UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
121,210,781. 1-8038001-08038Maryland Maryland
(State or other jurisdiction of
incorporation or organization) 04-2648081 04-2648081
(I.R.S. Employer
Identification No.)1301 McKinney StreetSuite 1800Houston, Texas 77010(Address of principal executive offices, including ZIP Code)(713) 651-4300(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange on Which RegisteredCommon Stock, $0.10 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:None Registrantregistrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes o No ýþRegistrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ýþRegistrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:days. Yes ýþ No oRegistrant'sregistrant’s knowledge, in definitive proxy or information statementstatements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. oRegistrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule12b-2 of the Exchange Act. (Check one):Large accelerated filer ýþAccelerated filer o Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company)Registrantregistrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No ýþ As of June 30, 2007, theRegistrantregistrant held by non-affiliates of the Registrant,registrant as of June 30, 2008, based on the $18.53$19.42 per share closing price for the Registrant'sregistrant’s common stock as quoted byon the National Quotation Bureau's Pink SheetsNew York Stock Exchange on June 29, 2007such date, was $2,145,411,905$1,727,937,807 (for purposes of calculating these amounts, only directors, officers and beneficial owners of 10% or more of the outstanding capital stock of the Registrantregistrant have been deemed affiliates).20, 2008,23, 2009, the number of outstanding shares of common stock of the Registrantregistrant was 128,149,793.Registrant'sRegistrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 with respect to the 20082009 Annual Meeting of Shareholders are incorporated by reference into Part III of thisForm 10-K.
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ITEM 1. | BUSINESS |
ancillary oilfield services.
Key's We also have an ownership interest in a drilling and production services company based in Canada, and, during October 2008, acquired a 26% ownership interest in a drilling and workover services and sub-surface engineering and modeling company based in the Russian Federation.
Data.”
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For our rig-based services, we typically charge by the hour in the United States and Argentina, and by the job in Mexico.
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Conversely, as commodity prices decrease, as they have during the second half of 2008, oil and natural gas producers tend to decrease capital spending for workover services.
Oilfield Transportation Services
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and the wellbore. Production logging can be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This service helps the operator analyze and monitor well performance and determine when a well may need a workover or further stimulation.
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Equipment Overview
Our
Region | Swab(1) | Light Duty(2) | Medium Duty(3) | Heavy Duty(4) | Total | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Appalachia | 2 | 15 | 8 | 1 | 26 | ||||||
Argentina | 1 | 3 | 31 | 7 | 42 | ||||||
Ark-La-Tex | 7 | 0 | 51 | 4 | 62 | ||||||
California | 0 | 86 | 57 | 9 | 152 | ||||||
Gulf Coast | 2 | 1 | 41 | 11 | 55 | ||||||
Mexico | 0 | 0 | 2 | 1 | 3 | ||||||
Mid-Continent | 12 | 13 | 97 | 4 | 126 | ||||||
Permian Basin | 13 | 36 | 232 | 66 | 347 | ||||||
Rocky Mountains | 3 | 2 | 47 | 37 | 89 | ||||||
Southeastern(5) | 6 | 5 | 46 | 16 | 73 | ||||||
Total | 46 | 161 | 612 | 156 | 975 |
Region | Swab(1) | Light-Duty(2) | Medium-Duty(3) | Heavy-Duty(4) | Total | |||||||||||||||
Appalachia | 2 | 14 | 8 | 1 | 25 | |||||||||||||||
Argentina | 1 | 3 | 31 | 7 | 42 | |||||||||||||||
Ark-La-Tex | 4 | 1 | 36 | 7 | 48 | |||||||||||||||
California | 0 | 88 | 66 | 20 | 174 | |||||||||||||||
Gulf Coast | 2 | 0 | 47 | 11 | 60 | |||||||||||||||
Mexico | 0 | 0 | 11 | 3 | 14 | |||||||||||||||
Mid-Continent | 10 | 9 | 97 | 4 | 120 | |||||||||||||||
Permian Basin | 12 | 8 | 216 | 59 | 295 | |||||||||||||||
Rocky Mountains | 2 | 1 | 47 | 33 | 83 | |||||||||||||||
Southeastern Marine(5) | 0 | 0 | 3 | 3 | 6 | |||||||||||||||
Southeastern | 4 | 1 | 41 | 11 | 57 | |||||||||||||||
Total | 37 | 125 | 603 | 159 | 924 |
(1) | Swab rigs include rigs used in shallow-depth wells. | |
(2) | Light-duty rigs include rigs with rated capacity of less than 90 tons. | |
(3) | Medium-duty rigs include rigs with rated capacity of 90 tons to 125 tons. | |
(4) | Heavy-duty rigs include rigs with rated capacity of greater than 125 tons. The seven heavy-duty rigs in Argentina are drilling rigs. | |
(5) | Consists of six inland barge rigs. |
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Region | Vacuum Truck | Winch Truck | Hot Oil Truck | Other | Total | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Appalachia | 16 | 20 | 0 | 9 | 45 | ||||||
Argentina | 1 | 15 | 2 | 29 | 47 | ||||||
Ark-La-Tex | 175 | 26 | 0 | 27 | 228 | ||||||
California | 24 | 1 | 0 | 44 | 69 | ||||||
Gulf Coast | 151 | 37 | 0 | 10 | 198 | ||||||
Mid-Continent | 30 | 16 | 7 | 18 | 71 | ||||||
Permian Basin | 183 | 25 | 63 | 110 | 381 | ||||||
Rocky Mountains | 12 | 2 | 0 | 4 | 18 | ||||||
Southeastern | 0 | 34 | 2 | 2 | 38 | ||||||
Total | 592 | 176 | 74 | 253 | 1,095 |
Region | Vacuum Truck | Winch Truck | Hot Oil Truck | Other | Total | |||||||||||||||
Appalachia | 19 | 21 | 0 | 11 | 51 | |||||||||||||||
Argentina | 1 | 13 | 2 | 30 | 46 | |||||||||||||||
Ark-La-Tex | 174 | 25 | 0 | 36 | 235 | |||||||||||||||
California | 29 | 2 | 0 | 30 | 61 | |||||||||||||||
Gulf Coast | 158 | 30 | 0 | 8 | 196 | |||||||||||||||
Mid-Continent | 23 | 14 | 6 | 20 | 63 | |||||||||||||||
Permian Basin | 181 | 29 | 64 | 110 | 384 | |||||||||||||||
Rocky Mountains | 13 | 2 | 0 | 6 | 21 | |||||||||||||||
Southeastern | 0 | 33 | 3 | 6 | 42 | |||||||||||||||
Total | 598 | 169 | 75 | 257 | 1,099 |
Region | Frac Pumps | Cement Units | Acidizing Units | Nitrogen Units | Total | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
California | 0 | 8 | 0 | 0 | 8 | ||||||
Barnett Shale | 41 | 4 | 3 | 0 | 48 | ||||||
Four Corners | 7 | 3 | 4 | 5 | 19 | ||||||
Mid-Continent | 18 | 4 | 1 | 0 | 23 | ||||||
Permian Basin | 20 | 5 | 3 | 2 | 30 | ||||||
Total | 86 | 24 | 11 | 7 | 128 |
Region | Frac Pumps | Cement Units | Acidizing Units | Nitrogen Units | Coiled Tubing Units | Total | ||||||||||||||||||
California | 0 | 9 | 0 | 0 | 8 | 17 | ||||||||||||||||||
Barnett Shale | 50 | 8 | 7 | 2 | 5 | 72 | ||||||||||||||||||
Mid-Continent | 13 | 3 | 3 | 0 | 0 | 19 | ||||||||||||||||||
Permian Basin | 23 | 7 | 8 | 6 | 2 | 46 | ||||||||||||||||||
Eastern | 0 | 0 | 8 | 6 | 6 | 20 | ||||||||||||||||||
Rocky Mountains | 0 | 0 | 3 | 2 | 3 | 8 | ||||||||||||||||||
Total | 86 | 27 | 29 | 16 | 24 | 182 |
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Argentina | Mexico | Canada | Total | |||||||||||||
(In thousands, except for percentages) | ||||||||||||||||
For the year ended December 31, 2008: | ||||||||||||||||
Revenues | $ | 118,841 | $ | 47,200 | $ | 5,848 | $ | 171,889 | ||||||||
Percentage of total Revenue | 6.0 | % | 2.4 | % | 0.3 | % | 8.7 | % | ||||||||
For the year ended December 31, 2007: | ||||||||||||||||
Revenues | $ | 93,925 | $ | 9,041 | $ | 2,938 | $ | 105,904 | ||||||||
Percentage of total Revenue | 5.7 | % | 0.5 | % | 0.2 | % | 6.4 | % | ||||||||
For the year ended December 31, 2006: | ||||||||||||||||
Revenues | $ | 78,321 | $ | — | $ | — | $ | 78,321 | ||||||||
Percentage of total Revenue | 5.1 | % | 0.0 | % | 0.0 | % | 5.1 | % |
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Revenue from our international operations during 2007 totaled $105.8 million, or 6.4% of total revenue. Revenue from international operationsinitial public offering for 2006 and 2005 totaled $78.3 million and $68.2 million, respectively.
On September 5,those shares.
December 31, 2008, we held a 48.73% interest in AFTI.
relationships is having an experienced, skilled and well-trained work force. In recent years, many of our larger customers have placed increased emphasis on the safety performance and quality of the crews, equipment and services provided by their contractors. We have devoted, and will continue to devote, substantial resources toward employee safety
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market is left with excess supply, placing additional pressure on our pricing.
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our field employeesthe Company in Argentina are represented by formal unions. While Mexico has a strong petroleum workers union, we are currently only employing non-union workers in Mexico. We have not experienced any material work stoppages associated with labor disputes or grievances and consider our relations with our employeesresponse to be satisfactory. During 2007,market conditions, we experienced an annual domestic employee turnover rate of approximately 41%,42% during 2008, compared to a turnover rate of approximately 45%41% in 2006.2007. The high turnover rate is caused, in part, by the nature of the work, which is physically demanding and sometimes performed in harsh outdoor conditions. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. Alternatively, some employees may leave Key if they can earn a higher wage with a competitor.
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CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants.
Recent scientific
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liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible. The CWA can impose substantial civil and criminal penalties for non-compliance.
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ITEM 1A. | RISK FACTORS |
The demand for our services is primarily influenced by currentcompanies, and anticipatedthe recent volatility in oil and natural gas prices. prices, in addition to the deteriorating credit markets and disruptions in the U.S. and global financial systems, may adversely impact our business.
• | the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies; | |
• | oil and natural gas production costs; | |
• | government regulation; and | |
• | conditions in the worldwide oil and natural gas industry. |
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The inability to maintain our pricing could:
Our business involves certain operating risks, which are primarily self-insured, and our insurance may not be adequate to cover all losses or liabilities we might incur in our operations.Increases in industryIndustry capacity may adversely affect our business.employeddeployed by existing service providers to increase their service capacity. We have beenThe new capacity adversely affected by the new capacity as our utilization for 2007rates in 2008, which is down from prior years. Lower utilization of our fleet has led to reduced pricing for our services. ShouldThe combination of overcapacity and declining demand has further exacerbated the pricing pressure for our services. Although oilfield service companies continueare not likely to add significant new capacity under current market conditions, in light of current market conditions and the deteriorating demand for our services, not increase, wethe overcapacity could cause us to experience continued pressure on the pricing of our services and experience lower utilization. This could have a material negative impact on our operating results.An economic downturn may adversely affect our business. There is a concern that the United States may enter into a recession in 2008, and if so, a downturn in the U.S. economy may cause reduced demand for petroleum-based products and natural gas. In addition, during a downturn many oil and natural gas production companies often reduce or delay expenditures to reduce costs, which in turn may cause a reduction in the demand for our services during these periods. If the economic environment should deteriorate, our business, financial condition and results of operations may be adversely impacted.•blow-outs, the uncontrolled flow of natural gas, oil or other well fluids into the atmosphere or an underground formation;•reservoir damage;•fires and explosions;•accidents resulting in serious bodily injury and the loss of life or property;•pollution and other damage to the environment; and•liabilities from accidents or damage by our fleet of trucks, rigs and other equipment.• blow-outs, the uncontrolled flow of natural gas, oil or other well fluids into the atmosphere or an underground formation; • reservoir damage; • fires and explosions; • accidents resulting in serious bodily injury and the loss of life or property; • pollution and other damage to the environment; and • liabilities from accidents or damage by our fleet of trucks, rigs and other equipment. party'sparty’s personnel.
