UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2010March 31, 2011
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-08038
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Maryland | | 04-2648081 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1301 McKinney Street, Suite 1800, Houston, Texas 77010(Address of principal executive offices) (Zip | | |
|
1301 McKinney Street, Suite 1800, Houston, Texas | | 77010 |
(Address of principal executive offices) | | (Zip Code) |
(713) 651-4300
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerþ | | Non-accelerated filero | | Accelerated filero | | Non-accelerated filer Smaller reporting companyo
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| | | | (Do not check if a smaller reporting company) | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
As of October 27, 2010,April 29, 2011, the number of outstanding shares of common stock of the registrant was 141,427,042.142,753,498.
KEY ENERGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2010March 31, 2011
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements. These “forward-looking statements” are based on our current expectations, estimates and projections about Key Energy Services, Inc. and its wholly-owned and controlled subsidiaries, our industry and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations. In some cases, you can identify these statements by terminology such as “may,” “will,” “predicts,” “expects,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions and are subject to substantial risks and uncertainties.uncertainties and not guarantees of performance. Future actions, events and conditions and future results of operations may differ materially from those expressed in these statements. In evaluating those statements, you should carefully consider the information above as well as the risks outlined in this Quarterly Report on Form 10-Q and“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, in our Quarterly Report on Form 10-Q for the periods ended March 31, 2010 and June 30, 2010, in our recent Current Reports on Form 8-K and in our other filings with the Securities and Exchange Commission. Actual performance or results may differ materially and adversely.2010.
We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as required by law. All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.
3
PART I—FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | |
| | September 30, | | December 31, | | | March 31, | | December 31, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
| | (unaudited) | | | (unaudited) | |
ASSETS | | |
Current assets: | | |
Cash and cash equivalents | | $ | 34,053 | | $ | 37,394 | | | $ | 13,184 | | $ | 56,628 | |
Accounts receivable, net of allowance for doubtful accounts of $6,996 and $5,441, respectively | | 301,592 | | 214,662 | | |
Inventory | | 22,064 | | 23,478 | | |
Accounts receivable, net of allowance for doubtful accounts of $7,939 and $7,791, respectively | | | 311,644 | | 261,818 | |
Inventories | | | 29,991 | | 23,516 | |
Other current assets | | 48,342 | | 104,624 | | | 73,778 | | 72,058 | |
Current assets held for sale | | 9,251 | | 3,974 | | |
| | | | | | | | | | |
Total current assets | | 415,302 | | 384,132 | | | 428,597 | | 414,020 | |
| | | | | | |
| | |
Property and equipment | | 1,650,025 | | 1,647,718 | | | 1,924,778 | | 1,832,443 | |
Accumulated depreciation | | | (863,173 | ) | | | (853,449 | ) | | | (928,200 | ) | | | (895,699 | ) |
| | | | | | | | | | |
Property and equipment, net | | 786,852 | | 794,269 | | | 996,578 | | 936,744 | |
| | | | | | |
| | |
Goodwill | | 349,779 | | 346,102 | | | 460,177 | | 447,609 | |
Other intangible assets, net | | 33,365 | | 41,048 | | | 53,971 | | 58,151 | |
Deferred financing costs, net | | 8,460 | | 10,421 | | | 14,558 | | 7,806 | |
Equity method investments | | 6,146 | | 5,203 | | | 7,012 | | 5,940 | |
Other noncurrent assets | | 13,807 | | 12,896 | | |
Noncurrent assets held for sale | | 67,264 | | 70,339 | | |
Other non-current assets | | | 26,486 | | 22,666 | |
| | | | | | | | | | |
TOTAL ASSETS | | $ | 1,680,975 | | $ | 1,664,410 | | | $ | 1,987,379 | | $ | 1,892,936 | |
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LIABILITIES AND EQUITY | | |
Current liabilities: | | |
Accounts payable | | $ | 54,227 | | $ | 46,086 | | | $ | 69,596 | | $ | 56,310 | |
Current portion of capital leases, notes payable and long-term debt | | 4,397 | | 10,152 | | |
Other current liabilities | | 158,395 | | 133,531 | | | 146,750 | | 221,346 | |
Current portion of capital leases | | | 3,438 | | 3,979 | |
| | | | | | | | | | |
Total current liabilities | | 217,019 | | 189,769 | | | 219,784 | | 281,635 | |
| | | | | | |
Capital leases, notes payable and long-term debt | | 515,876 | | 523,949 | | |
Other noncurrent liabilities | | 200,654 | | 207,552 | | |
| | |
Capital leases and long-term debt | | | 580,127 | | 427,121 | |
Other non-current liabilities | | | 216,590 | | 202,377 | |
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Commitments and contingencies | | |
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Equity: | | |
Common stock, $0.10 par value; 200,000,000 shares authorized, 125,618,228 and 123,993,480 shares issued and outstanding, respectively | | 12,562 | | 12,399 | | |
Common stock, $0.10 par value; 200,000,000 shares authorized, 142,699,781 and 141,656,426 shares issued and outstanding | | | 14,270 | | 14,166 | |
Additional paid-in capital | | 619,151 | | 608,223 | | | 781,377 | | 775,601 | |
Accumulated other comprehensive loss | | | (51,511 | ) | | | (50,763 | ) | | | (52,009 | ) | | | (51,334 | ) |
Retained earnings | | 134,114 | | 137,158 | | | 192,518 | | 210,653 | |
| | | | | | | | | | |
Total equity attributable to Key | | 714,316 | | 707,017 | | | 936,156 | | 949,086 | |
Noncontrolling interest | | 33,110 | | 36,123 | | | 34,722 | | 32,717 | |
| | | | | | | | | | |
Total equity | | 747,426 | | 743,140 | | | 970,878 | | 981,803 | |
| | | | | | | | | | |
| | |
TOTAL LIABILITIES AND EQUITY | | $ | 1,680,975 | | $ | 1,664,410 | | | $ | 1,987,379 | | $ | 1,892,936 | |
| | | | | | | | | | |
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
4
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | | | | | | |
| | September 30, | | September 30, | | | Three Months Ended March 31, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | |
REVENUES | | $ | 283,739 | | $ | 215,349 | | $ | 803,483 | | $ | 718,059 | | | $ | 390,984 | | $ | 251,959 | |
| | |
COSTS AND EXPENSES: | | |
Direct operating expenses | | 198,158 | | 156,444 | | 583,531 | | 497,091 | | | 271,800 | | 189,202 | |
Depreciation and amortization expense | | 32,565 | | 38,680 | | 98,367 | | 114,685 | | | 39,923 | | 33,324 | |
General and administrative expenses | | 46,833 | | 39,350 | | 130,726 | | 129,815 | | | 52,779 | | 39,028 | |
Asset retirements and impairments | | — | | 97,035 | | — | | 97,035 | | |
Loss on early extinguishment of debt | | | 46,451 | | — | |
Interest expense, net of amounts capitalized | | 10,626 | | 9,137 | | 31,614 | | 29,240 | | | 10,311 | | 10,259 | |
Other, net | | | (780 | ) | | 1,534 | | | (1,556 | ) | | | (688 | ) | | | (2,385 | ) | | | (1,243 | ) |
| | | | | | | | | | | | | | |
Total costs and expenses, net | | 287,402 | | 342,180 | | 842,682 | | 867,178 | | | 418,879 | | 270,570 | |
| | | | | | | | | | | | | | |
Loss from continuing operations before tax | | | (3,663 | ) | | | (126,831 | ) | | | (39,199 | ) | | | (149,119 | ) | | | (27,895 | ) | | | (18,611 | ) |
Income tax benefit | | 1,383 | | 47,751 | | 14,979 | | 56,228 | | | 9,183 | | 7,709 | |
| | | | | | | | | | | | | | |
Loss from continuing operations | | | (2,280 | ) | | | (79,080 | ) | | | (24,220 | ) | | | (92,891 | ) | | | (18,712 | ) | | | (10,902 | ) |
Income (loss) from discontinued operations, net of tax (expense) benefit of $(5,515), $25,438, $(11,044) and $27,394, respectively | | 8,283 | | | (45,937 | ) | | 18,360 | | | (49,695 | ) | |
Income from discontinued operations, net of tax benefit (expense) of $0 and $(1,217), respectively | | | — | | 1,895 | |
| | | | | | | | | | | | | | |
Net income (loss) | | 6,003 | | | (125,017 | ) | | | (5,860 | ) | | | (142,586 | ) | |
Net loss | | | | (18,712 | ) | | | (9,007 | ) |
| | | | | | | | | | | | | | |
Loss attributable to noncontrolling interest | | 769 | | 75 | | 2,816 | | 75 | | | | (577 | ) | | | (1,427 | ) |
| | | | | | | | | | | | | | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 6,772 | | $ | (124,942 | ) | | $ | (3,044 | ) | | $ | (142,511 | ) | |
LOSS ATTRIBUTABLE TO KEY | | | $ | (18,135 | ) | | $ | (7,580 | ) |
| | | | | | | | | | | | | | |
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Basic and diluted (loss) income per share: | | |
Basic and diluted (loss) earnings per share attributable to Key: | | |
Loss per share from continuing operations attributable to Key | | $ | (0.01 | ) | | $ | (0.65 | ) | | $ | (0.17 | ) | | $ | (0.77 | ) | | $ | (0.13 | ) | | $ | (0.08 | ) |
Income (loss) per share from discontinued operations | | | 0.06 | | | (0.38 | ) | | | 0.15 | | | (0.41 | ) | |
Earnings per share from discontinued operations attributable to Key | | | $ | — | | $ | 0.02 | |
| | | | | | | | | | | | | | |
Income (loss) per share attributable to Key | | $ | 0.05 | | $ | (1.03 | ) | | $ | (0.02 | ) | | $ | (1.18 | ) | |
Loss per share attributable to Key | | | $ | (0.13 | ) | | $ | (0.06 | ) |
| | | | | | | | | | | | | | |
| | |
Loss from continuing operations attributable to Key: | | |
Loss from continuing operations | | $ | (2,280 | ) | | $ | (79,080 | ) | | $ | (24,220 | ) | | $ | (92,891 | ) | | $ | (18,712 | ) | | $ | (10,902 | ) |
Loss attributable to noncontrolling interest | | 769 | | 75 | | 2,816 | | 75 | | | | (577 | ) | | | (1,427 | ) |
| | | | | | | | | | | | | | |
Loss from continuing operations attributable to Key | | $ | (1,511 | ) | | $ | (79,005 | ) | | $ | (21,404 | ) | | $ | (92,816 | ) | | $ | (18,135 | ) | | $ | (9,475 | ) |
| | | | | | | | | | | | | | |
| | |
Weighted average shares outstanding: | | |
Basic and diluted | | 125,637 | | 121,277 | | 125,336 | | 120,983 | | | 142,206 | | 124,952 | |
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
5
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
LOSS FROM CONTINUING OPERATIONS | | $ | (2,280 | ) | | $ | (79,080 | ) | | $ | (24,220 | ) | | $ | (92,891 | ) |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | |
Foreign currency translation gain (loss) | | | 446 | | | | (1,026 | ) | | | (945 | ) | | | (5,516 | ) |
Deferred gain from available for sale investments | | | — | | | | — | | | | — | | | | 30 | |
| | | | | | | | | | | | |
Total other comprehensive income (loss), net of tax | | | 446 | | | | (1,026 | ) | | | (945 | ) | | | (5,486 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
COMPREHENSIVE LOSS FROM CONTINUING OPERATIONS, NET OF TAX | | | (1,834 | ) | | | (80,106 | ) | | | (25,165 | ) | | | (98,377 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) from discontinued operations | | | 8,283 | | | | (45,937 | ) | | | 18,360 | | | | (49,695 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) | | | 6,449 | | | | (126,043 | ) | | | (6,805 | ) | | | (148,072 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Comprehensive (income) loss attributable to noncontrolling interest | | | (189 | ) | | | 206 | | | | 3,013 | | | | 206 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 6,260 | | | $ | (125,837 | ) | | $ | (3,792 | ) | | $ | (147,866 | ) |
| | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
LOSS FROM CONTINUING OPERATIONS | | $ | (18,712 | ) | | $ | (10,902 | ) |
|
Other comprehensive income, net of tax: | | | | | | | | |
Foreign currency translation gain | | | 1,907 | | | | 194 | |
| | | | | | |
Total other comprehensive income, net of tax | | | 1,907 | | | | 194 | |
| | | | | | |
|
COMPREHENSIVE LOSS FROM CONTINUING OPERATIONS, NET OF TAX | | | (16,805 | ) | | | (10,708 | ) |
|
Comprehensive income from discontinued operations | | | — | | | | 1,895 | |
| | | | | | |
COMPREHENSIVE LOSS | | | (16,805 | ) | | | (8,813 | ) |
| | | | | | |
Comprehensive (income) loss attributable to noncontrolling interest | | | (2,005 | ) | | | 1,444 | |
| | | | | | |
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO KEY | | $ | (18,810 | ) | | $ | (7,369 | ) |
| | | | | | |
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
6
Key Energy Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| | |
Net loss | | $ | (5,860 | ) | | $ | (142,586 | ) | | $ | (18,712 | ) | | $ | (9,007 | ) |
| | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | |
Depreciation and amortization expense | | 105,125 | | 132,424 | | | 39,923 | | 36,703 | |
Asset retirements and impairments | | — | | 159,802 | | |
Bad debt expense | | 452 | | 3,293 | | | 843 | | | (32 | ) |
Accretion of asset retirement obligations | | 388 | | 405 | | | 143 | | 128 | |
(Income) loss from equity method investments | | | (723 | ) | | 796 | | |
Income from equity method investments | | | | (838 | ) | | | (577 | ) |
Loss on early extinguishment of debt | | | 46,451 | | — | |
Amortization of deferred financing costs and discount | | 1,967 | | 1,568 | | | 465 | | 662 | |
Deferred income tax benefit | | | (5,953 | ) | | | (55,359 | ) | |
Deferred income tax expense (benefit) | | | | 5,972 | | | | (4,579 | ) |
Capitalized interest | | | (3,055 | ) | | | (3,556 | ) | | | (626 | ) | | | (952 | ) |
Loss on disposal of assets, net | | 492 | | 1,284 | | |
Loss on sale of available for sale investments, net | | — | | 30 | | |
(Gain) loss on disposal of assets, net | | | | (669 | ) | | 335 | |
Share-based compensation | | 9,001 | | 4,881 | | | 3,950 | | 2,679 | |
Excess tax benefits from share-based compensation | | | (1,966 | ) | | — | | | | (3,968 | ) | | — | |
Changes in working capital: | | |
Accounts receivable | | | (86,530 | ) | | 195,976 | | | | (49,842 | ) | | | (38,040 | ) |
Other current assets | | 51,532 | | 11,798 | | | | (7,416 | ) | | 55,132 | |
Accounts payable, accrued interest and accrued expenses | | 26,809 | | | (113,069 | ) | |
Accounts payable and accrued liabilities | | | | (52,975 | ) | | 21,972 | |
Share-based compensation liability awards | | 733 | | 517 | | | 104 | | 438 | |
Other assets and liabilities | | (1,985 | ) | | | (623 | ) | | | (2,719 | ) | | 892 | |
| | | | | | | | | | |
Net cash provided by operating activities | | 90,427 | | 197,581 | | |
Net cash (used in) provided by operating activities | | | | (39,914 | ) | | 65,754 | |
| | | | | | | | | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | |
Capital expenditures | | | (101,065 | ) | | | (102,971 | ) | | | (107,439 | ) | | | (32,415 | ) |
Proceeds from sale of fixed assets | | 20,502 | | 5,184 | | | 5,201 | | 1,006 | |
Acquisitions, net of cash acquired of $0 and $28,362 | | — | | 12,007 | | |
Dividend from equity method investments | | 165 | | 199 | | | — | | 165 | |
| | | | | | | | | | |
Net cash used in investing activities | | | (80,398 | ) | | | (85,581 | ) | | | (102,238 | ) | | | (31,244 | ) |
| | | | | | | | | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
Repayments of long-term debt | | | (6,970 | ) | | | (1,539 | ) | | | (460,509 | ) | | | (513 | ) |
Proceeds from long-term debt | | | 475,000 | | — | |
Repayments of capital lease obligations | | | (6,891 | ) | | | (8,505 | ) | | | (1,120 | ) | | | (2,077 | ) |
Proceeds from borrowings on revolving credit facility | | 30,000 | | — | | | 126,000 | | 30,000 | |
Repayments on revolving credit facility | | | (30,000 | ) | | | (100,000 | ) | | | (26,000 | ) | | | (30,000 | ) |
Payment of deferred financing costs | | | | (14,640 | ) | | — | |
Repurchases of common stock | | | (2,357 | ) | | | (248 | ) | | | (4,784 | ) | | | (2,180 | ) |
Proceeds from exercise of stock options | | 2,248 | | 1,192 | | | 2,747 | | 1,600 | |
Excess tax benefits from share-based compensation | | 1,966 | | — | | | 3,968 | | — | |
| | | | | | | | | | |
Net cash used in financing activities | | | (12,004 | ) | | | (109,100 | ) | |
Net cash provided by (used in) financing activities | | | 100,662 | | | (3,170 | ) |
| | | | | | | | | | |
| | |
Effect of changes in exchange rates on cash | | | (1,366 | ) | | | (2,508 | ) | | | (1,954 | ) | | | (1,920 | ) |
| | | | | | | | | | |
| | |
Net (decrease) increase in cash and cash equivalents | | | (3,341 | ) | | 392 | | | | (43,444 | ) | | 29,420 | |
| | | | | | | | | | |
Cash and cash equivalents, beginning of period | | 37,394 | | 92,691 | | | 56,628 | | 37,394 | |
| | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 34,053 | | $ | 93,083 | | | $ | 13,184 | | $ | 66,814 | |
| | | | | | | | | | |
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
7
Key Energy Services, Inc., and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Key Energy Services, Inc., its wholly-owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a completefull range of well intervention services to major oil companies, foreign national oil companies and independent oil and natural gas production companies to complete, maintain and enhance the flow of oil and natural gas throughout the life of a well. Thesecompanies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, pressure pumping services, coiled tubing services, fishing and rental services, and wirelineother ancillary oilfield services. On October 1, 2010, we completed the saleIn addition, certain of our pressure pumping and wireline businesses to Patterson-UTI Energy (“Patterson-UTI”), which significantly reduced our involvement in these linesrigs are capable of business in the United States.specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States as well as internationallyand have operations based in Latin America,Mexico, Colombia, the Middle East, Russia and the Russian Federation. We also ownArgentina. In addition, we have a technology development companygroup based in Canada and haveat March 31, 2011 we had ownership interests in two oilfield service companies based in Canada. We sold our ownership interest in one of the Canadian oilfield service companies in April 2011.
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed December 31, 20092010 balance sheet was prepared from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.2010 (the “2010 Form 10-K”). Certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on2010 Form 10-K10-K.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. We revised our reportable business segments effective in the first quarter of 2011, and in connection with the revision, have restated the corresponding items of segment information for all periods presented. The new operating segments are U.S. and International. We revised our segments to reflect changes in management’s resource allocation and performance assessment in making decisions regarding the year ended December 31, 2009.Company. Our fluid management services, fishing and rental services, intervention services and domestic rig services businesses are aggregated within our U.S. segment. Our international rig services business and our Canadian technology development group are now aggregated within our International segment. These changes reflect our current operating focus in compliance with Accounting Standards Codification (“ASC”) No. 280,Segment Reporting(“ASC 280”).See “Note 15. Segment Information”for a full description of our segment realignment. Also, as a result of the sale of our pressure pumping and wireline businesses in 2010, we now show the results of operations of these businesses as discontinued operations for all periods presented. These presentation changes did not impact our consolidated net income, earnings per share, total current assets, total assets or total stockholders’ equity.
The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented herein. The results of operations for the three and nine month periodsperiod ended September 30, 2010March 31, 2011 are not necessarily indicative of the results expected for the full year or any other interim period, due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.
We have evaluated events occurring after the balance sheet date included in this Quarterly Report on Form 10-Q for possible disclosure as a subsequent event. Management monitored for subsequent events through the date these financial statements were available to be issued. After the balance sheet date included in this Quarterly Report on Form 10-Q but before the financial statementsSubsequent events that were issued, we closed the sale of our pressure pumping and wireline business to Patterson-UTI that requiredidentified by management as requiring disclosure as a subsequent event. In addition, we closed the acquisition of certain subsidiaries of OFS Energy Services, LLC (“OFS ES”) and related assets. See“Note 17. Subsequent Events”for further discussion.
Certain reclassifications have been made to prior period information contained in this report in order to conform to current year presentation. As a result of the sale of our pressure pumping and wireline businesses, we now show the results of operations of these businesses as discontinued operations for all periods presented. The reclassifications had no effect on total assets or the income or loss attributable to Key for any period. See further discussionare described in“Note 16. Discontinued Operations”and“Note 17.19. Subsequent Events.”Event”.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The preparation of these unaudited condensed consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates may also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii)
8
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
8
differ materially from these estimates. We believe that the estimates used in the preparation of these interim financial statements are reasonable.
There have been no material changes or developments in our evaluation of accounting estimates and underlying assumptions or methodologies that we believe to be a “Critical Accounting Policy or Estimate” as disclosed in our Annual Report on2010 Form 10-K for the year ended December 31, 2009.10-K.
New Accounting Standards Adopted in this Report
ASU 2009-16. In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-16,Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. ASU 2009-16 revises the provisions of former 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. ASU 2009-16 also eliminates the concept of a “qualifying special purpose entity,” changes the requirements for derecognizing financial assets, and increases disclosure requirements about transfers of financial assets and a reporting entity’s continuing involvement in transferred financial assets. We adopted the provisions of ASU 2009-16 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.
ASU 2009-17.In December 2009, the FASB issued ASU 2009-17,Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.ASU 2009-17 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. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities. We adopted ASU 2009-17 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.
ASU 2010-02.In January 2010, the FASB issued ASU 2010-02,Consolidation (Topic 810) – Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope Clarification.ASU 2010-02 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. ASU 2010-02 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. We adopted the provisions of ASU 2010-02 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.
ASU 2010-06.In January 2010 the FASB issued ASU 2010-06,Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair Value Measurements.ASU 2010-06 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) separate presentation of information about purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. We adopted the provisions of ASU 2010-06 on January 1, 2010 and the adoption of this standard had a disclosure only impact on our financial statements.
ASU 2010-09.In February 2010 the FASB issued ASU 2010-09,Subsequent Events (Topic 855): Amendments to
9
Certain Recognition and Disclosure Requirements.This update provides amendments to Subtopic 855-10 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 an over-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 ASU 2010-09 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
ASU 2009-13.In October 2009, the FASB issued ASU 2009-13,Revenue Recognition (Topic 605) –— Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force(“ASU 2009-13”). ASU 2009-13 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 objective and reliable evidence of fair value for the undelivered items or the residual method to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU 2009-13, multiple-deliverable arrangements will be separated in more circumstances than under currentprior guidance. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on Vendor-Specific Objective Evidence (“VSOE”)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. ASU 2009-13 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. ASU 2009-13 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.2010. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We expect to prospectively adoptadopted the provisions of ASU 2009-13 on January 1, 2011 and do not believe that the adoption of this standard willdid not have a material impact on our financial position, results of operations, or cash flows.
