In utilizing the Black-Scholes option pricing model to determine fair values of awards, certain assumptions are made which are based on subjective expectations, and are subject to change. A change in one or more of these assumptions would impact the expense associated with future grants. These key assumptions include the volatility in the price of our common stock, the risk-free interest rate and the expected life of awards.
We used the following weighted average assumptions in the Black-Scholes option pricing model for determining the fair value of our stock option grants during the years ended December 31, 2009, 2008 2007 and 2006:2007:
We calculate the expected volatility for our stock option grants by measuring the volatility of our historical stock price for a period equal to the expected life of the option and ending at the time the option was granted. We determine the risk-free interest rate based upon the interest rate on a U.S. Treasury Bill with a term equal to the expected life of the option at the time the option was granted. In estimating the expected lives of our stock options and SARs, we have relied primarily onelected to use the simplified method. During the time that we did not have current financial statements filed with the SEC, our actual experience with our previousoptions were legally restricted from being exercised; therefore we believe that we do not have access to sufficient historical exercise data to appropriately provide a reasonable basis upon which to estimate the expected term of stock option grants.awards. The expected life is less than the term of the option as option holders, in our experience, exercise or forfeit the options during the term of the option.
We are not required to recalculate the fair value of our stock option grants estimated using the Black-Scholes option pricing model after the initial calculation unless the original option grant terms are modified. However, a 100 basis point10 percent increase in our expected volatility and risk-free interest rate at the grant date would have increased our compensation expense for the year ended December 31, 20082009 by approximately $1.0less than $0.1 million.
statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from currentprevious practice resulting from SFAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions of SFAS 141(R) on January 1, 2009, but did not consummate any business combinations during the three months ended March 31, 2009. SFAS 141(R) may have an impact on our consolidated financial statements.statements in the future. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of theany acquisitions consummated after the effective date.
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SFAS 160. In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51 (“(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We adopted the provisions of SFAS 160 on January 1, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
SFAS 165. In May 2009, the FASB issued SFAS No. 165,Subsequent Events(“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosing of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 does not significantly change the types of subsequent events that an entity reports, but it requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for fiscal years,interim or annual reporting requirements ending after June 15, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
ASU2009-01. In June 2009, the FASB issued Accounting Standards Update (“ASU”)2009-01,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162(“ASU2009-01”). ASU2009-01 established the Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification supersedes all prior non-SEC accounting and reporting standards. Following ASU2009-01, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU2009-01 also modifies the existing hierarchy of GAAP to include only two levels — authoritative and non-authoritative. ASU2009-01 is effective for financial statements issued for interim and annual periods within thoseending after September 15, 2009, and early adoption was not permitted. The adoption of this standard did not have an impact on our financial position, results of operations or cash flows.
ASU2009-05. In August 2009, the FASB issued ASU2009-05,Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value(“ASU2009-05”). ASU2009-05 addresses concerns in situations where there may be a lack of observable market information to measure the fair value of a liability, and provides clarification in circumstances where a quoted market price in an active market for an identical liability is not available. In these cases, reporting entities should measure fair value using a valuation technique that uses the quoted price of the identical liability when that liability is traded as an asset,
50
quoted prices for similar liabilities, or another valuation technique, such as an income or market approach. ASU2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU2009-05 is effective for the first reporting period subsequent to August 2009 and the adoption of this update did not have a material impact on our financial position, results of operations, or cash flows.
Accounting Standards Not Yet Adopted in this Report
SFAS 166. In June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140(“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement 125(“SFAS 140”), removes the concept of a “qualifying special purpose entity” from SFAS 140 and removes the exception from applying FASB Interpretation (“FIN”) No. 46(R),Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51(“FIN 46(R)”) to qualifying special purpose entities. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
SFAS 167. In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R)(“SFAS 167”). SFAS 167 amends the scope of FIN 46(R) to include entities previously considered qualifying special-purpose entities by FIN 46(R), as the concept of a qualifying special-purpose entity was eliminated in SFAS 166. This standard shifts the guidance for determining which enterprise in a Variable Interest Entity consolidates that entity from a quantitative consideration of who is the primary beneficiary to a qualitative focus of which entity has the power to direct activities and the obligation to absorb losses. This standard is to be effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
ASU2009-13. In October 2009, the FASB issued ASU2009-13,Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force(“ASU2009-13”). ASU2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires an entity to use vendor-specific objective evidence (“VSOE”) or third-party evidence of a selling price to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU2009-13, multiple-deliverable arrangements will be separated in more circumstances than under current guidance. ASU2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU2009-13 must be prospectively applied to all revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We expect to adopt the provisions of ASU2009-13 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-14. In October 2009, the FASB issued ASU2009-14,Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force(“ASU2009-14”). ASU2009-14 was issued to address concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more than incidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separate deliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current
51
accounting model does not appropriately reflect the economics of the underlying transactions and that more software-enabled products now fall or will fall within the scope of the current guidance than originally intended. ASU2009-14 changes the current accounting model for revenue arrangements that include both tangible products and software elements to exclude those where the software components are essential to the tangible products’ core functionality. In addition, ASU2009-14 also requires that hardware components of a tangible product containing software components always be excluded from the software revenue recognition guidance, and provides guidance on how to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded from the scope of software revenue recognition guidance. ASU2009-14 also provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU2009-14 was issued concurrently with ASU2009-13 and also requires entities to provide the disclosures required by ASU2009-13 that are included within the scope of ASU2009-14. ASU2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may also elect, but are not required, to adopt ASU2009-14 retrospectively to prior periods, and must adopt ASU2009-14 in the same period and using the same transition methods that it uses to adopt ASU2009-13. We expect to adopt the provisions of ASU2009-14 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-17. In December 2009, the FASB issued ASU2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU2009-17 replaces the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. ASU2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities. The provisions of ASU2009-17 are to be applied beginning in the first fiscal period beginning after November 15, 2009. We will adopt ASU2009-17 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material effect on our financial position, results of operations, or cash flows.
ASU2010-02. In January 2010, the FASB issued ASU2010-02,Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope Clarification. ASU2010-02 clarifies that the scope of previous guidance in the accounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assets that is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. ASU2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of any continuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The provisions of ASU2010-02 will be effective for us for the first reporting period beginning after December 13, 2009. We will adopt the provisions of ASU2010-02 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-06. In January 2010 the FASB issued ASU2010-06,Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures About Fair Value Measurements. ASU2010-06 clarifies the requirements for certain disclosures around fair value measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosure requirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during the period, along with the reason for those transfers, and (ii) separate presentation of information about
52
purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs. ASU2010-06 is effective for interim and annual reporting periods beginning after December 15, 2008. Earlier2009. We will adopt the provisions of ASU2010-06 on January 1, 2010 and do not expect that the adoption is not permitted. We are currently evaluating the potential impact of this statement.standard will have a material impact on our financial position, results of operations, or cash flows.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates, foreign currency exchange rates and equity prices that could impact our financial position, results of operations and cash flows. We manage our exposure to these risks through regular operating and financing activities, and may, on a limited basis, use derivative financial instruments to manage this risk. To the extent that we use such derivative financial instruments, we will use them only as risk management tools and not for speculative investment purposes.
Interest Rate Risk
As of December 31, 2008,2009, we had outstanding $425.0 million of 8.375% Senior Notes due 2014. These notes are fixed-rate obligations, and as such do not subject us to risks associated with changes in interest rates. Borrowings under our Senior Secured Credit Facility, our capital lease obligations, and the Monclaour Related Party Notes all bear interest at variable interest rates, and therefore expose us to interest rate risk. As of December 31, 2008,2009, the weighted average interest rate on our outstanding variable-rate debt obligations was 4.17%3.24%. A hypothetical 10% increase in that rate would increase the annual interest expense on those instruments by approximately $0.5$0.4 million.
Foreign Currency Risk
As of December 31, 2008,2009, we conduct operations in Argentina, and Mexico, the Russian Federation, and also own Canadian subsidiaries and have equity-method investments in atwo Canadian company and a Russian company.companies. The functional currency is the local currency for all of these entities, and as such we are exposed to the risk of changes in the exchange rates between the U.S. Dollar and the local currencies. For balances denominated in our foreign subsidiaries’ local currency, changes in the value of the subsidiaries’ assets and liabilities due to changes in exchange rates are deferred and accumulated in other comprehensive income until we liquidate our investment. For balances denominated in currencies other than the local currency, our foreign subsidiaries must remeasure the balance at the end of each period to an equivalent amount of local currency, with changes reflected in earnings during the period. A hypothetical 10% decrease in the average value of the U.S. Dollar relative to the value of the local currencies for our Argentinean, Mexican, Russian and Canadian subsidiaries and our Canadian and Russian investments would decrease our net income by approximately $1.3$0.2 million.
Equity Risk
We account forCertain of our equity-based compensation awards at fair value under the provisions of SFAS 123(R). Certain of these awards’ fair values are determined based upon the price of the Company’sour common stock on the measurement date. Any increase in the price of the Company’sour common stock would lead to a corresponding increase in the fair value of those awards. A 10% increase in the price of the Company’sour common stock from its value at December 31, 20082009 would increase annual compensation expense recognized on these awards by approximately $0.1 million.
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| ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Key Energy Services, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | | Page |
| |
| | | 6555 | |
| | | 6656 | |
| | | 6757 | |
| | | 6858 | |
| | | 6959 | |
| | | 7060 | |
| | | 7161 | |
| | | 7262 | |
6454
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and ShareholdersStockholders of
Key Energy Services, Inc.
We have audited the accompanying consolidated balance sheets of Key Energy Services, Inc. and subsidiaries (a Maryland corporation) and Subsidiaries as of December 31, 20082009 and 2007,2008, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Key Energy Services, Inc. and subsidiariesSubsidiaries as of December 31, 20082009 and 2007,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082009 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Interpretation No. 48,Accounting for Uncertainty in Income Taxes.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of FSPEITF 00-19-2,Accounting for Registration Payment Arrangements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Key Energy Services, Inc. and subsidiaries’Subsidiaries’ internal control over financial reporting as of December 31, 2008,2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 24, 200926, 2010, expressed an adverseunqualified opinion on the effectiveness of internal control over financial reporting.
Houston, Texas
February 24, 200926, 2010
6555
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and ShareholdersStockholders of
Key Energy Services, Inc.
We have audited Key Energy Services, Inc.’s and subsidiaries (a Maryland Corporation)corporation) and Subsidiaries’ internal control over financial reporting as of December 31, 2008,2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Key Energy Services, Inc. and subsidiaries’Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Key Energy Services, Inc. and subsidiaries’Subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Payroll: The Company determined that deficiencies surrounding its payroll process, in particular, lack of proper documentation concerning hours worked, employee master file data and rate changes coupled with deficiencies with reconciliations where payroll or payroll related data was a major component, constituted a material weakness in its system of internal controls.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Key Energy Services, Inc. and subsidiaries have notSubsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on criteria established inInternal Control — Integrated Frameworkissued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets, statements of operations, comprehensive income, stockholders’ equity, and cash flows of Key Energy Services, Inc. and subsidiaries. The material weakness identified above was considered in determining the nature, timing,Subsidiaries and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated February 24, 2009, which26, 2010, expressed an unqualified opinion on those consolidated financial statements.
Houston, Texas
February 24, 200926, 2010
6656
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands, except
| | | (In thousands, except
| |
| | | share amounts) | | | share amounts) | |
| |
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 92,691 | | | $ | 58,503 | | | $ | 37,394 | | | $ | 92,691 | |
| Accounts receivable, net of allowance for doubtful accounts of $11,468 and $13,501, respectively | | | 377,353 | | | | 343,408 | | |
| Accounts receivable, net of allowance for doubtful accounts of $5,441 and $11,468 | | | | 214,662 | | | | 377,353 | |
| Inventories | | | 34,756 | | | | 22,849 | | | | 27,452 | | | | 34,756 | |
| Prepaid expenses | | | 15,513 | | | | 12,997 | | | | 14,212 | | | | 15,513 | |
| Deferred tax assets | | | 26,623 | | | | 27,676 | | | | 25,323 | | | | 26,623 | |
| Income taxes receivable | | | 4,848 | | | | 15,796 | | | | 50,025 | | | | 4,848 | |
| Other current assets | | | 7,338 | | | | 6,636 | | | | 15,064 | | | | 7,338 | |
| | | | | | | | | | | |
Total current assets | | | 559,122 | | | | 487,865 | | | | 384,132 | | | | 559,122 | |
| | | | | | | | | | | |
| Property and equipment, gross | | | 1,858,307 | | | | 1,595,225 | | | | 1,728,174 | | | | 1,858,307 | |
| Accumulated depreciation | | | (806,624 | ) | | | (684,017 | ) | | | (863,566 | ) | | | (806,624 | ) |
| | | | | | | | | | | |
| Property and equipment, net | | | 1,051,683 | | | | 911,208 | | | | 864,608 | | | | 1,051,683 | |
| | | | | | | | | | | |
| Goodwill | | | 320,992 | | | | 378,550 | | | | 346,102 | | | | 320,992 | |
| Other intangible assets, net | | | 42,345 | | | | 45,894 | | | | 41,048 | | | | 42,345 | |
| Deferred financing costs, net | | | 10,489 | | | | 12,117 | | | | 10,421 | | | | 10,489 | |
| Notes and accounts receivable — related parties | | | 336 | | | | 173 | | |
| Equity method investments | | | 24,220 | | | | 11,217 | | |
| Equity-method investments | | | | 5,203 | | | | 24,220 | |
| Other assets | | | 7,736 | | | | 12,053 | | | | 12,896 | | | | 8,072 | |
| | | | | | | | | | | |
TOTAL ASSETS | | $ | 2,016,923 | | | $ | 1,859,077 | | | $ | 1,664,410 | | | $ | 2,016,923 | |
| | | | | | | | | | | |
| | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 46,185 | | | $ | 35,159 | | | $ | 46,086 | | | $ | 46,185 | |
| Accrued liabilities | | | 197,116 | | | | 183,364 | | | | 130,517 | | | | 197,116 | |
| Accrued interest | | | 4,368 | | | | 3,895 | | | | 3,014 | | | | 4,368 | |
| Current portion of capital lease obligations | | | 9,386 | | | | 10,701 | | | | 7,203 | | | | 9,386 | |
| Current notes payable — related parties, net of discount | | | 14,318 | | | | 1,678 | | |
| Current portion of notes payable — related parties, net of discount | | | | 1,931 | | | | 14,318 | |
| Current portion of long-term debt | | | 2,000 | | | | — | | | | 1,018 | | | | 2,000 | |
| | | | | | | | | | | |
Total current liabilities | | | 273,373 | | | | 234,797 | | | | 189,769 | | | | 273,373 | |
| | | | | | | | | | | |
| Capital lease obligations, less current portion | | | 13,763 | | | | 16,114 | | | | 7,110 | | | | 13,763 | |
| Notes payable — related parties, less current portion | | | 6,000 | | | | 20,500 | | | | 4,000 | | | | 6,000 | |
| Long-term debt, less current portion | | | 613,828 | | | | 475,000 | | | | 512,839 | | | | 613,828 | |
| Workers’ compensation, vehicular, health and other insurance claims | | | 43,151 | | | | 43,818 | | |
| Workers’ compensation, vehicular and health insurance liabilities | | | | 40,855 | | | | 43,151 | |
| Deferred tax liabilities | | | 188,581 | | | | 160,068 | | | | 146,980 | | | | 188,581 | |
| Other non-current accrued liabilities | | | 17,495 | | | | 19,531 | | | | 19,717 | | | | 17,495 | |
| Minority interest | | | — | | | | 251 | | |
Commitments and contingencies | | | | | | | | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | |
| Common stock, $0.10 par value; 200,000,000 shares authorized, 121,305,289 and 131,142,905 shares issued and outstanding, respectively | | | 12,131 | | | | 13,114 | | |
Equity: | | | | | | | | | |
| Common stock, $0.10 par value; 200,000,000 shares authorized, 123,993,480 and 121,305,289 shares issued and outstanding | | | | 12,399 | | | | 12,131 | |
| Additional paid-in capital | | | 601,872 | | | | 704,644 | | | | 608,223 | | | | 601,872 | |
| Accumulated other comprehensive loss | | | (46,550 | ) | | | (37,981 | ) | | | (50,763 | ) | | | (46,550 | ) |
| Retained earnings | | | 293,279 | | | | 209,221 | | | | 137,158 | | | | 293,279 | |
| | | | | | | | | | | |
Total stockholders’ equity | | | 860,732 | | | | 888,998 | | |
Total equity attributable to common stockholders | | | | 707,017 | | | | 860,732 | |
| Noncontrolling interest | | | | 36,123 | | | | — | |
| | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,016,923 | | | $ | 1,859,077 | | |
Total equity | | | | 743,140 | | | | 860,732 | |
| | | | | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | | $ | 1,664,410 | | | $ | 2,016,923 | |
| | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
6757
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
| |
REVENUES | | $ | 1,972,088 | | | $ | 1,662,012 | | | $ | 1,546,177 | | | $ | 1,078,665 | | | $ | 1,972,088 | | | $ | 1,662,012 | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct operating expenses | | | 1,250,327 | | | | 985,614 | | | | 920,602 | | | | 779,457 | | | | 1,250,327 | | | | 985,614 | |
| Depreciation and amortization expense | | | 170,774 | | | | 129,623 | | | | 126,011 | | | | 169,562 | | | | 170,774 | | | | 129,623 | |
| Impairment of goodwill and equity method investment | | | 75,137 | | | | — | | | | — | | |
| General and administrative expenses | | | 257,707 | | | | 230,396 | | | | 195,527 | | | | 178,696 | | | | 257,707 | | | | 230,396 | |
| Asset retirements and impairments | | | | 159,802 | | | | 75,137 | | | | — | |
| Interest expense, net of amounts capitalized | | | 41,247 | | | | 36,207 | | | | 38,927 | | | | 39,069 | | | | 41,247 | | | | 36,207 | |
| Loss on early extinguishment of debt | | | — | | | | 9,557 | | | | — | | |
| (Gain) loss on sale of assets, net | | | (641 | ) | | | 1,752 | | | | (4,323 | ) | |
| Interest income | | | (1,236 | ) | | | (6,630 | ) | | | (5,574 | ) | |
| Other expense (income), net | | | 4,717 | | | | (447 | ) | | | 527 | | |
| Other, net | | | | (120 | ) | | | 2,840 | | | | 4,232 | |
| | | | | | | | | | | | | | | |
| Total costs and expenses, net | | | 1,798,032 | | | | 1,386,072 | | | | 1,271,697 | | | | 1,326,466 | | | | 1,798,032 | | | | 1,386,072 | |
| | | | | | | | | | | | | | | |
| Income before income taxes and minority interest | | | 174,056 | | | | 275,940 | | | | 274,480 | | |
| Income tax expense | | | (90,243 | ) | | | (106,768 | ) | | | (103,447 | ) | |
| Minority interest | | | 245 | | | | 117 | | | | — | | |
| (Loss) income before taxes and noncontrolling interest | | | | (247,801 | ) | | | 174,056 | | | | 275,940 | |
| Income tax benefit (expense) | | | | 91,125 | | | | (90,243 | ) | | | (106,768 | ) |
| | | | | | | | | | | | | | | |
NET INCOME | | $ | 84,058 | | | $ | 169,289 | | | $ | 171,033 | | |
Net (Loss) Income | | | | (156,676 | ) | | | 83,813 | | | | 169,172 | |
| | | | | | | | | | | | | | | |
EARNINGS PER SHARE: | | | | | | | | | | | | | |
| Noncontrolling interest | | | | (555 | ) | | | (245 | ) | | | (117 | ) |
| | | | | | | | | |
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | |
| | | | | | | | | |
| (Loss) earnings per share attributable to common stockholders: | | | | | | | | | | | | | |
| Basic | | $ | 0.68 | | | $ | 1.29 | | | $ | 1.30 | | | $ | (1.29 | ) | | $ | 0.68 | | | $ | 1.29 | |
| Diluted | | $ | 0.67 | | | $ | 1.27 | | | $ | 1.28 | | | $ | (1.29 | ) | | $ | 0.67 | | | $ | 1.27 | |
WEIGHTED AVERAGE SHARES OUTSTANDING: | | | | | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | | | | |
| Basic | | | 124,246 | | | | 131,194 | | | | 131,332 | | | | 121,072 | | | | 124,246 | | | | 131,194 | |
| Diluted | | | 125,565 | | | | 133,551 | | | | 134,064 | | | | 121,072 | | | | 125,565 | | | | 133,551 | |
See the accompanying notes which are an integral part of these consolidated financial statements
6858
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands) | |
| |
NET INCOME | | $ | 84,058 | | | $ | 169,289 | | | $ | 171,033 | |
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: | | | | | | | | | | | | |
| Foreign currency translation loss, net of tax of $(952), $0, and $0, respectively | | | (8,561 | ) | | | (1,281 | ) | | | (51 | ) |
| Net deferred (loss) gain from cash flow hedges, net of tax of $0, $(115), and $115, respectively | | | — | | | | (213 | ) | | | 213 | |
| Deferred (loss) gain from available for sale investments, net of tax of $0, $(97), and $97, respectively | | | (8 | ) | | | (203 | ) | | | 181 | |
| | | | | | | | | | | | | |
COMPREHENSIVE INCOME, NET OF TAX | | $ | 75,489 | | | $ | 167,592 | | | $ | 171,376 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
Net (Loss) Income | | $ | (156,676 | ) | | $ | 83,813 | | | $ | 169,172 | |
| Other comprehensive (loss) income, net of tax: | | | | | | | | | | | | |
| Foreign currency translation loss, net of tax of $(347), $(952), and $0 | | | (4,243 | ) | | | (8,561 | ) | | | (1,281 | ) |
| Net deferred loss from cash flow hedges, net of tax of $0, $0, and $(115) | | | — | | | | — | | | | (213 | ) |
| Deferred gain (loss) from available for sale investments, net of tax of $0, $0 and $(97) | | | 30 | | | | (8 | ) | | | (203 | ) |
| | | | | | | | | | | | | |
| Total other comprehensive loss, net of tax | | | (4,213 | ) | | | (8,569 | ) | | | (1,697 | ) |
| | | | | | | | | | | | | |
Comprehensive (loss) income, net of tax | | | (160,889 | ) | | | 75,244 | | | | 167,475 | |
| Comprehensive loss attributable to noncontrolling interest | | | (416 | ) | | | (316 | ) | | | (119 | ) |
| | | | | | | | | | | | | |
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (160,473 | ) | | $ | 75,560 | | | $ | 167,594 | |
| | | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
6959
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | | (In thousands) | | | | | (In thousands) | | | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 84,058 | | | $ | 169,289 | | | $ | 171,033 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | |
| Minority interest | | | (245 | ) | | | (117 | ) | | | — | | |
| (Loss) income attributable to common stockholders | | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | |
Adjustments to reconcile (loss) income attributable to common stockholders to net cash provided by operating activities: | | | | | | | | | | | | | |
| Noncontrolling interest | | | | (555 | ) | | | (245 | ) | | | (117 | ) |
| Depreciation and amortization expense | | | 170,774 | | | | 129,623 | | | | 126,011 | | | | 169,562 | | | | 170,774 | | | | 129,623 | |
| Accretion on asset retirement obligations | | | 594 | | | | 585 | | | | 508 | | |
| Income from equity method investments | | | (160 | ) | | | (387 | ) | | | (416 | ) | |
| Impairment of goodwill and equity method investment | | | 75,137 | | | | — | | | | — | | |
| Asset retirements and impairments | | | | 159,802 | | | | 75,137 | | | | — | |
| Bad debt expense | | | | 3,295 | | | | 37 | | | | 3,675 | |
| Accretion of asset retirement obligations | | | | 533 | | | | 594 | | | | 585 | |
| Loss (income) from equity-method investments | | | | 1,057 | | | | (160 | ) | | | (387 | ) |
| Amortization of deferred financing costs and discount | | | 2,115 | | | | 1,680 | | | | 1,620 | | | | 2,182 | | | | 2,115 | | | | 1,680 | |
| Deferred income tax expense | | | 29,747 | | | | 24,613 | | | | 6,757 | | |
| Deferred income tax (benefit) expense | | | | (41,257 | ) | | | 29,747 | | | | 24,613 | |
| Capitalized interest | | | (6,514 | ) | | | (5,296 | ) | | | (3,358 | ) | | | (4,335 | ) | | | (6,514 | ) | | | (5,296 | ) |
| (Gain) loss on sale of assets | | | (641 | ) | | | 1,752 | | | | (4,323 | ) | |
| Loss (gain) on disposal of assets, net | | | | 401 | | | | (641 | ) | | | 1,752 | |
| Loss on early extinguishment of debt | | | — | | | | 9,557 | | | | — | | | | 472 | | | | — | | | | 9,557 | |
| Loss on sale of available for sale investments, net | | | | 30 | | | | — | | | | — | |
| Share-based compensation | | | 24,233 | | | | 9,355 | | | | 6,345 | | | | 6,381 | | | | 24,233 | | | | 9,355 | |
| Excess tax benefits from share-based compensation | | | (1,733 | ) | | | (3,401 | ) | | | — | | | | (580 | ) | | | (1,733 | ) | | | (3,401 | ) |
Changes in working capital: | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (34,906 | ) | | | (44,712 | ) | | | (60,801 | ) | | | 168,824 | | | | (34,943 | ) | | | (48,387 | ) |
| Share-based compensation liability awards | | | (516 | ) | | | 3,701 | | | | — | | |
| Other current assets | | | (15,622 | ) | | | (424 | ) | | | 976 | | | | 461 | | | | (15,622 | ) | | | (15,578 | ) |
| Accounts payable, accrued interest and accrued expenses | | | 46,375 | | | | (1,360 | ) | | | 35,138 | | | | (126,949 | ) | | | 46,375 | | | | (1,360 | ) |
| Income tax refund receivable | | | — | | | | (15,154 | ) | | | (642 | ) | |
| Cash paid for legal settlement with former chief executive officer | | | — | | | | (21,200 | ) | | | — | | | | — | | | | — | | | | (21,200 | ) |
| Share-based compensation liability awards | | | | 646 | | | | (516 | ) | | | 3,701 | |
| Other assets and liabilities | | | (5,532 | ) | | | (8,185 | ) | | | (20,124 | ) | | | 988 | | | | (5,532 | ) | | | (8,185 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 367,164 | | | | 249,919 | | | | 258,724 | | | | 184,837 | | | | 367,164 | | | | 249,919 | |
| | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (218,994 | ) | | | (212,560 | ) | | | (195,830 | ) | | | (128,422 | ) | | | (218,994 | ) | | | (212,560 | ) |
| Proceeds from sale of fixed assets | | | 7,961 | | | | 8,427 | | | | 11,658 | | | | 5,580 | | | | 7,961 | | | | 8,427 | |
| Investment in Geostream Services Group | | | (19,306 | ) | | | — | | | | — | | | | — | | | | (19,306 | ) | | | — | |
| Acquisitions, net of cash acquired of $2,017, $2,154, and $0, respectively | | | (63,457 | ) | | | (157,955 | ) | | | — | | |
| Acquisition of fixed assets from asset purchases | | | (34,468 | ) | | | — | | | | — | | |
| Acquisitions, net of cash acquired of $28,362, $2,017, and $2,154, respectively | | | | 12,007 | | | | (99,011 | ) | | | (160,278 | ) |
| Dividend from equity-method investments | | | | 199 | | | | — | | | | — | |
| Cash paid for short-term investments | | | — | | | | (121,613 | ) | | | (83,769 | ) | | | — | | | | — | | | | (121,613 | ) |
| Proceeds from the sale of short-term investments | | | 276 | | | | 183,177 | | | | 22,294 | | |
| Acquisition of intangible assets | | | (1,086 | ) | | | (2,323 | ) | | | — | | |
| Proceeds from sale of short-term investments | | | | — | | | | 276 | | | | 183,177 | |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (329,074 | ) | | | (302,847 | ) | | | (245,647 | ) | | | (110,636 | ) | | | (329,074 | ) | | | (302,847 | ) |
| | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Repayments of long-term debt | | | — | | | | (396,000 | ) | | | (4,000 | ) | | | (16,552 | ) | | | (3,026 | ) | | | (396,000 | ) |
| Proceeds from long-term debt | | | — | | | | 425,000 | | | | — | | | | — | | | | — | | | | 425,000 | |
| Payments on revolving credit facility | | | (35,000 | ) | | | — | | | | — | | |
| Borrowings under revolving credit facility | | | 172,813 | | | | 50,000 | | | | — | | |
| Repayments of capital lease obligations | | | (11,506 | ) | | | (11,316 | ) | | | (12,975 | ) | | | (9,847 | ) | | | (11,506 | ) | | | (11,316 | ) |
| Repayments of other long-term indebtedness | | | (3,026 | ) | | | — | | | | — | | |
| Repayments of debt assumed in acquisition | | | — | | | | (17,435 | ) | | | — | | |
| Proceeds paid for deferred financing costs | | | (314 | ) | | | (13,400 | ) | | | (479 | ) | |
| Borrowings on revolving credit facility | | | | — | | | | 172,813 | | | | 50,000 | |
| Repayments on revolving credit facility | | | | (100,000 | ) | | | (35,000 | ) | | | — | |
| Repayments of debt assumed in acquisitions | | | | — | | | | — | | | | (17,435 | ) |
| Repurchases of common stock | | | (139,358 | ) | | | (30,454 | ) | | | (1,180 | ) | | | (488 | ) | | | (139,358 | ) | | | (30,454 | ) |
| Proceeds from exercise of stock options | | | 6,688 | | | | 13,444 | | | | — | | | | 1,306 | | | | 6,688 | | | | 13,444 | |
| Payment of deferred financing costs | | | | (2,474 | ) | | | (314 | ) | | | (13,400 | ) |
| Excess tax benefits from share-based compensation | | | 1,733 | | | | 3,401 | | | | — | | | | 580 | | | | 1,733 | | | | 3,401 | |
| | | | | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (7,970 | ) | | | 23,240 | | | | (18,634 | ) | | | (127,475 | ) | | | (7,970 | ) | | | 23,240 | |
| | | | | | | | | | | | | | | |
| Effect of exchange rates on cash | | | 4,068 | | | | (184 | ) | | | (238 | ) | |
| Effect of changes in exchange rates on cash | | | | (2,023 | ) | | | 4,068 | | | | (184 | ) |
| | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 34,188 | | | | (29,872 | ) | | | (5,795 | ) | |
| Net (decrease) increase in cash and cash equivalents | | | | (55,297 | ) | | | 34,188 | | | | (29,872 | ) |
| | | | | | | | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 58,503 | | | | 88,375 | | | | 94,170 | | | | 92,691 | | | | 58,503 | | | | 88,375 | |
| | | | | | | | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 92,691 | | | $ | 58,503 | | | $ | 88,375 | | | $ | 37,394 | | | $ | 92,691 | | | $ | 58,503 | |
| | | | | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
7060
Key Energy Services, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated
| | | | | | | COMMON STOCKHOLDERS | | | | | |
| | | Common Stock | | Additional
| | Other
| | Retained
| | | | | | | | | | | Accumulated
| | | | | | | |
| | | Number of
| | Amount
| | Paid-in
| | Comprehensive
| | (Deficit)
| | | | | Common Stock | | Additional
| | Other
| | | | | | | |
| | | Shares | | at par | | Capital | | (Loss) Income | | Earnings | | Total | | | Number of
| | Amount
| | Paid-in
| | Comprehensive
| | Retained
| | Noncontrolling
| | | |
| | | (In thousands) | | | Shares | | at par | | Capital | | Loss | | Earnings | | Interest | | Total | |
| | | (In thousands) | |
BALANCE AT DECEMBER 31, 2005 | | | 131,334 | | | $ | 13,133 | | | $ | 706,749 | | | $ | (36,627 | ) | | $ | (129,198 | ) | | $ | 554,057 | | |
| | | | | | | | | | | | | | | |
| Comprehensive income, net of tax | | | — | | | | — | | | | — | | | | 343 | | | | — | | | | 343 | | |
| Common stock purchases | | | (81 | ) | | | (8 | ) | | | (1,172 | ) | | | — | | | | — | | | | (1,180 | ) | |
| Share-based compensation | | | 371 | | | | 37 | | | | 6,181 | | | | — | | | | — | | | | 6,218 | | |
| Tax benefits from share-based compensation | | | — | | | | — | | | | 40 | | | | — | | | | — | | | | 40 | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 171,033 | | | | 171,033 | | |
| | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2006 | | | 131,624 | | | | 13,162 | | | | 711,798 | | | | (36,284 | ) | | | 41,835 | | | | 730,511 | | | | 131,624 | | | $ | 13,162 | | | $ | 711,798 | | | $ | (36,284 | ) | | $ | 39,932 | | | $ | — | | | $ | 728,608 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of adoption of FIN 48 | | | — | | | | — | | | | — | | | | — | | | | (1,272 | ) | | | (1,272 | ) | |
Effect of adoption of EITF00-19-2, net of tax | | | — | | | | — | | | | — | | | | — | | | | (631 | ) | | | (631 | ) | |
| | | | | | | | | | | | | | | |
Adjusted balance, beginning of year | | | 131,624 | | | | 13,162 | | | | 711,798 | | | | (36,284 | ) | | | 39,932 | | | | 728,608 | | |
| | | | | | | | | | | | | | | |
| Comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (1,697 | ) | | | — | | | | (1,697 | ) | | | — | | | | — | | | | — | | | | (1,697 | ) | | | — | | | | — | | | | (1,697 | ) |
| Common stock purchases | | | (2,414 | ) | | | (241 | ) | | | (33,161 | ) | | | — | | | | — | | | | (33,402 | ) | | | (2,414 | ) | | | (241 | ) | | | (33,161 | ) | | | — | | | | — | | | | — | | | | (33,402 | ) |
| Purchase of AFTI | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 368 | | | | 368 | |
| Exercise of stock options | | | 1,592 | | | | 159 | | | | 13,285 | | | | — | | | | — | | | | 13,444 | | | | 1,598 | | | | 159 | | | | 13,285 | | | | — | | | | — | | | | — | | | | 13,444 | |
| Exercise of warrants | | | 23 | | | | 2 | | | | (2 | ) | | | — | | | | — | | | | — | | | | 23 | | | | 2 | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | |
| Share-based compensation | | | 318 | | | | 32 | | | | 9,323 | | | | — | | | | — | | | | 9,355 | | | | 312 | | | | 32 | | | | 9,323 | | | | — | | | | — | | | | — | | | | 9,355 | |
| Tax benefits from share-based compensation | | | — | | | | — | | | | 3,401 | | | | — | | | | — | | | | 3,401 | | | | — | | | | — | | | | 3,401 | | | | — | | | | — | | | | — | | | | 3,401 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 169,289 | | | | 169,289 | | | | — | | | | — | | | | — | | | | — | | | | 169,289 | | | | (117 | ) | | | 169,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2007 | | | 131,143 | | | | 13,114 | | | | 704,644 | | | | (37,981 | ) | | | 209,221 | | | | 888,998 | | | | 131,143 | | | | 13,114 | | | | 704,644 | | | | (37,981 | ) | | | 209,221 | | | | 251 | | | | 889,249 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss, net of tax | | | — | | | | — | | | | — | | | | (8,569 | ) | | | — | | | | (8,569 | ) | | | — | | | | — | | | | — | | | | (8,569 | ) | | | — | | | | — | | | | (8,569 | ) |
| Common stock purchases | | | (11,183 | ) | | | (1,118 | ) | | | (135,291 | ) | | | — | | | | — | | | | (136,409 | ) | | | (11,183 | ) | | | (1,118 | ) | | | (135,291 | ) | | | — | | | | — | | | | — | | | | (136,409 | ) |
| Deconsolidation of AFTI | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) |
| Exercise of stock options | | | 757 | | | | 76 | | | | 6,612 | | | | — | | | | — | | | | 6,688 | | | | 757 | | | | 76 | | | | 6,612 | | | | — | | | | — | | | | — | | | | 6,688 | |
| Exercise of warrants | | | 160 | | | | 16 | | | | (16 | ) | | | — | | | | — | | | | — | | | | 160 | | | | 16 | | | | (16 | ) | | | — | | | | — | | | | — | | | | — | |
| Share-based compensation | | | 428 | | | | 43 | | | | 24,190 | | | | — | | | | — | | | | 24,233 | | | | 428 | | | | 43 | | | | 24,190 | | | | — | | | | — | | | | — | | | | 24,233 | |
| Tax benefits from share-based compensation | | | — | | | | — | | | | 1,733 | | | | — | | | | — | | | | 1,733 | | | | — | | | | — | | | | 1,733 | | | | — | | | | — | | | | — | | | | 1,733 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 84,058 | | | | 84,058 | | | | — | | | | — | | | | — | | | | — | | | | 84,058 | | | | (245 | ) | | | 83,813 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2008 | | | 121,305 | | | $ | 12,131 | | | $ | 601,872 | | | $ | (46,550 | ) | | $ | 293,279 | | | $ | 860,732 | | | | 121,305 | | | | 12,131 | | | | 601,872 | | | | (46,550 | ) | | | 293,279 | | | | — | | | | 860,732 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss, net of tax | | | | — | | | | — | | | | — | | | | (4,213 | ) | | | — | | | | (7 | ) | | | (4,220 | ) |
| Common stock purchases | | | | (72 | ) | | | (7 | ) | | | (481 | ) | | | — | | | | — | | | | — | | | | (488 | ) |
| Exercise of stock options | | | | 418 | | | | 42 | | | | 1,264 | | | | — | | | | — | | | | — | | | | 1,306 | |
| Issuance of warrants | | | | — | | | | — | | | | 367 | | | | — | | | | — | | | | — | | | | 367 | |
| Share-based compensation | | | | 2,342 | | | | 233 | | | | 5,781 | | | | — | | | | — | | | | — | | | | 6,014 | |
| Tax benefits from share-based compensation | | | | — | | | | — | | | | (580 | ) | | | — | | | | — | | | | — | | | | (580 | ) |
| Net loss | | | | — | | | | — | | | | — | | | | — | | | | (156,121 | ) | | | (555 | ) | | | (156,676 | ) |
| Purchase of Geostream | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 36,685 | | | | 36,685 | |
| | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2009 | | | | 123,993 | | | $ | 12,399 | | | $ | 608,223 | | | $ | (50,763 | ) | | $ | 137,158 | | | $ | 36,123 | | | $ | 743,140 | |
| | | | | | | | | | | | | | | | | |
See the accompanying notes which are an integral part of these consolidated financial statements
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Key Energy Services, Inc. and Subsidiaries
| |
| NOTE 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Key Energy Services, Inc., its wholly-owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us,” “its,” and “our”) provide a complete range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies, including rig-based well maintenance, workover, well completion and recompletion services, fluid management services, pressure pumping services, fishing and rental services and ancillary oilfield services. We operate in most major oil and natural gas producing regions of the continental United States, as well as internationallyand have operations based in Mexico, Argentina and Mexico.the Russian Federation. We also own a technology development company based in Canada and have equity interests in oilfield service companies in Canada and the Russian Federation.Canada.
