
Net identifiable assets acquired | | | 7,000 | |
| | | | |
Goodwill | | | 4,700 | |
| | | | |
Net assets acquired | | $ | 11,700 | |
| | | | |
The $7.0 million of acquired intangible assets has been preliminarily assigned to patents that we expect to be amortized straight-line over 20 years. As noted above, the fair value of the acquired identifiable intangible asset is preliminary pending receipt of the final valuation for these assets. The valuation of these assets has not been completed as of December 31, 2010 due to the timing of the closing of the transaction.
The goodwill acquired of $4.7 million was assigned to our fishing and rental business. We believe the goodwill recognized is attributable primarily to the entrance in a new technology and service offering. All of the goodwill is expected to be deductible for income tax purposes.
We recognized less than $0.1 million of acquisition related costs that were expensed during the year ended December 31, 2010. These costs are included in the statement of operations in the line item “general and administrative expenses.”
Other Acquisitions. We have made other asset acquisitions during 2010 as part of our business strategy. In June 2010, we acquired five large diameter capable coiled tubing units and associated equipment for approximately $12.7 million in cash from Express Energy Services, privately-held oilfield service companies. Also, in November 2010, we acquired 13 rigs and associated equipment from Five J.A.B., privately-held oilfield companies, for cash consideration of approximately $14.6 million.
2009 Acquisitions
Geostream Services Group.Group (“Geostream”). On September 1, 2009, we acquired an additional 24% interest in Geostream for $16.4 million. This was our second investment in Geostream pursuant to an agreement dated August 26, 2008, as amended. This second investment bringsbrought our total investment in Geostream to 50%. Prior to the acquisition of the additional interest, we accounted for our ownership in Geostream as an equity-method investment. Upon acquiring the 50% interest, we also obtained majority representation on Geostream’s board of directors and a controlling interest. We accounted for this acquisition as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the acquisition date, with the portion outside of our control reflected asforming a noncontrolling interest.
Geostream is an oilfield services company in the Russian Federation providing drilling and workover services andsub-surface engineering and modeling. As a result of this acquisition, we expect to expand our international presence in Russia where oil wells are shallow and suited for services that we perform.
The acquisition date fair value of the consideration transferred totaled approximately $35.0 million, which consisted of cash consideration in the second investment and the fair value of our previous equity interest. The acquisition date fair value of our previous equity interest was approximately $18.3 million. We recognized a
73
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
loss of $0.2 million as a result of remeasuring our prior equity interest in Geostream held before the business combination, which is included in the line item “other, net” in the 2009 consolidated statements of operations.
The following table summarizes the estimated fair valuesAll of the assets acquired and liabilities assumed at September 1, 2009. We arepurchase price allocations for 2009 acquisitions were finalized in the process of obtaining a third-party valuation of intangible and certain tangible assets; thus, the preliminary measurements of intangible assets, goodwill and certain tangible assets are subject to change.
| | | | |
| | (In thousands) | |
|
At September 1, 2009: | | | | |
Cash and cash equivalents | | $ | 28,362 | |
Other current assets | | | 8,545 | |
Property and equipment | | | 2,959 | |
Intangible assets | | | 11,470 | |
Other assets | | | 194 | |
| | | | |
Total identifiable assets acquired | | | 51,530 | |
| | | | |
Current liabilities | | | 5,456 | |
Other liabilities | | | 8 | |
| | | | |
Total liabilities assumed | | | 5,464 | |
| | | | |
Noncontrolling interest | | | 34,994 | |
| | | | |
Net identifiable assets acquired | | | 11,072 | |
| | | | |
Goodwill | | | 23,918 | |
| | | | |
Net assets acquired | | $ | 34,990 | |
| | | | |
Of the $11.5 million of acquired intangible assets, $8.4 million was preliminarily assigned to trade name intangibles that are not subject to amortization. Of the remaining $3.1 million of acquired intangible assets, $1.2 million relates to three customer contracts that will be amortized over one year, and $1.9 million relates to customer relationships that will be amortized as the value of the relationships are realized using rates of 35%, 21%, 12%, 7%, 4%, 3%, 2%, and 1% for 2010 through 2017, respectively, with a portion already amortized in 2009. As noted above, the fair value of the acquired identifiable intangible assets is preliminary pending receipt of the final valuation for these assets. The fair value and carrying value of the acquired accounts receivable on September 1, 2009 were $6.3 million.
The $23.9 million of goodwill was assigned to our Well Servicing segment. The goodwill recognized is attributable primarily to international diversification and the assembled workforce of Geostream. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2009, there were no changes in the recognized amount of goodwill resulting from the acquisition of Geostream.
We recognized $0.1 million of acquisition related costs that were expensed during the year ended December 31, 2009. These costs are included in the statements of operations in the line item “general and administrative expenses” for the year ended December 31, 2009.
Included in our consolidated statements of operations for year ended December 31, 2009 are revenues of $9.2 million and net losses of $0.4 million attributable to Geostream from the acquisition date to the period ended December 31, 2009.
On September 1, 2009, the fair value of the 50% noncontrolling interest in Geostream was estimated to be $35.0 million. The fair value of the noncontrolling interest was estimated using a combination of the income approach and a market approach. As Geostream is a private company, the fair value measurement is
74
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
based onwithout significant inputs that are not observable in the market and thus represents a Level 3 measurement. The fair value estimates are based on (i) a discount rate range of 16% to 19%, (ii) a terminal value based on a long-term constant growth rate between two and three percent, (iii) financial data of historical and forecasted operating results of Geostream and (iv) adjustments because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in Geostream.
In conjunction with our second investment, Geostream agreed to purchase from us a customized suite of equipment, including two workover rigs, two drilling rigs, associated complementary support equipment, cementing equipment, and fishing tools for approximately $23.0 million, a portion of which will be financed by us. Concurrently with the second investment, Geostream paid us approximately $16.0 million in cash, representing a down payment on the equipment. We began to deliver this equipment in the fourth quarter of 2009. We recognized no gain or loss associated with the sale of the equipment to Geostream.changes.
2008 Acquisitions
Leader Energy Services Ltd. (“Leader”). On July 22, 2008, we purchased all of the United States-based assets of Leader, a Canadian company, for total consideration of $35.4 million, including direct transaction costs. The Leader assets were incorporated into our Production Services segment.
Hydra-Walk, Inc. (“Hydra-Walk”). On May 30, 2008, we acquired Hydra-Walk, a privately owned company providing automated pipe handling services. The purchase price totaled $10.7 million, including direct transaction costs. The purchase price also provided for a performance earn-out of which we paid $1.1 million total. Hydra-Walk was incorporated into our Production Services segment.
Western Drilling, LLC. (“Western”). On April 3, 2008, we acquired Western, Drilling, LLC (“Western”), a privately-owned company based in California that provides workover and drilling services. The purchase price totaled $52.0 million, including direct transaction costs. Western was incorporated into our Well Servicing segment.
Hydra-Walk, Inc. On May 30, 2008, we acquired Hydra-Walk, Inc. (“Hydra-Walk”), a privately owned company providing automated pipe handling services. The purchase price totaled $10.7 million, including direct transaction costs. The purchase price also provides for a performance earn-out potential of up to $2.0 million over two years from the acquisition date, if certain financial and operational performance measures are met, of which $1.1 million was paid through 2009.
Leader Energy Services Ltd. On July 22, 2008, we purchased all of the United States-based assets of Leader Energy Services, Ltd. (“Leader”), a Canadian company, for total consideration of $35.4 million, including direct transaction cots. The Leader assets were incorporated into our Production Services segment.
All of the purchase price allocations for 2008 acquisitions were finalized in 2009.
2007 Acquisitions
| |
NOTE 3. | DISCONTINUED OPERATIONS |
AMI.On September 5, 2007,October 1, 2010, we acquired Advanced Measurements, Inc. (“AMI”), which operatescompleted the sale of our pressure pumping and wireline businesses to Patterson-UTI. Management determined to sell these businesses because they were not aligned with our core business strategy of well intervention and international expansion. For the periods presented in Canada and is a technology company focused on oilfield service equipment controls, data acquisition and digital information flow. The purchase price totaled $7.9 million, including direct transaction costs. AMI was incorporated intothis report, we show the results of operations related to these businesses as discontinued operations for all periods. Prior to the sale, the businesses sold to Patterson-UTI were reported as part of our Production Services segment.
Moncla. On October 25, 2007, we acquired Moncla Well Service, Inc.segment and related entities (“Moncla”), which operated well service rigs, barges and ancillary equipmentwere based entirely in the southeastern United StatesU.S. The sale of these businesses represented the sale of a significant portion of a reporting unit which requires the reassessment of goodwill. However, due to previous impairment charges, there was no goodwill related to this segment remaining in 2010. Because theagreed-upon purchase price for total consideration of $147.0 million, including direct transaction costs. The Moncla purchase agreement entitles the former owners of Moncla to receive earnout payments, on each anniversarybusinesses exceeded the carrying value of the closingassets being sold, we did not record a write-down on these assets on the date that they became classified as held for sale. The carrying value of the acquisition until 2012,assets sold was $76.5 million as of up to $5.0September 30, 2010 and $74.3 million per yearas of December 31, 2009. We discontinued depreciation and $25.0 million in total. The earnout payments are based on achievementamortization of certain revenue targetsour pressure pumping and profit percentage targets on each anniversary date or a cumulative target on the 2012 anniversary date. Moncla was incorporated into our Well Servicing segment.
Kings Oil Tools. On December 7, 2007, we purchased the well service assetswireline property and related equipment of Kings Oil Tools, Inc. (“Kings”), a California-based well service company totaling $45.2 million, including direct transaction costs. The assets of Kingsat June 30, 2010 when they were incorporated into our Well Servicing segment.
All of the purchase price allocationsclassified as held for 2007 acquisitions were finalized in 2008.sale.
7574
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the results of discontinued operations for the businesses sold in connection with this transaction:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (In thousands) | |
|
REVENUES | | $ | 197,704 | | | $ | 122,966 | | | $ | 347,642 | |
COSTS AND EXPENSES: | | | | | | | | | | | | |
Direct operating expenses | | | 154,369 | | | | 103,515 | | | | 244,477 | |
Depreciation and amortization expense | | | 6,758 | | | | 20,329 | | | | 21,167 | |
General and administrative expenses | | | 11,734 | | | | 6,556 | | | | 11,362 | |
Asset retirements and impairments | | | — | | | | 62,767 | | | | 49,036 | |
Interest expense, net of amounts capitalized | | | (262 | ) | | | (336 | ) | | | (1,375 | ) |
Other, net | | | (75 | ) | | | 714 | | | | 288 | |
Gain on sale of discontinued operations | | | (154,355 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Total costs and expenses, net | | | 18,169 | | | | 193,545 | | | | 324,955 | |
| | | | | | | | | | | | |
Income (loss) before taxes and noncontrolling interest | | | 179,535 | | | | (70,579 | ) | | | 22,687 | |
Income tax (expense) benefit | | | (73,790 | ) | | | 25,151 | | | | (8,343 | ) |
| | | | | | | | | | | | |
Net income (loss) | | | 105,745 | | | | (45,428 | ) | | | 14,344 | |
| | | | | | | | | | | | |
| |
NOTE 3.4. | OTHER CURRENT AND NON-CURRENT LIABILITIES |
The table below presents comparative detailed information about our current accrued liabilities at December 31, 20092010 and 2008:2009:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
| | (In thousands) | |
|
Current Accrued Liabilities: | | | | | | | | |
Accrued payroll, taxes and employee benefits | | $ | 33,953 | | | $ | 67,408 | |
Accrued operating expenditures | | | 24,194 | | | | 50,833 | |
Income, sales, use and other taxes | | | 30,447 | | | | 41,003 | |
Self-insurance reserves | | | 24,366 | | | | 25,724 | |
Insurance premium financing | | | 7,282 | | | | — | |
Unsettled legal claims | | | 2,665 | | | | 4,550 | |
Phantom share liability | | | 1,518 | | | | 902 | |
Other | | | 6,092 | | | | 6,696 | |
| | | | | | | | |
Total | | $ | 130,517 | | | $ | 197,116 | |
| | | | | | | | |
The table below presents comparative detailed information about our other non-current accrued liabilities at December 31, 2009 and 2008:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
| | (In thousands) | |
|
Non-Current Accrued Liabilities: | | | | | | | | |
Asset retirement obligations | | $ | 10,045 | | | $ | 9,348 | |
Environmental liabilities | | | 3,353 | | | | 3,004 | |
Accrued rent | | | 2,399 | | | | 2,497 | |
Accrued income taxes | | | 2,813 | | | | 1,359 | |
Phantom share liability | | | 508 | | | | 478 | |
Other | | | 599 | | | | 809 | |
| | | | | | | | |
Total | | $ | 19,717 | | | $ | 17,495 | |
| | | | | | | | |
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2010 | | | 2009 | |
| | (In thousands) | |
|
Current Accrued Liabilities: | | | | | | | | |
Accrued payroll, taxes and employee benefits | | $ | 35,453 | | | $ | 33,953 | |
Accrued operating expenditures | | | 39,399 | | | | 24,194 | |
Income, sales, use and other taxes | | | 93,820 | | | | 30,447 | |
Self-insurance reserves | | | 30,195 | | | | 24,366 | |
Insurance premium financing | | | 7,443 | | | | 7,282 | |
Unsettled legal claims | | | 3,768 | | | | 2,665 | |
Phantom share liability | | | 1,146 | | | | 1,518 | |
Other | | | 6,025 | | | | 6,092 | |
| | | | | | | | |
Total | | $ | 217,249 | | | $ | 130,517 | |
| | | | | | | | |
7675
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below presents comparative detailed information about our other non-current accrued liabilities at December 31, 2010 and 2009:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2010 | | | 2009 | |
| | (In thousands) | |
|
Non-Current Accrued Liabilities: | | | | | | | | |
Asset retirement obligations | | $ | 11,003 | | | $ | 10,045 | |
Environmental liabilities | | | 4,011 | | | | 3,353 | |
Accrued rent | | | 1,998 | | | | 2,399 | |
Accrued sales, use and other taxes | | | 8,397 | | | | 2,813 | |
Phantom share liability | | | 1,106 | | | | 508 | |
Other | | | 1,443 | | | | 599 | |
| | | | | | | | |
Total | | $ | 27,958 | | | $ | 19,717 | |
| | | | | | | | |
| |
NOTE 4.5. | OTHER INCOME AND EXPENSE |
The table below presents comparative detailed information about our other income and expense shown on the consolidated statements offrom continuing operations as “other, net” for the years ended December 31, 2010, 2009 2008 and 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Loss on early extinguishment of debt | | $ | 472 | | | $ | — | | | $ | 9,557 | | | $ | — | | | $ | 472 | | | $ | — | |
Loss (gain) on disposal of assets, net | | | 401 | | | | (641 | ) | | | 1,752 | | | | 549 | | | | (309 | ) | | | (929 | ) |
Interest income | | | (499 | ) | | | (1,236 | ) | | | (6,630 | ) | | | (112 | ) | | | (499 | ) | | | (1,236 | ) |
Foreign exchange (gain) loss, net | | | (1,482 | ) | | | 3,547 | | | | (458 | ) | | | (1,541 | ) | | | (1,482 | ) | | | 3,547 | |
Equity-method loss (income) | | | 1,052 | | | | (166 | ) | | | (391 | ) | |
Other expense, net | | | (64 | ) | | | 1,336 | | | | 402 | | |
Other (income) expense, net | | | | (1,593 | ) | | | 984 | | | | 1,170 | |
| | | | | | | | | | | | | | |
Total | | $ | (120 | ) | | $ | 2,840 | | | $ | 4,232 | | | $ | (2,697 | ) | | $ | (834 | ) | | $ | 2,552 | |
| | | | | | | | | | | | | | |
| |
NOTE 5.6. | ALLOWANCE FOR DOUBTFUL ACCOUNTS |
The table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2010, 2009 2008 and 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | | | | Additions | | | | | |
| | Balance at
| | | | Charged to
| | | | | | Balance at
| | | Balance at
| | | | Charged to
| | | | | | Balance at
| |
| | Beginning
| | Charged to
| | Other
| | | | | | End of
| | | Beginning
| | Charged to
| | Other
| | | | | | End of
| |
| | of Period | | Expense | | Accounts | | Acquisitions | | Deductions(1) | | Period | | | of Period | | Expense | | Accounts | | Acquisitions | | Deductions | | Period | |
| | (In thousands) | | | (In thousands) | |
|
As of December 31, 2010 | | | $ | 5,441 | | | $ | 3,849 | | | $ | 896 | | | $ | — | | | $ | (2,395 | ) | | $ | 7,791 | |
As of December 31, 2009 | | $ | 11,468 | | | $ | 3,295 | | | $ | — | | | $ | — | | | $ | (9,322 | ) | | $ | 5,441 | | | | 11,468 | | | | 3,295 | | | | — | | | | — | | | | (9,322 | ) | | | 5,441 | |
As of December 31, 2008 | | | 13,501 | | | | 37 | | | | (38 | ) | | | 15 | | | | (2,047 | ) | | | 11,468 | | | | 13,501 | | | | 37 | | | | (38 | ) | | | 15 | | | | (2,047 | ) | | | 11,468 | |
As of December 31, 2007 | | | 12,998 | | | | 3,675 | | | | — | | | | 1,251 | | | | (4,423 | ) | | | 13,501 | | |
| | |
(1) | | Deductions represent write offs to the allowance. Deductions in 2009 include approximately $5.2 million for a single customer that had been specifically identified and reserved for prior to 2007. |
7776
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 6.7. | PROPERTY AND EQUIPMENT |
Property and equipment consists of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Major classes of property and equipment: | | | | | | | | | | | | | | | | |
Well servicing equipment | | $ | 1,368,925 | | | $ | 1,431,624 | | | $ | 1,418,996 | | | $ | 1,344,343 | |
Disposal wells | | | 52,797 | | | | 60,508 | | | | 68,834 | | | | 52,797 | |
Motor vehicles | | | 101,142 | | | | 125,031 | | | | 90,437 | | | | 51,825 | |
Furniture and equipment | | | 82,346 | | | | 81,129 | | | | 103,923 | | | | 81,695 | |
Buildings and land | | | 55,411 | | | | 71,014 | | | | 60,157 | | | | 49,550 | |
Work in progress | | | 67,553 | | | | 89,001 | | | | 90,096 | | | | 67,508 | |
| | | | | | | | | | |
Gross property and equipment | | | 1,728,174 | | | | 1,858,307 | | | | 1,832,443 | | | | 1,647,718 | |
Accumulated depreciation | | | (863,566 | ) | | | (806,624 | ) | | | (895,699 | ) | | | (853,449 | ) |
| | | | | | | | | | |
Net property and equipment | | $ | 864,608 | | | $ | 1,051,683 | | | $ | 936,744 | | | $ | 794,269 | |
| | | | | | | | | | |
We capitalize costs incurred during the application development stage of internal-use software. These costs are capitalized to work in progress until such time the application is put in service. For the years ended December 31, 2010, 2009 2008 and 20072008 we capitalized costs in the amount of $14.7 million, $13.1 million, $4.5 million, and $1.9$4.5 million, respectively. Capitalized internal-use software during 20092010 consisted primarily of our expenditures for new ERP and Human Resources information systems.
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. Capitalized interest for the years ended December 31, 2010, 2009 and 2008 and 2007 was $4.3$3.5 million, $6.5$4.0 million, and $5.3$5.1 million, respectively.
We are obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next five years. The carrying value of assets acquired under capital leases consists of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | 2010 | | 2009 | |
| | 2009 | | 2008 | | | (In thousands) | |
| | (In thousands) | |
| |
Carrying values of assets leased under capital lease obligations: | | | | | | | | | |
Values of assets leased under capital lease obligations: | | | | | | | | | |
Well servicing equipment | | $ | 116 | | | $ | 20,442 | | | $ | 281 | | | $ | 342 | |
Motor vehicles | | | 10,207 | | | | 9,271 | | | | 18,620 | | | | 22,178 | |
Furniture and fixtures | | | 36 | | | | — | | | | 3,153 | | | | 3,153 | |
| | | | | | | | | | |
Total | | $ | 10,359 | | | $ | 29,713 | | |
Gross values | | | | 22,054 | | | | 25,673 | |
| | | | | | | | | | |
Accumulated depreciation | | | | (15,738 | ) | | | (15,314 | ) |
| | | | | | |
Carrying value of leased assets | | | $ | 6,316 | | | $ | 10,359 | |
| | | | | | |
Depreciation of assets held under capital leases was $3.2 million, $3.5 million, $4.3 million, and $5.9$4.3 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
77
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Retirement and Impairment Charge
During the third quarter of 2009, we removed from service and retired a portion of our U.S. rig fleet and associated support equipment, resulting in the recording of a pre-tax asset retirement charge of $65.9 million. Included in the retirement were approximately 250 of our older, less efficient rigs. We retired these rigs in order to better align supply with demand for well servicing as market activity remained low. The asset
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
retirement charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. For the rigs we retired, certain of theseThese assets were stacked and will be harvested for spare parts, and certain of these assets are to be cut up and sold for scrap. The carrying value for stacked rigs and associated support equipment was reduced to salvage value of 10%, based on expected fair value for these assets. The carrying value for scrapped rigs and components was reduced to quoted market prices for scrap metal. These assets are reported under our Well Servicing segment.
We determined that the retirement of the rigs described above was an event requiring assessment for impairment of the asset groups within the reporting units of our Well Servicing segment. Based on our analysis, the expected undiscounted cash flows for these asset groups exceeded carrying value, and no indication of impairment existed.
Also, during the third quarter of 2009, due to market overcapacity, continued and prolonged depression of natural gas prices, decreased activity levels from our major customer base related to stimulation work and consecutive quarterly operating losses in our Production Services segment, we determined that events and changes in circumstances occurred indicating that the carrying value of the asset groups under this segment may not be recoverable. We performed an assessment of the fair value of these asset groups using an expected present value technique. We used discounted cash flow models involving assumptions based on utilization of the equipment, revenues, direct expenses, general and administrative expenses, applicable income taxes, capital expenditures and working capital requirements. Our discounted cash flow projections were based on financial forecasts and were discounted using a discount rate of 14%. Based on this assessment,assets in our pressure pumping assets were impaired.Production Services segment. This assessment resulted in the recording of a pre-tax impairment charge of $93.4$31.1 million during the third quarter of 2009. The asset impairment charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. These assets are reported under our Production Services segment.
| |
NOTE 7.8. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of our goodwill for the years ended December 31, 20092010 and 20082009 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Well Servicing | | Production Services | | Total | | | | | Well Servicing | | Production Services | | Total | |
| | (In thousands) | | | | | | | (In thousands) | | | |
|
December 31, 2007 | | $ | 306,248 | | | $ | 72,302 | | | $ | 378,550 | | | | | | |
December 31, 2008 | | | $ | 317,490 | | | $ | 3,502 | | | $ | 320,992 | |
Purchase price allocation and other adjustments, net | | | 2,353 | | | | 23 | | | | 2,376 | | | | | | | | (356 | ) | | | 500 | | | | 144 | |
Goodwill acquired during the period | | | 8,970 | | | | 1,815 | | | | 10,785 | | | | | | | | 23,918 | | | | — | | | | 23,918 | |
Impairment of goodwill | | | — | | | | (69,752 | ) | | | (69,752 | ) | | | | | | | — | | | | (500 | ) | | | (500 | ) |
Impact of foreign currency translation | | | (81 | ) | | | (886 | ) | | | (967 | ) | | | | | | | 971 | | | | 577 | | | | 1,548 | |
| | | | | | | | | | | | | | |
December 31, 2008 | | | 317,490 | | | | 3,502 | | | | 320,992 | | | | | | |
December 31, 2009 | | | | 342,023 | | | | 4,079 | | | | 346,102 | |
| | | | | | | | | | | | | | |
Purchase price allocation and other adjustments, net | | | (356 | ) | | | 500 | | | | 144 | | | | | | | | 3,750 | | | | — | | | | 3,750 | |
Acquisition of Geostream | | | 23,918 | | | | — | | | | 23,918 | | | | | | |
Goodwill acquired during the period | | | | 1,813 | | | | 95,971 | | | | 97,784 | |
Impairment of goodwill | | | — | | | | (500 | ) | | | (500 | ) | | | | | | | — | | | | — | | | | — | |
Impact of foreign currency translation | | | 971 | | | | 577 | | | | 1,548 | | | | | | | | (228 | ) | | | 201 | | | | (27 | ) |
| | | | | | | | | | | | | | |
December 31, 2009 | | $ | 342,023 | | | $ | 4,079 | | | $ | 346,102 | | | | | | |
December 31, 2010 | | | $ | 347,358 | | | $ | 100,251 | | | $ | 447,609 | |
| | | | | | | | | | | | | | |
The 2010 purchase price adjustment relates to a previous acquisition from 2007. During 2010, we made full payment of contingent consideration related to earnout provisions in the purchase agreement.