ASU 2009-14.In October 2009, the FASB issued ASU 2009-14,Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force(“ASU 2009-14”). ASU 2009-14 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. ASU 2009-14 changes the 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, ASU 2009-14 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. ASU 2009-14 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. ASU 2009-14 was issued concurrently with ASU 2009-13 and also requires entities to provide the disclosures required by ASU 2009-13 that are included within the scope of ASU 2009-14. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Entities may also elect, but are not required, to adopt ASU 2009-14 retrospectively to prior periods, and must adopt ASU 2009-14 in the same period and using the same transition methods that it uses to adopt ASU 2009-13. We adopted the provisions of ASU 2009-14 on January 1, 2011 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2010-13.In April 2010, the FASB issued ASU No. 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 Issue No. 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. ASU 2010-13 is effective for fiscal years
9
beginning on or after December 15, 2010. 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 ASU 2010-13 on January 1, 2011 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2010-28. In December 2010, the FASB issued ASU No. 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 Issue No. 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. We adopted the provisions of ASU 2010-28 on January 1, 2011 and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2010-29. In December 2010, the FASB issued ASU 2010-29,Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision reached in EITF Issue No. 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. ASU 2010-29 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. We adopted the provisions of ASU 2010-29 on January 1, 2011 and the adoption of this standard may result in additional disclosures related to future acquisitions, but it will not have a material impact on our financial position, results of operations, or cash flows.
Accounting Standards Not Yet Adopted in this Report
There were no new accounting standards that had not been adopted in this report.
NOTE 3. ACQUISITIONS
2011 Acquisitions
Equity Energy Company (“EEC”).In January 2011, we acquired 10 saltwater disposal ("SWD") wells from Equity Energy Company for approximately $14.3 million. Most of these SWD wells are located in North Dakota. We accounted for this purchase as an asset acquisition.
2010 Acquisitions
OFS Energy Services, LLC (“OFS”).In October 2010, we acquired certain subsidiaries, together with associated assets, owned by OFS, an oilfield services company owned by ArcLight Capital Partners, LLC. 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 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. Our third-party valuation of certain tangible and intangible assets was not finalized as of December 31, 2010.
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 following table summarizes the changes in the estimated fair values of the assets acquired and liabilities assumed through March 31, 2011. We are still 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.
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| | | | | | | | |
| | March 31, 2011 | | | December 31, 2010 | |
| | (in thousands) | |
At October 1, 2010: | | | | | | | | |
Cash and cash equivalents | | $ | 539 | | | $ | 539 | |
Accounts receivable | | | 23,386 | | | | 23,384 | |
Other current assets | | | 1,372 | | | | 1,372 | |
Property and equipment | | | 101,734 | | | | 108,152 | |
Intangible assets | | | 17,696 | | | | 20,988 | |
Deferred tax asset | | | 1,851 | | | | 1,851 | |
| | | | | | | | |
| | | | | | |
Total identifiable assets acquired | | | 146,578 | | | | 156,286 | |
| | | | | | |
| | | | | | | | |
Current liabilities | | | 18,881 | | | | 18,498 | |
Other liabilities | | | 707 | | | | 1,134 | |
| | | | | | | | |
| | | | | | |
Total liabilities assumed | | | 19,588 | | | | 19,632 | |
| | | | | | |
| | | | | | | | |
| | | | | | |
Net identifiable assets acquired | | | 126,990 | | | | 136,654 | |
| | | | | | |
| | | | | | | | |
Goodwill | | | 102,748 | | | | 93,084 | |
| | | | | | | | |
| | | | | | |
Net assets acquired | | $ | 229,738 | | | $ | 229,738 | |
| | | | | | |
Of the $17.7 million of acquired intangible assets, $16.7 million was preliminarily assigned to customer relationships that will be amortized as the value of the relationships are realized using rates of 30.0%, 21.0%, 14.7%, 10.3%, 7.2%, 5.0% and 3.6% through 2017. The remaining $1.0 million of acquired intangible assets was assigned to non-compete agreements that will be amortized on a straight-line basis 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. All of the goodwill acquired has been assigned to our U.S. reportable segment.
Five J.A.B., Inc. and Affiliates, (“5 JAB”).In November 2010, we acquired 13 rigs and associated equipment from 5 JAB for cash consideration of approximately $14.6 million. We initially accounted for this transaction as an asset acquisition. However, after preparing the preliminary valuation, we determined this transaction should be accounted for as a business combination. The following table summarizes the changes in the estimated fair values of the assets acquired through March 31, 2011. We are in the process of finalizing third-party valuations of the property and equipment and intangible assets acquired; thus, the provisional measurements of fixed assets, intangible assets and goodwill are preliminary and subject to change.
| | | | | | | | |
| | March 31, 2011 | | | December 31, 2010 | |
| | (in thousands) | |
At November 15, 2010: | | | | | | | | |
Property and equipment | | $ | 9,560 | | | $ | 14,583 | |
Intangible assets | | | 2,512 | | | | — | |
| | | | | | |
|
Total identifiable assets acquired | | | 12,072 | | | | 14,583 | |
| | | | | | |
| | | | | | | | |
Total liabilities assumed | | | — | | | | — | |
| | | | | | |
| | | | | | | | |
Net identifiable assets acquired | | | 12,072 | | | | 14,583 | |
| | | | | | |
| | | | | | | | |
Goodwill | | | 2,511 | | | | — | |
| | | | | | |
|
Net assets acquired | | $ | 14,583 | | | $ | 14,583 | |
| | | | | | |
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Enhanced Oilfield Technologies, LLC (“EOT”).In December 2010, we acquired 100% of the equity interests in EOT, a privately-held oilfield technology company for a cash payment of $11.7 million. We accounted for this acquisition as a business combination. The acquired business was still in the developmental stage at the time of acquisition and continues to be in the developmental stage. Since December 31, 2010, there have been no changes in the estimated fair values of the assets acquired. We are in the process of finalizing third-party valuations of the intangible assets acquired; thus, the provisional measurements of intangible assets and goodwill are preliminary and subject to change.
NOTE 3.4. OTHER BALANCE SHEET INFORMATION
The table below presents comparative detailed information about other current assets at September 30, 2010March 31, 2011 and December 31, 2009:2010:
| | | | | | | | | | | | | | | | |
| | September 30, | | December 31, | | | March 31, | | December 31, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
| | (in thousands) | | | (in thousands) | |
Other Current Assets: | | |
Deferred tax assets | | $ | 20,410 | | $ | 25,323 | | | $ | 32,926 | | $ | 32,046 | |
Prepaid current assets | | 10,313 | | 14,212 | | | 17,596 | | 20,478 | |
Income tax refund receivable | | 1,055 | | 50,025 | | | 356 | | 847 | |
Reinsurance receivable | | 8,904 | | 8,136 | | | 7,320 | | 6,827 | |
Other | | 7,660 | | 6,928 | | | 15,580 | | 11,860 | |
| | | | | | | | | | |
Total | | $ | 48,342 | | $ | 104,624 | | | $ | 73,778 | | $ | 72,058 | |
| | | | | | | | | | |
| |
The table below presents comparative detailed information about other current liabilities at March 31, 2011 and December 31, 2010: | | The table below presents comparative detailed information about other current liabilities at March 31, 2011 and December 31, 2010: | |
| |
| | | March 31, | | December 31, | |
| | | 2011 | | 2010 | |
| | | (in thousands) | |
Other Current Liabilities: | | |
Accrued payroll, taxes and employee benefits | | | $ | 49,071 | | $ | 35,453 | |
Accrued operating expenditures | | | 41,200 | | 39,399 | |
Income, sales, use and other taxes | | | 9,326 | | 93,820 | |
Self-insurance reserve | | | 30,526 | | 30,195 | |
Accrued interest | | | 2,541 | | 4,097 | |
Insurance premium financing | | | 4,641 | | 7,443 | |
Unsettled legal claims | | | 2,651 | | 3,768 | |
Share-based compensation liabilities | | | 1,745 | | 1,146 | |
Other | | | 5,049 | | 6,025 | |
| | | | | | |
Total | | | $ | 146,750 | | $ | 221,346 | |
| | | | | | |
| |
The table below presents comparative detailed information about other noncurrent assets at March 31, 2011 and December 31, 2010: | | The table below presents comparative detailed information about other noncurrent assets at March 31, 2011 and December 31, 2010: | |
| |
| | | March 31, | | December 31, | |
| | | 2011 | | 2010 | |
| | | (in thousands) | |
Other Noncurrent Assets: | | |
Deposits | | | $ | 1,580 | | $ | 1,478 | |
Reinsurance receivable | | | 8,152 | | 7,650 | |
Other | | | 16,754 | | 13,538 | |
| | | | | | |
Total | | | $ | 26,486 | | $ | 22,666 | |
| | | | | | |
1012
The table below presents comparative detailed information about other currentnoncurrent liabilities at September 30, 2010March 31, 2011 and December 31, 2009:2010:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
Other Current Liabilities: | | | | | | | | |
Accrued payroll, taxes and employee benefits | | $ | 42,490 | | | $ | 33,953 | |
Accrued operating expenditures | | | 38,511 | | | | 24,194 | |
Income, sales, use and other taxes | | | 21,470 | | | | 30,447 | |
Self-insurance reserve | | | 32,238 | | | | 24,366 | |
Accrued interest | | | 12,247 | | | | 3,014 | |
Insurance premium financing | | | 1,602 | | | | 7,282 | |
Unsettled legal claims | | | 2,240 | | | | 2,665 | |
Share-based compensation liabilities | | | 1,581 | | | | 1,518 | |
Other | | | 6,016 | | | | 6,092 | |
| | | | | | |
Total | | $ | 158,395 | | | $ | 133,531 | |
| | | | | | |
| | | | | | | | |
| | | | | | December 31, | |
| | March 31, 2011 | | | 2010 | |
| | (in thousands) | |
Other Noncurrent Liabilities: | | | | | | | | |
Deferred tax liabilities | | $ | 156,393 | | | $ | 144,309 | |
Accrued insurance costs | | | 30,135 | | | | 30,110 | |
Asset retirement obligations | | | 11,761 | | | | 11,003 | |
Environmental liabilities | | | 5,745 | | | | 4,011 | |
Income, sales, use and other taxes | | | 8,889 | | | | 8,398 | |
Accrued rent | | | 1,889 | | | | 1,998 | |
Share-based compensation liabilities | | | 506 | | | | 1,106 | |
Other | | | 1,272 | | | | 1,442 | |
| | | | | | |
Total | | $ | 216,590 | | | $ | 202,377 | |
| | | | | | |
The table below presents comparative detailed information about other noncurrent assets at September 30, 2010 and December 31, 2009:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
Other Noncurrent Assets: | | | | | | | | |
Deposits | | $ | 1,117 | | | $ | 1,008 | |
Reinsurance receivable | | | 8,896 | | | | 9,050 | |
Other | | | 3,794 | | | | 2,838 | |
| | | | | | |
Total | | $ | 13,807 | | | $ | 12,896 | |
| | | | | | |
The table below presents comparative detailed information about other noncurrent liabilities at September 30, 2010 and December 31, 2009:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
Other Noncurrent Liabilities: | | | | | | | | |
Deferred tax liabilities | | $ | 138,171 | | | $ | 146,980 | |
Accrued insurance costs | | | 33,868 | | | | 40,855 | |
Asset retirement obligations | | | 10,118 | | | | 10,045 | |
Environmental liabilities | | | 3,035 | | | | 3,353 | |
Income, sales, use and other taxes | | | 9,090 | | | | 2,813 | |
Accrued rent | | | 2,107 | | | | 2,399 | |
Share-based compensation liabilities | | | 713 | | | | 508 | |
Other | | | 3,552 | | | | 599 | |
| | | | | | |
Total | | $ | 200,654 | | | $ | 207,552 | |
| | | | | | |
NOTE 4.5. GOODWILL AND OTHER INTANGIBLE ASSETS
We revised our reportable business segments effective in the first quarter of 2011, and accordingly, have restated goodwill by segment as of December 31, 2010. The changes in the carrying amount of goodwill for the ninethree months ended September 30, 2010March 31, 2011 are as follows:
| | | | | | | | | | | | |
| | U.S. | | | International | | | Total | |
| | | | | | (in thousands) | | | | | |
December 31, 2010 | | $ | 418,047 | | | $ | 29,562 | | | $ | 447,609 | |
Purchase price and other adjustments, net | | | 10,811 | | | | — | | | | 10,811 | |
Impact of foreign currency translation | | | — | | | | 1,757 | | | | 1,757 | |
| | | | | | | | | |
March 31, 2011 | | $ | 428,858 | | | $ | 31,319 | | | $ | 460,177 | |
| | | | | | | | | |
1113
| | | | | | | | | | | | |
| | | | | | Production | | | | |
| | Well Servicing | | | Services | | | Total | |
| | (in thousands) | |
December 31, 2009 | | $ | 342,023 | | | $ | 4,079 | | | $ | 346,102 | |
Purchase price and other adjustments, net | | | 3,750 | | | | — | | | | 3,750 | |
Impact of foreign currency translation | | | (151 | ) | | | 78 | | | | (73 | ) |
| | | | | | | | | |
September 30, 2010 | | $ | 345,622 | | | $ | 4,157 | | | $ | 349,779 | |
| | | | | | | | | |
The components of our other intangible assets as of September 30, 2010March 31, 2011 and December 31, 20092010 are as follows:
| | | | | | | | | | | | | | | | |
| | September 30, | | December 31, | | | March 31, | | December 31, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
| | (In thousands) | | | (in thousands) | |
Noncompete agreements: | | |
Non-compete agreements: | | |
Gross carrying value | | $ | 14,009 | | $ | 14,010 | | | $ | 15,058 | | $ | 15,058 | |
Accumulated amortization | | | (7,559 | ) | | | (5,618 | ) | | | (9,232 | ) | | | (8,224 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 6,450 | | $ | 8,392 | | | $ | 5,826 | | $ | 6,834 | |
| | | | | | | | | | |
| | |
Patents, trademarks and tradename: | | |
Gross carrying value | | $ | 10,606 | | $ | 10,481 | | | $ | 18,118 | | $ | 17,461 | |
Accumulated amortization | | | (891 | ) | | | (917 | ) | | | (965 | ) | | | (927 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 9,715 | | $ | 9,564 | | | $ | 17,153 | | $ | 16,534 | |
| | | | | | | | | | |
| | |
Customer relationships and contracts: | | |
Gross carrying value | | $ | 41,371 | | $ | 41,389 | | | $ | 60,756 | | $ | 60,057 | |
Accumulated amortization | | | (25,180 | ) | | | (19,947 | ) | | | (30,327 | ) | | | (26,059 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 16,191 | | $ | 21,442 | | | $ | 30,429 | | $ | 33,998 | |
| | | | | | | | | | |
| | |
Developed technology: | | |
Gross carrying value | | $ | 2,976 | | $ | 3,073 | | | $ | 3,014 | | $ | 3,106 | |
Accumulated amortization | | | (2,160 | ) | | | (1,724 | ) | | | (2,536 | ) | | | (2,476 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 816 | | $ | 1,349 | | | $ | 478 | | $ | 630 | |
| | | | | | | | | | |
| | |
Customer backlog: | | |
Gross carrying value | | $ | 722 | | $ | 724 | | | $ | 739 | | $ | 762 | |
Accumulated amortization | | | (529 | ) | | | (423 | ) | | | (654 | ) | | | (607 | ) |
| | | | | | | | | | |
Net carrying value | | $ | 193 | | $ | 301 | | | $ | 85 | | $ | 155 | |
| | | | | | | | | | |
The changes in the carrying amount of other intangible assets are as follows (in thousands):
| | | | | | | | |
|
December 31, 2009 | | $ | 41,048 | | |
December 31, 2010 | | | $ | 58,151 | |
Additions | | 246 | | | — | |
Purchase price adjustments | | | | (781 | ) |
Amortization expense | | | (8,043 | ) | | | (4,183 | ) |
Impact of foreign currency translation | | 114 | | | 784 | |
| | | | | | |
September 30, 2010 | | $ | 33,365 | | |
March 31, 2011 | | | $ | 53,971 | |
| | | | | | |
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The weighted average remaining amortization periods and expected amortization expense for the next five years for our intangible assets are as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted | | | | | Weighted | | | |
| | average | | | | | average remaining | | | |
| | remaing amortization | | Expected Amortization Expense | | | amortization | | Expected Amortization Expense | |
| | period (years) | | Q4 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | | period (years) | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | |
| | (In thousands) | | | (in thousands) | |
Noncompete agreements | | 2.7 | | $ | 660 | | $ | 2,620 | | $ | 2,423 | | $ | 406 | | $ | 338 | | $ | — | | |
Non-compete agreements | | | 2.0 | | $ | 2,484 | | $ | 2,597 | | $ | 406 | | $ | 339 | | $ | — | |
Patents, trademarks and tradename | | 4.8 | | 84 | | 289 | | 183 | | 127 | | 120 | | 105 | | | 17.9 | | 644 | | 537 | | 481 | | 416 | | 405 | |
Customer relationships and contracts | | 7.7 | | 1,481 | | 4,224 | | 3,056 | | 2,208 | | 1,670 | | 1,299 | | | 7.0 | | 11,156 | | 6,818 | | 4,907 | | 3,491 | | 2,490 | |
Developed technology | | | 0.4 | | 478 | | — | | — | | — | | — | |
Customer backlog | | 0.9 | | 76 | | 122 | | — | | — | | — | | — | | | 0.4 | | 85 | | — | | — | | — | | — | |
Developed technology | | 0.9 | | 312 | | 499 | | — | | — | | — | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible asset amortization expense | | $ | 2,613 | | $ | 7,754 | | $ | 5,662 | | $ | 2,741 | | $ | 2,128 | | $ | 1,404 | | | $ | 14,847 | | $ | 9,952 | | $ | 5,794 | | $ | 4,246 | | $ | 2,895 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Certain of our goodwill and other 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. Additionally, certain of these assets are subject to purchase accounting adjustments. Purchase accounting adjustments in 2011 relate to reduction of fixed assets and intangibles acquired from OFS Energy Services, LLC (“OFS”) in 2010, and the addition of goodwill and intangibles related to the acquisition of assets from 5 JAB. Amortization expense for our intangible assets was $2.9$4.2 million and $3.1$2.8 million for the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively, and $8.0 million and $9.9 million for the nine months ended September 30, 2010 and 2009, respectively. The purchase price allocation for our 2009 acquisition of Geostream Services Group (“Geostream”) was finalized in 2010.
Goodwill Impairment Test
On September 1, 2009, we acquired an additional 24% interest in Geostream for $16.4 million. This was our second investment in Geostream, bringing our total investment in Geostream to 50% of the outstanding equity interests. Upon increasing our ownership interest to 50%, we also obtained majority representation on Geostream’s board of directors and a controlling interest, and we now fully consolidate the assets, liabilities and results of operations of Geostream, with the 50% that remains outside our control representing a noncontrolling interest. We accounted for this transaction as an acquisition performed in stages. Prior to the date we increased our ownership interest in Geostream to 50%, we accounted for our 26% interest in Geostream as an equity-method investment. On the date we increased our ownership interest in Geostream to 50%, we recorded $23.9 million of goodwill, which represented the difference between the fair value of the total consideration transferred to acquire the 50% interest and the fair value of the assets acquired and liabilities assumed on the acquisition date. We perform an annual goodwill impairment test for our Russian reporting unit on September 30 of each year, or more frequently if circumstances warrant.
Under the first step of the goodwill impairment test, we compared the fair value of the reporting unit to its carrying amount, including goodwill. The first step of the goodwill impairment test showed that the fair value of the reporting unit exceeded the carrying value by 10.8%. In determining the fair value of the reporting unit, we used 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 assigned a weight to the results of each of these methods based on the facts and circumstances in existence at the testing period. Because of our expansion into Russia and the overall economic downturn that affected most companies’ stock prices and market valuation in 2010, we assigned more weight to the discounted cash flow method. Our cash flow projections were based on financial forecasts developed by management and were discounted using a rate of 16%. A key assumption in our model is that revenue related to this reporting unit 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.
This test concluded that the fair value of the Russian reporting unit exceeded its carrying value. Therefore, the second step of the goodwill impairment test was not required. Our remaining reporting units will be tested for potential impairment on December 31, 2010, the annual testing date.
We also performed an impairment analysis for the $8.4 million of intangible assets related to Geostream that are not amortized. We performed an assessment of the fair value of these assets using an expected present value technique. We used a discounted cash flow model involving assumptions based on forecasted revenues, projected royalty expenses and applicable income taxes. Our cash flow projections were based on financial forecasts developed by management. Based on this assessment, these intangible assets were not impaired.
NOTE 5.6. EQUITY METHOD INVESTMENTINVESTMENTS
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IROC Energy Services Corp.
As of September 30, 2010,March 31, 2011, we owned 8.7 million shares of IROC Energy Services Corp. (“IROC”), an Alberta-based oilfield services company. The carrying value of our investment in IROC totaled $4.7$5.9 million and $4.0$5.1 million as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. The carrying value of our investment in IROC is less than our proportionate share of the book value of the net assets of IROC as of September 30, 2010.March 31, 2011. This difference is attributable to certain long-lived assets of IROC, and our proportionate share of IROC’s net income or loss for each period is being adjusted over the estimated remaining useful life of those long-lived assets. As of September 30, 2010,March 31, 2011, the difference between the carrying value of our investment in IROC and our proportionate share of the book value of IROC’s net assets was $4.6$7.9 million.
We recorded $0.1 million and $0.2 million of equity lossesincome related to our investment in IROC of $0.6 million for the three months ended September 30, 2010March 31, 2011 and 2009, respectively, and $0.8 million and $0.1 million of equity incomenone for the ninethree months ended September 30, 2010 and 2009, respectively.March 31, 2010.
In April 2011, we sold our 8.7 million shares of IROC for $12.0 million, net of fees. See“Note 19. Subsequent Event”for further discussion.
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NOTE 6.7. LONG-TERM DEBT
As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the components of our long-term debt were as follows:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
8.375% Senior Notes due 2014 | | $ | 425,000 | | | $ | 425,000 | |
Senior Secured Credit Facility revolving loans due 2012 | | | 87,813 | | | | 87,813 | |
Other long-term indebtedness | | | — | | | | 1,044 | |
Notes payable -related parties, net of discount of $69 | | | — | | | | 5,931 | |
Capital lease obligations | | | 7,460 | | | | 14,313 | |
| | | | | | |
| | | 520,273 | | | | 534,101 | |
| | | | | | | | |
Less current portion | | | 4,397 | | | | 10,152 | |
| | | | | | |
Total capital leases, notes payable and long-term debt | | $ | 515,876 | | | $ | 523,949 | |
| | | | | | |
Related Party Note
On May 13, 2010, we repaid the remaining $6.0 million principal balance of a promissory note, plus accrued and unpaid interest, that we entered into with related parties in connection with an acquisition in 2007 (the “Related Party Note”). No gain or loss on debt extinguishment was recognized in connection with the repayment. | | | | | | | | |
| | March 31, | | | December | |
| | 2011 | | | 31, 2010 | |
| | (in thousands) | |
6.75% Senior Notes due 2021 | | $ | 475,000 | | | $ | — | |
8.375% Senior Notes due 2014 | | | 3,573 | | | | 425,000 | |
Senior Secured Credit Facility revolving loans due 2016 | | | 100,000 | | | | — | |
Capital lease obligations | | | 4,992 | | | | 6,100 | |
| | | | | | |
| | | 583,565 | | | | 431,100 | |
Less current portion | | | 3,438 | | | | 3,979 | |
| | | | | | |
Total capital leases and long-term debt | | $ | 580,127 | | | $ | 427,121 | |
| | | | | | |
8.375% Senior Notes due 2014
We haveOn November 29, 2007, we issued $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the “Senior“2014 Notes”). On March 4, 2011, we repurchased $421.3 million of our 2014 Notes at a purchase price of $1,090 per $1,000 principal amount. On March 15, 2011, we repurchased an additional $0.1 million at a purchase price of $1,060 per $1,000 principal amount. In connection with the repurchase of the 2014 Notes, we incurred a loss of $44.3 million on the early extinguishment of debt related to the premium paid on the tender, the payment of related fees and the write-off of unamortized loan fees. Interest on the remaining $3.6 million aggregate principal amount of 2014 Notes outstanding is payable on June 1 and December 1 of each year.