Basis of Presentation
The consolidated financial statements and associated schedules included in this Annual Report onForm 10-K present our financial position, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”).
The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (viii)(ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that our estimates are reasonable.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. We now present the income statement line items related to gains and losses on the early extinguishment of debt, interest income, net gains and losses on disposal of assets, and other income and expense as the single line item “Other, net” on our short-term investmentsconsolidated statements of operations. Detail for these items is now provided in marketable securities“Note 4. Other Income and Expense” of these notes. Additionally, we now show the non-current portion of our notes and accounts receivable from related parties as a component of other currentnon-current assets and are disclosed in the accompanying consolidated balance sheets.“Note 19. Transactions with Related Parties.” In prior years, we presented these amounts were presented as a separate component of non-current assets on our consolidated balance sheet. As discussed in “Note 21. Segment Information,” during the first quarter of 2009 we changed our reportable segments due to a reorganization of our U.S. operations to realign both our management structure and resources. Financial information for prior years has been recast to reflect the change in segments. None of the reclassifications and presentation changes discussed above impacted our consolidated net income, earnings per share, total current assets.assets, total assets or total stockholders’ equity.
We applyhave evaluated events occurring after the provisions of Emerging Issues Task Force (“EITF”) Issuebalance sheet date included in this Annual Report on04-10,Determining Whether to Aggregate Operating Segments That Do Not Meet Quantitative Thresholds(“EITF 04-10”)Form 10-K for our segment reporting in “Note 19. Segment Information.” Underpossible disclosure as a subsequent event. Management monitored for subsequent events through the provisions ofEITF 04-10, operating segmentsdate that do not individually meet the aggregation criteria described in Statement of Financial Accounting Standards (“SFAS”) No. 131,Disclosures About Segments of an Enterprisethese financial statements were available to be issued. No subsequent events were identified by management that required disclosure.
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Key Energy Services, Inc. and Related Information(“SFAS 131”), may be combined with other operating segments that do not individually meet the aggregation criteria to form a separate reportable segment. We have combined all of our operating segments that do not individually meet the aggregation criteria established in SFAS 131 to form the “Corporate and Other” segment in our segment reporting.Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Principles of Consolidation
Within our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. We eliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, we account for that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interest using the equity method.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As further discussed in ““Note 2. Acquisitions,”in September 20072009, we completed the acquisition of Advanced Measurements, Inc.acquired an additional 24% interest in OOO Geostream Services Group (“AMI”Geostream”), a privately-held Canadian company focused on oilfield technology.bringing our total investment in Geostream to 50%. Prior to the acquisition AMI owned a portion of another Canadian company, Advanced Flow Technologies, Inc. (“AFTI”). As part of the additional interest, we accounted for our ownership in Geostream using the equity method. In connection with the acquisition AMI increased its ownership percentage of AFTI to 51.46%. At December 31, 2007,the additional interest, we obtained majority representation on Geostream’s board of directors and a controlling interest. We accounted for this acquisition as a business combination achieved in stages. Since the acquisition date, we have consolidated the assets, liabilities, results of operations and cash flows of AFTIGeostream into our consolidated financial statements, with the portion of AFTIGeostream remaining outside of our control formingreflected as a minoritynoncontrolling interest in our consolidated financial statements. Our ownership
Acquisitions
From time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of AFTI declined to 48.73% during the fourth quarter of 2008 due to the issuance of additional shares by AFTI. As a result, we deconsolidated AFTI fromoperations for acquisitions are included in our consolidated financial statements beginning on the date of acquisition. Acquisitions made after January 1, 2009 are accounted for using the acquisition method. The acquisition method differs from previous accounting guidance related to business combinations by expanding the scope of what constitutes a “business” and must therefore be accounted for as a business combination. For all business combinations (whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquired business, including goodwill, at their fair values; contingent consideration is recognized at its fair value on the acquisition date, and for certain arrangements, changes in fair value must be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs must be expensed rather than treated as part of the cost of the acquisition. The acquisition method also establishes new disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year after the date of the acquisition. Acquisitions through December 31, 2008 andare accounted for that interest underusing the equity method.
We apply Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46,Consolidationpurchase method of Variable Interest Entities — an Interpretationaccounting and the purchase price is allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of ARB No. 51 (Revised 2003)(“FIN 46(R)”) when determining whether or not to consolidate a Variable Interest Entity (“VIE”). FIN 46(R) requires that an equity investor in a VIE have significant equity at risk (generally a minimumacquisition. Final valuations of 10%)assets and hold a controlling interest, evidenced by voting rights,liabilities are obtained and absorb a majorityrecorded as soon as practicable and within one year from the date of the entity’s expected losses, receive a majority of the entity’s expected returns, or both. If the equity investor is unable to evidence these characteristics, the entity that retains these ownership characteristics will be required to consolidate the VIE. We have determined that we do not have an interest in a VIE, and as such we are not the primary beneficiary of a variable interest in a VIE and are not the holder of a significant variable interest in a VIE.acquisition.
Revenue Recognition
We recognize revenue when all of the following criteria established in the Securities and Exchange Commission (the “SEC”) Staff Accounting Bulletin (“SAB”) No. 101,Revenue Recognition in Financial Statements(“SAB 101”), as amended by SAB No. 104,Revenue Recognition(“SAB 104”), have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectibility is reasonably assured.
| | |
| | • | Evidence of an arrangement exists when a final understanding between the Companyus and itsour customer has occurred, and can be evidenced by a completed customer purchase order, field ticket, supplier contract, or master service agreement. |
| |
| | • | Delivery has occurred or services have been rendered when the Company haswe have completed what is requiredrequirements pursuant to the terms of the arrangement and can beas evidenced by a completed field ticket or service log. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | • | The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixed and determinable is evidenced by contractual terms, a Companyour price book, a completed customer purchase order, or a completed customer field ticket. |
| |
| | • | Collectibility is reasonably assured as a result of the Company screening itswhen we screen our customers to determine credit terms and providingprovide goods and services to customers that have been granted credit terms in accordance with the Company’sour credit policy. |
In accordance with EITF IssueNo. 06-03,How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross versus Net Presentation)(“EITF 06-03”), weWe present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmental taxing authorities.
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Key Energy Services, Inc.We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)assigned fair value if they have standalone value to our customer, they have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.
Cash and Cash Equivalents
We consider short-term investments with an original maturity of less than three months to be cash equivalents. None of our cash is restricted, andAt December 31, 2009, we have not entered into any compensating balance arrangements. However, at December 31, 2008,arrangements, but all of our obligations under our Seniorsenior credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the administrative agents (the “Senior Secured Credit FacilityFacility”) were secured by most of our assets, including assets held by our subsidiaries, which includes our cash and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.
We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2008,2009, accounts were guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per account and substantially all of the Company’sour accounts held deposits in excess of the FDIC limits.
Cash and cash equivalents held by our Russian subsidiary are subject to a noncontrolling interest. We believe that the cash held by our wholly-owned foreign subsidiaries could be repatriated for general corporate use without material withholdings. From time to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts of our cash in deposit accounts with restrictions that limit our ability to withdraw those funds. As of December 31, 2009, the amount of our cash restricted under such arrangements was $0.8 million.
Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. In accordance with FIN No. 39,Offsetting of Amounts Related to Certain Contracts, an Interpretation of APB No. 10 and FASB Statement No. 105(“FIN 39”), weWe present the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets.
Investment in Debt and Equity Securities
We account for investments in debt and equity securities under the provisions of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities(“SFAS 115”). Under SFAS 115, investments are classified as either “trading,” “available for sale,” or “held to maturity,” depending on management’s intent regarding the investment.
Securities classified as “trading” are carried at fair value, with any unrealized holding gains or losses reported currently in earnings. Securities classified as “available for sale” or “held to maturity” are carried at fair value, with any unrealized holding gains or losses, net of tax, reported as a separate component of shareholders’ equity in other comprehensive income.
Accounts Receivable and Allowance for Doubtful Accounts
We establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or part of the outstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectibility and establish or adjust our allowance as necessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off the accounts receivable against the associated allowance for uncollectible accounts.
From time to time we are entitled to proceeds under our insurance policies andfor amounts that we have reserved in accordance with FIN No. 39, weour self insurance liability. We present these insurance receivables gross on our balance sheet as a component of accounts receivable, separate from the corresponding liability.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of Credit Risk and Significant Customers
Key’sOur customers include major oil and natural gas production companies, independent oil and natural gas production companies, and foreign national oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial condition should be considered in light
During the year ended December 31, 2009, revenues from one of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial condition as supply and demand factors directly affect utilization and hours which are the primary determinantscustomers of our net cash provided by operating activities.
For all periods presented,Well Servicing segment were approximately 11% percent of our consolidated revenues. No other single customer accounted for 10% or more of our consolidated revenues for the year ended December 31, 2009. During the years ended December 31, 2008 and 2007 no single customer accounted for 10% or more than ten percent of our consolidated revenue.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)revenues.
Inventories
Inventories, which consist primarily of equipment parts for use in our well servicing operations, sand and chemicals for our pressure pumping operations, and supplies held for consumption, are valued at the lower of average cost or market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated depreciable lives of the assets using the straight-line method. Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $156.3 million, $153.2 million and $124.7 million, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a fair value higher than the assets’ value as scrap. Salvage value approximates 10% of an operational asset’s acquisition cost. When an operational asset is stacked or taken out of service, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is no longer operable and whether the remaining depreciable life and salvage value should be adjusted.
. In When we scrap an asset, we accelerate the first quarter of 2007, management reassessed the estimated useful lives assigned to alldepreciation of the Company’s equipment in lightasset down to its salvage value. When we dispose of the higher activity and utilization levels experienced in 2006 and early 2007. As a result, the maximum estimated useful lives of certain assets were adjusted to reflect higher annual utilization. As a result, the useful life expected for a well service rig was reduced from an average expected life of 17 years to 15 years. With respect to oilfield trucks, trailers and related equipment the expected life was reduced from an average expected life of 15 years to 12 years. Management also determined that the life assigned to a self-remanufactured well service rig should be the same as the15-year life assigned to a newly constructed well service rig acquired from third parties.asset, gain or loss is recognized.
As of December 31, 2008,2009, the estimated useful lives of the Company’sour asset classes are as follows:
| | | | | |
Description | | Years | |
| |
| Well service rigs and components | | | 3-15 | |
| Oilfield trucks, pressure pumping equipment, and related equipment | | | 7-12 | |
| Motor vehicles | | | 3-5 | |
| Fishing and rental tools | | | 4-10 | |
| Disposal wells | | | 15-30 | |
| Furniture and equipment | | | 3-7 | |
| Buildings and improvements | | | 15-30 | |
The Company leasesWe lease certain of itsour operating assets under capital lease obligations whose terms run from 55 to 60 months. These assets are depreciated over their estimated useful lives or the term of the capital lease obligation, whichever is shorter.
We apply SFAS No. 144,AccountingA long-lived asset or asset group is tested for the Impairment or Disposal of Long-Lived Assets(“SFAS 144”) in reviewing our long-lived assets for possible impairment. This statement requires that long-lived assets held and used by us, including certain identifiable intangibles, be reviewed for impairmentrecoverability whenever events or changes in circumstances indicate that theits carrying amount of an asset may not be recoverable. For purposes of testing for impairment, we group our long-lived assets into divisions, which arealong our lines of business based on geographical regions or the services provided. We then compare the estimated future cash flows of each division to the division’s net carrying value. The division level representsprovided, which is the lowest level for which identifiable cash flows are available. Welargely independent of the cash flows of other assets and liabilities. If the asset group’s estimated future cash flows are less than its net carrying value, we would record an impairment charge, reducing the division’s net carrying value to an estimated fair value, if its estimated future cash flows were less than the division’s net carrying value. “Trigger events,” as defined in SFAS 144, that cause us to evaluate our fixed assets for recoverability and possible impairment may includeEvents or changes in market conditions, such as adverse movements in the prices of oil and natural gas, which could reduce the fair value of certain of our property and equipment. The development ofcircumstance that
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cause us to evaluate our fixed assets for potential impairment may include changes in market conditions, such as adverse movements in the prices of oil and natural gas, or changes of an asset group, such as its expected future life, intended use or physical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination of fair value for a divisionan asset group involves significant judgment and estimates. During 2007As discussed in “Note 6. Property and 2006, no trigger events were identified by management. DuringEquipment,” during the fourththird quarter of 2008, the impairment of the Company’s goodwill was2009 we identified as a triggertriggering event by management.that required us to test our long-lived assets for potential impairment. As a result an undiscounted cash flow analysis was performedof those tests, we determined that the equipment for our long-lived assets, and no impairmentpressure pumping operations was indicated.impaired.
Asset Retirement Obligations
In accordance with SFAS No. 143,Accounting for Asset Retirement Obligations(“SFAS 143”), weWe recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirement activities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputs that we believe a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjust the cost for inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimating future cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of the cash flows change, such changes may have a material impact on our results of operations. See ““Note 7.9. Asset Retirement Obligations.Obligations.”
Capitalized Interest
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized to depreciation and amortization expense over the useful life of the assets. It is included in the depreciation and amortization line in the accompanying consolidated statements of operations.
Long-Term DebtDeferred Financing Costs
Deferred financing costs associated with long-term debt are carried at cost and are expensed over the term of the applicable long-term debt facility or the term of the notes. These costs are amortized to interest expense using the effective interest method over the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination of the gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. See“Note 12. Long-Term Debt.”
Goodwill and Other Intangible Assets
Goodwill results from business combinations and represents the excess of the acquisition costsconsideration over the fair value of the net assets acquired. We account for goodwill and other intangible assets under the provisions of SFAS No. 142,Accounting for Goodwill and Intangible Assets(“SFAS 142”). Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The test for impairment of indefinite-lived intangibles is a two step test. In the first step of the test, a fair value is calculated for each of the Company’sour reporting units, and that fair value is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for the reporting unit, then the second step of the test is required.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fair value of the reporting unit’s goodwill is determined in the same manner as the amount
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of goodwill recognized in a business combination, with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment is recorded. If the carrying value is in excess of the implied fair value, an impairment equal to the excess is recorded.
To assist management in the preparation and analysis of the valuation of the Company’sour reporting units, management utilizedwe utilize the services of a third-party valuation consultant, who reviewed management’sreviews our estimates, assumptions and calculations. The ultimate conclusions of the valuation techniques remain theour sole responsibility of the Company’s management. The Company conducts itsresponsibility. We conduct our annual impairment test on December 31 of each year. For the annual test completed as of December 31, 2008, an2009, no impairment of the Company’sour goodwill was indicated. While thisAs discussed in “Note 7. Goodwill and Other Intangible Assets,” our tests for the potential impairment of our long-lived assets during the third quarter of 2009 constituted an event that required us to test is requiredour goodwill for potential impairment on an annual basis, it also can be required more frequently based on changesinterim basis. As a result of that test, we determined that $0.5 million of goodwill in external factors.our Production Services segment was impaired and recorded a charge to reduce the goodwill to zero. We do not currently expect that additional tests would result in additional charges, but the determination of the fair value used in the test is heavily impacted by the market prices of our equity and debt securities. See“Note 5. Goodwillsecurities, as well as the assumptions and Other Intangible Assets.”estimates about our future activity levels, profitability and cash flows.
Internal-Use Software
As required by Statement of Position (“SOP”)No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use(“SOP 98-1”), weWe capitalize costs incurred during the application development stage of internal-use software and amortize these costs over its estimated useful life, generally five years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred. See“Note 4. Property and Equipment.”
Derivative Instruments and Hedging Activities
The Company applies SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS 133”), as amended, in accounting for derivative instruments. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets and liabilities on the balance sheet and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge, and if so, the type of hedge. To account for a financial instrument as a hedge, the contract must meet the following criteria: the underlying asset or liability must expose a company to risk that is not offset in another asset or liability, the hedging contract must reduce that risk, and the instrument must be properly designated as a hedge at the inception of the contract and throughout the contract period. To be an effective hedge, there must be a high correlation between changes in the fair value of the financial instrument and the fair value of the underlying asset or liability, such that changes in the market value of the financial instrument would be offset by the effect of price changes on the exposed items. For derivatives designated as cash flow hedges, the effective portion of the change in the fair value of the hedging instrument is recognized in other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of changes in the fair value of the hedging instrument is recognized currently in earnings. For all derivative contracts entered into, the Company analyzes the derivative contracts for embedded instruments and accounts for those instruments based on current guidance.
During the years ended December 31, 2007 and 2006, the Company had interest rate swaps and foreign currency instruments that qualified as derivative instruments under SFAS 133. During 2008, the Company had no derivative instruments. See“Note 10. Derivative Financial Instruments”for further discussion.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation
When estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss is probable and reasonably estimable in accordance with SFAS No. 5,Accounting for Contingencies(“SFAS 5”).estimable.
Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where we conduct business in the continental United States, we are often subject to jury verdicts and arbitration hearingsor other outcomes that resultmay be favorable to plaintiffs. We are also exposed to litigation in outcomes in favor of the plaintiffs.foreign locations where we operate. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. In accordance with SFAS 5 weWe establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is able to be estimated. See ““Note 13.14. Commitments and Contingencies.Contingencies.”
Environmental
Our operations are subject to various federal, state and local laws and regulations intended to protect the environment. Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, and regulated substances. Various environmentalThese operations are subject to various federal, state and local laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials, and some of our operations must obtain permits limitingintended to protect the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits. Laws and regulations have become more stringent over the years, and in certain circumstances may impose “strict liability,” rendering us liable for environmental damage without regard to negligence or fault on our part. Cleanup costs, penalties, and other damages arising as a result of environmental laws and costs associated with changes in environmental laws and regulations, could be substantial and could have a material adverse effect on our financial condition, results of operations and cash flows. From time to time, claims have been made and litigation has been brought against us under such laws.environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. For environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, weWe record liabilities on an undiscounted basis when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See ““Note 13.14. Commitments and Contingencies”Contingenciesfor further discussion..”
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Self Insurance
We are largely self-insured for physical damage tocaused by our equipment automobiles and rigs. Ourvehicles in the course of our operations. The accruals that we maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. To assist management with the liability amount for our self insurance reserves, we utilize the services of a third party actuary. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See “Note 14. Commitments and Contingencies.”
Income Taxes
In accounting for income taxes, we follow SFAS No. 109,Accounting for Income Taxes(“SFAS 109”), which requires that weWe account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, but which are deferred until future periods. Current taxes payable represent our liability related to our income tax returnreturns for the current year, while net deferred tax
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expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatmenttreatments of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.
We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record reserves for uncertain tax positions at their net recognizable amount, based on the amount that are subjectmanagement deems is more likely than not to management judgment related tobe sustained upon ultimate settlement with the resolution of the tax positions and completion of audits by tax authorities in the domestic and international tax jurisdictions in which we operate.
The Company is subject to the revised Texas Franchise tax. The revised Texas Franchise tax is an income tax equal to one percent of Texas-sourced revenue reduced by the greater of (a) cost of goods sold (as defined by Texas law), (b) compensation (as defined by Texas law), or (c) thirty percent of the Texas-sourced revenue. We account for the revised Texas Franchise tax in accordance with SFAS 109, as the tax is derived from a taxable base that consists of income less deductible expenses.
See ““Note 11.12. Income Taxes”Taxes” for further discussion of accounting for our income taxes, changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.
Earnings Per Share
We present earnings per share information in accordance with the provisions of SFAS No. 128,Earnings Per Share(“SFAS 128”). Under SFAS 128, basicBasic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See ““Note 6.8. Earnings Per Share”Sharefor further discussion..”
Share-Based Compensation
We account for share-basedIn the past, we have issued stock options, shares of restricted common stock, stock appreciation rights (“SARs”), and phantom shares to our employees as part of those employees’ compensation underand as a retention
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tool. For our options, restricted shares and SARs, we calculate the provisionsfair value of SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS 123(R)”),the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. The valuation of our stock options and SARs requires us to estimate the expected term of award, which we adopted on January 1, 2006. We adopted SFAS 123(R)estimate using the modified prospective transitionsimplified method, and no cumulative effect was recordedas we do not currently have sufficient historical exercise information because of past legal restrictions on the adoptionexercise of our stock options. Additionally, the valuation of our stock option and SAR awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expected term of the award, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using our stock price on the grant date. Our phantom shares are treated as “liability” awards and carried at fair value on each balance sheet date, with changes in fair value recorded as a component of SFAS 123(R).compensation expense and an offsetting liability on our consolidated balance sheet. We record share-based compensation as a component of general and administrative expense. See ““Note 17.18. Share-Based Compensation”Compensationfor further discussion..”
Foreign Currency Gains and Losses
We follow a translation policy in accordance with SFAS No. 52,Foreign Currency Translation(“SFAS 52”). InFor our international locations in Argentina, Mexico, the Russian Federation and Canada, where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the year.period. The resulting
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gains or losses arising from the translation of accounts from the functional currency to the U.S. Dollar are included as a separate component of stockholders’ equity in other comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity.
From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functional currency. These transactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction. At the end of each month, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rates in effect at that time. Any adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recorded in the income or loss of the foreign subsidiary as a component of other income and expense. See ““Note 14.15. Accumulated Other Comprehensive Loss.Loss.”
Comprehensive Income
We report and display comprehensive income in accordance with SFAS No. 130,Reporting Comprehensive Income(“SFAS 130”), which establishes standards for reporting and displaying comprehensive income and its components. SFAS 130 requires enterprises to display comprehensive income and its components in the enterprise’sour financial statements, toand we classify items of comprehensive income by their nature in theour financial statements and to display the accumulated balance of other comprehensive income separately in shareholders’our stockholders’ equity.
Leases
We accountlease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine whether the lease should be accounted for leases in accordance with SFAS No. 13,Accounting for Leases(“SFAS 13”). as an operating lease or a capital lease.
We periodically incur costs to improve the assets that we lease under these arrangements. We record the improvement as a component of our property and equipment and amortize the improvement over the useful life of the improvement or the lease term, whichever is shorter.
Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. These increases may be the result of an inducement or “rent holiday”
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conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. We apply the provisions of FASB Technical Bulletin (“FTB”)No. 85-3,Accounting for Operating Leases with Scheduled Rent Increases(“FTB85-3”), when accounting for scheduled and specified rent increases. FTB85-3 provides that the effects of scheduled and specified rent increases should be recognized on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed. We recognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement.
In addition, certain of our operating lease agreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such as moving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us or on our behalf represent incentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement. We amortize leasehold improvements on our operating leases over the shorter of their economic lives or the lease term.
New Accounting Standards Adopted in this Report
FIN 48 and FSPFIN 48-1. In June 2006, the FASB issued FIN No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”), which provides clarification of SFAS 109 with respect to the recognition of income tax benefits of uncertain tax positions in financial statements. FIN 48 requires that uncertain tax positions be reviewed and assessed, with recognition and measurement of the tax benefit based on a “more likely than not” standard.
In May 2007 the FASB issued FASB Staff Position (“FSP”)FIN 48-1 (“FSPFIN 48-1”). FSPFIN 48-1 provides guidance on how an enterprise should determine whether a tax position is effectively settled for the
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purpose of recognizing previously unrecognized tax benefits. In determining whether a tax position has been effectively settled, entities must evaluate (i) whether taxing authorities have completed their examination procedures; (ii) whether the entity intends to appeal or litigate any aspect of a tax position included in a completed evaluation; and (iii) whether it is remote that a taxing authority would examine or re-examine any aspect of a taxing position. FSPFIN 48-1 is to be applied upon the initial adoption of FIN 48.
We adopted the provisions of FIN 48 and FSPFIN 48-1 on January 1, 2007 and recorded a $1.3 million decrease to the balance of our retained earnings as of January 1, 2007 to reflect the cumulative effect of adopting these standards.
FSPEITF 00-19-2. In December 2006, the FASB issued FSPEITF 00-19-2,Accounting for Registration Payment Arrangements(“FSPEITF 00-19-2”). FSPEITF 00-19-2 addresses accounting for Registration Payment Arrangements (“RPAs”), which are provisions within financial instruments such as equity shares, warrants or debt instruments by which the issuer agrees to file a registration statement and to have that registration statement declared effective by the SEC within a specified grace period. If the registration statement is not declared effective within the grace period or its effectiveness is not maintained for the period of time specified in the RPA, the issuer must compensate its counterparty. The FASB Staff concluded that the contingent obligation to make future payments or otherwise transfer consideration under a RPA should be recognized as a liability and measured in accordance with SFAS 5 and FIN No. 14,Reasonable Estimation of the Amount of a Loss, and that the RPA should be recognized and measured separately from the instrument to which the RPA is attached.
In January 1999, the Company completed the private placement of 150,000 units consisting of $150.0 million of 14% Senior Subordinated Notes due January 25, 2009 (the “14% Senior Subordinated Notes”) and 150,000 warrants to purchase an aggregate of approximately 2.2 million shares of the Company’s common stock at an exercise price of $4.88125 per share (the “Warrants”). Under the terms of the Warrants, we were required to maintain an effective registration statement covering the shares of common stock issuable upon exercise of the Warrants. Due to our past failure to file our SEC reports in a timely manner, we did not have an effective registration statement covering the Warrants, and were required to make liquidated damages payments. The requirement to make liquidated damages payments constituted an RPA under the provisions of FSPEITF 00-19-2, and as prescribed by the transition provisions of that standard, on January 1, 2007 the Company recorded a pre-tax current liability of approximately $1.0 million, which is equivalent to the payments for the Warrant RPA for one year, with an offsetting adjustment to the opening balance of retained earnings.
SFAS 157. In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value, and does not expand the use of fair value accounting in any new circumstances. The adoption of this standard did not have a material impact on our consolidated financial statements.
SFAS 159. The Company adopted Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115(“SFAS 159”), on January 1, 2008. SFAS 159 permits companies to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Companies choosing such an election report unrealized gains and losses on items for which the Fair Value Option has been elected in earnings at each subsequent reporting period. We did not elect to measure any of our financial assets or liabilities using the Fair Value Option. We will assess at each measurement date whether to use the Fair Value Option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.
FSPSFAS 157-3. In October 2008, the FASB issued FSPSFAS No. 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active(“FSP 157-3”).FSP 157-3 clarified the
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application of SFAS 157.FSP 157-3 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive.FSP 157-3 was effective upon issuance, including for prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on our consolidated financial statements.
Accounting Standards Not Yet Adopted in this Report
FSPSFAS 142-3. In April 2008, the FASB issued FSPSFAS No. 142-3,Determination of Useful Life of Intangible Assets(“FSP 142-3”).FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142.FSP 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives.FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We are currently evaluating the potential impact the adoption ofFSP 142-3 will have on our consolidated financial statements.
SFAS 161. In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities(“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal periods beginning after November 15, 2008. Early application is encouraged. The Company currently has no financial instruments that qualify as derivatives, and we do not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
FSPSFAS 157-2. In February 2008, the FASB issued FSPSFAS No. 157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”), to partially defer SFAS 157. FSPSFAS 157-2 defers the effective date of SFAS 157 for nonfinancial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We are currently evaluating the impact of adopting the provisions of SFAS 157 as it relates to nonfinancial assets and liabilities.
SFAS 141(R). In December 2007, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised 2007),Business Combinations(“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from currentprevious practice resulting from SFAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions of SFAS 141(R) on January 1, 2009, but did not consummate any business combinations during the three months ended March 31, 2009. SFAS 141(R) may have an impact on our consolidated financial statements.statements in the future. The nature and magnitude of the specific impact will depend upon the nature, terms, and size of theany acquisitions consummated after the effective date.
SFAS 160. In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to establish accounting and reporting standards for the
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noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is a third-party ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires the consolidated statement of income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We adopted the provisions of SFAS 160 on January 1, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
SFAS 165. In May 2009, the FASB issued SFAS No. 165,Subsequent Events(“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosing of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 does not significantly change the types of subsequent events that an entity reports, but it requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for fiscal years, and interim periods within those fiscal years, beginning on or annual reporting requirements ending after DecemberJune 15, 2008. Earlier2009. The adoption is not permitted. We are currently evaluating the potential impact of this statement.
From time to time, the Company may acquire businesses or assets that are consistent with its long-term growth strategy. Resultsstandard did not have a material impact on our financial position, results of operations for acquisitions are included in the Company’s financial statements beginning from the date of acquisition. Acquisitions through December 31, 2008 are accounted for using the purchase method of accounting and the purchase price is allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition. Purchase price allocations that have not yet been finalized are based on preliminary information and are subject to change when final fair value determinations are made for the assets acquired and liabilities assumed.
Acquisitions completed during 2008
Tri-Energy Services, LLC. On January 17, 2008, the Company purchased the fishing and rental assets of Tri-Energy Services, LLC (“Tri-Energy”) for approximately $1.9 million in cash. These assets were integrated into our fishing and rental segment. The equity interests of Tri-Energy are owned by employees of the Company who joined the Company in October 2007 in connection with the earlier acquisition in 2007 of Moncla Well Service, Inc. and related entities (collectively, “Moncla”). The purchase price was allocated to the tangible and intangible assets purchased and the acquisition of the Tri-Energy assets was accounted for as an asset purchase and did not result in the establishment of goodwill. The assets acquired include an identifiable intangible asset of $1.1 million related to customer relationships and is subject to amortization under SFAS No. 142. The asset will be amortized on a straight-line basis over two years from the acquisition date.