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and Mexico and Canada, as well as investments in a drilling and production services company based in Canada and a drilling and workover services and sub-surface engineering and modeling company based in the Russian Federation. We may expand our operations into other foreign countries. We also have a technology development group in Canada.countries as well. As a result, we are exposed to risks of international operations, including:•increased governmental ownership and regulation of the economy in the markets where we operate;•inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition of higher interest rates and wage and price controls;•increased trade barriers, such as higher tariffs and taxes on imports of commodity products;•exposure to foreign currency exchange rates;•exchange controls or other currency restrictions;•war, civil unrest or significant political instability;•expropriation, confiscatory taxation or nationalization of our assets located in the markets where we operate;•governmental policies limiting investments by and returns to foreign investors;•labor unrest and strikes; and•restrictive governmental regulation and bureaucratic delays.• increased governmental ownership and regulation of the economy in the markets where we operate; • inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition of higher interest rates and wage and price controls; • increased trade barriers, such as higher tariffs and taxes on imports of commodity products; • exposure to foreign currency exchange rates; • exchange controls or other currency restrictions; • war, civil unrest or significant political instability; • restrictions on repatriation of income or capital; • expropriation, confiscatory taxation, nationalization or other government actions with respect to our assets located in the markets where we operate; • governmental policies limiting investments by and returns to foreign investors; • labor unrest and strikes, including the significant labor-related issues we are currently experiencing in Argentina; • deprivation of contract rights; and • restrictive governmental regulation and bureaucratic delays. •negatively impact our results of operations;•restrict the movement of funds and equipment to and from affected countries; and•inhibit our ability to collect receivables.• negatively impact our results of operations; • restrict the movement of funds and equipment to and from affected countries; and • inhibit our ability to collect receivables. ourwe experienced a lower 42% turnover rate domestically during 2007 improved to approximately 41%. The2008. We believe that the high turnover rate is attributable to the nature of the work, which is physically demanding and performed outdoors. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. We cannot assure that at times of high demand we will be able to retain, recruit and train an adequate number of workers. Potential inability or lack of desire by workers to commute to our facilities and job sites and competition for workers from competitors or other industries are factors that could affect our ability to attract and retain workers. We believe that our wage rates are competitive with the wage rates of our competitors and other potential employers. A significant increase in the wages other employers pay could result in a reduction in our workforce, increases in our wage rates, or both. Either of these events could diminish our profitability and growth potential.
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We rely on a limited number of suppliers for certain materials used in providing our pressure pumping services.KeyView®KeyView® system. The inability to successfully develop and integrate the technology could:•limit our ability to improve our market position;•increase our operating costs; and•limit our ability to recoup the investments made in technology initiatives.• limit our ability to improve our market position; • increase our operating costs; and • limit our ability to recoup the investments made in technology initiatives. PleaseFor additional information, see the discussion under“Governmental Regulations”in“Item 1. "BusinessBusiness.”—Governmental Regulations" for more information.vendors,suppliers, our ability to provide pressure pumping services could be limited.ThePursuit of this strategy may be restricted by the recent deterioration of the credit markets, which may significantly limit the availability of funds for such acquisitions. In addition to restricted funding availability, the success of this strategy will depend on our ability to identify suitable acquisition candidates and to negotiate acceptable financial and other terms. There is no assurance that we will be able to do so. The success of an acquisition depends on our ability to perform adequate diligence before the acquisition and on our ability to integrate the acquisition after it is completed. While we commit significant resources to ensure that we conduct comprehensive due diligence, there can be no assurance that all potential risks and liabilities will be identified in connection with an acquisition. Similarly, while we expect to commit substantial resources, including management time and effort, to integrating acquired businesses into ours, there is no assurance that we will be successful integrating these businesses. In particular, it is important that we arebe able to retain both key personnel of the acquired business and its customer base. A loss of either key personnel or customers could negatively impact the future operating results of the acquired business.
20Debt-Related Risk Factors
This risk is significantly exacerbated by the current economic downturn and related instability in the global and U.S. credit markets.
• | refinancing or restructuring our debt; | |
• | selling assets; | |
• | reducing or delaying acquisitions or capital investments, such as remanufacturing our rigs and related equipment; or | |
• | seeking to raise additional capital. |
future prospects for growth.
• | making it more difficult for us to satisfy our obligations under our indebtedness and increasing the risk that we may default on our debt obligations; | |
• | requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities; | |
• | limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other activities; | |
• | limiting management’s flexibility in operating our business; | |
• | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | |
• | diminishing our ability to withstand successfully a downturn in our business or the economy generally; | |
• | placing us at a competitive disadvantage against less leveraged competitors; and |
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• | making us vulnerable to increases in interest rates, because certain debt will vary with prevailing interest rates. |
The securities laws require that we supply current annual and quarterly financial statements in order for us to be able to register securities for a public offering or an acquisition. Although we are able to register securities for public offerings and acquisitions, we are not eligible to use "short-form" registration that allows us to incorporate by reference our SEC reports into our registration statements, or to use shelf registration until we have filed all of our periodic reports in a timely manner for a period of twelve months. Therefore, we will be ineligible for short-form or shelf registration until October 2008. Inability to use short-form or shelf registration could increase the costs of selling securities publicly and could significantly delay such sales.
Taxing authorities may determine that we owe additional taxes from previous years.
As a result of the restatement of
WeDuring the past three years, we have identified material weaknesses in our internal control over financial reporting. These material weaknesses, if not corrected, could affect the reliability of our financial statements and have other adverse consequences."material weaknesses"“material weaknesses” in its financial controls. A "material weakness"“material weakness” is a control 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 annual or interim financial statements will not be prevented or detected.
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• | establish a classified Board of Directors, providing for three-year staggered terms of office for all members of our Board of Directors; | |
• | set limitations on the removal of directors; | |
• | provide our Board of Directors the ability to set the number of directors and to fill vacancies on the Board of Directors occurring between shareholder meetings; and | |
• | set limitations on who may call a special meeting of shareholders. |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 2. | PROPERTIES |
office and yard locations. We owned or leased 57 salt water disposal wells, ten of which were inactive at December 31, 2007. The majority of our salt water disposal wells are located in Texas.
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Class Action Lawsuits
Since June 2004,leased properties, as well as active SWD facilities, categorized by business segment and geographic region:
Well Services | SWD | Pressure | Fishing & | |||||||||||||
Division | (Other Than SWD) | Facilities | Pumping | Rental | ||||||||||||
MID-CONTINENT | ||||||||||||||||
OWNED | 13 | 0 | 1 | 3 | ||||||||||||
LEASE | 13 | 1 | 1 | 6 | ||||||||||||
GULF COAST | ||||||||||||||||
OWNED | 14 | 4 | 0 | 1 | ||||||||||||
LEASE | 16 | 11 | 0 | 11 | ||||||||||||
ARK-LA-TEX | ||||||||||||||||
OWNED | 15 | 13 | 1 | 1 | ||||||||||||
LEASE | 12 | 7 | 1 | 2 | ||||||||||||
APPALACHIA | ||||||||||||||||
OWNED | 0 | 0 | 0 | 0 | ||||||||||||
LEASE | 8 | 0 | 1 | 0 | ||||||||||||
PERMIAN BASIN | ||||||||||||||||
OWNED | 55 | 6 | 0 | 2 | ||||||||||||
LEASE | 25 | 10 | 1 | 3 | ||||||||||||
ROCKY MOUNTAINS | ||||||||||||||||
OWNED | 14 | 0 | 0 | 0 | ||||||||||||
LEASE | 9 | 0 | 5 | 1 | ||||||||||||
CALIFORNIA | ||||||||||||||||
OWNED | 1 | 0 | 0 | 0 | ||||||||||||
LEASE | 11 | 0 | 0 | 1 | ||||||||||||
ARGENTINA | ||||||||||||||||
OWNED | 2 | 0 | 0 | 0 | ||||||||||||
LEASE | 14 | 0 | 0 | 0 | ||||||||||||
CANADA | ||||||||||||||||
OWNED | 0 | 0 | 0 | 0 | ||||||||||||
LEASE | 2 | 0 | 0 | 0 | ||||||||||||
MEXICO | ||||||||||||||||
OWNED | 0 | 0 | 0 | 0 | ||||||||||||
LEASE | 2 | 0 | 0 | 0 | ||||||||||||
TOTAL OWNED | 114 | 23 | 2 | 7 | ||||||||||||
TOTAL LEASE | 112 | 29 | 9 | 24 | ||||||||||||
TOTAL | 226 | 52 | 11 | 31 |
Cause No. MO-04-CV-082;Peter Kaltman, on behalf of himself and all others similarly situated v. Key Energy Services, Inc., Francis D. John, Royce W. Mitchell, Richard J. Alario and James J. Byerlotzer, filednine apartments leased in the United States District Courtand eight apartments leased in Argentina. These apartments are for the Western District of TexasKey employees to use for operational support and business purposes only.
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Cause No. MO-04-CV-083;Malcolm Lord, Individually and on Behalf of all Others Similarly situated v. Key Energy Services, Inc., Francis D. John, Richard J. Alario, James J. Byerlotzer and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas
Cause No. MO-04-CV-090;Celeste Navon, on behalf of herself and all others similarly situated v. Key Energy Services, Inc., Francis John, Royce Mitchell, James Byerlotzer and Richard Alario, filed in the United States District Court for the Western District of Texas
Cause No. MO-04-CV-104;David W. Ortbals, on Behalf of Himself and All Others Similarly situated v. Key Energy Services, Inc., Richard J. Alario, James J. Byerlotzer, Francis D. John, and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas
Cause No. MO-04-CV-0254;Paul E. Steward, on Behalf of Himself and All Others Similarly situated v. Key Energy Services, Inc., Francis D. John and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas
Cause No. MO-04-CV-0227;Garco Investment LLP Individually and on Behalf of all Others Similarly Situated v. Key Energy Services, Inc., Richard J. Alario, James J. Byerlotzer, Francis D. John and Royce W. Mitchell, filed in the United States District Court for the Western District of Texas
These six actions were consolidated into one action. On November 1, 2005, the plaintiffs filed a consolidated amended class action complaint. The complaint was brought on behalf of a putative class of purchasers of our securities between April 29, 2003 and June 4, 2004. The complaint named Key, Francis D. John, Royce W. Mitchell, Richard J. Alario and James J. Byerlotzer as defendants. The complaint generally alleged that we made false and misleading statements and omitted material information from our public statements and SEC reports during the class period in violation of the Securities Exchange Act of 1934, including alleged: (i) overstatement of revenues, net income, and earnings per share, (ii) failure to take write-downs of assets, consisting of primarily idle equipment, (iii) failure to amortize the Company's goodwill, (iv) failure to disclose that the Company lacked adequate internal controls and therefore was unable to ascertain the true financial condition of the Company, (v) material inflation of the Company's financial results at all relevant times, (vi) misrepresentation of the value of acquired businesses, and (vii) failure to disclose misappropriation of funds by employees.
ITEM 3. | LEGAL PROCEEDINGS |
In addition, four shareholder derivative suits were filed by certain of our shareholders. They are as follows:
Cause No. 2004-CV-44728; Moonlight Investments, LTD. on Behalf of Nominal Defendant Key Energy Services, Inc., v. Francis D. John, Richard J. Alario, James J. Byerlotzer, Royce W. Mitchell, Kevin P. Collins, W. Phillip Marcum, and Ralph S. Michael, III, and Key Energy Services, Inc., filed in the 385th Judicial District Court, Midland County, Texas
Cause No. EP-04-CA-0457;Sandra Weissman, Derivatively on Behalf of Key Energy Services, Inc., v. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, Richard J. Alario and Key Energy Services, Inc., a Maryland Corporation, filed in the United States District Court Western District of Texas
Cause No. EP-04-CA-0456;Daniel Bloom, Derivatively on Behalf of Key Energy Services, Inc., v. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, Richard J. Alario and Key Energy Services, Inc., a Maryland Corporation, filed in the United States District Court Western District of Texas
Cause No. 2007-31254;Sandra Weissman, Derivatively on Behalf of Key Energy Services, Inc., v. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, Richard J. Alario and Key Energy Services, Inc., a Maryland Corporation filed in the 270th Judicial District, Harris County, Texas
The first derivative suit was filed on August 9, 2004 in state court in Midland, Texas. Two other derivative suits were filed in federal court in El Paso, Texas on December 10, 2004 and subsequently transferred to federal court in Midland, Texas and consolidated by agreement of the parties. Following dismissal of those two actions for failure to make a demand, a fourth derivative suit was filed in Texas state court in Harris County, Texas on May 22, 2007. Francis D. John, David J. Breazzano, Kevin P. Collins, William D. Fertig, W. Phillip Marcum, Ralph S. Michael III, J. Robinson West, James J. Byerlotzer, Royce W. Mitchell, and Richard J. Alario were named as defendants in one or more of those actions. The actions were filed by individual shareholders purporting to act on our behalf, asserting various claims against the named officer and director defendants. The derivative actions generally allege the same facts as those in the shareholder class action suits. Those suits also allege breach of fiduciary duty, abuse of control, waste of corporate assets, and unjust enrichment by these defendants.