6.75% Senior Notes due 2021
On March 4, 2011, we issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Notes”). Net proceeds, after deducting underwriters’ fees and offering expenses, were $466.0 million. We used the net proceeds to repurchase the 2014 Notes, including accrued and unpaid interest and fees and expenses. We capitalized $10.0 million of financing costs associated with the issuance of the 2021 Notes that will be amortized over the term of the notes.
The Senior2021 Notes are general unsecured senior obligations and are subordinate to all of our existing and future secured indebtedness. The Senior2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the Senior2021 Notes is payable on JuneMarch 1 and DecemberSeptember 1 of each year.year, beginning on September 1, 2011. The Senior2021 Notes mature on DecemberMarch 1, 2014.2021.
TheOn or after March 1, 2016, the 2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, at the redemption prices below (expressed as percentages of the principal amount redeemed), plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of the years indicated below:
| | | | |
Year | | Percentage | |
2016 | | | 103.375 | % |
2017 | | | 102.250 | % |
2018 | | | 101.125 | % |
2019 and thereafter | | | 100.000 | % |
At any time and from time to time before March 1, 2014, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the outstanding 2021 Notes at a redemption price of 106.750% of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from any one or more equity offerings; provided that at least 65% of the aggregate principal amount of the 2021 Notes remains outstanding immediately after each
16
such redemption; and provided, further, that each such redemption shall occur within 180 days of the date of the closing of such equity offering.
In addition, at any time and from time to time prior to March 1, 2016, we may, at our option, redeem all or a portion of the 2021 Notes at a redemption price equal to 100% of the principal amount plus a premium with respect to the 2021 Notes plus accrued and unpaid interest to the redemption date. If we experience a change of control, subject to certain exceptions, we must give holders of the 2021 Notes the opportunity to sell to us their 2021 Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of purchase.
We are subject to certain negative covenants under the indenture governing the Senior2021 Notes contains various covenants.(the “Indenture”). The Indenture limits our ability to, among other things:
| • | | incur additional indebtedness and issue preferred equity interests; |
|
| • | | pay dividends or make other distributions or repurchase or redeem equity interests; |
|
| • | | make loans and investments; |
|
| • | | enter into sale and leaseback transactions; |
|
| • | | sell, transfer or otherwise convey assets; |
|
| • | | create liens; |
|
| • | | enter into transactions with affiliates; |
|
| • | | enter into agreements restricting subsidiaries’ ability to pay dividends; |
|
| • | | designate future subsidiaries as unrestricted subsidiaries; and |
|
| • | | consolidate, merge or sell all or substantially all of the applicable entities’ assets. |
These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions tiedrelating to the covenants of our Senior Secured2011 Credit
14
Facility (defined below).discussed below. Substantially all of the covenants will terminate before the 2021 Notes mature if one of two specified ratings agencies assigns the 2021 Notes an investment grade rating in the future and no events of default exist under the Indenture. As of March 31, 2011, the 2021 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 2021 Notes later falls below an investment grade rating. We were in compliance with these covenants at September 30, 2010.March 31, 2011.
Senior Secured Credit Facility
We maintainOn March 31, 2011, we simultaneously terminated (without pre-payment penalty) our $300 million credit agreement dated November 29, 2007, as amended, which was to mature no later than November 29, 2012, and entered into a new credit agreement with several lenders and JPMorgan Chase Bank, N.A., as Administrative Agent and Swing Line Lender, Bank of America, N.A., as Syndication Agent, and Capital One, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents. In connection with the termination of our previous credit agreement, we incurred a loss of $2.2 million on early extinguishment of debt related to the write-off of the unamortized portion of deferred financing costs. The new 2011 credit agreement provides for a senior secured credit facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank of America, N.A. and Wells Fargo Bank, N.A. are the administrative agents (the “Senior Secured“2011 Credit Facility”). The Senior Secured Credit Facility (which was amended October 27, 2009) consists consisting of a revolving credit facility, letter of credit sub-facility and swing line facility of up to an aggregate principal amount of $300.0$400 million, all of which will mature no later than November 29, 2012.March 31, 2016. The 2011 Credit Facility and the obligations thereunder are secured by substantially all of our assets and our subsidiary guarantors and are guaranteed by certain of our existing and future domestic subsidiaries.
In connection with the execution of the 2011 Credit Facility, we capitalized $4.7 million of financing costs that will be amortized over the term of the debt.
The interest rate per annum applicable to the Senior Secured2011 Credit Facility (as amended) is, at our option, (i) adjusted LIBOR plus athe applicable 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’sJPMorgan’s prime rate, and (y) the Federal Funds rate plus 0.5%) and (z) one-month adjusted LIBOR plus 1.0%, plus ain each case the applicable margin of 250 for all other loans. The applicable margin for LIBOR loans ranges from 225
17
to 350300 basis points, and the applicable margin for all other loans ranges from 125 to 200 basis points, depending onupon our consolidated total leverage ratio.ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility range fromequal 0.50% to 0.75%, depending upon our consolidated leverage ratio..
The Senior Secured2011 Credit Facility contains certain financial covenants, which, among other things, require us to maintain certain financial ratios, limitlimits our annual capital expenditures, restrictrestricts our ability to repurchase shares and requires us to maintain certain financial ratios. The financial ratios require that:
| • | | our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; |
|
| • | | our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of the 2011 Credit Facility, “EBITDA”) be no greater than 2.00 to 1.00; |
|
| • | | we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of the last day of any fiscal quarter of at least; |
| | |
Fiscal Quarter Ending | | Ratio |
June 30, 2011 through June 30, 2012 | | 1.85 to 1.00 |
September 30, 2012 and thereafter | | 2.00 to 1.00 |
| • | | we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least 3.00 to 1.00; and |
|
| • | | we limit our capital expenditures and investments in foreign subsidiaries to $250.0 million per fiscal year, up to 50% of which amount may be carried over for expenditure in the following fiscal year, if after giving pro forma effect thereto the consolidated total leverage ratio exceeds 3.00 to 1.00. |
In addition, the assets owned by domestic subsidiaries that may be located outside the United States.
The Senior Secured2011 Credit Facility also contains certain otheraffirmative and negative covenants, including, without limitation, restrictions related toon (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;investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event of default exists under the 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with other financial covenants and we have at least $25 million of availability under the 2011 Credit Facility); (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders;equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming or repurchasing the Senior Notessubordinated (contractually or other unsecured debt incurred; (viii)structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements; (xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (ix)(xiv) changes in the nature of our business; (x)(xv) 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 other unsecured debt incurred if the effect of such amendment is to shorten the maturity of the Senior Notes or such other unsecured debt;documents; and (xi)(xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions. Furthermore, the 2011 Credit Facility provides that share repurchases in excess of $200 million can be made only if our debt to capitalization ratio is below 45%.
We were in compliance with these covenants on September 30, 2010.at March 31, 2011. We may prepay the Senior Secured2011 Credit Facility in whole or in part at any time without premium or penalty, subject to our obligationcertain reimbursements to reimburse the lenders for breakage and redeployment costs. As of September 30, 2010,March 31, 2011, we had borrowings of $87.8$100.0 million under the revolving credit facility and committed$59.4 million of letters of credit of $58.8 million outstanding, leaving $153.4$240.6 million of available borrowing capacity under the Senior Secured2011 Credit Facility. On October 1, 2010 we borrowed $80.0 million under the credit facility to acquire certain subsidiaries of OFS ES (see “Note 17. Subsequent Events”). We subsequently repaid the entire $167.8 million outstanding balance of the revolving credit facility as of October 4, 2010 with a portion of the proceeds from the Patterson-UTI transaction (see “Note 17. Subsequent Events”). The weighted average interest rate on the outstanding borrowings under the Senior Secured2011 Credit Facility at September 30, 2010March 31, 2011 was 4.12%4.75%.
Capital Leases
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. See further discussion of the Patterson-UTI transaction in “Note 16. Discontinued Operations”and “Note 17. Subsequent Events”.
NOTE 7.8. OTHER INCOME AND EXPENSE
The table below presents comparative detailed information about our other income and expense, shown on the condensed consolidated statements of operations as “other,“Other, net” for the periods indicated:
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | |
| | (in thousands) | | (in thousands) | | | (in thousands) | |
(Gain) loss on disposal of assets, net | | $ | (146 | ) | | $ | 1,942 | | $ | 509 | | $ | 566 | | | $ | (669 | ) | | $ | 335 | |
Interest income | | | (5 | ) | | | (42 | ) | | | (41 | ) | | | (459 | ) | | | (20 | ) | | | (15 | ) |
Foreign exchange loss (gain), net | | 30 | | | (1,305 | ) | | | (479 | ) | | | (1,358 | ) | |
Other (income) expense, net | | | (659 | ) | | 939 | | | (1,545 | ) | | 563 | | |
Foreign exchange gain | | | | (1,467 | ) | | | (1,364 | ) |
Other income, net | | | | (229 | ) | | | (199 | ) |
| | | | | | | | | | | | | | |
Total | | $ | (780 | ) | | $ | 1,534 | | $ | (1,556 | ) | | $ | (688 | ) | | $ | (2,385 | ) | | $ | (1,243 | ) |
| | | | | | | | | | | | | | |
NOTE 8.9. INCOME TAXES
We recorded $1.4 millionare subject to U.S. federal income tax as well as income taxes in multiple state and $47.8 million offoreign jurisdictions. Our effective tax benefit on pretax losses of $3.7 million and $126.8 million for continuing operationsrates for the three months ended September 30,March 31, 2011 and 2010 were 32.9% and 2009,41.4%, respectively. Our effective tax rates for our continuing operations for the three months ended September 30, 2010 and 2009 were 37.8% and 37.6%, respectively. We recorded $15.0 million and $56.2 million of tax benefit on pretax losses of $39.2 million and $149.1 million from our continuing operations for the nine months ended September 30, 2010 and 2009, respectively. Our effective tax rates for our continuing operations for the nine months ended September 30, 2010 and 2009 were 38.2% and 37.7%, respectively. The variance quarter over quarter israte varies due to the mix of pre-tax profit between the U.S. and international taxing jurisdictions with varying statutory rates, differences in permanent items impacting mainly the U.S. effective rate, and differences between discrete items, including accrualmainly due to return adjustments, increases or decreases to valuation allowances, and tax expense or benefits recognized for uncertain tax positions. The variance between our effective rate and the U.S. statutory rate reflects the impact of permanent items, mainly non-deductible expenses such as fines and penalties, and expenses subject to statutorily imposed limitations such as meals and entertainment expenses, plus the impact of state income taxes.
As of September 30, 2010March 31, 2011 and December 31, 2009,2010, we had $2.4$2.3 million and $3.2$2.2 million, respectively, of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate. We recognized tax benefitexpense of $0.9less than $0.1 million and $0.1 million in each of the quarterquarters ended September 30,March 31, 2011 and 2010 and a tax benefit of $1.1 million for the quarter ended September 30, 2009 related to these items. We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. We have substantially concluded all U.S. federal and state tax matters through the year ended December 31, 2006.
We record expenseinterest and penalties related to unrecognized tax benefits as income tax expense. We have accrued a liability of $1.0$0.9 million and $1.1$0.8 million for the payment of interest and penalties as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. We believe that it is reasonably possible that $0.8$0.9 million of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized in the next twelve months as a result of a lapse of statute of limitations and settlement of ongoing audits.
During No release of our deferred tax asset valuation allowance was made during the quarter ended March 31, 2010, we filed our 2009 tax return reflecting a net operating loss of $153.5 million. We also filed a claim for refund of federal income taxes paid in prior years and on March 31, 2010, we received remittances from the Internal Revenue Service totaling $53.2 million.2011.
NOTE 9.10. COMMITMENTS AND CONTINGENCIES
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 and arbitration hearings that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. 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 September 30, 2010,March 31, 2011, the aggregate amount of our liabilities related to litigation that are deemed probable and reasonably estimable is $2.2$2.7 million. We do not believe that the disposition of any of these matters will result in an
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additional loss materially in excess of amounts that have been recorded. During the thirdfirst quarter of 2010,2011, we increasedrecorded a net decrease in our reserves by $0.5liability of $1.1 million associated withrelated to the settlement and revision of our assessment of the ultimate liabilityexposures related to ongoing legal matters. We paid $0.3 million during the quarter related to the settlement of legal matters for a net increase to our reserve of $0.2 million during the quarter.
Litigation with a Former Officer
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 alleged 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. Following the transfer of the case to the District of Pennsylvania, 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 sought 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. On September 2, 2010, we reached a settlement with Mr. Loftis regarding the alleged claims, and recorded an additional charge related to the settlement. The resolution of this claim did not have a material effect on our results of operations for the nine months ended September 30, 2010.
UMMA Verdict
On May 3, 2010, a jury returned a verdict in the case ofUMMA 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, that Key was negligent in performing the work, and that Key was not entitled to damages under its counterclaims. We believe that, as a matter of law, the jury erred in its decision. The judge in this case delayed rendering his judgment and requested both parties to file motions on the jury’s verdict. Our motion for judgment notwithstanding the verdict has been filed and is pending final ruling by the court. Because the court has not yet rendered judgment in this case, the ultimate outcome of this litigation and our potential liability, if any, cannot be predicted at this time. As of September 30, 2010, we have not taken any provision for this matter. We believe the range of possible damage awards, if the matter is decided adversely to us, could be between zero and $13.0 million, plus attorney’s fees. We currently expect to receive the court’s judgment during the fourth quarter of 2010.
Self-Insurance Reserves
We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, we have recorded $66.1 million$60.7 and $65.2$60.3 million, respectively, of self-insurance liabilitiesreserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had $17.8
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$16.3 million and $15.4 million of insurance receivables as of September 30, 2010March 31, 2011 and $17.2 millionDecember 31, 2010. These insurance receivables are recorded under other assets and accounts receivable as of March 31, 2011 and December 31, 2009.2010. We feelbelieve 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-disposedpreviously disposed properties, we record liabilities 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. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, we have recorded $3.0$5.7 million and $3.4$4.0 million, respectively, for our environmental remediation liabilities. We feelbelieve 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.
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NOTE 10.11. EARNINGS PER SHARE
Basic earnings per common share is determined by dividing net earnings attributable to Key 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 potentially dilutive outstanding securities using the treasury stock and “as if converted” methods.
The components of our earnings per share are as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | (in thousands, except per share amounts) | |
Basic EPS Calculation: | | | | | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | | | | | |
Loss from continuing operations attributable to Key | | $ | (1,511 | ) | | $ | (79,005 | ) | | $ | (21,404 | ) | | $ | (92,816 | ) |
Income (loss) from discontinued operations, net of tax | | | 8,283 | | | | (45,937 | ) | | | 18,360 | | | | (49,695 | ) |
| | | | | | | | | | | | |
Income (loss) attributable to Key | | $ | 6,772 | | | $ | (124,942 | ) | | $ | (3,044 | ) | | $ | (142,511 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Denominator | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 125,637 | | | | 121,277 | | | | 125,336 | | | | 120,983 | |
| | | | | | | | | | | | | | | | |
Basic loss per share from continuing operations attributable to Key | | $ | (0.01 | ) | | $ | (0.65 | ) | | $ | (0.17 | ) | | $ | (0.77 | ) |
Basic income (loss) per share from discontinued operations | | | 0.06 | | | | (0.38 | ) | | | 0.15 | | | | (0.41 | ) |
| | | | | | | | | | | | |
Basic income (loss) per share attributable to Key | | $ | 0.05 | | | $ | (1.03 | ) | | $ | (0.02 | ) | | $ | (1.18 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted EPS Calculation: | | | | | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | | | | | |
Loss from continuing operations attributable to Key | | $ | (1,511 | ) | | $ | (79,005 | ) | | $ | (21,404 | ) | | $ | (92,816 | ) |
Income (loss) from discontinued operations, net of tax | | | 8,283 | | | | (45,937 | ) | | | 18,360 | | | | (49,695 | ) |
| | | | | | | | | | | | |
Income (loss) attributable to Key | | $ | 6,772 | | | $ | (124,942 | ) | | $ | (3,044 | ) | | $ | (142,511 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Denominator | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 125,637 | | | | 121,277 | | | | 125,336 | | | | 120,983 | |
| | | | | | | | | | | | | | | | |
Diluted loss per share from continuing operations attributable to Key | | $ | (0.01 | ) | | $ | (0.65 | ) | | $ | (0.17 | ) | | $ | (0.77 | ) |
Diluted income (loss) per share from discontinued operations | | | 0.06 | | | | (0.38 | ) | | | 0.15 | | | | (0.41 | ) |
| | | | | | | | | | | | |
Diluted income (loss) per share attributable to Key | | $ | 0.05 | | | $ | (1.03 | ) | | $ | (0.02 | ) | | $ | (1.18 | ) |
| | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | (in thousands, except per share amounts) | |
Basic and Diluted EPS Calculation: | | | | | | | | |
Numerator | | | | | | | | |
Loss from continuing operations attributable to Key | | $ | (18,135 | ) | | $ | (9,475 | ) |
Income from discontinued operations, net of tax | | | — | | | | 1,895 | |
| | | | | | |
Loss attributable to Key | | $ | (18,135 | ) | | $ | (7,580 | ) |
| | | | | | |
| | | | | | | | |
Denominator | | | | | | | | |
Weighted average shares outstanding | | | 142,206 | | | | 124,952 | |
| | | | | | | | |
Basic and diluted loss per share from continuing operations attributable to Key | | $ | (0.13 | ) | | $ | (0.08 | ) |
Basic and diluted income per share from discontinued operations | | | — | | | | 0.02 | |
| | | | | | |
Basic and diluted loss per share attributable to Key | | $ | (0.13 | ) | | $ | (0.06 | ) |
| | | | | | |
Because of our loss from continuing operations for the three and nine months ended September 30,March 31, 2011 and 2010, 2.5 million and 2009, all potentially dilutive securities3.5 million stock options, respectively, and 0.4 million stock appreciation rights (“SARS”) were excluded from the calculation of our diluted earnings per share, as the potential exercise of those securities would be anti-dilutive. On October 1, 2010 we completedThere were no events occurring after March 31, 2011 that would materially affect the acquisitionnumber of certain subsidiaries and related assets of OFS ES. Upon the closing of this transaction, we issued approximately 15.8 million shares of our common stock (the “Consideration Shares”) as part of the total purchase price. The Consideration Shares will impact our basic and diluted weighted average shares outstanding beginning in the fourth quarter of 2010. See“Note 17. Subsequent Events”for further discussion.outstanding.
NOTE 11.12. SHARE-BASED COMPENSATION
We recognized employee share-based compensation expense of $3.2$4.0 million and $2.4$3.1 million during the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively, and the related income tax benefit recognized was $1.2 million and $0.8 million, respectively. We recognized employee share-based compensation expense of $9.7 million and $5.3$1.3 million for the nine months ended September 30, 2010 and 2009, respectively, and the related income tax benefit recognized was $3.8 million and $1.9 million, respectively.each period. We did not capitalize any share-based compensation during the three or nine month periods ended September 30, 2010March 31, 2011 and 2009.2010.
During February 2011, we issued 1.1 million shares of restricted common stock to certain of our employees and officers, which vest in equal installments over the next three years. These shares had an issuance price of $13.08 per share.
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The unrecognized compensation cost related to our unvested stock options, restricted shares and phantom shares as of September 30, 2010March 31, 2011 is estimated to be less than $0.1 million, $13.3$22.2 million and $0.5$0.4 million, respectively and is expected to be recognized over a weighted-average period of 1.2 years, 1.21.4 years and 0.70.6 years, respectively.
During March 2010, we issued a total of 0.62011, approximately 0.2 million performance units subject 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 equalfrom March 2010 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.March 2011 expired unvested. As of September 30, 2010,March 31, 2011, the fair value of outstandingthe remaining performance units issued in March 2010 was $2.2$2.0 million, and is being accreted to compensation expense over the vesting terms of the awards. During the three and nine months ended September 30, 2010, we recognized $0.2 million and $0.9 million, respectively, of pre-tax compensation expense associated with these awards. As of September 30, 2010,March 31, 2011, the unrecognized compensation cost related to our unvested performance units is estimated to be $1.3$0.8 million and is expected to be recognized over a weighted-average period of 1.10.9 years.
In October 2010, pursuant to the terms of the sale agreement, we accelerated the vesting period of 0.1 million shares of restricted stock held by certain of our employees who became employees of Patterson-UTI as part of this transaction. Compensation expense of $1.2 million was recognized related to this accelerated vesting. See “Note 17. Subsequent Events”for further discussion.
NOTE 12.13. TRANSACTIONS WITH RELATED PARTIES
Related Party Notes PayableEmployee Loans and Advances
On May 13,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 employees continue their employment with us. The relocation loans are repaid upon the employees selling their prior residence. As of March 31, 2011 and December 31, 2010, we repaidthese loans, in the outstanding principal balance of $6.0aggregate, totaled less than $0.1 million, of the Related Party Note, plus accrued and unpaid interest. This note was repaid concurrently with the sale of six operational barge rigs and related equipment to the holders of the note for total consideration of $17.9 million. We received net proceeds, after repayment of the note, of $11.9 million and recorded a $0.6 million loss on the sale of these assets.respectively.
Transactions with EmployeesAffiliates
In connectionOctober 2010, we acquired certain subsidiaries, together with associated assets, from OFS, an acquisition in 2008, the former owner of the acquiree became one of our employees.oilfield services company owned by ArcLight Capital Partners, LLC. At the time of the acquisition, theOFS conducted business with companies owned by a former owner and employee owned, and continues to own,of an exploration and production company.OFS subsidiary that we had previously purchased. Subsequent to the acquisition, we continued to provide services to this company.these companies. The prices charged to these companies for our services are at rates that are equivalent to the prices charged to our other customers in the U.S. market. As of March 31, 2011 and December 31, 2010, our receivables from these related parties totaled $0.9 million and $1.0 million, respectively. Revenues from these customers for the three month periods ended March 31, 2011 and 2010 totaled $1.5 million and $0.2 million, respectively.