7978
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of our other intangible assets as of December 31, 20092010 and 20082009 are as follows:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Noncompete agreements: | | | | | | | | | | | | | | | | |
Gross carrying value | | $ | 14,010 | | | $ | 16,309 | | | $ | 15,058 | | | $ | 14,010 | |
Accumulated amortization | | | (5,618 | ) | | | (4,699 | ) | | | (8,224 | ) | | | (5,618 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 8,392 | | | $ | 11,610 | | | $ | 6,834 | | | $ | 8,392 | |
| | | | | | | | | | |
Patents, trademarks and tradename: | | | | | | | | | | | | | | | | |
Gross carrying value | | $ | 10,481 | | | $ | 4,391 | | | $ | 17,461 | | | $ | 10,481 | |
Accumulated amortization | | | (917 | ) | | | (3,114 | ) | | | (927 | ) | | | (917 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 9,564 | | | $ | 1,277 | | | $ | 16,534 | | | $ | 9,564 | |
| | | | | | | | | | |
Customer relationships and contracts: | | | | | | | | | | | | | | | | |
Gross carrying value | | $ | 41,389 | | | $ | 39,225 | | | $ | 60,057 | | | $ | 41,389 | |
Accumulated amortization | | | (19,947 | ) | | | (12,359 | ) | | | (26,059 | ) | | | (19,947 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 21,442 | | | $ | 26,866 | | | $ | 33,998 | | | $ | 21,442 | |
| | | | | | | | | | |
Developed technology: | | | | | | | | | | | | | | | | |
Gross carrying value | | $ | 3,073 | | | $ | 3,598 | | | $ | 3,106 | | | $ | 3,073 | |
Accumulated amortization | | | (1,724 | ) | | | (1,421 | ) | | | (2,476 | ) | | | (1,724 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 1,349 | | | $ | 2,177 | | | $ | 630 | | | $ | 1,349 | |
| | | | | | | | | | |
Customer backlog: | | | | | | | | | | | | | | | | |
Gross carrying value | | $ | 724 | | | $ | 622 | | | $ | 762 | | | $ | 724 | |
Accumulated amortization | | | (423 | ) | | | (207 | ) | | | (607 | ) | | | (423 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 301 | | | $ | 415 | | | $ | 155 | | | $ | 301 | |
| | | | | | | | | | |
Amortization expense for our intangible assets with determinable lives was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Noncompete agreements | | $ | 3,222 | | | $ | 4,108 | | | $ | 1,919 | | | $ | 2,707 | | | $ | 3,222 | | | $ | 4,108 | |
Patents and trademarks | | | 489 | | | | 748 | | | | 774 | | |
Patents, trademarks and tradename | | | | 262 | | | | 489 | | | | 748 | |
Customer relationships and contracts | | | 8,679 | | | | 10,710 | | | | 1,649 | | | | 7,349 | | | | 8,679 | | | | 10,710 | |
Developed technology | | | 659 | | | | 1,803 | | | | 389 | | | | 752 | | | | 659 | | | | 1,803 | |
Customer backlog | | | 167 | | | | 252 | | | | 210 | | | | 184 | | | | 167 | | | | 252 | |
| | | | | | | | | | | | | | |
Total intangible asset amortization expense | | $ | 13,216 | | | $ | 17,621 | | | $ | 4,941 | | | $ | 11,254 | | | $ | 13,216 | | | $ | 17,621 | |
| | | | | | | | | | | | | | |
8079
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Of our intangible assets at December 31, 2010, $8.7 million are indefinite lived intangibles and not subject to amortization. The weighted average remaining amortization periods and expected amortization expense for the next five years for our intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted
| | | | | | | | | | | | | Weighted
| | | | | | | | | | | |
| | Average Remaining
| | | | | | | | | | | | | Average Remaining
| | | | | | | | | | | |
| | Amortization
| | Expected Amortization Expense | | | Amortization
| | Expected Amortization Expense | |
| | Period (Years) | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | | Period (years) | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | |
| | | | (In thousands) | | | (In thousands) | |
|
Noncompete agreements | | | 3.3 | | | $ | 2,654 | | | $ | 2,620 | | | $ | 2,423 | | | $ | 406 | | | $ | 289 | | | | 2.3 | | | $ | 3,446 | | | $ | 2,597 | | | $ | 406 | | | $ | 385 | | | $ | — | |
Patents and trademarks | | | 4.8 | | | | 273 | | | | 203 | | | | 96 | | | | 40 | | | | 33 | | |
Patents, trademarks and tradename | | | | 18.2 | | | | 637 | | | | 531 | | | | 475 | | | | 475 | | | | 404 | |
Customer relationships and contracts | | | 8.1 | | | | 6,726 | | | | 4,226 | | | | 3,057 | | | | 2,208 | | | | 1,671 | | | | 7.8 | | | | 11,293 | | | | 7,067 | | | | 5,208 | | | | 3,731 | | | | 2,619 | |
Developed technology | | | | 0.7 | | | | 630 | | | | — | | | | — | | | | — | | | | — | |
Customer backlog | | | 1.7 | | | | 181 | | | | 120 | | | | — | | | | — | | | | — | | | | 0.7 | | | | 155 | | | | — | | | | — | | | | — | | | | — | |
Developed technology | | | 1.7 | | | | 798 | | | | 551 | | | | — | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total intangible asset amortization expense | | | | | | $ | 10,632 | | | $ | 7,720 | | | $ | 5,576 | | | $ | 2,654 | | | $ | 1,993 | | | | | | | $ | 16,161 | | | $ | 10,195 | | | $ | 6,089 | | | $ | 4,591 | | | $ | 3,023 | |
| | | | | | | | | | | | | | | | | | | | | | |
Certain of our intangible assets are denominated in currencies other than U.S. Dollars and as such the values of these assets are subject to fluctuations associated with changes in exchange rates. Expected amortization expense for intangibles denominated in currencies other than U.S. Dollars are translated at the December 31, 2009 rate. Additionally, certain of these assets are also subject to purchase accounting adjustments. The estimated fair values of intangible assets obtained through acquisitions consummated in the preceding twelve months are based on preliminary information which is subject to change until final valuations are obtained.
We perform annual impairment tests associated with our goodwill on December 31 of each year, or more frequently if circumstances warrant. Due to the recoverability tests and impairments recorded for our long-lived assets described above in “Note 6. Property and Equipment,” we were required to test our goodwill for impairment during the third quarter rather than delaying testing until our annual assessment performed at year-end.
Under the first step of the goodwill impairment test, we compared the fair value of each reporting unit to its carrying amount, including goodwill. No impairment was indicated by thisBased on the results of our annual test, forthe fair value of our rig services, coiled tubing services, fluid management services reporting units and our Russia and Canadian reporting units substantially exceeded their carrying values. Because the fair value of the reporting units substantially exceeded their carrying values, we determined that no potential for impairment of our Well Servicing segment, thus the secondgoodwill associated with those reporting units existed as of December 31, 2010, and that step two of the impairment test was unnecessary. However, thisnot required.
As discussed in“Note 1. Organization and Summary of Significant Accounting Policies,”during the fourth quarter of 2010, we changed the date of our annual goodwill impairment assessment for our Russian reporting unit from September 30 to December 31. We tested $24.6 million of goodwill associated with the Russian reporting unit on December 31, 2010 and the first step of the goodwill impairment test concludedshowed that the fair value of the fishing and rental services reporting unit under our Production Services segment did not exceed itssubstantially exceeded the carrying value. Therefore, the second step of the goodwill impairment test was performedA key assumption in our model is that revenue related to measure the amount of the impairment loss, if any. As a result of our calculation of step two of the test, we determined that the goodwill of this reporting unit was impaired. As such,will increase in future years. Potential events that could affect this assumption are the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies in the Russian Federation, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry.
In 2009, we identified triggering events which required us to test our goodwill for impairment during the third quarter of 2009. Upon completion of the 2009 assessment, we recorded a pre-tax impairment charge of $0.5 million to our Production Services segment during the third quarter of 2009.segment. The impairment charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. We tested our goodwill for potential impairment again on the 2009 annual testing date. The results of that test indicated that the fair valuenone of our reporting units that havehad goodwill had a fair value that was not substantially in excess of its carrying value, and noneno goodwill existed at any of our reporting units that were at risk of failing step one of the 2009 annual goodwill impairment test.
Upon completion of the 2008 assessment, we determined that the fair value associated with two of our reporting units comprising our Production Services segment was less than the carrying value of these reporting units, indicating potential impairment. Because indicators of impairment existed for these reporting units, we performed step two of the impairment test for those units. The result of these tests indicated that the implied fair value of the goodwill for our pressure pumping and fishing and rental lines of business was less than their carrying values.
8180
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The implied fair valueUpon completion of the goodwill of the reporting units being tested was determined in the same manner as a hypothetical business combination, with the fair value of the reporting unit representing the purchase price. As a result of the calculations of step two of the test,2008 assessment, we determined that the goodwill of the pressure pumping and fishing and rental reporting units comprising our Production Services segment was impaired, and that the amount of the impairment loss was greater than the current carrying value of those reporting units’ goodwill. Asas such, we recorded a pre-tax impairment charge of $69.8$20.7 million infor our Production Services segment during the fourth quarter of 2008. The impairment charge is included in the item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2008.
Upon completion of the 2007 assessment, no impairment was indicated since the estimated fair values of the reporting units were in excess of their carrying values.
| |
NOTE 8.9. | EARNINGS PER SHARE |
The following table presents our basic and diluted earnings per share for the years ended December 31, 2010, 2009 2008 and 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands, except per share data) | | | (In thousands, except per share data) | |
|
Basic EPS Computation: | | | | | | | | | | | | | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | | |
(Loss) income from continuing operations attributable to Key | | | $ | (32,250 | ) | | $ | (110,693 | ) | | $ | 69,714 | |
Income (loss) from discontinued operations, net of tax | | | | 105,745 | | | | (45,428 | ) | | | 14,344 | |
| | | | | | | | |
Income (loss) attributable to Key | | | $ | 73,495 | | | $ | (156,121 | ) | | $ | 84,058 | |
| | | | | | | | |
Denominator | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 121,072 | | | | 124,246 | | | | 131,194 | | | | 129,368 | | | | 121,072 | | | | 124,246 | |
Basic (loss) earnings per share from continuing operations attributable to Key | | | $ | (0.25 | ) | | $ | (0.91 | ) | | $ | 0.56 | |
Basic earnings (loss) per share from discontinued operations | | | | 0.82 | | | | (0.38 | ) | | | 0.12 | |
| | | | | | | | | | | | | | |
Basic (loss) earnings per share | | $ | (1.29 | ) | | $ | 0.68 | | | $ | 1.29 | | |
Basic earnings (loss) per share attributable to Key | | | $ | 0.57 | | | $ | (1.29 | ) | | $ | 0.68 | |
| | | | | | | | | | | | | | |
Diluted EPS Computation: | | | | | | | | | | | | | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | | |
(Loss) income from continuing operations attributable to Key | | | $ | (32,250 | ) | | $ | (110,693 | ) | | $ | 69,714 | |
Income (loss) from discontinued operations, net of tax | | | | 105,745 | | | | (45,428 | ) | | | 14,344 | |
| | | | | | | | |
Income (loss) attributable to Key | | | $ | 73,495 | | | $ | (156,121 | ) | | $ | 84,058 | |
| | | | | | | | |
Denominator | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 121,072 | | | | 124,246 | | | | 131,194 | | | | 129,368 | | | | 121,072 | | | | 124,246 | |
Stock options | | | — | | | | 555 | | | | 1,518 | | | | — | | | | — | | | | 555 | |
Restricted stock | | | — | | | | 254 | | | | 256 | | | | — | | | | — | | | | 254 | |
Warrants | | | — | | | | 506 | | | | 565 | | | | — | | | | — | | | | 506 | |
Stock appreciation rights | | | — | | | | 4 | | | | 18 | | | | — | | | | — | | | | 4 | |
| | | | | | | | | | | | | | |
Total | | | | 129,368 | | | | 121,072 | | | | 125,565 | |
Diluted income (loss) per share from continuing operations attributable to Key | | | $ | (0.25 | ) | | $ | (0.91 | ) | | $ | 0.56 | |
Diluted income (loss) per share from discontinued operations | | | | 0.82 | | | | (0.38 | ) | | | 0.11 | |
| | | 121,072 | | | | 125,565 | | | | 133,551 | | | | | | | | |
Diluted income (loss) per share attributable to Key | | | $ | 0.57 | | | $ | (1.29 | ) | | $ | 0.67 | |
| | | | | | | | | | | | | | |
Diluted (loss) earnings per share | | $ | (1.29 | ) | | $ | 0.67 | | | $ | 1.27 | | |
| | | | | | | | |
Stock options, warrants and SARs are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock grants are legally considered issued and outstanding butand are included in basic and diluted earnings per share only to the extent that they are vested. Unvested restricted stock is included in the computation of diluted earnings per share using the treasury stock method.included. The diluted earnings per share calculation for the years ended December 31, 2010, 2009 2008 and 20072008 exclude the
81
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
potential exercise of 2.8 million, 3.5 million, 2.6 million, and 0.52.6 million stock options, respectively, because the effects of such exercises on earnings per share in those periodseffect would be anti-dilutive. The diluted earnings per share calculation for the years ended December 31, 2009 and 2008 each exclude the potential exercise of 0.4 million SARs because the effects of such exercises on earnings per share in those periods would be anti-dilutive. For 2010 and 2009, these options and SARs would be anti-dilutive because of our net loss for the year.from continuing operations in those years. For 2008, and 2007,
82
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
these options and SARs arewere considered anti-dilutive because their exercise prices exceeded the average price of our stock during those years.
There have been no material changes in share amounts subsequent to the balance sheet date that would have a material impact on the earnings per share calculation for the year ended December 31, 2009.2010. However, we issued 1.1 million shares of restricted stock on February 4, 2011.
| |
NOTE 9.10. | ASSET RETIREMENT OBLIGATIONS |
In connection with our well servicing activities, we operate a number of saltwater disposal (“SWD”) facilities. Our operations involve the transportation, handling and disposal of fluids in our SWD facilities that are by-products of the drilling process. SWD facilities used in connection with our fluid hauling operations are subject to future costs associated with the retirement of these properties. As a result, we have incurred costs associated with the proper storage and disposal of these materials.
Annual amortization of the assets associated with the asset retirement obligations was $0.5 million, $0.6$0.5 million, and $0.6 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. A summary of changes in our asset retirement obligations is as follows (in thousands):
| | | | | |
Balance at December 31, 2007 | | $ | 9,298 | | |
| | | | |
Additions | | | 397 | | |
Costs incurred | | | (462 | ) | |
Accretion expense | | | 594 | | |
Disposals | | | (479 | ) | |
| | | | | | | |
Balance at December 31, 2008 | | | 9,348 | | | $ | 9,348 | |
| | | | | | |
Additions | | | 517 | | | | 517 | |
Costs incurred | | | (306 | ) | | | (306 | ) |
Accretion expense | | | 533 | | | | 533 | |
Disposals | | | (47 | ) | | | (47 | ) |
| | | | | | |
Balance at December 31, 2009 | | $ | 10,045 | | | | 10,045 | |
| | | | | | |
Additions | | | | 1,023 | |
Costs incurred | | | | (342 | ) |
Accretion expense | | | | 525 | |
Disposals | | | | (248 | ) |
| | | | |
Balance at December 31, 2010 | | | $ | 11,003 | |
| | | | |
| |
NOTE 10.11. | EQUITY-METHOD INVESTMENTS |
IROC Energy Services Corp.
As of December 31, 20092010 and 20082009 we owned approximately 8.7 million shares of IROC Energy Services Corp. (“IROC”), an Alberta-based oilfield services company. This represented 20.1% and 19.7% of IROC’s outstanding common stock on December 31, 20092010 and 2008, respectively.2009.
Through December 31, 2009,2010, we have significant influence over the operations of IROC through our ownership interest, but we do not control it. We account for our investment in IROC using the equity method. The pro-rata share of IROC’s earnings and losses to which we are entitled is recorded in our consolidated statements of operations as a component of other income and expense, with an offsetting increase or decrease to the carrying value of our investment, as appropriate. Any earnings distributed back to us from IROC in the form of dividends would result in a decrease in the carrying value of our equity investment. The value of our
82
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
investment may also increase or decrease each period due to changes in the exchange rate between the U.S. Dollar and Canadian Dollar. Changes in the value of our investment due to fluctuations in exchange rates are offset by accumulated other comprehensive income.
During 2009,2010, the value of our investment in IROC increased by $0.6$0.2 million due to changes in exchange rates between the U.S. and Canadian dollar.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the years ended December 31, 2010, 2009 2008 and 2007,2008, we recorded equity losses of less than $0.1 million, of equity losses$0.1 million and $0.2 million and $0.4 million of equity income related to our investment in IROC, respectively. During the secondfirst quarter of 2009,2010, IROC declared a dividend which was paid to us in JuneFebruary of 2009,2010, reducing the value of our investment by $0.2 million.
The carrying value of our investment in IROC totaled $4.0$5.1 million and $3.7$4.0 million as of December 31, 20092010 and 2008,2009, respectively. The carrying value of our investment in IROC was $5.6$5.3 million below our proportionate share of the book value of the net assets of IROC as of December 31, 2009.2010. This difference is attributable to certain long-lived assets of IROC, and our proportionate share of IROC’s net income or loss will be adjusted in future periods over the estimated remaining useful lives of those long-lived assets. Accordingly, our investment increased $1.1 million during 2010 due to the accretion of this difference. The market value of our IROC shares was approximately $5.4$10.4 million as of December 31, 2009,2010, based on quoted market prices for IROC’s shares.
| |
NOTE 12. | VARIABLE INTEREST ENTITIES |
Advanced Flow Technologies, Inc.
On March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services LLC (“AlMansoori”) to form the joint venture AlMansoori Key Energy Services LLC under the laws of Abu Dhabi, UAE. The purpose of the joint venture is to engage in conventional workover and drilling services, pressure pumping services, coiled tubing services, fishing and rental tools and services, rig monitoring services, pipe handling services, fluids, waste treatment, and handling services, and wireline services. AlMansoori holds a 51% interest in the joint venture while we hold a 49% interest. Future capital contributions to the joint venture will be made on equal terms and in equal amounts and any future share capital increases will be issued in proportion to the initial share capital percentages but paid for by AlMansoori and Key in equal amounts. Also, we share the profits and losses of the joint venture on equal terms and in equal amounts with AlMansoori. However, we hold three of the five board of directors seats and a controlling financial interest. We consolidate the entity in our financial statements.
In September 2007, we completedFor the acquisition of AMI, a privately-held Canadian company focused on oilfield technology. AMI owns a portion of another Canadian company, Advanced Flow Technologies, Inc. (“AFTI”). As part of the acquisition, AMI increased its ownership percentage of AFTI to 51.46%, and subsequent to the acquisition date we consolidated the assets, liabilities, results of operations and cash flows of AFTI into our consolidated financial statements, with the portion of AFTI remaining outside of our control forming a noncontrolling interest in our consolidated financial statements. Our ownership of AFTI declined to 48.73% during the fourth quarter of 2008 due to the issuance of additional shares by AFTI. As a result, we deconsolidated AFTI from our consolidated financial statements at December 31, 2008. As of December 31, 2009 and 2008, AMI’s ownership percentage was 48.63% and 48.73%, respectively, and we account for the interest in AFTI using the equity method. We recorded losses of $0.2 million and income of less than $0.1 million associated with our investment in AFTI for the yearsyear ended December 31, 20092010, we recognized $1.0 million of revenue and 2008. The carrying value$1.5 million of our investmentnet loss in AFTI totaled approximately $1.2 million asthe statement of operations associated with this joint venture. Also, during 2010 we guaranteed the timely performance of the joint venture under its sole contract valued at $2 million. At December 31, 2009 and 2008, respectively. As2010, there was approximately $2.5 million of December 31, 2009, the carrying value of our investment in AFTI exceeded our proportionate share of the book value of the net assets of AFTI by $0.9 million. This difference was attributable to intangible assets that were recognized in the original purchase of AMI as well as unrecognized goodwill that is not subject to amortization. During 2009 the value of our investment in AFTI increased by $0.2 million due to changes in exchange rates between the U.S. and Canadian dollar. This increase was offset in accumulated other comprehensive income.joint venture.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 11.13. | ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31, 20092010 and 2008.2009.
Cash, cash equivalents, 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2009 | | December 31, 2008 | | | December 31, 2010 | | December 31, 2009 | |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | |
| | (In thousands) | | | (In thousands) | |
|
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes and accounts receivable — related parties | | $ | 281 | | | $ | 281 | | | $ | 336 | | | $ | 336 | | | $ | 1,198 | | | $ | 1,198 | | | $ | 281 | | | $ | 281 | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
8.375% Senior Notes | | $ | 425,000 | | | $ | 422,875 | | | $ | 425,000 | | | $ | 282,115 | | | $ | 425,000 | | | $ | 450,500 | | | $ | 425,000 | | | $ | 422,875 | |
Senior Secured Credit Facility revolving loans | | | 87,813 | | | | 87,813 | | | | 187,813 | | | | 187,813 | | | | — | | | | — | | | | 87,813 | | | | 87,813 | |
Notes payable — related parties | | | 5,931 | | | | 5,931 | | | | 20,318 | | | | 20,318 | | | | — | | | | — | | | | 5,931 | | | | 5,931 | |
Notes receivable-related parties. The amounts reported relate to notes receivable from certain of our employees related to relocation and retention agreements.agreements as well as services performed with affiliated parties. The carrying values of these notes approximate their fair values as of the applicable balance sheet dates.
8.375% Senior Notes due 2014. The fair value of our long-term debt is based upon the quoted market prices and face value for the various debt securities at December 31, 2009.2010. The carrying value of these notes as of December 31, 20092010 was $425.0 million and the fair value was $422.9$450.5 million (99.5%(106.0% of carrying value).
Senior Secured Credit Facility revolving loans. Because of their variable interest rates and our recent amendment of the credit facility, the fair values of the revolving loans borrowed under our Senior Secured Credit Facility approximateapproximated their carrying values as of December 31, 2009. The carrying and fair valuesOn October 4, 2010, we repaid the outstanding balance of these loans as of December 31, 2009 were approximately $87.8 million.loans.
Notes payable — related parties. The amounts reported relate to the seller financing arrangement entered into in connection with our acquisition of Moncla.Moncla in 2007. Because of their variable interest rates and the discount applied to the notes the carrying value of these notes approximateapproximated their fair values as of December 31, 2009. On May 13, 2010, we repaid the outstanding principal balance of this note, plus accrued and unpaid interest.
8584
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of our income tax expense are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Current income tax (expense) benefit: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal and state | | $ | 53,798 | | | $ | (55,190 | ) | | $ | (81,384 | ) | | $ | 11,134 | | | $ | 38,878 | | | $ | (49,808 | ) |
Foreign | | | (3,930 | ) | | | (5,306 | ) | | | (771 | ) | | | (2,992 | ) | | | (3,930 | ) | | | (5,306 | ) |
| | | | | | | | | | | | | | |
| | | 49,868 | | | | (60,496 | ) | | | (82,155 | ) | | | 8,142 | | | | 34,948 | | | | (55,114 | ) |
| | | | | | | | | | | | | | |
Deferred income tax (expense) benefit: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal and state | | | 36,895 | | | | (30,363 | ) | | | (24,281 | ) | | | (2,959 | ) | | | 26,664 | | | | (27,402 | ) |
Foreign | | | 4,362 | | | | 616 | | | | (332 | ) | | | 15,329 | | | | 4,362 | | | | 616 | |
| | | | | | | | | | | | | | |
| | | 41,257 | | | | (29,747 | ) | | | (24,613 | ) | | | 12,370 | | | | 31,026 | | | | (26,786 | ) |
| | | | | | | | | | | | | | |
Total income tax benefit (expense) | | $ | 91,125 | | | $ | (90,243 | ) | | $ | (106,768 | ) | | $ | 20,512 | | | $ | 65,974 | | | $ | (81,900 | ) |
| | | | | | | | | | | | | | |
The sources of our income or loss from continuing operations before income taxes and noncontrolling interest were as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | (In thousands) | |
|
Domestic | | $ | (279,278 | ) | | $ | 150,870 | | | $ | 270,975 | |
Foreign | | | 31,477 | | | | 23,186 | | | | 4,965 | |
| | | | | | | | | | | | |
Total | | $ | (247,801 | ) | | $ | 174,056 | | | $ | 275,940 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (In thousands) | |
|
Domestic income (loss) | | $ | 4,089 | | | $ | (208,699 | ) | | $ | 128,183 | |
Foreign income (loss) | | | (59,997 | ) | | | 31,477 | | | | 23,186 | |
| | | | | | | | | | | | |
Total income (loss) | | $ | (55,908 | ) | | $ | (177,222 | ) | | $ | 151,369 | |
| | | | | | | | | | | | |
We made netno federal income tax payments for the year ended December 31, 2010. We made payments of $0.1 million $33.5 million and $85.5$33.5 million for the years ended December 31, 2009 2008 and 2007,2008, respectively. We made net state income tax payments of $5.5$0.5 million, $6.6$5.5 million and $6.6 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. We made net foreign tax payments of $4.2 million, $7.3 million $3.4 million and $4.2$3.4 million for the years ended December 31, 2010, 2009 and 2008, respectively. For the years ended December 31, 2010 and 2007,2008, tax benefits allocated to stockholders’ equity for compensation expense for income tax purposes in excess of amounts recognized for financial reporting purposes were $2.1 million and $1.7 million, respectively. For the year ended December 31, 2009, $0.6 million of tax expense was allocated to stockholders’ equity for compensation expense for financial reporting purposes in excess of amounts recognized for income tax purposes. For the years ended December 31, 2008 and 2007, tax benefits allocated to stockholders’ equity for compensation expense for income tax purposes in excess of amounts recognized for financial reporting purposes were $1.7 million and $3.4 million, respectively. We had allocated tax benefits to stockholders’ equity in prior years for compensation expense for income tax purposes in excess of amounts recognized for financial reporting purposes. In addition, we expect to receivereceived a federal income tax refund of approximately $50.0$53.2 million in 2010.