Western Drilling, LLC. On April 3, 2008, the Company purchased all of the outstanding equity interests of Western Drilling, LLC (“Western”), a privately-owned company based in California that operated 22 working well service rigs, three stacked well service rigs and equipment used in the workover and rig relocation process. We acquired Western to increase our service footprint in the California market.
The purchase price was $51.5 million inor cash and was paid on April 3, 2008. The purchase price was subject to a working capital adjustment 45 days from the closing date of the acquisition that resulted in additional consideration paid of $0.1 million in May 2008. The Company also incurred direct transaction costs of approximately $0.4 million. The acquisition was funded by borrowings of $50.0 million under the Company’s Senior Secured Credit Facility (see“Note 12. Long-Term Debt”) and cash on hand.
The acquisition of Western was accounted for as a business combination. The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill. The allocation of the purchase price was based upon preliminary valuations and estimates, and is subject to change as the valuations are finalized. The primary area of the purchase price allocation that is not yet finalized relates to pre-mergerflows.
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contingencies. ASU2009-01. In June 2009, the FASB issued Accounting Standards Update (“ASU”)2009-01,The finalFASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162(“ASU2009-01”). ASU2009-01 established the Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification supersedes all prior non-SEC accounting and reporting standards. Following ASU2009-01, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU2009-01 also modifies the existing hierarchy of GAAP to include only two levels — authoritative and non-authoritative. ASU2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and early adoption was not permitted. The adoption of this standard did not have an impact on our financial position, results of operations or cash flows.
ASU2009-05. In August 2009, the FASB issued ASU2009-05,Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value(“ASU2009-05”). ASU2009-05 addresses concerns in situations where there may be a lack of observable market information to measure the fair value of a liability, and provides clarification in circumstances where a quoted market price in an active market for an identical liability is not available. In these cases, reporting entities should measure fair value using a valuation technique that uses the quoted price of the identical liability when that liability is traded as an asset, quoted prices for similar liabilities, or another valuation technique, such as an income or market approach. ASU2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU2009-05 is effective for the first reporting period subsequent to August 2009 and the adoption of this update did not have a material impact on our financial position, results of operations, or cash flows.
Accounting Standards Not Yet Adopted in this Report
SFAS 166. In June 2009, the FASB issued SFAS No. 166,Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140(“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of FASB Statement 125(“SFAS 140”), removes the concept of a “qualifying special purpose entity” from SFAS 140 and removes the exception from applying FASB Interpretation (“FIN”) No. 46(R),Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51(“FIN 46(R)”) to qualifying special purpose entities. SFAS 166 is effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
SFAS 167. In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R)(“SFAS 167”). SFAS 167 amends the scope of FIN 46(R) to include entities previously considered qualifying special-purpose entities by FIN 46(R), as the concept of a qualifying special-purpose entity was eliminated in SFAS 166. This standard shifts the guidance for determining which enterprise in a variable interest entity consolidates that entity from a quantitative consideration of who is the primary beneficiary to a qualitative focus of which entity has the power to direct activities and the obligation to absorb losses. This standard is to be effective for the first annual reporting period that begins after November 15, 2009, and early adoption is not permitted. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations or cash flows.
ASU2009-13. In October 2009, the FASB issued ASU2009-13,Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force(“ASU2009-13”). ASU2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate
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deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Existing GAAP requires an entity to use vendor-specific objective evidence (“VSOE”) or third-party evidence of a selling price to separate deliverables in a multiple-deliverable selling arrangement. As a result of ASU2009-13, multiple-deliverable arrangements will be separated in more circumstances than under current guidance. ASU2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on VSOE if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU2009-13 must be prospectively applied to all revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We expect to adopt the provisions of ASU2009-13 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-14. In October 2009, the FASB issued ASU2009-14,Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force(“ASU2009-14”). ASU2009-14 was issued to address concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more than incidental” to the product as a whole. Existing guidance in such circumstances requires entities to use VSOE of a selling price to separate deliverables in a multiple-deliverable arrangement. Reporting entities raised concerns that the current accounting model does not appropriately reflect the economics of the underlying transactions and that more software-enabled products now fall or will fall within the scope of the current guidance than originally intended. ASU2009-14 changes the current accounting model for revenue arrangements that include both tangible products and software elements to exclude those where the software components are essential to the tangible products’ core functionality. In addition, ASU2009-14 also requires that hardware components of a tangible product containing software components always be excluded from the software revenue recognition guidance, and provides guidance on how to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded from the scope of software revenue recognition guidance. ASU2009-14 also provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU2009-14 was issued concurrently with ASU2009-13 and also requires entities to provide the disclosures required by ASU2009-13 that are included within the scope of ASU2009-14. ASU2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. Entities may also elect, but are not required, to adopt ASU2009-14 retrospectively to prior periods, and must adopt ASU2009-14 in the same period and using the same transition methods that it uses to adopt ASU2009-13. We expect to adopt the provisions of ASU2009-14 on January 1, 2011 and do not believe that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2009-17. In December 2009, the FASB issued ASU2009-17,Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU2009-17 replaces the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be completed no later than the first quarter of 2009. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the date of the Western acquisition (in thousands):
| | | | | |
| Cash | | $ | 687 | |
| Other current assets | | | 6,839 | |
| Property and equipment | | | 30,162 | |
| Goodwill | | | 8,166 | |
| Intangible assets | | | 9,000 | |
| Other assets | | | 132 | |
| | | | | |
| Total assets acquired | | | 54,986 | |
| Current liabilities | | | 2,979 | |
| | | | | |
| Total liabilities assumed | | | 2,979 | |
| Net assets acquired | | $ | 52,007 | |
| | | | | |
The fair values of property and equipment were determined using a market approach. The fair values of identified intangible assets were determined using an income approach to measure the present worth of anticipated future economic benefits. The Company also performed an economic obsolescence analysis to confirm the values identified through the aforementioned methods. The allocation is still preliminary at this time, and may potentially change by a material amount once the purchase price allocation is finalized.
Goodwill was recognized as part of the acquisition of Western as the purchase price exceeded the fair value of the acquired assets and assumed liabilities. The Company believes the goodwill associated with the Western acquisition is related to the acquired workforce, potential future expansion of the Western service offerings, and the ability to expand our service offerings. Therefore, it was not allocated to the acquired assets and assumed liabilities.
The acquired identifiable intangible asset of $9.0 million is related to customer relationships and is subject to amortization under SFAS No. 142. The customer relationshipsprimarily qualitative will be amortized as the value of the relationships are realized using rates of 17%, 19%, 15%, 12%, 9%, 7%, 6%, 5%, 4%, 3%, 2% and 1%more effective for 2008 through 2019, respectively. The $8.2 million of goodwill associated with the purchase of Western was allocated to our well servicing segment, and the assets and results of operations subsequent to April 3, 2008 haveidentifying which reporting entity has a controlling financial interest in a variable interest entity. ASU2009-17 also been integrated into the well servicing segment. Of the goodwill recorded, $8.2 million is expected to be deductible for income tax purposes.
Hydra-Walk, Inc. On May 30, 2008, the Company purchased all of the outstanding stock of Hydra-Walk, Inc. (“Hydra-Walk”) for approximately $10.3 millionrequires additional disclosures about a reporting entity’s involvement in cash and a performance earn-out of up to $2.0 million over two years from the acquisition date if certain financial and operational performance measures are met. Additionally, during the third quarter of 2008 the Company paid approximately $0.2 million in additional consideration related to a holdback amount that was withheld from the seller pending the completion of a seller closing requirement. The purchase price was also subject to a post-closing working capital adjustment of less than $0.1 million that was paid during the third quarter of 2008. The Company incurred direct transaction costs of approximately $0.1 million. The Company retained approximately $1.1 million of Hydra-Walk’s net working capital as a result of the transaction and did not assume any debt of Hydra-Walk.
Hydra-Walk is a leading provider of pipe handling solutions for the oil and gas industry and operates over 80 automated pipe handling units in Oklahoma, Texas and Wyoming. We acquired Hydra-Walk to expand the level of integrated well servicing services we are able to provide customers. The assets and results of operations for Hydra-Walk were integrated into our fishing and rental segment beginning on May 31, 2008.variable interest entities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provisions of ASU2009-17 are to be applied beginning in the first fiscal period beginning after November 15, 2009. We will adopt ASU2009-17 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material effect on our financial position, results of operations, or cash flows.
ASU2010-02. In January 2010, the FASB issued ASU2010-02,Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope Clarification. ASU2010-02 clarifies that the scope of previous guidance in the accounting and disclosure requirements related to decreases in ownership of a subsidiary apply to (i) a subsidiary or a group of assets that is a business or nonprofit entity; (ii) a subsidiary that is a business or nonprofit entity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. ASU2010-02 also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include (i) the valuation techniques used to measure the fair value of any retained investment; (ii) the nature of any continuing involvement with the subsidiary or entity acquiring a group of assets; and (iii) whether the transaction that resulted in the deconsolidation or derecognition was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction. The provisions of ASU2010-02 will be effective for us for the first reporting period beginning after December 13, 2009. We will adopt the provisions of ASU2010-02 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
ASU2010-06. In January 2010 the FASB issued ASU2010-06,Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures About Fair Value Measurements. ASU2010-06 clarifies the requirements for certain disclosures around fair value measurements and also requires registrants to provide certain additional disclosures about those measurements. The new disclosure requirements include (i) the significant amounts of transfers into and out of Level 1 and Level 2 fair value measurements during the period, along with the reason for those transfers, and (ii) and separate presentation of information about purchases, sales, issuances and settlements of fair value measurements with significant unobservable inputs. ASU2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. We will adopt the provisions of ASU2010-06 on January 1, 2010 and do not anticipate that the adoption of this standard will have a material impact on our financial position, results of operations, or cash flows.
2009 Acquisitions
Geostream Services Group. On September 1, 2009, we acquired an additional 24% interest in Geostream for $16.4 million. This was our second investment in Geostream pursuant to an agreement dated August 26, 2008, as amended. This second investment brings our total investment in Geostream to 50%. Prior to the acquisition of Hydra-Walk wasthe additional interest, we accounted for our ownership in Geostream as an equity-method investment. Upon acquiring the 50% interest, we also obtained majority representation on Geostream’s board of directors and a controlling interest. We accounted for this acquisition as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the acquisition date, with the portion outside of our control reflected as a noncontrolling interest.
Geostream is an oilfield services company in the Russian Federation providing drilling and the purchase price was allocatedworkover services andsub-surface engineering and modeling. As a result of this acquisition, we expect to the assets acquiredexpand our international presence in Russia where oil wells are shallow and liabilities assumed based on their estimatedsuited for services that we perform.
The acquisition date fair values. The excessvalue of the purchase price overconsideration transferred totaled $35.0 million, which consisted of cash consideration in the second investment and the fair value of net assets acquired was recorded as goodwill.our previous equity interest. The allocation of the purchase price was based upon preliminary valuations and estimates, and is subject to change as valuations are finalized. The primary area of the purchase price allocation that is not yet finalized relates to pre-merger contingencies. The final valuation is expected to be completed no later than the second quarter of 2009.
This business combination resulted in the acquisition of $3.7 million of tangible assets, $4.5 million of intangible assets and $1.3 million of goodwill. The fair values of tangible assets were determined using a market approach. The fair values of intangible assets were determined using an income approach to measure the present worth of anticipated future economic benefits. The Company also performed an economic obsolescence analysis to confirm the values identified through the aforementioned methods. The allocation is still preliminary at this time and may potentially change by a material amount once the purchase price allocation is finalized.
The acquired identifiable intangible assets of $4.5 million relate to customer relationships, a tradename and a non-compete agreement. These intangible assets are subject to amortization under SFAS 142. The customer relationships asset of $4.0 million will be amortized as the value of the relationships are realized using rates of 19%, 24%, 17%, 13%, 9%, 6%, 4%, 3%, 3% and 2% for 2008 through 2017, respectively. The tradename asset of $0.4 million will be amortized straight-line over 10 years and the non-compete agreement asset will be amortized straight-line over 3 years.
Goodwill of $1.3 million has been recognized as part of the purchase price allocation as the purchase price exceeded thedate fair value of the acquired assets and assumed liabilities. The Company believes the goodwill associated with the Hydra-Walk acquisition is related to the acquired workforce and potential expansion of our service offerings. Therefore, itprevious equity interest was not allocated to the acquired assets and assumed liabilities. The $1.3 million of goodwill was allocated to our fishing and rental segment and $1.3 million is expected to be deductible for income tax purposes.
As of December 31, 2008, the Hydra-Walk operations had met performance earn-out requirements that resulted in additional consideration of $0.5 million which has been recorded as additional goodwill.
Leader Energy Services Ltd. On July 22, 2008, the Company acquired all of the United States-based assets of Leader Energy Services Ltd. (“Leader”),$18.3 million. We recognized a Canadian company, for consideration of $34.6 million in cash. The acquired assets include nine coiled tubing units, seven nitrogen trucks, twelve pumping trucks and other ancillary equipment. Additionally, the Company paid approximately $0.7 million for supplies and inventory used in pressure pumping operations. The Company also incurred direct transaction costs of approximately $0.1 million. The purchase price was allocated to the tangible assets acquired. The acquisition of the Leader assets was accounted for as an asset purchase as the assets acquired did not constitute a business and therefore did not result in the establishment of goodwill. The Company did not identify any acquired intangible assets. The Leader assets were integrated into our pressure pumping segment.
Acquisitions completed during 2007
AMI. On September 5, 2007, the Company acquired AMI, which operates in Canada and is a technology company focused on oilfield service equipment controls, data acquisition and digital information flow. The purchase price was $6.6 million in cash and $2.9 million in assumed debt and was paid in September 2007. During the nine months ended September 30, 2008, the Company refined its fair value allocation of the assets acquired and liabilities assumed by increasing its deferred tax asset balance by $0.3 million and decreasing its deferred tax liability balance by $1.0 million. These changes were offset by a corresponding net decrease to goodwill of $1.3 million. During 2008, but prior to the anniversary of the acquisition, the Company made additional payments to settle its working capital adjustment with the former owners of AMI and incurred
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
additional transactionloss of $0.2 million as a result of remeasuring our prior equity interest in Geostream held before the business combination, which is included in the line item “other, net” in the consolidated statements of operations.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at September 1, 2009. We are in the process of obtaining a third-party valuation of intangible and certain tangible assets; thus, the preliminary measurements of intangible assets, goodwill and certain tangible assets are subject to change.
| | | | | |
| | | (In thousands) | |
| |
At September 1, 2009: | | | | |
| Cash and cash equivalents | | $ | 28,362 | |
| Other current assets | | | 8,545 | |
| Property and equipment | | | 2,959 | |
| Intangible assets | | | 11,470 | |
| Other assets | | | 194 | |
| | | | | |
| Total identifiable assets acquired | | | 51,530 | |
| | | | | |
| Current liabilities | | | 5,456 | |
| Other liabilities | | | 8 | |
| | | | | |
| Total liabilities assumed | | | 5,464 | |
| | | | | |
| Noncontrolling interest | | | 34,994 | |
| | | | | |
| Net identifiable assets acquired | | | 11,072 | |
| | | | | |
| Goodwill | | | 23,918 | |
| | | | | |
| Net assets acquired | | $ | 34,990 | |
| | | | | |
Of the $11.5 million of acquired intangible assets, $8.4 million was preliminarily assigned to trade name intangibles that are not subject to amortization. Of the remaining $3.1 million of acquired intangible assets, $1.2 million relates to three customer contracts that will be amortized over one year, and $1.9 million relates to customer relationships that will be amortized as the value of the relationships are realized using rates of 35%, 21%, 12%, 7%, 4%, 3%, 2%, and 1% for 2010 through 2017, respectively, with a portion already amortized in 2009. As noted above, the fair value of the acquired identifiable intangible assets is preliminary pending receipt of the final valuation for these assets. The fair value and carrying value of the acquired accounts receivable on September 1, 2009 were $6.3 million.
The $23.9 million of goodwill was assigned to our Well Servicing segment. The goodwill recognized is attributable primarily to international diversification and the assembled workforce of Geostream. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2009, there were no changes in the recognized amount of goodwill resulting from the acquisition of Geostream.
We recognized $0.1 million of acquisition related costs directly relatedthat were expensed during the year ended December 31, 2009. These costs are included in the statements of operations in the line item “general and administrative expenses” for the year ended December 31, 2009.
Included in our consolidated statements of operations for year ended December 31, 2009 are revenues of $9.2 million and net losses of $0.4 million attributable to Geostream from the acquisition date to the business combination. These payments totaled $1.3period ended December 31, 2009.
On September 1, 2009, the fair value of the 50% noncontrolling interest in Geostream was estimated to be $35.0 million. The fair value of the noncontrolling interest was estimated using a combination of the income approach and a market approach. As Geostream is a private company, the fair value measurement is
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. The fair value estimates are based on (i) a discount rate range of 16% to 19%, (ii) a terminal value based on a long-term constant growth rate between two and three percent, (iii) financial data of historical and forecasted operating results of Geostream and (iv) adjustments because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in Geostream.
In conjunction with our second investment, Geostream agreed to purchase from us a customized suite of equipment, including two workover rigs, two drilling rigs, associated complementary support equipment, cementing equipment, and fishing tools for approximately $23.0 million, a portion of which will be financed by us. Concurrently with the second investment, Geostream paid us approximately $16.0 million in cash, representing a down payment on the equipment. We began to deliver this equipment in the fourth quarter of 2009. We recognized no gain or loss associated with the sale of the equipment to Geostream.
2008 Acquisitions
Western Drilling, LLC. On April 3, 2008, we acquired Western Drilling, LLC (“Western”), a privately-owned company based in California that provides workover and resulted in additional goodwill of $1.3 million.drilling services. The purchase price allocationtotaled $52.0 million, including direct transaction costs. Western was completed duringincorporated into our Well Servicing segment.
Hydra-Walk, Inc. On May 30, 2008, we acquired Hydra-Walk, Inc. (“Hydra-Walk”), a privately owned company providing automated pipe handling services. The purchase price totaled $10.7 million, including direct transaction costs. The purchase price also provides for a performance earn-out potential of up to $2.0 million over two years from the third quarteracquisition date, if certain financial and operational performance measures are met, of 2008.which $1.1 million was paid through 2009.
Leader Energy Services Ltd. On July 22, 2008, we purchased all of the United States-based assets of Leader Energy Services, Ltd. (“Leader”), a Canadian company, for total consideration of $35.4 million, including direct transaction cots. The Leader assets were incorporated into our Production Services segment.
All of the purchase price allocations for 2008 acquisitions were finalized in 2009.
2007 Acquisitions
AMI. On September 5, 2007, we acquired Advanced Measurements, Inc. (“AMI”), which operates in Canada and is a technology company focused on oilfield service equipment controls, data acquisition and digital information flow. The purchase price totaled $7.9 million, including direct transaction costs. AMI was incorporated into our Production Services segment.
Moncla. On October 25, 2007, the Companywe acquired Moncla Well Service, Inc. and related entities (“Moncla”), which operated well service rigs, barges and ancillary equipment in the southeastern United States for total consideration of $146.0 million. During 2008,$147.0 million, including direct transaction costs. The Moncla purchase agreement entitles the Company refined its fair value allocationformer owners of Moncla to receive earnout payments, on each anniversary of the assets acquired and liabilities assumed by increasing the working capital accounts (excluding deferred tax assets) by $2.2 million, decreasing the fair valueclosing date of the well service assets acquired by $3.6acquisition until 2012, of up to $5.0 million decreasingper year and $25.0 million in total. The earnout payments are based on achievement of certain revenue targets and profit percentage targets on each anniversary date or a cumulative target on the deferred tax and other long-term asset balances by $0.4 million, increasing its long-term deferred tax liability balance by $2.1 million and incurring additional fees related to the closing of the transaction of less than $0.2 million. The Company also paid additional purchase consideration of $0.8 million during the third quarter of 2008. These changes were offset with a corresponding net increase to goodwill of $4.9 million. The purchase price allocation2012 anniversary date. Moncla was finalized in the fourth quarter of 2008.incorporated into our Well Servicing segment.
Kings Oil Tools. On December 7, 2007, the Company acquiredwe purchased the well service assets and related equipment of Kings Oil Tools, Inc. (“Kings”), a California-based well service company for approximately $45.1 million. During the nine months ended September 30, 2008, the Company revised its fair value allocationtotaling $45.2 million, including direct transaction costs. The assets of Kings were incorporated into our Well Servicing segment.
All of the assets acquired and liabilities assumed by increasing the fair value of the well service assets acquired by $1.6 million, increasing the deferred tax assets by $0.4 million, decreasing the fair value of working capital accounts by $0.1 million and incurring additional fees related to the closing of the transaction of $0.1 million. These changes were offset with a corresponding net decrease to goodwill for $1.7 million. The purchase price allocation wasallocations for 2007 acquisitions were finalized in the fourth quarter of 2008 .2008.
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Acquisitions completed during 2006NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We made no acquisitions during 2006.
| |
| NOTE 3. | OTHER CURRENT AND NON-CURRENT LIABILITIES |
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
Current Accrued Liabilities: | | | | | | | | |
| Accrued payroll, taxes and employee benefits | | $ | 67,408 | | | $ | 55,486 | |
| Accrued operating expenditures | | | 50,833 | | | | 52,180 | |
| Income, sales, use and other taxes | | | 41,003 | | | | 35,310 | |
| Self-insurance reserve | | | 25,724 | | | | 25,208 | |
| Unsettled legal claims | | | 4,550 | | | | 6,783 | |
| Phantom share liability | | | 902 | | | | 2,458 | |
| Other | | | 6,696 | | | | 5,939 | |
| | | | | | | | | |
| Total | | $ | 197,116 | | | $ | 183,364 | |
| | | | | | | | | |
The table below presents comparative detailed information about our current accrued liabilities at December 31, 2009 and 2008:
| | | | | | | | | |
| | | December 31,
| | | December 31,
| |
| | | 2009 | | | 2008 | |
| | | (In thousands) | |
| |
Current Accrued Liabilities: | | | | | | | | |
| Accrued payroll, taxes and employee benefits | | $ | 33,953 | | | $ | 67,408 | |
| Accrued operating expenditures | | | 24,194 | | | | 50,833 | |
| Income, sales, use and other taxes | | | 30,447 | | | | 41,003 | |
| Self-insurance reserves | | | 24,366 | | | | 25,724 | |
| Insurance premium financing | | | 7,282 | | | | — | |
| Unsettled legal claims | | | 2,665 | | | | 4,550 | |
| Phantom share liability | | | 1,518 | | | | 902 | |
| Other | | | 6,092 | | | | 6,696 | |
| | | | | | | | | |
| Total | | $ | 130,517 | | | $ | 197,116 | |
| | | | | | | | | |
The table below presents comparative detailed information about our other non-current accrued liabilities at December 31, 2009 and 2008:
| | | | | | | | | |
| | | December 31,
| | | December 31,
| |
| | | 2009 | | | 2008 | |
| | | (In thousands) | |
| |
Non-Current Accrued Liabilities: | | | | | | | | |
| Asset retirement obligations | | $ | 10,045 | | | $ | 9,348 | |
| Environmental liabilities | | | 3,353 | | | | 3,004 | |
| Accrued rent | | | 2,399 | | | | 2,497 | |
| Accrued income taxes | | | 2,813 | | | | 1,359 | |
| Phantom share liability | | | 508 | | | | 478 | |
| Other | | | 599 | | | | 809 | |
| | | | | | | | | |
| Total | | $ | 19,717 | | | $ | 17,495 | |
| | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
Non-Current Accrued Liabilities: | | | | | | | | |
| Asset retirement obligations | | $ | 9,348 | | | $ | 9,298 | |
| Environmental liabilities | | | 3,004 | | | | 3,090 | |
| Accrued rent | | | 2,497 | | | | 2,829 | |
| Accrued income taxes | | | 1,359 | | | | 2,705 | |
| Phantom share liability | | | 478 | | | | 896 | |
| Other | | | 809 | | | | 713 | |
| | | | | | | | | |
| Total | | $ | 17,495 | | | $ | 19,531 | |
| | | | | | | | | |
| |
| NOTE 4. | OTHER INCOME AND EXPENSE |
The table below presents comparative detailed information about our other income and expense, shown on the consolidated statements of operations as “other, net” for the years ended December 31, 2009, 2008 and 2007:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Loss on early extinguishment of debt | | $ | 472 | | | $ | — | | | $ | 9,557 | |
| Loss (gain) on disposal of assets, net | | | 401 | | | | (641 | ) | | | 1,752 | |
| Interest income | | | (499 | ) | | | (1,236 | ) | | | (6,630 | ) |
| Foreign exchange (gain) loss, net | | | (1,482 | ) | | | 3,547 | | | | (458 | ) |
| Equity-method loss (income) | | | 1,052 | | | | (166 | ) | | | (391 | ) |
| Other expense, net | | | (64 | ) | | | 1,336 | | | | 402 | |
| | | | | | | | | | | | | |
| Total | | $ | (120 | ) | | $ | 2,840 | | | $ | 4,232 | |
| | | | | | | | | | | | | |
| |
| NOTE 5. | ALLOWANCE FOR DOUBTFUL ACCOUNTS |
The table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2009, 2008 and 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Additions | | | | | | | |
| | | Balance at
| | | | | | Charged to
| | | | | | | | | Balance at
| |
| | | Beginning
| | | Charged to
| | | Other
| | | | | | | | | End of
| |
| | | of Period | | | Expense | | | Accounts | | | Acquisitions | | | Deductions(1) | | | Period | |
| | | (In thousands) | |
| |
| As of December 31, 2009 | | $ | 11,468 | | | $ | 3,295 | | | $ | — | | | $ | — | | | $ | (9,322 | ) | | $ | 5,441 | |
| As of December 31, 2008 | | | 13,501 | | | | 37 | | | | (38 | ) | | | 15 | | | | (2,047 | ) | | | 11,468 | |
| As of December 31, 2007 | | | 12,998 | | | | 3,675 | | | | — | | | | 1,251 | | | | (4,423 | ) | | | 13,501 | |
| | |
| (1) | | Deductions represent write offs to the allowance. Deductions in 2009 include approximately $5.2 million for a single customer that had been specifically identified and reserved for prior to 2007. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 4.6. | PROPERTY AND EQUIPMENT |
Property and equipment consists of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
Major classes of property and equipment: | | | | | | | | | | | | | | | | |
| Well servicing equipment | | $ | 1,431,624 | | | $ | 1,200,069 | | | $ | 1,368,925 | | | $ | 1,431,624 | |
| Disposal wells | | | 60,508 | | | | 56,576 | | | | 52,797 | | | | 60,508 | |
| Motor vehicles | | | 125,031 | | | | 112,986 | | | | 101,142 | | | | 125,031 | |
| Furniture and equipment | | | 81,129 | | | | 73,032 | | | | 82,346 | | | | 81,129 | |
| Buildings and land | | | 71,014 | | | | 64,258 | | | | 55,411 | | | | 71,014 | |
| Work in progress | | | 89,001 | | | | 88,304 | | | | 67,553 | | | | 89,001 | |
| | | | | | | | | | | |
| Gross property and equipment | | | 1,858,307 | | | | 1,595,225 | | | | 1,728,174 | | | | 1,858,307 | |
| Accumulated depreciation | | | (806,624 | ) | | | (684,017 | ) | | | (863,566 | ) | | | (806,624 | ) |
| | | | | | | | | | | |
| Net property and equipment | | $ | 1,051,683 | | | $ | 911,208 | | | $ | 864,608 | | | $ | 1,051,683 | |
| | | | | | | | | | | |
The Company capitalizesWe capitalize costs incurred during the application development stage of internal-use software. These costs are capitalized to work in progress until such time the application is put in service. For the years ended December 31, 2009, 2008 and 2007 and 2006 the Companywe capitalized costs in the amount of $13.1 million, $4.5 million, and $1.9 million, respectively. Capitalized internal-use software during 2009 consisted primarily of our expenditures for new ERP and zero, respectively.Human Resources information systems.
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. Capitalized interest for the years ended December 31, 2009, 2008 and 2007 and 2006 was $4.3 million, $6.5 million, and $5.3 million, and $3.4 million, respectively.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company isWe are obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next five years. The carrying value of assets acquired under capital leases consists of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
Carrying values of assets leased under capital lease obligations: | | | | | | | | | |
| Well servicing equipment | | $ | 20,442 | | | $ | 19,687 | | | $ | 116 | | | $ | 20,442 | |
| Motor vehicles | | | 9,271 | | | | 5,938 | | | | 10,207 | | | | 9,271 | |
| Furniture and fixtures | | | | 36 | | | | — | |
| | | | | | | | | | | |
| Total | | $ | 29,713 | | | $ | 25,625 | | | $ | 10,359 | | | $ | 29,713 | |
| | | | | | | | | | | |
Depreciation of assets held under capital leases of approximatelywas $3.5 million, $4.3 million, $5.9 million and $6.0$5.9 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
During the third quarter of 2009, we removed from service and retired a portion of our U.S. rig fleet and associated support equipment, resulting in the recording of a pre-tax asset retirement charge of $65.9 million. Included in the retirement were approximately 250 of our older, less efficient rigs. We retired these rigs in order to better align supply with demand for well servicing as market activity remained low. The asset
78
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
retirement charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. For the rigs we retired, certain of these assets were stacked and will be harvested for spare parts, and certain of these assets are to be cut up and sold for scrap. The carrying value for stacked rigs and associated support equipment was reduced to salvage value of 10%, based on expected fair value for these assets. The carrying value for scrapped rigs and components was reduced to quoted market prices for scrap metal. These assets are reported under our Well Servicing segment.
We determined that the retirement of the rigs described above was an event requiring assessment for impairment of the asset groups within the reporting units of our Well Servicing segment. Based on our analysis, the expected undiscounted cash flows for these asset groups exceeded carrying value, and no indication of impairment existed.