We provide services to an exploration and production company owned by one of our employees who had been the owner of a business we acquired. The prices charged to this company for these services are at rates that are an average of the prices charged to our other customers in the California market where the services are provided. As of September 30,March 31, 2011 and December 31, 2010, our receivables withfrom this company totaled $0.4 million.$0.3 million and $0.2 million, respectively. Revenues from this company totaled $0.6 million for each of the three month periods ended March 31, 2011 and 2010.
Board of Director RelationshipRelationships with CustomerCustomers
OneA member of our board of directors 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 were approximately 4% and 2% of our total revenues for the nine months ended September 30, 2010 and 2009, respectively. Sales to Anadarko were approximately 6% and 2%each of our total revenues for the three monthsmonth periods ended September 30, 2010March 31, 2011 and 2009, respectively.2010. Receivables outstanding from Anadarko were approximately 6% and 1%2% of our total accounts receivable as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. Transactions with Anadarko for our services are made on terms consistent with other customers.
Another member of our board of directors is a member and managing director of the general partner of the indirect, majority owner of Element Petroleum, LP (“Element”), which is one of our customers. Sales to Element were less than 1% of our total revenues for the three months ended March 31, 2011 and 2010. Receivables outstanding from Element were less than 1% of our total accounts receivable as of March 31, 2011 and December 31, 2010. Transactions with Element for our services are made on terms consistent with other customers.
NOTE 13.14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
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The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of September 30, 2010March 31, 2011 and December 31, 2009:2010.
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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2010 | | December 31, 2009 | | March 31, 2011 | | December 31, 2010 | |
| | 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 | | $ | 588 | | $ | 588 | | $ | 281 | | $ | 281 | | |
Notes and accounts receivable — related parties | | | $ | 1,256 | | $ | 1,256 | | $ | 1,198 | | $ | 1,198 | |
| | |
Financial liabilities: | | |
6.75% Senior Notes | | | $ | 475,000 | | $ | 483,313 | | $ | — | | $ | — | |
8.375% Senior Notes | | $ | 425,000 | | $ | 449,438 | | $ | 425,000 | | $ | 422,875 | | | 3,573 | | 3,893 | | 425,000 | | 450,500 | |
Senior Secured Credit Facility revolving loans | | 87,813 | | 87,813 | | 87,813 | | 87,813 | | |
Note payable — related parties | | — | | — | | 5,931 | | 5,931 | | |
Credit Facility revolving loans | | | 100,000 | | 100,000 | | — | | — | |
Notes and accounts receivable –— related parties.The amounts reported relate to notes receivable from certain of our employees related to relocation and retention agreements and certain trade accounts receivable with affiliates. The carrying values of these items approximate their fair values as of the applicable balance sheet dates.
8.375%6.75% Senior Notes due 2014.2021.The fair value of our Senior2021 Notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of September 30, 2010March 31, 2011 was $425.0$475.0 million, and the fair value was $449.4$483.3 million (105.75%(101.75% of carrying value).
8.375% Senior Secured Notes due 2014.The fair value of our 2014 Notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of March 31, 2011 was $3.6 million, and the fair value was $3.9 million (108.95% of carrying value).
Credit Facility Revolving Loans.Because of their variable interest rates, and the amendment of the Senior Secured Credit Facility during the fourth quarter of 2009, the fair values of the revolving loans borrowed under our Senior Secured2011 Credit Facility approximate their carrying values. The carrying and fair values of these loans as of September 30, 2010March 31, 2011 were $87.8$100.0 million.
Note payable – related parties.The amounts reported relate to the Related Party Note in connection with a seller financing arrangement entered into in connection with an acquisition made in 2007. The outstanding balance of this note was repaid on May 13, 2010.
NOTE 14.15. SEGMENT INFORMATION
As of September 30, 2010, we operate in twoWe revised our reportable business segments Well Servicingeffective beginning with the first quarter of 2011. The new operating segments are U.S. and Production Services.International. We also have a “Functional Support” segment associated with managing each of our reportable operating segments. Financial results as of and for the three months ended March 31, 2010 have been restated to reflect the change in operating segments. We revised our segments to reflect changes in management’s resource allocation and performance assessment in making decisions regarding our business. Our domestic rig services, and fluid management services are aggregated within our Well Servicing segment. Our pressure pumping services, fishing and rental services, and wirelineintervention services as well asare now aggregated within our U.S. reportable segment. Our international rig services business and our Canadian technology development group in Canada, are now aggregated within our Production ServicesInternational reportable segment. TheThese changes reflect our current operating focus in compliance with ASC 280. We aggregate services that create our reportable segments in accordance with ASC 280, and the accounting policies for our segments are the same as those described in“Note 1. Organization and Summary of Significant Accounting Policies”of the notes to our consolidated financial statements included in Item 8 of our Annual Report2010 Form 10-K. We evaluate the performance of our operating segments based on Form 10-K for the year ended December 31, 2009.revenue and income measures. All inter-segment sales pricing is based on current market conditions. As mentioned in “Note 1. General,” 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. We anticipate revising our reportable segments in the fourth quarter of 2010 to realign our current business and management structure. The following is a description of our segments as of September 30, 2010:the segments:
Well ServicingU.S. Segment
Rig-Based Services
Our rig-based services include the maintenance, workover, and recompletion of existing oil and natural gas wells, completion of newly-drillednewly drilled wells, 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 Servicingwell servicing rigs that are capable of
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providing conventional and horizontal drilling services. Based on current industry data, we have the largest land-based Well Servicing rig fleet in the world. Our rigs consist of various sizes and capabilities, allowing us to work onservice all types of wells with depths up to 20,000 feet. Many of our rigs are outfitted with our proprietary KeyView® technology, which captures and reports well site operating data. We believe that this technology allows our customers and our crews to better monitor well site operations, to improveimproves efficiency and safety, and to addadds value to the services that we offer.
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The maintenance services provided bythat our rig fleet provides are generally required throughout the life cycle of an oil or natural gas well to ensure efficient and continuous production.well. Examples of the maintenance services provided bythat we provide as part of our rigsrig-based services include routine mechanical repairs to the pumps, tubing and other equipment, in a well, removing debris and formation material from the wellbore,wellbores, and pulling the rods and other downhole equipment out of the wellborefrom wellbores to identify and resolve a production problem.problems. Maintenance services generally take less than 48 hours to complete and, in general, the demand for these services is closely related to the total number of producing oil and gas wells in a given market.complete.
The workover services provided by our rig fleetthat we provide are performeddesigned to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbore sections,wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
The completion and recompletion services provided by our rigs prepare a newly drilled well, or a well that was recently extended through a workover, for production. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. The completion process typicallyusually takes a few days to several weeks, depending on the nature of the completion.
Our rig fleet is also used in the process of permanently shutting-in an oil or natural gas well that is at the end of its productive life. These plugging and abandonment services generally require auxiliary equipment in addition to a Well Servicingwell servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state regulations to plug wells that are no longer productive.
Fluid Management Services
We provide fluid management services, including oilfield transportation and produced water disposal services, with a very largeour fleet of heavy-heavy and medium-duty trucks. The specific services offered include vacuum truck services, fluid transportation services and disposal services for operators whose wells produce saltwater or other non-hydrocarbon fluids. We also supply frac tanks which are used for temporary storage of fluids associated with fluid hauling operations. In addition, we provide equipment trucks that are used to move large pieces of equipment from one well site to the next, and we operate a fleet of hot oilers which are capable of pumping heated fluids that are used to clear soluble restrictions in a wellbore.
Fluid hauling trucks are utilized in connection with drilling and workover projects, which tend to use large amounts of various fluids. In connection with drilling, maintenance or workover activity at a well site, we transport fresh and brine water to the well site and provide temporary storage and disposal of produced saltwater and drilling or workover fluids. These fluids are removed from the well site and transported for disposal in a saltwater disposal well that is either owned by us or a third party.
Production Services Segment
Pressure PumpingIntervention Services
Our pressure pumpingintervention services include fracturing, nitrogen, acidizing, cementing andour coiled tubing services. These services (which may be utilized during the completion or workover of a well) are provided to oilbusiness and natural gas producers and are used to enhance the production of oil and natural gas from formations which exhibit restricted flow. 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
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between the casing and the wellbore.specialty pumping business. 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 tubingthrough-tubing fishing and formation stimulations utilizing acid, chemical treatments and sand fracturing. Coiled tubing is also used for a number of horizontal well applications.
On October 1, 2010, we closed the sale of our U.S. based pressure pumping and wireline businesses to Patterson-UTI. For the periods presented in this report, we show these assetsapplications such as held for sale and the results of operations for pressure pumping operations as discontinued operations for all periods presented. See“Note 16. Discontinued Operations”and“Note 17. Subsequent Events”.Our coiled tubing operations were not sold as part of this transaction, and are still reported in the Production Services segment.milling temporary plugs between frac stages.
Fishing and& Rental Services
We offer a full line of services and rental equipment designed for use in providing both onshore and offshore drilling and workover services. Fishing services involve recovering lost or stuck equipment in the wellbore utilizing a broad array of “fishing tools.” Our rental tool inventory consists of drill pipe, tubulars, handling tools (including our patented Hydra-Walk® pipe-handling units and services), pressure-control equipment, power swivels and foam air units.
Wireline ServicesInternational Segment
Our international operations include Mexico, Colombia, the Middle East, the Russian Federation and Argentina. Services in these locations include rig-based services such as the maintenance, workover, and recompletion of existing oil and natural gas wells, completion of newly-drilled wells, and plugging and abandonment of wells at the end of their useful
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lives. We have a fleetalso provide drilling services in the regions where we work and we provide engineering services for the development of wireline units that perform services at various times throughoutreservoirs.
Our operations in Mexico consist mainly of drilling, workover, project management and consulting services. We generate significant revenue from our contract with the life of the well including perforating, completion logging, production logging and casing integrity services. After the wellbore is cased and cemented, we can provide a number of services. Perforating creates the flow path between the reservoir and the wellbore. 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.Mexican national oil company Petróleos Mexicanos.
In addition, wireline services may involve wellbore remediation, which could include the positioningArgentina and installationColombia, our operations consist of various plugsdrilling and packers to maintain production or repair well problems, and casing inspection for internal or external abnormalitiesworkover services. Our operations in Colombia commenced in the casing string. Wireline servicesthird quarter of 2010 and we expect to increase activity during 2011.
In Russia, we provide drilling, workover, and reservoir engineering services. Our Russian operations are provided from surface logging units,structured as a joint venture in which lower toolswe have a controlling financial interest.
In the Middle East, we formed a joint venture in the first quarter of 2010 in which we have a controlling financial interest. We commenced operations in the Middle East in the fourth quarter of 2010. Our operations in the Middle East consist mainly of drilling and sensors into the wellbore. We use advanced wireline instruments to evaluate well integrityworkover services.
Advanced Measurements, Inc. (“AMI”)
Also included in our International segment is AMI, our technology development company based in Canada. AMI is focused on oilfield service equipment controls, data acquisition and perform cement evaluations and production logging. As discussed above and in“Note 16. Discontinued Operations” and“Note 17. Subsequent Events,”we closed the sale of our U.S. based pressure pumping and wireline businesses to Patterson-UTI. For the periods presented in this report, we show these assets as held for sale and the results of operations for our wireline operations as discontinued operations for all periods presented.digital information flow.
Functional Support Segment
We have aggregated all ofOur Functional Support segment manages 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 reportableU.S. and International operating segments. Functional Support assets consist primarily of cash and cash equivalents, accounts and notes receivable and investments in subsidiaries, deferred financing costs, our equity-method investments and deferred income tax assets.
The following tables set forth our segment information as of and for the three and nine month periods ended September 30, 2010March 31, 2011 and 2009:
22
For the three months ended September 30, 2010:
| | | | | | | | | | | | | | | | | | | | |
| | | | Production | | Functional | | Reconciling | | |
| | Well Servicing | | Services | | Support | | Eliminations | | Total |
Revenues from external customers | | $ | 244,288 | | | $ | 39,451 | | | $ | — | | | $ | — | | | $ | 283,739 | |
Intersegment revenues | | | 82 | | | | 2,834 | | | | — | | | | (2,916 | ) | | | — | |
Depreciation and amortization | | | 24,213 | | | | 5,719 | | | | 2,633 | | | | — | | | | 32,565 | |
Operating income (loss) | | | 25,348 | | | | 9,660 | | | | (28,825 | ) | | | — | | | | 6,183 | |
Interest expense, net of amounts capitalized | | | (21 | ) | | | (88 | ) | | | 10,735 | | | | — | | | | 10,626 | |
Income (loss) from continuing operations before tax | | | 25,380 | | | | 9,593 | | | | (38,636 | ) | | | — | | | | (3,663 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | 1,350,262 | | | | 325,242 | | | | 223,055 | | | | (217,584 | ) | | | 1,680,975 | |
Capital expenditures, excluding acquisitions | | | 17,520 | | | | 6,889 | | | | 8,733 | | | | — | | | | 33,142 | |
For the three months ended September 30, 2009:
| | | | | | | | | | | | | | | | | | | | |
| | | | Production | | Functional | | Reconciling | | |
| | Well Servicing | | Services | | Support | | Eliminations | | Total |
Revenues from external customers | | $ | 194,071 | | | $ | 21,278 | | | $ | — | | | $ | — | | | $ | 215,349 | |
Intersegment revenues | | | — | | | | 2,014 | | | | — | | | | (2,014 | ) | | | — | |
Depreciation and amortization | | | 28,757 | | | | 7,578 | | | | 2,345 | | | | — | | | | 38,680 | |
Asset retirements and impairments | | | 65,869 | | | | 31,166 | | | | — | | | | — | | | | 97,035 | |
Operating (loss) income | | | (57,953 | ) | | | (31,732 | ) | | | (26,475 | ) | | | — | | | | (116,160 | ) |
Interest expense, net of amounts capitalized | | | (607 | ) | | | (62 | ) | | | 9,806 | | | | — | | | | 9,137 | |
Loss from continuing operations before tax | | | (58,889 | ) | | | (31,487 | ) | | | (36,455 | ) | | | — | | | | (126,831 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | 1,155,860 | | | | 252,483 | | | | 648,956 | | | | (388,472 | ) | | | 1,668,827 | |
Capital expenditures, excluding acquisitions | | | 24,125 | | | | 7,705 | | | | 3,732 | | | | — | | | | 35,562 | |
23
For the nine months ended September 30, 2010:
| | | | | | | | | | | | | | | | | | | | |
| | | | Production | | Functional | | Reconciling | | |
| | Well Servicing | | Services | | Support | | Eliminations | | Total |
Revenues from external customers | | $ | 701,025 | | | $ | 102,458 | | | $ | — | | | $ | — | | | $ | 803,483 | |
Intersegment revenues | | | 233 | | | | 5,825 | | | | — | | | | (6,058 | ) | | | — | |
Depreciation and amortization | | | 74,599 | | | | 16,534 | | | | 7,234 | | | | — | | | | 98,367 | |
Operating income (loss) | | | 56,882 | | | | 15,494 | | | | (81,517 | ) | | | — | | | | (9,141 | ) |
Interest expense, net of amounts capitalized | | | (845 | ) | | | (154 | ) | | | 32,613 | | | | — | | | | 31,614 | |
Income (loss) from continuing operations before tax | | | 57,947 | | | | 15,046 | | | | (112,192 | ) | | | — | | | | (39,199 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | 1,350,262 | | | | 325,242 | | | | 223,055 | | | | (217,584 | ) | | | 1,680,975 | |
Capital expenditures, excluding acquisitions | | | 48,742 | | | | 29,898 | | | | 22,425 | | | | — | | | | 101,065 | |
For the nine months ended September 30, 2009:
| | | | | | | | | | | | | | | | | | | | |
| | | | Production | | Functional | | Reconciling | | |
| | Well Servicing | | Services | | Support | | Eliminations | | Total |
Revenues from external customers | | $ | 648,277 | | | $ | 69,782 | | | $ | — | | | $ | — | | | $ | 718,059 | |
Intersegment revenues | | | 6 | | | | 3,910 | | | | — | | | | (3,916 | ) | | | — | |
Depreciation and amortization | | | 88,009 | | | | 19,956 | | | | 6,720 | | | | — | | | | 114,685 | |
Asset retirements and impairments | | | 65,869 | | | | 31,166 | | | | — | | | | — | | | | 97,035 | |
Operating loss | | | (1,416 | ) | | | (38,888 | ) | | | (80,263 | ) | | | — | | | | (120,567 | ) |
Interest expense, net of amounts capitalized | | | (1,494 | ) | | | (390 | ) | | | 31,124 | | | | — | | | | 29,240 | |
Loss from continuing operations before tax | | | (617 | ) | | | (37,559 | ) | | | (110,943 | ) | | | — | | | | (149,119 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | 1,155,860 | | | | 252,483 | | | | 648,956 | | | | (388,472 | ) | | | 1,668,827 | |
Capital expenditures, excluding acquisitions | | | 56,709 | | | | 36,532 | | | | 9,730 | | | | — | | | | 102,971 | |
The following table presents information related to our operations on a geographical basis as of and for the three and nine month periods ended September 30, 2010 and 2009:
24
| | | | | | | | | | | | | | | | |
| | U.S. | | International | | Eliminations | | Total |
| | (in thousands) |
As of and for the three months ended September 30, 2010 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 242,142 | | | $ | 41,597 | | | $ | — | | | $ | 283,739 | |
Long-lived assets | | | 1,158,994 | | | | 106,679 | | | | — | | | | 1,265,673 | |
| | | | | | | | | | | | | | | | |
As of and for the three months ended September 30, 2009 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 168,601 | | | $ | 46,748 | | | $ | — | | | $ | 215,349 | |
Long-lived assets | | | 1,240,845 | | | | 131,940 | | | | (88,881 | ) | | | 1,283,904 | |
| | | | | | | | | | | | | | | | |
As of and for the nine months ended September 30, 2010 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 662,671 | | | $ | 140,812 | | | $ | — | | | $ | 803,483 | |
Long-lived assets | | | 1,158,994 | | | | 106,679 | | | | — | | | | 1,265,673 | |
| | | | | | | | | | | | | | | | |
As of and for the nine months ended September 30, 2009 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenue from external customers | | $ | 579,881 | | | $ | 138,178 | | | $ | — | | | $ | 718,059 | |
Long-lived assets | | | 1,240,845 | | | | 131,940 | | | | (88,881 | ) | | | 1,283,904 | |
As of and for the three months ended March 31, 2011: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Functional | | | Reconciling | | | | |
| | U.S. | | | International | | | Support | | | Eliminations | | | Total | |
Revenues from external customers | | $ | 329,904 | | | $ | 61,080 | | | $ | — | | | $ | — | | | $ | 390,984 | |
Intersegment revenues | | | — | | | | 1,863 | | | | — | | | | (1,863 | ) | | | — | |
Depreciation and amortization | | | 32,429 | | | | 4,495 | | | | 2,999 | | | | — | | | | 39,923 | |
Other operating expenses | | | 238,828 | | | | 55,017 | | | | 30,734 | | | | — | | | | 324,579 | |
Loss on early extinguishment of debt | | | — | | | | — | | | | 46,451 | | | | — | | | | 46,451 | |
Operating income (loss) | | | 58,647 | | | | 1,568 | | | | (80,184 | ) | | | — | | | | (19,969 | ) |
Operating income (loss), excluding loss on early extinguishment of debt | | | 58,647 | | | | 1,568 | | | | (33,733 | ) | | | — | | | | 26,482 | |
Interest expense, net of amounts capitalized | | | 41 | | | | 419 | | | | 9,851 | | | | — | | | | 10,311 | |
Income (loss) from continuing operations before tax | | | 59,501 | | | | 1,986 | | | | (89,382 | ) | | | — | | | | (27,895 | ) |
| | | | | | | | | | | | | | | | | | | | |
Long-lived assets1 | | | 1,433,781 | | | | 186,899 | | | | 179,975 | | | | (241,873 | ) | | | 1,558,782 | |
Total assets | | | 1,637,853 | | | | 344,947 | | | | 468,601 | | | | (464,022 | ) | | | 1,987,379 | |
Capital expenditures, excluding acquisitions | | | 95,723 | | | | 8,960 | | | | 2,756 | | | | — | | | | 107,439 | |
As of and for the three months ended March 31, 2010:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Functional | | | Reconciling | | | | |
| | U.S. | | | International | | | Support | | | Eliminations | | | Total | |
Revenues from external customers | | $ | 196,308 | | | $ | 55,651 | | | $ | — | | | $ | — | | | $ | 251,959 | |
Intersegment revenues | | | 885 | | | | — | | | | — | | | | (885 | ) | | | — | |
Depreciation and amortization | | | 27,297 | | | | 3,747 | | | | 2,280 | | | | — | | | | 33,324 | |
Other operating expenses | | | 155,845 | | | | 50,564 | | | | 21,821 | | | | — | | | | 228,230 | |
Intersegment expenses | | | (207 | ) | | | 207 | | | | — | | | | — | | | | — | |
Operating income (loss) | | | 13,373 | | | | 1,133 | | | | (24,101 | ) | | | — | | | | (9,595 | ) |
Interest (income) expense, net of amounts capitalized | | | (467 | ) | | | (156 | ) | | | 10,882 | | | | — | | | | 10,259 | |
Income (loss) from continuing operations before tax | | | 13,641 | | | | 2,576 | | | | (34,828 | ) | | | — | | | | (18,611 | ) |
| | | | | | | | | | | | | | | | | | | | |
Long-lived assets1 | | | 1,135,307 | | | | 148,681 | | | | 121,414 | | | | (128,682 | ) | | | 1,276,720 | |
Total assets | | | 1,344,089 | | | | 290,126 | | | | 633,187 | | | | (584,310 | ) | | | 1,683,092 | |
Capital expenditures, excluding acquisitions | | | 20,864 | | | | 5,957 | | | | 5,594 | | | | — | | | | 32,415 | |
| | |
1 | | Long lived assets include: fixed assets, goodwill, intangibles and other assets. |
NOTE 15.16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
During the fourthfirst quarter of 2007,2011, we issued the Senior2021 Notes, which are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly-owned. These guarantees are joint and several, full, complete and unconditional. There are no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of these guaranteed arrangements, we are required to present the following condensed consolidating financial information pursuant to SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The information presented below for the year ended December 31, 2010 reflects our previous guarantee arrangements under the 2014 Notes which were issued in the fourth quarter of 2007 and of which an aggregate principal amount of $3.6 million remains outstanding as of March 31, 2011.