Income tax expense differs from amounts computed by applying the statutory federal rate as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Income tax computed at Federal statutory rate | | | 35.00 | % | | | 35.00 | % | | | 35.00 | % |
State taxes | | | 1.7 | | | | 2.5 | | | | 3.0 | |
Non-deductible goodwill | | | — | | | | — | | | | 14.7 | |
Change in valuation allowance | | | (3.7 | ) | | | — | | | | (0.4 | ) |
Other | | | 3.7 | | | | (0.3 | ) | | | 1.8 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 36.70 | % | | | 37.20 | % | | | 54.10 | % |
| | | | | | | | | | | | |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income tax expense differs from amounts computed by applying the statutory federal rate as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Income tax computed at Federal statutory rate | | | 35.00 | % | | | 35.00 | % | | | 35.00 | % |
State taxes | | | 2.1 | | | | 3.1 | | | | 3.2 | |
Non-deductible goodwill | | | — | | | | 12.8 | | | | — | |
Change in valuation allowance | | | — | | | | (0.3 | ) | | | 0.2 | |
Other | | | (0.3 | ) | | | 1.2 | | | | 0.3 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 36.80 | % | | | 51.80 | % | | | 38.70 | % |
| | | | | | | | | | | | |
As of December 31, 20082010 and 2007,2009, our deferred tax assets and liabilities were comprisedconsisted of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Deferred tax assets: | | | | | | | | | | | | | | | | |
Net operating loss and tax credit carryforwards | | $ | 11,990 | | | $ | 4,664 | | | $ | 32,475 | | | $ | 11,990 | |
Self-insurance reserves | | | 17,735 | | | | 20,944 | | | | 16,623 | | | | 17,735 | |
Allowance for doubtful accounts | | | 1,835 | | | | 4,023 | | | | 2,544 | | | | 1,835 | |
Accrued liabilities | | | 11,550 | | | | 14,681 | | | | 13,886 | | | | 11,550 | |
Share-based compensation | | | 10,746 | | | | 10,116 | | | | 11,275 | | | | 10,746 | |
Other | | | 2,554 | | | | 3,085 | | | | 137 | | | | 2,554 | |
| | | | | | | | | | |
Total deferred tax assets | | | 56,410 | | | | 57,513 | | | | 76,940 | | | | 56,410 | |
| | | | | | | | | | |
Valuation allowance for deferred tax assets | | | (835 | ) | | | (844 | ) | | | (2,918 | ) | | | (835 | ) |
Net deferred tax assets | | | 55,575 | | | | 56,669 | | | | 74,022 | | | | 55,575 | |
| | | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Property and equipment | | | (147,956 | ) | | | (190,675 | ) | | | (143,211 | ) | | | (147,956 | ) |
Intangible assets | | | (29,238 | ) | | | (27,952 | ) | | | (32,515 | ) | | | (29,238 | ) |
Other | | | (38 | ) | | | — | | | | — | | | | (38 | ) |
| | | | | | | | | | |
Total deferred tax liabilities | | | (177,232 | ) | | | (218,627 | ) | | | (175,726 | ) | | | (177,232 | ) |
| | | | | | | | | | |
Net deferred tax liability, net of valuation allowance | | $ | (121,657 | ) | | $ | (161,958 | ) | | $ | (101,704 | ) | | $ | (121,657 | ) |
| | | | | | | | | | |
In 2010 and 2009, deferred tax liabilities decreased by $0.1 million and $0.4 million, for adjustments to accumulated other comprehensive loss. In 2008, deferred tax liabilities decreased by $1.0 millionrespectively, for adjustments to accumulated other comprehensive loss.
In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxable income for this determination. To fully realize the deferred income tax assets related to our federal net operating loss carryforwards that do not have a valuation allowance due to Section 382 limitations, we would need to generate future federal taxable income of approximately $4.8$2.6 million over the next nineeight years. With certain exceptions noted below, we believe that after considering all the available
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
objective evidence, both positive and negative, historical and prospective, with greater weight given to the historical evidence, it is more likely than not that these assets will be realized.
In 2009, we generated a federal tax net operating loss of $142.1 million. The 2009 federal net operating loss will be carried back, in its entirety, to a prior year and result in a refund of approximately $50.0 million. We estimate that as of December 31, 2010, 2009 2008 and 20072008 we have available $7.1$4.9 million, $7.1 million and $8.2 million, respectively, of federal net operating loss carryforwards. Approximately $4.7$2.5 million of our net operating losses as of December 31, 20092010 are subject to a $1.1 million annual Section 382 limitation and expire in 2018. Approximately $2.4 million of our net operating losses as of December 31, 20092010 are subject to a $5,000 annual Section 382 limitation and expire in 2016 through 2018. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Due to annual limitations under Sections 382 and 383, management believes that we will not be able to utilize all available carryforwards prior to their ultimate expiration. At December 31, 20092010 and 2008,2009, we had a valuation allowance of $0.8 million related to the deferred tax asset associated with our remaining federal net operating loss carryforwards that will expire before utilization due to Section 382 limitations.
We estimate that as of December 31, 2010, 2009 2008 and 20072008 we have available approximately $37.7 million, $64.2 million $15.9 million, and $18.6$15.9 million, respectively, of state net operating loss carryforwards that will expire from 2019 to 2025. To fully realize the deferred income tax assets related to our state net operating loss carryforwards, we would need to generate future West Virginia taxable income of $15.2 million over the next 20 years and future Pennsylvania taxable income of $3.3 million over the next 20 years. Management believes that it is not more likely than not that we will be able to utilize all available carryforwards prior to their ultimate expiration. The deferred tax asset associated with our remaining state net operating loss carryforwards at December 31, 2009 of $5.2 million includes a valuation allowance of less than $0.1 million as a result.
In 2007, we began operations in Mexico that resulted in a net operating loss of $2 million and a deferred tax asset related to the net operating loss carryforward of $0.6 million. Mexico enacted a flat tax rate effective January 1, 2008. The flat tax functions in addition to the regular corporate tax rate of 28%. Tax expense is calculated under both methods and if the flat tax is greater than the regular tax, the additional tax expense above the regular tax is assessed in addition to the regular tax calculation. In 2007, we recorded a full valuation allowance related to our Mexico net operating loss carryforwards of $0.6 million, as management believed that, due to the enactment of the Mexico flat tax, all of our net operating loss carryforwards related to the Mexico operations were not more likely than not to be fully realized in the future. We determined we were not in a flat tax position in 2008 and all of the 2007 regular net operating loss were utilized against 2008 regular Mexico income. Accordingly, the valuation allowance of $0.6 million set up in 2007 was released in 2008.
At December 31, 2009 and 2008, our Canadian operations had net operating losses of $3.9 million and $3.8 million, respectively. At December 31, 2009 and 2008 the deferred tax asset related to the net operating loss carryforward was $1.1 million and $1.1 million respectively. We have recorded no valuation allowance related to our Canadian net operating loss carryforwards at December 31, 2009 and 2008, as management believes that all of our net operating loss carryforwards are more likely than not to be fully realized in the future. To fully realize the deferred income tax assets related to our Canadian net operating loss carryforwards, we would need to generate $0.2 million of future Canadian taxable income over the next six years and $3.7 million of future Canadian taxable income over the next nineteen years. The net operating losses expire from 2015 to 2029.
We have not provided deferred U.S. income taxes or foreign withholding taxes on the unremitted cumulative earnings of our foreign subsidiaries as these earnings are considered permanently reinvested in these operations. The unremitted earnings of our foreign subsidiaries that are considered permanently reinvested were approximately $14.2 million as of December 31, 2009. Upon repatriation of these earnings, we would be subject to U.S. income tax, net of available foreign tax credits. At December 31, 2009, thebetween
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimated amount of this unrecognized2020 to 2029. The deferred tax liability on permanently reinvested foreign earnings, based on current exchange rates and assumingasset associated with our remaining state net operating loss carryforwards at December 31, 2010 is $3.3 million. Management believes that it is more likely than not that we wouldwill be able to useutilize all available carryforwards prior to their ultimate expiration.
We estimate that as of December 31, 2010, 2009 and 2008 we have available approximately $74.5 million, $16.4 million, and $3.2 million, respectively, of foreign net operating loss carryforwards that will expire between 2014 and 2030. The gross deferred tax credits,asset associated with our foreign net operating loss carryforwards at December 31, 2010 is $22.2 million. Management believes that it is more likely than not that we will be able to utilize the net operating loss carryforwards prior to their ultimate expiration in all foreign jurisdictions, with the exception of Argentina. Management believes that it is more likely than not that a portion of the net operating loss carryforwards in Argentina will not be utilized prior to their ultimate expiration, so a valuation allowance of $2.1 million was approximately $1.0 million.recorded during the year ended December 31, 2010.
We did not provide for U.S. income taxes or withholding taxes on the 2010 unremitted earnings of our Mexico subsidiaries as these earnings are considered permanently reinvested. Furthermore, we did not provide for U.S. income taxes on unremitted earnings of our other foreign subsidiaries in 2010 or prior years as our tax basis in these foreign subsidiaries exceeded the book basis for each period.
We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. We are currently under audit by the Internal Revenue Service for the tax year ended December 31, 2009. Our other significant filings are in Argentina and Mexico, which have been examined through 2006 and 2008, respectively.
As of December 31, 2010, 2009 2008 and 20072008 we had $2.2 million, $3.2 million $5.6 million and $6.8$5.6 million, respectively, of unrecognized tax benefits which, if recognized, would impact our effective tax rate. We have accrued $0.8 million, $1.1 million $2.1 million and $2.3$2.1 million for the payment of interest and penalties as of December 31, 2010, 2009 2008 and 2007,2008, respectively. We believe that it is reasonably possible that $1.7$0.9 million of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 20102011 as a result of a lapse of the statute of limitations and settlement of an audit of our former operations in Egypt.
We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. We are not under a current federal tax examination. Federal tax years ending December 31, 2006 and forward are open for tax audits as of December 31, 2009. Our other significant filings are Argentina which has been examined through 2006, Mexico which is in the intermediate stages of a 2007 tax audit of our initial year of operations and in the State of Texas, where tax filings remain open for 2003 to 2006 for certain subsidiaries of the Company.audit.
We recognized a net tax benefitsbenefit of $1.0 million in 2009 of $2.6 million2010 for expirations of statutes of limitations. We recorded ana net income tax benefit of $1.4$1.2 million and an increase to deferred tax liabilities of $0.4$0.2 million related to these statute expirations.
The following table presents the activity during 2010 and 2009 related to our liabilities for uncertain tax positions (in thousands):
| | | | | | | | |
Balance at January 1, 2009 | | $ | 5,058 | | | $ | 5,058 | |
Additions based on tax positions related to the current year | | | 336 | | | | 336 | |
Reductions as a result of lapse of applicable statute of limitations | | | (2,153 | ) | | | (2,153 | ) |
Settlements | | | — | | | | — | |
| | | | | | |
Balance at December 31, 2009 | | $ | 3,241 | | | | 3,241 | |
| | | | | | |
Additions based on tax positions related to the current year | | | | 192 | |
Decreases in unrecognized tax benefits acquired or assumed in business combinations | | | | (163 | ) |
Reductions for tax positions from prior years | | | | (1,016 | ) |
Settlements | | | | — | |
| | | | |
Balance at December 31, 2010 | | | $ | 2,254 | |
| | | | |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tax Legislative Changes
The Economic StimulusSmall Business Jobs Act of 2008.2010. The Economic StimulusSmall Business Jobs Act of 2008 permits a2010 extends the bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property (most personalacquired and placed in service during 2010 and increases the deduction to 100% of the adjusted basis of qualified property and software) acquired and placed in service after December 31, 2007September 8, 2010 and before January 1, 2009.2012. We have $140estimated $62 million of qualifying additions in 20082010 resulting in additional 2008bonus tax depreciation of $70$38.5 million.
The American Recovery and Reinvestment Act of 2009. The American Recovery and Reinvestment Act of 2009 extends the bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service to after December 31, 2008 and before January 1, 2010. We have an estimatedhad $66 million of qualifying additions in 2009 resulting in additional 2009 tax depreciation of $33 million.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 13.15. | LONG-TERM DEBT |
The components of our long-term debt are as follows:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
8.375% Senior Notes due 2014 | | $ | 425,000 | | | $ | 425,000 | | | $ | 425,000 | | | $ | 425,000 | |
Senior Secured Credit Facility revolving loans due 2012 | | | 87,813 | | | | 187,813 | | | | — | | | | 87,813 | |
Other long-term indebtedness | | | 1,044 | | | | 3,015 | | | | — | | | | 1,044 | |
Notes payable — related parties, net of discount of $69 and $182, respectively | | | 5,931 | | | | 20,318 | | |
Notes payable — related parties, net of discount of $69 | | | | — | | | | 5,931 | |
Capital lease obligations | | | 14,313 | | | | 23,149 | | | | 6,100 | | | | 14,313 | |
| | | | | | | | | | |
| | $ | 534,101 | | | $ | 659,295 | | | | 431,100 | | | | 534,101 | |
| | | | | | | | | | |
Less current portion | | | (10,152 | ) | | | (25,704 | ) | | | (3,979 | ) | | | (10,152 | ) |
| | | | | | | | | | |
Total long-term debt and capital lease obligations, net of discount | | $ | 523,949 | | | $ | 633,591 | | | $ | 427,121 | | | $ | 523,949 | |
| | | | | | | | | | |
8.375% Senior Notes due 2014
On November 29, 2007, we issued $425.0 million inof Senior Notes under an indenture (the “Indenture”). The Senior Notes were priced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers’ fees and offering expenses, were approximately $416.1 million. The Senior Notes were registered as public debt effective August 22, 2008.
The Senior Notes are general unsecured senior obligations of the Company. They rank effectively subordinate to all of our existing and future secured indebtedness. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. The Senior Notes mature on December 1, 2014.
On or after December 1, 2011, the Senior Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at the redemption prices (expressed as percentages of the principal amount redeemed) below, plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
| | | | |
Year | | Percentage | |
|
2011 | | | 104.19 | % |
2012 | | | 102.09 | % |
2013 | | | 100.00 | % |
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Key Energy Services, Inc. and Subsidiaries
In addition, at any time and from time to time before December 1, 2010, we have the option to redeem up to 35% of the aggregate principal amount of the outstanding Senior Notes at a redemption price of 108.375%, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings, provided that at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remains outstanding immediately after each such redemption. These redemptions must occur within 180 days of the date of the closing of the equity offering.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition, at any time and from time to time prior to December 1, 2011, we may, at our option, redeem all or a portion of the Senior Notes at a redemption price equal to 100% of the principal amount, plus the Applicable Premium (as defined in the Indenture) with respect to the Senior Notes and plus accrued and unpaid interest to the redemption date. If we experience a change of control, subject to certain exceptions, we must give holders of the Senior Notes the opportunity to sell to us their Senior Notes, in whole or in part, at a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.
We are subject to certain negative covenants under the Indenture governing the Senior Notes. The Indenture limits our ability to, among other things:
| | |
| • | sell assets; |
|
| • | pay dividends or make other distributions on capital stock or subordinated indebtedness; |
|
| • | make investments; |
|
| • | incur additional indebtedness or issue preferred stock; |
|
| • | create certain liens; |
|
| • | enter into agreements that restrict dividends or other payments from our subsidiaries to us; |
|
| • | consolidate, merge or transfer all or substantially all of our assets; |
|
| • | engage in transactions with affiliates; and |
|
| • | create unrestricted subsidiaries. |
These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions in connection with the covenants of our Senior Secured Credit Facility. Substantially all of the covenants will terminate before the Senior Notes mature if one of two specified ratings agencies assigns the Senior Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2009,2010, the Senior Notes were below investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit rating assigned to the Senior Notes later falls below an investment grade rating. We were in compliance with these covenants at December 31, 2009.
Senior Secured Credit Facility
We maintain a Senior Secured Credit Facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the administrative agents. We entered into the Senior Secured Credit Facility on November 29, 2007, simultaneously with the offering of the Senior Notes, and entered into an amendment (the “Amendment”) to the Senior Secured Credit Facility on October 27, 2009. As amended, the Senior Secured Credit Facility consists of a revolving credit facility, letter of creditsub-facility and swing line facility, up to an aggregate principal amount of $300.0 million, all of which will mature no later than November 29, 2012.
The Amendment we entered into in the fourth quarter of 2009 reduced the total credit commitments under the facility from $400.0 million to $300.0 million, effected by a pro rata reduction of the commitment of each lender under the facility. We have the ability to request increases in the total commitments under the facility by up to $100.0 million in the aggregate, with any such increases being subject to certain requirements as well as lenders’ approval. Pursuant to the Amendment, we also modified the applicable interest rates and some of the financial covenants, among other changes.
The interest rate per annum applicable to the Senior Secured Credit Facility (as amended) is, at our option, (i) LIBOR plus a margin of 350 to 450 basis points, depending on our consolidated leverage ratio, or, (ii) the base rate (defined as the higher of (x) Bank of America’s prime rate and (y) the Federal Funds rate plus 0.5%), plus a margin of 250 to 350 basis points, depending on our consolidated leverage ratio. Unused commitment fees on the facility range from 0.50% to 0.75%, depending upon our consolidated leverage ratio.
The Senior Secured Credit Facility contains certain financial covenants, which, among other things, require us to maintain certain financial ratios and limit our annual capital expenditures. In addition to
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
covenants that impose restrictions on our ability to repurchase shares, have assets owned by domestic subsidiaries located outside the United States and other such limitations, the amended Senior Secured Credit Facility also requires:
| | |
| • | that our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; |
|
| • | that our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of the Senior Secured Credit Facility, “EBITDA”) be no greater than (i) 2.50 to 1.00 for the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending December 31, 2010 and, (ii) thereafter, 2.00 to 1.00; |
|
| • | that we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least the following amounts during each corresponding period: |
| | |
from the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending June 30, 2010 | | 1.75 to 1.00 |
through the fiscal quarter ending September 30, 2010 | | 2.00 to 1.00 |
for the fiscal quarter ending December 31, 2010 | | 2.50 to 1.00 |
thereafter | | 3.00 to 1.00; |
| | |
| • | that we limit our capital expenditures (not including any made by foreign subsidiaries that are not wholly-owned) to (i) $135.0 million during fiscal year 2009 and $120.0 million during each subsequent fiscal year if our consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 3.50 to 1.00; or (ii) $250.0 million if our consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is equal to or less than 3.50 to 1.00, subject to certain adjustments; |
|
| • | that we only make acquisitions that either (i) are completed for equity consideration, without regard to leverage, or (ii) are completed for cash consideration, but only (A) if the consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is 2.75 to 1.00 or less, (x) there is an aggregate amount of $25.0 million in unused credit commitments under the facility and (y) we are in pro forma compliance with the financial covenants contained in the credit agreement; and (B) if the consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 2.75 to 1.00, in addition to the requirements in subclauses (x) and (y) in clause (A) above, the cash amount paid with respect to acquisitions is limited to $25.0 million per fiscal year (subject to potential increase using amounts then available for capital expenditures and any net cash proceeds we receive after October 27, 2009 in connection with the issuance or sale of equity interests or the incurrence or issuance of certain unsecured debt securities that are identified as being used for such purpose); and |
|
| • | that we limit our investment in foreign subsidiaries (including by way of loans made by us and our domestic subsidiaries to foreign subsidiaries and guarantees made by us and our domestic subsidiaries of debt of foreign subsidiaries) to $75.0 million during any fiscal year or an aggregate amount after October 27, 2009 equal to (i) the greater of $200.0 million or 25% of our consolidated net worth, plus (ii) any net cash proceeds we receive after October 27, 2009, in connection with the issuance or sale of equity interests or the incurrence of certain unsecured debt securities that are identified as being used for such purpose. |
In addition, the amended Senior Secured Credit Facility contains certain affirmative covenants, including, without limitation, restrictions related to (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments; (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing the Senior Notes or other unsecured debt incurred pursuant to the sixth bullet point listed above; (viii) granting negative pledges other
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
than to the lenders; (ix) changes in the nature of our business; (x) amending organizational documents, or amending or otherwise modifying any debt if such amendment or modification would have a material adverse effect, or amending the Senior Notes or any other unsecured debt incurred pursuant to the sixth bullet point listed above if the effect of such amendment is to shorten the maturity of the Senior Notes or such other
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unsecured debt; and (xi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions. We were in compliance with these covenants at December 31, 2009.
We may prepay the Senior Secured Credit Facility in whole or in part at any time without premium or penalty, subject to our obligation to reimburse the lenders for breakage and redeployment costs. In connection with the Amendment, we wrote off a proportionate amount of the unamortized deferred financing costs associated with the capacity reduction of the credit facility. During the year ended December 31, 2009, we recognized $0.5 million in pre-tax charges in losses on extinguishment of debt associated with the write-off of unamortized deferred financing costs.
As of December 31, 2009, $87.8 million of borrowings and $55.22010, $59.4 million of letters of credit were outstanding under our revolving credit facility, leaving $156.9$240.6 million of availability under our revolving credit facility. Under the terms of the Senior Secured Credit Facility, committed letters of credit count against our borrowing capacity. All obligations under the Senior Secured Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventory and equipment. The weighted average interest rate on the outstanding borrowings of the Senior Secured Credit Facility was 3.73% at December 31, 2009.
Notes Payable to Related Parties
On October 25, 2007,Concurrently with the sale of six barge rigs and related equipment in May 2010, we entered intorepaid the remaining $6.0 million outstanding under a note payable to a related party. This was the second of two promissory notes payable with related parties in connection with an acquisition.(each, a “Related Party Note”) entered into on October 25, 2007. The first Related Party Note was an unsecured note in the amount of $12.5 million, whichand was due and paid in a lump-sum, together with accrued interest,repaid on October 25, 2009. The second Related Party Note was an unsecured note in the amount of $10.0 million isand was payable in annual installments of $2.0 million, plus accrued interest, on each anniversary date of its issue through October 2012. Each of the notes bore or bears interest at the Federal Funds Rate, adjusted annually on the anniversary date of the note. As of December 31, 2009, the interest rate on the second note was 0.11%. Interest expense for the years ended December 31, 2009 and 2008 was $0.2 million and $1.2 million, respectively, on the two notes in aggregate.