On September 7, 2007, we reached agreements in principle to settle all pending securities 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 Key will be required to pay $1,125,000. Final approval of the settlement of the shareholder and class action claims by the court is anticipated to occur in the first quarter of 2008.
Other Matters
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
At our 2007 Annual Meeting of Shareholders held on December 6, 2007, holders of 106,759,477 shares were present in person or by proxy, constituting 80.47% of the outstanding shares of
Election of four Class I Directors. The shareholders elected four Class I Directors to serve for a three year term, expiring in 2010:
| Votes cast in favor: | Votes withheld: | ||
---|---|---|---|---|
Lynn R. Coleman | 100,342,605 | 6,416,872 | ||
Kevin P. Collins | 93,124,276 | 13,635,201 | ||
W. Phillip Marcum | 93,386,783 | 13,372,694 | ||
William F. Owens | 100,345,025 | 6,414,452 |
Four Class II Directors, David J. Breazzano, William D. Fertig, Robert K. Reeves and J. Robinson West, continued in office with terms expiring in 2008. Three Class III Directors, Richard J. Alario, Ralph S. Michael, III and Arlene M. Yocum, continued in office with terms expiring in 2009.
Adoption of 2007 Equity and Cash Incentive Plan. The shareholders adopted the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan:
Ratification of Independent Registered Public Accounting Firm. The shareholders ratified the selection of Grant Thornton LLP as the Company's independent registered public accounting firm for the current fiscal year:
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market and Share Prices. On October 3, 2007, Key's common stock resumed tradingtraded on the New York Stock Exchange,NYSE, under the symbol "KEG."“KEG.” From April 8, 2005 until October 2, 2007, our stock was quoted on the Pink Sheets Electronic Quotation Service (the "Pink Sheets"“Pink Sheets”) under the symbol "KEGS."“KEGS.” As of February 20, 2008,23, 2009, there were 556537 registered holders of 128,149,793121,210,781 issued and outstanding shares of common stock. The following table sets forth the reported high and low sales price of Key'sKey’s common stock for the periods indicated.
| High | Low | |||||
---|---|---|---|---|---|---|---|
Year Ended December 31, 2007 | |||||||
1st Quarter | $ | 16.90 | $ | 14.85 | |||
2nd Quarter | 20.07 | 16.52 | |||||
3rd Quarter | 18.38 | 13.08 | |||||
4th Quarter | 16.95 | 13.25 |
High | Low | |||||||
Year Ended December 31, 2008 | ||||||||
1st Quarter | $ | 14.47 | $ | 11.23 | ||||
2nd Quarter | 19.75 | 13.36 | ||||||
3rd Quarter | 18.94 | 11.33 | ||||||
4th Quarter | 11.14 | 3.58 |
| High | Low | |||||
---|---|---|---|---|---|---|---|
Year Ended December 31, 2006 | |||||||
1st Quarter | $ | 16.50 | $ | 13.46 | |||
2nd Quarter | 18.75 | 13.00 | |||||
3rd Quarter | 15.85 | 12.75 | |||||
4th Quarter | 16.95 | 13.05 |
High Low 1st Quarter $ 16.90 $ 14.85 2nd Quarter 20.07 16.52 3rd Quarter 18.38 13.08 4th Quarter 16.95 13.25 "soliciting material"“soliciting material” or to be "filed"“filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.ThisDuring 2008, the Company moved from the Russell 2000 Index to the Russell 1000 Index. For comparative purposes, both the Russell 2000 and the Russell 1000 Indices are reflected in the following performance graph. The peer group is comprised of five other companies with a similar mix of operations and includes Nabors Industries Ltd., Weatherford International Ltd., Basic Energy Services, Inc., Complete Production Services, Inc., and RPC, Inc. The graph below matches the cumulative five-year total return to holders of our common stock with the cumulative total returns of the PHLX Oil Service Sector, the listed Russell Indices and our peer group. The graph assumes that the value of the investment in our common stock
25
* | $100 invested on December 31, 2003 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. |
Dividend Policy.
26
repurchases:
Total Number of Shares | ||||||||||||
Purchased as Part of | ||||||||||||
Total Number | Weighted | Publicly Announced | ||||||||||
of Shares | Average Price | Plans or | ||||||||||
Period | Purchased | Paid Per Share | Programs | |||||||||
October 1, 2008 to October 31, 2008 | 1,728,528 | (1) | $ | 6.56 | (2) | 1,725,000 | ||||||
November 1, 2008 to November 30, 2008 | 522,500 | $ | 5.73 | 522,500 | ||||||||
December 1, 2008 to December 31, 2008 | 33,463 | (3) | $ | 4.42 | (4) | — |
(1) | Includes 3,528 shares repurchased to satisfy tax withholding obligations of certain executive officers upon vesting of restricted stock. | |
(2) | The price paid per share on the vesting date with respect to the tax withholding repurchases was determined using the closing prices on October 2, 2008 and October 30, 2008, respectively, as quoted on the NYSE. | |
(3) | Relates to shares repurchased to satisfy tax withholding obligations of certain executive officers upon vesting of restricted stock. | |
(4) | The price paid per share on the vesting date with respect to the tax withholding repurchases was determined using the closing price on December 19, 2008, as quoted on the NYSE. |
Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Appropriate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||
---|---|---|---|---|---|---|---|---|---|---|
October 1, 2007 to October 31, 2007 | 3,528 | (1) | $ | 15.64 | (2) | — | — | |||
November 1, 2007 to November 30, 2007 | 820,400 | (3) | $ | 13.53 | 820,400 | $ | 288.9 million | |||
December 1, 2007 to December 31, 2007 | 1,554,355 | (4) | $ | 13.81 | (5) | 1,521,000 | $ | 267.8 million |
Equity Compensation Plan Information
Number of Securities | Weighted Average | Number of Securities Remaining | ||||||||||
to be Issued Upon | Exercise Price of | Available for Future Issuance | ||||||||||
Exercise of | Outstanding | Under Equity Compensation | ||||||||||
Outstanding Options, | Options, Warrants | Plans (Excluding Securities | ||||||||||
Warrants And Rights | And Rights | Reflected in Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
(In thousands) | (In thousands) | |||||||||||
Equity compensation plans approved by shareholders(1) | 5,429 | $ | 12.53 | 2,250 | ||||||||
Equity compensation plans not approved by shareholders(2) | 120 | $ | 8.07 | — | ||||||||
Total | 5,549 | 2,250 |
(1) | Represents options and other stock-based awards granted under the Key Energy Group, Inc. 1997 Incentive Plan (the “1997 Incentive Plan”) and the options and other stock-based awards available under the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan (the “2007 Incentive Plan”). The 1997 Incentive Plan expired in November 2007. | |
(2) | Represents non-statutory stock options granted outside the 1997 Incentive Plan and the 2007 Incentive Plan. The options have a ten-year term and other terms and conditions as those options granted under the 1997 Incentive Plan. These options were granted during 2000 and 2001. |
27
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||
---|---|---|---|---|---|---|---|
| (in thousands) | | (in thousands) | ||||
Equity compensation plans approved by shareholders(1) | 4,998 | $ | 11.50 | 4,000 | |||
Equity compensation plans not approved by shareholders(2) | 180 | $ | 8.10 | — | |||
Total | 5,178 | 4,000 |
ITEM 6. | SELECTED FINANCIAL DATA |
The historical selected financial data should be read in conjunction with the historical Consolidated Financial Statements and related notes thereto included in “Item 8. "Consolidated Financial Statements and Supplementary Data."
Consolidated Results of Operations Data:
| Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | ||||||||||||
| (in thousands, except per share data) | |||||||||||||||
Revenues | $ | 1,662,012 | $ | 1,546,177 | $ | 1,190,444 | $ | 987,739 | ||||||||
Direct expenses | 985,614 | 920,602 | 780,243 | 685,420 | ||||||||||||
Gross margin | 676,398 | 625,575 | 410,201 | 302,319 | ||||||||||||
General and administrative expenses | 230,396 | 195,527 | 151,303 | 162,133 | ||||||||||||
Operating income, before depreciation and amortization | 446,002 | 430,048 | 258,898 | 140,186 | ||||||||||||
Depreciation and amortization | 129,623 | 126,011 | 111,888 | 103,339 | ||||||||||||
Interest expense, net of amounts capitalized | 36,207 | 38,927 | 50,299 | 46,206 | ||||||||||||
Other, net | 4,232 | (9,370 | ) | 12,313 | 19,114 | |||||||||||
Income (loss) from continuing operations before income taxes | 275,940 | 274,480 | 84,398 | (28,473 | ) | |||||||||||
Income tax (expense) benefit | (106,768 | ) | (103,447 | ) | (35,320 | ) | 1,890 | |||||||||
Minority interest | 117 | — | — | — | ||||||||||||
Income (loss) from continuing operations | 169,289 | 171,033 | 49,078 | (26,583 | ) | |||||||||||
Discontinued operations, net of tax | — | — | (3,361 | ) | (5,643 | ) | ||||||||||
Net income (loss) | $ | 169,289 | $ | 171,033 | $ | 45,717 | $ | (32,226 | ) | |||||||
Income (loss) per common share from continuing operations: | ||||||||||||||||
Basic | $ | 1.29 | $ | 1.30 | $ | 0.37 | $ | (0.20 | ) | |||||||
Diluted | $ | 1.27 | $ | 1.28 | $ | 0.37 | $ | (0.20 | ) | |||||||
Income (loss) per common share from discontinued operations: | ||||||||||||||||
Basic | $ | — | $ | — | $ | (0.03 | ) | $ | (0.04 | ) | ||||||
Diluted | $ | — | $ | — | $ | (0.03 | ) | $ | (0.04 | ) | ||||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | 1.29 | $ | 1.30 | $ | 0.34 | $ | (0.24 | ) | |||||||
Diluted | $ | 1.27 | $ | 1.28 | $ | 0.34 | $ | (0.24 | ) |
Cash Flow Data:
| Year Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | |||||||||
| (in thousands) | ||||||||||||
Net cash provided by operating activities | $ | 249,919 | $ | 258,724 | $ | 218,838 | $ | 69,801 | |||||
Net cash used in investing activities | (302,847 | ) | (245,647 | ) | (33,218 | ) | (64,081 | ) | |||||
Net cash provided by (used in) financing activities | 23,240 | (18,634 | ) | (111,213 | ) | (88,277 | ) | ||||||
Effect of exchange rates on cash | (184 | ) | (238 | ) | (662 | ) | (233 | ) |
Selected Balance Sheet Data:
| December 31, 2007 | December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||
Working capital | $ | 253,068 | $ | 265,498 | $ | 169,022 | $ | 165,920 | ||||
Property and equipment, gross | 1,595,225 | 1,279,980 | 1,089,826 | 999,414 | ||||||||
Property and equipment, net | 911,208 | 694,291 | 610,341 | 597,778 | ||||||||
Total assets | 1,859,077 | 1,541,398 | 1,329,244 | 1,316,622 | ||||||||
Long-term debt and capital leases, net of current maturities | 511,614 | 406,080 | 410,781 | 481,047 | ||||||||
Total liabilities | 970,079 | 810,887 | 775,187 | 810,956 | ||||||||
Stockholders' equity | 888,998 | 730,511 | 554,057 | 505,666 | ||||||||
Cash dividends per common share | — | — | — | — |
ITEM 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsOperations”and the historical consolidated financial statements and related notes thereto included in“Item 8. Consolidated Financial Statements and Supplementary Data.”