25
CONDENSED CONSOLIDATING BALANCE SHEETS
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | March 31, 2011 | |
| | September 30, 2010 | | | Guarantor | | Non-Guarantor | | | | | |
| | Guarantor | | Non-Guarantor | | | | | | | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | (in thousands) | |
| | (in thousands) (unaudited) | | | (unaudited) | |
Assets: | | |
Current assets | | $ | 19,232 | | $ | 294,348 | | $ | 101,722 | | $ | — | | $ | 415,302 | | | $ | 19,579 | | $ | 330,042 | | $ | 78,976 | | $ | — | | $ | 428,597 | |
Property and equipment, net | | — | | 738,598 | | 48,254 | | — | | 786,852 | | | — | | 918,960 | | 77,618 | | — | | 996,578 | |
Goodwill | | — | | 320,264 | | 29,515 | | — | | 349,779 | | | — | | 428,858 | | 31,319 | | — | | 460,177 | |
Deferred financing costs, net | | 8,460 | | — | | — | | — | | 8,460 | | | 14,558 | | — | | — | | — | | 14,558 | |
Intercompany notes and accounts receivable and investment in subsidiaries | | 1,879,726 | | 625,135 | | 5,033 | | | (2,509,894 | ) | | — | | | 2,237,618 | | 797,230 | | | (9,607 | ) | | | (3,025,241 | ) | | — | |
Other assets | | 4,818 | | 36,218 | | 12,282 | | — | | 53,318 | | | 6,024 | | 55,830 | | 25,615 | | — | | 87,469 | |
Noncurrent assets held for sale | | — | | 67,264 | | — | | — | | 67,264 | | |
| | |
| | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,912,236 | | $ | 2,081,827 | | $ | 196,806 | | $ | (2,509,894 | ) | | $ | 1,680,975 | | | $ | 2,277,779 | | $ | 2,530,920 | | $ | 203,921 | | $ | (3,025,241 | ) | | $ | 1,987,379 | |
| | | | | | | | | | | | | | | | |
| | |
Liabilities and equity: | | |
Current liabilities | | 16,356 | | 151,385 | | 49,278 | | — | | 217,019 | | | $ | 50,280 | | $ | 108,355 | | $ | 61,149 | | $ | — | | $ | 219,784 | |
Long-term debt and capital leases, less current portion | | 512,813 | | 3,053 | | 10 | | — | | 515,876 | | | 578,573 | | 1,554 | | — | | — | | 580,127 | |
Intercompany notes and accounts payable | | 481,207 | | 1,583,966 | | 103,323 | | | (2,168,496 | ) | | — | | | 590,155 | | 1,849,378 | | 11,990 | | | (2,451,523 | ) | | — | |
Deferred tax liabilities | | 153,037 | | — | | | (14,866 | ) | | — | | 138,171 | | | 86,223 | | 70,162 | | 8 | | — | | 156,393 | |
Other long-term liabilities | | 1,398 | | 61,085 | | — | | — | | 62,483 | | | 1,671 | | 58,545 | | | (19 | ) | | — | | 60,197 | |
Equity | | 747,425 | | 282,338 | | 59,061 | | | (341,398 | ) | | 747,426 | | | 970,877 | | 442,926 | | 130,793 | | | (573,718 | ) | | 970,878 | |
| | | | | | | | | | | | |
| | | | | | |
TOTAL LIABILITIES AND EQUITY | | $ | 1,912,236 | | $ | 2,081,827 | | $ | 196,806 | | $ | (2,509,894 | ) | | $ | 1,680,975 | | | $ | 2,277,779 | | $ | 2,530,920 | | $ | 203,921 | | $ | (3,025,241 | ) | | $ | 1,987,379 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2009 | | December 31, 2010 | |
| | Guarantor | | Non-Guarantor | | | | | | Guarantor | | Non-Guarantor | | | | | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | Parent 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 | | — | | 752,543 | | 41,726 | | — | | 794,269 | | | — | | 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 | | — | | — | | — | | 10,421 | | | 7,806 | | — | | — | | — | | 7,806 | |
Intercompany notes and accounts receivable and investment in subsidiaries | | 1,782,002 | | 577,546 | | 7,462 | | | (2,367,010 | ) | | — | | | 2,110,185 | | 757,657 | | | (6,226 | ) | | | (2,861,616 | ) | | — | |
Other assets | | 4,033 | | 40,198 | | 14,916 | | — | | 59,147 | | | 5,234 | | 56,954 | | 24,569 | | — | | 86,757 | |
Noncurrent assets held for sale | | — | | 70,339 | | — | | — | | 70,339 | | |
| | |
| | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | |
26
CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2011 | |
| | Three Months Ended September 30, 2010 | | | Guarantor | | Non-Guarantor | | | | | |
| | Guarantor | | Non-Guarantor | | | | | | | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | (in thousands) | |
| | (in thousands) (unaudited) | | | (unaudited) | |
Revenues | | $ | — | | $ | 253,076 | | $ | 43,635 | | $ | (12,972 | ) | | $ | 283,739 | | | $ | — | | $ | 360,661 | | $ | 41,253 | | $ | (10,930 | ) | | $ | 390,984 | |
| | |
Costs and expenses: | | |
Direct operating expense | | — | | 162,640 | | 45,546 | | | (10,028 | ) | | 198,158 | | | — | | 245,755 | | 33,852 | | | (7,807 | ) | | 271,800 | |
Depreciation and amortization expense | | — | | 30,315 | | 2,250 | | — | | 32,565 | | | — | | 37,372 | | 2,551 | | — | | 39,923 | |
General and administrative expense | | 337 | | 41,178 | | 6,677 | | | (1,359 | ) | | 46,833 | | | 313 | | 46,290 | | 7,182 | | | (1,006 | ) | | 52,779 | |
Interest expense, net of amounts capitalized | | 11,361 | | | (949 | ) | | 214 | | — | | 10,626 | | | 10,499 | | | (607 | ) | | 419 | | — | | 10,311 | |
Loss on early extinguishment of debt | | | 46,451 | | — | | — | | — | | 46,451 | |
Other, net | | 18 | | | (1,348 | ) | | 2,135 | | | (1,585 | ) | | | (780 | ) | | | (749 | ) | | | (1,083 | ) | | 1,519 | | | (2,072 | ) | | | (2,385 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | 11,716 | | 231,836 | | 56,822 | | | (12,972 | ) | | 287,402 | | | 56,514 | | 327,727 | | 45,523 | | | (10,885 | ) | | 418,879 | |
| | |
(Loss) income from continuing operations before taxes | | | (11,716 | ) | | 21,240 | | | (13,187 | ) | | — | | | (3,663 | ) | | | (56,514 | ) | | 32,934 | | | (4,270 | ) | | | (45 | ) | | | (27,895 | ) |
Income tax (expense) benefit | | | (12,031 | ) | | 5,759 | | 7,655 | | — | | 1,383 | | |
Income tax benefit | | | 8,022 | | 1,008 | | 153 | | — | | 9,183 | |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations | | | (23,747 | ) | | 26,999 | | | (5,532 | ) | | — | | | (2,280 | ) | | | (48,492 | ) | | 33,942 | | | (4,117 | ) | | | (45 | ) | | | (18,712 | ) |
Discontinued operations | | — | | 8,283 | | — | | — | | 8,283 | | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (23,747 | ) | | 35,282 | | | (5,532 | ) | | — | | 6,003 | | | | (48,492 | ) | | 33,942 | | | (4,117 | ) | | | (45 | ) | | | (18,712 | ) |
Loss attributable to noncontrolling interest | | — | | — | | 769 | | — | | 769 | | | — | | — | | | (577 | ) | | — | | | (577 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
(LOSS) INCOME ATTRIBUTABLE TO KEY | | $ | (23,747 | ) | | $ | 35,282 | | $ | (4,763 | ) | | $ | — | | $ | 6,772 | | | $ | (48,492 | ) | | $ | 33,942 | | $ | (3,540 | ) | | $ | (45 | ) | | $ | (18,135 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2010 | |
| | Three Months Ended September 30, 2009 | | | Guarantor | | Non-Guarantor | | | | | |
| | Guarantor | | Non-Guarantor | | | | | | | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | (in thousands) | |
| | (in thousands) (unaudited) | | | (unaudited) | |
Revenues | | $ | — | | $ | 180,910 | | $ | 47,960 | | $ | (13,521 | ) | | $ | 215,349 | | | $ | — | | $ | 211,194 | | $ | 56,011 | | $ | (15,246 | ) | | $ | 251,959 | |
| | |
Costs and expenses: | | |
Direct operating expense | | — | | 123,751 | | 43,492 | | | (10,799 | ) | | 156,444 | | | — | | 145,347 | | 55,136 | | | (11,281 | ) | | 189,202 | |
Depreciation and amortization expense | | — | | 37,087 | | 1,593 | | — | | 38,680 | | | — | | 30,961 | | 2,363 | | — | | 33,324 | |
General and administrative expense | | | (891 | ) | | 35,975 | | 4,266 | | — | | 39,350 | | | 1,228 | | 33,922 | | 5,239 | | | (1,361 | ) | | 39,028 | |
Asset retirements and impairments | | — | | 97,035 | | — | | — | | 97,035 | | |
Interest expense, net of amounts capitalized | | 10,367 | | | (1,326 | ) | | 96 | | — | | 9,137 | | | 11,187 | | | (889 | ) | | | (39 | ) | | — | | 10,259 | |
Other, net | | 195 | | 1,836 | | 2,183 | | | (2,680 | ) | | 1,534 | | | | (697 | ) | | 686 | | 2,482 | | | (3,714 | ) | | | (1,243 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | 9,671 | | 294,358 | | 51,630 | | | (13,479 | ) | | 342,180 | | | 11,718 | | 210,027 | | 65,181 | | | (16,356 | ) | | 270,570 | |
| | |
(Loss) income from continuing operations before taxes | | | (9,671 | ) | | | (113,448 | ) | | | (3,670 | ) | | | (42 | ) | | | (126,831 | ) | | | (11,718 | ) | | 1,167 | | | (9,170 | ) | | 1,110 | | | (18,611 | ) |
Income tax benefit (expense) | | 70,143 | | | (25,438 | ) | | 3,045 | | 1 | | 47,751 | | |
Income tax benefit | | | 7,307 | | — | | 402 | | — | | 7,709 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | 60,472 | | | (138,886 | ) | | | (625 | ) | | | (41 | ) | | | (79,080 | ) | |
(Loss) income from continuing operations | | | | (4,411 | ) | | 1,167 | | | (8,768 | ) | | 1,110 | | | (10,902 | ) |
Discontinued operations | | — | | | (45,937 | ) | | — | | — | | | (45,937 | ) | | — | | 1,895 | | — | | — | | 1,895 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | 60,472 | | | (184,823 | ) | | | (625 | ) | | | (41 | ) | | | (125,017 | ) | |
Net (loss) income | | | | (4,411 | ) | | 3,062 | | | (8,768 | ) | | 1,110 | | | (9,007 | ) |
Loss attributable to noncontrolling interest | | — | | — | | 75 | | — | | 75 | | | — | | — | | | (1,427 | ) | | — | | | (1,427 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 60,472 | | $ | (184,823 | ) | | $ | (550 | ) | | $ | (41 | ) | | $ | (124,942 | ) | |
(LOSS) INCOME ATTRIBUTABLE TO KEY | | | $ | (4,411 | ) | | $ | 3,062 | | $ | (7,341 | ) | | $ | 1,110 | | $ | (7,580 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
27
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2010 | |
| | | | | | Guarantor | | | Non-Guarantor | | | | | | | |
| | Parent Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) (unaudited) | |
Revenues | | $ | — | | | $ | 702,221 | | | $ | 144,187 | | | $ | (42,925 | ) | | $ | 803,483 | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Direct operating expense | | | — | | | | 459,021 | | | | 156,333 | | | | (31,823 | ) | | | 583,531 | |
Depreciation and amortization expense | | | — | | | | 91,410 | | | | 6,957 | | | | — | | | | 98,367 | |
General and administrative expense | | | 1,630 | | | | 114,383 | | | | 17,981 | | | | (3,268 | ) | | | 130,726 | |
Interest expense, net of amounts capitalized | | | 34,034 | | | | (2,659 | ) | | | 239 | | | | — | | | | 31,614 | |
Other, net | | | (997 | ) | | | (730 | ) | | | 8,005 | | | | (7,834 | ) | | | (1,556 | ) |
| | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 34,667 | | | | 661,425 | | | | 189,515 | | | | (42,925 | ) | | | 842,682 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations before taxes | | (34,667 | ) | | | 40,796 | | | | (45,328 | ) | | | — | | | | (39,199 | ) |
Income tax (expense) benefit | | | (5,068 | ) | | | 11,287 | | | | 8,760 | | | | — | | | | 14,979 | |
| | | | | | | | | | | | | | | |
(Loss) income from continuing operations | | | (39,735 | ) | | | 52,083 | | | | (36,568 | ) | | | — | | | | (24,220 | ) |
Discontinued operations | | | — | | | | 18,360 | | | | — | | | | — | | | | 18,360 | |
| | | | | | | | | | | | | | | |
Net (loss) income | | | (39,735 | ) | | | 70,443 | | | | (36,568 | ) | | | — | | | | (5,860 | ) |
Net loss attributable to noncontrolling interest | | | — | | | | — | | | | 2,816 | | | | — | | | | 2,816 | |
| | | | | | | | | | | | | | | |
(LOSS) INCOME ATTRIBUTABLE TO KEY | | $ | (39,735 | ) | | $ | 70,443 | | | $ | (33,752 | ) | | $ | — | | | $ | (3,044 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2009 | |
| | | | | | Guarantor | | | Non-Guarantor | | | | | | | |
| | Parent Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) (unaudited) | |
Revenues | | $ | — | | | $ | 609,167 | | | $ | 141,520 | | | $ | (32,628 | ) | | $ | 718,059 | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Direct operating expense | | | — | | | | 409,243 | | | | 112,532 | | | | (24,684 | ) | | | 497,091 | |
Depreciation and amortization expense | | | — | | | | 110,091 | | | | 4,594 | | | | — | | | | 114,685 | |
General and administrative expense | | | 58 | | | | 116,593 | | | | 13,136 | | | | 28 | | | | 129,815 | |
Asset retirements and impairments | | | — | | | | 97,035 | | | | — | | | | — | | | | 97,035 | |
Interest expense, net of amounts capitalized | | | 31,828 | | | | (2,738 | ) | | | 150 | | | | — | | | | 29,240 | |
Other, net | | | 551 | | | | 224 | | | | 7,504 | | | | (8,967 | ) | | | (688 | ) |
| | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 32,437 | | | | 730,448 | | | | 137,916 | | | | (33,623 | ) | | | 867,178 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income from continuing operations before taxes | | | (32,437 | ) | | | (121,281 | ) | | | 3,604 | | | | 995 | | | | (149,119 | ) |
Income tax benefit (expense) | | | 83,815 | | | | (27,394 | ) | | | (193 | ) | | | — | | | | 56,228 | |
| | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 51,378 | | | | (148,675 | ) | | | 3,411 | | | | 995 | | | | (92,891 | ) |
Discontinued operations | | | — | | | | (49,695 | ) | | | — | | | | — | | | | (49,695 | ) |
| | | | | | | | | | | | | | | |
Net income (loss) | | | 51,378 | | | | (198,370 | ) | | | 3,411 | | | | 995 | | | | (142,586 | ) |
Net loss attributable to noncontrolling interest | | | — | | | | — | | | | 75 | | | | — | | | | 75 | |
| | | | | | | | | | | | | | | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 51,378 | | | $ | (198,370 | ) | | $ | 3,486 | | | $ | 995 | | | $ | (142,511 | ) |
| | | | | | | | | | | | | | | |
28
CONDENSED CONSOLIDATING UNAUDITED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2010 | | | Three Months Ended March 31, 2011 | |
| | Guarantor | | Non-Guarantor | | | | | | | Parent | | Guarantor | | Non-Guarantor | | | | | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (in thousands) | | | (in thousands) | |
| | (unaudited) | | | (unaudited) | |
Net cash provided by (used in) operating activities | | $ | — | | $ | 98,362 | | $ | (7,935 | ) | | $ | — | | $ | 90,427 | | |
| | |
Net cash (used in) provided by operating activities | | | $ | — | | | $ | (38,599 | ) | | $ | (1,315 | ) | | $ | — | | $ | (39,914 | ) |
Cash flows from investing activities: | | |
Capital expenditures | | — | | | (100,620 | ) | | | (445 | ) | | — | | | (101,065 | ) | | — | | | (101,261 | ) | | | (6,178 | ) | | — | | | (107,439 | ) |
Intercompany notes and accounts | | | (165 | ) | | | (5,034 | ) | | — | | 5,199 | | — | | | — | | 116,422 | | — | | | (116,422 | ) | | — | |
Other investing activities, net | | 165 | | 20,502 | | — | | 20,667 | | | — | | 5,201 | | — | | — | | 5,201 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Net cash (used in) provided by investing activities | | — | | | (85,152 | ) | | | (445 | ) | | 5,199 | | | (80,398 | ) | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | — | | | 20,362 | | | | (6,178 | ) | | | (116,422 | ) | | | (102,238 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | |
Repayments of long-term debt | | — | | | (6,970 | ) | | — | | — | | | (6,970 | ) | | (460,509 | ) | | | — | | — | | — | | | (460,509 | ) |
Proceeds from long-term debt | | | 475,000 | | — | | — | | — | | 475,000 | |
Repayment of capital lease obligations | | | — | | | (1,120 | ) | | — | | — | | | (1,120 | ) |
Proceeds from borrowings on revolving credit facility | | | 126,000 | | — | | — | | — | | 126,000 | |
Repayments on revolving credit facility | | | | (26,000 | ) | | — | | — | | — | | | (26,000 | ) |
Payment of deferred financing costs | | | — | | | (14,640 | ) | | — | | — | | | (14,640 | ) |
Repurchases of common stock | | | (2,357 | ) | | — | | — | | — | | | (2,357 | ) | | | (4,784 | ) | | — | | — | | — | | | (4,784 | ) |
Intercompany notes and accounts | | 5,034 | | 165 | | — | | | (5,199 | ) | | — | | | | (116,422 | ) | | — | | — | | 116,422 | | — | |
Other financing activities, net | | | (2,677 | ) | | — | | — | | — | | | (2,677 | ) | | 6,715 | | — | | — | | — | | 6,715 | |
| | | | | | | | | | | | | | | | �� | | | | | | | |
| | |
Net cash used in financing activities | | — | | | (6,805 | ) | | — | | | (5,199 | ) | | | (12,004 | ) | |
Net cash provided by (used in) financing activities | | | — | | | (15,760 | ) | | — | | 116,422 | | 100,662 | |
| | | | | | | | | | | | | | | | | | | | | | |
| |
Effect of changes in exchange rates on cash | | — | | — | | | (1,366 | ) | | — | | | (1,366 | ) | | — | | — | | | (1,954 | ) | | — | | | (1,954 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash | | — | | 6,405 | | | (9,746 | ) | | — | | | (3,341 | ) | |
| | | | | | | | | | | |
Net decrease in cash and cash equivalents | | | — | | | (33,997 | ) | | | (9,447 | ) | | — | | | (43,444 | ) |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | — | | 19,391 | | 18,003 | | — | | 37,394 | | | — | | 42,973 | | 13,655 | | — | | 56,628 | |
| | | | | | | | | | | | | | | | | | | | | | |
| |
Cash and cash equivalents at end of period | | $ | — | | $ | 25,796 | | $ | 8,257 | | $ | — | | $ | 34,053 | | | $ | — | | $ | 8,976 | | $ | 4,208 | | $ | — | | $ | 13,184 | |
| | | | | | | | | | | | | | | | | | | | | | |
2928
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2009 | | | Three Months Ended March 31, 2010 | |
| | Guarantor | | Non-Guarantor | | | | | | | Parent | | Guarantor | | Non-Guarantor | | | | | |
| | Parent Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | (in thousands) | | | (in thousands) | |
| | (unaudited) | | | (unaudited) | |
Net cash provided by (used in) operating activities | | $ | — | | $ | 189,119 | | $ | 8,462 | | $ | — | | $ | 197,581 | | |
| | |
Net cash provided by operating activities | | | $ | — | | $ | 57,629 | | $ | 8,125 | | $ | — | | $ | 65,754 | |
Cash flows from investing activities: | | |
Capital expenditures | | — | | | (100,255 | ) | | | (2,716 | ) | | — | | | (102,971 | ) | | — | | | (27,493 | ) | | | (4,922 | ) | | — | | | (32,415 | ) |
Intercompany notes and accounts | | 82,389 | | | (1,168 | ) | | | (6,067 | ) | | | (75,154 | ) | | — | | | | (165 | ) | | | (580 | ) | | — | | 745 | | — | |
Other investing activities, net | | 199 | | 5,184 | | 12,007 | | — | | 17,390 | | | 165 | | 1,006 | | — | | — | | 1,171 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Net cash provided by (used in) investing activities | | 82,588 | | | (96,239 | ) | | 3,224 | | | (75,154 | ) | | | (85,581 | ) | |
| | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | — | | | (27,067 | ) | | | (4,922 | ) | | 745 | | | (31,244 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | |
Repayment of long-term debt | | | (100,000 | ) | | — | | — | | — | | | (100,000 | ) | |
Repayments on long-term debt | | | — | | | (2,590 | ) | | — | | — | | | (2,590 | ) |
Repurchases of common stock | | | | (2,180 | ) | | — | | — | | — | | | (2,180 | ) |
Intercompany notes and accounts | | 16,468 | | | (92,677 | ) | | 1,055 | | 75,154 | | — | | | 580 | | 165 | | — | | | (745 | ) | | — | |
Other financing activities, net | | 944 | | | (10,044 | ) | | — | | — | | | (9,100 | ) | | 1,600 | | — | | — | | — | | 1,600 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Net cash (used in) provided by financing activities | | | (82,588 | ) | | | (102,721 | ) | | 1,055 | | 75,154 | | | (109,100 | ) | |
Net cash used in financing activities | | | — | | | (2,425 | ) | | — | | | (745 | ) | | | (3,170 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| |
Effect of changes in exchange rates on cash | | — | | — | | | (2,508 | ) | | — | | | (2,508 | ) | | — | | — | | | (1,920 | ) | | — | | | (1,920 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash | | — | | | (9,841 | ) | | 10,233 | | — | | 392 | | |
| | | | | | | | | | | |
Net increase in cash and cash equivalents | | | — | | 28,137 | | 1,283 | | — | | 29,420 | |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | — | | 75,847 | | 16,844 | | — | | 92,691 | | | — | | 19,391 | | 18,003 | | — | | 37,394 | |
| | | | | | | | | | | | | | | | | | | | | | |
| |
Cash and cash equivalents at end of period | | $ | — | | $ | 66,006 | | $ | 27,077 | | $ | — | | $ | 93,083 | | | $ | — | | $ | 47,528 | | $ | 19,286 | | $ | — | | $ | 66,814 | |
| | | | | | | | | | | | | | | | | | | | | | |
NOTE 16.17. DISCONTINUED OPERATIONS
On October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI.Patterson-UTI Energy, Inc. 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 this report, we show the assets being sold as assets held for sale on our consolidated balance sheets and the results of operations related to these businesses as discontinued operations for all periods presented. Prior to the sale, the businesses sold to Patterson-UTI were reported as part of our Production Services segment and were based entirely in the U.S. Because the agreed-upon purchase price for the businesses exceeded the carrying value of the assets being sold, we did not record a write-down on these assets on the date that they became classified as held for sale.operations. The following tables present more detailed information about the assets held for sale as well astable presents the results of discontinued operations for the businesses being sold in connection with this transaction:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
Inventory | | $ | 9,251 | | | $ | 3,974 | |
| | | | | | |
Current assets held for sale | | | 9,251 | | | | 3,974 | |
| | | | | | | | |
Property and equipment, gross | | | 83,416 | | | | 80,456 | |
Accumulated depreciation | | | (16,152 | ) | | | (10,117 | ) |
| | | | | | |
Noncurrent assets held for sale | | | 67,264 | | | | 70,339 | |
| | | | | | |
Net assets held for sale | | $ | 76,515 | | | $ | 74,313 | |
| | | | | | |
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
REVENUES | | $ | — | | | $ | 50,112 | |
| | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | |
Direct operating expenses | | | — | | | | 41,718 | |
Depreciation and amortization | | | — | | | | 3,379 | |
General and administrative expenses | | | — | | | | 1,925 | |
Other, net | | | — | | | | (22 | ) |
| | | | | | |
Total costs and expenses, net | | | — | | | | 47,000 | |
| | | | | | |
Income before taxes | | | — | | | | 3,112 | |
Income tax expense | | | — | | | | (1,217 | ) |
| | | | | | |
Net income | | $ | — | | | $ | 1,895 | |
| | | | | | |
3029
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | (in thousands) | |
Revenues | | $ | 76,348 | | | $ | 22,322 | | | $ | 197,704 | | | $ | 93,059 | |
| | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Direct operating expenses | | | 59,111 | | | | 23,457 | | | | 154,369 | | | | 83,890 | |
Depreciation and amortization | | | — | | | | 5,797 | | | | 6,758 | | | | 17,739 | |
General and administrative expenses | | | 3,589 | | | | 1,721 | | | | 7,510 | | | | 5,357 | |
Asset retirements and impairments | | | — | | | | 62,767 | | | | — | | | | 62,767 | |
Other, net | | | (150 | ) | | | (45 | ) | | | (337 | ) | | | 395 | |
| | | | | | | | | | | | |
Total costs and expenses, net | | | 62,550 | | | | 93,697 | | | | 168,300 | | | | 170,148 | |
| | | | | | | | | | | | |
Income (loss) before tax | | | 13,798 | | | | (71,375 | ) | | | 29,404 | | | | (77,089 | ) |
Income tax (expense) benefit | | | (5,515 | ) | | | 25,438 | | | | (11,044 | ) | | | 27,394 | |
| | | | | | | | | | | | |
Income (loss) from discontinued operations | | $ | 8,283 | | | $ | (45,937 | ) | | $ | 18,360 | | | $ | (49,695 | ) |
| | | | | | | | | | | | |
NOTE 18. VARIABLE INTEREST ENTITIES In connectionOn March 7, 2010, we entered into an agreement with our closingAlMansoori Petroleum Services LLC to form the joint venture AlMansoori Key Energy Services LLC. We hold three of the Patterson-UTI transaction, we recorded pre-tax chargesfive board of $0.5 milliondirectors seats and a controlling financial interest in the third quarterjoint venture; accordingly, we consolidate the entity in our financial statements.