The Federal Funds Rate does not represent a rate that would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions and is not equal to our incremental borrowing rate. We recorded the promissory notes at fair value which resulted in a discount being recorded. The discount will be recognized as interest expense over the life of the promissory notes using the effective interest method. The amount of discount remaining to be amortized as of December 31, 2009 and 2008 was less than $0.1 million and $0.2 million, respectively, for both notes in the aggregate. The total amount of discount amortization included in interest expense related to the notes for both years ended December 31, 2009 and 2008 was $0.1 million.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-Term Debt Principal Repayment and Interest Expense
Presented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of December 31, 2009:2010:
| | | | | | | | |
| | Principal Amount of Long-Term Debt | | | Principal Amount of Long-Term Debt | |
| | (In thousands) | | | (In thousands) | |
|
2010 | | $ | 3,044 | | |
2011 | | | 2,000 | | | $ | — | |
2012 | | | 89,813 | | | | — | |
2013 | | | — | | | | — | |
2014 | | | 425,000 | | | | 425,000 | |
2015 | | | | — | |
Thereafter | | | — | | | | — | |
| | | | | | |
Total principal payments | | | 519,857 | | | | 425,000 | |
| | | | | | |
Less: fair value discount | | | (69 | ) | | | — | |
| | | | | | |
Total long-term debt | | $ | 519,788 | | | $ | 425,000 | |
| | | | | | |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Presented below is a schedule of our estimated minimum lease payments on our capital lease obligations for the next five years and thereafter as of December 31, 2009:2010:
| | | | | | | | |
| | Capital Lease Obligation Minimum
| | | Capital Lease Obligation Minimum
| |
| | Lease Payments | | | Lease Payments | |
| | (In thousands) | | | (In thousands) | |
|
2010 | | $ | 7,517 | | |
2011 | | | 4,828 | | | $ | 4,344 | |
2012 | | | 2,116 | | | | 1,888 | |
2013 | | | 499 | | | | 503 | |
2014 | | | — | | | | — | |
2015 | | | | — | |
Thereafter | | | — | | | | — | |
| | | | | | |
Total minimum lease payments | | | 14,960 | | | | 6,735 | |
Less: executory costs | | | (479 | ) | | | (569 | ) |
| | | | | | |
Net minimum lease payments | | | 14,481 | | | | 6,166 | |
Less: amounts representing interest | | | (168 | ) | | | (66 | ) |
| | | | | | |
Present value of minimum lease payments | | $ | 14,313 | | | $ | 6,100 | |
| | | | | | |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest expense for the years ended December 31, 2010, 2009 2008 and 20072008 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Cash payments | | $ | 41,750 | | | $ | 45,211 | | | $ | 33,964 | | | $ | 40,612 | | | $ | 41,750 | | | $ | 45,211 | |
Commitment and agency fees paid | | | 825 | | | | 102 | | | | 2,232 | | | | 1,151 | | | | 825 | | | | 102 | |
Amortization of discount | | | 113 | | | | 140 | | | | — | | | | 15 | | | | 113 | | | | 140 | |
Amortization of deferred financing costs | | | 2,070 | | | | 1,975 | | | | 1,680 | | | | 2,615 | | | | 2,070 | | | | 1,975 | |
Settlement of interest rate swaps | | | — | | | | — | | | | 2,261 | | |
Net change in accrued interest | | | (1,354 | ) | | | 333 | | | | 1,366 | | | | 1,083 | | | | (1,354 | ) | | | 333 | |
Capitalized interest | | | (4,335 | ) | | | (6,514 | ) | | | (5,296 | ) | | | (3,517 | ) | | | (3,999 | ) | | | (5,139 | ) |
| | | | | | | | | | | | | | |
Net interest expense | | $ | 39,069 | | | $ | 41,247 | | | $ | 36,207 | | | $ | 41,959 | | | $ | 39,405 | | | $ | 42,622 | |
| | | | | | | | | | | | | | |
As of December 31, 20092010 and 2008,2009, the weighted average interest rate of our variable rate debt was 3.24%1.78% and 4.17%3.24%, respectively.
Deferred Financing Costs
Cost capitalized, amortized, and written off in the determination of the loss on extinguishment of debt for the years ended December 31, 2010, 2009 2008 and 20072008 are presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Capitalized costs | | $ | 2,474 | | | $ | 314 | | | $ | 13,400 | | | $ | — | | | $ | 2,474 | | | $ | 314 | |
Amortization | | | 2,070 | | | | 1,975 | | | | 1,680 | | | | 2,615 | | | | 2,070 | | | | 1,975 | |
Loss on extinguishment | | | 472 | | | | — | | | | 9,557 | | | | — | | | | 472 | | | | — | |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net carrying values for the years presented appear in the table below:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
|
Deferred financing costs: | | | | | | | | | | | | | | | | |
Gross carrying value | | $ | 14,611 | | | $ | 12,609 | | | $ | 14,611 | | | $ | 14,611 | |
Accumulated amortization | | | (4,190 | ) | | | (2,120 | ) | | | (6,805 | ) | | | (4,190 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 10,421 | | | $ | 10,489 | | | $ | 7,806 | | | $ | 10,421 | |
| | | | | | | | | | |
| |
NOTE 14.16. | COMMITMENTS AND CONTINGENCIES |
Operating Lease Arrangements
We lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2019, with varying payment dates throughout each month.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2009,2010, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
| | | | | | | | |
| | Lease Payments | | | Lease
| |
| | Payments | |
2010 | | $ | 7,230 | | |
| |
2011 | | | 4,706 | | | $ | 15,827 | |
2012 | | | 4,045 | | | | 10,821 | |
2013 | | | 2,933 | | | | 6,530 | |
2014 | | | 2,147 | | | | 4,078 | |
2015 | | | | 2,359 | |
Thereafter | | | 3,472 | | | | 1,926 | |
| | | | | | |
| | $ | 24,533 | | | $ | 41,541 | |
| | | | | | |
We are also party to a significant number ofmonth-to-month leases that are cancelable at any time. Operating lease expense was $21.1 million, $22.7 million, $22.4 million, and $16.4$22.4 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively.
Litigation
Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where we conduct business in the continental United States, we are often subject to jury verdicts or other outcomes that may be favorable to plaintiffs. 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. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. As of December 31, 2009,2010, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is approximately $2.7$3.8 million. We do not believe that the disposition of any of these matters will have a material impact on our financial position, results of operations, or cash flows. In the year ended December 31, 2009,2010, we recorded a net decreaseincrease in our reserves of $3.7$1.1 million related to the settlement of ongoing legal matters and the continued refinement of liabilities recognized for litigation deemed probable and estimable. Our liabilities related to litigation matters that were deemed probable and estimable as of December 31, 2009 and 2008 were $2.7 million and 2007 were $4.5 million, respectively.
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Key Energy Services, Inc. and $6.8 million, respectively.Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation with Former Officers and Employees
Our former general counsel, Jack D. Loftis, Jr., filed a lawsuit against us in the U.S. District Court, District of New Jersey, on April 21, 2006, in which he allegesalleged a “whistle-blower” claim under the Sarbanes-Oxley Act, breach of contract, breach of duties of good faith and fair dealing, breach of fiduciary duty and wrongful termination. On August 17, 2007, we filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract and breach of fiduciary duties. In our counterclaims, we are seekingsought repayment of all severance paid to Mr. Loftis (approximately $0.8 million) plus benefits paid during the period July 8, 2004 to September 21, 2004, and damages relating to the allegations of malpractice and breach of fiduciary duties. The case is currently pending in the U.S. District Court for the Eastern District of Pennsylvania and will begin to appear on the trial docket during the second quarter of 2010. We recorded a liability for this matter in the fourth quarter of 2008.
On October 17, 2006, Jane John, the ex-wife of our former chief executive officer, Francis John, filed a complaint in Bucks County, Pennsylvania against her ex-husband and us. Ms. John alleged a breach of the marital agreement, a breach of options agreements, civil conspiracy and fraud. By virtue of assignments, Ms. John held 375,000 stock options which expired unexercised during a period in whichSeptember 2, 2010, we were not current in our financial statements, when such options could not be exercised. Mr. John has agreed to indemnify us
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
with respect to damages attributable to any and all of Ms. John’s claims, other than damages attributable to any alleged breach of Ms. John’s stock option agreements. We reached a settlement with Ms. JohnMr. Loftis regarding the alleged breach of stock option agreements,claims, and recorded an additional charge related to the settlement insettlement. The resolution of this claim did not have a material effect on our results of operations for the third quarter of 2009, having initially recorded a liability for this matter in the third quarter of 2008.year ended December 31, 2010.
UMMA Verdict
On SeptemberMay 3, 2006, our former controller and former assistant controller filed suit against us2010, a District Court jury in HarrisMcMullen County, Texas alleging constructive terminationreturned a verdict in the case of UMMA Resources, LLC v. Key Energy Services, Inc. The lawsuit involved pipe recovery and workover operations performed between September 2003 through December 2004. The plaintiff alleged that we breached an oral contract and negligently performed the work. We countersued for our unpaid invoices for work performed. The jury found that Key was in breach of contract. Wecontract, that Key was negligent in performing the work, and that Key was not entitled to damages under its counterclaims. On December 15, 2010, our motion for judgment notwithstanding the verdict was partially granted; however, the Court entered judgment in favor of UMMA on one of its claims. During the subsequent briefing on motions for new trial and for reconsideration, the parties reached an agreement to resolve the matter through arbitration that included an obligation to pay a minimum amount to the claimants regardless of outcome,settlement in this case, and we recorded a liability based upon the minimum paymentloss for this matter. The resolution of this matter indid not have a material effect on our results of operations for the third quarter of 2009. In earlyyear ended December 2009, the matter went to trial and the arbitrator found in favor of Key.31, 2010.
Tax Audits
We are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As of December 31, 20092010 and 2008,2009, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of prior audits. While we believe we have fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates.
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 acase-by-case basis. We maintain insurance policies for workers’ compensation, vehicular 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 December 31, 20092010 and 2008,2009, we have recorded $65.2$60.3 million and $68.9$65.2 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $17.2$15.4 million and $10.8$17.2 million of insurance receivables as of December 31, 20092010 and 2008,2009, respectively. We feel 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
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to conduct such remediation efforts can be reasonably estimated. As of December 31, 20092010 and 2008,2009, we have recorded $3.4$4.0 million and $3.0$3.4 million, respectively, for our environmental remediation liabilities. We feel 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.
We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties to comply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 15.17. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The components of our accumulated other comprehensive loss are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Foreign currency translation loss | | $ | (50,763 | ) | | $ | (46,520 | ) | | $ | (51,334 | ) | | $ | (50,763 | ) |
Deferred loss from available for sale investments | | | — | | | | (30 | ) | |
| | | | | | | | | | |
Accumulated other comprehensive loss | | $ | (50,763 | ) | | $ | (46,550 | ) | | $ | (51,334 | ) | | $ | (50,763 | ) |
| | | | | | | | | | |
The local currency is the functional currency for our operations in Argentina, Mexico, Canada, the Russian Federation and for our equity investments in Canada. The cumulative translation gains and losses resulting from translating each foreign subsidiary’s financial statements from the functional currency to U.S. Dollarsdollars are included in other comprehensive income and accumulated in stockholders’ equity until a partial or complete sale or liquidation of our net investment in the foreign entity. The table below summarizes the conversion ratios used to translate the financial statements and the cumulative currency translation gains and losses, net of tax, for each currency:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Argentine Peso | | Mexican Peso | | Canadian Dollar | | Euro | | Russian Rouble | | Total | | | Argentine Peso | | Mexican Peso | | Canadian Dollar | | Euro | | Russian Rouble | | Total | |
| | (In thousands, except for conversion ratios) | | | (In thousands, except for conversion ratios) | |
|
As of December 31, 2010: | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion ratio | | | | 3.98 : 1 | | | | 12.39 : 1 | | | | 1.00 : 1 | | | | 0.75 : 1 | | | | 30.54 : 1 | | | | n/a | |
Cumulative translation adjustment | | | $ | (50,518 | ) | | $ | 56 | | | $ | (944 | ) | | | n/a | | | $ | 72 | | | $ | (51,334 | ) |
As of December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion ratio | | | 3.82:1 | | | | 13.04:1 | | | | 1.05:1 | | | | 0.70:1 | | | | 30.27:1 | | | | n/a | | | | 3.82 : 1 | | | | 13.04 : 1 | | | | 1.05 : 1 | | | | 0.70 : 1 | | | | 30.27 : 1 | | | | n/a | |
Cumulative translation adjustment | | $ | (48,953 | ) | | $ | (716 | ) | | $ | (1,087 | ) | | | n/a | | | $ | (7 | ) | | $ | (50,763 | ) | | $ | (48,953 | ) | | $ | (716 | ) | | $ | (1,087 | ) | | | n/a | | | $ | (7 | ) | | $ | (50,763 | ) |
As of December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion ratio | | | 3.46:1 | | | | 13.78:1 | | | | 1.22:1 | | | | 0.71:1 | | | | 29.48:1 | | | | n/a | | |
Cumulative translation adjustment | | $ | (43,654 | ) | | $ | (1,663 | ) | | $ | (917 | ) | | $ | (286 | ) | | | n/a | | | $ | (46,520 | ) | |
| |
NOTE 16.18. | EMPLOYEE BENEFIT PLANS |
We maintain a 401(k) plan as part of our employee benefits package. InLate in the first quarter of 2009, management suspended the 401(k) matching program as part of our cost cutting efforts. No matching contributions were made during 2010. Prior to this suspension, we matched 100% of employee contributions up to 4% of the employee’s salary into our 401(k) plan, subject to maximums of $9,200$9,800 and $9,000$9,200 for the years ended December 31, 20082009 and 20072008 respectively. Our matching contributions were $1.7 million $11.9 million, and $10.2$11.9 million for the years ended December 31, 2009 2008 and 2007,2008, respectively. We do not offer participants the option to purchase units of our common stock through a 401(k) plan fund. We reinstated the 401(k) matching program effective January 1, 2011.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 17.19. | STOCKHOLDERS’ EQUITY |
Common Stock
As of December 31, 2010 and 2009, we had 200,000,000 shares of common stock authorized with a $0.10 par value, of which 141,656,426 shares were issued and outstanding at December 31, 2010 and 123,993,480 shares were issued and outstanding. Onoutstanding at December 31, 2008, we had 200,000,000 shares of common stock authorized with a $0.10 par value, of which 121,305,289 shares were issued2009. During 2010 and outstanding. During 2009, and 2008, no dividends were declared or paid. Under the terms of the Senior Notes and Senior Secured Credit Facility, we must meet certain financial covenants before we may pay dividends. We currently do not intend to pay dividends.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share Repurchase Program
In October 2007, our board of directors authorized a share repurchase program of up to $300.0 million which was effective through March 31, 2009. From the inception of the program in November 2007 through December 31, 2008, we repurchased approximately 13.4 million shares of our common stock through open market transactions for an aggregate price of approximately $167.3 million. We did not repurchase any shares under this program in 2009, and the plan expired on March 31, 2009.
Tax Withholding
We repurchase shares of restricted common stock that have been previously granted to certain of our employees, pursuant to an agreement under which those individuals are permitted to sell shares back to us in order to satisfy the minimum income tax withholding requirements related to vesting of these grants. We repurchased a total of 301,837, 71,954 97,443 and 72,84797,443 shares for an aggregate cost of $3.1 million, $0.5 million and $1.2 million during 2010, 2009 and $1.3 million during 2009, 2008, and 2007, respectively, which represented the fair market value of the shares based on the price of our stock on the dates of purchase.
Common Stock Warrants
In January 1999, we issued 150,000 warrants (the “Warrants”) in connection with a debt offering that were exercisable for an aggregate of approximately 2.2 million shares of our stock at an exercise price of $4.88125 per share. As of December 31, 2008, 83,800 Warrants had been exercised, leaving 66,200 outstanding, which were exercisable for approximately 1.0 million shares of our common stock. Termination notice was provided to the holders of the outstanding Warrants and the Warrants expired unexercised on February 2, 2009.
Under the terms of the Warrants, we were required to maintain an effective registration statement covering the shares potentially issuable upon exercise of the Warrants or make liquidated damages payments to the holders of the Warrants if we did not. On August 21, 2008, the requisite registration statement required by the terms of the Warrants became effective. However, because we did not have an effective registration statement through this date, we made liquidated damages payments totaling $0.8 and $0.9 million, respectively during 2008 and 2007.
On May 12, 2009, in connection with the settlement of a lawsuit, we issued to two individuals warrants to purchase shares of Key’s common stock. The warrants, which expire on May 12, 2014, are exercisable for 174,000 shares of our common stock at an exercise price of $4.56 per share. We received no proceeds upon the issuance of the warrants, but we will receive the exercise price of any warrants that are exercised prior to their expiration. The warrants, which are unregistered securities, were issued in a private placement and, therefore, their issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. As of December 31, 2009, none2010, 54,400 of these warrants had been exercised.exercised, leaving 119,600 outstanding.
| |
NOTE 18.20. | SHARE-BASED COMPENSATION |
2009 Incentive Plan
On June 4, 2009, our stockholders approved the 2009 Equity and Cash Incentive Plan (the “2009 Incentive Plan”). The 2009 Incentive Plan is administered by our board of directors or a committee designated by our board of directors (the “Committee”). Our board of directors or the Committee (the “Administrator”) will have the power and authority to select Participants (as defined below) in the 2009 Incentive Plan and to grant Awards (as defined below) to such Participants pursuant to the terms of the 2009 Incentive Plan. The 2009 Incentive Plan expires June 4, 2019.
Subject to adjustment, the total number of shares of our common stock that will be available for the grant of Awards under the 2009 Incentive Plan may not exceed 4,000,000 shares; however, for purposes of this
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
limitation, any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuance under the 2009 Incentive Plan. Subject to adjustment, no Participant will be granted, during any one year period, options to purchase common stockand/or stock appreciation rights with respect to more than 500,000 shares of common stock. Stock available for distribution under the 2009 Incentive Plan will come from authorized and unissued shares or shares we reacquire in any manner. All awards under the 2009 Incentive Plan are granted at fair market value on the date of issuance.
Awards may be in the form of stock options (incentive stock options and nonqualified stock options), restricted stock, restricted stock units, performance compensation awards and stock appreciation rights (collectively, “Awards”). Awards may be granted to employees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expected to become employees, directors
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or consultants following the grant date of the Award (“Participants”). However, incentive stock options may be granted only to employees. Vesting periods may be set at the Board’s discretion of the board of directors, or its compensation committee, but are generally set at two to four years. Awards to our directors are generally not subject to vesting.
Our boardBoard of directors mayDirectors at any time, and from time to time, may amend or terminate the 2009 Incentive Plan. However, no repricing of stock options is permitted unless approved by our stockholders, and, except as provided otherwise in the 2009 Incentive Plan, no other amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of December 31, 2009,2010, there were 3,835,6882.2 million remaining shares available for grant under the 2009 Incentive Plan.
2007 Incentive Plan
On December 6, 2007, our stockholders approved the 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”). The 2009 Incentive Plan was based on the form of the 2007 Incentive Plan and the terms of both plans areis substantially similar. However, there are a few differences between the plans. For example,similar to the 2009 Incentive Plan addresses theexcept for certain differences related to treatment of Awards when a Participant’s continuous service with the Company terminates as a result ofat retirement (as defined in the plan), but the 2007 Incentive Plan does not specifically address that situation. Also, the 2007 Incentive Plan allows for theand transferability of stock options by will, by the laws of descent and distribution, to a third party designee upon death, or, as may determined in the discretion of the Administrator, to certain other permitted transferees set forth in the 2007 Incentive Plan. However, the 2009 Incentive Plan only permits such transferability by will, by the laws of descent and distribution or to a third party designee uponAwards at death.
Subject to adjustment, the total number of shares of our common stock that are available for the grant of Awards under the 2007 Incentive Plan may not exceed 4,000,000 shares; however, as is the case under the 2009 Incentive Plan, for purposes of this limitation, any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuance under the 2007 Incentive Plan.
Our board of directors may at any time, and from time to time, may amend or terminate the 2007 Incentive Plan. However, except as provided otherwise in the 2007 Incentive Plan, no amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of December 31, 2009,2010, there were 246,5370.2 million remaining shares available for grant under the 2007 Incentive Plan.
1997 Incentive Plan
On January 13, 1998, our stockholders approved the Key Energy Group, Inc. 1997 Incentive Plan, as amended (the “1997 Incentive Plan”). The 1997 Incentive Plan wasis an amendment and restatement of the plans formerly known as the Key Energy Group, Inc. 1995 Stock Option Plan and the Key Energy Group, Inc.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1995 Outside Directors Stock Option Plan. On November 17, 2007, the 1997 Incentive Plan terminated pursuant to its terms, after which no new awards could be granted under the plan.terms.
The exercise price of options granted under the 1997 Incentive Plan is at or above the fair market value per share on the date the options are granted. Under the 1997 Incentive Plan, whenwhile the shares of common stock wereare listed on a securities exchange, fair market value was determined using the closing sales price on the immediate preceding business day as reported on such securities exchange.
When the shares were not listed on an exchange, which includedincludes the period from April 2005 through October 2007, the fair market value was determined by using the published closing price of the common stock on the Pink Sheets on the business day immediately preceding the date of grant.
During the period from 2000 to 2001,2000-2001, the boardBoard of directorsDirectors granted 3.7 million stock options that were outside the 1997 Incentive Plan, of which 120,00060,000 remained outstanding as of December 31, 2009.2010. The 3.7 million non-plan options were in addition to and diddo not include other options which were granted under the 1997 Incentive Plan, but not in conformity with certain of the terms of the 1997 Incentive Plan.
Accelerated Vesting of Option and SAR Awards
Our boardBoard of directorsDirectors resolved during the fourth quarter of 2008 to accelerate the vesting period foron certain of our outstanding unvested stock option awards and stock appreciation rights, which affected
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately 280 employees. Primarily asAs a result of the acceleration, we recorded a pre-tax charge of $10.9 million in general and administrative expense during the fourth quarter of 2008. Because of the acceleration of the vesting term, no expense will beis recognized on these awards in periods subsequent to December 31, 2008.