Also, during the third quarter of 2009, due to market overcapacity, continued and prolonged depression of natural gas prices, decreased activity levels from our major customer base related to stimulation work and consecutive quarterly operating losses in our Production Services segment, we determined that events and changes in circumstances occurred indicating that the carrying value of the asset groups under this segment may not be recoverable. We performed an assessment of the fair value of these asset groups using an expected present value technique. We used discounted cash flow models involving assumptions based on utilization of the equipment, revenues, direct expenses, general and administrative expenses, applicable income taxes, capital expenditures and working capital requirements. Our discounted cash flow projections were based on financial forecasts and were discounted using a discount rate of 14%. Based on this assessment, our pressure pumping assets were impaired. This assessment resulted in the recording of a pre-tax impairment charge of $93.4 million during the third quarter of 2009. The asset impairment charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. These assets are reported under our Production Services segment.
| |
NOTE 5.7. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following table summarizeschanges in the activity incarrying amount of our goodwill accounts for the years ended December 31, 2009 and 2008 and 2007:are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pressure
| | Fishing and
| | | | | Well Servicing | | Production Services | | Total | | | |
| | | Well Servicing
| | Pumping
| | Rental Services
| | | | | (In thousands) | | | |
| | | Segment | | Segment | | Segment | | Total | |
| | | | | (In thousands) | | | | | | |
| | |
| Balance at December 31, 2006 | | $ | 252,975 | | | $ | 49,036 | | | $ | 18,901 | | | $ | 320,912 | | |
| December 31, 2007 | | | $ | 306,248 | | | $ | 72,302 | | | $ | 378,550 | | | | | |
| Purchase price allocation and other adjustments, net | | | | 2,353 | | | | 23 | | | | 2,376 | | | | | |
| Goodwill acquired during the period | | | 57,820 | | | | — | | | | — | | | | 57,820 | | | | 8,970 | | | | 1,815 | | | | 10,785 | | | | | |
| Impact of foreign currency translation | | | (182 | ) | | | — | | | | — | | | | (182 | ) | |
| | | | | | | | | | | |
| Balance at December 31, 2007 | | | 310,613 | | | | 49,036 | | | | 18,901 | | | | 378,550 | | |
| | | | | | | | | | | |
| Goodwill acquired during the period | | | 8,970 | | | | | | | | 1,815 | | | | 10,785 | | |
| Purchase price allocation and other adjustments, net | | | 2,376 | | | | — | | | | — | | | | 2,376 | | |
| Impairment of goodwill | | | — | | | | (49,036 | ) | | | (20,716 | ) | | | (69,752 | ) | | | — | | | | (69,752 | ) | | | (69,752 | ) | | | | |
| Impact of foreign currency translation | | | (967 | ) | | | — | | | | — | | | | (967 | ) | | | (81 | ) | | | (886 | ) | | | (967 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | $ | 320,992 | | | $ | — | | | $ | — | | | $ | 320,992 | | |
| December 31, 2008 | | | | 317,490 | | | | 3,502 | | | | 320,992 | | | | | |
| | | | | | | | | | | | | | | | | |
| Purchase price allocation and other adjustments, net | | | | (356 | ) | | | 500 | | | | 144 | | | | | |
| Acquisition of Geostream | | | | 23,918 | | | | — | | | | 23,918 | | | | | |
| Impairment of goodwill | | | | — | | | | (500 | ) | | | (500 | ) | | | | |
| Impact of foreign currency translation | | | | 971 | | | | 577 | | | | 1,548 | | | | | |
| | | | | | | | | |
| December 31, 2009 | | | $ | 342,023 | | | $ | 4,079 | | | $ | 346,102 | | | | | |
| | | | | | | | | |
8879
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present the gross carrying values and accumulated amortizationcomponents of our identifiedother intangible assets with determinable lives that are subject to amortization under SFAS 142 as of December 31, 2009 and 2008 and 2007:are as follows:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31,
| | December 31,
| |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
Noncompete agreements: | | | | | | | | | | | | | | | | |
| Gross carrying value | | $ | 16,309 | | | $ | 18,402 | | | $ | 14,010 | | | $ | 16,309 | |
| Accumulated amortization | | | (4,699 | ) | | | (2,772 | ) | | | (5,618 | ) | | | (4,699 | ) |
| | | | | | | | | | | |
| Net carrying value | | $ | 11,610 | | | $ | 15,630 | | | $ | 8,392 | | | $ | 11,610 | |
| | | | | | | | | | | |
Patents and trademarks: | | | | | | | | | |
Patents, trademarks and tradename: | | | | | | | | | |
| Gross carrying value | | $ | 4,391 | | | $ | 4,150 | | | $ | 10,481 | | | $ | 4,391 | |
| Accumulated amortization | | | (3,114 | ) | | | (2,526 | ) | | | (917 | ) | | | (3,114 | ) |
| | | | | | | | | | | |
| Net carrying value | | $ | 1,277 | | | $ | 1,624 | | | $ | 9,564 | | | $ | 1,277 | |
| | | | | | | | | | | |
Customer relationships: | | | | | | | | | |
Customer relationships and contracts: | | | | | | | | | |
| Gross carrying value | | | $ | 41,389 | | | $ | 39,225 | |
| Accumulated amortization | | | | (19,947 | ) | | | (12,359 | ) |
| | | | | | | |
| Net carrying value | | | $ | 21,442 | | | $ | 26,866 | |
| | | | | | | |
Developed technology: | | | | | | | | | |
| Gross carrying value | | $ | 39,225 | | | $ | 25,139 | | | $ | 3,073 | | | $ | 3,598 | |
| Accumulated amortization | | | (12,359 | ) | | | (1,649 | ) | | | (1,724 | ) | | | (1,421 | ) |
| | | | | | | | | | | |
| Net carrying value | | $ | 26,866 | | | $ | 23,490 | | | $ | 1,349 | | | $ | 2,177 | |
| | | | | | | | | | | |
Customer backlog: | | | | | | | | | | | | | | | | |
| Gross carrying value | | $ | 622 | | | $ | 999 | | | $ | 724 | | | $ | 622 | |
| Accumulated amortization | | | (207 | ) | | | (214 | ) | | | (423 | ) | | | (207 | ) |
| | | | | | | | | | | |
| Net carrying value | | $ | 415 | | | $ | 785 | | | $ | 301 | | | $ | 415 | |
| | | | | | | | | | | |
Developed technology: | | | | | | | | | |
| Gross carrying value | | $ | 3,598 | | | $ | 4,762 | | |
| Accumulated amortization | | | (1,421 | ) | | | (397 | ) | |
| | | | | | | |
| Net carrying value | | $ | 2,177 | | | $ | 4,365 | | |
| | | | | | | |
Amortization expense for our intangible assets with determinable lives was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Noncompete agreements | | $ | 4,108 | | | $ | 1,919 | | | $ | 2,202 | | | $ | 3,222 | | | $ | 4,108 | | | $ | 1,919 | |
| Patents and trademarks | | | 748 | | | | 774 | | | | 713 | | | | 489 | | | | 748 | | | | 774 | |
| Customer relationships | | | 10,710 | | | | 1,649 | | | | — | | |
| Customer relationships and contracts | | | | 8,679 | | | | 10,710 | | | | 1,649 | |
| Developed technology | | | | 659 | | | | 1,803 | | | | 389 | |
| Customer backlog | | | 252 | | | | 210 | | | | — | | | | 167 | | | | 252 | | | | 210 | |
| Developed technology | | | 1,803 | | | | 389 | | | | — | | |
| | | | | | | | | | | | | | | |
| Total intangible asset amortization expense | | $ | 17,621 | | | $ | 4,941 | | | $ | 2,915 | | | $ | 13,216 | | | $ | 17,621 | | | $ | 4,941 | |
| | | | | | | | | | | | | | | |
8980
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average remaining amortization periods and expected amortization expense for the next five years for our intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted
| | | | | | | | | | | | | Weighted
| | | | | | | | | | | |
| | | Average Remaining
| | | | | | | | | | | | | Average Remaining
| | | | | | | | | | | |
| | | Amortization
| | Expected Amortization Expense | | | Amortization
| | Expected Amortization Expense | |
| | | Period (Years) | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | | Period (Years) | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | |
| | | | | (In thousands) | | | | | (In thousands) | |
| |
| Noncompete agreements | | | 5.9 | | | $ | 3,221 | | | $ | 2,652 | | | $ | 2,620 | | | $ | 2,423 | | | $ | 406 | | | | 3.3 | | | $ | 2,654 | | | $ | 2,620 | | | $ | 2,423 | | | $ | 406 | | | $ | 289 | |
| Patents and trademarks | | | 4.5 | | | | 489 | | | | 273 | | | | 203 | | | | 96 | | | | 40 | | | | 4.8 | | | | 273 | | | | 203 | | | | 96 | | | | 40 | | | | 33 | |
| Customer relationships | | | 9.3 | | | | 8,113 | | | | 5,232 | | | | 3,808 | | | | 2,818 | | | | 2,069 | | |
| Customer relationships and contracts | | | | 8.1 | | | | 6,726 | | | | 4,226 | | | | 3,057 | | | | 2,208 | | | | 1,671 | |
| Customer backlog | | | 2.3 | | | | 797 | | | | 668 | | | | 423 | | | | — | | | | — | | | | 1.7 | | | | 181 | | | | 120 | | | | — | | | | — | | | | — | |
| Developed technology | | | 2.8 | | | | 156 | | | | 156 | | | | 104 | | | | — | | | | — | | | | 1.7 | | | | 798 | | | | 551 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible asset amortization expense | | | | | | $ | 12,776 | | | $ | 8,981 | | | $ | 7,158 | | | $ | 5,337 | | | $ | 2,515 | | | | | | | $ | 10,632 | | | $ | 7,720 | | | $ | 5,576 | | | $ | 2,654 | | | $ | 1,993 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Certain of our intangible assets are denominated in currencies other than U.S. Dollars and as such the values of these assets are subject to fluctuations associated with changes in exchange rates. Expected amortization expense for intangibles denominated in currencies other than U.S. Dollars are translated at the December 31, 2009 rate. Additionally, certain of these assets are also subject to purchase accounting adjustments. The estimated fair values of intangible assets obtained through acquisitions consummated in the preceding twelve months are based on preliminary information which is subject to change until final valuations are obtained.
We perform annual impairment tests associated with our goodwill on December 31 of each year, or more frequently if circumstances warrant, as dictatedwarrant. Due to the recoverability tests and impairments recorded for our long-lived assets described above in “Note 6. Property and Equipment,” we were required to test our goodwill for impairment during the third quarter rather than delaying testing until our annual assessment performed at year-end.
Under the first step of the goodwill impairment test, we compared the fair value of each reporting unit to its carrying amount, including goodwill. No impairment was indicated by SFAS 142.this test for the reporting units of our Well Servicing segment, thus the second step of the impairment test was unnecessary. However, this test concluded that the fair value of the fishing and rental services reporting unit under our Production Services segment did not exceed its carrying value. Therefore, the second step of the goodwill impairment test was performed to measure the amount of the impairment loss, if any. As a result of our calculation of step two of the test, we determined that the goodwill of this reporting unit was impaired. As such, we recorded a pre-tax impairment charge of $0.5 million to our Production Services segment during the third quarter of 2009. The impairment charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2008, 2007 and 2006, we had three reporting units as determined and identified by SFAS 142.
2009. We estimatetested our goodwill for potential impairment again on the 2009 annual testing date. The results of that test indicated that the fair valuesvalue of our reporting units using three common valuation techniques — the discounted cash flow method, the guideline company method,that have goodwill was substantially in excess of its carrying value, and the similar transaction method. The Company’s management assigns a weighting to the resultsnone of each method based on the facts and circumstances that exist at the assessment date. The discounted cash flows for each reporting unit being tested are based on the Company’s financial budgets and forecasts, as well as management’s beliefs about the long-term growth patterns of the reporting units. For the 2008 future cash flow projections were discounted at rates ranging from 14% to 15% and terminal growth rates of approximately 3%. As part of the assessment, management also considered the current market capitalization of the Company, based on publicly available information and adjusted for an estimate of a control premium, in assessing the reasonableness of the fair values of the reporting units based on the results of the valuation models.
To assist management in the preparation and analysis of the valuation of the Company’s reporting units, management utilized the services of a third-party valuation consultant, who reviewed management’s estimates, assumptions and calculations. The ultimate conclusions of the valuation techniques remain the sole responsibility of the Company’s management. The Company conducts its annual impairment test on December 31 of each year. Upon completion of the 2007 and 2006 assessments, no impairment was indicated since the estimated fair values of theour reporting units were in excessat risk of their carrying values. failing step one of the 2009 annual goodwill impairment test.
Upon completion of the 2008 assessment, we determined that the fair value associated with thetwo of our reporting units comprising our pressure pumping and fishing and rental reportable segmentsProduction Services segment was less than the carrying value of thethese reporting units, of those segments, indicating potential impairment. Because indicators of impairment existed for these reporting units, we performed step two of the SFAS 142 impairment test for those units. While this test is required on an annual basis, it also can be required more frequently based on changes in external factors. We do not currently expectThe result of these tests indicated that additional tests would result in any additional charges, but the determination ofimplied fair value used inof the test is heavily impacted by the market pricesgoodwill for our pressure pumping and fishing and rental lines of our equity and debt securities.business was less than their carrying values.
9081
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In accordance with SFAS 142, theThe implied fair value of the goodwill of the reporting units being tested was determined in the same manner as a hypothetical business combination, with the fair value of the reporting unit representing the purchase price. As a result of the calculations of step two of the test, we determined that the goodwill of the reporting units comprising our pressure pumping and fishing and rental segmentsreporting units comprising our Production Services segment was impaired, and that the amount of the impairment loss was greater than the current carrying value of those reporting units’ goodwill. As such, we recorded a pre-tax impairment charge of approximately $49.0$69.8 million and $20.7 million forin our pressure pumping and fishing and rental segments, respectively,Production Services segment during the fourth quarter of 2008. The impairment charge is included in the item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2008.
Upon completion of the 2007 assessment, no impairment was indicated since the estimated fair values of the reporting units were in excess of their carrying values.
| |
NOTE 6.8. | EARNINGS PER SHARE |
The following table presents our basic and diluted earnings per share for the years ended December 31, 2009, 2008 2007 and 2006:2007:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | | (In thousands, except per share data) | | | (In thousands, except per share data) | |
| |
Basic EPS Computation: | | | | | | | | | | | | | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 84,058 | | | $ | 169,289 | | | $ | 171,033 | | |
| (Loss) income attributable to common stockholders | | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | |
Denominator | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 124,246 | | | | 131,194 | | | | 131,332 | | | | 121,072 | | | | 124,246 | | | | 131,194 | |
| Basic earnings per share | | $ | 0.68 | | | $ | 1.29 | | | $ | 1.30 | | |
| | | | | | | | | |
Basic (loss) earnings per share | | | $ | (1.29 | ) | | $ | 0.68 | | | $ | 1.29 | |
| | | | | | | | | |
Diluted EPS Computation: | | | | | | | | | | | | | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 84,058 | | | $ | 169,289 | | | $ | 171,033 | | |
| (Loss) income attributable to common stockholders | | | $ | (156,121 | ) | | $ | 84,058 | | | $ | 169,289 | |
Denominator | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 124,246 | | | | 131,194 | | | | 131,332 | | | | 121,072 | | | | 124,246 | | | | 131,194 | |
| Stock options | | | 555 | | | | 1,518 | | | | 2,180 | | | | — | | | | 555 | | | | 1,518 | |
| Restricted stock | | | 254 | | | | 256 | | | | — | | | | — | | | | 254 | | | | 256 | |
| Warrants | | | 506 | | | | 565 | | | | 552 | | | | — | | | | 506 | | | | 565 | |
| Stock appreciation rights | | | 4 | | | | 18 | | | | — | | | | — | | | | 4 | | | | 18 | |
| | | | | | | | | | | | | | | |
| | | | 125,565 | | | | 133,551 | | | | 134,064 | | | | 121,072 | | | | 125,565 | | | | 133,551 | |
| | | | | | | | | | | | | | | |
| Diluted earnings per share | | $ | 0.67 | | | $ | 1.27 | | | $ | 1.28 | | |
Diluted (loss) earnings per share | | | $ | (1.29 | ) | | $ | 0.67 | | | $ | 1.27 | |
| | | | | | | | | |
Stock options, warrants and stock appreciation rightsSARs are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock grants are legally considered issued and outstanding, but are included in basic and diluted earnings per share only to the extent that they are vested. Unvested restricted stock is included in the computation of diluted earnings per share using the treasury stock method. The diluted earnings per share calculation for the years ended December 31, 2009, 2008 2007 and 20062007 exclude the potential exercise of 3.5 million, 2.6 million, 0.5 million and 0.40.5 million stock options, respectively, because the effects of such exercises on earnings per share in those periods would be anti-dilutive. The diluted earnings per share calculation for the yearyears ended December 31, 2009 and 2008 excludeseach exclude the potential exercise of 0.4 million stock-settled stock appreciation rights (“SARs”)SARs because the effects of such exercises on earnings per share in those periods would be anti-dilutive. Shares are consideredFor 2009, these options and SARs would be anti-dilutive because their exercise prices exceededof our net loss for the average price of the Company’s stock during those years.year. For 2008 and 2007,
9182
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
these options and SARs are considered anti-dilutive because their exercise prices exceeded the average price of our stock during those years.
There have been no material changes in share amounts subsequent to the balance sheet date that would have a material impact on the earnings per share calculation for the year ended December 31, 2008.2009.
| |
NOTE 7.9. | ASSET RETIREMENT OBLIGATIONS |
In connection with our well servicing activities, we operate a number of saltwater disposal (“SWD”) facilities. Our operations involve the transportation, handling and disposal of fluids in our SWD facilities that are by-products of the drilling process, some of which have been determined to be harmful to the environment.process. SWD facilities used in connection with our fluid hauling operations are subject to future costs associated with the abandonmentretirement of these properties. As a result, we have incurred costs associated with the proper storage and disposal of these materials.
Annual amortization of the assets associated with the asset retirement obligations was $0.6$0.5 million, $0.6 million, and $0.5$0.6 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. A summary of changes in our asset retirement obligations is as follows (in thousands):
| | | | | | |
| Balance at December 31, 2006 | | $ | 9,622 | | |
| | | | | |
| Additions | | | 12 | | |
| Costs incurred | | | (576 | ) | |
| Accretion expense | | | 585 | | |
| Disposals | | | (345 | ) | |
| | | | | | | | |
| Balance at December 31, 2007 | | | 9,298 | | | $ | 9,298 | |
| | | | | | | |
| Additions | | | 397 | | | | 397 | |
| Costs incurred | | | (462 | ) | | | (462 | ) |
| Accretion expense | | | 594 | | | | 594 | |
| Disposals | | | (478 | ) | | | (479 | ) |
| | | | | | | |
| Balance at December 31, 2008 | | $ | 9,349 | | | | 9,348 | |
| | | | | | | |
| Additions | | | | 517 | |
| Costs incurred | | | | (306 | ) |
| Accretion expense | | | | 533 | |
| Disposals | | | | (47 | ) |
| | | | | |
| Balance at December 31, 2009 | | | $ | 10,045 | |
| | | | | |
| |
NOTE 8.10. | EQUITY METHODEQUITY-METHOD INVESTMENTS |
IROC Energy Services Corp.
As of December 31, 20082009 and 2007,2008 we owned approximately 8.7 million shares of IROC Energy Services Corp. (“IROC”), an Alberta-based oilfield services company. This represented approximately20.1% and 19.7% of IROC’s outstanding common stock on December 31, 2009 and 2008, and 2007. IROC shares trade on the Toronto Venture Stock Exchange and had a closing price of $0.54 CDN and $0.74 CDN per share on December 31, 2008 and 2007, respectively. Mr. William Austin, our former chief financial officer, and Mr. Newton W. Wilson III, our Chief Operating Officer, serve on the board of directors of IROC.
Through December 31, 2008,2009, we have significant influence over the operations of IROC through our ownership interest, and representation on IROC’s board of directors, but we do not control it. We account for our investment in IROC using the equity method. Our investment in IROC totaled $3.7 million and $11.2 million as of December 31, 2008 and 2007, respectively. The pro-rata share of IROC’s earnings and losses to which we are entitled is recorded in our consolidated statements of operations as a component of other income and expense, with an offsetting increase or decrease to the carrying value of our investment, as appropriate. Any earnings distributed back to us from IROC in the form of dividends would result in a decrease in the carrying value of our equity investment. The value of our investment may also increase or decrease each period due to changes in the exchange rate between the U.S. Dollar and Canadian Dollar. Changes in the value of our investment due to fluctuations in exchange rates are offset by accumulated other comprehensive income.
During 2009, the value of our investment in IROC increased by $0.6 million due to changes in exchange rates between the U.S. and Canadian dollar.
9283
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the value of our investment due to fluctuations in exchange rates are offset by accumulated other comprehensive income.
IROC had net income of approximately $0.8 million, $2.0 million and $1.8 million U.S. Dollars for the years ended December 31, 2008, 2007 and 2006, respectively. In addition to our pro-rata share of IROC’s net income, the value of our investment changes based on the exchange rate between the U.S. and Canadian dollars. During the fourth quarter of 2008 the U.S. Dollar strengthened significantly against the Canadian Dollar, reducing the value of our investment. This decrease was offset in accumulated other comprehensive income.
During the years ended December 31, 2009, 2008 2007 and 2006,2007, we recorded $0.2$0.1 million $0.4of equity losses and $0.2 million and $0.4 million respectively, of equity income related to our investment in IROC.IROC, respectively. During the years ended December 31, 2008, 2007 and 2006, no earnings were distributed to us by IROC. Only distributed earnings or any gains or losses arising from the disposal of our investment are reportable for income tax purposes; as a result, the amounts we record for our pro-rata share of IROC’s earnings or losses to which we are entitled result in a temporary difference between book and taxable income. Under the provisions of SFAS 109, we record a deferred tax asset or liability, as appropriate, to account for these temporary differences.
An impairment review of our equity method investment in IROC is performed on a quarterly basis to determine if there has been a decline in fair value that is other than temporary. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, fair value is based on an estimate of discounted cash flows. In determining whether the decline is other than temporary, we consider the cyclicality of the industry in which the investment operates, its historical performance, its performance in relation to its peers and the current economic environment. Future conditions in the industry, operating performance and performance in relation to peers and the future economic environment may vary from our current assessment of recoverability. While the carrying value of the investment approximated the fair value during the second quarter of 2008, IROC’s stock price is currently depressed and has historically been volatile. During the fourth quarter2009, IROC declared a dividend which was paid to us in June of 2008 the Company’s management determined that the decline in2009, reducing the value of theour investment by $0.2 million.
The carrying value of our investment in IROC totaled $4.0 million and $3.7 million as of December 31, 2009 and 2008, respectively. The carrying value of our investment in IROC was other than temporary and as such recorded a pretax charge$5.6 million below our proportionate share of $5.4 million in order to reduce the carryingbook value of the investmentnet assets of IROC as of December 31, 2009. This difference is attributable to fair value. Faircertain long-lived assets of IROC, and our proportionate share of IROC’s net income or loss will be adjusted in future periods over the estimated remaining useful lives of those long-lived assets. The market value of our IROC shares was determined by using theapproximately $5.4 million as of December 31, 2009, based on quoted market prices for the IROC shares as of December 31, 2008.
Geostream Services Group
On October 31, 2008, we acquired a 26% interest in OOO Geostream Services Group (“Geostream”) for $17.4 million. We incurred direct transaction costs of approximately $1.9 million associated with the transaction. Geostream is located in the Russian Federation and provides drilling and workover services andsub-surface engineering and modeling in the Russian Federation. In connection with our initial investment, three officers of the Company became board members of Geostream, representing 50% of the board membership. We can exert significant influence over the operations of Geostream, but do not control it; therefore we account for it using the equity method.
The fair value of the amounts we have invested in Geostream is in excess of the underlying book value of our investment. We are currently performing a valuation to determine the components of the difference in basis and have preliminarily allocated substantially all of the difference to goodwill. Our pro-rata share of Geostream’s net income for the two months ended December 31, 2008 was not material.
We are contractually required to purchase an additional 24% of Geostream no later than March 31, 2009 for approximately €11.3 million (which at December 31, 2008 was equivalent to $15.9 million). For a period not to exceed six years subsequent to October 31, 2008, we have the option to increase our ownership percentage of Geostream to 100%; however, if we have not acquired 100% of Geostream on or before the end of the six-year period, we will be required to arrange an initial public offering for thoseIROC’s shares.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advanced Flow Technologies, Inc.
In September 2007, we completed the acquisition of AMI, a privately-held Canadian company focused on oilfield technology. Prior to the acquisition, AMI ownedowns a portion of another Canadian company, AFTI.Advanced Flow Technologies, Inc. (“AFTI”). As part of the acquisition, AMI increased its ownership percentage of AFTI to 51.46%. At December 31, 2007, and subsequent to the acquisition date we consolidated the assets, liabilities, results of operations and cash flows of AFTI into our consolidated financial statements, with the portion of AFTI remaining outside of our control forming a minoritynoncontrolling interest in our consolidated financial statements.
Our ownership of AFTI declined to 48.73% asduring the fourth quarter of December 31, 2008 due to the issuance of additional shares by AFTI. As a result, we deconsolidated AFTI results from our consolidated financial statements at December 31, 2008. As of December 31, 2009 and 2008, AMI’s ownership percentage was 48.63% and now48.73%, respectively, and we account for thatthe interest underin AFTI using the equity method. We recorded losses of $0.2 million and income of less than $0.1 million associated with our investment in AFTI for the years ended December 31, 2009 and 2008. The carrying value of our investment in AFTI totaled approximately $1.2 million as of December 31, 2009 and 2008, respectively. As of December 31, 2009, the carrying value of our investment in AFTI exceeded our proportionate share of the book value of the net assets of AFTI by $0.9 million. This difference was attributable to intangible assets that were recognized in the original purchase of AMI as well as unrecognized goodwill that is not subject to amortization. During 2009 the value of our investment in AFTI increased by $0.2 million due to changes in exchange rates between the U.S. and Canadian dollar. This increase was offset in accumulated other comprehensive income.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 9.11. | ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31, 20082009 and 2007. SFAS No. 107,Disclosures about Fair Value of Financial Instruments(“SFAS 107”) defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.2008.
Cash, cash equivalents, short-term investments, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | | December 31, 2007 | | | December 31, 2009 | | December 31, 2008 | |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | |
| | | (In thousands) | | | (In thousands) | |
| |
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notes receivable — related parties | | $ | 336 | | | $ | 336 | | | $ | 173 | | | $ | 173 | | |
| Notes and accounts receivable — related parties | | | $ | 281 | | | $ | 281 | | | $ | 336 | | | $ | 336 | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 8.375% Senior Notes due 2014 | | $ | 425,000 | | | $ | 282,115 | | | $ | 425,000 | | | $ | 434,563 | | |
| 8.375% Senior Notes | | | $ | 425,000 | | | $ | 422,875 | | | $ | 425,000 | | | $ | 282,115 | |
| Senior Secured Credit Facility revolving loans | | | 187,813 | | | | 187,813 | | | | 50,000 | | | | 50,000 | | | | 87,813 | | | | 87,813 | | | | 187,813 | | | | 187,813 | |
| Notes payable — related parties | | | 20,318 | | | | 20,318 | | | | 22,178 | | | | 22,178 | | | | 5,931 | | | | 5,931 | | | | 20,318 | | | | 20,318 | |
Notes receivable-related parties. The amounts reported relate to notes receivable from certain employees of the Companyour employees related to relocation and retention agreements. The carrying values of these notes approximate their fair values as of the applicable balance sheet dates.
8.375% Senior Notes due 2014. The fair value of our long-term debt is based upon the quoted market prices and face value for the various debt securities at December 31, 2008.2009. The carrying value of these notes as of December 31, 20082009 was $425.0 million and the fair value was $282.1 million.$422.9 million (99.5% of carrying value).
Senior Secured Credit Facility revolving loans. Because of their variable interest rates and our recent amendment of the credit facility, the fair values of the revolving loans borrowed under our Senior Secured Credit Facility approximate their carrying values as of December 31, 2008.2009. The carrying and fair values of these loans as of December 31, 20082009 were approximately $187.8$87.8 million.
Notes payable — related parties. The amounts reported relate to the seller financing arrangement entered into in connection with our acquisition of Moncla (see“Note 2. Acquisitions”). TheMoncla. Because of their variable interest rates and the discount applied to the notes the carrying value of these notes approximate their fair values as of December 31, 2008.2009.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 10. | DERIVATIVE FINANCIAL INSTRUMENTS |
Interest Rate Swaps. On March 10, 2006 we entered into two $100.0 million notional amount interest rate swaps to fix the interest rate on a portion of the borrowings under our prior senior credit agreement, dated July 29, 2005 (the “Prior Credit Facility”). These swaps met the criteria of derivative instruments.
In connection with the termination of our Prior Credit Facility in November 2007, we settled all outstanding interest rate swap arrangements. We recognized a loss of approximately $2.3 million related to the settlement of our interest rate swaps, which is recorded in our consolidated statements of operations as a component of interest expense.
Call Options on 8.375% Senior Notes due 2014. The indenture related to our $425.0 million in 8.375% Senior Notes due 2014 (see“Note 12. Long-Term Debt”) contains provisions by which, at our option, we may redeem the notes at varying prices before their stated maturity date. Certain of these provisions are based on contingent events, such as a future equity offering by us or a change in control of the Company. Other provisions are not contingent in nature. In one of the non-contingent scenarios, the price at which we could retire the notes is based, in part, on a variable interest rate. We have analyzed all the provisions of the indenture that allow us to repay this debt early in order to determine if any of these call options constitute an embedded derivative instrument under SFAS 133 and require bifurcation and separate measurement from the host contract. We followed the guidance provided in paragraphs 6, 12, 13 and 61 of SFAS 133 and Derivatives Implementation Group (“DIG”) Issues B-16 and B-39 in determining whether or not the call options required bifurcation and separate measurement. Based on our analysis, we do not believe these options require bifurcation and separate measurement.
The components of our income tax expense are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Current income tax expense: | | | | | | | | | | | | | |
| Current income tax (expense) benefit: | | | | | | | | | | | | | |
| Federal and state | | $ | (55,190 | ) | | $ | (81,384 | ) | | $ | (92,213 | ) | | $ | 53,798 | | | $ | (55,190 | ) | | $ | (81,384 | ) |
| Foreign | | | (5,306 | ) | | | (771 | ) | | | (4,242 | ) | | | (3,930 | ) | | | (5,306 | ) | | | (771 | ) |
| | | | | | | | | | | | | | | |
| | | | (60,496 | ) | | | (82,155 | ) | | | (96,455 | ) | | | 49,868 | | | | (60,496 | ) | | | (82,155 | ) |
| | | | | | | | | | | | | | | |
| Deferred income tax (expense) benefit: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal and state | | | (30,363 | ) | | | (24,281 | ) | | | (7,906 | ) | | | 36,895 | | | | (30,363 | ) | | | (24,281 | ) |
| Foreign | | | 616 | | | | (332 | ) | | | 914 | | | | 4,362 | | | | 616 | | | | (332 | ) |
| | | | | | | | | | | | | | | |
| | | | (29,747 | ) | | | (24,613 | ) | | | (6,992 | ) | | | 41,257 | | | | (29,747 | ) | | | (24,613 | ) |
| | | | | | | | | | | | | | | |
| Total income tax expense | | $ | (90,243 | ) | | $ | (106,768 | ) | | $ | (103,447 | ) | |
| Total income tax benefit (expense) | | | $ | 91,125 | | | $ | (90,243 | ) | | $ | (106,768 | ) |
| | | | | | | | | | | | | | | |
The sources of our income or loss before income taxes and noncontrolling interest were as follows:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Domestic | | $ | (279,278 | ) | | $ | 150,870 | | | $ | 270,975 | |
| Foreign | | | 31,477 | | | | 23,186 | | | | 4,965 | |
| | | | | | | | | | | | | |
| Total | | $ | (247,801 | ) | | $ | 174,056 | | | $ | 275,940 | |
| | | | | | | | | | | | | |
We made net federal income tax payments of approximately$0.1 million, $33.5 million $85.5 million and $87.6$85.5 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. We made net state income tax payments of approximately $6.6$5.5 million, $6.6 million and $8.4$6.6 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. We made net foreign tax payments of approximately$7.3 million, $3.4 million $4.2 million and $3.0$4.2 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively. For the year ended December 31, 2009, $0.6 million of tax expense was allocated to stockholders’ equity for compensation expense for financial reporting purposes in excess of amounts recognized for income tax purposes. For the years ended December 31, 2008 2007 and 2006,2007, tax benefits allocated to stockholders’ equity for compensation expense for income tax purposes in excess of amounts recognized for financial reporting purposes were $1.7 million and $3.4 million, and less than $0.1 million, respectively. The CompanyWe had allocated tax benefits to stockholders’ equity in prior years for compensation expense for income tax purposes in excess of amounts recognized for financial reporting purposes. In addition, we expect to receive a federal income tax refund of approximately $50.0 million in 2010.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income tax expense differs from amounts computed by applying the statutory federal rate as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| Income tax computed at Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.00 | % | | | 35.00 | % | | | 35.00 | % |
| State taxes | | | 3.1 | | | | 3.2 | | | | 1.7 | | | | 2.1 | | | | 3.1 | | | | 3.2 | |
| Non deductible goodwill | | | 12.8 | | | | — | | | | — | | |
| Non-deductible goodwill | | | | — | | | | 12.8 | | | | — | |
| Change in valuation allowance | | | (0.3 | ) | | | 0.2 | | | | (0.5 | ) | | | — | | | | (0.3 | ) | | | 0.2 | |
| Other | | | 1.2 | | | | 0.3 | | | | 1.5 | | | | (0.3 | ) | | | 1.2 | | | | 0.3 | |
| | | | | | | | | | | | | | | |
| Effective income tax rate | | | 51.8 | % | | | 38.7 | % | | | 37.7 | % | | | 36.80 | % | | | 51.80 | % | | | 38.70 | % |
| | | | | | | | | | | | | | | |
As of December 31, 2008 and 2007, our deferred tax assets and liabilities were comprised of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
| Deferred tax assets: | | | | | | | | | | | | | | | | |
| Net operating loss and tax credit carryforwards | | $ | 4,664 | | | $ | 6,000 | | | $ | 11,990 | | | $ | 4,664 | |
| Self-insurance reserves | | | 20,944 | | | | 21,484 | | | | 17,735 | | | | 20,944 | |
| Allowance for doubtful accounts | | | 4,023 | | | | 4,731 | | | | 1,835 | | | | 4,023 | |
| Accrued liabilities | | | 14,681 | | | | 15,600 | | | | 11,550 | | | | 14,681 | |
| Equity-based compensation | | | 10,116 | | | | 3,876 | | |
| Share-based compensation | | | | 10,746 | | | | 10,116 | |
| Other | | | 3,085 | | | | 488 | | | | 2,554 | | | | 3,085 | |
| | | | | | | | | | | |
| Total deferred tax assets | | | 57,513 | | | | 52,179 | | | | 56,410 | | | | 57,513 | |
| | | | | | | | | | | |
| Valuation allowance for deferred tax assets | | | (844 | ) | | | (1,458 | ) | | | (835 | ) | | | (844 | ) |
| | | | | | | |
| Net deferred tax assets | | | 56,669 | | | | 50,721 | | | | 55,575 | | | | 56,669 | |
| | | | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | | | | | | | | | |
| Property and equipment | | | (190,675 | ) | | | (150,802 | ) | | | (147,956 | ) | | | (190,675 | ) |
| Intangible assets | | | (27,952 | ) | | | (31,993 | ) | | | (29,238 | ) | | | (27,952 | ) |
| Other | | | — | | | | (318 | ) | | | (38 | ) | | | — | |
| | | | | | | | | | | |
| Total deferred tax liabilities | | | (218,627 | ) | | | (183,113 | ) | | | (177,232 | ) | | | (218,627 | ) |
| | | | | | | | | | | |
| Net deferred tax liability, net of valuation allowance | | $ | (161,958 | ) | | $ | (132,392 | ) | | $ | (121,657 | ) | | $ | (161,958 | ) |
| | | | | | | | | | | |
In 2008,2009, deferred tax liabilities decreased by $1.0$0.4 million for adjustments to accumulated other comprehensive loss. In 2007,2008, deferred tax liabilities decreased by $0.2$1.0 million for adjustments to accumulated other comprehensive loss.
In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxable income for this determination. To fully realize the deferred income tax assets related to our federal net operating loss carryforwards that do not have a valuation allowance due to Section 382 limitations, we would need to generate future federal taxable income of approximately $4.8 million over the next tennine years. With certain exceptions noted below, we believe that after considering all the available
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
objective evidence, both positive and negative, historical and prospective, with greater weight given to the historical evidence, it is more likely than not that these assets will be realized.
In 2009, we generated a federal tax net operating loss of $142.1 million. The 2009 federal net operating loss will be carried back, in its entirety, to a prior year and result in a refund of approximately $50.0 million. We estimate that as of December 31, 2009, 2008 2007 and 20062007 we have available $7.1 million, $8.2$7.1 million and $9.3$8.2 million, respectively, of federal net operating loss carryforwards. Approximately $4.7 million of our net operating losses as of December 31, 20082009 are subject to a $1.1 million annual Section 382 limitation and expire in 2018. Approximately $2.4 million of our net operating losses as of December 31, 20082009 are subject to a $5,000 annual Section 382 limitation and expire in 2016 through 2018. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Due to annual limitations under Sections 382 and 383, management believes that we will not be able to utilize all available carryforwards prior to their ultimate expiration. TheAt December 31, 2009 and 2008, we had a valuation allowance of $0.8 million related to the deferred tax asset associated with our remaining federal net operating loss carryforwards that will expire before utilization due to Section 382 limitations of $2.3 million includes a valuation allowance of $0.8 million as a result of the Section 382 limitations at December 31, 2008 and 2007, respectively.limitations.
We estimate that as of December 31, 2009, 2008 2007 and 20062007 we have available $16approximately $64.2 million, $19$15.9 million, and $31$18.6 million, respectively, of state net operating loss carryforwards that will expire from 20092019 to 2025. To fully realize the deferred income tax assets related to our state net operating loss carryforwards, we would need to generate future West Virginia taxable income of $12.9$15.2 million over the next 1720 years and future Pennsylvania taxable income of $2.0$3.3 million over the next 1720 years. Management believes that it is not more likely than not that we will be able to utilize all available carryforwards prior to their ultimate expiration. The deferred tax asset associated with our remaining state net operating loss carryforwards at December 31, 20082009 of $1.4$5.2 million includes a valuation allowance of less than $0.1 million as a result.