For the periods ended March 31, 2011 and 2010, respectively, we recognized $1.7 million and zero of revenue and $0.3 million and zero of net income associated with this joint venture. Also, during 2010 related to transaction costs. We also anticipate recording a pre-tax gain onwe guaranteed the saletimely performance of thesethe joint venture under its sole contract valued at $2 million. At March 31, 2011, there was approximately $3.6 million of assets in the fourth quarter of 2010.joint venture.
NOTE 17.19. SUBSEQUENT EVENTS
Sale of Pressure Pumping and Wireline BusinessesEVENT
On October 1, 2010,In April 2011, we closed the sale ofsold our pressure pumping and wireline businesses to Patterson-UTI for cash consideration of $237.7 million and our retention of working capital associated with the businesses (subject to certain adjustments based on closing inventory).
Acquisition
On October 1, 2010, we completed the purchase of 100% of the ownership interests in three of OFS ES’s subsidiaries, Davis Energy Services, LLC, QCP Energy Services, LLC and Swan Energy Services, LLC (and indirectly their related subsidiaries). In addition, we acquired certain incidental assets from OFS ES and its parent company, OFS Holdings, LLC, that are used in the purchased businesses, and we agreed to assume certain specified liabilities. We will account for this acquisition as a business combination. The results of operations for the acquired businesses will be included in our consolidated financial statements from the date of acquisition.
The OFS ES subsidiaries are privately held oilfield services companies that provide well workover and stimulation services as well as nitrogen pumping, coiled tubing, fluid handling and wellsite construction and preparation services. In addition to complementing our existing rig and fluids management businesses, closing this transaction will result in Key having a total of 41 coiled tubing units, two-thirds of which are large diameter units. This will represent a total fleet increase of 78%.
The total consideration for the acquisition was approximately 15.88.7 million shares of our common stock andIROC at a cash paymentprice of $75.8$1.40 CAD per share. Our net proceeds were $12.0 million. We will record a gain on sale of $6.0 million subject to certain working capital and other adjustments. We are required to registerduring the sharessecond quarter of common stock issued in2011, as the transaction underproceeds received exceeded the Securities Act of 1933, as amended, subject to certain conditions.
The acquisition-date faircarrying value of the consideration transferred totaled $229.7 million, which consisted of the following (in thousands):our investment.
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| | | | |
|
Cash | | $ | 75,775 | |
Key common stock | | | 153,962 | |
| | | |
Total | | $ | 229,737 | |
| | | |
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).
Transaction costs related to this acquisition were $0.6 million through September 30 2010 and are included in general and administrative expense in the condensed consolidated statements of operations.
We are in the process of obtaining third-party valuations of certain tangible and intangible assets. The closing of the transaction occurred on October 1, 2010, and as such no revenue or earnings have been included in the consolidated statements of operations through September 30, 2010. We have not disclosed pro forma earnings as these amounts would be calculated after applying our accounting policies and adjusting the results of the OFS ES entities for any fair value adjustments that may result from our third party valuation, which is not complete at this time.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Key Energy Services, Inc., its wholly-owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a completefull range of well intervention services to major oil companies, foreign national oil companies and independent oil and natural gas production companies to complete, maintain and enhance the flow of oil and natural gas throughout the life of a well. Thesecompanies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, pressure pumping services, coiled tubing services, fishing and rental services, and wirelineother ancillary oilfield services. On October 1, 2010, we completed the saleAdditionally, certain of our pressure pumping and wireline businesses to Patterson-UTI Energy (“Patterson-UTI”) which significantly reduced our involvement in these linesrigs are capable of business, specifically in the U.S.specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States as well as internationallyand have operations based in Latin AmericaMexico, Colombia, the Middle East, Russia and the Russian Federation. We also ownArgentina. In addition, we have a technology development companygroup based in Canada and haveat March 31, 2011 we had ownership interests in two oilfield service companies based in Canada. We sold our ownership interest in one of the Canadian oilfield service companies in April 2011.
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of and for the three months ended March 31, 2011 and 2010, included elsewhere herein, and the audited consolidated financial statements and notes thereto included in our Annual Report on2010 Form 10-K for the year ended December 31, 2009 (“2009 Annual Report”).10-K.
Through September 30, 2010, we operatedWe operate in two business segments, Well Servicingsegments; U.S. and Production Services.International. We also have a “Functional Support” segment associated with managing all of our reportableU.S. and International operating segments. See“Note 14.15. Segment Information”in“Item 1. Financial Statements”of Part I of this report for a summary of our business segments.
PERFORMANCE MEASURES
We believe that the Baker Hughes U.S. land drilling rig count is the best barometer of overall oilfield capital spending and activity levels in our primary U.S. onshore market, since this data is made publicly available on a weekly basis. Historically, our activity levels have been highly correlated to capital spending by oil and natural gas producers. When oil and natural gas prices are strong, capital spending by our customers tends to increase. Similarly, as oil and natural gas prices fall, the Baker Hughes U.S. land drilling rig count tends to decline.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | NYMEX Henry | | Average Baker | | NYMEX Henry | | Average Baker | |
| | WTI Cushing Oil | | Hub Natural Gas | | Hughes U.S. Land | | WTI Cushing Oil | | Hub Natural Gas | | Hughes U.S. Land | |
| | | (1) | | (1) | | Drilling Rigs (2) | |
2011: | | |
First Quarter | | | $ | 94.07 | | $ | 4.20 | | 1,695 | |
| | (1) | | (1) | | Drilling Rigs (2) | |
2010: | | |
First Quarter | | $ | 74.78 | | $ | 5.14 | | 1,354 | | | $ | 74.78 | | $ | 5.14 | | 1,354 | |
Second Quarter | | $ | 74.79 | | $ | 4.30 | | 1,513 | | | $ | 74.79 | | $ | 4.30 | | 1,513 | |
Third Quarter | | $ | 72.46 | | $ | 4.30 | | 1,626 | | | $ | 72.46 | | $ | 4.30 | | 1,626 | |
| | |
2009: | | |
First Quarter | | $ | 40.16 | | $ | 4.60 | | 1,344 | | |
Second Quarter | | $ | 55.84 | | $ | 3.71 | | 934 | | |
Third Quarter | | $ | 66.02 | | $ | 3.17 | | 970 | | |
Fourth Quarter | | $ | 71.67 | | $ | 4.38 | | 1,108 | | | $ | 85.16 | | $ | 3.98 | | 1,688 | |
| | |
(1) | | Represents the average of the monthly average prices for each of the periods presented. Source: EIA / Bloomberg |
|
(2) | | Source:www.bakerhughes.com |
Internally, we measure activity levels in our Well Servicing segmentU.S and International segments primarily through our rig and trucking hours. Generally, as capital spending by oil and natural gas producers increases, demand for our services also rises, resulting in increased rig and trucking services and more hours worked. Conversely, when activity levels decline due to lower spending by oil and natural gas producers, we generally provide fewer rig and trucking services, which results in lower hours worked.
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We publicly release our monthly rig and trucking hours, and the following table presents our quarterly rig and trucking hours from 20092010 through the thirdfirst quarter of 2010:2011:
| | | | | | | | | | | | | | | | |
| | | Rig Hours | | Trucking Hours | |
2011: | | |
First Quarter | | | 525,460 | | 711,701 | |
| | Rig Hours | | Trucking Hours | |
2010: | | |
First Quarter | | 485,183 | | 459,292 | | | 485,183 | | 459,292 | |
Second Quarter | | 489,168 | | 518,483 | | | 489,168 | | 518,483 | |
Third Quarter | | 503,890 | | 559,181 | | | 503,890 | | 559,181 | |
2009: | | |
First Quarter | | 489,819 | | 499,247 | | |
Second Quarter | | 415,520 | | 416,269 | | |
Third Quarter | | 416,810 | | 398,027 | | |
Fourth Quarter | | 439,552 | | 422,253 | | | 493,945 | | 707,616 | |
| | | | | | | | | | |
Total 2009 | | 1,761,701 | | 1,735,796 | | |
Total 2010 | | | 1,972,186 | | 2,244,572 | |
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MARKET CONDITIONS AND OUTLOOK
Market Conditions — Quarter Ended September 30, 2010March 31, 2011
Overall,Market conditions during the first quarter of 2011 continued to improve, especially in the oil markets we serve. Many of our major customers increased oil-directed activity during the quarter. As a result of higher oil prices and improving overall market conditions during the thirdquarter ended March 31, 2011 compared with fiscal year 2010, overall demand for our services continues to increase. Our activity in the first quarter of 2011 exceeded quarterly activity levels in both 2010 continued their recovery from the lows experiencedand 2009.
Demand for our services in the second and thirdU.S. was strong in all our oil-driven markets. We saw improvement in pricing compared to previous quarters due largely to price increases implemented in the first quarter of 2009. Within2011. However, our U.S. well servicingrig business experienced higher labor, fuel and other costs, which limited additional margin expansion. Dynamics in our fluid management services business were consistent with those in the rig hoursbusiness. We implemented price increases for these services but also experienced increases in costs. Our fishing and rental and intervention services businesses experienced increased for the fifth consecutive quarterrevenue and our trucking hours increased for the fourth consecutive quarter. Although oil and natural gas prices have remained relatively flat over the last several quarters, we continued to see moderate pricing improvements for our rig-based servicesprofitability during the quarter primarilydue to the deployment of additional equipment, increased utilization and better pricing. Results for our larger equipmentintervention services improved in selected oil and shale markets.the first quarter of 2011 as the assets we acquired in 2010 were more effectively utilized. We continue to redeploy assets across all our domestic lines of business to more profitable regions to offset our rising costs.
Our fluid management business continuedinternational segment returned to expand duringprofitability in the first quarter with muchof 2011. Our assets in Mexico were fully utilized by the end of the increase located in the Bakken Shale.
In our Production Services segment, our fishing and rental services business also improved during the quarter, with higher activity levels and revenues coming from equipment rentals. Our coiled tubing business, in which we have been investing heavily over the last twelve months, continued to expand during the quarter. Strong customer demand for new horizontal well completion has driven the activity increases. Our pressure pumping and wireline businesses, both of which were sold to Patterson-UTI on October 1, 2010, and which are presented as discontinued operations, contributed additional operating income during the third quarter as compared to the second quarter.
Internationally, we continued our expansion strategy during the third quarter of 2010. We began operations in Colombia during the quarter under our first project award in this country. Additionally, we received an award for a 3-year, 2-rig commitment in Bahrain through our Middle East joint venture, although operations have not yet commenced. In Russia, activity levels increased during the quarter as our customers there resumed work, and several rigs that we sold to our joint venture earlier in 2010 became available for work during the quarter. In Argentina, activity levels improved moderately during the quarter, and we were able to secureachieved some activity and price increasesimprovement in that country.Argentina. In Mexico, thirdColombia, we had a full quarter activity continued to be negatively impacted by Petroleos Mexicanos’ (“Pemex”) budget cuts for 2010. A work stoppage in Mexico’s North Region during September negatively impacted utilization and profitability.of operations with profitable results.
Market Outlook
We expect trendsbelieve that we will continue to see steady growth in our U.S. and international markets during the remainder of 2011 due to increased customer spendingactivity and pricing relative to 2010. Driven by higher commodity prices, we anticipate that our core businesses will continue to show improvement, as our customers increase capital expenditures to increase production.
In the U.S., with the largest fleet of onshore well servicing rigs, we believe we are well positioned to benefit from increasing demand for conventional well maintenance and repair. Given our recent and ongoing investments in larger, higher capability rigs and coiled tubing units, as well as fluid transportation, frac tanks, and fishing and rental equipment, we believe we are well positioned to benefit from increased horizontal well drilling activity, which is driving a higher level of revenue and margin intensity per well.
We also believe that our international operations will play an increasing role in the U.S.growth of our business. We intend to deploy additional assets internationally during 2011. We expect our activity in the Middle East and Russia to grow in 2011, combined with our full utilization of assets in Mexico and continued improvements in Argentina and Colombia, and should result in positive contributions to our revenues and earnings for the remainder of 2011.
We also continue through the end of 2010, offset by typical seasonality, such as reduced daylight, more holidays and weather. The fourth quarter of 2010 will also be a transition period as we integrate new businesses recently acquired and continueto explore opportunities for expanding our expansionservice footprint into new international markets. We believe that the recent strategic moves we have made domestically better position us to capture increased activity related to more complex horizontal drilling and completion techniques.markets or new lines of business as those opportunities present themselves.
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As we enter new markets in Latin America and the Middle East, and with the commencement of operations for our new equipment in Russia, we believe our outlook for our international businesses is positive. We believe that additional international opportunities will arise to expand our footprint in large oil producing regions with mature fields facing production declines.
On October 1, 2010, we closed the sale of our pressure pumping and wireline businesses to Patterson-UTI for cash consideration of $237.7 million and our retention of working capital associated with the businesses (subject to certain adjustments based on closing inventory). Management determined to sell these businesses because they were not aligned with our core business strategy of well intervention and international expansion.
Also, on October 1, 2010, we completed the purchase of 100% of the ownership interests in three subsidiaries of OFS Energy Services, LLC (“OFS ES”): Davis Energy Services, LLC; QCP Energy Services; LLC and Swan Energy Services, LLC (and indirectly their related subsidiaries). In addition, we acquired certain incidental assets from OFS ES and its parent company, OFS Holdings, LLC, that are used in the purchased businesses and agreed to assume certain specified liabilities. The total consideration of $229.7 million consisted of 15.8 million shares of our common stock (valued at $9.74 per share, based on the closing price on October 1, 2010) and a cash payment of $75.8 million. The purchase price is subject to certain post closing working capital and other adjustments. We are required to register the shares of common stock issued in the transaction under the Securities Act of 1933, as amended, subject to certain conditions. We will account for this acquisition as a business combination. The results of operations for the acquired businesses will be included in our consolidated financial statements beginning October 1, 2010.
RESULTS OF OPERATIONS
The following table shows our consolidated results of operations for the three and nine months ended September 30,March 31, 2011 and 2010, and 2009respectively (in thousands, except per share data)thousands):
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | | | | | | |
| | September 30, | | September 30, | | | Three Months Ended March 31, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2011 | | 2010 | |
REVENUES | | $ | 283,739 | | $ | 215,349 | | $ | 803,483 | | $ | 718,059 | | | $ | 390,984 | | $ | 251,959 | |
| | |
COSTS AND EXPENSES: | | |
Direct operating expenses | | 198,158 | | 156,444 | | 583,531 | | 497,091 | | | 271,800 | | 189,202 | |
Depreciation and amortization expense | | 32,565 | | 38,680 | | 98,367 | | 114,685 | | | 39,923 | | 33,324 | |
General and administrative expenses | | 46,833 | | 39,350 | | 130,726 | | 129,815 | | | 52,779 | | 39,028 | |
Asset retirements and impairments | | — | | 97,035 | | — | | 97,035 | | |
Loss on early extinguishment of debt | | | 46,451 | | — | |
Interest expense, net of amounts capitalized | | 10,626 | | 9,137 | | 31,614 | | 29,240 | | | 10,311 | | 10,259 | |
Other, net | | | (780 | ) | | 1,534 | | | (1,556 | ) | | | (688 | ) | | | (2,385 | ) | | | (1,243 | ) |
| | | | | | | | | | | | | | |
Total costs and expenses, net | | 287,402 | | 342,180 | | 842,682 | | 867,178 | | | 418,879 | | 270,570 | |
| | | | | | | | | | | | | | |
Loss from continuing operations before tax | | | (3,663 | ) | | | (126,831 | ) | | | (39,199 | ) | | | (149,119 | ) | | | (27,895 | ) | | | (18,611 | ) |
Income tax benefit | | 1,383 | | 47,751 | | 14,979 | | 56,228 | | | 9,183 | | 7,709 | |
| | | | | | | | | | | | | | |
Loss from continuing operations | | | (2,280 | ) | | | (79,080 | ) | | | (24,220 | ) | | | (92,891 | ) | | | (18,712 | ) | | | (10,902 | ) |
Income (loss) from discontinued operations, net of tax (expense) benefit of $(5,515), $25,438, $(11,044) and $27,394, respectively | | 8,283 | | | (45,937 | ) | | 18,360 | | | (49,695 | ) | |
Income from discontinued operations, net of tax | | | — | | 1,895 | |
| | | | | | | | | | | | | | |
Net income (loss) | | 6,003 | | | (125,017 | ) | | | (5,860 | ) | | | (142,586 | ) | |
Net loss | | | | (18,712 | ) | | | (9,007 | ) |
| | | | | | | | | | | | | | |
Loss attributable to noncontrolling interest | | 769 | | 75 | | 2,816 | | 75 | | | (577 | ) | | (1,427 | ) |
| | | | | | | | | | | | | | |
INCOME (LOSS) ATTRIBUTABLE TO KEY | | $ | 6,772 | | $ | (124,942 | ) | | $ | (3,044 | ) | | $ | (142,511 | ) | |
LOSS ATTRIBUTABLE TO KEY | | | $ | (18,135 | ) | | $ | (7,580 | ) |
| | | | | | | | | | | | | | |
Consolidated Results of Operations — Three Months Ended September 30,March 31, 2011 and 2010 and 2009
Revenues
Our revenues for the three months ended September 30, 2010March 31, 2011 increased $68.4$139.0 million, or 31.8%55.2%, to $283.7$391.0 million from $215.3$252.0 million for the three months ended September 30, 2009.March 31, 2010. See“Segment Operating Results — Three Months Ended September 30, 2010March 31, 2011 and 2009”2010”below for a more detailed discussion of the change in our revenues.
Direct Operating Expenses
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Our direct operating expenses increased $41.7$82.6 million, to $198.2$271.8 million (69.8%(69.5% of revenues), for the three months ended March 31, 2011, compared to $189.2 million (75.1% of revenues) for the three months ended September 30, 2010, compared to $156.4 million (72.6% of revenues) for the three months ended September 30, 2009.March 31, 2010. The increase in direct operating expenses is directly attributablewas a direct result of activity increases in our business and inflation. Fuel and salary expenses have increased compared to increased activity.the first quarter of the prior year due to rising prices and the reinstatement of employee benefits which were suspended in prior years.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $6.1increased $6.6 million, or 19.8%, to $32.6$39.9 million (11.5% of revenues) during the thirdfirst quarter of 2010,2011, compared to $38.7$33.3 million (18.0% of revenues) for the thirdfirst quarter of 2009.2010. The decreaseincrease in our depreciation and amortization expense is primarily attributable to the increase in our fixed asset retirementsbase through our acquisitions during 2010, as well as increased capital expenditures in 2010 and impairments we recognized during the thirdfirst quarter of 2009, which decreased the basis of our depreciable fixed assets.2011.
General and Administrative Expenses
General and administrative expenses increased $7.5$13.8 million, to $46.8$52.8 million (16.5%(13.5% of revenues), for the three months ended March 31, 2011, compared to $39.0 million (15.5% of revenues) for the three months ended September 30, 2010, compared to $39.4 million (18.3% of revenues) for the three months ended September 30, 2009.March 31, 2010. The increase in general and administrative expenses for the thirdfirst quarter of 20102011 was primarily due to higher stock-basedan increase in employee compensation resulting from the rescission of temporary employee salary and benefit reductions as well as increased headcount due to our growth. We also incurred additional professional fees related to new equity awards and implementation costs for a new Enterprise Resource Planning (“ERP”) system conversion. Transaction costs incurred in the third quarter of 2010 related to our acquisition of OFS ES also contributed to the increase.activity.
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Interest Expense, Netnet of Amounts Capitalized
Interest expense was $10.6increased less than $0.1 million, (3.7% of revenues)to $10.3 million for the three months ended September 30, 2010, an increaseMarch 31, 2011. We repurchased 99.2%, or $421.4 million, the aggregate principal amount of $1.5our 8.375% Notes due 2014 during the first quarter pursuant to a tender offer for the notes and simultaneously issued $475.0 million or 16.3%,aggregate principal amount of our 6.75% Notes due 2021. During the first quarter, we also borrowed $126.0 million and repaid $26.0 million on our revolving credit facility, leaving $100.0 million outstanding at March 31, 2011.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $46.5 million for the three months ended March 31, 2011, compared to $9.1 million (4.2% of revenues)zero for the same period in 2009,2010, due to higher interest ratesour tender offer for the 2014 Notes and the termination of the 2007 Credit Facility during the first quarter of 2011. The loss primarily consisted of the tender premium on our borrowings under our amended revolving credit facility.the 2014 Notes, as well as transaction fees and the write-off of the unamortized portion of deferred financing costs.