Stock Option Awards
Stock option awards granted under our incentive plans have a maximum contractual term of ten years from the date of grant. Shares issuable upon exercise of a stock option are issued from authorized but unissued shares of our common stock. The following table summarizes the stock option activity during fiscaland certain options granted in prior years ended December 31, 2009, 2008 and 2007that were outside the 1997 Incentive Plan (shares in thousands):
| | | | | | | | | | | | |
| | Year Ended December 31, 2010 | |
| | | | | Weighted Average
| | | Weighted Average
| |
| | Options | | | Exercise Price | | | Fair Value | |
|
Outstanding at beginning of period | | | 3,895 | | | $ | 12.90 | | | $ | 5.62 | |
Granted | | | — | | | $ | — | | | $ | — | |
Exercised | | | (454 | ) | | $ | 8.51 | | | $ | 4.83 | |
Cancelled or expired | | | (625 | ) | | $ | 13.28 | | | $ | 5.77 | |
| | | | | | | | | | | | |
Outstanding at end of period | | | 2,816 | | | $ | 13.52 | | | $ | 5.72 | |
| | | | | | | | | | | | |
Exercisable at end of period | | | 2,790 | | | $ | 13.60 | | | $ | 5.76 | |
| | | | | | | | | | | | |
| | Year Ended December 31, 2009 | |
| | | | | Weighted Average
| | | Weighted Average
| |
| | Options | | | Exercise Price | | | Fair Value | |
|
Outstanding at beginning of period | | | 4,961 | | | $ | 12.21 | | | $ | 5.42 | |
Granted | | | 15 | | | $ | 4.14 | | | $ | 2.23 | |
Exercised | | | (418 | ) | | $ | 3.12 | | | $ | 2.30 | |
Cancelled or expired | | | (663 | ) | | $ | 13.70 | | | $ | 5.84 | |
| | | | | | | | | | | | |
Outstanding at end of period | | | 3,895 | | | $ | 12.90 | | | $ | 5.62 | |
| | | | | | | | | | | | |
Exercisable at end of period | | | 3,853 | | | $ | 12.99 | | | $ | 5.66 | |
| | | | | | | | | | | | |
| | Year Ended December 31, 2008 | |
| | | | | Weighted Average
| | | Weighted Average
| |
| | Options | | | Exercise Price | | | Fair Value | |
|
Outstanding at beginning of period | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | |
Granted | | | 1,379 | | | $ | 14.76 | | | $ | 5.43 | |
Exercised | | | (757 | ) | | $ | 8.81 | | | $ | 4.81 | |
Cancelled or expired | | | (255 | ) | | $ | 14.53 | | | $ | 6.15 | |
| | | | | | | | | | | | |
Outstanding at end of period | | | 4,961 | | | $ | 12.21 | | | $ | 5.38 | |
| | | | | | | | | | | | |
Exercisable at end of period | | | 4,911 | | | $ | 12.30 | | | $ | 5.42 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | |
| | Year Ended December 31, 2008 | |
| | | | | Weighted Average
| | | Weighted Average
| |
| | Options | | | Exercise Price | | | Fair Value | |
|
Outstanding at beginning of period | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | |
Granted | | | 1,379 | | | $ | 14.76 | | | $ | 5.43 | |
Exercised | | | (757 | ) | | $ | 8.81 | | | $ | 4.81 | |
Cancelled or expired | | | (255 | ) | | $ | 14.53 | | | $ | 6.15 | |
| | | | | | | | | | | | |
Outstanding at end of period | | | 4,961 | | | $ | 12.21 | | | $ | 5.38 | |
| | | | | | | | | | | | |
Exercisable at end of period | | | 4,911 | | | $ | 12.30 | | | $ | 5.42 | |
| | | | | | | | | | | | |
| | Year Ended December 31, 2007 | |
| | | | | Weighted Average
| | | Weighted Average
| |
| | Options | | | Exercise Price | | | Fair Value | |
|
Outstanding at beginning of period | | | 5,829 | | | $ | 9.46 | | | $ | 4.94 | |
Granted | | | 1,195 | | | $ | 14.41 | | | $ | 5.98 | |
Exercised | | | (1,592 | ) | | $ | 8.45 | | | $ | 4.58 | |
Cancelled or expired | | | (838 | ) | | $ | 10.36 | | | $ | 5.03 | |
| | | | | | | | | | | | |
Outstanding at end of period | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | |
| | | | | | | | | | | | |
Exercisable at end of period | | | 2,615 | | | $ | 8.34 | | | $ | 4.47 | |
The following table summarizes information about the stock options outstanding at December 31, 20092010 and certain options granted in prior years that were outside the 1997 Incentive Plan (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Outstanding | |
| | Weighted Average
| | | | | | | | | Weighted Average
| | | | | | | |
| | Remaining
| | Number of
| | | | | | | Remaining
| | Number of
| | | | | |
| | Contractual Life
| | Options
| | Weighted Average
| | Weighted Average
| | | Contractual Life
| | Options
| | Weighted Average
| | Weighted Average
| |
| | (Years) | | Outstanding | | Exercise Price | | Fair Value | | | (Years) | | Outstanding | | Exercise Price | | Fair Value | |
|
Range of exercise prices: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$3.87 - $8.00 | | | 2.60 | | | | 350 | | | $ | 7.36 | | | $ | 3.98 | | | | 2.76 | | | | 134 | | | $ | 7.06 | | | $ | 3.65 | |
$8.01 - $9.37 | | | 0.99 | | | | 425 | | | $ | 8.49 | | | $ | 5.25 | | | | 1.24 | | | | 139 | | | $ | 8.38 | | | $ | 4.48 | |
$9.38 - $13.10 | | | 4.64 | | | | 708 | | | $ | 11.42 | | | $ | 5.04 | | | | 3.87 | | | | 590 | | | $ | 11.58 | | | $ | 5.26 | |
$13.11 - $15.05 | | | 7.08 | | | | 1,341 | | | $ | 14.58 | | | $ | 6.43 | | | | 6.07 | | | | 1,077 | | | $ | 14.57 | | | $ | 6.43 | |
$15.06 - $19.42 | | | 8.26 | | | | 1,071 | | | $ | 15.34 | | | $ | 5.69 | | | | 7.27 | | | | 876 | | | $ | 15.33 | | | $ | 5.68 | |
| | | | | | |
| | | | | | | 3,895 | | | $ | 12.90 | | | $ | 5.62 | | | | | | | | 2,816 | | | $ | 13.52 | | | $ | 5.72 | |
| | | | | | |
Aggregate intrinsic value (in thousands) | | | | | | $ | 637 | | | | | | | | | | | | | | | $ | 2,265 | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Exercisable | | | Options Exercisable | |
| | Number of
| | | | | | | Number of
| | | | | |
| | Options
| | Weighted Average
| | Weighted Average
| | | Options
| | Weighted Average
| | Weighted Average
| |
| | Exercisable | | Exercise Price | | Fair Value | | | Exercisable | | Exercise Price | | Fair Value | |
|
Range of exercise prices: | | | | | | | | | | | | | | | | | | | | | | | | |
$3.87 - $8.00 | | | 308 | | | $ | 7.76 | | | $ | 4.24 | | | | 108 | | | $ | 7.68 | | | $ | 4.03 | |
$8.01 - $9.37 | | | 425 | | | $ | 8.49 | | | $ | 5.25 | | | | 139 | | | $ | 8.38 | | | $ | 4.48 | |
$9.38 - $13.10 | | | 708 | | | $ | 11.42 | | | $ | 5.04 | | | | 590 | | | $ | 11.58 | | | $ | 5.26 | |
$13.11 - $15.05 | | | 1,341 | | | $ | 14.58 | | | $ | 6.43 | | | | 1,077 | | | $ | 14.57 | | | $ | 6.43 | |
$15.06 - $19.42 | | | 1,071 | | | $ | 15.34 | | | $ | 5.69 | | | | 876 | | | $ | 15.33 | | | $ | 5.68 | |
| | | | | | |
| | | 3,853 | | | $ | 12.99 | | | $ | 5.66 | | | | 2,790 | | | $ | 13.60 | | | $ | 5.76 | |
| | | | | | |
Aggregate intrinsic value (in thousands) | | $ | 453 | | | | | | | | | | | $ | 2,040 | | | | | | | | | |
We did not grant any stock options during the year ended December 31, 2010. The total fair value of stock options granted during the years ended December 31, 2009 2008 and 20072008 was less than $0.1 million, $7.5 million and $7.1$7.5 million, respectively. The total fair value of stock options vested during the year ended December 31, 20092010 was less than $0.1 million. For the years ended December 31, 2010, 2009 2008 and 2007,2008, we recognized less than $0.1 million, $15.1less than $0.1 million and $3.5$15.1 million in pre-tax expense related to stock options, respectively. We recognized tax benefits of less than $0.1 million, $5.2less than $0.1 million, and $0.7$5.2 million related to our stock options for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. Compensation expense recognized during 2008 related to stock option awards included the charge we took for the accelerated vesting, as discussed above. For unvested stock option awards outstanding as of December 31, 2009,2010, we expect to recognize less than $0.1 million of compensation expense over a weighted average remaining vesting period of approximately 2.01.5 years. The weighted average remaining contractual term for stock option awards exercisable as of December 31, 20092010 is 5.95.6 years. The intrinsic value of the options exercised for the years ended December 31, 2010, 2009 and 2008 and 2007 was $4.0 million, $1.9 million $5.8 million and $10.2$5.8 million, respectively. Cash received from the exercise of options for the year ended December 31, 20092010, was $1.3$3.6 million with recognition of associated tax benefits in the amount of $0.1$0.3 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common Stock Awards
The total fair market value of all common stock awards granted during the years ended December 31, 2010, 2009 and 2008 and 2007 was $17.9 million, $8.8 million $6.5 million and $4.7$6.5 million, respectively.
The following table summarizes information for the years ended December 31, 2010, 2009 2008 and 20072008 about the common share awards that we have issued (shares in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2010 | |
| | | | | Weighted Average
| | | | | | Weighted Average
| |
| | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
|
Shares at beginning of period | | | 3,679 | | | $ | 7.14 | | | | 1,094 | | | $ | 13.70 | |
Shares issued during period(1) | | | 1,804 | | | $ | 9.90 | | | | 153 | | | $ | 1.28 | |
Previously issued shares vesting during period | | | — | | | $ | — | | | | 968 | | | $ | 4.13 | |
Shares cancelled during period | | | (154 | ) | | $ | 5.94 | | | | — | | | $ | — | |
Shares repurchased during period | | | (302 | ) | | $ | 10.24 | | | | (302 | ) | | $ | 10.24 | |
| | | | | | | | | | | | | | | | |
Shares at end of period | | | 5,027 | | | $ | 7.98 | | | | 1,913 | | | $ | 8.41 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2009 | |
| | | | | Weighted Average
| | | | | | Weighted Average
| |
| | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
|
Shares at beginning of period | | | 1,409 | | | $ | 14.42 | | | | 748 | | | $ | 14.05 | |
Shares issued during period(1) | | | 2,667 | | | $ | 3.30 | | | | 146 | | | $ | 5.96 | |
Previously issued shares vesting during period | | | — | | | $ | — | | | | 272 | | | $ | 15.04 | |
Shares cancelled during period | | | (325 | ) | | $ | 7.24 | | | | — | | | $ | — | |
Shares repurchased during period | | | (72 | ) | | $ | 6.73 | | | | (72 | ) | | $ | 6.73 | |
| | | | | | | | | | | | | | | | |
Shares at end of period | | | 3,679 | | | $ | 7.14 | | | | 1,094 | | | $ | 13.70 | |
| | | | | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2008 | |
| | | | | Weighted Average
| | | | | | Weighted Average
| |
| | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
|
Shares at beginning of period | | | 1,078 | | | $ | 14.01 | | | | 478 | | | $ | 13.48 | |
Shares issued during period(1) | | | 428 | | | $ | 15.10 | | | | 47 | | | $ | 18.01 | |
Previously issued shares vesting during period | | | — | | | $ | — | | | | 320 | | | $ | 13.97 | |
Shares repurchased during period | | | (97 | ) | | $ | 12.86 | | | | (97 | ) | | $ | 12.86 | |
| | | | | | | | | | | | | | | | |
Shares at end of period | | | 1,409 | | | $ | 14.42 | | | | 748 | | | $ | 14.05 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2007 | |
| | | | | Weighted Average
| | | | | | Weighted Average
| |
| | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
|
Shares at beginning of period | | | 833 | | | $ | 13.69 | | | | 258 | | | $ | 12.44 | |
Shares issued during period(1) | | | 318 | | | $ | 14.87 | | | | 54 | | | $ | 17.48 | |
Previously issued shares vesting during period | | | — | | | $ | — | | | | 239 | | | $ | 13.87 | |
Shares repurchased during period | | | (73 | ) | | $ | 14.05 | | | | (73 | ) | | $ | 14.05 | |
| | | | | | | | | | | | | | | | |
Shares at end of period | | | 1,078 | | | $ | 14.01 | | | | 478 | | | $ | 13.48 | |
| | | | | | | | | | | | | | | | |
| | |
(1) | | Includes 109,410, 143,100 47,190 and 53,64847,190 shares of common stock issued to our non-employee directors vested immediately upon issuance during 2010, 2009 2008 and 2007,2008, respectively. |
For common stock grants that vest immediately upon issuance, we record expense equal to the fair market value of the shares on the date of grant. For common stock awards that do not immediately vest, we recognize compensation expense ratably over the vesting period of the grant, net of estimated and actual forfeitures. For the years ended December 31, 2010, 2009 2008 and 2007,2008, we recognized $10.6 million, $6.0 million $6.1 million and $5.6$6.1 million, respectively, of pre-tax expense from continuing operations associated with common stock
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
awards, including common stock grants to our outside directors. In connection with the expense related to common stock awards recognized during the year ended December 31, 2009,2010, we recognized tax benefits of $2.0$4.1 million. Tax benefits for the years ended December 31, 2009 and 2008 and 2007 were $1.5$2.0 million and $1.2$1.5 million, respectively. For the unvested common stock awards outstanding as of December 31, 2009,2010, we anticipate that we will recognize $6.5$11.3 million of pre-tax expense over the next 1.21.0 years.
Performance Units
During March 2010, we issued a total of 0.6 million performance units to certain of our employees and officers. Performance units provide a cash incentive award, the unit value of which is determined with reference to our common stock. The performance units are measured based on two performance periods. One half of the performance units are measured based on a performance period consisting of the first year after the grant date, and the other half are measured based on a performance period consisting of the second year after the grant date. At the end of each performance period, 100%, 50%, or 0% of an individual’s performance units for that period will vest, based on the relative placement of our total shareholder return within a peer group consisting of Key and five other companies. If we are in the top third of the peer group, 100% of the performance units will vest; if we are in the middle third, 50% will vest; and if we are in the bottom third, the performance units will expire unvested and no payment will be made. If any performance units vest for a given performance period, the award holder will be paid a cash amount equal to the vested percentage of the performance units multiplied by the closing price of our common stock on the last trading day of the performance period. We account for the performance units as a liability-type award as they are settled in cash. As of December 31, 2010, the fair value of outstanding performance units issued in March 2010 was $2.7 million, and is being accreted to compensation expense over the vesting terms of the awards. The unrecognized compensation cost related to our unvested performance units is estimated to be $1.2 million and is expected to be recognized over a weighted-average period of 1.0 years as of December 31, 2010.
Phantom Share Plan
In December 2006, we announced the implementation of a “Phantom Share Plan,” in which certain of our employees were granted “Phantom Shares.” Phantom Shares vest ratably over a four-year period and convey the right to the grantee to receive a cash payment on the anniversary date of the grant equal to the fair market value of the Phantom Shares vesting on that date. Grantees are not permitted to defer this payment to a later date. The Phantom Shares are a “liability” type award and we account for these awards at fair value. We recognize compensation expense related to the Phantom Shares based on the change in the fair value of the awards during the period and the percentage of the service requirement that has been performed, net of estimated and actual forfeitures, with an offsetting liability recorded on our consolidated balance sheets. We recognized $1.1 million and $1.9 million of pre-tax compensation expense from continuing operations, and less than $0.1 million of pre-tax benefit and approximately $3.3 million of pre-tax compensation expense associated with the Phantom Shares for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. As of December 31, 2009,2010, we recorded current and non-current liabilities of $1.5$1.1 million and $0.5,$1.1 million, respectively, which represented the aggregate fair value of the Phantom Shares on that date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We recognized income tax benefits associated with the Phantom Shares of $0.4 million, $0.7 million and less than $0.1 million in 2010, 2009 and $1.3 million in 2009, 2008, and 2007, respectively. For unvested Phantom Share awards outstanding as of December 31, 2009,2010, based on the market price of our common stock on this date, we expect to recognize approximately $0.9$0.4 million of compensation expense over a weighted average remaining vesting period of approximately 1.20.8 years. During 2009,2010, cash payments related to the Phantom Shares totaled $1.2$2.2 million.
Stock Appreciation Rights
In August 2007, we issued approximately 587,000 SARs to our executive officers. Each SAR has a ten-year term from the date of grant. The vesting of all outstanding SAR awards was accelerated during the fourth quarter of 2008. Upon the exercise of a SAR, the recipient will receive an amount equal to the difference
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
between the exercise price and the fair market value of a share of our common stock on the date of exercise, multiplied by the number of shares of common stock for which the SAR was exercised. All payments will be made in shares of our common stock. Prior to exercise, the SAR does not entitle the recipient to receive any shares of our common stock and does not provide the recipient with any voting or other stockholders’ rights. We account for these SARs as equity awards and recognize compensation expense ratably over the vesting period of the SAR based on their fair value on the date of issuance, net of estimated and actual forfeitures. We did not recognize any expense associated with these awards during 2010 and 2009. Compensation expense recognized in 2008 and 2007 in connection with the SARs was $3.1 million and $0.6 million, respectively.million. We recognized income tax benefits of $1.1 million and $0.2 million in 2008, and 2007, respectively, in connection with this expense.
Valuation Assumptions on Stock Options and Stock Appreciation Rights
The fair value of each stock option grant or SAR was estimated on the date of grant using the Black-Scholes option-pricing model, based on the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Risk-free interest rate | | | 2.21 | % | | | 2.86 | % | | | 4.41 | % | | | n/a | | | | 2.21 | % | | | 2.86 | % |
Expected life of options and SARs, years | | | 6 | | | | 6 | | | | 6 | | | | n/a | | | | 6 | | | | 6 | |
Expected volatility of our stock price | | | 53.70 | % | | | 36.86 | % | | | 39.49 | % | | | n/a | | | | 53.70 | % | | | 36.86 | % |
Expected dividends | | | none | | | | none | | | | none | | | | n/a | | | | none | | | | none | |
| |
NOTE 19.21. | TRANSACTIONS WITH RELATED PARTIES |
Employee Loans and Advances
From time to time, we have made certain retention loans and relocation loans to employees other than executive officers. The retention loans are forgiven over various time periods so long as the employee continues their employment with us. The relocation loans are repaid upon the employee selling his prior residence. As of December 31, 20092010 and 2008,2009, these loans, in the aggregate, totaled $0.2.$0.1 million and $0.2 million, respectively. Of this amount, less than $0.1 million were made to our former officers, with the remainder being made to our current employees.
Receivables from Affiliates
As discussed in “Note 2. Acquisitions”, in October 2010, we acquired certain subsidiaries, together with associated assets, owned by OFS, a privately-held oilfield services company of ArcLight Capital Partners, LLC. At the time of the acquisition, OFS conducted business with companies owned by one of the former owners and employees of an OFS subsidiary purchased by us. Subsequent to the acquisition, we continued to provide services to these companies. The prices charged for our services are at rates that are equivalent to the prices charged to our other customers in the U.S. market. As of December 31, 2010, our receivables with these related parties totaled $1.0 million and revenues from these customers since the date of acquisition through the year ended December 31, 2010 totaled $1.3 million.
Related Party Notes Payable
On October 25, 2007,Concurrently with the sale of six barge rigs and related equipment in May 2010, we entered intorepaid the remaining $6.0 million outstanding under a note payable to a related party. This was the second of two promissory notes payable with related parties in connection with an acquisition.(each, a “Related Party Note”) entered into on October 25, 2007. The first Related Party Note was an unsecured note in the amount of $12.5 million, whichand was due and paid in a lump-sum, together with accrued interest,repaid on October 25, 2009. The second Related Party Note was an unsecured note in the amount of $10.0 million isand was payable in annual installments of $2.0 million, plus accrued interest, on each anniversary date of its issue through October 2012. Each of the notes bore or bears interest at the Federal Funds Rate, adjustedmillion.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
annually on the anniversary date of the note. As of December 31, 2009, the interest rate on the second note was 0.11%. Interest expense for the years ended December 31, 2009, 2008 and 2007 was $0.2 million, $1.2 million and $0.2 million respectively, on the two notes in aggregate.
The Federal Funds rate does not represent a rate that would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions and is not equal to our incremental borrowing rate. We recorded the promissory notes at fair value which resulted in a discount being recorded. The discount will be recognized as interest expense over the life of the promissory notes using the effective interest method.
Transactions with Employees
In connection with an acquisition in 2008, the former owner of the acquiree became an employee of Key. At the time of the acquisition, the employee owned, and continues to own, an exploration and production company. Subsequent to the acquisition, we continued to provide services to this company. The prices charged for these services are at rates that are an average of the prices charged to our other customers in the California market. As of December 31, 2009,2010, our receivables with this company totaled $0.1$0.2 million, and for the year ended December 31, 2009,2010, revenues from this company totaled $3.4$4.3 million.
Board of Director Relationship with CustomerRelationships
One memberof the members of our boardBoard of directorsDirectors is the Senior Vice President, General Counsel and Chief Administrative Officer of Anadarko Petroleum Corporation (“Anadarko”), which is one of our customers. Sales to Anadarko comprisedwere approximately 4% of our total revenues for the year ended December 31, 2010, and less than 2% of our total revenues for the years ended December 31, 2009 2008 and 2007.2008. Our sales to Anadarko were less than 1% of Anadarko’s revenues for 2010, 2009 2008 and 2007.2008. Receivables outstanding from Anadarko were approximately 2% and 1% of our total accounts receivable as of December 31, 2010 and 2009, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.
Concurrent with our acquisition of OFS in October 2010, we created a new class III directorship on our Board with a term ending at the 2012 annual stockholder meeting. This vacancy was filled with by a nominee designated by OFS pursuant to the terms of the purchase and sale agreement.
| |
NOTE 20.22. | SUPPLEMENTAL CASH FLOW INFORMATION |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Noncash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Property and equipment acquired under captial lease obligations | | $ | 938 | | | $ | 7,654 | | | $ | 12,003 | | |
Property and equipment acquired under capital | | | $ | — | | | $ | 938 | | | $ | 7,654 | |
lease obligations | | | | | | | | | | | | | |
Common stock issued in acquisition | | | | 153,963 | | | | — | | | | — | |
Asset retirement obligations | | | 517 | | | | 397 | | | | 12 | | | | 1,023 | | | | 517 | | | | 397 | |
Unrealized loss on short-term investments | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | (8 | ) |
Accrued repurchases of common stock | | | — | | | | — | | | | 2,949 | | |
Debt assumed and issued in acquisitions | | | — | | | | — | | | | 40,149 | | |
Software acquired under financing arrangement | | | — | | | | 3,985 | | | | — | | | | — | | | | — | | | | 3,985 | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 42,575 | | | $ | 45,313 | | | $ | 38,457 | | | $ | 41,763 | | | $ | 42,575 | | | $ | 45,313 | |
Cash paid for taxes | | $ | 12,872 | | | $ | 43,494 | | | $ | 96,327 | | | $ | 4,610 | | | $ | 12,872 | | | $ | 43,494 | |
Tax refunds | | $ | 9,135 | | | $ | 3,701 | | | $ | 429 | | | $ | 56,154 | | | $ | 9,135 | | | $ | 3,701 | |
Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, and commitment and agency fees paid, and cash paid to settle the interest rate swaps associated with the termination of our prior credit facility in 2007.
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paid.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 21.23. | SEGMENT INFORMATION |
We revised our reportableAs of December 31, 2010, we operate in two business segments, effective in the first quarter of 2009. The new operating segments are Well Servicing and Production Services. Financial results for the years ended December 31, 2008 and 2007 have been restated to reflect the change in operating segments. We revised our segments to align with changes in management’s resource allocation and performance assessment in making decisions regarding our operations. Our rig services and fluid management services operations are aggregated within our Well Servicing segment. Our pressure pumping services, coiled tubing services, fishing and rental services and wireline services operations, as well as our technology development group in Canada, are now aggregated within our Production Services segment. These changes reflect our current operating focus. The accounting policies for our segments are the same as those described in“Note 1. Organization and Summary of Significant Accounting PoliciesPolicies.”.” All inter-segment sales pricing is based on current market conditions. As mentioned in“Note 3. Discontinued Operations,”on October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI, which significantly
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reduced our involvement in these lines of business. We are revising our reportable segments in the first quarter of 2011 to realign our current business and management structure. The following is a description of the segments:our segments as of December 31, 2010:
Well Servicing Segment
RigRig-Based Services
These services include the maintenance, of existing wells, workover and recompletion of existing wells, completion of newly drilled wells, drilling of horizontal wells, recompletion of existing wells (re-entering a well to complete the well in a new geologic zone or formation) and 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 well servicing rigs that are capable of providing conventional and horizontal drilling services.
WorkoverMaintenance services provided by our rigs include routine mechanical repairs to the pumps, tubing and other equipment in a well, removing debris and formation material from the wellbore, and pulling rods and other downhole equipment out of the wellbore to identify and resolve a production problem.
The workover services that we provide are performeddesigned to enhance the production of existing wells. Suchwells, and generally are more complex and time consuming than normal maintenance services. Workover services can include extensions of existing wells to drain new formations either by deepening or extending well bores tointo new zones orformations by drilling horizontal or lateral well bores, to improve reservoir drainage. In less extensive workovers, our rigs are used to sealsealing off depleted production zones in existing well bores or to access aand accessing previously bypassed productive zone.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.
Our completion and recompletion services prepare a newly drilled oil or natural gas well for production. We typically provide a well service rig and may also provide other equipment such as a workover package to assist in the completion process.
Fluid Management Services
These services include fluid management logistics, including oilfield transportation and produced-water disposal services. Our oilfield transportation and produced-water disposalThese services include vacuum truck services, fluid transportation services and disposal services for operators whose oil or natural gas wells produce saltwater andor other non-hydrocarbon fluids. In addition, we are a supplier of frac tanks which are used for temporary storage of fluids in conjunctionassociated with the fluid hauling operations. Our fluid management services will collect, transport and dispose of the saltwater. These fluids are removed from the well site and transported for disposal in a SWD well.
Production Services Segment
Pressure PumpingHistorically, our Production Services
These segment included pressure pumping services include well stimulation(fracturing, nitrogen, acidizing, and cementing), wireline services (perforating, completion logging, production logging and casing integrity services), coiled tubing services and fishing and rental services. On October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI, which significantly reduced our involvement in these lines of business in the United States. As discussed in “Note 3. Discontinued Operations,” for the financial statements presented in this report, we show the results of operations for our pressure pumping and wireline business as discontinued operations for all periods presented. As of December 31, 2010, our Production Services segment primarily consists of our coiled tubing and fishing and rental services. Our Production Services segment also includes some specialty pumping services, nitrogen services, and cementing services to oil and natural gas producers. Well stimulation services include fracturing, nitrogen, acidizing, cementing and coiled tubing services. These services (which may be completion or workover services) are provided to oil and natural gas producers and are used to enhance the production of oil and natural gas wells from formations which exhibit restricted flow of oil and natural gas. In the fracturing process, we typically pump fluid and sized sand, or proppants, into a well at high pressure in order to fracture the formation and thereby increase the flow of oil and natural gas. With our cementing services, we pump cement into a well between the casing and the well bore.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Coiled Tubing Services
Coiled tubing services involve the use of a continuous metal pipe spooled on a large reel for oil and natural gas well applications, such as wellbore clean-outs, nitrogen jet lifts, and through-tubing fishing and formation stimulations utilizing acid, chemical treatments and fracturing. Coiled tubing is also used for a number of horizontal well applications such as milling temporary plugs between frac stages.
Fishing and Rental Services
These services include the recovery of lost or stuck equipment in the well bore utilizing a “fishing tool.” We offer a full line of services and rental equipment designed for use both onshore and offshore for 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, production tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-controlledpressure-control equipment, power swivels and foam air units.