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Revenues | $ | 1,972,088 | $ | 1,662,012 | $ | 1,546,177 | $ | 1,190,444 | $ | 987,739 | ||||||||||
Direct operating expenses | 1,250,327 | 985,614 | 920,602 | 780,243 | 685,420 | |||||||||||||||
Depreciation and amortization expense | 170,774 | 129,623 | 126,011 | 111,888 | 103,339 | |||||||||||||||
Impairment of goodwill and equity method investment | 75,137 | — | — | — | — | |||||||||||||||
General and administrative expenses | 257,707 | 230,396 | 195,527 | 151,303 | 162,133 | |||||||||||||||
Interest expense, net of amounts capitalized | 41,247 | 36,207 | 38,927 | 50,299 | 46,206 | |||||||||||||||
Other, net | 2,840 | 4,232 | (9,370 | ) | 12,313 | 19,114 | ||||||||||||||
Income from continuing operations before income taxes and minority interest | 174,056 | 275,940 | 274,480 | 84,398 | (28,473 | ) | ||||||||||||||
Income tax (expense) benefit | (90,243 | ) | (106,768 | ) | (103,447 | ) | (35,320 | ) | 1,890 | |||||||||||
Minority interest | 245 | 117 | — | — | — | |||||||||||||||
Income from continuing operations | 84,058 | 169,289 | 171,033 | 49,078 | (26,583 | ) | ||||||||||||||
Discontinued operations, net of tax | — | — | — | (3,361 | ) | (5,643 | ) | |||||||||||||
Net income (loss) | $ | 84,058 | $ | 169,289 | $ | 171,033 | $ | 45,717 | $ | (32,226 | ) | |||||||||
Income (loss) per common share from continuing operations: | ||||||||||||||||||||
Basic | $ | 0.68 | $ | 1.29 | $ | 1.30 | $ | 0.37 | $ | (0.20 | ) | |||||||||
Diluted | $ | 0.67 | $ | 1.27 | $ | 1.28 | $ | 0.37 | $ | (0.20 | ) | |||||||||
Income (loss) per common share from discontinued operations: | ||||||||||||||||||||
Basic | $ | — | $ | — | $ | — | $ | (0.03 | ) | $ | (0.04 | ) | ||||||||
Diluted | $ | — | $ | — | $ | — | $ | (0.03 | ) | $ | (0.04 | ) | ||||||||
Net income (loss) per common share: | ||||||||||||||||||||
Basic | $ | 0.68 | $ | 1.29 | $ | 1.30 | $ | 0.34 | $ | (0.24 | ) | |||||||||
Diluted | $ | 0.67 | $ | 1.27 | $ | 1.28 | $ | 0.34 | $ | (0.24 | ) |
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash provided by operating activities | $ | 367,164 | $ | 249,919 | $ | 258,724 | $ | 218,838 | $ | 69,801 | ||||||||||
Net cash used in investing activities | (329,074 | ) | (302,847 | ) | (245,647 | ) | (33,218 | ) | (64,081 | ) | ||||||||||
Net cash (used in) provided by financing activities | (7,970 | ) | 23,240 | (18,634 | ) | (111,213 | ) | (88,277 | ) | |||||||||||
Effect of exchange rates on cash | 4,068 | (184 | ) | (238 | ) | (662 | ) | (233 | ) |
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Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Working capital | $ | 285,749 | $ | 253,068 | $ | 265,498 | $ | 169,022 | $ | 165,920 | ||||||||||
Property and equipment, gross | 1,858,307 | 1,595,225 | 1,279,980 | 1,089,826 | 999,414 | |||||||||||||||
Property and equipment, net | 1,051,683 | 911,208 | 694,291 | 610,341 | 597,778 | |||||||||||||||
Total assets | 2,016,923 | 1,859,077 | 1,541,398 | 1,329,244 | 1,316,622 | |||||||||||||||
Long-term debt and capital leases, net of current maturities | 633,591 | 511,614 | 406,080 | 410,781 | 481,047 | |||||||||||||||
Total liabilities | 1,156,191 | 970,079 | 810,887 | 775,187 | 810,956 | |||||||||||||||
Stockholders’ equity | 860,732 | 888,998 | 730,511 | 554,057 | 505,666 | |||||||||||||||
Cash dividends per common share | — | — | — | — | — |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Business and Growth Strategies
enhancement of safety and quality.
29
We are currently evaluating a number of geographic-focused acquisition candidates, primarily” in our well servicing segment, and these acquisitions, if completed, would help strengthen our position in several core markets. We may seek to identify other acquisition candidates and we may evaluate acquisition opportunities in either our pressure pumping or fishing and rental services segments. this Item.
services resulted from the overall turmoil in the credit markets that caused many of our customers to begin to slow down their capital spending, and from significant declines in the prices of oil and natural gas. In response to the pending downturn, we took steps during the later part of the third quarter and in the fourth quarter of 2008 to decrease our spending levels and control costs. These steps included targeted reductions in our workforce, reductions in pay and other reductions in our cost structure. We believe that the actions we have already taken will result in significant cost savings in the near term, and we are continuing to implement other cost saving measures during early 2009, including further reductions in our spending levels and capital expenditures, in order to further improve our cost structure.
more capital tomaintain liquidity and provide flexibility for the use of our acquisition and share repurchase programs.capital. Presently, we estimate that we will spend approximately $175.0$130.0 million in capital expenditures in 2008; however, that amount2009, of which we estimate approximately $20.0 million a quarter will be devoted to maintenance of our existing fleet. Our 2009 capital spending could increase if we are awarded additional international work which would require usor recognize an opportunity to build new equipment.
expand our services in a particular market.
International Expansion. We presently operate in Argentina and Mexico and have a technology development group based in Canada. We are evaluating ways in which we can expand internationally. One of our objectives is to redeploy under-utilized assets to international markets. In addition, we will consider strategic international acquisitions in order to establish a presence in a particular market, if appropriate. We have evaluated a number of international markets, and our near-term priority is expansion in Mexico. Long term, we believe opportunities may exist in the Middle East, Russia and Latin America. See Item 1. "Business—Foreign Operations," for further discussion of our current international operations. We also have an investment in IROC Energy Services Corp. in Canada. See Item 8. "Consolidated Financial Statements and Supplementary Data," Note 7—"Investment in IROC Energy Services Corp."
Technology Initiative. We have invested, and will continue to invest, in technology projects that improve operating efficiencies for both ourselves and our customers, improve safety performance of our well service rigs and fluid hauling vehicles and provide opportunities for additional revenue. In 2003, we began deployment of our proprietary well service technology. The KeyView® system captures well-site operating data, thereby allowing customers and ourselves to monitor and analyze information about well servicing, resulting in improved efficiency. At December 31, 2007,2008, we had 220 KeyView® units installed. The KeyView® system increases our and our customers' visibility into activities at the well site. Through this technology, we have the ability to (i) ensure proper rod and tubing make-up which will result$92.7 million in reduced downhole failures, (ii) improve efficiency, through better logistics and planning, and (iii) improve safety. We believe that this system provides us a competitive advantage as it is a patented technology. For a further discussion of the KeyView® system, see Item 1. "Business—Patents, Trade Secrets, Trademarks and Copyrights."
Our technology initiative was expanded with the acquisition of AMI in 2007. AMI designs and produces oilfield service data acquisition, control and information systems. AMI's technology platform and applications facilitate the collection of job performance and related information and digitally distributes the information to customers. AMI contributed to the development of the KeyView® system and will assist in the advancement of this technology.
Expansion of Services Offering. We believe that it is important to have a broad and diverse services offering. For this reason, we have invested in our pressure pumping segment and our fishing and rental segment. In addition, during 2006 we entered the cased-hole electric wireline business in Texas, and we expanded our cased-hole electric wireline operation during 2007. During 2008, we intend to seek opportunities to expand our wireline services to other markets and to expand our project with PEMEX in Mexico. We also have ordered six coiled-tubing units which we expect to receive during the
second quarter of 2008. We believe that some customers prefer to consolidate vendors and we feel that our expanded services offering may provide better opportunities for customer penetration.
Training and Developing Employees. We devote significant resources to the training and professional development of our employees, with a special emphasis on safety. We currently own and operate training centers in Texas, California, Wyoming and Louisiana. In addition, in conjunction with local community colleges, we have two cooperative training centers in New Mexico and Oklahoma. The training centers are used to enhance our employees' understanding of operating and safety procedures. We recognize the historically high turnover rate in the industry in which we operate. We are committed to offering attractive and competitive compensation, benefits and incentive programs for our employees in order to ensure a steady stream of qualified, safety-conscious personnel that are able to provide quality service to our customers.
Current Financial Condition and Liquidity
We believe our current financial condition is strong, and we believe that our current reserves of cash and cash equivalents currentas well as $139.3 million of availability under the revolving portion of our 2007 Senior Secured Credit Facility, and internally generated cash flow from operations are sufficient to finance the cash requirements of our current and future operations and our budgeted capital expenditures for 2008. As of December 31, 2007, we had $58.8 million in cash and short-term investments and $288.9 million of availabilityhave no maturities under our 20078.375% Senior Notes (the “Senior Notes”) until 2014 or required repayments of borrowings on our Senior Secured Credit Facility.
In July 2007, we adopted a near-term capital investment plan to return capital to our shareholders and to make strategic geographic-focused acquisitions. Our Board of Directors subsequently authorized a share repurchase program of up to $300 million which is effective through March 31, 2009. Through December 31, 2007, we repurchased 2,341,400 shares of our common stock for approximately $32.2 million. In addition, through February 20, 2008, we cumulatively had repurchased 5,363,096 shares for approximately $69.8 million. Our repurchase program, as well as the amount and timing of the future repurchases, is subject to market conditions and our financial condition and liquidity.
The capital investment plan also provides for the Company to make acquisitions. During 2007, we completed three acquisitions for approximately $158.0 million in the aggregate, net of cash acquired. Our capital expenditure program for 2008 is expected to total approximately $175.0 million; however, that amount is subject to market conditions, including activity levels, commodity prices and industry capacity. Our focus in 2008 will be maximizing the utilization of our current equipment, however, we may seek to increase our 2008 capital expenditure budget in the event international expansion opportunities develop. See—"Acquisitions."
Our stock repurchase program and acquisition program, as well as planned capital expenditures, are expected to be financed through a combination of cash on hand, cash flow from operations and borrowings under our 2007 Senior Secured Credit Facility.
Performance Measures
In determining the overall health of the oilfield service industry, we believe that the Baker Hughes U.S. land drilling rig count is the best barometer of capital spending and activity levels, since this data is made publicly available on a weekly basis. Historically, our activity levels have been highly correlated to capital spending by oil and natural gas producers. When commodity prices are strong, capital spending by our customers tends to be high, as illustrated by the Baker Hughes U.S. land drilling rig
count. As the following table indicates, the land drilling rig count has increased significantly over the past several years as commodity prices, both oil and natural gas, have increased.
Year | WTI Cushing Crude Oil(1) | NYMEX Henry Hub Natural Gas(1) | Average Baker Hughes Land Drilling Rigs(2) | |||||
---|---|---|---|---|---|---|---|---|
2002 | $ | 26.18 | $ | 3.37 | 717 | |||
2003 | $ | 31.08 | $ | 5.49 | 924 | |||
2004 | $ | 41.51 | $ | 6.18 | 1,095 | |||
2005 | $ | 56.64 | $ | 9.02 | 1,290 | |||
2006 | $ | 66.05 | $ | 6.98 | 1,559 | |||
2007 | $ | 72.34 | $ | 7.12 | 1,695 |
Internally, we measure activity levels primarily through our rig and trucking hours. Generally, as capital spending by oil and natural gas producers increases, demand for our services also rises, resulting in increased rig and trucking services and more hours worked. Conversely, when activity levels decline due to lower spending by oil and natural gas producers, we generally provide fewer rig and trucking services, which results in lower hours worked. We publicly release our monthly rig and trucking hours, and the following table presents our quarterly rig and trucking hours from 2005 through 2007.
| Rig Hours | Trucking Hours | |||
---|---|---|---|---|---|
2005: | |||||
First Quarter | 621,228 | 641,841 | |||
Second Quarter | 661,928 | 635,448 | |||
Third Quarter | 668,741 | 607,500 | |||
Fourth Quarter | 646,810 | 594,762 | |||
Total 2005: | 2,598,707 | 2,479,551 | |||
2006: | |||||
First Quarter | 663,819 | 609,317 | |||
Second Quarter | 679,545 | 602,118 | |||
Third Quarter | 677,271 | 587,129 | |||
Fourth Quarter | 637,994 | 578,471 | |||
Total 2006: | 2,658,629 | 2,377,035 | |||
2007: | |||||
First Quarter | 625,748 | 571,777 | |||
Second Quarter | 611,890 | 583,074 | |||
Third Quarter | 597,617 | 570,356 | |||
Fourth Quarter | 614,444 | 583,191 | |||
Total 2007: | 2,449,699 | 2,308,398 |
In our pressure pumping segment, we track the total number of jobs performed to measure activity levels. The following table presents the types and total number of jobs performed by our pressure pumping services segment for the periods presented.