Other, net
The following table summarizes the components of other, net for the periods indicated:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
| | (in thousands) | | | (in thousands) | |
(Gain) loss on disposal of assets, net | | $ | (146 | ) | | $ | 1,942 | | | $ | (669 | ) | | $ | 335 | |
Interest income | | | (5 | ) | | | (42 | ) | | | (20 | ) | | | (15 | ) |
Foreign exchange loss (gain), net | | 30 | | | (1,305 | ) | |
Other (income) expense, net | | | (659 | ) | | 939 | | |
Foreign exchange gain | | | | (1,467 | ) | | | (1,364 | ) |
Other income, net | | | | (229 | ) | | | (199 | ) |
| | | | | | | | | | |
Total | | $ | (780 | ) | | $ | 1,534 | | | $ | (2,385 | ) | | $ | (1,243 | ) |
| | | | | | | | | | |
Income Tax Benefit (Expense)
We recorded an income tax benefit of $1.4$9.2 million on a pretax loss of $3.7$27.9 million in the thirdfirst quarter of 2010,2011, compared to an income tax benefit of $47.8$7.7 million on a pretax loss of $126.8$18.6 million in the thirdfirst quarter of 2009.2010. Our effective tax rate was 37.8%32.9% for the three months ended September 30, 2010,March 31, 2011, compared to 37.6%41.4% for the three months ended September 30, 2009.March 31, 2010. Our effective tax rates for the periods differ from the U.S. statutory rate of 35% due to numerous factors, including the mix of profit and loss between various taxing jurisdictions, such as foreign, statespecifically the charge recorded in the U.S. on the early extinguishment of debt, and local taxes, the impact of permanent items that affect book income but do not affect taxable income, and discrete adjustments such as accrual to return adjustments, changes in valuation allowances, and expenses or benefits recognized for uncertain tax positions.income.
Discontinued Operations
We recorded no amounts from discontinued operations for the three months ended March 31, 2011, compared to net income from discontinued operations of $8.3$1.9 million for the three months ended September 30,March 31, 2010. Our discontinued operations in 2010 compared to a net loss of $45.9 million for the three months ended September 30, 2009. The loss in 2009 mostly relatedrelate to the asset impairment onsale of our pressure pumping equipment recorded inand wireline businesses during the thirdfourth quarter of 2009. Excluding the impairment, results of discontinued
36
operations improved in the third quarter of 2010 compared to the same period in 2009, for our fracturing and cementing services within our pressure pumping operations, including higher activity, expansion into new markets and improved pricing.2010.
Noncontrolling Interest
For the three months ended September 30, 2010,March 31, 2011, we recorded a benefit of $0.8allocated $0.6 million compared to a benefit of $0.1 million for the three months ended September 30, 2009, associated with the net loss incurred by our joint venture in the Russian Federation with OOO Geostream Services Group (“Geostream”). We own a 50% interest in Geostream and fully consolidate its results, withventures to the noncontrolling interest representing the portionholders of Geostream’s net income or lossthese ventures compared to $1.4 million for the period that is attributable to Geostream’s other shareholder.three months ended March 31, 2010.
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Segment Operating Results — Three Months Ended September 30, 2010 and 2009
The following table shows operating results for each of our segments for the three month periods ended September 30,March 31, 2011 and 2010 and 2009, respectively (in thousands, except for percentages):
| | | | | | | | | | | | |
| | | | | | | | | | Functional | |
For the three months ended March 31, 2011: | | U.S. | | | International | | | Support | |
Revenues from external customers | | $ | 329,904 | | | $ | 61,080 | | | $ | — | |
Operating expenses | | | 271,257 | | | | 59,512 | | | | 33,733 | |
Loss on early extinguishment of debt | | | — | | | | — | | | | 46,451 | |
Operating income (loss) | | | 58,647 | | | | 1,568 | | | | (80,184 | ) |
Operating income (loss), excluding loss on early extinguishment of debt | | | 58,647 | | | | 1,568 | | | | (33,733 | ) |
Operating income, as a percentage of revenue | | | 17.8 | % | | | 2.6 | % | | | n/a | |
| | | | | | | | | | | | |
| | | | | | | | | | Functional | |
For the three months ended March 31, 2010: | | U.S. | | | International | | | Support | |
Revenues from external customers | | $ | 196,308 | | | $ | 55,651 | | | $ | — | |
Operating expenses | | | 182,935 | | | | 54,518 | | | | 24,101 | |
Operating income (loss) | | | 13,373 | | | | 1,133 | | | | (24,101 | ) |
Operating income, as a percentage of revenue | | | 6.8 | % | | | 2.0 | % | | | n/a | |
For the three months ended September 30, 2010:Segment Operating Results — Three Months Ended March 31, 2011 and 2010
| | | | | | | | | | | | |
| | Well | | Production | | Functional |
| | Servicing | | Services | | Support |
Revenues from external customers | | $ | 244,288 | | | $ | 39,451 | | | $ | — | |
Operating expenses | | | 216,648 | | | | 32,071 | | | | 28,837 | |
Net intersegment expense (income) | | | 2,292 | | | | (2,280 | ) | | | (12 | ) |
Operating income (loss) | | | 25,348 | | | | 9,660 | | | | (28,825 | ) |
|
For the three months ended September 30, 2009: |
|
| | Well | | Production | | Functional |
| | Servicing | | Services | | Support |
Revenues from external customers | | $ | 194,071 | | | $ | 21,278 | | | $ | — | |
Operating expenses | | | 183,466 | | | | 23,794 | | | | 27,214 | |
Asset retirements and impairments | | | 65,869 | | | | 31,166 | | | | — | |
Net intersegment expense (income) | | | 2,689 | | | | (1,950 | ) | | | (739 | ) |
Operating loss | | | (57,953 | ) | | | (31,732 | ) | | | (26,475 | ) |
Well ServicingU.S.
Revenues from external customers for our Well ServicingU.S. segment increased $50.2$133.6 million, or 25.9%68.1%, to $244.3$329.9 million for the three months ended September 30, 2010,March 31, 2011, compared to $194.1$196.3 million for the three months ended September 30, 2009.March 31, 2010. The increase in revenues for this segment iswas due to an increase in U.S. market activity, which hasdemand for our services along with improved pricing during the period. During the first quarter overof 2011, we implemented price increases for all of our lines of business. Rig and trucking hours in our rig-based services and fluid management services business, respectively, increased in the first quarter since June 2009. However, we have experienced declinesof 2011 compared to the same period last year. Activity also increased in revenue in Mexicoour intervention services business due to the expirationacquisition of one of our contracts with Pemex in March 2010additional coiled tubing units during 2010. Demand for fishing and rental services also dueincreased compared to 2010 budget cuts by Pemex affecting our activity under our second contract.the prior year and pricing for these services has improved.
Operating expenses for our Well ServicingU.S. segment were $216.6$271.3 million during the three months ended September 30, 2010,March 31, 2011, which represented an increase of $33.2$88.3 million, or 18.1%48.3%, compared to $183.5$182.9 million for the same period in 2009.2010. The increase in operating expenses iswas primarily attributable to increased activity during the period.period combined with the impact of inflationary pressure on fuel and wage expenses and the impact of the rescission in late 2010 of temporary cost reduction measures implemented in 2009.
During the three months ended September 30, 2009, we took out of 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 approximately $65.9 million.
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Production ServicesInternational
Revenues from external customers for our Production Servicesinternational segment increased $18.2$5.4 million, or 85.4%9.8%, to $39.5$61.1 million for the three months ended September 30, 2010,March 31, 2011, compared to $21.3$55.7 million for the three months ended September 30, 2009.March 31, 2010. The increase in revenue for this segment is primarily attributable to an increaseour international expansion during 2010 to Colombia and the Middle East, in addition to increased activity in Argentina and Russia, offset by a decrease in revenues fromattributable to our fishing and rentalMexican operations as well as expansion of our coiled tubing services along with improved pricing during the period.first quarter of 2011 compared to the same period last year.
Operating expenses for our Production Servicesinternational segment increased $8.3$5.0 million, or 34.8%9.2%, to $32.1$59.5 million for the thirdfirst quarter of 2011, compared to $54.5 million for the first quarter of 2010 compared to $23.8 million for the third quarter of 2009. Operating expensesand increased due to expenses associated with the expansion of our coiled tubing operations. However, increased activity and improved pricing contributed to better operating income (excluding impairment charges) as a percentagedirect result of revenue from external customers compared to the same period in 2009.
During the three months ended September 30, 2009, due to market overcapacity, continued and prolonged depression of natural gas prices, decreasedadditional 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 asset impairment test which resulted in the recording of a pre-tax impairment charge of approximately $30.7 million during the third quarter of 2009. In addition, we impaired $0.5 million of goodwill related to this segment.period.
Functional Support
OperatingExcluding the loss on early extinguishment of debt, operating expenses for Functional Support, which represent expenses associated with managing our other reportableU.S. and International operating segments, increased $1.6$9.6 million, or 6.0%40.0%, to $28.8 $33.7
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million (10.2%(8.6% of consolidated revenues) for the three months ended September 30, 2010March 31, 2011 compared to $27.2$24.1 million (12.6%(9.6% of consolidated revenues) for the same period in 2009.2010. The primary reason for the increase in costs is higher stock based compensation expense related to new equity awards and support costs related to our new ERP system during the third quarter of 2010. Transaction costs incurred in the third quarter of 2010 related to our acquisition of OFS ES also contributed to the increase.
Consolidated Results of Operations — Nine Months Ended September 30, 2010 and 2009
Revenues
Our revenues for the nine months ended September 30, 2010 increased $85.4 million, or 11.9%, to $803.5 million from $718.1 million for the nine months ended September 30, 2009. See“Segment Operating Results — Nine Months Ended September 30, 2010 and 2009”below for a more detailed discussion of the change in our revenues.
Direct Operating Expenses
Our direct operating expenses increased $86.4 million to $583.5 million (72.6% of revenues) for the nine months ended September 30, 2010, compared to $497.1 million (69.2% of revenues) for the nine months ended September 30, 2009. The increase in direct operating expenses is directly attributable to increased activity during the period, higher repairs and maintenance expenses as we mobilized idle equipment in the first part of the year to support the increases in activity, expansion into new domestic and international markets, and increases in fuel costs due to higher fuel prices.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $16.3 million to $98.4 million (12.2% of revenues) during the first nine months of 2010, compared to $114.7 million (16.0% of revenues) for the first nine months of 2009. The decrease in our depreciation and amortization expense is attributable to the asset retirements and impairments we recognized during the third quarter of 2009, which decreased the basis of our depreciable fixed assets.
General and Administrative Expenses
General and administrative expenses increased $0.9 million to $130.7 million (16.3% of revenues) for the nine
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months ended September 30, 2010, compared to $129.8 million (18.1% of revenues) for the nine months ended September 30, 2009. General and administrative expenses increased due to additional stock based compensation expense related to new equity awards in 2010 offset by less professional fees during 2010 related to our cost reduction efforts. Transaction costs incurred during 2010 related to our acquisition of OFS ES also contributed to the increase.
Interest Expense, Net of Amounts Capitalized
Interest expense increased $2.4 million to $31.6 million (3.9% of revenues) for the nine months ended September 30, 2010, compared to $29.2 million (4.1% of revenues) for the same period in 2009, due to higher interest rates on our borrowings under our amended revolving credit facility, combined with lower capitalized interest due to lower capital expenditures related to the construction of equipment.
Other, net
The following table summarizes the components of other, net for the periods indicated:
| | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
Loss on disposal of assets, net | | $ | 509 | | | $ | 566 | |
Interest income | | | (41 | ) | | | (459 | ) |
Foreign exchange gain, net | | | (479 | ) | | | (1,358 | ) |
Other (income) expense, net | | | (1,545 | ) | | | 563 | |
| | | | | | |
Total | | $ | (1,556 | ) | | $ | (688 | ) |
| | | | | | |
Income Tax Benefit
We recorded an income tax benefit of $15.0 million on a pretax loss of $39.2 million for the nine months ended September 30, 2010, compared to an income tax benefit of $56.2 million on a pretax loss of $149.1 million for the nine months ended September 30, 2009. Our effective tax rate was 38.2% for the nine months ended September 30, 2010, compared to 37.7% for the nine months ended September 30, 2009. Our effective tax rate for 2010 differs from the statutory rate of 35% due to the mix of profit and loss between various taxing jurisdictions, such as foreign, state and local taxes, the impact of permanent items that affect book income but do not affect taxable income, and discrete adjustments such as accrual to return adjustments, changes in valuation allowances, and expenses or benefits recognized for uncertain tax positions.
Discontinued Operations
We recorded net income from discontinued operations of $18.4 million for the nine months ended September 30, 2010, compared to a net loss from discontinued operations of $49.7 million for the nine months ended September 30, 2009. The loss in 2009 mostly related to the asset impairment recorded on out pressure pumping equipment recorded in the third quarter of 2009. Excluding the impairment, results of discontinued operations improved in 2010, compared to the same period in 2009, for our fracturing and cementing services within our pressure pumping operations, due to higher activity, expansion into new markets and better pricing.
Noncontrolling Interest
For the nine months ended September 30, 2010, we recorded a benefit of $2.8 million, compared to a benefit of $0.1 million for the nine months ended September 30, 2009, associated with the net loss incurred by our joint venture in the Russian Federation with Geostream.
Segment Operating Results — Nine Months Ended September 30, 2010 and 2009
The following table shows operating results for each of our segments for the nine month periods ended September
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30, 2010 and 2009, respectively (in thousands, except for percentages):
For the nine months ended September 30, 2010:
| | | | | | | | | | | | |
| | Well | | Production | | Functional |
| | Servicing | | Services | | Support |
Revenues from external customers | | $ | 701,025 | | | $ | 102,458 | | | $ | — | |
Operating expenses | | | 638,939 | | | | 91,867 | | | | 81,818 | |
Net intersegment expense (income) | | | 5,204 | | | | (4,903 | ) | | | (301 | ) |
Operating income (loss) | | | 56,882 | | | | 15,494 | | | | (81,517 | ) |
For the nine months ended September 30, 2009:
| | | | | | | | | | | | |
| | Well | | Production | | Functional |
| | Servicing | | Services | | Support |
Revenues from external customers | | $ | 648,277 | | | $ | 69,782 | | | $ | — | |
Operating expenses | | | 579,989 | | | | 81,193 | | | | 80,409 | |
Asset retirements and impairments | | | 65,869 | | | | 31,166 | | | | — | |
Net intersegment expense (income) | | | 3,835 | | | | (3,689 | ) | | | (146 | ) |
Operating loss | | | (1,416 | ) | | | (38,888 | ) | | | (80,263 | ) |
Well Servicing
Revenues from external customers for our Well Servicing segment increased $52.7 million, or 8.1%, to $701.0 million for the nine months ended September 30, 2010, compared to $648.3 million for the nine months ended September 30, 2009. The overall increase in revenues resulted from sequential improvements in U.S. activity since June 2009, offset by lower revenues attributable to our operations in Mexico due to a decrease in activity of our work for Pemex.
Operating expenses for our Well Servicing segment were $638.9 million during the nine months ended September 30, 2010, which represented an increase of $59.0 million, or 10.2%, compared to $580.0 million for the same period in 2009. The increase in operating expenses is attributable to higher activity levels in the U.S. and severance costs incurred in Mexico due to a decrease in activity of our work for Pemex.
Production Services
Revenues for our Production Services segment increased $32.7 million, or 46.8%, to $102.5 million for the nine months ended September 30, 2010, compared to $69.8 million for the nine months ended September 30, 2009. The increase in revenue for this segment is attributable to an increase in revenues from our fishing and rental operations, as well as expansion of our coiled tubing services along with improved pricing during 2010.
Operating expenses for our Production Services segment increased $10.7 million, or 13.1%, to $91.9 million for the first nine months of 2010, compared to $81.2 million for the first nine months of 2009. Operating expenses increased due to expenses associated with the expansion of our coiled tubing operations. However, increased activity and improved pricing contributed to better operating income (excluding the impairment charges) as a percentage of revenues from external customers compared to the same period in 2009.
Functional Support
Operating expenses for Functional Support increased $1.4 million, or 1.8%, to $81.8 million (10.2% of consolidated revenues) for the nine months ended September 30, 2010 compared to $80.4 million (11.2% of consolidated revenues) for the same period in 2009. The primary reason for the increase in costs relates to higher equity compensation expense due to
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new equity awards and implementation costs for a new ERP system conversiongranted during the secondfirst quarter of 2011, as well as the reinstatement in late 2010 and overall increasesof certain employee benefits that had been suspended in activity. Transaction2009 as part of our cost savings effort. Additionally, the first quarter of 2011 includes a legal charge related to an injury claim as well as costs incurredrelated to managing our new financial system implemented in 2010 related to our acquisitionthat were not present in the first quarter of OFS ES also contributed to the increase.2010.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition and Liquidity
As of September 30, 2010,March 31, 2011, we had cash and cash equivalents of $34.1$13.2 million. Our working capital (excluding the current portion of capital leases notes payable and long-term debt) was $202.7$212.3 million, compared to $204.5$136.4 million as of December 31, 2009.2010. Our working capital decreasedincreased from the prior year end primarily as a result of increased current liabilitiesthe payment of income taxes during the period through borrowings on our long-term revolving credit facility and an increase in accounts receivable due to activity increases associated with improving market conditions during the first nine monthsquarter of 2010.2011. Our total outstanding debt (including capital leases) was $520.3$583.6 million, and we have no significant debt maturities until 2012.2016. As of September 30, 2010,March 31, 2011, we had $87.8have $100.0 million in borrowings and $58.8$59.4 million in committed letters of credit outstanding under our revolving credit facility,2011 Credit Facility, leaving $153.4$240.6 million of available borrowing capacity. On October 1, 2010 we borrowed $80.0 millioncapacity (as discussed further below under the credit facility to fund a portion of the purchase price of the OFS ES 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 (see “Note 17. Subsequent Events”in“Item 1. Financial Statements"“Senior Secured Credit Facility”).
Cash Flows
The following table summarizes our cash flows for the ninethree month periods ended September 30, 2010March 31, 2011 and 2009:2010:
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September | | | Three Months Ended March 31, | |
| | 30, | | | 2011 | | 2010 | |
| | 2010 | | 2009 | | | (in thousands) | |
| | (in thousands) | | |
Net cash provided by operating activities | | $ | 90,427 | | $ | 197,581 | | |
Net cash (used in) provided by operating activities | | | $ | (39,914 | ) | | $ | 65,754 | |
Cash paid for capital expenditures | | | (101,065 | ) | | | (102,971 | ) | | | (107,439 | ) | | | (32,415 | ) |
Proceeds received from sale of fixed assets | | 20,502 | | 5,184 | | |
Other investing activities, net | | 165 | | 12,206 | | | 5,201 | | 1,171 | |
Repayments of capital lease obligations | | | (6,891 | ) | | | (8,505 | ) | | | (1,120 | ) | | | (2,077 | ) |
Repayments on long-term debt | | | (6,970 | ) | | | (1,539 | ) | |
Net repayment on revolving credit facility | | — | | | (100,000 | ) | |
Repayments of long-term debt | | | | (460,509 | ) | | | (513 | ) |
Proceeds from long-term debt | | | 475,000 | | — | |
Proceeds from borrowings on revolving credit facility | | | 126,000 | | 30,000 | |
Repayments on revolving credit facility | | | | (26,000 | ) | | (30,000 | ) |
Repurchases of common stock | | | (2,357 | ) | | | (248 | ) | | | (4,784 | ) | | | (2,180 | ) |
Other financing activities, net | | 4,214 | | 1,192 | | | | (7,925 | ) | | 1,600 | |
Effect of exchange rates on cash | | | (1,366 | ) | | | (2,508 | ) | | | (1,954 | ) | | | (1,920 | ) |
| | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | $ | (3,341 | ) | | $ | 392 | | | $ | (43,444 | ) | | $ | 29,420 | |
| | | | | | | | | | |
During the ninethree months ended September 30, 2010,March 31, 2011, we generated cash flowsused $39.9 million in our operating activities, compared to generating $65.8 million from operating activities of $90.4 million, compared to $197.6 million for the ninethree months ended September 30, 2009.March 31, 2010. Operating cash inflowsoutflows for 20102011 primarily relate to the collectionpayment of accounts receivable and receipt of a $53.2 million federalour income tax refund, partially offset by our net loss for the period, as well as by cash paid against accounts payableobligations from 2010 and other liabilities due to the increase in activity. Our operating cash flows declined from 2009 primarily as a result of the increase in our net working capital compared to the end of the third quarter of 2009. This was primarily driven by an increase in and timing of the collection of our accounts receivable as a result of higher revenues during the nine months ended September 30, 2010, compared to the same period in 2009.associated with increased activity.
Cash used in investing activities was $80.4$102.2 million and $85.6$31.2 million for the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, respectively, consistingrespectively. Investing cash outflows during these periods consisted primarily of capital expenditures. Partially offsettingOur capital expenditures for the three months ended March 31, 2011 relate to the increased demand for our services and associated growth initiatives.
Cash provided by financing activities was $100.7 million during the three months ended March 31, 2011 compared to cash used in financing activities of $3.2 million for the three months ended March 31, 2010. Overall financing cash inflows for 2011 relate to borrowings on our revolving credit facility to fund a portion of our capital expenditures was the receipt of $17.9 million related to the sale of six barge rigs and related equipment during the second quarter of 2010.expenditure program.
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Cash used in financing activities was $12.0 million during the nine months ended September 30, 2010 and $109.1 million for the nine months ended September 30, 2009. Financing cash outflows during the first nine months of 2010 primarily consisted of repayments on capital lease obligations, and the repayment of the $6.0 million outstanding principal balance of a related party note and repurchases of common stock related to tax withholding on vesting restricted stock awards. These outflows were partially offset by the proceeds we received from the exercise of stock options.
Sources of Liquidity and Capital Resources
Our sources of liquidity include our current cash and cash equivalents, availability under our Senior Secured2011 Credit Facility (defined below), and internally generated cash flows from operations. We received net cash proceeds of $237.7 million as a result of the Patterson-UTI transaction. We subsequently used $75.8 million to complete the purchase of the OFS ES entities. In addition, we paid off the outstanding revolver balance of $87.8 million as of September 30, 2010. These transactions resulted in a net pre-tax cash inflow of $74.1 million.
Debt Service
We do not have any significant maturities of debt until 2012.in 2011. Interest on our Senior Notes (defined below)revolving credit facility is due on June 1 and December 1 of each year.quarter. Interest on the Seniorour 2021 Notes of $17.8 million was paid on June 1, 2010 and(as defined below) is estimated to be $17.8$26.9 million for December 1, 2010.2011. We expect to fund interest payments from cash generated by operations. At September 30, 2010,March 31, 2011, our annual debt maturities for our Senior2014 Notes and 2021 Notes and borrowings under our Senior Secured2011 Credit Facility arewere as follows:
| | | | | | | | |
| | Principal Payments | | | Principal Payments | |
| | (in thousands) | | | (in thousands) | |
Remainder of 2010 | | $ | — | | |
2011 | | — | | | $ | — | |
2012 | | 87,813 | | | — | |
2013 | | — | | | — | |
2014 | | 425,000 | | | 3,573 | |
2015 and thereafter | | | 575,000 | |
| | | | | | |
Total principal payments | | $ | 512,813 | | | $ | 578,573 | |
| | | | |
As discussed above,At March 31, 2011, we repaidwere in compliance with all the outstanding principal balance on our revolving credit facility in early October 2010 with a portion ofcovenants required under the proceeds from2011 Credit Facility and the sale of our pressure pumpingindentures governing the 2014 Notes and wireline businesses.2021 Notes.