Wireline Services
These services include perforating, completion logging, production logging and casing integrity services. After the well bore is cased and cemented, we can provide a number of services. Perforating creates the flow path between the reservoir and the well bore. Production logging can be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This service helps the operator analyze and monitor well performance and determine when a well may need a workover or further stimulation.
Advanced Measurements, Inc. (“AMI”)
Also included in our Production Services segment is AMI, our technology development company based in Canada. AMI is focused on oilfield service equipment controls, data acquisition and digital information flow.
Functional Support
We have aggregated all of our operating segments that do not meet the aggregation criteria to form a “Functional Support” segment. These services include expenses associated with managing all of our reportable operating segments. Functional Support assets consist primarily of cash and cash equivalents, accounts and notes receivable and investments in subsidiaries, our equity-method investment in IROC and deferred income tax assets.
The following present our segment information as of and for the years ended December 31, 2010, 2009 2008 and 20072008 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Well
| | Production
| | Functional
| | | | | | | Well
| | Production
| | Functional
| | | | | |
| | Servicing | | Services | | Support | | Eliminations | | Total | | | Servicing | | Services | | Support | | Eliminations | | Total | |
|
As of and for the year ended December 31, 2009: | | | | | | | | | | | | | | | | | | | | | |
As of and for the year ended December 31, 2010: | | | | | | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 859,747 | | | $ | 218,918 | | | $ | — | | | $ | — | | | $ | 1,078,665 | | | $ | 980,271 | | | $ | 173,413 | | | $ | — | | | $ | — | | | $ | 1,153,684 | |
Intersegment revenue | | | 10 | | | | 5,662 | | | | — | | | | (5,672 | ) | | | — | | | | 251 | | | | 9,434 | | | | — | | | | (9,685 | ) | | | — | |
Depreciation and amortization | | | | 102,044 | | | | 24,114 | | | | 10,889 | | | | — | | | | 137,047 | |
Operating expenses | | | 781,504 | | | | 240,625 | | | | 105,586 | | | | — | | | | 1,127,715 | | | | 801,238 | | | | 117,210 | | | | 114,835 | | | | — | | | | 1,033,283 | |
Asset retirements and impairments | | | 65,869 | | | | 93,933 | | | | — | | | | — | | | | 159,802 | | |
Operating income (loss) | | | 12,374 | | | | (115,640 | ) | | | (105,586 | ) | | | — | | | | (208,852 | ) | | | 76,989 | | | | 32,089 | | | | (125,724 | ) | | | — | | | | (16,646 | ) |
Interest expense | | | (2,007 | ) | | | (727 | ) | | | 41,803 | | | | — | | | | 39,069 | | |
Income (loss) before income taxes | | | 14,414 | | | | (114,150 | ) | | | (148,065 | ) | | | — | | | | (247,801 | ) | |
Interest expense, net of amounts capitalized | | | | (948 | ) | | | (190 | ) | | | 43,097 | | | | — | | | | 41,959 | |
Income (loss) from continuing operations before tax | | | | 76,756 | | | | 34,538 | | | | (167,202 | ) | | | — | | | | (55,908 | ) |
| | | | | | | | | | | | | | | | | | | | — | |
Total assets | | | 1,133,068 | | | | 251,580 | | | | 643,854 | | | | (364,092 | ) | | | 1,664,410 | | | | 1,425,710 | | | | 369,639 | | | | 479,913 | | | | (382,326 | ) | | | 1,892,936 | |
Capital expenditures, excluding acquisitions | | | 75,242 | | | | 39,305 | | | | 13,875 | | | | — | | | | 128,422 | | | | 109,301 | | | | 37,058 | | | | 33,951 | | | | — | | | | 180,310 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Well
| | Production
| | Functional
| | | | | | | Well
| | Production
| | Functional
| | | | | |
| | Servicing | | Services | | Support | | Eliminations | | Total | | | Servicing | | Services | | Support | | Eliminations | | Total | |
|
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | |
As of and for the year ended December 31, 2009: | | | | | | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,470,332 | | | $ | 501,756 | | | $ | — | | | $ | — | | | $ | 1,972,088 | | | $ | 859,747 | | | $ | 95,952 | | | $ | — | | | $ | — | | | $ | 955,699 | |
Intersegment revenue | | | 93 | | | | 5,281 | | | | — | | | | (5,374 | ) | | | — | | | | 10 | | | | 5,411 | | | | — | | | | (5,421 | ) | | | — | |
Depreciation and amortization | | | | 114,178 | | | | 27,163 | | | | 7,892 | | | | — | | | | 149,233 | |
Operating expenses | | | 1,114,432 | | | | 407,560 | | | | 156,816 | | | | — | | | | 1,678,808 | | | | 667,326 | | | | 83,062 | | | | 97,694 | | | | — | | | | 848,082 | |
Asset retirements and impairments | | | — | | | | 69,752 | | | | 5,385 | | | | — | | | | 75,137 | | | | 65,869 | | | | 31,166 | | | | — | | | | — | | | | 97,035 | |
Operating income (loss) | | | 355,900 | | | | 24,444 | | | | (162,201 | ) | | | — | | | | 218,143 | | | | 12,374 | | | | (45,439 | ) | | | (105,586 | ) | | | — | | | | (138,651 | ) |
Interest expense | | | (2,310 | ) | | | (1,828 | ) | | | 45,385 | | | | — | | | | 41,247 | | |
Income (loss) before income taxes | | | 354,928 | | | | 27,804 | | | | (208,676 | ) | | | — | | | | 174,056 | | |
Interest expense, net of amounts capitalized | | | | (2,007 | ) | | | (391 | ) | | | 41,803 | | | | — | | | | 39,405 | |
Income (loss) from continuing operations before tax | | | | 14,414 | | | | (43,571 | ) | | | (148,065 | ) | | | — | | | | (177,222 | ) |
Total assets | | | 1,386,753 | | | | 429,131 | | | | 587,696 | | | | (386,657 | ) | | | 2,016,923 | | | | 1,133,068 | | | | 251,580 | | | | 643,854 | | | | (364,092 | ) | | | 1,664,410 | |
Capital expenditures, excluding acquisitions | | | 145,494 | | | | 65,312 | | | | 8,188 | | | | — | | | | 218,994 | | | | 75,242 | | | | 39,305 | | | | 13,875 | | | | — | | | | 128,422 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Well
| | Production
| | Functional
| | | | | | | Well
| | Production
| | Functional
| | | | | |
| | Servicing | | Services | | Support | | Eliminations | | Total | | | Servicing | | Services | | Support | | Eliminations | | Total | |
|
As of and for the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | |
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,240,126 | | | $ | 421,886 | | | $ | — | | | $ | — | | | $ | 1,662,012 | | | $ | 1,470,332 | | | $ | 154,114 | | | $ | — | | | $ | — | | | $ | 1,624,446 | |
Intersegment revenue | | | — | | | | — | | | | — | | | | — | | | | — | | | | 93 | | | | 5,177 | | | | — | | | | (5,270 | ) | | | — | |
Depreciation and amortization | | | | 120,169 | | | | 17,718 | | | | 11,720 | | | | — | | | | 149,607 | |
Operating expenses | | | 879,270 | | | | 315,919 | | | | 150,444 | | | | — | | | | 1,345,633 | | | | 994,263 | | | | 112,836 | | | | 145,096 | | | | — | | | | 1,252,195 | |
Asset retirements and impairments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 20,716 | | | | 5,385 | | | | — | | | | 26,101 | |
Operating income (loss) | | | 360,856 | | | | 105,967 | | | | (150,444 | ) | | | — | | | | 316,379 | | | | 355,900 | | | | 2,844 | | | | (162,201 | ) | | | — | | | | 196,543 | |
Interest expense | | | (1,205 | ) | | | (1,047 | ) | | | 38,459 | | | | — | | | | 36,207 | | |
Income (loss) before income taxes | | | 358,549 | | | | 108,129 | | | | (190,738 | ) | | | — | | | | 275,940 | | |
Interest expense, net of amounts capitalized | | | | (2,310 | ) | | | (453 | ) | | | 45,385 | | | | — | | | | 42,622 | |
Income (loss) from continuing operations before tax | | | | 354,928 | | | | 5,117 | | | | (208,676 | ) | | | — | | | | 151,369 | |
Total assets | | | 1,300,516 | | | | 373,380 | | | | 390,662 | | | | (205,481 | ) | | | 1,859,077 | | | | 1,386,753 | | | | 429,131 | | | | 587,696 | | | | (386,657 | ) | | | 2,016,923 | |
Capital expenditures, excluding acquisitions | | | 126,394 | | | | 79,854 | | | | 6,312 | | | | — | | | | 212,560 | | | | 145,494 | | | | 65,312 | | | | 8,188 | | | | — | | | | 218,994 | |
The following table presents selected financial information related to our operations by geography (in thousands of U.S. Dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Argentina | | Mexico | | Canada | | Russia | | Eliminations | | Total | | | U.S. | | International | | Eliminations | | Total | |
|
As of and for the year ended December 31, 2010: | | | | | | | | | | | | | | | | | |
Revenue from external customers | | | $ | 961,244 | | | $ | 192,440 | | | $ | — | | | $ | 1,153,684 | |
Long-lived assets | | | | 1,359,993 | | | | 171,957 | | | | (53,034 | ) | | | 1,478,916 | |
As of and for the year ended December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 881,329 | | | $ | 68,625 | | | $ | 118,650 | | | $ | 873 | | | $ | 9,188 | | | $ | — | | | $ | 1,078,665 | | | $ | 758,363 | | | $ | 197,336 | | | $ | — | | | $ | 955,699 | |
Long-lived assets | | | 1,263,376 | | | | 18,671 | | | | 64,162 | | | | 8,182 | | | | 54,956 | | | | (129,069 | ) | | | 1,280,278 | | | | 1,263,376 | | | | 145,971 | | | | (129,069 | ) | | | 1,280,278 | |
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 1,800,199 | | | $ | 118,841 | | | $ | 47,200 | | | $ | 5,848 | | | $ | — | | | $ | — | | | $ | 1,972,088 | | | $ | 1,452,557 | | | $ | 171,889 | | | $ | — | | | $ | 1,624,446 | |
Long-lived assets | | | 1,434,578 | | | | 25,419 | | | | 45,547 | | | | 7,482 | | | | — | | | | (55,225 | ) | | | 1,457,801 | | | | 1,434,578 | | | | 78,448 | | | | (55,225 | ) | | | 1,457,801 | |
As of and for the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 1,556,108 | | | $ | 93,925 | | | $ | 9,041 | | | $ | 2,938 | | | $ | — | | | $ | — | | | $ | 1,662,012 | | |
Long-lived assets | | | 1,368,735 | | | | 29,762 | | | | 11,089 | | | | 10,782 | | | | — | | | | (49,156 | ) | | | 1,371,212 | | |
109106
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 22.24. | UNAUDITED QUARTERLY RESULTS OF OPERATIONS |
Set forth below is unaudited summarized quarterly information for the two most recent years covered by these consolidated financial statements (in thousands, except for per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
|
Year Ended December 31, 2009: | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2010: | | | | | | | | | | | | | | | | | |
Revenues | | $ | 331,989 | | | $ | 241,458 | | | $ | 237,671 | | | | 267,547 | | | $ | 251,959 | | | $ | 267,785 | | | $ | 283,739 | | | $ | 350,201 | |
Direct operating expenses | | | 227,227 | | | | 173,853 | | | | 179,901 | | | | 198,476 | | | | 189,202 | | | | 196,171 | | | | 198,158 | | | | 251,481 | |
Asset retirements and impairments | | | — | | | | — | | | | 159,802 | | | | — | | |
Income (loss) before income taxes | | | 1,129 | | | | (29,131 | ) | | | (198,206 | ) | | | (21,593 | ) | |
Net income (loss) | | | 904 | | | | (18,473 | ) | | | (125,017 | ) | | | (14,090 | ) | |
Income (loss) attributable to common stockholders | | | 904 | | | | (18,473 | ) | | | (124,942 | ) | | | (13,610 | ) | |
(Loss) income from continuing operations | | | | (10,902 | ) | | | (11,038 | ) | | | (2,280 | ) | | | (11,176 | ) |
Net (loss) income | | | | (9,007 | ) | | | (2,856 | ) | | | 6,003 | | | | 76,209 | |
(Loss) income attributable to Key | | | | (7,580 | ) | | | (2,236 | ) | | | 6,772 | | | | 76,539 | |
Earnings per share(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.01 | | | $ | (0.15 | ) | | $ | (1.03 | ) | | $ | (0.11 | ) | | $ | (0.06 | ) | | $ | (0.02 | ) | | $ | 0.05 | | | $ | 0.54 | |
Diluted | | $ | 0.01 | | | $ | (0.15 | ) | | $ | (1.03 | ) | | $ | (0.11 | ) | | $ | (0.06 | ) | | $ | (0.02 | ) | | $ | 0.05 | | | $ | 0.54 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
|
Year Ended December 31, 2008: | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2009: | | | | | | | | | | | | | | | | | |
Revenues | | $ | 456,399 | | | $ | 502,003 | | | $ | 535,620 | | | $ | 478,066 | | | $ | 283,649 | | | $ | 219,061 | | | $ | 215,349 | | | $ | 237,640 | |
Direct operating expenses | | | 281,641 | | | | 322,488 | | | | 342,195 | | | | 304,003 | | | | 185,529 | | | | 155,118 | | | | 156,444 | | | | 178,851 | |
Asset retirements and impairments | | | — | | | | — | | | | — | | | | 75,137 | | | | — | | | | — | | | | 97,035 | | | | — | |
Income (loss) before income taxes | | | 56,907 | | | | 71,247 | | | | 77,541 | | | | (31,639 | ) | |
Income (loss) from continuing operations | | | | 2,213 | | | | (16,024 | ) | | | (79,080 | ) | | | (18,357 | ) |
Net income (loss) | | | 34,450 | | | | 43,801 | | | | 48,462 | | | | (42,900 | ) | | | 904 | | | | (18,473 | ) | | | (125,017 | ) | | | (14,090 | ) |
Income (loss) attributable to common stockholders | | | 34,484 | | | | 44,012 | | | | 48,462 | | | | (42,900 | ) | |
Income (loss) attributable to Key | | | | 904 | | | | (18,473 | ) | | | (124,942 | ) | | | (13,610 | ) |
Earnings per share(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.39 | | | $ | (0.35 | ) | | $ | 0.01 | | | $ | (0.15 | ) | | $ | (1.03 | ) | | $ | (0.11 | ) |
Diluted | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.39 | | | $ | (0.35 | ) | | $ | 0.01 | | | $ | (0.15 | ) | | $ | (1.03 | ) | | $ | (0.11 | ) |
| | |
(1) | | Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual earnings per common share. |
110107
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 23.25. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
Our Senior Notes are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly-owned. The guarantees were joint and several, full, complete and unconditional. There were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information.
CONDENSED CONSOLIDATING BALANCE SHEETS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2009 | | | December 31, 2010 | |
| | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (In thousands) | | | (In thousands) | |
|
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | $ | 72,021 | | | $ | 189,935 | | | $ | 122,018 | | | $ | 158 | | | $ | 384,132 | | | $ | 20,287 | | | $ | 287,244 | | | $ | 106,489 | | | $ | — | | | $ | 414,020 | |
Property and equipment, net | | | — | | | | 822,882 | | | | 41,726 | | | | — | | | | 864,608 | | | | — | | | | 861,041 | | | | 75,703 | | | | — | | | | 936,744 | |
Goodwill | | | — | | | | 316,513 | | | | 29,589 | | | | — | | | | 346,102 | | | | — | | | | 418,047 | | | | 29,562 | | | | — | | | | 447,609 | |
Deferred financing costs, net | | | 10,421 | | | | — | | | | 537 | | | | — | | | | 10,958 | | | | 7,806 | | | | — | | | | — | | | | — | | | | 7,806 | |
Intercompany notes, accounts receivable and investment in subsidiaries | | | 1,782,002 | | | | 577,546 | | | | 7,462 | | | | (2,367,010 | ) | | | — | | |
Intercompany notes and accounts receivable and investment in subsidiaries | | | | 2,110,185 | | | | 757,657 | | | | (6,226 | ) | | | (2,861,616 | ) | | | — | |
Other assets | | | 4,033 | | | | 40,198 | | | | 14,379 | | | | — | | | | 58,610 | | | | 5,234 | | | | 56,954 | | | | 24,569 | | | | — | | | | 86,757 | |
| | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,868,477 | | | $ | 1,947,074 | | | $ | 215,711 | | | $ | (2,366,852 | ) | | $ | 1,664,410 | | | $ | 2,143,512 | | | $ | 2,380,943 | | | $ | 230,097 | | | $ | (2,861,616 | ) | | $ | 1,892,936 | |
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities and equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | $ | 6,468 | | | $ | 145,040 | | | $ | 38,261 | | | $ | — | | | $ | 189,769 | | | | 77,144 | | | | 142,962 | | | | 61,529 | | | | — | | | | 281,635 | |
Long-term debt and capital leases, less current portion | | | 512,812 | | | | 11,105 | | | | 32 | | | | — | | | | 523,949 | | | | 425,000 | | | | 2,116 | | | | 5 | | | | — | | | | 427,121 | |
Intercompany notes and accounts payable | | | 451,361 | | | | 1,487,950 | | | | 87,568 | | | | (2,026,879 | ) | | | — | | | | 587,801 | | | | 1,738,214 | | | | 120,410 | | | | (2,446,425 | ) | | | — | |
Deferred tax liabilities | | | 151,624 | | | | — | | | | (4,644 | ) | | | — | | | | 146,980 | | | | 70,511 | | | | 73,790 | | | | 8 | | | | — | | | | 144,309 | |
Other long-term liabilities | | | 3,072 | | | | 57,500 | | | | — | | | | — | | | | 60,572 | | | | 1,253 | | | | 56,815 | | | | — | | | | — | | | | 58,068 | |
Equity | | | 743,140 | | | | 245,479 | | | | 94,494 | | | | (339,973 | ) | | | 743,140 | | | | 981,803 | | | | 367,046 | | | | 48,145 | | | | (415,191 | ) | | | 981,803 | |
| | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | $ | 1,868,477 | | | $ | 1,947,074 | | | $ | 215,711 | | | $ | (2,366,852 | ) | | $ | 1,664,410 | | | $ | 2,143,512 | | | $ | 2,380,943 | | | $ | 230,097 | | | $ | (2,861,616 | ) | | $ | 1,892,936 | |
| | | | | | | | | | | | | | | | | | | | | | |
111108
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2008 | | | December 31, 2009 | |
| | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (In thousands) | | | (In thousands) | |
|
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | $ | 29,673 | | | $ | 440,758 | | | $ | 88,534 | | | $ | 157 | | | $ | 559,122 | | | $ | 72,021 | | | $ | 189,935 | | | $ | 122,018 | | | $ | 158 | | | $ | 384,132 | |
Property and equipment, net | | | — | | | | 1,025,007 | | | | 26,676 | | | | — | | | | 1,051,683 | | | | — | | | | 752,543 | | | | 41,726 | | | | — | | | | 794,269 | |
Goodwill | | | — | | | | 316,669 | | | | 4,323 | | | | — | | | | 320,992 | | | | — | | | | 316,513 | | | | 29,589 | | | | — | | | | 346,102 | |
Deferred financing costs, net | | | 10,489 | | | | — | | | | — | | | | — | | | | 10,489 | | | | 10,421 | | | | — | | | | 537 | | | | — | | | | 10,958 | |
Intercompany notes, accounts receivable and investment in subsidiaries | | | 1,917,522 | | | | 419,554 | | | | 1,775 | | | | (2,338,851 | ) | | | — | | | | 1,782,002 | | | | 577,546 | | | | 7,462 | | | | (2,367,010 | ) | | | — | |
Other assets | | | 22,597 | | | | 48,237 | | | | 3,803 | | | | — | | | | 74,637 | | | | 4,033 | | | | 40,198 | | | | 14,379 | | | | — | | | | 58,610 | |
Noncurrent assets held for sale | | | | — | | | | 70,339 | | | | — | | | | — | | | | 70,339 | |
| | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,980,281 | | | $ | 2,250,225 | | | $ | 125,111 | | | $ | (2,338,694 | ) | | $ | 2,016,923 | | | $ | 1,868,477 | | | $ | 1,947,074 | | | $ | 215,711 | | | $ | (2,366,852 | ) | | $ | 1,664,410 | |
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities and equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | $ | 13,792 | | | $ | 231,528 | | | $ | 28,054 | | | $ | (1 | ) | | $ | 273,373 | | | $ | 6,468 | | | $ | 145,040 | | | $ | 38,261 | | | $ | — | | | $ | 189,769 | |
Long-term debt and capital leases, less current portion | | | 612,813 | | | | 20,729 | | | | 49 | | | | — | | | | 633,591 | | | | 512,812 | | | | 11,105 | | | | 32 | | | | — | | | | 523,949 | |
Intercompany notes and accounts payable | | | 305,348 | | | | 1,624,932 | | | | 69,204 | | | | (1,999,484 | ) | | | — | | | | 451,361 | | | | 1,487,950 | | | | 87,568 | | | | (2,026,879 | ) | | | — | |
Deferred tax liabilities | | | 187,596 | | | | — | | | | 985 | | | | — | | | | 188,581 | | | | 151,624 | | | | — | | | | (4,644 | ) | | | — | | | | 146,980 | |
Other long-term liabilities | | | — | | | | 60,386 | | | | 260 | | | | — | | | | 60,646 | | | | 3,072 | | | | 57,500 | | | | — | | | | — | | | | 60,572 | |
Stockholders’ equity | | | 860,732 | | | | 312,650 | | | | 26,559 | | | | (339,209 | ) | | | 860,732 | | |
Equity | | | | 743,140 | | | | 245,479 | | | | 94,494 | | | | (339,973 | ) | | | 743,140 | |
| | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,980,281 | | | $ | 2,250,225 | | | $ | 125,111 | | | $ | (2,338,694 | ) | | $ | 2,016,923 | | |
TOTAL LIABILITIES AND EQUITY | | | $ | 1,868,477 | | | $ | 1,947,074 | | | $ | 215,711 | | | $ | (2,366,852 | ) | | $ | 1,664,410 | |
| | | | | | | | | | | | | | | | | | | | | | |
112109
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2009 | | | | | | | | | | | | | | | | | | | | | |
| | | | Guarantor
| | Non-Guarantor
| | | | | | | Year Ended December 31, 2010 | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | | | Guarantor
| | Non-Guarantor
| | | | | |
| | (In thousands) | | | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
|
Revenues | | $ | — | | | $ | 928,639 | | | $ | 201,507 | | | $ | (51,481 | ) | | $ | 1,078,665 | | | $ | — | | | $ | 1,009,261 | | | $ | 198,005 | | | $ | (53,582 | ) | | $ | 1,153,684 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct operating expenses | | | — | | | | 653,112 | | | | 164,243 | | | | (37,898 | ) | | | 779,457 | | |
Direct operating expense | | | | — | | | | 664,387 | | | | 212,195 | | | | (41,570 | ) | | | 835,012 | |
Depreciation and amortization expense | | | — | | | | 162,415 | | | | 7,147 | | | | — | | | | 169,562 | | | | — | | | | 127,550 | | | | 9,497 | | | | — | | | | 137,047 | |
General and administrative expenses | | | (452 | ) | | | 160,426 | | | | 18,693 | | | | 29 | | | | 178,696 | | |
Asset retirements and impairments | | | — | | | | 159,535 | | | | 267 | | | | — | | | | 159,802 | | |
General and administrative expense | | | | 3,618 | | | | 173,274 | | | | 25,517 | | | | (4,138 | ) | | | 198,271 | |
Interest expense, net of amounts capitalized | | | 42,671 | | | | (3,756 | ) | | | 154 | | | | — | | | | 39,069 | | | | 44,707 | | | | (3,390 | ) | | | 642 | | | | — | | | | 41,959 | |
Other, net | | | 1,237 | | | | (698 | ) | | | 10,412 | | | | (11,071 | ) | | | (120 | ) | | | (1,243 | ) | | | (1,404 | ) | | | 9,161 | | | | (9,211 | ) | | | (2,697 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 43,456 | | | | 1,131,034 | | | | 200,916 | | | | (48,940 | ) | | | 1,326,466 | | | | 47,082 | | | | 960,417 | | | | 257,012 | | | | (54,919 | ) | | | 1,209,592 | |
| | | | | | | | | | | | |
(Loss) income before income taxes and noncontrolling interest | | | (43,456 | ) | | | (202,395 | ) | | | 591 | | | | (2,541 | ) | | | (247,801 | ) | |
(Loss) income from continuing operations before taxes | | | | (47,082 | ) | | | 48,844 | | | | (59,007 | ) | | | 1,337 | | | | (55,908 | ) |
Income tax benefit | | | 90,694 | | | | — | | | | 431 | | | | — | | | | 91,125 | | | | 8,175 | | | | — | | | | 12,337 | | | | — | | | | 20,512 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | 47,238 | | | | (202,395 | ) | | | 1,022 | | | | (2,541 | ) | | | (156,676 | ) | |
(Loss) income from continuing operations | | | | (38,907 | ) | | | 48,844 | | | | (46,670 | ) | | | 1,337 | | | | (35,396 | ) |
Discontinued operations | | | | — | | | | 105,745 | | | | — | | | | — | | | | 105,745 | |
| | | | | | | | | | | | | | | | | | | | | | |
Noncontrolling interest | | | — | | | | — | | | | (555 | ) | | | — | | | | (555 | ) | |
Net (loss) income | | | | (38,907 | ) | | | 154,589 | | | | (46,670 | ) | | | 1,337 | | | | 70,349 | |
Loss attributable to noncontrolling interest | | | | — | | | | — | | | | (3,146 | ) | | | — | | | | (3,146 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) attributable to common stockholders | | $ | 47,238 | | | $ | (202,395 | ) | | $ | 1,577 | | | $ | (2,541 | ) | | $ | (156,121 | ) | |
(LOSS) INCOME ATTRIBUTABLE TO KEY | | | $ | (38,907 | ) | | $ | 154,589 | | | $ | (43,524 | ) | | $ | 1,337 | | | $ | 73,495 | |
| | | | | | | | | | | | | | | | | | | | | | |
113110
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2008 | | | | | | | | | | | | | | | | | | | | | |
| | | | Guarantor
| | Non-Guarantor