Year | Fracturing | Cementing | Acidizing | Other | Total | |||||
---|---|---|---|---|---|---|---|---|---|---|
2005 | 1,329 | 1,558 | 1,057 | 106 | 4,050 | |||||
2006 | 1,585 | 1,958 | 639 | 96 | 4,278 | |||||
2007 | 2,152 | 2,074 | 481 | 77 | 4,784 |
The majority of our pressure pumping segment revenue (approximately 80 - 85%) is derived from our fracturing jobs.
Operating Environment
2007 Operating Environment
Activity levels in 2007 (as measured by our rig and trucking hours) were lower than 2006 due to increased supply of well service rigs and oilfield trucking assets in the market. Our activity declines occurred despite continued strength of commodity prices, including record high oil prices, and overall industry demand for well services. Rig hours for 2007 totaled 2,449,699, a decrease of 7.9% from 2006. The decrease in activity levels would have been greater absent the impact of the businesses acquired during 2007. The Moncla acquisition included 59 well service rigs and during the fourth quarter those assets contributed approximately 34,000 rig hours.
Our trucking hours totaled 2,308,398, a decrease of 2.9% from 2006. The Baker Hughes land drilling rig count averaged 1,695 in 2007, an increase of approximately 8.7% from an average of 1,559 in 2006. The higher drilling rig count is indicative of the strength of the U.S. marketplace, which is directly associated with the strength of oil and natural gas prices. As of December 31, 2007, the Baker Hughes land drilling rig count totaled 1,719, while in 2007 the WTI Cushing price for light sweet crude averaged $72.34 per barrel and natural gas prices averaged $7.12 per MMbtu.
Our business has been negatively impacted by new industry capacity. In our well servicing segment, both our rig and trucking hours are down year-over-year due primarily to new competition. The new capacity has entered the U.S. market place due to high returns and strong demand for oilfield services. In addition, some of our customers have elected to vertically integrate and have purchased and now operate their own equipment. Activity levels in most of our operating regions are down from 2006; the regions with the most pronounced declines include the Gulf Coast, the Rocky Mountains and East Texas. These regions are characterized by high natural gas production. In response to lower utilization of our assets, during 2007, we reduced pricing for some of our customers. These reductions have taken place in most of our regions and in all of our operating segments.
2008 Operating Environment Outlook
Our activity levels to date in 2008, excluding the contribution of businesses acquired in 2007, are down from last year. However, our business remains strong and we believe that our activity levels will remain stable for the balance of 2008. Our belief is predicated on the fact that commodity prices through February 2008 remain at levels higher than 2007. As of February 15, 2008 crude oil prices were in excess of $90 per barrel while natural gas prices were in excess of $8.50 per MMbtu. At these high prices, we believe customer spending in 2008 could surpass spending in 2007. We also believe that our recent acquisitionsFacility until 2012. Also, in the fourth quarter of 2007 will help offset declines in our other businesses. We also believe that our recent acquisitions in the fourth quarter of 2007 will help offset declines in our other businesses. Because demand for our well servicing, pressure pumping services, and fishing and rental services is generally correlated2009, we are required to commodity prices and drilling activity, our activity levels may be negatively impacted in the event commodity prices decline rapidly or unexpectedly.
Although we believe that demand for our services will be strong because of the high commodity prices, we also believe that our business will continue to face increased competition due to additional industry capacity and new market entrants. We believe that this risk is somewhat mitigated as a number of oilfield service companies, including us, have announced capital spending reductions for 2008. This should reduce the rate of growth of new equipment entering the market. This reduction, combined with higher commodity prices, leads us to believe that 2008 could be as strong, if not stronger, than 2007. Our 2008 budget estimates that our revenues will exceed revenue for 2007. In the event new capacity does not slow, we believe that margin compression could occur in 2008 as increased equipment capacity could result in lower utilization of our assets. Further, an increase in equipment supply could lead to higher labor rates as the demand for people would correspondingly increase.
We also have initiatives underway that we hope will maintain and possibly enhance our margins. These initiatives include a continued focus on safety improvements and reductions in employee turnover. Better safety performance, we believe, will reduce workers compensation expense and help lower our insurance premiums. Additionally, lower employee turnover will help reduce hiring and training costs. We are also seeking to reduce our reliance on third-party consultants and outside legal counsel, to the extent their services were generally attributable to matters arising out of our restatement and financial reporting process. We believe this will help reduce our general and administrative expenses.
We also anticipate that our international operations will expand. We have received additional requests for equipment from our customer in Mexico. Presently, we operate three rigs in Mexico, and we believe that we will send up to eight additional rigs to Mexico during 2008. In addition, we have secured pricing increases in our Argentina division and anticipate that margins for that division should improve in 2008.
Acquisitions
Moncla Acquisition. On October 25, 2007, we purchased all of the outstanding shares and membership interests of Moncla. Moncla operated in Texas, Louisiana, Mississippi, Alabama and Florida. Headquartered in Lafayette, Louisiana, and with offices in Sour Lake, Texas and Sandersville, Mississippi, Moncla operated a total of 59 rigs (including six swabbing units) and had over 900 employees. Moncla's fleet included 37 daylight rigs for well servicing and workovers and eight twenty-four hour rigs for shallow drilling, sidetracking and deep workovers. In addition, the Moncla companies operated eight barge rigs, and owned rig-up, swab, hot oil and anchor trucks, tubing testing units and rental equipment. Revenue attributable to the Moncla business is anticipated to be approximately $140.0 million in 2008.
The purchase price for Moncla was approximately $146.0 million, which consisted of net assets acquired of $131.3 million and assumed debt of $14.7 million. Amounts transferred at closing consisted of (i) $108.6 million of cash; (ii) the issuance of an unsecured promissory note for $12.5 million that is payable in a lump sum on October 25, 2009, with accrued interest payable on each anniversary date of the closing of the acquisition; and (iii) the issuance of an unsecured promissory note for $10.0 million that is payable in five annual installments of $2.0 million plus accrued interest on each annual anniversary date of the closing of the acquisition. Both promissory notes bear interest at the Federal Funds rate, adjusted annually on the anniversary of the closing date. The long-term debt assumed in the acquisition was repaid simultaneously with the closing of the transaction. The purchase price is subject to a working capital adjustment, which has not been finalized.
The Moncla purchase agreement entitles the former owners of Moncla to receive earnoutmake principal payments on each of the next five anniversary dates of the closing date of the acquisition, of up to $5.0 million (up to $25.0 million in total). The earnout payments are based on the achievement of certain revenue targets and profit percentage targets over the next five years and are payable upon
achieving annual targets or a cumulative target on the fifth anniversary date. These payments represent an additional element of cost of the acquired entity and will be accounted for as an increase to goodwill if and when the contingent payment is made.
Kings Acquisition. On December 7, 2007, we acquired the well service assets and related equipment of Kings. The acquired assets, all of which are located in California, included 36 marketed well service rigs, 10 stacked well service rigs and related support equipment. We anticipate that the acquired assets will contribute revenue of approximately $36 million in 2008. Total consideration paid for the transaction was approximately $45 million in cash, which included consideration for a noncompete agreement with the owner of Kings.
Technology Acquisition. On September 5, 2007, we purchased, through a wholly-owned Canadian subsidiary, all of the outstanding shares of AMI, a privately-held Canadian technology company focused on oilfield service equipment controls, data acquisition, and digital information work flow. The purchase price was $6.6 million in cash and the assumption of approximately $2.9 million in debt, which has since been paid in full. The purchase agreement also provided for deferred cash payments up to a maximum of $1.8totaling $14.5 million related to the retention of key employees. On the date of acquisition, AMI owned a 48% interest in Advanced Flow Technologies, Inc. ("AFTI"), a privately-held Canadian technology company focused on low cost wireless gas well production monitoring. As part of the purchase of AMI we were required to exercise an option to increase AMI's interest in AFTI to 51.46%. The cost to exercise this option was approximately $0.5 million. As a result, through AMI we now own a 51.46% interest in AFTI. In connection with the acquisition of AMI, we became party to a revolving credit agreement with a maximum outstanding amount of $0.9 million. This facility was extinguished in November 2007.
We made no acquisitions during 2005 or 2006.
Discontinued Operations
On January 15, 2005, we completed the sale to Patterson-UTI Energy, Inc. of the majority of our contract drilling assets, which included drilling rigs and associated equipment in the Permian Basin and Four Corners regions and certain rigs from the Rocky Mountain region. In consideration of the sale, we received approximately $60.5 million in cash, after paying all fees related to the sale. The sale included approximately 25 active rigs and 10 stacked rigs as well as a number of rigs which had been classified as either scrap or salvage. The active rigs were mechanical with an average of approximately 700 horsepower and depth ratings of approximately 10,000 feet. As a result of the sale, we treated our drilling business as a discontinued operation for all periods presented and recorded an after-tax loss from discontinued operations of $3.4 million, or $0.03 per diluted share, for the year ended December 31, 2005.
Cash flows from our discontinued operations have been segregated and individually presented for all years in our consolidated statements of cash flows. We do not anticipate that the absence of these cash flows in future periods will have a material adverse impact on our liquidity, results of operations or financial position.
The following table sets forth statements of operations for the years indicated:
| Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||||||
| (in thousands) | ||||||||||
REVENUES: | |||||||||||
Well servicing | $ | 1,264,797 | $ | 1,201,228 | $ | 956,457 | |||||
Pressure pumping | 299,348 | 247,489 | 152,320 | ||||||||
Fishing and rental | 97,867 | 97,460 | 81,667 | ||||||||
Total revenues | 1,662,012 | 1,546,177 | 1,190,444 | ||||||||
COSTS AND EXPENSES: | |||||||||||
Well servicing | 738,694 | 725,008 | 634,043 | ||||||||
Pressure pumping | 189,645 | 138,377 | 92,301 | ||||||||
Fishing and rental | 57,275 | 57,217 | 53,899 | ||||||||
Depreciation and amortization | 129,623 | 126,011 | 111,888 | ||||||||
General and administrative | 230,396 | 195,527 | 151,303 | ||||||||
Interest expense, net of amounts capitalized | 36,207 | 38,927 | 50,299 | ||||||||
Loss on early extinguishment of debt | 9,557 | — | 20,918 | ||||||||
Loss (gain) on sale of assets, net | 1,752 | (4,323 | ) | (656 | ) | ||||||
Interest income | (6,630 | ) | (5,574 | ) | (2,713 | ) | |||||
Other, net | (447 | ) | 527 | (5,236 | ) | ||||||
Total costs and expenses, net | 1,386,072 | 1,271,697 | 1,106,046 | ||||||||
Income from continuing operations before income taxes | 275,940 | 274,480 | 84,398 | ||||||||
Income tax expense | (106,768 | ) | (103,447 | ) | (35,320 | ) | |||||
Minority interest | 117 | — | — | ||||||||
INCOME FROM CONTINUING OPERATIONS | 169,289 | 171,033 | 49,078 | ||||||||
Loss from discontinued operations, net of tax expense of $4,590 | — | — | (3,361 | ) | |||||||
NET INCOME | $ | 169,289 | $ | 171,033 | $ | 45,717 | |||||
For the year ended December 31, 2007, our revenue reached a record high. Our revenue for the year ended December 31, 2007 totaled $1.66 billion, which represents a 7.5% increase over the prior year. Our net income for the year totaled $169.3 million, which represents a 1.0% decrease from the prior year while our earnings per fully diluted share totaled $1.27 compared to $1.28 from the prior year.
Impacting our net income and earnings per share for 2007 results were costs associated with the refinancing of our indebtedness in the fourth quarter of 2007. These include a loss related to the early extinguishment of our 2005 Senior Secured Credit Facility (defined herein) which totaled $9.6 million, or $0.04 per fully diluted share, and the termination of two interest rate swaps associated with that debt, which resulted in a loss of $2.3 million, or $0.01 per fully diluted share.
A detailed review of our operations, including a review of our segments, is provided below.