In 2007, the Companywe began operations in Mexico that resulted in a net operating loss of $2 million and a deferred tax asset related to the net operating loss carryforward of $0.6 million. Mexico enacted a new flat tax rate effective January 1, 2008. The flat tax functions in addition to the regular corporate tax rate of 28%. Tax expense is calculated under both methods and if the flat tax is greater than the regular tax, the additional tax expense above the regular tax is assessed in addition to the regular tax calculation. In 2007, we recorded a full valuation allowance related to our Mexico net operating loss carryforwards of $0.6 million, as management believed that, due to the enactment of the Mexico flat tax, all of our net operating loss carryforwards related to the Mexico operations were not more likely than not to be fully realized in the future. It wasWe determined the Company wouldwe were not be in a flat tax position in 2008 and all of the 2007 regular net operating loss will bewere utilized against 2008 regular Mexico income. Accordingly, the valuation allowance of $0.6 million set up in 2007 was released in 2008.
In 2007, the Company made a stock acquisition of AMI, a Canadian company. At December 31, 2009 and 2008, and 2007, the Company’sour Canadian operations had net operating losses of $3.8$3.9 million and $3.2$3.8 million, respectively. At December 31, 20082009 and 20072008 the deferred tax asset related to the net operating loss carryforward was $1.1 million and $1.0$1.1 million respectively. We have recorded no valuation allowance related to our Canadian net operating loss carryforwards at December 31, 20082009 and 2007,2008, as management believes that all of our net operating loss carryforwards related to the Canadian operations are more likely than not to be fully realized in the future. To fully realize the deferred income tax assets related to our Canadian net operating loss carryforwards, we would need to generate $0.2 million of future Canadian taxable income over the next sevensix years and $3.6$3.7 million of future Canadian taxable income over the next nineteen years. The net operating losses expire from 2015 to 2028.2029.
We didhave not provide forprovided deferred U.S. income taxes or foreign withholding taxes on the 2008 unremitted cumulative earnings of our Mexicoforeign subsidiaries as these earnings are considered permanently reinvested. Unremittedreinvested in these operations. The unremitted earnings of our Mexicoforeign subsidiaries representing tax basis accumulated earnings and profits, totaledthat are considered permanently reinvested were approximately $6.3$14.2 million as of December 31, 2008. We did not provide for2009. Upon repatriation of these earnings, we would be subject to U.S. income taxes on 2007 and 2006 unremitted earningstax, net of ouravailable foreign tax credits. At December 31, 2009, the
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimated amount of this unrecognized deferred tax liability on permanently reinvested foreign subsidiaries as ourearnings, based on current exchange rates and assuming we would be able to use foreign tax basis in each foreign subsidiarycredits, was in excess of the book basis as of December 31, 2007 and 2006.
In December 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
In May 2007, the FASB issued FSPFIN 48-1. FSPFIN 48-1 provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. In determining whether a tax position has been effectively settled, entities must evaluate (i) whether taxing authorities have completed their examination procedures; (ii) whether the entity intends to appeal or litigate any aspect of a tax position included in a completed evaluation; and (iii) whether it is remote that a taxing authority would examine or re-examine any aspect of a taxing position. FSPFIN 48-1 is to be applied upon the initial adoption of FIN 48.approximately $1.0 million.
As of December 31, 2009, 2008 December 31, 2007 and January 1, 2007 we had approximately$3.2 million, $5.6 million $6.8 million and $3.4$6.8 million, respectively, of unrecognized tax benefits net of federal benefits which, if recognized, would impact our effective tax rate. We have accrued approximately$1.1 million, $2.1 million $2.3 million and $1.0$2.3 million for the payment of interest and penalties as of December 31, 2009, 2008 December 31, 2007 and January 1, 2007, respectively. We believe that is reasonably possible that approximately $2.8$1.7 million of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 20082010 as a result of a lapse of the statute of limitations.limitations and settlement of an audit of our former operations in Egypt.
We file income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. We are not under a current federal tax examination. Federal tax years ending December 31, 20052006 and forward are open for tax audits as of December 31, 2008.2009. Our other significant filings are Argentina which has been examined through 2006, Mexico which is in the initialintermediate stages of a 2007 tax audit of our initial year of operations and in the State of Texas, where tax filings remain open for 2003 to 2006 for certain subsidiaries of the Company.
We recognized tax benefits in 20082009 of $1.7$2.6 million for expirations of statutes of limitations. We recorded an income tax benefit of $0.7$1.4 million and an increase to deferred tax liabilities of $0.5 million and decrease to goodwill of $0.5$0.4 million related to these statute expirations.
The following table presents the activity during 20082009 related to our FIN 48 reserveliabilities for uncertain tax positions (in thousands):
| | | | | |
| Balance at January 1, 2008 | | $ | 5,722 | |
| Additions based on tax positions related to the current year | | | 551 | |
| Additions based on tax positions related to prior years | | | 104 | |
| Decreases in unrecognized tax benefits acquired or assumed in business combinations | | | (707 | ) |
| Reductions for tax positions from prior years | | | (612 | ) |
| Settlements | | | — | |
| | | | | |
| Balance at December 31, 2008 | | $ | 5,058 | |
| | | | | |
| Balance at January 1, 2009 | | $ | 5,058 | |
| Additions based on tax positions related to the current year | | | 336 | |
| Reductions as a result of lapse of applicable statute of limitations | | | (2,153 | ) |
| Settlements | | | — | |
| | | | | |
| Balance at December 31, 2009 | | $ | 3,241 | |
| | | | | |
Tax Legislative Changes
The Economic Stimulus Act of 2008. The Economic Stimulus Act of 2008 permits a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property (most personal property and software) acquired and placed in service after December 31, 2007 and before January 1, 2009. We have
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimated $123 $140 million of qualifying additions in 2008 resulting in additional 2008 tax depreciation of $49$70 million.
The American Recovery and Reinvestment Act of 2009. The American Recovery and Reinvestment Act of 2009 extends the bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service to after December 31, 2008 and before January 1, 2010. We have an estimated $66 million of qualifying additions in 2009 resulting in additional 2009 tax depreciation of $33 million.
89
Key Energy Services, Inc. and Subsidiaries
Revised Texas Franchise tax. In May 2006, the state of Texas enacted a new law, effective January 1, 2007, that substantially changes the tax system in Texas. The law replaces the taxable capital and earned surplus components of its franchise tax with a new tax that is based on modified gross revenue. This law imposes a tax on a unitary group of affiliated entities’ net receipts rather than on the earned surplus of each separate entity.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 12.13. | LONG-TERM DEBT |
The components of our long-term debt are as follows:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31,
| | December 31,
| |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
| 8.375% Senior Notes due 2014 | | $ | 425,000 | | | $ | 425,000 | | | $ | 425,000 | | | $ | 425,000 | |
| Senior Secured Credit Facility revolving loans due 2012 | | | 187,813 | | | | 50,000 | | | | 87,813 | | | | 187,813 | |
| Other long-term indebtedness | | | 3,015 | | | | — | | | | 1,044 | | | | 3,015 | |
| Notes payable — related party, net of discount of $182 and $322 | | | 20,318 | | | | 22,178 | | |
| Notes payable — related parties, net of discount of $69 and $182, respectively | | | | 5,931 | | | | 20,318 | |
| Capital lease obligations | | | 23,149 | | | | 26,815 | | | | 14,313 | | | | 23,149 | |
| | | | | | | | | | | |
| | | | 659,295 | | | | 523,993 | | | $ | 534,101 | | | $ | 659,295 | |
| | | | | | | | | | | |
| Less current portion | | | (25,704 | ) | | | (12,379 | ) | | | (10,152 | ) | | | (25,704 | ) |
| | | | | | | | | | | |
| Total long-term debt and capital lease obligations, net of fair value discount | | $ | 633,591 | | | $ | 511,614 | | |
| Total long-term debt and capital lease obligations, net of discount | | | $ | 523,949 | | | $ | 633,591 | |
| | | | | | | | | | | |
8.375% Senior Notes due 2014
On November 29, 2007, the Companywe issued $425.0 million aggregate principal amount of 8.375%in Senior Notes due 2014 (the “Senior Notes”), under an Indenture, dated as of November 29, 2007indenture (the “Indenture”), among us, the guarantors party thereto (the “Guarantors”) and The Bank of New York Trust Company, N.A., as trustee.. The Senior Notes were priced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers’ fees and estimated offering expenses, were approximately $416.1 million. We used approximately $394.9 million of the net proceeds to retire then existing term loans, including accrued and unpaid interest, with the balance used for general corporate purposes.The Senior Notes were registered as public debt effective August 22, 2008.
The Senior Notes are general unsecured senior obligations of Key. Accordingly, they willthe Company. They rank effectively subordinate to all of our existing and future secured indebtedness. The Senior 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 Senior Notes is payable on June 1 and December 1 of each year beginning June 1, 2008. The Senior Notes mature on December 1, 2014.
On or after December 1, 2011, the Senior Notes will be subject to redemption at any time and from time to time at our option, in whole or in part, upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount redeemed) set forth below, plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
| | | | | |
Year | | Percentage | |
| |
| 2011 | | | 104.19 | % |
| 2012 | | | 102.09 | % |
| 2013 | | | 100.00 | % |
In addition, at any time and from time to time before December 1, 2010, we have the option to redeem up to 35% of the aggregate principal amount of the outstanding Senior Notes at a redemption price of 108.375%, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings, provided that at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remains outstanding immediately after each such redemption. These redemptions must occur within 180 days of the date of the closing of the equity offering.
In addition, at any time and from time to time prior to December 1, 2011, we may, at our option, redeem all or a portion of the Senior Notes at a redemption price equal to 100% of the principal amount, plus the Applicable Premium (as defined in the Indenture) with respect to the Senior Notes plus accrued and unpaid interest to the redemption date. If we experience a change of control, subject to certain exceptions, we must give holders of the Senior Notes the opportunity to sell to us their Senior Notes, in whole or in part, at a
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
| | | | | |
Year | | Percentage | |
| |
| 2011 | | | 104.19 | % |
| 2012 | | | 102.09 | % |
| 2013 | | | 100.00 | % |
Notwithstanding the foregoing, at any time and from time to time before December 1, 2010, we may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the outstanding Senior Notes at a redemption price of 108.375% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net cash proceeds of any one or more equity offerings; provided that at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remains outstanding immediately after each such redemption; 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 December 1, 2011, the Company may, at our option, redeem all or a portion of the Senior Notes at a redemption price equal to 100% of the principal amount thereof plus the applicable premium (as defined in the Indenture) with respect to the Senior Notes and plus accrued and unpaid interest thereon to the redemption date. If the Company experiences a change of control, subject to certain exceptions, it must give holders of the Senior Notes the opportunity to sell to the Company their Senior 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.
The Company and its restricted subsidiariesWe are subject to certain negative covenants under the indentureIndenture governing the Senior Notes. The indentureIndenture limits theour ability of the Company and each of its restricted subsidiaries to, among other things, (i) sell assets, (ii) pay dividends or make other distributions on capital stock or subordinated indebtedness, (iii) make investments, (iv) incur additional indebtedness or issue preferred stock, (v) create certain liens, (vi) enter into agreements that restrict dividends or other payments from its subsidiaries to itself, (vii) consolidate, merge or transfer all or substantially all of its assets, (viii) engage in transactions with affiliates and (ix) create unrestricted subsidiaries.things:
| | |
| • | sell assets; |
|
| • | pay dividends or make other distributions on capital stock or subordinated indebtedness; |
|
| • | make investments; |
|
| • | incur additional indebtedness or issue preferred stock; |
|
| • | create certain liens; |
|
| • | enter into agreements that restrict dividends or other payments from our subsidiaries to us; |
|
| • | consolidate, merge or transfer all or substantially all of our assets; |
|
| • | engage in transactions with affiliates; and |
|
| • | create unrestricted subsidiaries. |
In
These covenants are subject to certain exceptions and qualifications, and contain cross-default provisions in connection with the salecovenants of our Senior Secured Credit Facility. Substantially all of the covenants will terminate before the Senior Notes mature if one of two specified ratings agencies assigns the Senior Notes an investment grade rating in the future and no events of default exist under the Indenture. As of December 31, 2009, the Senior Notes were below investment grade. Any covenants that cease to apply to us as a result of achieving an investment grade rating will not be restored, even if the credit rating assigned to the Senior Notes later falls below an investment grade rating. We were in compliance with these covenants at December 31, 2009.
Senior Secured Credit Facility
We maintain a Senior Secured Credit Facility pursuant to a revolving credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the administrative agents. We entered into the Senior Secured Credit Facility on November 29, 2007, simultaneously with the offering of the Senior Notes, the Companyand entered into a registration rights agreement with the initial purchasers, pursuantan amendment (the “Amendment”) to which it agreed to file an exchange offer registration statement with the SEC with respect to an offer to exchange the Senior Notes for substantially identical notes that would be registered underSecured Credit Facility on October 27, 2009. As amended, the Securities Act,Senior Secured Credit Facility consists of a revolving credit facility, letter of creditsub-facility and swing line facility, up to use reasonable best efforts to cause such registration statement become effective on or prior to November 29, 2008. In accordance with the agreement, the Company filed an exchange offer registration statement with the SEC on August 19, 2008, which became effective August 22, 2008, and offered to exchange an aggregate principal amount of $425.0$300.0 million, all of registered 8.375%which will mature no later than November 29, 2012.
The Amendment we entered into in the fourth quarter of 2009 reduced the total credit commitments under the facility from $400.0 million to $300.0 million, effected by a pro rata reduction of the commitment of each lender under the facility. We have the ability to request increases in the total commitments under the facility by up to $100.0 million in the aggregate, with any such increases being subject to certain requirements as well as lenders’ approval. Pursuant to the Amendment, we also modified the applicable interest rates and some of the financial covenants, among other changes.
The interest rate per annum applicable to the Senior Notes due 2014, whichSecured Credit Facility (as amended) is, at our option, (i) LIBOR plus a margin of 350 to 450 basis points, depending on our consolidated leverage ratio, or, (ii) the Company refers tobase rate (defined as the exchange notes, for anyhigher of (x) Bank of America’s prime rate and all(y) the Federal Funds rate plus 0.5%), plus a margin of 250 to 350 basis points, depending on our original unregistered 8.375% Senior Notes due 2014 that were issued in a private offeringconsolidated leverage ratio. Unused commitment fees on November 29, 2007. The terms of the exchange notes were substantially identicalfacility range from 0.50% to those terms of the original notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the originally issued notes did not apply to the exchange notes. References to the “Senior Notes” herein includes exchange notes issued in the exchange offer.0.75%, depending upon our consolidated leverage ratio.
As of December 31, 2008, the Company is in compliance with all theThe Senior Secured Credit Facility contains certain financial covenants, required under the Senior Notes.which, among other things, require us to maintain certain financial ratios and limit our annual capital expenditures. In addition to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
covenants that impose restrictions on our ability to repurchase shares, have assets owned by domestic subsidiaries located outside the United States and other such limitations, the amended Senior Secured Credit Facility also requires:
| | |
| • | that our consolidated funded indebtedness be no greater than 45% of our adjusted total capitalization; |
|
| • | that our senior secured leverage ratio of senior secured funded debt to trailing four quarters of earnings before interest, taxes, depreciation and amortization (as calculated pursuant to the terms of the Senior Secured Credit Facility, “EBITDA”) be no greater than (i) 2.50 to 1.00 for the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending December 31, 2010 and, (ii) thereafter, 2.00 to 1.00; |
|
| • | that we maintain a consolidated interest coverage ratio of trailing four quarters EBITDA to interest expense of at least the following amounts during each corresponding period: |
| | |
| from the fiscal quarter ended December 31, 2009 through and including the fiscal quarter ending June 30, 2010 | | 1.75 to 1.00 |
| through the fiscal quarter ending September 30, 2010 | | 2.00 to 1.00 |
| for the fiscal quarter ending December 31, 2010 | | 2.50 to 1.00 |
| thereafter | | 3.00 to 1.00; |
| | |
| • | that we limit our capital expenditures (not including any made by foreign subsidiaries that are not wholly-owned) to (i) $135.0 million during fiscal year 2009 and $120.0 million during each subsequent fiscal year if our consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 3.50 to 1.00; or (ii) $250.0 million if our consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is equal to or less than 3.50 to 1.00, subject to certain adjustments; |
|
| • | that we only make acquisitions that either (i) are completed for equity consideration, without regard to leverage, or (ii) are completed for cash consideration, but only (A) if the consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is 2.75 to 1.00 or less, (x) there is an aggregate amount of $25.0 million in unused credit commitments under the facility and (y) we are in pro forma compliance with the financial covenants contained in the credit agreement; and (B) if the consolidated leverage ratio of total funded debt to trailing four quarters EBITDA is greater than 2.75 to 1.00, in addition to the requirements in subclauses (x) and (y) in clause (A) above, the cash amount paid with respect to acquisitions is limited to $25.0 million per fiscal year (subject to potential increase using amounts then available for capital expenditures and any net cash proceeds we receive after October 27, 2009 in connection with the issuance or sale of equity interests or the incurrence or issuance of certain unsecured debt securities that are identified as being used for such purpose); and |
|
| • | that we limit our investment in foreign subsidiaries (including by way of loans made by us and our domestic subsidiaries to foreign subsidiaries and guarantees made by us and our domestic subsidiaries of debt of foreign subsidiaries) to $75.0 million during any fiscal year or an aggregate amount after October 27, 2009 equal to (i) the greater of $200.0 million or 25% of our consolidated net worth, plus (ii) any net cash proceeds we receive after October 27, 2009, in connection with the issuance or sale of equity interests or the incurrence of certain unsecured debt securities that are identified as being used for such purpose. |
In addition, the amended Senior Secured Credit Facility contains certain affirmative covenants, including, without limitation, restrictions related to (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments; (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing the Senior Notes or other unsecured debt incurred pursuant to the sixth bullet point listed above; (viii) granting negative pledges other
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Key Energy Services, Inc. and Subsidiaries
Simultaneously withNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
than to the closinglenders; (ix) changes in the nature of our business; (x) amending organizational documents, or amending or otherwise modifying any debt if such amendment or modification would have a material adverse effect, or amending the offeringSenior Notes or any other unsecured debt incurred pursuant to the sixth bullet point listed above if the effect of such amendment is to shorten the maturity of the Senior Notes or such other unsecured debt; and (xi) changes in accounting policies or reporting practices; in each of the Company entered into a new credit agreement (the “Credit Agreement”)foregoing cases, with several lenders. The Credit Agreement provides for a senior secured credit facility (the “Seniorcertain exceptions. We were in compliance with these covenants at December 31, 2009.
We may prepay the Senior Secured Credit Facility”) consistingFacility in whole or in part at any time without premium or penalty, subject to our obligation to reimburse the lenders for breakage and redeployment costs. In connection with the Amendment, we wrote off a proportionate amount of athe unamortized deferred financing costs associated with the capacity reduction of the credit facility. During the year ended December 31, 2009, we recognized $0.5 million in pre-tax charges in losses on extinguishment of debt associated with the write-off of unamortized deferred financing costs.
As of December 31, 2009, $87.8 million of borrowings and $55.2 million of letters of credit were outstanding under our revolving credit facility, letterleaving $156.9 million of availability under our revolving credit facility. Under the terms of the Senior Secured Credit Facility, committed letters of credit sub-facility and swing line facility of up to an aggregate principal amount of $400.0 million, all of which will mature no later than November 29, 2012.count against our borrowing capacity. All obligations under the Senior Secured Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventory and equipment.
The Senior Secured Credit Facility replaced the Company’s Prior Credit Facility, which was repaid with the proceeds from the Senior Notes.
Theweighted average interest rate per annum applicable to amounts borrowed underon the outstanding borrowings of the Senior Secured Credit Facility are,was 3.73% at the Company’s option, (i) LIBOR plus the applicable margin or (ii) the higher of (x) Bank of America’s prime rate and (y) the Federal Funds rate plus 0.5%, plus the applicable margin. The applicable margin for LIBOR loans ranges from 150 to 200 basis points, and the applicable margin for all other loans ranges from 50 to 100 basis points, both of which depend upon the Company’s consolidated leverage ratio.
The Senior Secured Credit Facility contains certain financial covenants, which, among other things, require the maintenance of a consolidated leverage ratio not to exceed 3.50 to 1.00 and a consolidated interest coverage ratio of not less than 3.00 to 1.00, and limit the Company’s capital expenditures to $250.0 million per fiscal year, up to 50% of which amount may be carried over for expenditure in the following fiscal year. Each of the ratios referred to above will be calculated quarterly on a consolidated basis for each trailing four fiscal quarter period. In addition, the Senior Secured Credit Facility contains certain affirmative and negative covenants, including, without limitation, restrictions on (i) liens; (ii) debt, guarantees and other contingent obligations; (iii) mergers and consolidations; (iv) sales, transfers and other dispositions of property or assets; (v) loans, acquisitions, joint ventures and other investments (with acquisitions permitted so long as, after giving pro forma effect thereto, no default or event of default exists under the Senior Secured Credit Facility, the consolidated leverage ratio does not exceed 2.75 to 1.00, the Company is in compliance with the consolidated interest coverage ratio and the Company has at least $25 million of availability under the Senior Secured Credit Facility); (vi) dividends and other distributions to, and redemptions and repurchases from, equity holders; (vii) prepaying, redeeming or repurchasing subordinated (contractually or structurally) debt; (viii) granting negative pledges other than to the lenders; (ix) changes in the nature of the Company’s business; (x) amending organizational documents, or amending or otherwise modifying any debt, any related document or any other material agreement if such amendment or modification would have a material adverse effect; and (xi) changes in accounting policies or reporting practices; in each of the foregoing cases, with certain exceptions. Further, the Senior Secured Credit Facility permits share repurchases up to $200.0 million and provides that share repurchases in excess of $200.0 million can be made only if our debt to capitalization ratio is below 50%.
As of December 31, 2008, the Company is in compliance with all the covenants required under the Senior Secured Credit Facility.
The Company may prepay the Senior Secured Credit Facility in whole or in part at any time without premium or penalty, subject to certain reimbursements to the lenders for breakage and redeployment costs.
On September 15, 2008, Lehman Brothers Holdings (“Lehman”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Lehman Commercial Paper, Inc. (“LCPI”), a subsidiary of Lehman, was a member of the syndicate of banks participating in our Senior Secured Credit Facility. LCPI’s commitment was approximately 11% of the Company’s total facility. As of December 31, 2008, the Company had approximately $139.3 million available under its Senior Secured Credit Facility. This availability reflects the reduction of approximately $19.3 million of unfunded commitments by LCPI. The Company also had
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$53.6 million in committed letters of credit under the facility. Under the terms of the agreement, committed letters of credit count against our borrowing capacity under the revolving credit facility.2009.
Seller Financing Arrangement in Moncla PurchaseNotes Payable to Related Parties
In connection with the acquisition of Moncla (see“Note 2. Acquisitions”), the CompanyOn October 25, 2007, we entered into two promissory notes with the sellers.related parties in connection with an acquisition. The first iswas an unsecured note in the amount of $12.5 million, which iswas due and payablepaid in a lump-sum, together with accrued interest, on October 25, 2009. Interest on this note is due on each anniversary of the closing of the acquisition of Moncla, which was October 25, 2007. The second unsecured note in the amount of $10.0 million is payable in annual installments of $2.0 million, plus accrued interest, beginningon each anniversary date of its issue through October 25, 2008 through 2012. Each of the notes bore or bears interest at the Federal Funds rate,Rate, adjusted annually on the anniversary date of the closing date.note. As of December 31, 2008,2009, the interest rate on these notesthe second note was 1.5%0.11%. Interest expense for the years ended December 31, 2009 and 2008 and 2007 was $1.2$0.2 million and $0.2$1.2 million, respectively, on the two notes in aggregate.
The Federal Funds rateRate does not represent a rate that would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions and is not equal to our incremental borrowing rate. In accordance with Accounting Principles Board (“APB”) No. 21,Interest on Receivables and Payables(“APB 21”) and SFAS No. 141, Business Combinations(“SFAS 141”), weWe recorded the promissory notes at fair value which resulted in a discount being recorded. The discount will be recognized as interest expense over the life of the promissory notes using the effective interest method. The amount of discount remaining to be amortized as of December 31, 2009 and 2008 and 2007 was $0.2less than $0.1 million and $0.3$0.2 million, respectively, for both notes in the aggregate. The total amount of discount amortization included in interest expense related to the notes for theboth years ended December 31, 2009 and 2008 was $0.1 million.
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Key Energy Services, Inc. and 2007 was approximately $0.1 million and less than $0.1 million, respectively.Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-Term Debt Principal Repayment and Interest Expense
Presented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of December 31, 2008:2009:
| | | | | | | | | |
| | | Principal Amount of Long-Term Debt | | | Principal Amount of Long-Term Debt | |
| | | (In thousands) | | | (In thousands) | |
| |
| 2009 | | $ | 16,500 | | |
| 2010 | | | 3,015 | | | $ | 3,044 | |
| 2011 | | | 2,000 | | | | 2,000 | |
| 2012 | | | 189,813 | | | | 89,813 | |
| 2013 | | | — | | | | — | |
| 2014 | | | | 425,000 | |
| Thereafter | | | 425,000 | | | | — | |
| | | | | | | |
| Total principal payments | | | 636,328 | | | | 519,857 | |
| | | | | |
| Less: fair value discount | | | 182 | | | | (69 | ) |
| | | | | | | |
| Total long-term debt | | $ | 636,146 | | | $ | 519,788 | |
| | | | | | | |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Presented below is a schedule of our estimated minimum lease payments on our capital lease obligations for the next five years and thereafter as of December 31, 2008:2009:
| | | | | | | | | |
| | | Capital Lease Obligation Minimum
| | | Capital Lease Obligation Minimum
| |
| | | Lease Payments | | | Lease Payments | |
| | | (In thousands) | | | (In thousands) | |
| |
| 2009 | | $ | 10,635 | | |
| 2010 | | | 7,913 | | | $ | 7,517 | |
| 2011 | | | 4,832 | | | | 4,828 | |
| 2012 | | | 1,969 | | | | 2,116 | |
| 2013 | | | 378 | | | | 499 | |
| 2014 | | | | — | |
| Thereafter | | | — | | | | — | |
| | | | | | | |
| Total minimum lease payments | | | 25,727 | | | | 14,960 | |
| | | | | |
| Less: executory costs | | | (729 | ) | | | (479 | ) |
| | | | | | | |
| Net minimum lease payments | | | 24,998 | | | | 14,481 | |
| | | | | |
| Less: amounts representing interest | | | (1,849 | ) | | | (168 | ) |
| | | | | | | |
| Present value of minimum lease payments | | $ | 23,149 | | | $ | 14,313 | |
| | | | | | | |
Interest expense for the years ended December 31, 2008, 2007 and 2006 consisted of the following:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands) | |
| |
| Cash payments | | $ | 45,211 | | | $ | 33,964 | | | $ | 40,290 | |
| Commitment and agency fees paid | | | 102 | | | | 2,232 | | | | 4,244 | |
| Amortization of discount, net | | | 140 | | | | — | | | | — | |
| Amortization of deferred financing costs | | | 1,975 | | | | 1,680 | | | | 1,620 | |
| Settlement of interest rate swaps | | | — | | | | 2,261 | | | | — | |
| Net change in accrued interest | | | 333 | | | | 1,366 | | | | (3,869 | ) |
| Capitalized interest | | | (6,514 | ) | | | (5,296 | ) | | | (3,358 | ) |
| | | | | | | | | | | | | |
| Total interest expense | | $ | 41,247 | | | $ | 36,207 | | | $ | 38,927 | |
| | | | | | | | | | | | | |
As of December 31, 2008 and 2007, the weighted average interest rate of our variable rate debt was 4.17% and 5.98%, respectively.
Deferred Financing Costs
In connection with our long-term debt, we capitalized costs and expenses of approximately $0.3 million, $13.4 million and $0.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization of deferred financing costs totaled $2.0 million, $1.7 million and $1.6 million for the years ended December 31, 2008, 2007 and 2006, respectively. Unamortized debt issuance costs written off and included in the determination of the gain or loss on the extinguishment of debt were zero, $9.6 million and
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
zeroInterest expense for the years ended December 31, 2009, 2008 and 2007 consisted of the following:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Cash payments | | $ | 41,750 | | | $ | 45,211 | | | $ | 33,964 | |
| Commitment and agency fees paid | | | 825 | | | | 102 | | | | 2,232 | |
| Amortization of discount | | | 113 | | | | 140 | | | | — | |
| Amortization of deferred financing costs | | | 2,070 | | | | 1,975 | | | | 1,680 | |
| Settlement of interest rate swaps | | | — | | | | — | | | | 2,261 | |
| Net change in accrued interest | | | (1,354 | ) | | | 333 | | | | 1,366 | |
| Capitalized interest | | | (4,335 | ) | | | (6,514 | ) | | | (5,296 | ) |
| | | | | | | | | | | | | |
| Net interest expense | | $ | 39,069 | | | $ | 41,247 | | | $ | 36,207 | |
| | | | | | | | | | | | | |
As of December 31, 2009 and 2006,2008, the weighted average interest rate of our variable rate debt was 3.24% and 4.17%, respectively.
Deferred Financing Costs
Cost capitalized, amortized, and written off in the determination of the loss on extinguishment of debt for the years ended December 31, 2009, 2008 and 2007 are presented in the table below:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
| Capitalized costs | | $ | 2,474 | | | $ | 314 | | | $ | 13,400 | |
| Amortization | | | 2,070 | | | | 1,975 | | | | 1,680 | |
| Loss on extinguishment | | | 472 | | | | — | | | | 9,557 | |
Net carrying values for the years presented appear in the table below:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | (In thousands) | | | (In thousands) | |
| |
Deferred financing costs: | | | | | | | | | | | | | | | | |
| Gross carrying value | | $ | 12,609 | | | $ | 12,262 | | | $ | 14,611 | | | $ | 12,609 | |
| Accumulated amortization | | | (2,120 | ) | | | (145 | ) | | | (4,190 | ) | | | (2,120 | ) |
| | | | | | | | | | | |
| Net carrying value | | $ | 10,489 | | | $ | 12,117 | | | $ | 10,421 | | | $ | 10,489 | |
| | | | | | | | | | | |
| |
NOTE 13.14. | COMMITMENTS AND CONTINGENCIES |
Operating Lease Arrangements
Key leasesWe lease certain property and equipment under non-cancelable operating leases that expire at various dates through 2019, with varying payment dates throughout each month.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2008,2009, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
| | | | | | | | | |
| | | Lease Payments | | | Lease Payments | |
| |
| 2009 | | $ | 6,312 | | |
| 2010 | | | 5,664 | | | $ | 7,230 | |
| 2011 | | | 4,578 | | | | 4,706 | |
| 2012 | | | 4,000 | | | | 4,045 | |
| 2013 | | | 2,996 | | | | 2,933 | |
| 2014 | | | | 2,147 | |
| Thereafter | | | 4,679 | | | | 3,472 | |
| | | | | | | |
| | | $ | 28,229 | | | $ | 24,533 | |
| | | | | | | |
The CompanyWe are also is party to a significant number ofmonth-to-month leases that are cancelable at any time. Operating lease expense was $22.7 million, $22.4 million, $16.4 million and $17.0$16.4 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.
Litigation
Various suits and claims arising in the ordinary course of business are pending against us. Due in part to the locations where we conduct business in the continental United States, we are often subject to jury verdicts and arbitration hearingsor other outcomes that result in outcomes in favor of themay be favorable to plaintiffs. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. In accordance with SFAS 5, weWe establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. As of December 31, 2008,2009, the aggregate amount of our provisions for lossesliabilities related to litigation that are deemed probable and reasonably estimable is approximately $4.5$2.7 million. We do not believe that the disposition of any of these matters will result in an additional loss materially in excess of amounts that have been recorded. In the year ended December 31, 2008, we recorded a benefit of approximately $2.2 million related to settlement of ongoing legal matters and continued refinement of liabilities recognized for litigation deemed probable and estimable. Provisions related to litigation matters that were deemed probable and estimable were $6.8 million in 2007 and $28.8 million in 2006.
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Gonzales Matter
In September 2005, a class action lawsuit,Gonzales v. Key Energy Services, Inc., was filed in Ventura County, California Superior Court, alleging that Key did not pay its hourly employees for travel time between the yard and the wellhead and that certain employees were denied meal and rest periods. On September 17, 2008, we reached an agreement in principle, subject to court approval, to settle all claims related to this matter for $1.2 million. In 2005 we recorded a liability for this lawsuit, and the subsequent settlement of this matter in 2008 did not have a material impact on our financial position, results of operations, or cash flows. In the year ended December 31, 2009, we recorded a net decrease in our reserves of $3.7 million related to the settlement of ongoing legal matters and the continued refinement of liabilities recognized for litigation deemed probable and estimable. Our liabilities related to litigation matters that were deemed probable and estimable as of December 31, 2008 and 2007 were $4.5 million and $6.8 million, respectively.
Litigation with Former Officers and Employees
We were named in a lawsuit by ourOur 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 alleges a “whistle-blower” claim under the Sarbanes-Oxley Act, breach of contract, breach of duties of good faith and fair dealing, breach of fiduciary duty and wrongful termination. On August 17, 2007, the Companywe filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract and breach of fiduciary duties. In itsour counterclaims, the Company seekswe are seeking repayment of all severance paid to Mr. Loftis to date (approximately $0.8 million) plus benefits paid during the period July 8, 2004 to September 21, 2004, and damages relating to the allegations of malpractice and breach of fiduciary duties. The case was transferred to and is nowcurrently pending in the U.S. District Court for the Eastern District of Pennsylvania and is currently setwill begin to appear on the trial docket during the second quarter of 2010. We recorded a liability for trialthis matter in the fourth quarter of 2009. We recorded for the fourth quarter of 2008 a liability for this matter and do not believe that the conclusion of this matter will have a material impact on our financial position, results of operations or cash flows.2008.