8.375%8.375% Senior Notes due 2014
We haveOn November 29, 2007, we issued $425.0 million aggregate principal amount of 8.375% Senior Notes due 2014 (the “Senior“2014 Notes”). On March 4, 2011, we repurchased $421.3 million of our 2014 Notes at a purchase price of $1,090 per $1,000 principal amount. On March 15, 2011, we repurchased an additional $0.1 million at a purchase price of $1,060 per $1,000 principal amount. In connection with the repurchase of the 2014 Notes, we incurred a loss of $44.3 million on the early extinguishment of debt related to the premium paid on the tender, the payment of related fees and the write-off of unamortized loan fees. Interest on the remaining $3.6 million aggregate principal amount of 2014 Notes outstanding is payable on June 1 and December 1 of each year. The 2014 Notes mature on December 1, 2014.
6.75% Senior Notes due 2021
On March 4, 2011, we issued $475.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Notes”). Net proceeds, after deducting underwriters’ fees and offering expenses, were $466.0 million. We used the net proceeds to repurchase the 2014 Notes, including accrued and unpaid interest and fees and expenses. We capitalized $10.0 million of financing costs associated with the issuance of this debt that will be amortized over the term of the notes.
The 2021 Notes are general unsecured senior obligations and are subordinate to all of our existing and future secured indebtedness. The Senior2021 Notes are or will be jointly and severally guaranteed on a senior unsecured basis by certain of our existing and future domestic subsidiaries. Interest on the Senior2021 Notes is payable on JuneMarch 1 and DecemberSeptember 1 of each year.year, beginning on September 1, 2011. The Senior2021 Notes mature on DecemberMarch 1, 2014.2021.
On or after DecemberMarch 1, 2011,2016, the Senior2021 Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, upon not less than 30 nor more than 60 days’ notice, at the redemption prices below (expressed as percentages of the principal amount redeemed) set forth below,, plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on DecemberMarch 1 of the years indicated below:
| | | | |
Year | | Percentage |
2011 | | | 104.19 | % |
2012 | | | 102.09 | % |
2013 | | | 100.00 | % |
| | | | |
Year | | Percentage | |
2016 | | | 103.375 | % |
2017 | | | 102.250 | % |
2018 | | | 101.125 | % |
2019 and thereafter | | | 100.000 | % |
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Notwithstanding the foregoing, atAt any time and from time to time before DecemberMarch 1, 2010,2014, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the outstanding Senior2021 Notes at a redemption price of 108.375%106.750% of the principal amount, thereof,
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plus accrued and unpaid interest thereon to the redemption date, with the net cash proceeds offrom any one or more equity offerings; provided that at least 65% of the aggregate principal amount of the Senior2021 Notes issued under the indenture remains outstanding immediately after each such redemption; and provided, further, that each such redemption shall occur within 180 days of the date of the closing of such equity offering.
In addition, at any time and from time to time prior to DecemberMarch 1, 2011,2016, we may, at our option, redeem all or a portion of the Senior2021 Notes at a redemption price equal to 100% of the principal amount thereof plus the “applicable premium” (as defined in the indenture governing the Senior Notes)a premium with respect to the Senior2021 Notes and plus accrued and unpaid interest thereon to the redemption date. If we experience a change of control, subject to certain exceptions, we must give holders of the Senior2021 Notes the opportunity to sell to us their Senior2021 Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount, thereof, plus accrued and unpaid interest thereon to the date of purchase.
We are subject to certain negative covenants under the indenture governing the Senior Notes.2021 Notes (the “Indenture”). The indentureIndenture limits our ability to, among other things:
| • | | sell assets;incur additional indebtedness and issue preferred equity interests; |
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| • | | pay dividends or make other distributions on capital stock or subordinated indebtedness;repurchase or redeem equity interests; |
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| • | | make loans and investments; |
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| • | | incur additional indebtednessenter into sale and leaseback transactions; |
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| • | | sell, transfer or issue preferred stock;otherwise convey assets; |
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| • | | create certain liens; |
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| • | | enter into transactions with affiliates; |
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| • | | enter into agreements that restrict dividends or other payments from ourrestricting subsidiaries’ ability to pay dividends; |
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| • | | designate future subsidiaries to us;as unrestricted subsidiaries; and |
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| • | | consolidate, merge or transfersell all or substantially all of our assets; |
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| • | | engage in transactions with affiliates; and |
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| • | | create unrestricted subsidiaries.the applicable entities’ assets. |
These covenants are subject to certain exceptions and qualifications and contain cross-default provisions tiedrelating to the covenants of our Senior Secured2011 Credit Facility. In addition, substantiallyFacility, discussed below. Substantially all of the covenants will terminate before the Senior2021 Notes mature if one of two specified ratings agencies assigns the Senior2021 Notes an investment grade rating in the future and no events of default exist under the indenture governingIndenture. As of March 31, 2011, the Senior Notes.2021 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 Senior2021 Notes later falls below an investment grade rating. As of September 30, 2010, the Senior Notes were below investment grade and have never been assigned an investment grade rating, and weWe were in compliance with all thethese covenants under the Senior Notes.at March 31, 2011.
Senior Secured Credit Facility
We maintainOn March 31, 2011, we simultaneously terminated (without pre-payment penalty) our $300 million credit agreement dated November 29, 2007, as amended, which was to mature no later than November 29, 2012, and entered into a new credit agreement with several lenders and JPMorgan Chase Bank, N.A., as Administrative Agent and Swing Line Lender, Bank of America, N.A., as Syndication Agent, and Capital One, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents. In connection with the termination of our previous credit agreement, we incurred a loss of $2.2 million on early extinguishment of debt related to the write-off of the unamortized portion of deferred financing costs. The new 2011 credit agreement provides for a senior secured credit facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank of America, N.A. and Wells Fargo Bank, N.A. are the administrative agents (the “Senior Secured“2011 Credit Facility”). 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 consisting of a revolving credit facility, letter of credit sub-facility and swing line facility of up to an aggregate principal amount of $300.0$400 million, all of which will mature no later than November 29, 2012.March 31, 2016. The 2011 Credit Facility and the obligations thereunder are secured by substantially all of our assets and those of our subsidiary guarantors and are guaranteed by certain of our existing and future domestic subsidiaries.
The Amendment reducedIn connection with the total credit commitments under the facility from $400.0 million to $300.0 million, effected by a pro rata reductionexecution of the commitment2011 Credit Facility, we capitalized $4.7 million of each lender underfinancing costs that will be amortized over the facility. We haveterm of 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 thedebt.
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applicable interest rates and some of the financial covenants, among other changes.
The interest rate per annum applicable to the Senior Secured2011 Credit Facility (as amended) is, at our option, (i) adjusted LIBOR plus athe applicable 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’sJPMorgan’s prime rate, and (y) the Federal Funds rate plus 0.5%) and (z) one-month adjusted LIBOR plus 1.0%, plus ain each case the applicable margin of 250for all other loans. The applicable margin for LIBOR loans ranges from 225 to 350300 basis points, and the applicable margin for all other loans ranges from 125 to 200 basis points, depending onupon our consolidated total leverage ratio.ratio as defined in the 2011 Credit Facility. Unused commitment fees on the facility range fromequal 0.50% to 0.75%, depending upon our consolidated leverage ratio..
The Senior Secured2011 Credit Facility contains certain financial covenants, which, among other things, requirelimits our annual capital expenditures, restricts our ability to repurchase shares and requires us to maintain certain financial ratios. The 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:require that:
| • | | that our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; |
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| • | | 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 Secured2011 Credit Facility, “EBITDA”) be no greater than (i) 2.50 to 1.00 for the fiscal quarter ended March 31, 2010 through and including the fiscal quarter ending December 31, 2010 and, (ii) thereafter, 2.00 to 1.00; |
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| • | | that we maintain a collateral coverage ratio, the ratio of the aggregate book value of the collateral to the amount of the total commitments, as of the last day of any fiscal quarter of at least; |
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Fiscal Quarter Ending | | Ratio | |
June 30, 2011 through June 30, 2012 | | | 1.85 to 1.00 | |
September 30, 2012 and thereafter | | | 2.00 to 1.00 | |
| • | | 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: |
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through the fiscal quarter ending September 30, 2010 | | | 2.00 to 1.00 | |
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for the fiscal quarter ending December 31, 2010 | | | 2.50 to 1.00 | |
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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) $120.0 million during each 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; |
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| • | | 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 sub clauses (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 |
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| • | | that we limit our investmentcapital expenditures and investments 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$250.0 million during anyper fiscal year, or an aggregateup to 50% of which amount may be carried over for expenditure in the following fiscal year, if after October 27, 2009 equalgiving pro forma effect thereto the consolidated total leverage ratio exceeds 3.00 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.1.00. |
In addition, the amended Senior Secured2011 Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions related toon (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;
44
investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event of default exists under the 2011 Credit Facility, the pro forma consolidated total leverage ratio does not exceed 4.00 to 1.00, we are in compliance with other financial covenants and we have at least $25 million of availability under the 2011 Credit Facility); (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders;equityholders; (vii) making investments, loans or advances; (viii) selling properties; (ix) prepaying, redeeming or repurchasing the Senior Notessubordinated (contractually or other unsecured debt incurred pursuant to the sixth bullet point listed above; (viii)structurally) debt; (x) engaging in transactions with affiliates; (xi) entering into hedging arrangements; (xii) entering into sale and leaseback transactions; (xiii) granting negative pledges other than to the lenders; (ix)(xiv) changes in the nature of our business; (x)(xv) 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;documents; and (xi)(xvi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions. Furthermore, the 2011 Credit Facility provides that share repurchases in excess of $200 million can be made only if our debt to capitalization ratio is below 45%.
We may prepay the Senior Secured2011 Credit Facility in whole or in part at any time without premium or penalty, subject to our obligationcertain reimbursements to reimburse the lenders for breakage and redeployment costs. The highest amount outstanding under the credit facility during the quarter was $87.8 million. On October 1, 2010 we borrowed $80.0 million against the credit facility to facilitate the purchase of the OFS ES entities (see “Note 17. Subsequent Events” in“Item 1. Financial Statements”) which brought our total borrowings outstanding under the revolver to $167.8 million. Using a portion of the proceeds from the Patterson-UTI transaction, we subsequently repaid the entire balance on October 4, 2010, bringing our total revolving facility borrowings outstanding to zero (see “Note 17. Subsequent Events”in“Item 1. Financial Statements”). We were in compliance with the covenants of the Senior Secured Credit Facility at September 30, 2010.
Related Party Notes Payable
Concurrently with the sale of six barge rigs and related equipment in May 2010, we repaid 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”) entered into on October 25, 2007. The first Related Party Note was an unsecured note in the amount of $12.5 million, and was repaid on October 25, 2009. The second Related Party Note was an unsecured note in the amount of $10.0 million and was payable in annual installments of $2.0 million.
Capital Lease Agreements
We lease equipment, such as vehicles, tractors, trailers, frac tanks and forklifts, from financial institutions under master lease agreements. As discussed in “Note 6. Long-Term Debt” in“Item 1. Financial Statements”, during the third quarter of 2010, we repaid $1.3 million of outstanding capital leases in connection with the Patterson — UTI transaction. As of September 30, 2010,March 31, 2011, there was $7.5$5.0 million outstanding under such equipment leases.
Off-Balance Sheet Arrangements
At September 30, 2010,March 31, 2011 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.
39
Liquidity Outlook and Future Capital Requirements
As of March 31, 2011, we had cash and cash equivalents of $13.2 million, available borrowing capacity of $240.6 million under our 2011 Credit Facility, and no significant debt maturities until 2016. We believe that our internally generated cash flows from operations, net cash inflows fromavailability under the purchase and sale transactions occurring on October 1, 2010,2011 Credit Facility and current reserves of cash and cash equivalents will be sufficient to finance the majority of our cash requirements for current and future operations, budgeted capital expenditures, and debt service for the next twelve months. Also, 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, could be financed through a combination of cash on hand, cash flow from operations, borrowings under our Senior Secured2011 Credit Facility and, in the case of acquisitions, equity.
Capital Expenditures
During the ninethree months ended September 30, 2010,March 31, 2011, our capital expenditures totaled $101.1$107.4 million, primarily related to fluid management expansion in the Bakken Shale, the deployment of heavy duty workover rigs, the purchase of coiled tubing units, the addition of larger well service rigs,premium drill pipe and major maintenance of our existing fleet and equipment, and capitalized costs associated with our new ERP system.equipment. Our capital expenditures program is
45
expected to total approximately $190.0$240.0 million during 2010, with capital expenditures during the remainder of the year2011, focusing mainly on the maintenance of our fleet andexpansion to selected growth opportunitiesregions in the U.S. market, as well as customer driven requirements. This projected capital expenditure amount does not include the acquisition of certain subsidiaries of OFS ES accounted for as a business combination or other potential growth opportunities related to strategic investments and acquisitions that may be in preliminary stages or unplanned at this point.market. Our remaining capital expenditure program for 20102011 is subject to market conditions, including activity levels, commodity prices, and industry capacity. During 2011, we plan to focus on maximizing our current equipment fleet, although we may choose to increase our capital expenditures in 2011 to increase market share or expand our presence into a new market. We currently anticipate funding our remaining 20102011 capital expenditures through a combination of cash on hand, operating cash flow, net cash inflows from the transactions completed in October 2010, orand borrowings under our Senior Secured2011 Credit Facility.
Divestitures and Acquisitions
On October 1, 2010, we closed the sale of Should our pressure pumping and wireline businesses to Patterson-UTI for cash consideration of $237.7 million and our retention of working capital associated with the businesses (subject to certain adjustments based on closing inventory).
On October 1, 2010, we completed the purchase of 100% of the ownership interests in three of OFS ES’s subsidiaries (and indirectly their related subsidiaries). In addition, we acquired certain incidental assets from OFS ES and its parent company, OFS Holdings, LLC, that are used in the purchased businesses, and we agreed to assume certain specified liabilities. The total consideration consisted of approximately 15.8 million shares of our common stock (which had a closing price of $9.74 on October 1, 2010) and a cash payment of $75.8 million. The purchase price is subject to certain post closing working capital and other adjustments, and was funded by cash on hand and borrowings on our Senior Secured Credit Facility.
We used a portion of the net proceeds from the Patterson-UTI transaction to pay down the outstanding balance on the revolving portion of our Senior Secured Credit Facility, with the remainder being available for use for general corporate purposes.
Theoperating cash flows from the businesses being sold have not been separately identified inor activity levels prove to be insufficient to warrant our consolidated statements of cash flowscurrently planned capital spending levels, management expects it will adjust our capital spending plans accordingly. We may also incur capital expenditures for the nine month periods ended September 30, 2010strategic investments and 2009. We believe that the reduction in cash flows expected after the closing of the Patterson-UTI transaction will not have a material adverse impact on our liquidity or our ability to fund future operations and capital expenditures. We expect that the proceeds and investment of proceeds from the Patterson-UTI transaction, as well as anticipated cash flows from the OFS ES businesses, will have offset such reduction. Additionally, as we used a portion of the net proceeds from the divestiture to pay down the outstanding balance on our Senior Secured Credit Facility, we expect to improve our liquidity by reducing 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 flows.acquisitions.
40
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in our 2009 Annual Report.2010 Form 10-K. More detailed information concerning market risk can be found in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2009 Annual Report.2010 Form 10-K.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to our
46
management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, management concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the thirdfirst quarter of 20102011 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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 second quarter that impacted financial reporting. However, we continue to perform a significant portion of controls that follow our previously tested control structure. We believe that the new 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 related controls during subsequent periods.
4741
PART II—OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
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 alleged 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. Following the transfer of the caseWe are subject to the District of Pennsylvania, 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 sought 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. During the third quarter, on September 2, 2010, we reached a settlement with Mr. Loftis regarding the alleged claims, and recorded an additional charge related to the settlement, having initially recorded a liability for this matter in the fourth quarter of 2008. Additionally, we are involved in various suits and claims that have arisen in the ordinary course of business. We do not believe that the disposition of any of these itemsour ordinary course litigation will result in a material adverse effect on our consolidated financial position, results of operations or cash flows.
For additional information on legal proceedings, see “Note 9.10. Commitments and Contingencies” in “Item 1. Financial Statements” of “Part I” above.
ITEM 1A.RISK FACTORS
There have been no material changes in our risk factors disclosed in our 2009 Annual Report dated as of, and filed with the SEC on, February 26, 2010.2010 Form 10-K. For a discussion of these risk factors, see “Item 1A. Risk Factors” in our 2009 Annual Report. However, we have identified the following additional risk factor:
We have sold our pressure pumping and wireline businesses, which poses certain risks.
On October 1, 2010 we completed the sale of our pressure pumping and wireline businesses. Divestitures of businesses involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, the loss of customer relationships, a decrease in revenues and earnings associated with the divested businesses, and the possible disruption of operations in both the affected and retained businesses. In addition, divestitures may involve significant post-closing separation activities, including the expenditure of significant financial and employee resources.Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2010,March 31, 2011, we repurchased the shares shown in the table below to satisfy tax withholding obligations upon the vesting of restricted stock awarded to certain of our employees:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Approximate | |
| | | | | | | | | | Total Number of | | | Dollar Amount of | |
| | | | | | | | | | Shares Purchased | | | Shares that may | |
| | | | | | Weighted | | | as Part of Publicly | | | yet be Purchased | |
| | Number of | | | Average Price | | | Announced Plans | | | Under the Plans | |
Period | | Shares Purchased (1) | | | Paid per Share (2) | | | or Programs | | | or Programs | |
July 1, 2010 to July 31, 2010 | | | — | | | $ | — | | | | — | | | | — | |
August 1, 2010 to August 31, 2010 | | | 25,327 | | | | 8.45 | | | | — | | | | — | |
September 1, 2010 to September 30, 2010 | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | | 25,327 | | | $ | 8.45 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Approximate | |
| | | | | | | | | | Total Number of | | | Dollar Amount of | |
| | | | | | | | | | Shares Purchased | | | Shares that may | |
| | | | | | Weighted | | | as Part of Publicly | | | yet be Purchased | |
| | Number of | | | Average Price | | | Announced Plans | | | Under the Plans | |
Period | | Shares Purchased (1) | | | Paid per Share (2) | | | or Programs | | | or Programs | |
January 1, 2011 to January 31, 2011 | | | 132,023 | | | $ | 13.16 | | | | — | | | $ | — | |
February 1, 2011 to February 28, 2011 | | | — | | | | — | | | | — | | | | — | |
March 1, 2011 to March 31, 2011 | | | 196,894 | | | | 15.47 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | | 328,917 | | | $ | 14.54 | | | | — | | | $ | — | |
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| | |
(1) | | Represents shares repurchased to satisfy tax withholding obligations upon the vesting of restricted stock awards. |
|
(2) | | The price paid per share on the vesting date with respect to the tax withholding repurchases was determined using the closing price as quoted on the New York Stock ExchangeNYSE on the vesting date for awards granted under the Key Energy Services, Inc. 20072009 Equity and Cash Incentive Plan and the previous business day for awards granted under the Key Energy Group, Inc. 1997 Incentive Plan. |
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.(REMOVED AND RESERVED)
ITEM 5.OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
The Exhibit Index, which follows the signature pages to this report and is incorporated by reference herein, sets forth a list of exhibits to this report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| KEY ENERGY SERVICES, INC. (Registrant)
| |
Date: May 5, 2011 | By: | /s/ T.M. Whichard III | |
| | T.M. Whichard III | |
| | Senior Vice President and Chief Financial Officer (As duly authorized officer and Principal Financial Officer) | |
44
EXHIBIT INDEX
| | |
3.1 | | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of our 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 our 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. (Incorporated by reference to Exhibit 3.1 of our 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. (Incorporated by reference to Exhibit 3.1 of our 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 our Current Report on Form 8-K filed on April 9, 2008, File No. 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 our Current Report on Form 8-K filed on June 10, 2009, File No. 001-08038.) |
|
| |
4.1 | | Fourth Supplemental Indenture dated as of November 29, 2007,March 1, 2011 by and among Key Energy Services, Inc., the subsidiary guarantors party theretonamed therein and The Bank of New York Mellon Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on November 30, 2007,March 1, 2011, File No. 001-08038.) |
|
| |
4.2 | | Registration Rights Agreement,Indenture, dated as of November 29, 2007,March 4, 2011, among Key Energy Services, Inc., the subsidiary guarantors named therein and The Bank of theNew York Mellon Trust Company, party thereto, and Lehman BrothersN.A., as trustee. (Incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on March 4, 2011, File No. 001-08038.) |
| | |
4.3 | | First Supplemental Indenture, dated as of March 4, 2011, among Key Energy Services, Inc., Bancthe guarantors named therein and The Bank of America Securities LLC and Morgan Stanley & Co. Incorporated,New York Mellon Trust Company, N.A., as representatives of the several initial purchasers named therein.trustee. (Incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on November 30, 2007,March 4, 2011, File No. 001-08038.) |
|
| 4.3 |
4.4 | | First Supplemental Indenture, dated asForm of January 22, 2008, among Key Marine Services, LLC, the existing guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporatedglobal note for 6.750% Senior Notes due 2021 (incorporated by reference from Exhibit A to Exhibit 4.5 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, File No. 001-08038.) |
4.3). |
| 4.4 | |
10.1 | | Second Supplemental Indenture,Credit Agreement, 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 our Annual Report on Form 10-K for the fiscal year ended DecemberMarch 31, 2009, File No. 001-08038.) |
|
| 4.5 | | Third Supplemental Indenture, dated as of July 31, 2009,2011, among Key Energy Services, California, Inc., each of the existing Guarantors and Thelenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of New York Trust Company,America, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) |
|
| 10.1 | | Asset Purchase Agreement, datedsyndication agent, and Capital One, N.A. and Wells Fargo Bank, N.A., 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.co-documentation agents. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on July 6, 2010, File No. 001-08038.) |
49
| 10.2* | | 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. |
|
| 10.3* | | 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. |
|
| 10.4 | | 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 our Current Report on Form 8-K/A filed on October 8, 2010,April 5, 2011, File No. 001-08038.) |
|
| 10.5 | | 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 our Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) |
|
| 10.6 | | 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 our Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) |
|
| 31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
| |
31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
| |
32* | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| |
101* | | Interactive Data File. |
50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
|
KEY ENERGY SERVICES, INC.
(Registrant)
| |
| By: | /s/ Richard J. Alario | |
| | Richard J. Alario | |
| | President and Chief Executive Officer
(Principal Executive Officer) | |
|
Date: November 1, 2010
51
EXHIBITS INDEX
| 3.1 | | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of our 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 our 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. (Incorporated by reference to Exhibit 3.1 of our 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. (Incorporated by reference to Exhibit 3.1 of our 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 our Current Report on Form 8-K filed on April 9, 2008, File No. 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 our 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 our Form 8-K filed on November 30, 2007, File No. 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 our 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 party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, File No. 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 our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-08038.) |
|
| 10.1 | | 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 our Current Report on Form 8-K filed on July 6, 2010, File No. 001-08038.) |
|
| 10.2* | | 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. |
|
| 10.3* | | 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. |
|
| 10.4 | | 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 our Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) |
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| 10.5 | | 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 our Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) |
| 10.6 | | 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 our Current Report on Form 8-K/A filed on October 8, 2010, File No. 001-08038.) |
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| 31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32* | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 101* | | Interactive Data File. |
245