Revenue
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Our revenue for the year ended December 31, 2007 increased $115.8 million, or 7.5%, to $1.66 billion from $1.55 billion for the year ended December 31, 2006. The increase in revenue relates to:
Revenue (in millions) | Change from 2006 | ||
---|---|---|---|
Well servicing segment | $ | 63.5 | |
Pressure pumping segment | $ | 51.9 | |
Fishing & rental segment | $ | 0.4 | |
Total change | $ | 115.8 |
Businesses acquired during 2007 contributed approximately $26.5 million of the increase in the well servicing segment over 2006. The Moncla transaction included 59 well service rigs, and during the fourth quarter those assets contributed approximately 34,000 rig hours and $23.6 million in revenue. The remaining $2.9 million of revenues from acquired businesses is attributable to AMI. Mexican operations began during the second quarter of 2007 and added $9.0 million in revenue to our well servicing segment. We presently operate three well service rigs in Mexico and the number of rigs in Mexico is anticipated to increase by eight rigs (for a total of 11 rigs) during 2008. Our cased-hole electric wireline activities in our well servicing segment also expanded during the year, providing a $13.7 million increase in revenues as we added additional units to our fleet. We believe this business offers a good growth opportunity and we intend to add additional cased-hole electric wireline units during 2008. Absent these items, overall increases in well servicing segment revenue were driven primarily by the impact of pricing increases that were implemented during the middle of 2006, though we were affected by declines in prices in the second half of 2007. Revenue was also affected by declines in rig and truck hours, as competition in the well servicing sector increased during 2007 and we lost market share to new capacity in the marketplace. Our pressure pumping segment revenue increased as we deployed additional frac pumps and cement units. This allowed us to perform more frac jobs, which is the primary revenue driver in our pressure pumping segment. Revenue in the fishing and rental segment was flat compared to 2006.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Our revenue for the year ended December 31, 2006 increased $355.7 million, or 29.9%, to $1.55 billion from $1.19 billion for the year ended December 31, 2005. The increase in revenue relates to:
Revenue (in millions) | Change from 2005 | ||
---|---|---|---|
Well servicing segment | $ | 244.7 | |
Pressure pumping segment | $ | 95.2 | |
Fishing & rental segment | $ | 15.8 | |
Total change | $ | 355.7 |
Our well servicing segment benefited from a 2.3% increase in our rig hours combined with a significant improvement in the pricing for our well service rig services. Our pressure pumping segment revenue increased as we deployed new frac pumps and cement units, adding to our fleet. This allowed us to perform more frac jobs, which is the primary revenue driver in our pressure pumping segment. Fishing and rental revenue increased principally due to higher activity levels and improved pricing.
Direct Costs
Direct costs as a percentage of total revenue improved to 59.3% for the year ended December 31, 2007, compared to 59.5% for the year ended December 31, 2006. Direct costs as a percentage of total revenue improved to 59.5% for the year ended December 31, 2006, compared to 65.5% for the year ended December 31, 2005.
Year ended December 31, 2007 versus Year Ended December 31, 2006
Consolidated direct costs for the year ended December 31, 2007 increased $65.0 million, or 7.1%, to $985.6 million from $920.6 million for the year ended December 31, 2006. The $65.0 million increase is primarily the result of:
Direct Costs (in millions) | Change from 2006 | |||
---|---|---|---|---|
Employee compensation | $ | 25.4 | ||
Pressure pumping supplies and equipment | $ | 41.6 | ||
Well service acquisitions | $ | 16.0 | ||
Self-insurance costs | $ | (21.8 | ) | |
Other costs | $ | 3.8 | ||
Total change | $ | 65.0 |
Our employee compensation costs, which include salaries, bonuses and related expenses, increased $25.4 million primarily as the result of increased incentive compensation and increased headcount, exclusive of the impact of acquisitions. Wage and bonus increases during the year were necessary, as the market for our labor continues to be extremely competitive. With new competitors entering the market and existing competitors adding equipment capacity, we were forced to increase wage rates in order to maintain our high levels of quality personnel. Supplies and equipment for our pressure pumping segment increased $41.6 million, primarily as a result of increases in the size of our pressure pumping fleet and increases in the costs to purchase and transport materials used in providing services to our customers. Acquisitions in our well services segment added $16.0 million to our direct costs in 2007. Our self-insurance costs, composed of costs associated with workers compensation, vehicular liability exposure, and insurance premiums declined significantly in 2007 as compared to 2006. We have been focused on improving our safety performance, and in 2007 the number and severity of safety-
related accidents declined. We continue to focus on safety improvements and our safety performance is a component of our incentive compensation program.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Consolidated direct costs for the year ended December 31, 2006 increased $140.4 million, or 18.0%, to $920.6 million from $780.2 million for the year ended December 31, 2005. The $140.4 million increase is primarily the result of:
Direct Costs (in millions) | Change from 2005 | |||
---|---|---|---|---|
Employee compensation | $ | 97.0 | ||
Well service equipment and supplies | $ | 17.9 | ||
Pressure pumping equipment and supplies | $ | 36.6 | ||
Other costs | $ | (11.1 | ) | |
Total change | $ | 140.4 |
Our employee compensation costs, which include salaries, bonuses and related expenses increased $97.0 million, primarily as the result of increased incentive compensation and increased headcount. Wage and bonus increases during the year were necessary, as the market for our labor continues to be extremely competitive. With new competitors entering the market and existing competitors adding equipment capacity, we were forced to increase wage rates in order to maintain our high levels of quality personnel. Supplies and equipment costs for our well servicing operations increased $17.9 million in 2006 compared to 2005, primarily as a result of increases in costs associated with higher activity levels, which results in strong utilization of our equipment and therefore, more wear and tear on our operational assets. Additionally, many of the assets we acquired through acquisitions during the 1994 - 2002 timeframe are beginning to reach the end of their economic useful lives; because of this, these assets require greater repairs and maintenance to keep them productive and operating. The repair and maintenance expense is also a function of our proactive maintenance programs. Supplies and equipment for our pressure pumping operations increased $36.6 million, primarily as a result of increases in the size of our fleet as we added equipment year over year, as well as increases in the costs to purchase and transport sand and chemicals used in our operations. Other costs declined $11.1 million, primarily as a result of reductions in self-insurance costs.
Depreciation and Amortization Expense
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Depreciation and amortization expense increased $3.6 million, or 2.9%, to $129.6 million for the year ended December 31, 2007, compared to $126.0 million for the year ended December 31, 2006. Contributing to the increase in depreciation and amortization expense was depreciation expense associated with our acquisitions during 2007, which totaled approximately $4.8 million, and increased depreciation of approximately $7.7 million related to management's reassessment of the useful lives of certain assets. Excluding the depreciation and amortization expense associated with acquisitions and reassessment of useful lives, our depreciation expense would have declined approximately $8.9 million because the assets we added through various acquisitions during the 1994 to 2002 time period are now reaching the end of their depreciable lives. Depreciation and amortization expense as a percentage of revenue for the year ended December 31, 2007 totaled 7.8%, compared to 8.1% for the year ended December 31, 2006.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Depreciation and amortization expense increased $14.1 million, or 12.6%, to $126.0 million for the year ended December 31, 2006, compared to $111.9 million for the year ended December 31, 2005. The increase is primarily attributable to a greater fixed asset base, which is due to increased capital expenditures. For the year ended December 31, 2006, our capital expenditures totaled approximately $195.8 million, as compared to $118.1 million for the year ended December 31, 2005. Depreciation and amortization expense as a percentage of revenue for the year ended December 31, 2006 totaled 8.1%, compared to 9.4% for the year ended December 31, 2005.
General and Administrative Expense
Year Ended December 31, 2007 versus Year Ended December 31, 2006
General and administrative ("G&A") expense increased $34.9 million, or 17.8%, to $230.4 million for the year ended December 31, 2007, compared to $195.5 million for the year ended December 31, 2006. The $34.9 million increase is primarily the result of:
G&A Expense (in millions) | Change from 2006 | ||
---|---|---|---|
Employee compensation | $ | 7.5 | |
Acquisitions | $ | 3.0 | |
2006 legal settlement to the Company | $ | 7.5 | |
Professional fees | $ | 9.6 | |
Bad debt expense | $ | 1.8 | |
Other | $ | 5.5 | |
Total change | $ | 34.9 |
Employee compensation, exclusive of the impact of acquisitions, which includes salaries, bonuses, equity-based compensation and payroll taxes, increased primarily due to higher equity-based compensation and, to a lesser extent, increased salaries. Equity-based compensation expense, excluding grants made to our outside directors, during 2007 totaled $12.0 million, compared to $5.6 million during 2006. The $6.4 million increase is primarily attributable to awards granted under our Phantom Share Plan at the end of 2006, as well as incremental stock options, restricted stock and stock appreciation rights awarded during 2007 under our 1997 Incentive Plan. G&A expenses added through acquisitions made during 2007 contributed $3.0 million to the increase in costs when compared to 2006.
G&A also increased in 2007, because G&A in 2006 included a $7.5 million benefit from a legal settlement in 2006 that was not repeated during 2007. Professional fees increased approximately $9.6 million during 2007, primarily due to our financial reporting process. Also contributing to the increase in G&A was an additional $1.8 million in bad debt expense and $5.5 million in other G&A costs. G&A expense as a percentage of revenue for the year ended December 31, 2007 totaled 13.9% compared to 12.6% for the year ended December 31, 2006.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
G&A expense increased $44.2 million, or 29.2%, to $195.5 million for the year ended December 31, 2006 compared to $151.3 million for the year ended December 31, 2005. The increases in G&A expense are primarily attributable to:
G&A Expense (in millions) | Change from 2005 | |||
---|---|---|---|---|
Employee compensation | $ | 40.5 | ||
2006 legal settlement | $ | (7.5 | ) | |
Other costs | $ | 11.2 | ||
Total change | $ | 44.2 |
Compensation-related expenses increased primarily due to increased staff, higher equity-based compensation and increased incentive compensation expense. Equity-based compensation expense during 2006 totaled $5.6 million compared to $1.7 million during 2005, primarily due to incremental stock options and restricted stock granted during 2006. The 2006 period also benefited from a $7.5 million legal settlement. With the increases in staff, other general and administrative costs associated with additional employees, including but not limited to office and computer supplies and travel, also increased. These other G&A costs increased $11.2 million in 2006 as compared to 2005. G&A expense as a percentage of revenue for the year ended December 31, 2006 totaled 12.6% compared to 12.7% for the year ended December 31, 2005.
Interest Expense
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Interest expense decreased $2.7 million, or 7.0%, to $36.2 million for the year ended December 31, 2007, compared to $38.9 million for the year ended December 31, 2006. The decrease is primarily the result of the impact of higher capitalized interest as a result of higher capital expenditures. This decrease was partially offset by a one-time $2.3 million cost associated with the settlement of two interest rate swaps that were terminated in connection with the termination of our 2005 Senior Secured Credit Facility in 2007. Interest expense as a percent of revenue for the year ended December 31, 2007 totaled 2.2%, compared to 2.5% for the year ended December 31, 2006. We anticipate that our interest expense will be higher in 2008 as our total debt has increased from the prior year.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Interest expense decreased $11.4 million, or 22.6%, to $38.9 million for the year ended December 31, 2006, compared to $50.3 million for the year ended December 31, 2005. The decrease was the result of lower interest rates under our 2005 Senior Secured Credit Facility, which was entered into in July 2005 and used to refinance all of our then-outstanding senior notes. The refinancing eliminated the monthly consent fees which were being paid to bondholders due to our failure to file SEC reports. Interest expense as a percentage of revenue for the year ended December 31, 2006 totaled 2.5%, compared to 4.2% for the year ended December 31, 2005.
Loss on Early Extinguishment of Debt
Year Ended December 31, 2007 versus Year Ended December 31, 2006
For the year ended December 31, 2007, we incurred a loss of $9.6 million associated with the termination of our 2005 Senior Secured Credit Facility. During 2007, we issued $425.0 million of Notes and used the proceeds to retire the term loans then outstanding under the 2005 Senior Secured Credit Facility. Concurrently, we entered into the 2007 Senior Secured Credit Facility and terminated the 2005
Senior Secured Credit Facility. The loss represents the write-off of debt issue costs we incurred when we entered into the 2005 Senior Secured Credit Facility.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
For the year ended December 31, 2006, we did not incur any losses associated with the retirement of long-term debt obligations; however, for the year ended December 31, 2005, we incurred losses totaling $20.9 million associated with the termination of our then senior secured credit facility and the redemption or repayment of $425.0 million in senior notes.
Income Taxes
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Our income tax expense was $106.8 million for the year ended December 31, 2007, as compared to income tax expense of $103.4 million for the year ended December 31, 2006. Our effective tax rate in 2007 was 38.7%, as compared to 37.7% in 2006. The increase in income tax and our effective tax rate is primarily attributable to the Texas Margins Tax, which added $5.5 million of state income taxes during 2007. In general, differences between the effective tax rates and the statutory rate of 35% result primarily from the effect of certain foreign and state income taxes and permanent items attributable to book-tax differences.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Our income tax expense was $103.4 million for the year ended December 31, 2006, as compared to income tax expense from continuing operations of $35.3 million for the year ended December 31, 2005. The increase in income tax was the result of higher taxable income. Our effective tax rate in 2006 was 37.7%, as compared to 41.8% in 2005. In general, differences between the effective tax rates and the statutory rate of 35% result primarily from the effect of certain foreign and state income taxes and permanent items attributable to book-tax differences.