On October 17, 2006, Jane John, the ex-wife of our former chief executive officer, Francis John, filed a complaint in Bucks County, Pennsylvania against her ex-husband and the Company.us. Ms. John allegesalleged a breach of the marital agreement, a breach of options agreements, civil conspiracy and fraud. She alleges that Mr. John and the Company defrauded her with regard to Mr. John’s compensation, as well as in the disclosures of marital property. By virtue of assignments, Ms. John holdsheld 375,000 stock options which expired unexercised during thea period before the Company becamein which we were not current in itsour financial statements, when such options could not be exercised. In resolving a separate lawsuit between the Company and Mr. John Mr. Johnhas agreed to indemnify the Company with respect to damages attributable to any and all of Ms. John’s claims, other than damages attributable to any alleged breach of Ms. John’s stock option agreements, for which the Company agreed to indemnify Mr. John. Discovery in the case remains ongoing, and there is currently not a trial setting. We recorded a liability for this matter for the third quarter of 2008 and do not believe that the conclusion of this matter will have a material impact on our financial position, results of operations or cash flows.
On September 3, 2006, our former controller and former assistant controller filed a joint complaint against the Company in the 133rd District Court, Harris County, Texas, alleging constructive termination and breach of contract. Additionally, on January 11, 2008, our former chief operating officer, James Byerlotzer, filed a lawsuit in the 55th District Court, Harris County, Texas, alleging breach of contract based on his inability to exercise his stock options during the period that we were not current in our SEC filings, and based on our failure to provide him shares of restricted stock. We are currently set for trial in both of these matters in the second quarter of 2009. We have not recorded a liability for these matters and do not believe that the conclusion of these matters will have a material impact on our financial position, results of operations or cash flows.
On August 21, 2006, our former chief financial officer, Royce W. Mitchell, filed a suit against the Company in 385th District Court, Midland County, Texas alleging breach of contract with regard to alleged bonuses, benefits, expense reimbursements, conditional stock grants and stock options, as well as relief under theories of quantum meruit, promissory estoppel and specific performance. On February 15, 2008, the partiesus
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settledwith respect to damages attributable to any and all of Ms. John’s claims, other than damages attributable to any alleged breach of Ms. John’s stock option agreements. We reached a settlement with Ms. John regarding the alleged breach of stock option agreements, and recorded an additional charge related to the settlement in the third quarter of 2009, having initially recorded a liability for this matter for $0.5 million, which included reimbursementin the third quarter of expenses and attorneys fees of approximately $0.4 million.2008.
Stockholder Class Action Suits and Derivative Actions
Since June 2004, we and certain of our officers and directors were named as defendants in six class action complaints brought on behalf of a putative class of purchasers of our securities for alleged violations of federal securities laws, which were filed in federal district court in Texas. These six actions were consolidated into one action. Four stockholder derivative actions were also filed, purportedly on our behalf, generally alleging the same facts as those in the consolidated stockholder class action. On September 7, 2007, we reached agreements in principle to settle all of these stockholder class action and derivative lawsuits in consideration of payments totaling $16.6 million in exchange for full and complete releases for all defendants, of which the Company paid approximately $1.1 million. We received final approval of the settlement of the stockholder class action claims by the court on March 6, 2008, and final court approval on the derivative settlement was received on August 8, 2008. All litigation in the stockholder class action and derivative matters has been concluded.
Expired Option Holders
In September 2007, Belinda Taylor filed a lawsuit in the 11th Judicial District of Harris County, Texas, on behalf of herself and all similarly situated current and former employees who held vested options that expired between April 28, 2004 and the date that the Company became current in its financial statements (the “Expired Option Holders”). The suit, as amended, alleged that the Company breached its contracts with the Expired Option Holders, and breached its fiduciary duties and duties of good faith and fair dealing in the pricing of stock options it granted to those Expired Option Holders. On March 6, 2008, the parties agreed to settle all pending claims with all Expired Option Holders, excluding those terminated for cause and those who have previously filed suits against us, for approximately $1.0 million, which includes all taxes and legal fees. The court entered a final order approving the settlement on August 25, 2008 and dismissed the case. In December 2008, the payments to the class, pursuant to the terms of the settlement, were completed.
The lawsuits in which we are involved with Jane John and3, 2006, our former controller and former assistant controller described above under“Litigation with Former Officersfiled suit against us in Harris County, Texas, alleging constructive termination and Employees,”also involve claims relatingbreach of contract. We reached an agreement to expired stock options.
Automobile Accident Litigation
On August 22, 2007, oneresolve the matter through arbitration that included an obligation to pay a minimum amount to the claimants regardless of our employees was involved in an automobile accident that resulted in a third party fatalityoutcome, and during the first quarter of 2008 we recorded an appropriatea liability based upon the minimum payment for this matter. The lawsuit arising from this accident was settled duringmatter in the third quarter of 20082009. In early December 2009, the matter went to trial and the Company recognized incremental expensearbitrator found in favor of less than $0.5 million related to the settlement during the third quarter of 2008.Key.
Tax Audits
We are routinely the subject of audits by tax authorities, and in the past have received material assessments from tax auditors. As of December 31, 20082009 and 2007,2008, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of theseprior audits. While we believe we have fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates.
In connection with an ongoing sales tax audit, the Company recorded a liability of approximately $3.2 million during the third quarter of 2008 relating to state sales taxes not collected from the Company’s customers from 2003 through September 30, 2008 and therefore not remitted to the appropriate state agency.
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The provision was recorded as general and administrative expense. We do not expect that the ultimate resolution of the matter will result in a loss materially in excess of the amount already accrued.
In connection with our former Egyptian operations, which terminated in 2005, we are undergoing income tax audits for all periods in which we had operations. As of December 31, 2008, the Company has recorded a liability of approximately $0.4 million relating to open Egyptian income tax audits. In the fourth quarter of 2007, the Company reached a preliminary settlement with the Egyptian tax authorities on the 2003 and 2004 tax years, recording a tax benefit of $0.7 million and reducing the tax liability accrued at December 31, 2007 to approximately $0.4 million. We do not expect that the ultimate resolution of the matter will result in a loss materially in excess of the amount already accrued.
Self-Insurance Reserves
We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on acase-by-case basis. We maintain insurance policies for workers’ compensation, vehiclevehicular liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As of December 31, 20082009 and 2007,2008, we have recorded $68.9$65.2 million and $69.0$68.9 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $10.8$17.2 million and $8.1$10.8 million of insurance receivables as of December 31, 20082009 and 2007,2008, respectively. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.
Environmental Remediation Liabilities
For environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we record liabilities when our remediation efforts are probable and the costs 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 December 31, 20082009 and 2007,2008, we have recorded $3.0$3.4 million and $3.1$3.0 million, respectively, for our environmental remediation liabilities. We feel that the liabilities we have recorded are appropriate based on the known facts and circumstances and do not expect further losses materially in excess of the amounts already accrued.
We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our SWD properties to comply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).
Registration Payment Arrangement
In January 1999, we issued 150,000 warrants (the “Warrants”) in connection with a debt offering that were exercisable for an aggregate of approximately 2.2 million shares of the Company’s stock at an exercise price of $4.88125 per share. As of December 31, 2008, 83,800 Warrants had been exercised, leaving 66,200 outstanding, which were exercisable for approximately 1.0 million shares of our common stock. Termination notice was provided to the holders of the outstanding Warrants that the Warrants expired on February 2, 2009.
Under the terms of the Warrants, the Company was required to maintain an effective registration statement covering the shares potentially issuable upon exercise of the Warrants. If the Company did not have
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an effective registration statement covering the shares, the Company was required to make liquidated damages payments to the holders of the Warrants. During the twelve months ended December 31, 2008, 2007 and 2006, the Company made liquidated damages payments totaling $0.8 million, $0.9 million and $0.9 million, respectively. On August 21, 2008, the requisite registration statement required by the terms of the Warrants became effective. From and after August 22, 2008, no additional liquidated damage payments were required to be made by the Company.
| |
NOTE 14.15. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The components of our accumulated other comprehensive loss are as follows:follows (in thousands):
| | | | | | | | | | |
| | | December 31, | | | | | | | | | |
| | | 2008 | | 2007 | | | December 31, | |
| | | (In thousands) | | | 2009 | | 2008 | |
| |
| Foreign currency translation loss | | $ | (46,520 | ) | | $ | (37,959 | ) | | $ | (50,763 | ) | | $ | (46,520 | ) |
| Deferred loss from available for sale investments | | | (30 | ) | | | (22 | ) | | | — | | | | (30 | ) |
| | | | | | | | | | | |
| Accumulated other comprehensive loss | | $ | (46,550 | ) | | $ | (37,981 | ) | | $ | (50,763 | ) | | $ | (46,550 | ) |
| | | | | | | | | | | |
The local currency is the functional currency for our operations in Argentina, Mexico, and Canada, the Russian Federation and for our equity investments in Canada and the Russian Federation.Canada. The cumulative translation gains and losses resulting from translating each foreign subsidiary’s financial statements from the functional currency to U.S. dollarsDollars are included in other comprehensive income and accumulated in stockholders’ equity until a partial or complete sale or liquidation of our net investment in the foreign entity. The table below summarizes the conversion ratios used to translate the financial statements and the cumulative currency translation gains and losses, net of tax, for each currency:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Argentine Peso | | Mexican Peso | | Canadian Dollar | | Euro | | Russian Rouble | | Total | | | Argentine Peso | | Mexican Peso | | Canadian Dollar | | Euro | | Russian Rouble | | Total | |
| | | (In thousands, except for conversion ratios) | | | (In thousands, except for conversion ratios) | |
| |
As of December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion ratio | | | | 3.82:1 | | | | 13.04:1 | | | | 1.05:1 | | | | 0.70:1 | | | | 30.27:1 | | | | n/a | |
| Cumulative translation adjustment | | | $ | (48,953 | ) | | $ | (716 | ) | | $ | (1,087 | ) | | | n/a | | | $ | (7 | ) | | $ | (50,763 | ) |
As of December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion ratio | | | 3.46:1 | | | | 13.78:1 | | | | 1.22:1 | | | | 0.71:1 | | | | 29.48:1 | | | | n/a | | | | 3.46:1 | | | | 13.78:1 | | | | 1.22:1 | | | | 0.71:1 | | | | 29.48:1 | | | | n/a | |
| Cumulative translation adjustment | | $ | (43,654 | ) | | $ | (1,663 | ) | | $ | (917 | ) | | $ | (286 | ) | | $ | — | | | $ | (46,520 | ) | | $ | (43,654 | ) | | $ | (1,663 | ) | | $ | (917 | ) | | $ | (286 | ) | | | n/a | | | $ | (46,520 | ) |
As of December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion ratio | | | 3.15:1 | | | | 10.92:1 | | | | 0.98:1 | | | | 0.68:1 | | | | 24.51:1 | | | | n/a | | |
| Cumulative translation adjustment | | $ | (38,181 | ) | | $ | (143 | ) | | $ | 365 | | | $ | — | | | $ | — | | | $ | (37,959 | ) | |
| |
NOTE 15.16. | EMPLOYEE BENEFIT PLANS |
We maintain a 401(k) plan as part of our employee benefits package. We matchIn the first quarter of 2009, management suspended the 401(k) matching program as part of our cost cutting efforts. Prior to this, we matched 100% of employee contributions up to 4% of the employee’s salary into our 401(k) plan, subject to maximums of $9,200 $9,000 and $8,800$9,000 for the years ended December 31, 2008 2007 and 2006,2007 respectively. Our matching contributions were $1.7 million, $11.9 million, $10.2 million and $7.4$10.2 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively. Employees are fully vested in the matching contributions when they are made by the Company.
Effective January 1, 2006, we no longer offeredWe do not offer participants the option to purchase units of companyour common stock through a 401(k) plan fund. We discontinued this option for participants and transferred all units of Key stock into another 401(k) plan fund, which did not affect the ability of plan participants to manage these contributions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 16.17. | STOCKHOLDERS’ EQUITY |
Common Stock
As of December 31, 2009, we had 200,000,000 shares of common stock authorized with a $0.10 par value, of which 123,993,480 shares were issued and outstanding. On December 31, 2008, we had 200,000,000 shares of common stock authorized with a $0.10 par value, of which 121,305,289 shares were issued and outstanding,outstanding. During 2009 and during 2008, no dividends were paid. On December 31, 2007, we had 200,000,000 shares of common stock authorized with a $0.10 par value, of which 131,142,905 shares were issued and outstanding, and during 2007 no dividends weredeclared or paid. Under the terms of the Senior Notes and Senior Secured Credit Facility, we must meet certain financial covenants before we may pay dividends. We currently do not intend to pay dividends.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share Repurchase Program
In October 2007, our Boardboard of Directorsdirectors authorized a share repurchase program of up to $300.0 million which iswas effective through March 31, 2009. From the inception of the program in November 2007 through December 31, 2008, we have repurchased approximately 13.4 million shares of our common stock through open market transactions for an aggregate price of approximately $167.3 million. Share repurchases during 2008 were approximately 11.1 millionWe did not repurchase any shares for an aggregate price of approximately $135.2 million. Our repurchaseunder this program as well asin 2009, and the amount and timing of future repurchases, is subject to market conditions, our financial condition, and our liquidity. Our Senior Secured Credit Facility permits us to make stock repurchases in excess of $200.0 million only if our consolidated debt to capitalization ratio (as defined) is below 50%; as of Decemberplan expired on March 31, 2008, that ratio was below 50%.2009.
Tax Withholding
In June 2006, the Company began purchasingWe repurchase shares of restricted common stock that hadhave been previously granted to certain of the Company’s officers,our employees, pursuant to an agreement under which those individuals wereare permitted to sell shares back to the Companyus in order to satisfy the minimum income tax withholding requirements related to vesting of these grants. We repurchased a total of 71,954, 97,443 and 72,847 shares for an aggregate cost of $0.5 million, $1.2 million and $1.3 million during 2009, 2008 and 2007, respectively, which represented the fair market value of the shares based on the price of the Company’sour stock on the dates of purchase.
Through December 31, 2008, under the share repurchase program, tax withholdings and share acquisitions in prior years, we have repurchased approximately 13.7 million shares of our common stock, at an aggregate cost of $171.0 million.
Common Stock Warrants
In January 1999, we issued 150,000 warrants (the “Warrants”) in connection with a debt offering that were exercisable for an aggregate of approximately 2.2 million shares of the Company’sour stock at an exercise price of $4.88125 per share. As of December 31, 2008, 83,800 Warrants had been exercised, leaving 66,200 outstanding, which were exercisable for approximately 1.0 million shares of our common stock. Termination notice was provided to the holders of the outstanding Warrants and the Warrants expired unexercised on February 2, 2009.
Under the terms of the Warrants, the Company waswe were required to maintain an effective registration statement covering the shares potentially issuable upon exercise of the Warrants. If the Company did not have an effective registration statement covering the shares, the Company was required toWarrants or make liquidated damages payments to the holders of the Warrants. Because of the Company’s past failure to timely file its Annual and Quarterly Reports with the SEC, itWarrants if we did not have an effective registration statement, and during the twelve months ended December 31, 2008, 2007 and 2006, the Company made liquidated damages payments totaling $0.8, $0.9 and $0.9 million, respectively.not. On August 21, 2008, the requisite registration statement required by the terms of the Warrants became effective. FromHowever, because we did not have an effective registration statement through this date, we made liquidated damages payments totaling $0.8 and after August 22,$0.9 million, respectively during 2008 no additional liquidated damage payments were required to be made by the Company related to the Warrants.
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2007.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)On May 12, 2009, in connection with the settlement of a lawsuit, we issued to two individuals warrants to purchase shares of Key’s common stock. The warrants, which expire on May 12, 2014, are exercisable for 174,000 shares of our common stock at an exercise price of $4.56 per share. We received no proceeds upon the issuance of the warrants, but we will receive the exercise price of any warrants that are exercised prior to their expiration. The warrants, which are unregistered securities, were issued in a private placement and, therefore, their issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. As of December 31, 2009, none of these warrants had been exercised.
| |
NOTE 17.18. | SHARE-BASED COMPENSATION |
20072009 Incentive Plan
On December 6, 2007, the Company’s shareholdersJune 4, 2009, our stockholders approved the 20072009 Equity and Cash Incentive Plan (the “2007“2009 Incentive Plan”). The 20072009 Incentive Plan is administered by the Boardour board of directors or a committee designated by the Boardour board of directors (the “Committee”). The BoardOur board of directors or the Committee (the “Administrator”) will have the power and authority to select Participants (as defined below) in the 20072009 Incentive Plan and to grant Awards (as defined below) to such Participants pursuant to the terms of the 20072009 Incentive Plan. The 2009 Incentive Plan expires June 4, 2019.
Subject to adjustment, the total number of shares of the Company’sour common stock par value $0.10 per share, that will be available for the grant of Awards under the 20072009 Incentive Plan may not exceed 4,000,000 shares; however, for purposes of this
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limitation, any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuance under the 20072009 Incentive Plan. Subject to adjustment, no Participant will be granted, during any one year period, options to purchase common stockand/or stock appreciation rights with respect to more than 500,000 shares of common stock. Stock available for distribution under the 20072009 Incentive Plan will come from authorized and unissued shares or shares reacquired by the Companywe reacquire in any manner. All awards under the 20072009 Incentive Plan are granted at fair market value on the date of issuance.
Awards may be in the form of stock options (incentive stock options and nonstatutorynonqualified stock options), restricted stock, restricted stock units, performance compensation awards and stock appreciation rights (collectively, “Awards”). Awards may be granted to employees, directors and, in some cases, consultants and those individuals whom the Administrator determines are reasonably expected to become employees, directors or consultants following the grant date of the Award (“Participants”). However, incentive stock options may be granted only to employees. Vesting periods may be set at the Board’s discretion andof the board of directors, or its compensation committee, but are generally set at two to four years. Awards have ten-year contractual lives.to our directors are generally not subject to vesting.
The BoardOur board of directors may at any time, and from time to time, amend or terminate the 2009 Incentive Plan. However, no repricing of stock options is permitted unless approved by our stockholders, and, except as provided otherwise in the 2009 Incentive Plan, no other amendment will be effective unless approved by our stockholders to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of December 31, 2009, there were 3,835,688 remaining shares available for grant under the 2009 Incentive Plan.
2007 Incentive Plan
On December 6, 2007, our stockholders approved the 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”). The 2009 Incentive Plan was based on the form of the 2007 Incentive Plan, and the terms of both plans are substantially similar. However, there are a few differences between the plans. For example, the 2009 Incentive Plan addresses the treatment of Awards when a Participant’s continuous service with the Company terminates as a result of retirement (as defined in the plan), but the 2007 Incentive Plan does not specifically address that situation. Also, the 2007 Incentive Plan allows for the transferability of stock options by will, by the laws of descent and distribution, to a third party designee upon death, or, as may determined in the discretion of the Administrator, to certain other permitted transferees set forth in the 2007 Incentive Plan. However, the 2009 Incentive Plan only permits such transferability by will, by the laws of descent and distribution or to a third party designee upon death.
Subject to adjustment, the total number of shares of our common stock that are available for the grant of Awards under the 2007 Incentive Plan may not exceed 4,000,000 shares; however, as is the case under the 2009 Incentive Plan, for purposes of this limitation, any stock subject to an award that is canceled, forfeited or expires prior to exercise or realization will again become available for issuance under the 2007 Incentive Plan.
Our board of directors may at any time, and from time to time, amend or terminate the 2007 Incentive Plan. However, except as provided otherwise in the 2007 Incentive Plan, no amendment will be effective unless approved by the shareholders of the Companyour stockholders to the extent shareholderstockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of December 31, 2008,2009, there have been 1,806,556 awards granted with 2,250,144were 246,537 remaining grantsshares available for grant under the 2007 Incentive Plan.
1997 Incentive Plan
On January 13, 1998, Key’s shareholdersour stockholders approved the Key Energy Group, Inc. 1997 Incentive Plan, as amended (the “1997 Incentive Plan”, and together with the 2007 Incentive Plan, the “Plans”). The 1997 Incentive Plan iswas an amendment and restatement of the plans formerly known as the Key Energy Group, Inc. 1995 Stock Option Plan and the Key Energy Group, Inc.
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1995 Outside Directors Stock Option Plan. On November 17, 2007, the 1997 Incentive Plan terminated pursuant to its terms.terms, after which no new awards could be granted under the plan.
The exercise price of options granted under the 1997 Incentive Plan is at or above the fair market value per share on the date the options are granted. Under the 1997 Incentive Plan, whilewhen the shares of common stock arewere listed on a securities exchange, fair market value was determined using the closing sales price on the immediate preceding business day as reported on such securities exchange.
When the shares were not listed on an exchange, which includesincluded the period from April 2005 through October 2007, the fair market value was determined by using the published closing price of the common stock on the Pink Sheets on the business day immediately preceding the date of grant.
The exercise of NSOs results in a U.S. tax deduction to us equal to the difference between the exercise price and the market price at the exercise date.
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During the period2000-2001, from 2000 to 2001, the Boardboard of Directorsdirectors granted 3.7 million stock options that were outside the 1997 Incentive Plan, of which 120,000 remained outstanding as of December 31, 20082009. The 3.7 million non-plan options were in addition to, and dodid not include, other options which were granted under the 1997 Incentive Plan, but not in conformity with certain of the terms of the 1997 Incentive Plan.
Accelerated Vesting of Option and SAR Awards
BecauseOur board of declines in the Company’s stock price, the Company’s Board of Directorsdirectors resolved during the fourth quarter of 2008 to accelerate the vesting period onfor certain of the Company’sour outstanding unvested stock option awards and stock appreciation rights, which affected approximately 280 employees. AsPrimarily as a result of the acceleration, the Companywe recorded a pre-tax charge of approximately $10.9 million in general and administrative expense during the fourth quarter of 2008. Because of the acceleration of the vesting term, no expense will be recognized on these awards in the accompanying consolidated statement of operations.periods subsequent to December 31, 2008.
Stock Option Awards
Stock option awards granted under the Plansour incentive plans have a maximum contractual term of ten years from the date of grant. Shares issuable upon exercise of a stock option are issued from authorized but unissued shares of the Company’sour common stock. The following table summarizes the stock option activity related to the Plans and certain options granted in priorduring fiscal years that were outside the 1997 Incentive Plan. 5.0 million options were outstanding as ofended December 31, 2009, 2008 and 2.3 million shares remained available for issuance under the 2007 Incentive Plan as of December 31, 2008 (shares in thousands):
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | | | | Weighted Average
| | | Weighted Average
| |
| | | Options | | | Exercise Price | | | Fair Value | |
| |
| Outstanding at beginning of period | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | |
| Granted | | | 1,379 | | | $ | 14.76 | | | $ | 5.43 | |
| Exercised | | | (757 | ) | | $ | 8.81 | | | $ | 4.81 | |
| Cancelled or expired | | | (255 | ) | | $ | 14.53 | | | $ | 6.15 | |
| | | | | | | | | | | | | |
| Outstanding at end of period | | | 4,961 | | | $ | 12.21 | | | $ | 5.38 | |
| | | | | | | | | | | | | |
| Exercisable at end of period | | | 4,911 | | | $ | 12.30 | | | $ | 5.42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | | | Year Ended December 31, 2009 | |
| | | | | Weighted Average
| | Weighted Average
| | | | | Weighted Average
| | Weighted Average
| |
| | | Options | | Exercise Price | | Fair Value | | | Options | | Exercise Price | | Fair Value | |
| |
| Outstanding at beginning of period | | | 5,829 | | | $ | 9.46 | | | $ | 4.94 | | | | 4,961 | | | $ | 12.21 | | | $ | 5.42 | |
| Granted | | | 1,195 | | | $ | 14.41 | | | $ | 5.98 | | | | 15 | | | $ | 4.14 | | | $ | 2.23 | |
| Exercised | | | (1,592 | ) | | $ | 8.45 | | | $ | 4.58 | | | | (418 | ) | | $ | 3.12 | | | $ | 2.30 | |
| Cancelled or expired | | | (838 | ) | | $ | 10.36 | | | $ | 5.03 | | | | (663 | ) | | $ | 13.70 | | | $ | 5.84 | |
| | | | | | | |
| Outstanding at end of period | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | | | | 3,895 | | | $ | 12.90 | | | $ | 5.62 | |
| | | | | | | |
| Exercisable at end of period | | | 2,615 | | | $ | 8.34 | | | $ | 4.47 | | | | 3,853 | | | $ | 12.99 | | | $ | 5.66 | |
111101
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2006 | | | Year Ended December 31, 2008 | |
| | | | | Weighted Average
| | Weighted Average
| | | | | Weighted Average
| | Weighted Average
| |
| | | Options | | Exercise Price | | Fair Value | | | Options | | Exercise Price | | Fair Value | |
| |
| Outstanding at beginning of period | | | 9,275 | | | $ | 8.68 | | | $ | 4.79 | | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | |
| Granted | | | 833 | | | $ | 15.03 | | | $ | 7.21 | | | | 1,379 | | | $ | 14.76 | | | $ | 5.43 | |
| Exercised | | | — | | | $ | — | | | $ | — | | | | (757 | ) | | $ | 8.81 | | | $ | 4.81 | |
Cancelled or expired(1) | | | (4,279 | ) | | $ | 8.86 | | | $ | 5.06 | | | | (255 | ) | | $ | 14.53 | | | $ | 6.15 | |
| | | | | | | |
| Outstanding at end of period | | | 5,829 | | | $ | 9.46 | | | $ | 4.94 | | | | 4,961 | | | $ | 12.21 | | | $ | 5.38 | |
| | | | | | | |
| Exercisable at end of period | | | 4,791 | | | $ | 8.42 | | | $ | 4.51 | | | | 4,911 | | | $ | 12.30 | | | $ | 5.42 | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | | | | Weighted Average
| | | Weighted Average
| |
| | | Options | | | Exercise Price | | | Fair Value | |
| |
| Outstanding at beginning of period | | | 5,829 | | | $ | 9.46 | | | $ | 4.94 | |
| Granted | | | 1,195 | | | $ | 14.41 | | | $ | 5.98 | |
| Exercised | | | (1,592 | ) | | $ | 8.45 | | | $ | 4.58 | |
| Cancelled or expired | | | (838 | ) | | $ | 10.36 | | | $ | 5.03 | |
| | | | | | | | | | | | | |
| Outstanding at end of period | | | 4,594 | | | $ | 11.01 | | | $ | 5.32 | |
| | | | | | | | | | | | | |
| Exercisable at end of period | | | 2,615 | | | $ | 8.34 | | | $ | 4.47 | |
| | |
(1) | | Cancelled/expired options in 2006 include approximately 3.9 million options previously held by our former chief executive officer, which were cancelled in connection with his termination. |
The following table summarizes information about the stock options outstanding at December 31, 20082009 (shares in thousands):
| | | | | | | | | | | | | | | | | |
| | | Options Outstanding | |
| | | Weighted Average
| | | | | | | | | | |
| | | Remaining
| | | Number of
| | | | | | | |
| | | Contractual Life
| | | Options
| | | Weighted Average
| | | Weighted Average
| |
| | | (Years) | | | Outstanding | | | Exercise Price | | | Fair Value | |
| |
| Range of exercise prices: | | | | | | | | | | | | | | | | |
| $ 3.00 - $ 7.44 | | | 1.42 | | | | 549 | | | $ | 3.85 | | | $ | 2.62 | |
| $ 7.45 - $ 9.37 | | | 2.28 | | | | 660 | | | $ | 8.31 | | | $ | 4.89 | |
| $ 9.38 - $13.10 | | | 5.63 | | | | 813 | | | $ | 11.32 | | | $ | 5.28 | |
| $13.11 -$14.70 | | | 8.55 | | | | 1,066 | | | $ | 14.31 | | | $ | 5.99 | |
| $14.71 -$19.42 | | | 8.63 | | | | 1,873 | | | $ | 15.22 | | | $ | 6.14 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | 4,961 | | | $ | 12.21 | | | $ | 5.38 | |
| | | | | | | | | | | | | | | | | |
| Aggregate intrinsic value (in thousands) | | | | | | $ | 578 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Options Outstanding | |
| | | Weighted Average
| | | | | | | | | | |
| | | Remaining
| | | Number of
| | | | | | | |
| | | Contractual Life
| | | Options
| | | Weighted Average
| | | Weighted Average
| |
| | | (Years) | | | Outstanding | | | Exercise Price | | | Fair Value | |
| |
| Range of exercise prices: | | | | | | | | | | | | | | | | |
| $3.87 - $8.00 | | | 2.60 | | | | 350 | | | $ | 7.36 | | | $ | 3.98 | |
| $8.01 - $9.37 | | | 0.99 | | | | 425 | | | $ | 8.49 | | | $ | 5.25 | |
| $9.38 - $13.10 | | | 4.64 | | | | 708 | | | $ | 11.42 | | | $ | 5.04 | |
| $13.11 - $15.05 | | | 7.08 | | | | 1,341 | | | $ | 14.58 | | | $ | 6.43 | |
| $15.06 - $19.42 | | | 8.26 | | | | 1,071 | | | $ | 15.34 | | | $ | 5.69 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | 3,895 | | | $ | 12.90 | | | $ | 5.62 | |
| | | | | | | | | | | | | | | | | |
| Aggregate intrinsic value (in thousands) | | | | | | $ | 637 | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Options Exercisable | | | | |
| | | Number of
| | | | | | | |
| | | Options
| | | Weighted Average
| | | Weighted Average
| |
| | | Exercisable | | | Exercise Price | | | Fair Value | |
| |
| Range of exercise prices: | | | | | | | | | | | | |
| $ 3.00 - $ 7.44 | | | 499 | | | $ | 3.83 | | | $ | 2.71 | |
| $ 7.45 - $ 9.37 | | | 653 | | | $ | 8.33 | | | $ | 4.89 | |
| $ 9.38 - $13.10 | | | 821 | | | $ | 11.30 | | | $ | 5.11 | |
| $13.11 -$14.70 | | | 1,066 | | | $ | 14.31 | | | $ | 5.99 | |
| $14.71 -$19.42 | | | 1,872 | | | $ | 15.22 | | | $ | 6.14 | |
| | | | | | | | | | | | | |
| | | | 4,911 | | | $ | 12.30 | | | $ | 5.42 | |
| | | | | | | | | | | | | |
| Aggregate intrinsic value (in thousands) | | $ | 556 | | | | | | | | | |
The total fair value of stock options granted during the years ended December 31, 2008, 2007 and 2006 was $7.5 million, $7.1 million and $6.0 million, respectively. The total fair value of stock options vested during the year ended December 31, 2008 was $19.4 million, including $14.8 million resulting from the
112102
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | |
| | | Options Exercisable | |
| | | Number of
| | | | | | | |
| | | Options
| | | Weighted Average
| | | Weighted Average
| |
| | | Exercisable | | | Exercise Price | | | Fair Value | |
| |
| Range of exercise prices: | | | | | | | | | | | | |
| $3.87 - $8.00 | | | 308 | | | $ | 7.76 | | | $ | 4.24 | |
| $8.01 - $9.37 | | | 425 | | | $ | 8.49 | | | $ | 5.25 | |
| $9.38 - $13.10 | | | 708 | | | $ | 11.42 | | | $ | 5.04 | |
| $13.11 - $15.05 | | | 1,341 | | | $ | 14.58 | | | $ | 6.43 | |
| $15.06 - $19.42 | | | 1,071 | | | $ | 15.34 | | | $ | 5.69 | |
| | | | | | | | | | | | | |
| | | | 3,853 | | | $ | 12.99 | | | $ | 5.66 | |
| | | | | | | | | | | | | |
| Aggregate intrinsic value (in thousands) | | $ | 453 | | | | | | | | | |
acceleration
The total fair value of stock options granted during the vestingyears ended December 31, 2009, 2008 and 2007 was less than $0.1 million, $7.5 million and $7.1 million, respectively. The total fair value of certain ofstock options vested during the Company’s equity awards.year ended December 31, 2009 was less than $0.1 million. For the years ended December 31, 2009, 2008 and 2007, and 2006, the Companywe recognized approximatelyless than $0.1 million, $15.1 million $3.5 million and $2.6$3.5 million in pre-tax expense related to stock options, respectively. We recognized tax benefits of less than $0.1 million, $5.2 million, and $0.7 million related to our stock options for the years ended December 31, 2009, 2008 and 2007, respectively. Compensation expense recognized during 2008 related to stock option awards included the charge we took for the accelerated vesting, as discussed above. For unvested stock option awards outstanding as of December 31, 2008, the Company expects2009, we expect to recognize approximately less than $0.1 million of compensation expense over a weighted average remaining vesting period of approximately 2.42.0 years. The weighted average remaining contractual term for stock option awards exercisable as of December 31, 20082009 is 6.55.9 years. The intrinsic value of the options exercised for the years ended December 31, 2009, 2008 and 2007 was $1.9 million, $5.8 million and $10.2 million, respectively. No options were exercised in 2006. Cash received from the exercise of options for the year ended December 31, 20082009 was $6.7$1.3 million with recognition of associated tax benefits in the amount of $5.2$0.1 million.
Common Stock Awards
In June 2005 we began granting shares of common stock to our outside directors and certain employees. Common stock awards granted to our outside directors vest immediately, while those granted to our employees vest ratably over a three-year period and are subject to forfeiture. The total fair market value of all common stock awards granted during the years ended December 31, 2008, 2007 and 2006 was $6.5 million, $4.7 million and $5.9 million, respectively.
Pursuant to the agreement under which they are issued common stock awards, recipients of those awards may have shares withheld in order to satisfy those individuals’ income tax obligations associated with the vesting of the awards granted to them. Shares withheld for tax withholding purposes totaled 97,443 and 72,847 for the years ended December 31,2009, 2008 and 2007 respectively, with aggregate repurchase values of $1.2was $8.8 million, $6.5 million and $1.3$4.7 million, respectively. In connection with a vesting in June of 2006, one of the recipients was permitted to have an amount withheld that was in excess of the required minimum withholding under current tax law. Under SFAS 123(R), the Company is required to account for this grant as a liability award. Compensation expense for this award during the years ended December 31, 2008, 2007 and 2006 was less than $0.1 million, $0.1 million and $0.2 million, respectively. The last tranche of shares associated with this award vested during 2008.