| | | | | | | Year Ended December 31, 2009 | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | | | Guarantor
| | Non-Guarantor
| | | | | |
| | (In thousands) | | | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
|
Revenues | | $ | — | | | $ | 1,818,736 | | | $ | 175,845 | | | $ | (22,493 | ) | | $ | 1,972,088 | | | $ | — | | | $ | 805,673 | | | $ | 201,507 | | | $ | (51,481 | ) | | $ | 955,699 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct operating expenses | | | — | | | | 1,139,006 | | | | 127,374 | | | | (16,053 | ) | | | 1,250,327 | | |
Direct operating expense | | | | — | | | | 549,597 | | | | 164,243 | | | | (37,898 | ) | | | 675,942 | |
Depreciation and amortization expense | | | — | | | | 163,257 | | | | 7,517 | | | | — | | | | 170,774 | | | | — | | | | 142,086 | | | | 7,147 | | | | — | | | | 149,233 | |
General and administrative expenses | | | 1,616 | | | | 237,635 | | | | 19,251 | | | | (795 | ) | | | 257,707 | | |
General and administrative expense | | | | (452 | ) | | | 153,870 | | | | 18,693 | | | | 29 | | | | 172,140 | |
Asset retirements and impairments | | | — | | | | 75,137 | | | | — | | | | — | | | | 75,137 | | | | — | | | | 96,768 | | | | 267 | | | | — | | | | 97,035 | |
Interest expense, net of amounts capitalized | | | 44,842 | | | | (4,320 | ) | | | 477 | | | | 248 | | | | 41,247 | | | | 42,671 | | | | (3,420 | ) | | | 154 | | | | — | | | | 39,405 | |
Other, net | | | 5,219 | | | | (7,073 | ) | | | 9,143 | | | | (4,449 | ) | | | 2,840 | | | | 1,237 | | | | (1,412 | ) | | | 10,412 | | | | (11,071 | ) | | | (834 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 51,677 | | | | 1,603,642 | | | | 163,762 | | | | (21,049 | ) | | | 1,798,032 | | | | 43,456 | | | | 937,489 | | | | 200,916 | | | | (48,940 | ) | | | 1,132,921 | |
(Loss) income from continuing operations before taxes | | | | (43,456 | ) | | | (131,816 | ) | | | 591 | | | | (2,541 | ) | | | (177,222 | ) |
Income tax benefit (expense) | | | | 90,694 | | | | (25,151 | ) | | | 431 | | | | — | | | | 65,974 | |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before income taxes and noncontrolling interest | | | (51,677 | ) | | | 215,094 | | | | 12,083 | | | | (1,444 | ) | | | 174,056 | | |
Income tax expense | | | (81,233 | ) | | | (4,320 | ) | | | (4,690 | ) | | | — | | | | (90,243 | ) | |
Income (loss) from continuing operations | | | | 47,238 | | | | (156,967 | ) | | | 1,022 | | | | (2,541 | ) | | | (111,248 | ) |
Discontinued operations | | | | — | | | | (45,428 | ) | | | — | | | | — | | | | (45,428 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (132,910 | ) | | | 210,774 | | | | 7,393 | | | | (1,444 | ) | | | 83,813 | | |
Net income (loss) | | | | 47,238 | | | | (202,395 | ) | | | 1,022 | | | | (2,541 | ) | | | (156,676 | ) |
Loss attributable to noncontrolling interest | | | | — | | | | — | | | | (555 | ) | | | — | | | | (555 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Noncontrolling interest | | | — | | | | — | | | | (245 | ) | | | — | | | | (245 | ) | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | | $ | 47,238 | | | $ | (202,395 | ) | | $ | 1,577 | | | $ | (2,541 | ) | | $ | (156,121 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (132,910 | ) | | $ | 210,774 | | | $ | 7,638 | | | $ | (1,444 | ) | | $ | 84,058 | | |
| | | | | | | | | | | | |
114111
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2007 | | | | | | | | | | | | | | | | | | | | | |
| | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Year Ended December 31, 2008 | |
| | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | (In thousands) | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
|
Revenues | | $ | — | | | $ | 1,561,059 | | | $ | 105,819 | | | $ | (4,866 | ) | | $ | 1,662,012 | | | $ | — | | | $ | 1,471,094 | | | $ | 175,845 | | | $ | (22,493 | ) | | $ | 1,624,446 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct operating expenses | | | — | | | | 906,254 | | | | 82,980 | | | | (3,620 | ) | | | 985,614 | | |
Direct operating expense | | | | — | | | | 894,529 | | | | 127,374 | | | | (16,053 | ) | | | 1,005,850 | |
Depreciation and amortization expense | | | — | | | | 123,821 | | | | 5,802 | | | | — | | | | 129,623 | | | | — | | | | 142,090 | | | | 7,517 | | | | — | | | | 149,607 | |
General and administrative expenses | | | 1,693 | | | | 216,959 | | | | 11,935 | | | | (191 | ) | | | 230,396 | | |
General and administrative expense | | | | 1,616 | | | | 226,273 | | | | 19,251 | | | | (795 | ) | | | 246,345 | |
Asset retirements and impairments | | | | — | | | | 26,101 | | | | — | | | | — | | | | 26,101 | |
Interest expense, net of amounts capitalized | | | 38,866 | | | | (3,134 | ) | | | 723 | | | | (248 | ) | | | 36,207 | | | | 44,842 | | | | (2,945 | ) | | | 477 | | | | 248 | | | | 42,622 | |
Loss on early extinguishment of debt | | | 9,557 | | | | — | | | | — | | | | — | | | | 9,557 | | |
Other, net | | | (449 | ) | | | (5,850 | ) | | | 1,781 | | | | (807 | ) | | | (5,325 | ) | | | 5,219 | | | | (7,361 | ) | | | 9,143 | | | | (4,449 | ) | | | 2,552 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 49,667 | | | | 1,238,050 | | | | 103,221 | | | | (4,866 | ) | | | 1,386,072 | | | | 51,677 | | | | 1,278,687 | | | | 163,762 | | | | (21,049 | ) | | | 1,473,077 | |
| | | | | | | | | | | | |
(Loss) income before income taxes and noncontrolling interest | | | (49,667 | ) | | | 323,009 | | | | 2,598 | | | | — | | | | 275,940 | | |
(Loss) income from continuing operations before taxes | | | | (51,677 | ) | | | 192,407 | | | | 12,083 | | | | (1,444 | ) | | | 151,369 | |
Income tax (expense) benefit | | | (105,928 | ) | | | 934 | | | | (1,774 | ) | | | — | | | | (106,768 | ) | | | (81,233 | ) | | | 4,023 | | | | (4,690 | ) | | | — | | | | (81,900 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations | | | | (132,910 | ) | | | 196,430 | | | | 7,393 | | | | (1,444 | ) | | | 69,469 | |
Discontinued operations | | | | — | | | | 14,344 | | | | — | | | | — | | | | 14,344 | |
| | | | | | | | | | | | |
Net (loss) income | | | (155,595 | ) | | | 323,943 | | | | 824 | | | | — | | | | 169,172 | | | | (132,910 | ) | | | 210,774 | | | | 7,393 | | | | (1,444 | ) | | | 83,813 | |
Loss attributable to noncontrolling interest | | | | — | | | | — | | | | (245 | ) | | | — | | | | (245 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Noncontrolling interest | | | — | | | | — | | | | (117 | ) | | | — | | | | (117 | ) | |
(LOSS) INCOME ATTRIBUTABLE TO KEY | | | $ | (132,910 | ) | | $ | 210,774 | | | $ | 7,638 | | | $ | (1,444 | ) | | $ | 84,058 | |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (155,595 | ) | | $ | 323,943 | | | $ | 941 | | | $ | — | | | $ | 169,289 | | |
| | | | | | | | | | | | |
115112
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2009 | | | Year Ended December 31, 2010 | |
| | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (In thousands) | | | (In thousands) | |
|
Net cash provided by (used in) operating activities | | $ | — | | | $ | 185,279 | | | $ | (442 | ) | | $ | — | | | $ | 184,837 | | |
Net cash provided by operating activities | | | $ | — | | | $ | 121,551 | | | $ | 8,254 | | | $ | — | | | $ | 129,805 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (124,744 | ) | | | (3,678 | ) | | | — | | | | (128,422 | ) | | | — | | | | (169,443 | ) | | | (10,867 | ) | | | — | | | | (180,310 | ) |
Proceeds from sale of fixed assets | | | | — | | | | 258,202 | | | | — | | | | — | | | | 258,202 | |
Acquisitions, net of cash acquired | | | | — | | | | (86,688 | ) | | | — | | | | — | | | | (86,688 | ) |
Intercompany notes and accounts | | | 65,580 | | | | (17,523 | ) | | | (22,115 | ) | | | (25,942 | ) | | | — | | | | (165 | ) | | | (84,742 | ) | | | — | | | | 84,907 | | | | — | |
Other investing activities, net | | | 199 | | | | 5,580 | | | | 12,007 | | | | — | | | | 17,786 | | | | 165 | | | | — | | | | — | | | | | | | | 165 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 65,779 | | | | (136,687 | ) | | | (13,786 | ) | | | (25,942 | ) | | | (110,636 | ) | |
Net cash (used in) provided by investing activities | | | | — | | | | (82,671 | ) | | | (10,867 | ) | | | 84,907 | | | | (8,631 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payments on revolving credit facility | | | (100,000 | ) | | | — | | | | — | | | | — | | | | (100,000 | ) | |
Repayments of long-term debt | | | | — | | | | (6,970 | ) | | | — | | | | — | | | | (6,970 | ) |
Repayments of capital lease obligations | | | | — | | | | (8,493 | ) | | | — | | | | — | | | | (8,493 | ) |
Proceeds from borrowings on revolving credit facility | | | | 110,000 | | | | — | | | | — | | | | — | | | | 110,000 | |
Repayments on revolving credit facility | | | | (197,813 | ) | | | — | | | | — | | | | — | | | | (197,813 | ) |
Repurchases of common stock | | | | (3,098 | ) | | | — | | | | — | | | | — | | | | (3,098 | ) |
Intercompany notes and accounts | | | 32,823 | | | | (76,175 | ) | | | 17,410 | | | | 25,942 | | | | — | | | | 84,742 | | | | 165 | | | | — | | | | (84,907 | ) | | | — | |
Other financing activities, net | | | 1,398 | | | | (28,873 | ) | | | — | | | | — | | | | (27,475 | ) | | | 6,169 | | | | — | | | | — | | | | — | | | | 6,169 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (65,779 | ) | | | (105,048 | ) | | | 17,410 | | | | 25,942 | | | | (127,475 | ) | |
Net cash used in financing activities | | | | — | | | | (15,298 | ) | | | — | | | | (84,907 | ) | | | (100,205 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | (2,023 | ) | | | — | | | | (2,023 | ) | | | — | | | | — | | | | (1,735 | ) | | | — | | | | (1,735 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash | | | — | | | | (56,456 | ) | | | 1,159 | | | | — | | | | (55,297 | ) | |
Net increase (decrease) in cash | | | | — | | | | 23,582 | | | | (4,348 | ) | | | — | | | | 19,234 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | — | | | | 75,847 | | | | 16,844 | | | | — | | | | 92,691 | | |
Cash and cash equivalents at beginning of period | | | | — | | | | 19,391 | | | | 18,003 | | | | — | | | | 37,394 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | — | | | $ | 19,391 | | | $ | 18,003 | | | $ | — | | | $ | 37,394 | | |
Cash and cash equivalents at end of period | | | $ | — | | | $ | 42,973 | | | $ | 13,655 | | | $ | — | | | $ | 56,628 | �� |
| | | | | | | | | | | | | | | | | | | | | | |
116113
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2008 | | | Year Ended December 31, 2009 | |
| | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (In thousands) | | | (In thousands) | |
|
Net cash provided by (used in) operating activities | | $ | 17,573 | | | $ | 364,840 | | | $ | (15,249 | ) | | $ | — | | | $ | 367,164 | | | $ | — | | | $ | 185,279 | | | $ | (442 | ) | | $ | — | | | $ | 184,837 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (214,659 | ) | | | (4,335 | ) | | | — | | | | (218,994 | ) | | | — | | | | (124,744 | ) | | | (3,678 | ) | | | — | | | | (128,422 | ) |
Acquisitions and asset purchases, net | | | — | | | | (97,925 | ) | | | — | | | | — | | | | (97,925 | ) | |
of cash acquired | | | | | | | | | | | | | | | | | | | | | |
Investment in Geostream Services Group | | | (19,306 | ) | | | — | | | | — | | | | — | | | | (19,306 | ) | |
Intercompany notes and accounts | | | (179,501 | ) | | | (199,428 | ) | | | (1,515 | ) | | | 380,444 | | | | — | | | | 65,580 | | | | (17,523 | ) | | | (22,115 | ) | | | (25,942 | ) | | | — | |
Other investing activities, net | | | — | | | | 7,151 | | | | — | | | | — | | | | 7,151 | | | | 199 | | | | 5,580 | | | | 12,007 | | | | — | | | | 17,786 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (198,807 | ) | | | (504,861 | ) | | | (5,850 | ) | | | 380,444 | | | | (329,074 | ) | |
Net cash provided by (used in) investing activities | | | | 65,779 | | | | (136,687 | ) | | | (13,786 | ) | | | (25,942 | ) | | | (110,636 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings on revolving credit facilty | | | 172,813 | | | | — | | | | — | | | | — | | | | 172,813 | | |
Payments on revolving credit facility | | | (38,026 | ) | | | — | | | | — | | | | — | | | | (38,026 | ) | | | (100,000 | ) | | | — | | | | — | | | | — | | | | (100,000 | ) |
Repurchases of common stock | | | (139,358 | ) | | | — | | | | — | | | | — | | | | (139,358 | ) | |
Intercompany notes and accounts | | | 177,698 | | | | 181,016 | | | | 21,730 | | | | (380,444 | ) | | | — | | | | 32,823 | | | | (76,175 | ) | | | 17,410 | | | | 25,942 | | | | — | |
Other financing activities, net | | | 8,107 | | | | (11,506 | ) | | | — | | | | — | | | | (3,399 | ) | | | 1,398 | | | | (28,873 | ) | | | — | | | | — | | | | (27,475 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 181,234 | | | | 169,510 | | | | 21,730 | | | | (380,444 | ) | | | (7,970 | ) | |
Net cash (used in) provided by financing activities | | | | (65,779 | ) | | | (105,048 | ) | | | 17,410 | | | | 25,942 | | | | (127,475 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | 4,068 | | | | — | | | | 4,068 | | | | — | | | | — | | | | (2,023 | ) | | | — | | | | (2,023 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net increase in cash | | | — | | | | 29,489 | | | | 4,699 | | | | — | | | | 34,188 | | |
Net (decrease) increase in cash | | | | — | | | | (56,456 | ) | | | 1,159 | | | | — | | | | (55,297 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | — | | | | 46,358 | | | | 12,145 | | | | — | | | | 58,503 | | | | — | | | | 75,847 | | | | 16,844 | | | | — | | | | 92,691 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | — | | | $ | 75,847 | | | $ | 16,844 | | | $ | — | | | $ | 92,691 | | | $ | — | | | $ | 19,391 | | | $ | 18,003 | | | $ | — | | | $ | 37,394 | |
| | | | | | | | | | | | | | | | | | | | | | |
117114
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2007 | | | Year Ended December 31, 2008 | |
| | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (In thousands) | | | (In thousands) | |
|
Net cash (used in) provided by operating activities | | $ | (3,401 | ) | | $ | 264,275 | | | $ | (10,955 | ) | | $ | — | | | $ | 249,919 | | |
Net cash provided by (used in) operating activities | | | $ | 17,573 | | | $ | 364,840 | | | $ | (15,249 | ) | | $ | — | | | $ | 367,164 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (207,400 | ) | | | (5,160 | ) | | | — | | | | (212,560 | ) | | | — | | | | (214,659 | ) | | | (4,335 | ) | | | — | | | | (218,994 | ) |
Acquisitions, net of cash acquired | | | — | | | | (157,955 | ) | | | — | | | | — | | | | (157,955 | ) | |
Investment in available for sale securities | | | — | | | | (121,613 | ) | | | — | | | | — | | | | (121,613 | ) | |
Proceeds from the sale of available for sale securities | | | — | | | | 183,177 | | | | — | | | | — | | | | 183,177 | | |
Acquisitions and asset purchases, net of cash acquired | | | | — | | | | (97,925 | ) | | | — | | | | — | | | | (97,925 | ) |
Investment in Geostream Services Group | | | | (19,306 | ) | | | — | | | | — | | | | — | | | | (19,306 | ) |
Intercompany notes and accounts | | | (473,412 | ) | | | (434,672 | ) | | | — | | | | 908,084 | | | | — | | | | (179,501 | ) | | | (199,428 | ) | | | (1,515 | ) | | | 380,444 | | | | — | |
Other investing activities, net | | | — | | | | 6,104 | | | | — | | | | — | | | | 6,104 | | | | — | | | | 7,151 | | | | — | | | | — | | | | 7,151 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (473,412 | ) | | | (732,359 | ) | | | (5,160 | ) | | | 908,084 | | | | (302,847 | ) | | | (198,807 | ) | | | (504,861 | ) | | | (5,850 | ) | | | 380,444 | | | | (329,074 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repayment of long-term debt | | | (396,000 | ) | | | — | | | | — | | | | — | | | | (396,000 | ) | |
Proceeds from long-term debt | | | 425,000 | | | | — | | | | — | | | | — | | | | 425,000 | | |
Borrowings on revolving credit facility | | | 50,000 | | | | — | | | | — | | | | — | | | | 50,000 | | | | 172,813 | | | | — | | | | — | | | | — | | | | 172,813 | |
Common stock acquired by purchase | | | (30,454 | ) | | | — | | | | — | | | | — | | | | (30,454 | ) | |
Payments on revolving credit facility | | | | (38,026 | ) | | | — | | | | — | | | | — | | | | (38,026 | ) |
Repurchases of common stock | | | | (139,358 | ) | | | — | | | | — | | | | — | | | | (139,358 | ) |
Intercompany notes and accounts | | | 424,822 | | | | 458,560 | | | | 24,702 | | | | (908,084 | ) | | | — | | | | 177,698 | | | | 181,016 | | | | 21,730 | | | | (380,444 | ) | | | — | |
Other financing activities, net | | | 3,445 | | | | (28,751 | ) | | | — | | | | — | | | | (25,306 | ) | | | 8,107 | | | | (11,506 | ) | | | — | | | | — | | | | (3,399 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 476,813 | | | | 429,809 | | | | 24,702 | | | | (908,084 | ) | | | 23,240 | | | | 181,234 | | | | 169,510 | | | | 21,730 | | | | (380,444 | ) | | | (7,970 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | (184 | ) | | | — | | | | (184 | ) | | | — | | | | — | | | | 4,068 | | | | — | | | | 4,068 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash | | | — | | | | (38,275 | ) | | | 8,403 | | | | — | | | | (29,872 | ) | |
Net increase in cash | | | | — | | | | 29,489 | | | | 4,699 | | | | — | | | | 34,188 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | — | | | | 84,633 | | | | 3,742 | | | | — | | | | 88,375 | | | | — | | | | 46,358 | | | | 12,145 | | | | — | | | | 58,503 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | — | | | $ | 46,358 | | | $ | 12,145 | | | $ | — | | | $ | 58,503 | | | $ | — | | | $ | 75,847 | | | $ | 16,844 | | | $ | — | | | $ | 92,691 | |
| | | | | | | | | | | | | | | | | | | | | | |
118115
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 26. | SUBSEQUENT EVENTS |
In January 2011, we acquired 10 SWD wells from Equity Energy Company for $14.3 million. We accounted for this purchase as an asset acquisition.
On February 14, 2011, we commenced an any and all cash tender offer and consent solicitation with respect to the Senior Notes. The tender offer is scheduled to expire at 12:00 midnight, New York City time on March 14, 2011, unless extended or earlier terminated. Our obligation to accept for purchase and to pay for Senior Notes in the tender offer is conditioned on, among other things, the tender of Senior Notes representing at least a majority of the aggregate principal amount of Senior Notes outstanding on or prior to March 14, 2011 and our having received replacement financing on terms acceptable to us. We intend to fund the repurchase of the Senior Notes, plus all related fees and expenses, from the proceeds of one or more capital markets debt offerings and borrowings under our Senior Secured Credit Facility.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (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 required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our principal executive and financial officers have concluded that our disclosure controls and procedures were effective as of the end of such period.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
A material weakness (as defined in SECRule 12b-2)12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009.2010. In making this assessment, management used the criteria described inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
117
Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2009.2010.
119
Our internal control over financial reporting has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report included herein.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
As described in “Item 9A. Controls and Procedures” in our Annual Report onForm 10-K for the year ended December 31, 2008, our management determined that as of December 31, 2008, ineffective control activities surrounding our payroll process constituted a material weakness to our system of internal control. These ineffective control activities had first been identified during 2006 and changes were made to our controls and procedures over 2007 and 2008, and continuing into 2009, in an effort to remediate these deficiencies. Activities to remediate the previously identified material weakness included relocating the payroll function to our corporate offices in Houston, Texas, replacement of personnel, increasing the overall size of the payroll department, and the implementation of a new human resource information system. The new human resource information system implemented in January 2009 allows for automated workflow and approval of standard human resource transactions. Additionally, we have compensating controls in place such as analytical reviews of payroll expenses and reconciliations of payroll accounts. Based upon the changes in internal control and the testing and evaluation of the effectiveness of these controls, management has concluded that the remediation of the material weakness for our payroll process has been achieved as of December 31, 2009.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourthour last fiscal quarter of 2009,2010, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting; however, the testing of the remediation of the material weakness identifiedreporting.
We implemented a new Enterprise Resource Planning (“ERP”) system on May 1, 2010. This implementation resulted in certain changes to business processes and internal controls beginning in the prior year was completed during the fourthsecond quarter that impacted financial reporting. However, we continue to perform a significant portion of 2009, allowing us to concludecontrols that follow our previously tested control structure. We believe that the remediationnew ERP system and related changes to internal controls will enhance our internal controls over financial reporting. We have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting subsequent to the system implementation and will continue to evaluate the operating effectiveness of this material weakness was achieved as of December 31, 2009.
related controls during subsequent periods.
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ITEM 9B. | OTHER INFORMATION |
Not applicable.
PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Item 10 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2009.2010.
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ITEM 11. | EXECUTIVE COMPENSATION |
Item 11 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2009.2010.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Item 12 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2009.2010.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Item 13 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2009.2010.
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ITEM 14. | PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES |
Item 14 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2009.2010.
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PART IV
| |
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
The following financial statements and exhibits are filed as part of this report:
1. Financial Statements — See“Index to Consolidated Financial Statements”at Page 54.48.
2. We have omitted all financial statement schedules because they are not required or are not applicable, or the required information is shown in the financial statements in notes to the financial statements.