Segment Results
| Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Segments | |||||||||||
2007 | 2006 | 2005 | |||||||||
| (in thousands, except for percentages) | ||||||||||
Well Servicing | |||||||||||
Revenue | $ | 1,264,797 | $ | 1,201,228 | $ | 956,457 | |||||
Direct Costs | 738,694 | 725,008 | 634,043 | ||||||||
Gross Profit | 526,103 | 476,220 | 322,414 | ||||||||
Gross Margin | 41.6 | % | 39.6 | % | 33.7 | % | |||||
Pressure Pumping | |||||||||||
Revenue | $ | 299,348 | $ | 247,489 | $ | 152,320 | |||||
Direct Costs | 189,645 | 138,377 | 92,301 | ||||||||
Gross Profit | 109,703 | 109,112 | 60,019 | ||||||||
Gross Margin | 36.6 | % | 44.1 | % | 39.4 | % | |||||
Fishing & Rental | |||||||||||
Revenue | $ | 97,867 | $ | 97,460 | $ | 81,667 | |||||
Direct Costs | 57,275 | 57,217 | 53,899 | ||||||||
Gross Profit | 40,592 | 40,243 | 27,768 | ||||||||
Gross Margin | 41.5 | % | 41.3 | % | 34.0 | % |
Well Servicing Segment
Revenue
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Well servicing segment revenue increased $63.5 million, or 5.3%, to $1.26 billion for the year ended December 31, 2007, compared to revenue of $1.20 billion for the year ended December 31, 2006. The increase in revenue is largely attributable to the impact of the acquisition of Moncla, which contributed $23.6 million, $9.0 million from our contract with PEMEX in Mexico and $13.7 million in higher revenue from our cased-hole electric wireline operations. The remainder of the increase is a result of the full-year impact of pricing increases implemented during the second half of 2006, though revenues were affected by declines in activity levels and reductions from overall peak pricing in the second half of 2007. During the year ended December 31, 2007, our rig hours decreased 7.9% compared to the year ended December 31, 2006 and our trucking hours decreased 2.9% during the comparable period. The decrease in both rig and trucking hours was due primarily to lost market share to new market entrants.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Well servicing segment revenues increased $244.7 million, or 25.6%, to $1.20 billion for the year ended December 31, 2006, compared to revenue of $956.5 million for the year ended December 31, 2005. The increase in revenue is largely attributable to higher pricing for our well service rigs and modestly higher activity levels. Because of continued high commodity prices and strong demand for maintenance and workover-related services, we implemented multiple price increases during 2006. This resulted in increased revenue year-over-year. Also, during the year ended December 31, 2006, our rig hours increased 2.3% compared to the year ended December 31, 2005, while our trucking hours decreased 4.1% during the comparable period. The decrease in trucking hours was due primarily to lost market share to new market entrants.
Direct Costs
Direct costs as a percent of total well servicing segment revenue improved to 58.4% for the year ended December 31, 2007, compared to 60.4% for the year ended December 31, 2006. Direct costs as a percent of total well servicing segment revenue improved to 60.4% for the year ended December 31, 2006, compared to 66.3% for the year ended December 31, 2005.
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Well servicing direct costs increased $13.7 million, or 1.9%, to $738.7 million for the year ended December 31, 2007, compared to $725.0 million for the year ended December 31, 2006. Acquisitions made during 2007 contributed approximately $16.0 million to the increase in direct costs. Excluding the effect of acquisitions, well servicing direct costs increased as a result of higher employee compensation costs of $17.2 million. Compensation-related expenses increased due to the need to retain our workforce. As a result of new equipment capacity in the marketplace, the demand for labor remains strong and we have implemented programs to retain our personnel, including higher wage rates. Partially offsetting the increased compensation costs was a $22.8 million decrease in costs associated with our self-insurance programs. These costs, which include workers compensation, vehicular liability exposure and insurance premiums declined primarily as a result of improved safety performance and fewer and less severe incidents in 2007 compared to 2006. Other well servicing direct expenses increased approximately $3.3 million.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Well servicing direct costs increased $91.0 million, or 14.3%, to $725.0 million for the year ended December 31, 2006, compared to $634.0 million for the year ended December 31, 2005. The overall increase in direct costs is largely attributable to higher activity levels. During the year, direct labor costs increased $83.4 million due primarily to higher compensation-related expenses and higher workers compensation expense. Compensation-related expenses increased due to increased headcount, increased payroll hours and higher wages, all of which are attributable to increased demand for our services. Further, because demand for personnel had been very high due to strong market conditions, we increased wage rates for our employees in order to retain our employees and minimize employee turnover. Equipment costs increased $17.9 million during 2006 due primarily to higher repair and maintenance expense and higher supplies expense. This is the result of increased activity levels. Other direct well servicing costs decreased $10.3 million, which is largely attributable to lower self-insurance-related costs.
Pressure Pumping Services Segment
Revenue
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Pressure pumping services ("PPS") segment revenue increased $51.9 million, or 21.0%, to $299.3 million for the year ended December 31, 2007, compared to revenue of $247.5 million for the year ended December 31, 2006. The increase in revenue is attributable to the purchase of incremental pressure pumping equipment and higher activity levels, but was offset somewhat by lower pricing in 2007. Over the course of 2006 and 2007 we purchased additional new pressure pumping equipment to service and satisfy our customers' needs, increasing the size of our fleet. The new equipment resulted in additional services performed, which resulted in higher revenue during 2007. During 2007, we completed 2,152 fracturing jobs and 2,074 cementing jobs as compared to 1,585 and 1,958, respectively, in 2006. Fracturing and cementing jobs accounted for the substantial majority of the PPS segment revenue.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
PPS segment revenues increased $95.2 million, or 62.5%, to $247.5 million for the year ended December 31, 2006, compared to revenue of $152.3 million for the year ended December 31, 2005. The increase in revenue is attributable to the purchase of incremental pressure pumping equipment, higher activity levels and higher pricing for our services. Over the course of 2006 and 2005 we purchased additional new pressure pumping equipment to service and satisfy our customers' needs, increasing the size of our fleet. The new equipment resulted in additional services performed, which resulted in higher revenue during 2006. During 2006, we completed 1,585 fracturing jobs and 1,958 cementing jobs as compared to 1,329 and 1,558, respectively, in 2005. Fracturing and cementing jobs accounted for the substantial majority of the PPS segment revenues.
Direct Costs
Direct costs as a percent of total PPS segment revenue worsened to 63.4% for the year ended December 31, 2007, compared to 55.9% for the year ended December 31, 2006. Direct costs as a percent of total PPS segment revenue improved to 55.9% for the year ended December 31, 2006, compared to 60.6% for the year ended December 31, 2005.
Year Ended December 31, 2007 versus Year Ended December 31, 2006
PPS direct costs increased $51.3 million, or 37.0%, to $189.6 million for the year ended December 31, 2007, compared to $138.4 million for the year ended December 31, 2006. The increase in direct costs is largely attributable to costs associated with increased demand for pressure pumping services and the increased size of our pressure pumping fleet. During 2007, costs related to employee compensation for the pressure pumping segment increased $8.8 million due primarily to expansion of our pressure pumping fleet through the introduction of new equipment, which required us to hire additional personnel and increased wage rates for our crews. Our equipment costs increased $13.2 million from 2006 primarily due to the expansion of our pressure pumping fleet. Additionally, sand, chemical and associated freight costs increased approximately $29.3 million during 2007. These costs relate to the purchase of sand and chemicals used in our operations from our various suppliers and the shipment to our pressure pumping facilities and job locations. As activity levels in our pressure pumping segment increased in 2007, we used greater amounts of sand and chemicals. Additionally, as overall activity in the pressure pumping sector increased during 2007, the costs for the materials and their transportation increased.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
PPS direct costs increased $46.1 million, or 49.9%, to $138.4 million for the year ended December 31, 2006, compared to $92.3 million for the year ended December 31, 2005. The increase in direct costs is largely attributable to costs associated with increased demand for pressure pumping services and the increased size of our pressure pumping fleet. During 2006, direct labor costs increased $9.5 million due primarily to higher compensation-related expenses and higher contract labor costs. Compensation-related expenses increased due to increased headcount, increased payroll hours and higher wages, all of which are attributable to increased demand for our services. Further, because of the expansion of our pressure pumping fleet, we hired additional personnel to operate the new equipment, and because demand for personnel had been high due to strong market conditions, we increased wage rates in order to retain our employees. Equipment costs increased $12.5 million in 2006 due primarily to higher repair and maintenance expense, higher fuel expense and higher supplies expense. These increases are all the result of increased activity levels and the expansion of our pressure pumping fleet. Other direct pressure pumping costs increased $24.1 million. This increase is due primarily to higher sand and chemical product purchases, as well as higher freight costs.
Fishing and Rental Services Segment
Revenue
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Fishing and rental services ("FRS") segment revenue totaled $97.9 million for the year ended December 31, 2007, compared to revenue of $97.5 million for the year ended December 31, 2006. Although the segment benefited from additional rental equipment in 2007, these equipment additions were offset somewhat by lower overall pricing.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
FRS segment revenue increased $15.8 million, or 19.3%, to $97.5 million for the year ended December 31, 2006, compared to revenue of $81.7 million for the year ended December 31, 2005. The increase in revenue is due to higher activity levels and improved pricing for our services. In addition, the FRS segment benefited from the implementation of our management team's turnaround efforts which began during 2005.
Direct Costs
Direct costs as a percent of total FRS segment revenue improved to 58.5% for the year ended December 31, 2007, compared to 58.7% for the year ended December 31, 2006. Direct costs as a percent of total FRS segment revenue improved to 58.7% for the year ended December 31, 2006, compared to 66.0% for the year ended December 31, 2005.
Year Ended December 31, 2007 versus Year Ended December 31, 2006
FRS direct costs were flat at $57.3 million for the year ended December 31, 2007, compared to $57.2 million for the year ended December 31, 2006.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
FRS direct costs increased $3.3 million, or 6.2%, to $57.2 million for the year ended December 31, 2006, compared to $53.9 million for the year ended December 31, 2005. The increase in direct costs is largely attributable to increased demand for our services. During the year, direct labor costs increased $4.2 million from the prior year. The FRS segment recorded higher labor costs due to higher activity levels, and incentive payments increased due to improved financial performance. Equipment costs were essentially flat, declining by $0.2 million while other direct costs decreased $0.7 million.
Liquidity and Capital Resources
Historical Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2007 and 2006:
| Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (in thousands) | ||||||
Net cash provided by operating activities | $ | 249,919 | $ | 258,724 | |||
Cash paid for capital expenditures | (212,560 | ) | (195,830 | ) | |||
Cash paid for acquisitions, net of cash acquired | (157,955 | ) | — | ||||
Cash paid for short-term investments | (121,613 | ) | (83,769 | ) | |||
Cash proceeds received from sales of short-term investments | 183,177 | 22,294 | |||||
Other investing activities | 6,104 | 11,658 | |||||
Repayments of long-term debt and capital leases | (424,751 | ) | (16,975 | ) | |||
Borrowings of long-term debt, net of cash paid for debt issuance costs | 461,600 | (479 | ) | ||||
Cash paid to repurchase common stock | (30,454 | ) | (1,180 | ) | |||
Proceeds received from exercises of stock options | 13,444 | — | |||||
Other financing activities | 3,401 | — | |||||
Effect of exchange rates on cash | (184 | ) | (238 | ) | |||
Net decrease in cash and cash equivalents | $ | (29,872 | ) | $ | (5,795 | ) | |
Sources of Liquidity
Our sources of liquidity include our current cash and short-term investments, availability under our 2007 Senior Secured Credit Facility and internally generated cash flow from operations. During 2007, we refinanced our indebtedness. We issued $425.0 million of Notes and entered into the 2007 Senior Secured Credit Facility. The Notes, which have a coupon of 8.375%, require no prepayment and mature in 2014. The 2007 Senior Secured Credit Facility consists of a revolving credit facility, letter of credit sub-facility and swing line facility of up to an aggregate principal amount of $400.0 million, all of
which mature no later than 2012. As of December 31, 2007, we had $288.9 million available for borrowing under the 2007 Senior Secured Credit Facility. Approximately $50.0 million in borrowings were outstanding under the revolving credit facility, and $61.1 million of letters of credit, issued under the letter of credit sub-facility, were outstanding, which also reduces the availability under the 2007 Senior Secured Credit Facility. We believe that our liquidity position is strong. Our debt totaled $524.0 million as of December 31, 2007, and we believe that this amount is acceptable given our recent financial performance and our belief that industry activity levels in 2008 should remain stable.