The following table summarizes information for the years ended December 31, 2009, 2008 2007 and 20062007 about the common share awards that we have been issued by the Company (shares in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
| |
| Shares at beginning of year | | | 1,078 | | | $ | 14.01 | | | | 478 | | | $ | 13.48 | |
| Shares issued during year(1) | | | 428 | | | $ | 15.10 | | | | 47 | | | $ | 18.01 | |
| Previously issued shares vesting during year | | | — | | | $ | — | | | | 320 | | | $ | 13.97 | |
| Shares repurchased during year | | | (97 | ) | | $ | 12.86 | | | | (97 | ) | | $ | 12.86 | |
| | | | | | | | | | | | | | | | | |
| Shares at end of year | | | 1,409 | | | $ | 14.42 | | | | 748 | | | $ | 14.05 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2009 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
| |
| Shares at beginning of period | | | 1,409 | | | $ | 14.42 | | | | 748 | | | $ | 14.05 | |
| Shares issued during period(1) | | | 2,667 | | | $ | 3.30 | | | | 146 | | | $ | 5.96 | |
| Previously issued shares vesting during period | | | — | | | $ | — | | | | 272 | | | $ | 15.04 | |
| Shares cancelled during period | | | (325 | ) | | $ | 7.24 | | | | — | | | $ | — | |
| Shares repurchased during period | | | (72 | ) | | $ | 6.73 | | | | (72 | ) | | $ | 6.73 | |
| | | | | | | | | | | | | | | | | |
| Shares at end of period | | | 3,679 | | | $ | 7.14 | | | | 1,094 | | | $ | 13.70 | |
| | | | | | | | | | | | | | | | | |
113103
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
| |
| Shares at beginning of year | | | 833 | | | $ | 13.69 | | | | 258 | | | $ | 12.44 | |
| Shares issued during year(1) | | | 318 | | | $ | 14.87 | | | | 54 | | | $ | 17.48 | |
| Previously issued shares vesting during year | | | — | | | $ | — | | | | 239 | | | $ | 13.87 | |
| Shares repurchased during year | | | (73 | ) | | $ | 14.05 | | | | (73 | ) | | $ | 14.05 | |
| | | | | | | | | | | | | | | | | |
| Shares at end of year | | | 1,078 | | | $ | 14.01 | | | | 478 | | | $ | 13.48 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
| |
| Shares at beginning of period | | | 1,078 | | | $ | 14.01 | | | | 478 | | | $ | 13.48 | |
| Shares issued during period(1) | | | 428 | | | $ | 15.10 | | | | 47 | | | $ | 18.01 | |
| Previously issued shares vesting during period | | | — | | | $ | — | | | | 320 | | | $ | 13.97 | |
| Shares repurchased during period | | | (97 | ) | | $ | 12.86 | | | | (97 | ) | | $ | 12.86 | |
| | | | | | | | | | | | | | | | | |
| Shares at end of period | | | 1,409 | | | $ | 14.42 | | | | 748 | | | $ | 14.05 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2006 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
| |
| Shares at beginning of year | | | 543 | | | $ | 11.90 | | | | 43 | | | $ | 11.90 | |
| Shares issued during year(1) | | | 371 | | | $ | 15.92 | | | | 46 | | | $ | 14.95 | |
| Previously issued shares vesting during year | | | — | | | $ | — | | | | 250 | | | $ | 11.90 | |
| Shares repurchased during year | | | (81 | ) | | $ | 11.90 | | | | (81 | ) | | $ | 11.90 | |
| | | | | | | | | | | | | | | | | |
| Shares at end of year | | | 833 | | | $ | 13.69 | | | | 258 | | | $ | 12.44 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | Outstanding | | | Issuance Price | | | Vested | | | Issuance Price | |
| |
| Shares at beginning of period | | | 833 | | | $ | 13.69 | | | | 258 | | | $ | 12.44 | |
| Shares issued during period(1) | | | 318 | | | $ | 14.87 | | | | 54 | | | $ | 17.48 | |
| Previously issued shares vesting during period | | | — | | | $ | — | | | | 239 | | | $ | 13.87 | |
| Shares repurchased during period | | | (73 | ) | | $ | 14.05 | | | | (73 | ) | | $ | 14.05 | |
| | | | | | | | | | | | | | | | | |
| Shares at end of period | | | 1,078 | | | $ | 14.01 | | | | 478 | | | $ | 13.48 | |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | SharesIncludes 143,100, 47,190 and 53,648 shares of common stock issued to our non-employee directors vestvested immediately upon issuance.issuance during 2009, 2008 and 2007, respectively. |
For common stock grants that vest immediately upon issuance, the Company recordswe record expense equal to the fair market value of the shares on the date of grant. For common stock awards that do not immediately vest, the Company recognizeswe recognize compensation expense ratably over the vesting period of the grant, net of estimated and actual forfeitures. For the years ended December 31, 2009, 2008 and 2007, and 2006, the Companywe recognized $6.0 million, $6.1 million $5.6 million and $3.6$5.6 million, respectively, of pre-tax expense associated with common stock awards, including common stock grants to our outside directors, net of estimated and actual forfeitures.directors. In connection with the expense related to common stock awards recognized during the year ended December 31, 2008, the Company2009, we recognized tax benefits of approximately$2.0 million. Tax benefits for the years ended December 31, 2008 and 2007 were $1.5 million.million and $1.2 million, respectively. For the unvested common stock awards outstanding as of December 31, 2008, the Company anticipates2009, we anticipate that itwe will recognize approximately $5.5$6.5 million of pre-tax expense over the next 1.51.2 years.
Phantom Share Plan
In December 2006, the Companywe announced the implementation of a “Phantom Share Plan,” in which certain of our employees were granted “Phantom Shares.” The Phantom Shares vest ratably over a four-year period and convey the right to the grantee to receive a cash payment on the anniversary date of the grant equal to the fair market value of the Phantom Shares vesting on that date. Grantees are not permitted to defer this payment to a later date. The Phantom Shares are a “liability” type award under SFAS 123(R), and we account for these awards at fair value. We recognize compensation expense related to the Phantom Shares based on the change in the fair value of the awards during the period and the percentage of the service requirement that has been performed, net of estimated and actual forfeitures, with an offsetting liability recorded on our consolidated balance sheets. We recognized $1.9 million of pre-tax compensation expense, less than $0.1 million of pre-tax benefit and approximately $3.3 million of pre-tax compensation expense associated with the Phantom Shares for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2008,2009, we recorded current and non-current liabilities of $0.9$1.5 million and $0.5, million, respectively, which represented the aggregate fair value of the Phantom Shares on that date.
114104
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Phantom Shares on that date. As of December 31, 2006, the amount of compensation expense and liabilities recorded related to the Phantom Share Plan in our consolidated financial statements were not material.
We recognized income tax benefits associated with the Phantom Shares of $0.7 million, less than $0.1 million and $1.3 million in 2009, 2008 and 2007, respectively. For unvested Phantom Share awards outstanding as of December 31, 2008,2009, based on the market price of our common stock on this date, we expect to recognize approximately $1.3$0.9 million of compensation expense over a weighted average remaining vesting period of approximately 1.71.2 years. The first payout underDuring 2009, cash payments related to the Phantom Share Plan was made in January 2008, at which time we paid approximately $1.6 million in cash to the holders of Phantom Shares that vested in December 2007.totaled $1.2 million.
Stock Appreciation Rights
In August 2007, the Companywe issued approximately 587,000 SARs to itsour executive officers. Each SAR has a ten-year term from the date of grant and vests in equal annual installments ongrant. The vesting of all outstanding SAR awards was accelerated during the first, second and third anniversariesfourth quarter of the date of grant.2008. Upon the exercise of a SAR, the recipient will receive an amount equal to the difference between the exercise price and the fair market value of a share of the Company’sour common stock on the date of exercise, multiplied by the number of shares of common stock for which the SAR was exercised. All payments will be made in shares of the Company’sour common stock. Prior to exercise, the SAR does not entitle the recipient to receive any shares of the Company’sour common stock and does not provide the recipient with any voting or other stockholders’ rights. The Company accountsWe account for these SARs as equity awards under SFAS 123(R) and recognizesrecognize compensation expense ratably over the vesting period of the SAR based on their fair value on the date of issuance, net of estimated and actual forfeitures.
We did not recognize any expense associated with these awards during 2009. Compensation expense recognized in 2008 and 2007 in connection with the SARs was approximately $3.1 million and $0.6 million, respectively. IncomeWe recognized income tax benefits of approximately $1.1 million and $0.2 million in 2008 and 2007, respectively, were recognized by the Company in connection with this expense. The vesting of all of the Company’s outstanding SAR awards was accelerated during the fourth quarter of 2008 and therefore there were no outstanding unvested SAR awards as of December 31, 2008. As such, the Company will not recognize expense in future periods associated with these awards.
Valuation Assumptions on Stock Options and Stock Appreciation Rights
The fair value of each stock option grant or SAR was estimated on the date of grant using the Black-Scholes option-pricing model, based on the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| Risk-free interest rate | | | 2.86 | % | | | 4.41 | % | | | 4.70 | % | | | 2.21 | % | | | 2.86 | % | | | 4.41 | % |
| Expected life of options, years | | | 6 | | | | 6 | | | | 6 | | |
| Expected volatility of the Company’s stock price | | | 36.86 | % | | | 39.49 | % | | | 48.80 | % | |
| Expected life of options and SARs, years | | | | 6 | | | | 6 | | | | 6 | |
| Expected volatility of our stock price | | | | 53.70 | % | | | 36.86 | % | | | 39.49 | % |
| Expected dividends | | | none | | | | none | | | | none | | | | none | | | | none | | | | none | |
| |
NOTE 18.19. | TRANSACTIONS WITH RELATED PARTIES |
Employee Loans and Advances
From time to time, and continuing in the comparative periods contained in this report, we have made certain retention loans and relocation loans to employees other than executive officers. The retention loans are forgiven over various time periods so long as the employee continues their employment at the Company.with us. The relocation loans are repaid upon the employee selling his prior residence. As of December 31, 20082009 and 2007,2008, these loans, in the aggregate, totaled approximately $0.2$0.2. Of this amount, less than $0.1 million were made to our former officers, with the remainder being made to our current employees.
Related Party Notes Payable
On October 25, 2007, we entered into two promissory notes with related parties in connection with an acquisition. The first was an unsecured note in the amount of $12.5 million, which was due and $0.2paid in a lump-sum, together with accrued interest, on October 25, 2009. The second unsecured note in the amount of $10.0 million respectively. Of thisis payable in annual installments of $2.0 million, plus accrued interest, on each anniversary date of its issue through October 2012. Each of the notes bore or bears interest at the Federal Funds Rate, adjusted
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amount, less than $0.1 million were made to former officers of the Company, with the remainder being made to current employees of the Company.
Seller Financing Arrangement Associated with Moncla Acquisition
In connection with the acquisition of Moncla (see “Note 2. Acquisitions”), the Company entered into two promissory notes payable agreement with the seller, who, subsequent to the acquisition, became an officer of the Company. The first is an unsecured note in the amount of $12.5 million, which is due and payable in a lump-sum, together with accrued interest, on October 25, 2009. Interest on this note is payable on each anniversary of the closing of the acquisition of Moncla, which was October 25, 2007. The second unsecured note in the amount of $10.0 million is payable in annual installments of $2.0 million, plus accrued interest, beginning October 25, 2008 through 2012. Each of the notes bears interest at the Federal Funds rate adjusted annually on the anniversary date of the closing date.note. As of December 31, 2009, the interest rate on the second note was 0.11%. Interest expense for the years ended December 31, 2009, 2008 and 2007 was $0.2 million, $1.2 million and $0.2 million respectively, on the two notes in aggregate.
The Federal Funds rate does not represent a rate that would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions and is not equal to our incremental borrowing rate. In accordance with APB 21 and SFAS 141, weWe recorded the promissory notes at fair value which resulted in a discount being recorded. The discount will be recognized as interest expense over the life of the promissory notes using the effective interest method.
Transactions with Employees
In connection with ouran acquisition of Western,in 2008, the former owner of Western, Fred Holmes,the acquiree became an employee of the Company. Mr. Holmes owned atKey. At the time of the acquisition, the employee owned, and continues to own, an exploration and production company, Holmes Western Oil Corporation (“HWOC”), which was a customer of Western.company. Subsequent to the acquisition, the Companywe continued to provide services to HWOC.this company. The prices charged for these services are at rates that are an average of the prices charged to our other customers in the California market. As of December 31, 2008,2009, our receivables with HWOCthis company totaled approximately $0.2$0.1 million, and for the year ended December 31, 2008,2009, revenues from HWOCthis company totaled approximately $4.3$3.4 million.
Board of Director Relationship with Customer
In October 2007, we added aOne member to the Company’s Board of Directors whoour 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 comprised less than 2% of our total revenues for the years ended December 31, 2009, 2008 and 2007, respectively.2007. Our sales to Anadarko were less than 1% of Anadarko’s revenues for 2009, 2008 and 2007. Transactions with Anadarko for our services are made at market prices.on terms consistent with other customers.
| |
| NOTE 20. | SUPPLEMENTAL CASH FLOW INFORMATION |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (In thousands) | |
| |
Noncash investing and financing activities: | | | | | | | | | | | | |
| Property and equipment acquired under captial lease obligations | | $ | 938 | | | $ | 7,654 | | | $ | 12,003 | |
| Asset retirement obligations | | | 517 | | | | 397 | | | | 12 | |
| Unrealized loss on short-term investments | | | — | | | | (8 | ) | | | — | |
| Accrued repurchases of common stock | | | — | | | | — | | | | 2,949 | |
| Debt assumed and issued in acquisitions | | | — | | | | — | | | | 40,149 | |
| Software acquired under financing arrangement | | | — | | | | 3,985 | | | | — | |
Supplemental cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 42,575 | | | $ | 45,313 | | | $ | 38,457 | |
| Cash paid for taxes | | $ | 12,872 | | | $ | 43,494 | | | $ | 96,327 | |
| Tax refunds | | $ | 9,135 | | | $ | 3,701 | | | $ | 429 | |
Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, commitment and agency fees paid, and cash paid to settle the interest rate swaps associated with the termination of our prior credit facility in 2007.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 19.21. | SEGMENT INFORMATION |
For 2008,We revised our reportable operating business segments effective in the first quarter of 2009. The new operating segments are well servicing,Well Servicing and Production Services. Financial results for the years ended December 31, 2008 and 2007 have been restated to reflect the change in operating segments. We revised our segments to align with changes in management’s resource allocation and performance assessment in making decisions regarding our operations. Our rig services and fluid management services operations are aggregated within our Well Servicing segment. Our pressure pumping andservices, fishing and rental. We aggregaterental services which createand wireline services operations, as well as our reportable segmentstechnology development group in accordance with SFAS 131.Canada, are now aggregated within our Production Services segment. These changes reflect our current operating focus. The accounting policies of the reportablefor our segments are the same as those described in “Note 1. Organization and Summary of Significant Accounting Policies.” We evaluate the performance of our operating segments based on revenue and EBITDA, which is a non-GAAP measure and not disclosed below. All inter-segment sales pricing is based on current market conditions. The following is a description of the segments:
Well Servicing Segment
Well servicing.Rig Services
These operationsservices include the maintenance of existing wells, workover of existing wells, completion of newly drilled wells, drilling of horizontal wells, recompletion of existing wells (re-entering a well to complete the well in a new geologic zone or formation) and plugging and abandonment of wells at the end of their useful lives.
Workover services are performed to enhance the production of existing wells. Such services include extensions of existing wells to drain new formations either by deepening well bores to new zones or by drilling horizontal or lateral well bores to improve reservoir drainage. In less extensive workovers, our rigs are used to seal off depleted zones in existing well bores or to access a previously bypassed productive zone.
Our completion services prepare a newly drilled oil or natural gas well for production. We typically provide a full range of well service rig and may also provide other equipment such as a workover package to assist in the completion process.
Fluid Management Services
These services include fluid management logistics, including rig-based services, oilfield transportation and produced-water disposal services. Our oilfield transportation and produced-water disposal services cased-hole wirelineinclude vacuum truck services, fluid transportation services and disposal services for operators whose oil or natural gas wells produce saltwater and other ancillary oilfieldfluids. In addition, we are a supplier of frac tanks which are used for temporary storage of fluids in conjunction with the fluid hauling operations. Our fluid management services necessarywill collect, transport and dispose of the saltwater. These fluids are removed from the well site and transported for disposal in a SWD well.
Production Services Segment
Pressure Pumping Services
These services include well stimulation and cementing services to complete, maintain and workover oil and natural gas producing wells. Our Argentinaproducers. Well stimulation services include fracturing, nitrogen, acidizing, cementing and Mexico operationscoiled tubing services. These services (which may be completion or workover services) are includedprovided to oil and natural gas producers and are used to enhance the production of oil and natural gas wells from formations which exhibit restricted flow of oil and natural gas. In the fracturing process, we typically pump fluid and sized sand, or proppants, into a well at high pressure in order to fracture the formation and thereby increase the flow of oil and natural gas. With our cementing services, we pump cement into a well servicing segment. We aggregate our operating divisions engaged inbetween the casing and the well servicing activities into our well servicing reportable segment.bore.
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Pressure pumping. These operations provide well stimulationFishing and cementing services. Stimulation includes fracturing, nitrogen services and acidizing services and is used to enhance the production of oil and natural gas wells from formations which exhibit a restricted flow of oil and / or natural gas. CementingRental Services
These services include pumping cement into a well between the casing and the wellbore.
Fishing and rental. These operations provide services that include “fishing” to recoverrecovery of lost or stuck equipment in the well bore utilizing a wellbore through the use of “fishing tools.tool.” In addition, this segment offersWe offer a full line of services and rental equipment designed for use both onshore and offshore for drilling and workover services and includes anservices. Our rental tool inventory consistingconsists of drill pipe, tubulars, handling tools pressure-control(including our patented Hydra-Walk® pipe-handling units and services), pressure-controlled equipment, power swivels, and power swivels.foam air units.
Corporate / Other.Wireline Services We apply
These services include perforating, completion logging, production logging and casing integrity services. After the provisionswell bore is cased and cemented, we can provide a number of services. Perforating creates the flow path between the reservoir and the well bore. Production logging can be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This service helps the operator analyze and monitor well performance and determine when a well may need a workover or further stimulation.
EITF 04-10Advanced Measurements, Inc. for
Also included in our Production Services segment reporting. Under the provisions ofEITF 04-10, operating segments that do not individually meet the aggregation criteria describedis AMI, our technology development company based in SFAS 131 may be combined with other operating segments that do not individually meet the aggregation criteria to form a separate reportable segment. Canada. AMI is focused on oilfield service equipment controls, data acquisition and digital information flow.
Functional Support
We have combinedaggregated all of our operating segments that do not individually meet the aggregation criteria established in SFAS 131 to form the “Corporate and Other” segment for our segment reporting. Corporate expensesa “Functional Support” segment. These services include general expenses associated with managing all of our reportable operating segments. CorporateFunctional Support assets consist principallyprimarily of cash and cash equivalents, short-term investments, deferred financing costs, investments in subsidiaries, accounts and notes receivable fromand investments in subsidiaries, the Company’sour equity-method investment in IROC Services Corp., and deferred income tax assets.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Well
| | | Pressure
| | | Fishing
| | | Corporate/
| | | | | | | |
| | | Servicing | | | Pumping | | | and Rental | | | Other | | | Eliminations | | | Total | |
| | | | | | | | | (In thousands) | | | | | | | |
| |
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 1,509,823 | | | $ | 344,993 | | | $ | 117,272 | | | $ | — | | | $ | — | | | $ | 1,972,088 | |
| Inter-segment revenue | | | 4,153 | | | | | | | | 1,221 | | | | | | | | (5,374 | ) | | | — | |
| Direct operating expenses | | | 942,886 | | | | 239,870 | | | | 70,706 | | | | — | | | | (3,135 | ) | | | 1,250,327 | |
| Depreciation and amortization expense | | | 125,008 | | | | 22,237 | | | | 11,809 | | | | 11,720 | | | | — | | | | 170,774 | |
| Interest expense, net of amounts capitalized | | | (1,880 | ) | | | (1,402 | ) | | | (512 | ) | | | 44,793 | | | | 248 | | | | 41,247 | |
| Net income (loss) | | | 347,007 | | | | 23,834 | | | | 3,991 | | | | (289,329 | ) | | | (1,445 | ) | | | 84,058 | |
| Property and equipment, net | | | 762,849 | | | | 191,563 | | | | 62,429 | | | | 34,842 | | | | — | | | | 1,051,683 | |
| Total assets | | | 1,688,732 | | | | 277,693 | | | | 103,521 | | | | 2,035,206 | | | | (2,088,229 | ) | | | 2,016,923 | |
| Capital expenditures, excluding acquisitions | | | 147,963 | | | | 42,860 | | | | 19,970 | | | | 8,201 | | | | — | | | | 218,994 | |
The following present our segment information as of and for the years ended December 31, 2009, 2008 and 2007 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Well
| | | Production
| | | Functional
| | | | | | | |
| | | Servicing | | | Services | | | Support | | | Eliminations | | | Total | |
| |
As of and for the year ended December 31, 2009: | | | | | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 859,747 | | | $ | 218,918 | | | $ | — | | | $ | — | | | $ | 1,078,665 | |
| Intersegment revenue | | | 10 | | | | 5,662 | | | | — | | | | (5,672 | ) | | | — | |
| Operating expenses | | | 781,504 | | | | 240,625 | | | | 105,586 | | | | — | | | | 1,127,715 | |
| Asset retirements and impairments | | | 65,869 | | | | 93,933 | | | | — | | | | — | | | | 159,802 | |
| Operating income (loss) | | | 12,374 | | | | (115,640 | ) | | | (105,586 | ) | | | — | | | | (208,852 | ) |
| Interest expense | | | (2,007 | ) | | | (727 | ) | | | 41,803 | | | | — | | | | 39,069 | |
| Income (loss) before income taxes | | | 14,414 | | | | (114,150 | ) | | | (148,065 | ) | | | — | | | | (247,801 | ) |
| Total assets | | | 1,133,068 | | | | 251,580 | | | | 643,854 | | | | (364,092 | ) | | | 1,664,410 | |
| Capital expenditures, excluding acquisitions | | | 75,242 | | | | 39,305 | | | | 13,875 | | | | — | | | | 128,422 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Well
| | | Pressure
| | | Fishing
| | | Corporate/
| | | | | | | |
| | | Servicing | | | Pumping | | | and Rental | | | Other | | | Eliminations | | | Total | |
| | | | | | | | | (In thousands) | | | | | | | |
| |
As of and for the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues, net | | $ | 1,264,797 | | | $ | 299,348 | | | $ | 97,867 | | | $ | — | | | $ | — | | | $ | 1,662,012 | |
| Direct operating expenses | | | 738,694 | | | | 189,645 | | | | 57,275 | | | | — | | | | — | | | | 985,614 | |
| Depreciation and amortization expense | | | 90,274 | | | | 16,854 | | | | 8,742 | | | | 13,753 | | | | — | | | | 129,623 | |
| Interest expense, net of amounts capitalized | | | (712 | ) | | | (1,048 | ) | | | (493 | ) | | | 38,708 | | | | (248 | ) | | | 36,207 | |
| Net income (loss) | | | 360,617 | | | | 83,785 | | | | 22,028 | | | | (297,141 | ) | | | — | | | | 169,289 | |
| Property and equipment, net | | | 693,804 | | | | 133,903 | | | | 48,703 | | | | 34,798 | | | | — | | | | 911,208 | |
| Total assets | | | 1,500,913 | | | | 247,018 | | | | 89,802 | | | | 402,513 | | | | (381,169 | ) | | | 1,859,077 | |
| Capital expenditures, excluding acquisitions | | | 135,336 | | | | 51,115 | | | | 19,811 | | | | 6,298 | | | | — | | | | 212,560 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Well
| | | Production
| | | Functional
| | | | | | | |
| | | Servicing | | | Services | | | Support | | | Eliminations | | | Total | |
| |
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 1,470,332 | | | $ | 501,756 | | | $ | — | | | $ | — | | | $ | 1,972,088 | |
| Intersegment revenue | | | 93 | | | | 5,281 | | | | — | | | | (5,374 | ) | | | — | |
| Operating expenses | | | 1,114,432 | | | | 407,560 | | | | 156,816 | | | | — | | | | 1,678,808 | |
| Asset retirements and impairments | | | — | | | | 69,752 | | | | 5,385 | | | | — | | | | 75,137 | |
| Operating income (loss) | | | 355,900 | | | | 24,444 | | | | (162,201 | ) | | | — | | | | 218,143 | |
| Interest expense | | | (2,310 | ) | | | (1,828 | ) | | | 45,385 | | | | — | | | | 41,247 | |
| Income (loss) before income taxes | | | 354,928 | | | | 27,804 | | | | (208,676 | ) | | | — | | | | 174,056 | |
| Total assets | | | 1,386,753 | | | | 429,131 | | | | 587,696 | | | | (386,657 | ) | | | 2,016,923 | |
| Capital expenditures, excluding acquisitions | | | 145,494 | | | | 65,312 | | | | 8,188 | | | | — | | | | 218,994 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Well
| | | Pressure
| | | Fishing
| | | Corporate/
| | | | | | | |
| | | Servicing | | | Pumping | | | and Rental | | | Other | | | Eliminations | | | Total | |
| | | | | | | | | (In thousands) | | | | | | | |
| |
As of and for the year ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating revenues, net | | $ | 1,201,228 | | | $ | 247,489 | | | $ | 97,460 | | | $ | — | | | $ | — | | | $ | 1,546,177 | |
| Direct operating expenses | | | 725,008 | | | | 138,377 | | | | 57,217 | | | | — | | | | — | | | | 920,602 | |
| Depreciation and amortization expense | | | 95,673 | | | | 12,416 | | | | 6,787 | | | | 11,135 | | | | — | | | | 126,011 | |
| Interest expense, net of amounts capitalized | | | (615 | ) | | | (600 | ) | | | (98 | ) | | | 40,240 | | | | — | | | | 38,927 | |
| Net income (loss) | | | 311,339 | | | | 88,070 | | | | 22,860 | | | | (251,236 | ) | | | — | | | | 171,033 | |
| Property and equipment, net | | | 531,685 | | | | 97,372 | | | | 35,971 | | | | 29,263 | | | | — | | | | 694,291 | |
| Total assets | | | 1,022,898 | | | | 190,704 | | | | 79,364 | | | | 206,622 | | | | 41,810 | | | | 1,541,398 | |
| Capital expenditures, excluding acquisitions | | | 143,080 | | | | 35,513 | | | | 12,953 | | | | 4,284 | | | | — | | | | 195,830 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Well
| | | Production
| | | Functional
| | | | | | | |
| | | Servicing | | | Services | | | Support | | | Eliminations | | | Total | |
| |
As of and for the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | |
| Revenues from external customers | | $ | 1,240,126 | | | $ | 421,886 | | | $ | — | | | $ | — | | | $ | 1,662,012 | |
| Intersegment revenue | | | — | | | | — | | | | — | | | | — | | | | — | |
| Operating expenses | | | 879,270 | | | | 315,919 | | | | 150,444 | | | | — | | | | 1,345,633 | |
| Asset retirements and impairments | | | — | | | | — | | | | — | | | | — | | | | — | |
| Operating income (loss) | | | 360,856 | | | | 105,967 | | | | (150,444 | ) | | | — | | | | 316,379 | |
| Interest expense | | | (1,205 | ) | | | (1,047 | ) | | | 38,459 | | | | — | | | | 36,207 | |
| Income (loss) before income taxes | | | 358,549 | | | | 108,129 | | | | (190,738 | ) | | | — | | | | 275,940 | |
| Total assets | | | 1,300,516 | | | | 373,380 | | | | 390,662 | | | | (205,481 | ) | | | 1,859,077 | |
| Capital expenditures, excluding acquisitions | | | 126,394 | | | | 79,854 | | | | 6,312 | | | | — | | | | 212,560 | |
The following table presents selected financial information related to our operations by geography (in thousands of U.S. Dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. | | | Argentina | | | Mexico | | | Canada | | | Russia | | | Eliminations | | | Total | |
| |
As of and for the year ended December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | $ | 881,329 | | | $ | 68,625 | | | $ | 118,650 | | | $ | 873 | | | $ | 9,188 | | | $ | — | | | $ | 1,078,665 | |
| Long-lived assets | | | 1,263,376 | | | | 18,671 | | | | 64,162 | | | | 8,182 | | | | 54,956 | | | | (129,069 | ) | | | 1,280,278 | |
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | $ | 1,800,199 | | | $ | 118,841 | | | $ | 47,200 | | | $ | 5,848 | | | $ | — | | | $ | — | | | $ | 1,972,088 | |
| Long-lived assets | | | 1,434,578 | | | | 25,419 | | | | 45,547 | | | | 7,482 | | | | — | | | | (55,225 | ) | | | 1,457,801 | |
As of and for the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | $ | 1,556,108 | | | $ | 93,925 | | | $ | 9,041 | | | $ | 2,938 | | | $ | — | | | $ | — | | | $ | 1,662,012 | |
| Long-lived assets | | | 1,368,735 | | | | 29,762 | | | | 11,089 | | | | 10,782 | | | | — | | | | (49,156 | ) | | | 1,371,212 | |
118
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents information related to our foreign operations (in thousands of U.S. Dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. | | | Argentina | | | Mexico | | | Canada | | | Eliminations | | | Total | |
| | | (In thousands) | |
| |
As of and for the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | $ | 1,800,199 | | | $ | 118,841 | | | $ | 47,200 | | | $ | 5,848 | | | $ | — | | | $ | 1,972,088 | |
| Long-lived assets | | | 1,434,578 | | | | 25,419 | | | | 45,547 | | | | 7,482 | | | | (55,225 | ) | | | 1,457,801 | |
| Capital expenditures, excluding acquisitions | | | 181,525 | | | | 2,677 | | | | 34,792 | | | | — | | | | — | | | | 218,994 | |
As of and for the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | | 1,556,108 | | | $ | 93,925 | | | $ | 9,041 | | | $ | 2,938 | | | $ | — | | | $ | 1,662,012 | |
| Long-lived assets | | | 1,368,735 | | | | 29,762 | | | | 11,089 | | | | 10,782 | | | | (49,156 | ) | | | 1,371,212 | |
| Capital expenditures, excluding acquisitions | | | 197,120 | | | | 3,997 | | | | 11,348 | | | | 95 | | | | — | | | | 212,560 | |
As of and for the year ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | $ | 1,467,856 | | | $ | 78,321 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,546,177 | |
| Long-lived assets | | | 1,064,031 | | | | 30,623 | | | | — | | | | — | | | | (41,862 | ) | | | 1,052,792 | |
| Capital expenditures, excluding acquisitions | | | 186,348 | | | | 9,482 | | | | — | | | | — | | | | — | | | | 195,830 | |
| |
NOTE 20.22. | SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (In thousands) | |
| |
Noncash investing and financing activities: | | | | | | | | | | | | |
| Property and equipment acquired under captial lease obligations | | $ | 7,654 | | | $ | 12,003 | | | $ | 15,349 | |
| Asset retirement obligations | | | 397 | | | | 12 | | | | 155 | |
| Unrealized (loss) gain on short-term investments | | | (8 | ) | | | — | | | | 328 | |
| Unrealized gain on cash flow hedges | | | — | | | | — | | | | 185 | |
| Accrued repurchases of common stock | | | — | | | | 2,949 | | | | — | |
| Debt assumed and issued in acquisitions | | | — | | | | 40,149 | | | | — | |
| Software acquired under financing arrangement | | | 3,985 | | | | — | | | | — | |
Supplemental cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 45,313 | | | $ | 38,457 | | | $ | 44,534 | |
| Cash paid for taxes | | $ | 43,494 | | | $ | 96,327 | | | $ | 99,048 | |
Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations, commitment and agency fees paid, and cash paid to settle the interest rate swaps associated with the termination of our Prior Credit Facility.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 21. | UNAUDITED SUPPLEMENTARY INFORMATION — QUARTERLY RESULTS OF OPERATIONS |
Set forth below is unaudited summarized quarterly information for the two most recent years covered by these consolidated financial statements (in thousands, except for per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| |
Year Ended December 31, 2008: | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2009: | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 456,399 | | | $ | 502,003 | | | $ | 535,620 | | | $ | 478,066 | | | $ | 331,989 | | | $ | 241,458 | | | $ | 237,671 | | | | 267,547 | |
| Direct operating expenses | | | 281,641 | | | | 322,488 | | | | 342,195 | | | | 304,003 | | | | 227,227 | | | | 173,853 | | | | 179,901 | | | | 198,476 | |
| Impairment of goodwill and equity method investment | | | — | | | | — | | | | — | | | | 75,137 | | |
| Asset retirements and impairments | | | | — | | | | — | | | | 159,802 | | | | — | |
| Income (loss) before income taxes | | | 56,907 | | | | 71,247 | | | | 77,541 | | | | (31,639 | ) | | | 1,129 | | | | (29,131 | ) | | | (198,206 | ) | | | (21,593 | ) |
| Net income (loss) | | | 34,484 | | | | 44,012 | | | | 48,462 | | | | (42,900 | ) | | | 904 | | | | (18,473 | ) | | | (125,017 | ) | | | (14,090 | ) |
| Income (loss) attributable to common stockholders | | | | 904 | | | | (18,473 | ) | | | (124,942 | ) | | | (13,610 | ) |
| Earnings per share(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.39 | | | $ | (0.35 | ) | | $ | 0.01 | | | $ | (0.15 | ) | | $ | (1.03 | ) | | $ | (0.11 | ) |
| Diluted | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.39 | | | $ | (0.35 | ) | | $ | 0.01 | | | $ | (0.15 | ) | | $ | (1.03 | ) | | $ | (0.11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter(2) | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| |
Year Ended December 31, 2007: | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2008: | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 408,919 | | | $ | 410,511 | | | $ | 413,967 | | | $ | 428,615 | | | $ | 456,399 | | | $ | 502,003 | | | $ | 535,620 | | | $ | 478,066 | |
| Direct operating expenses | | | 235,513 | | | | 238,223 | | | | 257,482 | | | | 254,396 | | | | 281,641 | | | | 322,488 | | | | 342,195 | | | | 304,003 | |
| Income before income taxes | | | 84,694 | | | | 78,471 | | | | 59,832 | | | | 52,943 | | |
| Net income | | | 52,190 | | | | 48,136 | | | | 35,896 | | | | 33,067 | | |
| Asset retirements and impairments | | | | — | | | | — | | | | — | | | | 75,137 | |
| Income (loss) before income taxes | | | | 56,907 | | | | 71,247 | | | | 77,541 | | | | (31,639 | ) |
| Net income (loss) | | | | 34,450 | | | | 43,801 | | | | 48,462 | | | | (42,900 | ) |
| Income (loss) attributable to common stockholders | | | | 34,484 | | | | 44,012 | | | | 48,462 | | | | (42,900 | ) |
| Earnings per share(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.40 | | | $ | 0.37 | | | $ | 0.27 | | | $ | 0.25 | | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.39 | | | $ | (0.35 | ) |
| Diluted | | $ | 0.39 | | | $ | 0.36 | | | $ | 0.27 | | | $ | 0.25 | | | $ | 0.27 | | | $ | 0.35 | | | $ | 0.39 | | | $ | (0.35 | ) |
| | |
| (1) | | Quarterly earnings per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual earnings per common share. |
|
(2) | | Revenues, gross margins, income before income taxes, net income and earnings per share were impacted in the fourth quarter of 2007 due to the acquisitions of Moncla, Kings and AMI. See “Note 2. Acquisitions.” |
110
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 22.23. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
TheOur Senior Notes are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly-owned. The guarantees were joint and several, full, complete and unconditional. There were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information pursuant to SECinformation.