3. Exhibits
| | | | |
Exhibit No. | | Description |
|
| 3 | .1 | | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-08038.) |
| 3 | .2 | | Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting the designation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 001-08038.) |
| 3 | .3 | | Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on September 22, 2006, File No. 001-08038.) |
| 3 | .4 | | Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 2, 2007, File No. 001-08038.) |
| 3 | .5 | | Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 9, 2008, File No. 001-08038.) |
| 3 | .6 | | Amendment to Second Amended and Restated Bylaws of Key Energy Services, Inc., adopted June 4, 2009. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on June 10, 2009, File No. 001-08038.) |
| 4 | .1 | | Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on November 30, 2007, FileNo. 001-08038.) |
| 4 | .2 | | Registration Rights Agreement dated as of November 29, 2007, among Key Energy Services, Inc., the subsidiary guarantors of the Company party thereto, and Lehman Brothers Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the several initial purchasers named therein. (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on November 30, 2007, File No. 001-08038.) |
| 4 | .3 | | First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, File No. 001-08038.) |
| 4 | .4 | | Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) |
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.
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| | | | |
Exhibit No. | | Description |
|
| 4 | .5 | | Third Supplemental Indenture, dated as of July 31, 2009, among Key Energy Services California, Inc., the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) |
| 10 | .1† | | Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of the Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of the Company’s Schedule 14A Proxy Statement filed November 26, 1997, File No. 001-08038.) |
| 10 | .2† | | Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 001-08038.) |
| 10 | .3† | | The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) |
| 10 | .4† | | Form of Award Agreement under the 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) |
| 10 | .5† | | Form of Stock Appreciation Rights Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K dated August 24, 2007, File No. 001-08038.) |
| 10 | .6† | | Form of Non-Plan Option Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed on September 25, 2007, File No. 333-146294.) |
| 10 | .7† | | Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of the Company’s Schedule 14A Proxy Statement filed on November 1, 2007, File No. 001-08038.) |
| 10 | .8† | | Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 001-08038.) |
| 10 | .9† | | Form of Restricted Stock Award Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 16, 2008, File No. 001-08038.) |
| 10 | .10† | | Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of the Company’s Schedule 14A Proxy Statement filed on April 16, 2009, FileNo. 001-08038.) |
| 10 | .11† | | Form of Restricted Stock Award Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) |
| 10 | .12† | | Form of Nonqualified Stock Option Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) |
| 10 | .13† | | Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) |
| 10 | .14† | | Acknowledgment and Waiver by Richard J. Alario, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated March 29, 2005, File No. 001-08038.) |
| 10 | .15† | | Employment Agreement, dated as of March 26, 2009, by and between Trey Whichard and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 1, 2009, File No. 001-08038.) |
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| | | | |
Exhibit No.
| | Description
|
|
| 10 | .16† | | Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) |
| 10 | .17† | | Acknowledgment and Waiver by Newton W. Wilson III, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated March 29, 2005, File No. 001-08038.) |
| 10 | .18† | | Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) |
| 10 | .19† | | Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services, Inc. and Key Energy Shared Services, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on January 7, 2008, FileNo. 001-08038.) |
| 10 | .20† | | Employment Agreement, dated as of January 1, 2004, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report onForm 8-K dated October 19, 2006, File No. 001-08038.) |
| 10 | .21† | | First Amendment to Employment Agreement, dated November 26, 2007, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 30, 2007, File No. 001-08038.) |
| 10 | .22† | | Employment Agreement, dated November 17, 2004, between Key Energy Services, Inc. and Phil Coyne. (Incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) |
| 10 | .23† | | First Amendment to Employment Agreement, effective as of January 24, 2005, between Key Energy Services, Inc. and Phil Coyne. (Incorporated by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K dated October 19, 2006, File No. 001-08038.) |
| 10 | .24† | | Amended and Restated Employment Agreement, dated December 31, 2007, between Key Energy Services, Inc. and Don D. Weinheimer. (Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on February 28, 2008, File No. 001-08038.) |
| 10 | .25† | | Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and J. Marshall Dodson. (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 001-08038.) |
| 10 | .26† | | Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and D. Bryan Norwood. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 001-08038.) |
| 10 | .27† | | Restated Employment Agreement, effective August 1, 2007, between Key Energy Shared Services, LLC and Tommy Pipes. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) |
| 10 | .28† | | Employment Agreement, effective August 1, 2007, between Key Energy Services, Inc. and John Carnett. (Incorporated by reference to Exhibit 10.24 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, File No. 001-08038.) |
| 10 | .29† | | Restated Employment Agreement, dated effective as of December 31, 2007, among William M. Austin, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 7, 2008, File No. 001-08038.) |
| 10 | .30† | | Letter Agreement, dated February 5, 2009, between Key Energy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2009, File No. 001-08038.) |
| 10 | .31† | | Settlement Agreement and Release of Claims by and between Kevin P. Collins and Key Energy Services, Inc. dated April 3, 2009 (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, File No. 001-08038.) |
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| | | | |
Exhibit No. | | Description |
|
| 10 | .32† | | Settlement Agreement and Release of Claims by and between W. Phillip Marcum and Key Energy Services, Inc. dated April 3, 2009 (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-08038.) |
| 10 | .33† | | Separation and Release Agreement, dated February 11, 2009, by and between Key Energy Shared Services, LLC, Key Energy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-08038.) |
| 10 | .34† | | Separation and Release Agreement, dated February 11, 2009, by and between Key Energy Shared Services, LLC, Key Energy Services, Inc. and William M. Austin. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, File No. 001-08038.) |
| 10 | .35 | | Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 30, 2007, FileNo. 001-08038.) |
| 10 | .36 | | Amendment No. 1 to Credit Agreement, dated as of October 27, 2009, among Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 29, 2009, File No. 001-08038.) |
| 10 | .37 | | Stock and Membership Interest Purchase Agreement, dated as of September 19, 2007, between and among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 20, 2007, File No. 001-08038.) |
| 10 | .38 | | First Amendment to Stock and Membership Interest Purchase Agreement, dated as of October 25, 2007, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 001-08038.) |
| 10 | .39 | | Second Amendment to Stock and Membership Interest Purchase Agreement, dated as of September 30, 2008, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.31 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-08038.) |
| 10 | .40 | | Purchase Agreement, dated November 14, 2007, by and among the Company, certain of its domestic subsidiaries, and Lehman Brothers, Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the initial purchasers. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on November 15, 2007, File No. 001-08038.) |
| 10 | .41 | | Asset Purchase Agreement, dated December 7, 2007, among Key Energy Services, LLC, Kings Oil Tools, Inc. and Thomas Fowler. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 13, 2007, File No. 001-08038.) |
| 10 | .42 | | Purchase Agreement, dated April 3, 2008, among Key Energy Services, LLC, Western Drilling Holdings, Inc., and Fred S. Holmes and Barbara J. Holmes. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on April 9, 2008, FileNo. 001-08038.) |
| 10 | .43 | | Stock Purchase Agreement, dated May 30, 2008, by and among Key Energy Services, LLC, and E. Kent Tolman, Nita Tolman, Ronald D. Jones and Melinda Jones. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 5, 2008, FileNo. 001-08038.) |
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| | | | |
Exhibit No. | | Description |
|
| 10 | .44 | | Asset Purchase Agreement, dated July 22, 2008, by and among Key Energy Pressure Pumping Services, LLC, Leader Energy Services Ltd., Leader Energy Services USA Ltd., and CementRite, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 24, 2008, FileNo. 001-08038.) |
| 10 | .45 | | Master Agreement, dated August 26, 2008, by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 2, 2008, File No. 001-08038.) |
| 10 | .46 | | Amendment to Master Agreement, dated March 11, 2009, by and among Key Energy Services, Inc., Key Energy services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 25, 2009, File No. 001-08038.) |
| 10 | .47 | | Amendment No. 2 to Master Agreement, dated June 23, 2009 (fully executed on June 26, 2009), by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 1, 2009, File No. 001-08038.) |
| 10 | .48 | | Master Equipment Purchase and Sale Agreement, dated September 1, 2009, by and between Key Energy Pressure Pumping Services, LLC and GK Drilling Tools Leasing Company Ltd., and form of Addendum thereto (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 8, 2009, File No. 001-08038.) |
| 21 | * | | Significant Subsidiaries of the Company. |
| 23 | * | | Consent of Independent Registered Public Accounting Firm. |
| 31 | .1* | | Certification of CEO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. of 2002. |
| 31 | .2* | | Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | * | | Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
† | | Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. |
|
* | | Filed herewith. |
125119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
KEY ENERGY SERVICES, INC.
| | |
| By: | /s/ T.M. Whichard III, |
T.M. Whichard III,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: February 26, 201025, 2011
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Richard J. Alario and T.M. Whichard III, and each of them, his true and lawful attorney-in-fact and agent, with full powers of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report onForm 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting to said attorneys-in-fact, and each of them, full power and authority to perform any other act on behalf of the undersigned required to be done in connection therewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in their capacities and on February 26, 2010.25, 2011.
| | | | |
Signature | | Title |
|
| | |
/s/ Richard J. Alario Richard J. Alario | | Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) |
| | |
/s/ T.M. Whichard III T.M. Whichard III | | Senior Vice President and Chief Financial Officer
(Principal (Principal Financial Officer) |
| | |
/s/ Ike C. Smith Ike C. Smith | | Vice President and Controller (Principal Accounting Officer) |
| | |
/s/ David J. Breazzano David J. Breazzano | | Director |
| | |
/s/ Lynn R. Coleman Lynn R. Coleman | | Director |
| | |
/s/ Kevin P. Collins Kevin P. Collins | | Director |
| | |
/s/ William D. Fertig William D. Fertig | | Director |
126120
| | | | |
Signature | | Title |
|
| | |
/s/ W. Phillip Marcum W. Phillip Marcum | | Director |
| | |
/s/ Ralph S. Michael, III Ralph S. Michael, III | | Director |
| | |
/s/ William F. Owens William F. Owens | | Director |
| | |
/s/ Robert K. Reeves Robert K. Reeves | | Director |
| | |
/s/ Carter A. Ward Carter A. Ward | | Director |
| | |
/s/ J. Robinson West J. Robinson West | | Director |
| | |
/s/ Arlene M. Yocum Arlene M. Yocum | | Director |
127121
EXHIBIT INDEX
| | | | |
Exhibit No. | | Description |
|
| 3 | .1 | | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, FileNo. 001-08038.) |
| 3 | .2 | | Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting the designation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2000, FileNo. 001-08038.) |
| 3 | .3 | | Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on September 22, 2006, FileNo. 001-08038.) |
| 3 | .4 | | Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on November 2, 2007, FileNo. 001-08038.) |
| 3 | .5 | | Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, FileNo. 001-08038.) |
| 3 | .6 | | Amendment to Second Amended and Restated Bylaws of Key Energy Services, Inc., adopted June 4, 2009. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on June 10, 2009, FileNo. 001-08038.) |
| 4 | .1 | | Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) |
| 4 | .2 | | Registration Rights Agreement dated as of November 29, 2007, among Key Energy Services, Inc., the subsidiary guarantors of the Company party thereto, and Lehman Brothers Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the several initial purchasers named therein. (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) |
| 4 | .3 | | First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2008, FileNo. 001-08038.) |
| 4 | .4 | | Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.6 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, FileNo. 001-08038.) |
| 4 | .5 | | Third Supplemental Indenture, dated as of July 31, 2009, among Key Energy Services California, Inc., the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2009, FileNo. 001-08038.) |
| 10 | .1† | | Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of the Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of the Company’s Schedule 14A Proxy Statement filed November 26, 1997, FileNo. 001-08038.) |
| 10 | .2† | | Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, FileNo. 001-08038.) |
| 10 | .3† | | The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
| | |
Exhibit No. | | Description |
|
2.1 | | Asset Purchase Agreement, dated as of July 2, 2010, by and among Key Energy Pressure Pumping Services, LLC, Key Electric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as Universal Pressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on July 6, 2010, FileNo. 001-08038.) |
2.2 | | Amending Letter Agreement, dated September 1, 2010, by and among Key Energy Pressure Pumping Services, LLC, Key Electric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as Universal Pressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report onForm 10-Q for the quarterly period ended September 30, 2010, FileNo. 001-08038) |
2.3 | | Amending Letter Agreement, dated October 1, 2010, by and among Key Energy Pressure Pumping Services, LLC, Key Electric Wireline Services, LLC, Key Energy Services, Inc., Portofino Acquisition Company (now known as Universal Pressure Pumping, Inc.) and Patterson UTI Energy, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report onForm 10-Q for the quarterly period ended September 30, 2010, FileNo. 001-08038) |
2.4 | | Purchase and Sale Agreement, dated as of July 23, 2010, by and among OFS Holdings, LLC, a Delaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, Key Energy Services, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report onForm 8-K/A filed on October 8, 2010, FileNo. 001-08038.) |
2.5 | | Amendment No. 1 to Purchase and Sale Agreements, dated as of August 27, 2010, by and among OFS Holdings, LLC, a Delaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, Key Energy Services, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporated by reference to Exhibit 2.2 of the Company’s Current Report onForm 8-K/A filed on October 8, 2010, FileNo. 001-08038.) |
2.6 | | Amendment No. 2 to Purchase and Sale Agreements, dated as of September 30, 2010, by and among OFS Holdings, LLC, a Delaware limited liability company, OFS Energy Services, LLC, a Delaware limited liability company, Key Energy Services, Inc., a Maryland corporation, and Key Energy Services, LLC, a Texas limited liability company. (Incorporated by reference to Exhibit 2.3 of the Company’s Current Report onForm 8-K/A filed on October 8, 2010, FileNo. 001-08038.) |
3.1 | | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, FileNo. 001-08038.) |
3.2 | | Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting the designation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2000, FileNo. 001-08038.) |
3.3 | | Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on September 22, 2006, FileNo. 001-08038.) |
3.4 | | Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on November 2, 2007, FileNo. 001-08038.) |
3.5 | | Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, FileNo. 001-08038.) |
3.6 | | Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted June 4, 2009. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on June 10, 2009, FileNo. 001-08038.) |
128122
| | | | |
Exhibit No. | | Description |
|
4.1 | 10 | .4†Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) |
4.2 | | First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2008, FileNo. 001-08038.) |
4.3 | | Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.6 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, FileNo. 001-08038.) |
4.4 | | Third Supplemental Indenture, dated as of July 31, 2009, among Key Energy Services California, Inc., the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2009, FileNo. 001-08038.) |
10.1† | | Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of the Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of the Company’s Schedule 14A Proxy Statement filed November 26, 1997, FileNo. 001-08038.) |
10.2† | | Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, FileNo. 001-08038.) |
10.3† | | The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
10.4† | | Form of Award Agreement under the 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
| 10 | .5†10.5† | | Form of Stock Appreciation Rights Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 99.1 of the Company’s Current Report onForm 8-K dated August 24, 2007, FileNo. 001-08038.) |
| 10 | .6†10.6† | | Form of Non-Plan Option Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement onForm S-8 filed on September 25, 2007, FileNo. 333-146294.) |
| 10 | .7†10.7† | | Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of the Company’s Schedule 14A Proxy Statement filed on November 1, 2007, FileNo. 001-08038.) |
| 10 | .8†10.8† | | Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.8 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2007, FileNo. 001-08038.) |
| 10 | .9†10.9† | | Form of Restricted Stock Award Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated April 16, 2008, FileNo. 001-08038.) |
| 10 | .10†10.10† | | Key Energy Services, Inc. 2009 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of the Company’s Schedule 14A Proxy Statement filed on April 16, 2009, FileNo. 001-08038.) |
| 10 | .11†10.11† | | Form of Restricted Stock Award Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2009, FileNo. 001-08038.) |
123
| 10 | .12† |
Exhibit No. | | Description |
|
10.12† | | Form of Nonqualified Stock Option Agreement under 2009 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2009, FileNo. 001-08038.) |
| 10 | .13†10.13† | | Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) |
| 10 | .14† | | Acknowledgment and Waiver by Richard J. Alario, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated March 29, 2005, FileNo. 001-08038.) |
| 10 | .15†10.14† | | Employment Agreement, dated as of March 26, 2009, by and between Trey Whichard and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated April 1, 2009, FileNo. 001-08038.) |
| 10 | .16†10.15† | | Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) |
| 10 | .17† | | Acknowledgment and Waiver by Newton W. Wilson III, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated March 29, 2005, FileNo. 001-08038.) |
| 10 | .18†10.16† | | Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.14 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, FileNo. 001-08038.) |
| 10 | .19†10.17† | | Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services, Inc. and Key Energy Shared Services, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) |
129
| | | | |
Exhibit No.
| | Description
|
|
| 10 | .20† | | Employment Agreement, dated as of January 1, 2004, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
| 10 | .21† | | First Amendment to Employment Agreement, dated November 26, 2007, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) |
| 10 | .22† | | Employment Agreement, dated November 17, 2004, between Key Energy Services, Inc. and Phil Coyne. (Incorporated by reference to Exhibit 10.8 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
| 10 | .23† | | First Amendment to Employment Agreement, effective as of January 24, 2005, between Key Energy Services, Inc. and Phil Coyne. (Incorporated by reference to Exhibit 10.9 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
| 10 | .24†10.18† | | Amended and Restated Employment Agreement, dated December 31, 2007, between Key Energy Services, Inc. and Don D. Weinheimer. (Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2007 filed on February 28, 2008, FileNo. 001-08038.) |
| 10 | .25†10.19† | | Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and J. Marshall Dodson. (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2007, FileNo. 001-08038.) |
| 10 | .26†10.20† | | Form of Amendment to Employment Agreement, dated August 14, 2007,in the form executed on March 29, 2010, by and between Key Energy Services, Inc., Key Energy Shared Services, LLC, and D. Bryan Norwood.each of Richard J. Alario, T.M. Whichard III, Newton W. Wilson III, Kim B. Clarke and Kim R. Frye. (Incorporated by reference to Exhibit 10.210.1 of the Company’s QuarterlyCurrent Report onForm 10-Q8-K for the quarter ended September 30, 2007,dated April 1, 2010, FileNo. 001-08038.) |
| 10 | .27†10.21 | | Restated EmploymentCredit Agreement, effective August 1,dated as of November 29, 2007, betweenamong Key Energy Shared Services, LLCInc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and Tommy Pipes.L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, FileNo. 001-08038.) |
| 10 | .28† | | Employment Agreement, effective August 1, 2007, between Key Energy Services, Inc. and John Carnett. (Incorporated by reference to Exhibit 10.24 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, FileNo. 001-08038.) |
| 10 | .29† | | Restated Employment Agreement, dated effective as of December 31, 2007, among William M. Austin, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.210.1 of the Company’s Current Report onForm 8-K filed on January 7, 2008,November 30, 2007, FileNo. 001-08038.) |
| 10 | .30†10.22 | | LetterAmendment No. 1 to Credit Agreement, dated February 5,as of October 27, 2009, betweenamong Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and William M. Austin.L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s QuarterlyCurrent Report onForm 10-Q8-K for the quarter ended March 31,filed on October 29, 2009, FileNo. 001-08038.) |
| 10 | .31†10.23 | | SettlementMaster Agreement, and Release of Claimsdated August 26, 2008, by and between Kevin P. Collins andamong Key Energy Services, Inc. dated April 3, 2009, Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.210.1 of the Company’s QuarterlyCurrent Report onForm 10-Q8-K forfiled on September 2, 2008, FileNo. 001-08038.) |
124
| | |
Exhibit No. | | Description |
|
10.24 | | Amendment to Master Agreement, dated March 11, 2009, by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the quarter endedCompany’s Current Report onForm 8-K filed on March 31,25, 2009, FileNo. 001-08038.) |
| 10 | .32†10.25 | | SettlementAmendment No. 2 to Master Agreement, and Release of Claimsdated June 23, 2009 (fully executed on June 26, 2009), by and between W. Phillip Marcum andamong Key Energy Services, Inc. dated April 3, 2009, Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.310.1 of the Company’s QuarterlyCurrent Report onForm 10-Q8-K for the quarter ended June 30,filed on July 1, 2009, FileNo. 001-08038.) |
| 10 | .33†10.26 | | SeparationMaster Equipment Purchase and ReleaseSale Agreement, dated February 11,September 1, 2009, by and between Key Energy SharedPressure Pumping Services, LLC Key Energy Services, Inc. and William M. Austin.GK Drilling Tools Leasing Company Ltd., and form of Addendum thereto (Incorporated by reference to Exhibit 10.210.1 of the Company’s QuarterlyCurrent Report onForm 10-Q8-K for the quarter ended June 30,filed on September 8, 2009, FileNo. 001-08038.) |
| 10 | .34†10.27 | | Separation and ReleaseAsset Purchase Agreement, dated February 11, 2009,May 13, 2010, by and between Key Energy Shared Services, LLC,among Key Energy Services, Inc.LLC, a Texas limited liability company, Key Marine Services, LLC, a Delaware limited liability company, Moncla Companies, L.L.C., a Texas limited liability company, and William M. Austin.Moncla Marine, L.L.C., a Louisiana limited liability company, L. Charles Moncla, Jr., Moncla Family Partnership, Ltd., L. Charles Moncla, Jr. Charitable Remainder Trust, Michael Moncla, Matthew Moncla, Marc Moncla, Christopher Moncla, Bipin A. Pandya, Thomas Sandahl, Rhonda Moncla, Cain Moncla, Andrew Moncla, Kenneth Rothstein, Second 4 M Ltd., a Texas limited partnership, and Leon Charles Moncla, Jr., as payment agent. (Incorporated by reference to Exhibit 10.210.1 of the Company’s QuarterlyCurrent Report onForm 10-Q8-K for the quarter ended March 31, 2009,filed on May 19, 2010, FileNo. 001-08038.) |
18.1* | | Preferability Letter from Grant Thornton, LLP dated February 25, 2011. |
21* | | Significant Subsidiaries of the Company. |
23* | | Consent of Independent Registered Public Accounting Firm. |
31.1* | | Certification of CEO pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. of 2002. |
31.2* | | Certification of CFO pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32* | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101* | | Interactive Data File. |
130
| | | | |
Exhibit No. | | Description |
|
| 10 | .35 | | Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) |
| 10 | .36 | | Amendment No. 1 to Credit Agreement, dated as of October 27, 2009, among Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on October 29, 2009, FileNo. 001-08038.) |
| 10 | .37 | | Stock and Membership Interest Purchase Agreement, dated as of September 19, 2007, between and among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 20, 2007, FileNo. 001-08038.) |
| 10 | .38 | | First Amendment to Stock and Membership Interest Purchase Agreement, dated as of October 25, 2007, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2007, FileNo. 001-08038.) |
| 10 | .39 | | Second Amendment to Stock and Membership Interest Purchase Agreement, dated as of September 30, 2008, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.31 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2008, FileNo. 001-08038.) |
| 10 | .40 | | Purchase Agreement, dated November 14, 2007, by and among the Company, certain of its domestic subsidiaries, and Lehman Brothers, Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the initial purchasers. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed on November 15, 2007, FileNo. 001-08038.) |
| 10 | .41 | | Asset Purchase Agreement, dated December 7, 2007, among Key Energy Services, LLC, Kings Oil Tools, Inc. and Thomas Fowler. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on December 13, 2007, FileNo. 001-08038.) |
| 10 | .42 | | Purchase Agreement, dated April 3, 2008, among Key Energy Services, LLC, Western Drilling Holdings, Inc., and Fred S. Holmes and Barbara J. Holmes. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, FileNo. 001-08038.) |
| 10 | .43 | | Stock Purchase Agreement, dated May 30, 2008, by and among Key Energy Services, LLC, and E. Kent Tolman, Nita Tolman, Ronald D. Jones and Melinda Jones. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on June 5, 2008, FileNo. 001-08038.) |
| 10 | .44 | | Asset Purchase Agreement, dated July 22, 2008, by and among Key Energy Pressure Pumping Services, LLC, Leader Energy Services Ltd., Leader Energy Services USA Ltd., and CementRite, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on July 24, 2008, FileNo. 001-08038.) |
| 10 | .45 | | Master Agreement, dated August 26, 2008, by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 2, 2008, FileNo. 001-08038.) |
| 10 | .46 | | Amendment to Master Agreement, dated March 11, 2009, by and among Key Energy Services, Inc., Key Energy services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on March 25, 2009, FileNo. 001-08038.) |
131
| | | | |
Exhibit No. | | Description |
|
| 10 | .47 | | Amendment No. 2 to Master Agreement, dated June 23, 2009 (fully executed on June 26, 2009), by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on July 1, 2009, FileNo. 001-08038.) |
| 10 | .48 | | Master Equipment Purchase and Sale Agreement, dated September 1, 2009, by and between Key Energy Pressure Pumping Services, LLC and GK Drilling Tools Leasing Company Ltd., and form of Addendum thereto (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 8, 2009, FileNo. 001-08038.) |
| 21 | * | | Significant Subsidiaries of the Company. |
| 23 | * | | Consent of Independent Registered Public Accounting Firm. |
| 31 | .1* | | Certification of CEO pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. of 2002. |
| 31 | .2* | | Certification of Principal Financial Officer pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | * | | Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
† | | Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. |
|
* | | Filed herewith. |
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