Regulation S-XRule 3-10,CONDENSED CONSOLIDATING BALANCE SHEETS “Financial Statements of Guarantors
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 72,021 | | | $ | 189,935 | | | $ | 122,018 | | | $ | 158 | | | $ | 384,132 | |
| Property and equipment, net | | | — | | | | 822,882 | | | | 41,726 | | | | — | | | | 864,608 | |
| Goodwill | | | — | | | | 316,513 | | | | 29,589 | | | | — | | | | 346,102 | |
| Deferred financing costs, net | | | 10,421 | | | | — | | | | 537 | | | | — | | | | 10,958 | |
| Intercompany notes, accounts receivable and investment in subsidiaries | | | 1,782,002 | | | | 577,546 | | | | 7,462 | | | | (2,367,010 | ) | | | — | |
| Other assets | | | 4,033 | | | | 40,198 | | | | 14,379 | | | | — | | | | 58,610 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,868,477 | | | $ | 1,947,074 | | | $ | 215,711 | | | $ | (2,366,852 | ) | | $ | 1,664,410 | |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities and equity: | | | | | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 6,468 | | | $ | 145,040 | | | $ | 38,261 | | | $ | — | | | $ | 189,769 | |
| Long-term debt and capital leases, less current portion | | | 512,812 | | | | 11,105 | | | | 32 | | | | — | | | | 523,949 | |
| Intercompany notes and accounts payable | | | 451,361 | | | | 1,487,950 | | | | 87,568 | | | | (2,026,879 | ) | | | — | |
| Deferred tax liabilities | | | 151,624 | | | | — | | | | (4,644 | ) | | | — | | | | 146,980 | |
| Other long-term liabilities | | | 3,072 | | | | 57,500 | | | | — | | | | — | | | | 60,572 | |
| Equity | | | 743,140 | | | | 245,479 | | | | 94,494 | | | | (339,973 | ) | | | 743,140 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | $ | 1,868,477 | | | $ | 1,947,074 | | | $ | 215,711 | | | $ | (2,366,852 | ) | | $ | 1,664,410 | |
| | | | | | | | | | | | | | | | | | | | | |
111
Key Energy Services, Inc. and Issuers of Guaranteed Securities Registered or Being Registered.”Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 29,673 | | | $ | 440,758 | | | $ | 88,534 | | | $ | 157 | | | $ | 559,122 | |
| Property and equipment, net | | | — | | | | 1,025,007 | | | | 26,676 | | | | — | | | | 1,051,683 | |
| Goodwill | | | — | | | | 316,669 | | | | 4,323 | | | | — | | | | 320,992 | |
| Deferred financing costs, net | | | 10,489 | | | | — | | | | — | | | | — | | | | 10,489 | |
| Intercompany notes, accounts receivable and investment in subsidiaries | | | 1,917,522 | | | | 419,554 | | | | 1,775 | | | | (2,338,851 | ) | | | — | |
| Other assets | | | 22,597 | | | | 48,237 | | | | 3,803 | | | | — | | | | 74,637 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,980,281 | | | $ | 2,250,225 | | | $ | 125,111 | | | $ | (2,338,694 | ) | | $ | 2,016,923 | |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities and equity: | | | | | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 13,792 | | | $ | 231,528 | | | $ | 28,054 | | | $ | (1 | ) | | $ | 273,373 | |
| Long-term debt and capital leases, less current portion | | | 612,813 | | | | 20,729 | | | | 49 | | | | — | | | | 633,591 | |
| Intercompany notes and accounts payable | | | 305,348 | | | | 1,624,932 | | | | 69,204 | | | | (1,999,484 | ) | | | — | |
| Deferred tax liabilities | | | 187,596 | | | | — | | | | 985 | | | | — | | | | 188,581 | |
| Other long-term liabilities | | | — | | | | 60,386 | | | | 260 | | | | — | | | | 60,646 | |
| Stockholders’ equity | | | 860,732 | | | | 312,650 | | | | 26,559 | | | | (339,209 | ) | | | 860,732 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,980,281 | | | $ | 2,250,225 | | | $ | 125,111 | | | $ | (2,338,694 | ) | | $ | 2,016,923 | |
| | | | | | | | | | | | | | | | | | | | | |
120112
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETSTATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2008 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | |
| Current assets | | $ | 29,673 | | | $ | 440,758 | | | $ | 88,534 | | | $ | 157 | | | $ | 559,122 | |
| Property and equipment, net | | | — | | | | 1,025,007 | | | | 26,676 | | | | — | | | | 1,051,683 | |
| Goodwill | | | — | | | | 316,669 | | | | 4,323 | | | | — | | | | 320,992 | |
| Deferred financing costs, net | | | 10,489 | | | | — | | | | — | | | | — | | | | 10,489 | |
| Intercompany notes and accounts receivable and investment in subsidiaries | | | 1,917,522 | | | | 419,554 | | | | 1,775 | | | | (2,338,851 | ) | | | — | |
| Other assets | | | 22,597 | | | | 48,237 | | | | 3,803 | | | | — | | | | 74,637 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,980,281 | | | $ | 2,250,225 | | | $ | 125,111 | | | $ | (2,338,694 | ) | | $ | 2,016,923 | |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities and equity: | | | | | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 13,792 | | | $ | 231,528 | | | $ | 28,054 | | | $ | (1 | ) | | $ | 273,373 | |
| Capital lease obligations, less current portion | | | — | | | | 13,714 | | | | 49 | | | | — | | | | 13,763 | |
| Notes payable — related parties, less current portion | | | — | | | | 6,000 | | | | — | | | | — | | | | 6,000 | |
| Long-term debt, less current portion | | | 612,813 | | | | 1,015 | | | | — | | | | — | | | | 613,828 | |
| Intercompany notes and accounts payable | | | 305,348 | | | | 1,624,932 | | | | 69,204 | | | | (1,999,484 | ) | | | — | |
| Deferred tax liabilities | | | 187,596 | | | | — | | | | 985 | | | | — | | | | 188,581 | |
| Other long-term liabilities | | | — | | | | 60,386 | | | | 260 | | | | — | | | | 60,646 | |
| Stockholders’ equity | | | 860,732 | | | | 312,650 | | | | 26,559 | | | | (339,209 | ) | | | 860,732 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,980,281 | | | $ | 2,250,225 | | | $ | 125,111 | | | $ | (2,338,694 | ) | | $ | 2,016,923 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2009 | |
| | | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Parent Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Revenues | | $ | — | | | $ | 928,639 | | | $ | 201,507 | | | $ | (51,481 | ) | | $ | 1,078,665 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Direct operating expenses | | | — | | | | 653,112 | | | | 164,243 | | | | (37,898 | ) | | | 779,457 | |
| Depreciation and amortization expense | | | — | | | | 162,415 | | | | 7,147 | | | | — | | | | 169,562 | |
| General and administrative expenses | | | (452 | ) | | | 160,426 | | | | 18,693 | | | | 29 | | | | 178,696 | |
| Asset retirements and impairments | | | — | | | | 159,535 | | | | 267 | | | | — | | | | 159,802 | |
| Interest expense, net of amounts capitalized | | | 42,671 | | | | (3,756 | ) | | | 154 | | | | — | | | | 39,069 | |
| Other, net | | | 1,237 | | | | (698 | ) | | | 10,412 | | | | (11,071 | ) | | | (120 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 43,456 | | | | 1,131,034 | | | | 200,916 | | | | (48,940 | ) | | | 1,326,466 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss) income before income taxes and noncontrolling interest | | | (43,456 | ) | | | (202,395 | ) | | | 591 | | | | (2,541 | ) | | | (247,801 | ) |
| Income tax benefit | | | 90,694 | | | | — | | | | 431 | | | | — | | | | 91,125 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | 47,238 | | | | (202,395 | ) | | | 1,022 | | | | (2,541 | ) | | | (156,676 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Noncontrolling interest | | | — | | | | — | | | | (555 | ) | | | — | | | | (555 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Income (loss) attributable to common stockholders | | $ | 47,238 | | | $ | (202,395 | ) | | $ | 1,577 | | | $ | (2,541 | ) | | $ | (156,121 | ) |
| | | | | | | | | | | | | | | | | | | | | |
121113
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2007 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | |
Current assets | | $ | 39,501 | | | $ | 378,865 | | | $ | 69,499 | | | $ | — | | | $ | 487,865 | |
| Property and equipment, net | | | — | | | | 880,907 | | | | 30,301 | | | | — | | | | 911,208 | |
| Goodwill | | | — | | | | 373,283 | | | | 5,267 | | | | — | | | | 378,550 | |
| Deferred financing costs, net | | | 12,117 | | | | — | | | | — | | | | — | | | | 12,117 | |
| Intercompany notes and accounts receivable and investment in subsidiaries | | | 1,557,993 | | | | 175,461 | | | | — | | | | (1,733,454 | ) | | | — | |
| Other assets | | | 11,217 | | | | 52,074 | | | | 6,046 | | | | — | | | | 69,337 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 1,620,828 | | | $ | 1,860,590 | | | $ | 111,113 | | | $ | (1,733,454 | ) | | $ | 1,859,077 | |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities and equity: | | | | | | | | | | | | | | | | | | | | |
| Current liabilities | | $ | 17,278 | | | $ | 192,222 | | | $ | 25,297 | | | $ | — | | | $ | 234,797 | |
| Capital lease obligations, less current portion | | | — | | | | 15,998 | | | | 116 | | | | — | | | | 16,114 | |
| Notes payable — related parties, less current portion | | | — | | | | 20,500 | | | | — | | | | — | | | | 20,500 | |
| Long-term debt, less current portion | | | 475,000 | | | | — | | | | — | | | | — | | | | 475,000 | |
| Intercompany notes and accounts payable | | | 78,660 | | | | 1,489,377 | | | | 24,408 | | | | (1,592,445 | ) | | | — | |
| Deferred tax liabilities | | | 157,759 | | | | (79 | ) | | | 2,388 | | | | — | | | | 160,068 | |
| Other long-term liabilities | | | 3,133 | | | | 60,216 | | | | 251 | | | | — | | | | 63,600 | |
| Stockholders’ equity | | | 888,998 | | | | 82,356 | | | | 58,653 | | | | (141,009 | ) | | | 888,998 | |
| | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,620,828 | | | $ | 1,860,590 | | | $ | 111,113 | | | $ | (1,733,454 | ) | | $ | 1,859,077 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Parent Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Revenues | | $ | — | | | $ | 1,818,736 | | | $ | 175,845 | | | $ | (22,493 | ) | | $ | 1,972,088 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Direct operating expenses | | | — | | | | 1,139,006 | | | | 127,374 | | | | (16,053 | ) | | | 1,250,327 | |
| Depreciation and amortization expense | | | — | | | | 163,257 | | | | 7,517 | | | | — | | | | 170,774 | |
| General and administrative expenses | | | 1,616 | | | | 237,635 | | | | 19,251 | | | | (795 | ) | | | 257,707 | |
| Asset retirements and impairments | | | — | | | | 75,137 | | | | — | | | | — | | | | 75,137 | |
| Interest expense, net of amounts capitalized | | | 44,842 | | | | (4,320 | ) | | | 477 | | | | 248 | | | | 41,247 | |
| Other, net | | | 5,219 | | | | (7,073 | ) | | | 9,143 | | | | (4,449 | ) | | | 2,840 | |
| | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 51,677 | | | | 1,603,642 | | | | 163,762 | | | | (21,049 | ) | | | 1,798,032 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss) income before income taxes and noncontrolling interest | | | (51,677 | ) | | | 215,094 | | | | 12,083 | | | | (1,444 | ) | | | 174,056 | |
| Income tax expense | | | (81,233 | ) | | | (4,320 | ) | | | (4,690 | ) | | | — | | | | (90,243 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (132,910 | ) | | | 210,774 | | | | 7,393 | | | | (1,444 | ) | | | 83,813 | |
| | | | | | | | | | | | | | | | | | | | | |
| Noncontrolling interest | | | — | | | | — | | | | (245 | ) | | | — | | | | (245 | ) |
| | | | | | | | | | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (132,910 | ) | | $ | 210,774 | | | $ | 7,638 | | | $ | (1,444 | ) | | $ | 84,058 | |
| | | | | | | | | | | | | | | | | | | | | |
114
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Revenues | | $ | — | | | $ | 1,561,059 | | | $ | 105,819 | | | $ | (4,866 | ) | | $ | 1,662,012 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Direct operating expenses | | | — | | | | 906,254 | | | | 82,980 | | | | (3,620 | ) | | | 985,614 | |
| Depreciation and amortization expense | | | — | | | | 123,821 | | | | 5,802 | | | | — | | | | 129,623 | |
| General and administrative expenses | | | 1,693 | | | | 216,959 | | | | 11,935 | | | | (191 | ) | | | 230,396 | |
| Interest expense, net of amounts capitalized | | | 38,866 | | | | (3,134 | ) | | | 723 | | | | (248 | ) | | | 36,207 | |
| Loss on early extinguishment of debt | | | 9,557 | | | | — | | | | — | | | | — | | | | 9,557 | |
| Other, net | | | (449 | ) | | | (5,850 | ) | | | 1,781 | | | | (807 | ) | | | (5,325 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 49,667 | | | | 1,238,050 | | | | 103,221 | | | | (4,866 | ) | | | 1,386,072 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss) income before income taxes and noncontrolling interest | | | (49,667 | ) | | | 323,009 | | | | 2,598 | | | | — | | | | 275,940 | |
| Income tax (expense) benefit | | | (105,928 | ) | | | 934 | | | | (1,774 | ) | | | — | | | | (106,768 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (155,595 | ) | | | 323,943 | | | | 824 | | | | — | | | | 169,172 | |
| | | | | | | | | | | | | | | | | | | | | |
| Noncontrolling interest | | | — | | | | — | | | | (117 | ) | | | — | | | | (117 | ) |
| | | | | | | | | | | | | | | | | | | | | |
(Loss) income attributable to common stockholders | | $ | (155,595 | ) | | $ | 323,943 | | | $ | 941 | | | $ | — | | | $ | 169,289 | |
| | | | | | | | | | | | | | | | | | | | | |
122115
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTSTATEMENTS OF OPERATIONSCASH FLOWS
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Revenues | | $ | — | | | $ | 1,818,736 | | | $ | 175,845 | | | $ | (22,493 | ) | | $ | 1,972,088 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Direct operating expenses | | | — | | | | 1,139,006 | | | | 127,374 | | | | (16,053 | ) | | | 1,250,327 | |
| Depreciation and amortization expense | | | — | | | | 163,257 | | | | 7,517 | | | | — | | | | 170,774 | |
| Impairment of goodwill and equity-method investment | | | — | | | | 75,137 | | | | — | | | | — | | | | 75,137 | |
| General and administrative expenses | | | 1,616 | | | | 237,635 | | | | 19,251 | | | | (795 | ) | | | 257,707 | |
| Interest expense, net of amounts capitalized | | | 44,842 | | | | (4,320 | ) | | | 477 | | | | 248 | | | | 41,247 | |
| Other, net | | | 5,219 | | | | (7,073 | ) | | | 9,143 | | | | (4,449 | ) | | | 2,840 | |
| | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 51,677 | | | | 1,603,642 | | | | 163,762 | | | | (21,049 | ) | | | 1,798,032 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss) income before income taxes and minority interest | | | (51,677 | ) | | | 215,094 | | | | 12,083 | | | | (1,444 | ) | | | 174,056 | |
| Income tax expense | | | (81,233 | ) | | | (4,320 | ) | | | (4,690 | ) | | | — | | | | (90,243 | ) |
| Minority interest | | | — | | | | — | | | | 245 | | | | — | | | | 245 | |
| | | | | | | | | | | | | | | | | | | | | |
NET (LOSS) INCOME | | $ | (132,910 | ) | | $ | 210,774 | | | $ | 7,638 | | | $ | (1,444 | ) | | $ | 84,058 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2009 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Net cash provided by (used in) operating activities | | $ | — | | | $ | 185,279 | | | $ | (442 | ) | | $ | — | | | $ | 184,837 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | — | | | | (124,744 | ) | | | (3,678 | ) | | | — | | | | (128,422 | ) |
| Intercompany notes and accounts | | | 65,580 | | | | (17,523 | ) | | | (22,115 | ) | | | (25,942 | ) | | | — | |
| Other investing activities, net | | | 199 | | | | 5,580 | | | | 12,007 | | | | — | | | | 17,786 | |
| | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 65,779 | | | | (136,687 | ) | | | (13,786 | ) | | | (25,942 | ) | | | (110,636 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
| Payments on revolving credit facility | | | (100,000 | ) | | | — | | | | — | | | | — | | | | (100,000 | ) |
| Intercompany notes and accounts | | | 32,823 | | | | (76,175 | ) | | | 17,410 | | | | 25,942 | | | | — | |
| Other financing activities, net | | | 1,398 | | | | (28,873 | ) | | | — | | | | — | | | | (27,475 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (65,779 | ) | | | (105,048 | ) | | | 17,410 | | | | 25,942 | | | | (127,475 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | (2,023 | ) | | | — | | | | (2,023 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash | | | — | | | | (56,456 | ) | | | 1,159 | | | | — | | | | (55,297 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | — | | | | 75,847 | | | | 16,844 | | | | — | | | | 92,691 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | — | | | $ | 19,391 | | | $ | 18,003 | | | $ | — | | | $ | 37,394 | |
| | | | | | | | | | | | | | | | | | | | | |
123116
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Revenues | | $ | — | | | $ | 1,561,059 | | | $ | 105,819 | | | $ | (4,866 | ) | | $ | 1,662,012 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | — | |
| Direct operating expenses | | | — | | | | 906,254 | | | | 82,980 | | | | (3,620 | ) | | | 985,614 | |
| Depreciation and amortization expense | | | — | | | | 123,821 | | | | 5,802 | | | | — | | | | 129,623 | |
| General and administrative expenses | | | 1,693 | | | | 216,959 | | | | 11,935 | | | | (191 | ) | | | 230,396 | |
| Interest expense, net of amounts capitalized | | | 38,866 | | | | (3,134 | ) | | | 723 | | | | (248 | ) | | | 36,207 | |
| Loss on early extinguishment of debt | | | 9,557 | | | | — | | | | — | | | | — | | | | 9,557 | |
| Other, net | | | (449 | ) | | | (5,850 | ) | | | 1,781 | | | | (807 | ) | | | (5,325 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Total costs and expenses, net | | | 49,667 | | | | 1,238,050 | | | | 103,221 | | | | (4,866 | ) | | | 1,386,072 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss) income before income taxes and minority interest | | | (49,667 | ) | | | 323,009 | | | | 2,598 | | | | — | | | | 275,940 | |
| Income tax expense | | | (105,928 | ) | | | 934 | | | | (1,774 | ) | | | — | | | | (106,768 | ) |
| Minority interest | | | — | | | | — | | | | 117 | | | | — | | | | 117 | |
| | | | | | | | | | | | | | | | | | | | | |
NET (LOSS) INCOME | | $ | (155,595 | ) | | $ | 323,943 | | | $ | 941 | | | $ | — | | | $ | 169,289 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Net cash provided by (used in) operating activities | | $ | 17,573 | | | $ | 364,840 | | | $ | (15,249 | ) | | $ | — | | | $ | 367,164 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | — | | | | (214,659 | ) | | | (4,335 | ) | | | — | | | | (218,994 | ) |
| Acquisitions and asset purchases, net | | | — | | | | (97,925 | ) | | | — | | | | — | | | | (97,925 | ) |
| of cash acquired | | | | | | | | | | | | | | | | | | | | |
| Investment in Geostream Services Group | | | (19,306 | ) | | | — | | | | — | | | | — | | | | (19,306 | ) |
| Intercompany notes and accounts | | | (179,501 | ) | | | (199,428 | ) | | | (1,515 | ) | | | 380,444 | | | | — | |
| Other investing activities, net | | | — | | | | 7,151 | | | | — | | | | — | | | | 7,151 | |
| | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (198,807 | ) | | | (504,861 | ) | | | (5,850 | ) | | | 380,444 | | | | (329,074 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
| Borrowings on revolving credit facilty | | | 172,813 | | | | — | | | | — | | | | — | | | | 172,813 | |
| Payments on revolving credit facility | | | (38,026 | ) | | | — | | | | — | | | | — | | | | (38,026 | ) |
| Repurchases of common stock | | | (139,358 | ) | | | — | | | | — | | | | — | | | | (139,358 | ) |
| Intercompany notes and accounts | | | 177,698 | | | | 181,016 | | | | 21,730 | | | | (380,444 | ) | | | — | |
| Other financing activities, net | | | 8,107 | | | | (11,506 | ) | | | — | | | | — | | | | (3,399 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 181,234 | | | | 169,510 | | | | 21,730 | | | | (380,444 | ) | | | (7,970 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | 4,068 | | | | — | | | | 4,068 | |
| | | | | | | | | | | | | | | | | | | | | |
Net increase in cash | | | — | | | | 29,489 | | | | 4,699 | | | | — | | | | 34,188 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | — | | | | 46,358 | | | | 12,145 | | | | — | | | | 58,503 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | — | | | $ | 75,847 | | | $ | 16,844 | | | $ | — | | | $ | 92,691 | |
| | | | | | | | | | | | | | | | | | | | | |
124117
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | Parent
| | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | | Company | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | | (In thousands) | |
| |
Net cash provided by operating activities | | $ | 17,573 | | | $ | 364,840 | | | $ | (15,249 | ) | | $ | — | | | $ | 367,164 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | — | | | | (214,659 | ) | | | (4,335 | ) | | | — | | | | (218,994 | ) |
| Acquisitions, net of cash acquired | | | — | | | | (63,457 | ) | | | — | | | | — | | | | (63,457 | ) |
| Acquisition of fixed assets from asset purchases | | | — | | | | (34,468 | ) | | | — | | | | — | | | | (34,468 | ) |
| Investment in Geostream Services Group | | | (19,306 | ) | | | — | | | | — | | | | — | | | | (19,306 | ) |
| Intercompany notes and accounts | | | (179,501 | ) | | | (199,428 | ) | | | (1,515 | ) | | | 380,444 | | | | — | |
| Other investing activities, net | | | — | | | | 7,151 | | | | — | | | | — | | | | 7,151 | |
| | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (198,807 | ) | | | (504,861 | ) | | | (5,850 | ) | | | 380,444 | | | | (329,074 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
| Borrowings on revolving credit facility | | | 172,813 | | | | — | | | | — | | | | — | | | | 172,813 | |
| Repayments on revolving credit facility | | | (38,026 | ) | | | — | | | | — | | | | — | | | | (38,026 | ) |
| Repurchases of common stock | | | (139,358 | ) | | | — | | | | — | | | | — | | | | (139,358 | ) |
| Intercompany notes and accounts | | | 177,698 | | | | 181,016 | | | | 21,730 | | | | (380,444 | ) | | | — | |
| Other financing activities, net | | | 8,107 | | | | (11,506 | ) | | | — | | | | — | | | | (3,399 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 181,234 | | | | 169,510 | | | | 21,730 | | | | (380,444 | ) | | | (7,970 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | 4,068 | | | | — | | | | 4,068 | |
| | | | | | | | | | | | | | | | | | | | | |
Net increase in cash | | | — | | | | 29,489 | | | | 4,699 | | | | — | | | | 34,188 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | — | | | | 46,358 | | | | 12,145 | | | | — | | | | 58,503 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | — | | | $ | 75,847 | | | $ | 16,844 | | | $ | — | | | $ | 92,691 | |
| | | | | | | | | | | | | | | | | | | | | |
125
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | | | Year Ended December 31, 2007 | |
| | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | | | Parent
| | Guarantor
| | Non-Guarantor
| | | | | |
| | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | | | Company | | Subsidiaries | | Subsidiaries | | Eliminations | | Consolidated | |
| | | (In thousands) | | | (In thousands) | |
| |
| Net cash (used in) provided by operating activities | | $ | (3,401 | ) | | $ | 264,275 | | | $ | (10,955 | ) | | $ | — | | | $ | 249,919 | | | $ | (3,401 | ) | | $ | 264,275 | | | $ | (10,955 | ) | | $ | — | | | $ | 249,919 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | — | | | | (207,400 | ) | | | (5,160 | ) | | | — | | | | (212,560 | ) | | | — | | | | (207,400 | ) | | | (5,160 | ) | | | — | | | | (212,560 | ) |
| Acquisitions, net of cash acquired | | | — | | | | (157,955 | ) | | | — | | | | — | | | | (157,955 | ) | | | — | | | | (157,955 | ) | | | — | | | | — | | | | (157,955 | ) |
| Investment in available for sale securities | | | — | | | | (121,613 | ) | | | — | | | | — | | | | (121,613 | ) | | | — | | | | (121,613 | ) | | | — | | | | — | | | | (121,613 | ) |
| Proceeds from the sale of available of sale securities | | | — | | | | 183,177 | | | | — | | | | — | | | | 183,177 | | |
| Proceeds from the sale of available for sale securities | | | | — | | | | 183,177 | | | | — | | | | — | | | | 183,177 | |
| Intercompany notes and accounts | | | (473,412 | ) | | | (434,672 | ) | | | — | | | | 908,084 | | | | — | | | | (473,412 | ) | | | (434,672 | ) | | | — | | | | 908,084 | | | | — | |
| Other investing activities, net | | | — | | | | 6,104 | | | | — | | | | — | | | | 6,104 | | | | — | | | | 6,104 | | | | — | | | | — | | | | 6,104 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (473,412 | ) | | | (732,359 | ) | | | (5,160 | ) | | | 908,084 | | | | (302,847 | ) | | | (473,412 | ) | | | (732,359 | ) | | | (5,160 | ) | | | 908,084 | | | | (302,847 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repayment of long-term debt | | | (396,000 | ) | | | — | | | | — | | | | — | | | | (396,000 | ) | | | (396,000 | ) | | | — | | | | — | | | | — | | | | (396,000 | ) |
| Proceeds from long-term debt | | | 425,000 | | | | — | | | | — | | | | — | | | | 425,000 | | | | 425,000 | | | | — | | | | — | | | | — | | | | 425,000 | |
| Borrowings on revolving credit facility | | | 50,000 | | | | — | | | | — | | | | — | | | | 50,000 | | | | 50,000 | | | | — | | | | — | | | | — | | | | 50,000 | |
| Common stock acquired by purchase | | | (30,454 | ) | | | — | | | | — | | | | — | | | | (30,454 | ) | | | (30,454 | ) | | | — | | | | — | | | | — | | | | (30,454 | ) |
| Intercompany notes and accounts | | | 424,822 | | | | 458,560 | | | | 24,702 | | | | (908,084 | ) | | | — | | | | 424,822 | | | | 458,560 | | | | 24,702 | | | | (908,084 | ) | | | — | |
| Other financing activities, net | | | 3,445 | | | | (28,751 | ) | | | — | | | | — | | | | (25,306 | ) | | | 3,445 | | | | (28,751 | ) | | | — | | | | — | | | | (25,306 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 476,813 | | | | 429,809 | | | | 24,702 | | | | (908,084 | ) | | | 23,240 | | | | 476,813 | | | | 429,809 | | | | 24,702 | | | | (908,084 | ) | | | 23,240 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Effect of changes in exchange rates on cash | | | — | | | | — | | | | (184 | ) | | | — | | | | (184 | ) | | | — | | | | — | | | | (184 | ) | | | — | | | | (184 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash | | | — | | | | (38,275 | ) | | | 8,403 | | | | — | | | | (29,872 | ) | | | — | | | | (38,275 | ) | | | 8,403 | | | | — | | | | (29,872 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | — | | | | 84,633 | | | | 3,742 | | | | — | | | | 88,375 | | |
Cash and cash equivalents, beginning of period | | | | — | | | | 84,633 | | | | 3,742 | | | | — | | | | 88,375 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | — | | | $ | 46,358 | | | $ | 12,145 | | | $ | — | | | $ | 58,503 | | |
Cash and cash equivalents, end of period | | | $ | — | | | $ | 46,358 | | | $ | 12,145 | | | $ | — | | | $ | 58,503 | |
| | | | | | | | | | | | | | | | | | | | | | | |
126118
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’sour management, including the Company’sour principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company’sOur management, with the participation of the Company’sour principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’sour disclosure controls and procedures (as such term is defined inRules 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’sour principal executive and financial officers have concluded that because of the material weakness described below for our payroll process, our disclosure controls and procedures were ineffectiveeffective as of the end of such period.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect theour transactions and dispositions of the assets of the Company;our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors of the Company;directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’sour assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
A material weakness (as defined in SECRule 12b-2) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of the Company’sour internal control over financial reporting as of December 31, 2008.2009. In making this assessment, management used the criteria
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described inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. Based on this assessment, management concluded that the Company’sour internal control over financial reporting was not effective as of December 31, 2008 due to a material weakness described below.2009.
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Payroll process. We determined that ineffective control activities surrounding our payroll process constituted a material weakness in our system of internal control as of December 31, 2008. In particular, these control activities pertained to documentation and approvals of employee master file data, proper evidence concerning approval of hours worked or rate changes and deficiencies with reconciliations where payroll data was a major component. The actions taken and the controls that were in place and operating during 2008 with respect to this material weakness, which was identified in previous years, were not sufficient to effectively remediate this material weakness as of December 31, 2008. In 2008, we continued our process to improve our data quality and controls surrounding our payroll process that began in 2007. During the middle of 2008, we began to relocate the payroll function from a shared services location in Midland, Texas to our corporate offices in Houston, Texas. During this transition, the payroll department lost a significant percentage of its staff which required their replacement with new personnel. We also increased the overall size of the payroll department upon its relocation to Houston. With this change, we also added new payroll practices and procedures. Additionally, throughout 2008, we worked on the replacement of our existing payroll system with a new human resource information system, which included a payroll system, that was initiated in late 2007. However, due to the nature and functionality of the payroll system that was in place during 2008, our conversion to a new system was delayed until January 2009. The implementation of a new human resource information system allows for automated workflow and approval of information, including, among other things, employee master file data, hours worked and rate changes. We believe that as the new payroll department employees receive the proper training and with the implementation of the new human resource and payroll system that was completed in January 2009, we will further strengthen our control structure, increase our efficiency in processing payroll and provide transparency of payroll related data, allowing for the remediation of this material weakness.
Our internal control over financial reporting has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report included herein.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
In October 2006, we filed our 2003 FinancialAs described in “Item 9A. Controls and Informational Report onForm 8-K/A with the SEC, which described numerous material weaknessesProcedures” in internal control over financial reporting that we identified during our restatement and delayed financial reporting process. In the third quarter of 2007, we filed our Annual Report onForm 10-K for the year ended December 31, 2006 and reported that nine of the material weaknesses that we had previously identified remained as of December 31, 2006. Our Annual Report onForm 10-K for the year ended December 31, 2007, filed in February 2008, reported that some of these material weaknesses had been remediated and that seven existed at December 31, 2007.
Beginning in the fourth quarter of 2007 and continuing in 2008, the Company implemented numerous remediation efforts to address the material weaknesses in existence at December 31, 2007 as described in“Item 9A. Controls and Procedures”in the 2007 Report. As a result of these efforts, the Company’sour management determined that as of December 31, 2008, sixineffective control activities surrounding our payroll process constituted a material weakness to our system of internal control. These ineffective control activities had first been identified during 2006 and changes were made to our controls and procedures over 2007 and 2008, and continuing into 2009, in an effort to remediate these deficiencies. Activities to remediate the previously identified material weakness included relocating the payroll function to our corporate offices in Houston, Texas, replacement of personnel, increasing the overall size of the seven material weaknesses identifiedpayroll department, and the implementation of a new human resource information system. The new human resource information system implemented in the 2007 Report had been remediated, but as discussed above, the material weakness relating to theJanuary 2009 allows for automated workflow and approval of standard human resource transactions. Additionally, we have compensating controls surrounding the payroll process had not been remediated. While many of the changes in internal control over financial reporting were made during the fourth quarter of 2007, they were not in place and operating long enough during 2007 to be assessedsuch as effective. In addition, we made changes in internal control over financial reporting during 2008 to further address the material weaknesses identified in the 2007 Report. The material weaknesses identified in the 2007 Report that have been remediated are:
Financial Closeanalytical reviews of payroll expenses and Reporting. Management instituted substantial changes in the fourth quarter of 2007 to our internal control structure related to our financial reporting and close process. These changes included additional personnel, additional analytical procedures and reviews, revised methodologies for the preparation
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Item 14 is incorporated by reference pursuant to Regulation 14A under the Exchange Act. We expect to file a definitive proxy statement with the SEC within 120 days after the close of the year ended December 31, 2008.2009.