Cash Requirements
During 2008, we anticipate our cash requirements to include working capital needs, capital expenditures, acquisitions and the repurchase of shares of our common stock. We believe that our current reserves of cash and short-term investments, our availability under our 2007 Senior Secured Credit Facility and our internally generated cash flow from operations are sufficient to finance the cash requirements of our current and future operations, including our 2008 capital expenditure budget. We do not budget for acquisitions; however, we are continually evaluating opportunities that fit our specific acquisition profile. We expect to finance acquisitions through a combination of cash on hand, cash flow from operations and borrowings under our 2007 Senior Secured Credit Facility. In some limited cases, however, we may elect to use equity as a financing tool.
We anticipate that our capital expenditures in 2008, excluding acquisitions, will be approximately $175.0 million. For the past three years we have devoted significant amounts of our cash flow from operations to support organic growth. From the beginning of 2005 through December 31, 2007, we have cumulatively invested approximately $526.5 million in our rig fleet and equipment, excluding acquisitions. Capital expenditures during the year ended December 31, 2007 were $212.6 million, excluding acquisitions.
In October 2007, our board authorized us to repurchase up to $300.0 million of our outstanding common stock. We may from time to time repurchase shares of our common stock depending on the price of the stock, our liquidity and other considerations. During the year ended December 31, 2007, we repurchased approximately 2.3 million shares of our common stock for $32.2 million through our stock repurchase program. The 2007 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 if our debt to capitalization ratio is below 50%. As of December 31, 2007, we would have been permitted to make share repurchases in excess of $200.0 million.
From time to time we acquire businesses that improve our footprint in certain geographic areas, increase our range of products or services or are otherwise strategic to our business. During the year ended December 31, 2007, we used approximately $158.0 million in cash (net of cash acquired) and $22.5 million in notes payable, in business acquisitions.
Outstanding Indebtedness and Working Capital as of December 31, 2007
Our primary debt obligations, other than capital lease obligations and the notes payable incurred in the acquisition of Moncla, as of December 31, 2007, consisted of $425.0 million outstanding principal amount of the Notes and $50.0 million of borrowings under the 2007 Senior Secured Credit Facility.
As of December 31, 2007, we had net working capital (excluding the current portion of long-term debt and capital lease obligations of $12.4 million) of $265.5 million, which includes cash, cash equivalents and short-term investments of $58.8 million, as compared to net working capital (excluding the current portion of long-term debt and capital lease obligations of $15.7 million) of $281.2 million, which includes cash and cash equivalents and short-term investments of $150.1 million, as of December 31, 2006. Our working capital declined from December 31, 2006 to December 31, 2007 primarily as a result of using cash for our acquisitions in the fourth quarter of 2007.
Contractual Obligations
Set forth below is a summary of our contractual obligations as of December 31, 2007. The obligations we pay in future periods reflect certain assumptions, including variability in interest rates on our variable-rate obligations and the duration of our obligations, and actual payments in future periods may vary.
| Payments Due by Period (in thousands) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Less than 1 Year (2008) | 1 - 3 Years (2009 - 2011) | 4 - 5 Years (2012 - 2013) | After 5 Years (2014 +) | ||||||||||
8.375% Senior Notes due 2014 | $ | 425,000 | $ | — | $ | — | $ | — | $ | 425,000 | |||||
Interest associated with 8.375% Senior Notes due 2014 | 249,361 | 35,693 | 106,785 | 71,288 | 35,595 | ||||||||||
Borrowings under 2007 Senior Secured Credit Facility | 50,000 | — | — | 50,000 | — | ||||||||||
Interest associated with 2007 Senior Secured Credit Facility(1) | 16,015 | 3,242 | 9,699 | 3,074 | — | ||||||||||
Commitment and availability fees associated with 2007 Senior Secured Credit Facility | 22,266 | 4,453 | 13,360 | 4,453 | — | ||||||||||
Notes payable—related party, excluding discount | 22,500 | 2,000 | 18,500 | 2,000 | — | ||||||||||
Interest associated with notes payable—related party(1) | 2,611 | 1,079 | 1,437 | 95 | — | ||||||||||
Capital lease obligations, excluding interest and executory costs | 26,815 | 10,701 | 15,879 | 235 | — | ||||||||||
Interest and executory costs associated with capital lease obligations(1) | 4,838 | 2,441 | 2,388 | 9 | — | ||||||||||
Non-cancellable operating leases | 24,224 | 7,428 | 11,111 | 3,030 | 2,655 | ||||||||||
Severance liabilities and retention payments | 1,970 | 831 | 1,104 | 27 | 8 | ||||||||||
FIN 48 liabilities | 6,751 | 782 | 4,039 | 1,930 | — | ||||||||||
Equity-based compensation liability awards | 5,386 | 1,775 | 3,611 | — | — | ||||||||||
Earnout payments(2) | 25,000 | 5,000 | 15,000 | 5,000 | — | ||||||||||
Total | $ | 882,737 | $ | 75,425 | $ | 202,913 | $ | 141,141 | $ | 463,258 | |||||
Senior Notes
On November 29, 2007, we issued $425.0 million aggregate principal amount of Notes under an indenture, dated as of November 29, 2007 (the "Indenture"), among us, the guarantors party thereto (the "Guarantors") and The Bank of New York Trust Company, N.A., as trustee. The Notes were priced at 100% of their face value to yield 8.375%. Net proceeds, after deducting initial purchasers' discounts and estimated offering expenses, were approximately $416.1 million. We used approximately $394.9 million of the net proceeds to retire our term loans, including accrued and unpaid interest, under the 2005 Senior Secured Credit Facility, with the balance used for general corporate purposes. The 2005 Senior Secured Credit Facility was terminated in connection with our entry into the 2007 Senior Secured Credit Facility described below.
The Notes are general unsecured senior obligations of Key. Accordingly, they will rank effectively subordinate to all of our existing and future secured indebtedness. The 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 Notes is payable on June 1 and December 1 of each year, beginning June 1, 2008. The Notes mature on December 1, 2014.
On or after December 1, 2011, the 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 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 | 104.188 | % | |
2012 | 102.094 | % | |
2013 | 100.000 | % |
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 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 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, we may, at our option, redeem all or a portion of the 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 Notes and plus accrued and unpaid interest thereon to the redemption date. If we experience a changediscussion below of control, subject to certain exceptions, we must give holders of the Notes the opportunity to sell to us their Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase.
We are subject to certain negative covenants under the Indenture governing the Notes. The Indenture limits our ability to, among other things:
These covenants are subject to certain exceptions and qualifications. In addition, substantially all of the covenants will terminate before the Notes mature if one of two specified ratings agencies assigns the Notes an investment grade rating in the future and no events of default exist under the Indenture. 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 Notes later falls below an investment grade rating.
In connection with the sale of the Notes, we entered into a registration rights agreement with the initial purchasers, pursuant to which we have agreed to file an exchange offer registration statement with the SEC with respect to an offer to exchange the Notes for substantially identical notes that are registered under the Securities Act, and to use reasonable best efforts to cause such registration statement become effective on or prior to November 29, 2008. Additionally, we have agreed to commence the registered exchange offer and to use our reasonable best efforts to issue, on or prior to the date that is 60 days after the date on which the exchange offer registration statement became effective, exchange notes in exchange for all Notes tendered prior thereto in the registered exchange
offer. Under some circumstances, in lieu of a registered exchange offer, we have agreed to file a shelf registration statement to cover resales of the Notes by certain holders thereof and to use reasonable best efforts to keep the shelf registration statement effective for a period of at least two years or such shorter period ending on the earlier of when all of the Notes available for sale thereunder (i) have been sold pursuant thereto and (ii) are no longer restricted securities (as defined in Rule 144 under the Securities Act, or any successor rule thereof). We are required to pay additional interest if we fail to comply with our obligations to register the Notes within the specified time periods.
2007 Senior Secured Credit Facility
Simultaneously with the closing of the offering of the Notes, we entered into a new credit agreement (the "Credit Agreement") with the several lenders from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. The Credit Agreement provides for a senior secured credit facility (the "2007 Senior Secured Credit Facility") consisting of a revolving credit facility, letter 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. The 2007 Senior Secured Credit Facility and the obligations thereunder are secured by substantially all of the assets of the Company and the Guarantors, and are or will be guaranteed by certain of our existing and future domestic subsidiaries. The 2007 Senior Secured Credit Facility replaced our 2005 Senior Secured Credit Facility, which was terminated in connection with the closing of the offering of the Notes.
The interest rate per annum applicable to the 2007 Senior Secured Credit Facility is, at our 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, depending upon our consolidated leverage ratio.
The 2007 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 our 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 2007 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 2007 Senior Secured Credit Facility, the consolidated leverage ratio does not exceed 2.75 to 1.00, we are in compliance with the consolidated interest coverage ratio and we have at least $25 million of availability under the 2007 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 our 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. The 2007 Senior Secured Credit Facility permits share repurchase 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%.
We may prepay the 2007 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.
“Moncla Notes Payable” under “Liquidity and Capital Resources” in this Item). We expect to fund our obligations under the Moncla Notes through cash on hand generated by operating activities or borrowing under our Senior Secured Credit Facility.
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WTI Cushing Crude | NYMEX Henry Hub | Average Baker Hughes Land | ||||||||||
Year | Oil(1) | Natural Gas(1) | Drilling Rigs(2) | |||||||||
2002 | $ | 26.18 | $ | 3.37 | 717 | |||||||
2003 | $ | 31.08 | $ | 5.49 | 924 | |||||||
2004 | $ | 41.51 | $ | 6.18 | 1,095 | |||||||
2005 | $ | 56.64 | $ | 9.02 | 1,290 | |||||||
2006 | $ | 66.05 | $ | 6.98 | 1,559 | |||||||
2007 | $ | 72.34 | $ | 7.12 | 1,695 | |||||||
2008 | $ | 99.57 | (3) | $ | 8.90 | (3) | 1,814 | (4) |
(1) | Represents average crude oil or natural gas price, respectively, for each of the years presented. Source: Bloomberg | |
(2) | Source:www.bakerhughes.com | |
(3) | Prices for oil and natural gas declined sharply during the fourth quarter of 2008. The spot prices at February 23, 2009 for WTI-Cushing crude oil and NYMEX Henry Hub natural gas were $39.47 per barrel and $4.20 per Mcf, respectively. | |
(4) | The land drilling rig count was affected by the drop in commodity prices. The land drilling rig count at January 31, 2009 was 1,412. |
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Rig Hours | Trucking Hours | |||||||
2008 | ||||||||
First Quarter | 659,462 | 585,040 | ||||||
Second Quarter | 701,286 | 603,632 | ||||||
Third Quarter | 721,285 | 620,885 | ||||||
Fourth Quarter | 634,772 | 607,004 | ||||||
Total 2008: | 2,716,805 | 2,416,561 | ||||||
2007 | ||||||||
First Quarter | 625,748 | 571,777 | ||||||
Second Quarter | 611,890 | 583,074 | ||||||
Third Quarter | 597,617 | 570,356 | ||||||
Fourth Quarter | 614,444 | 583,191 | ||||||
Total 2007: | 2,449,699 | 2,308,398 | ||||||
2006 | ||||||||
First Quarter | 663,819 | 609,317 | ||||||
Second Quarter | 679,545 | 602,118 | ||||||
Third Quarter | 677,271 | 587,129 | ||||||
Fourth Quarter | 637,994 | 578,471 | ||||||
Total 2006: | 2,658,629 | 2,377,035 |
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Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
REVENUES | $ | 1,972,088 | $ | 1,662,012 | $ | 1,546,177 | ||||||
COSTS AND EXPENSES: | ||||||||||||
Direct operating expenses | 1,250,327 | 985,614 | 920,602 | |||||||||
Depreciation and amortization expense | 170,774 | 129,623 | 126,011 | |||||||||
Impairment of goodwill and equity method investment | 75,137 | — | — | |||||||||
General and administrative expenses | 257,707 | 230,396 | 195,527 | |||||||||
Interest expense, net of amounts capitalized | 41,247 | 36,207 | 38,927 | |||||||||
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 | ||||||||
Total costs and expenses, net | 1,798,032 | 1,386,072 | 1,271,697 | |||||||||
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 | — | |||||||||
NET INCOME | $ | 84,058 | $ | 169,289 | $ | 171,033 | ||||||
36
Change from 2007 | ||||
Well Servicing segment | $ | 245.1 | ||
Pressure Pumping segment | 45.6 | |||
Fishing and Rental segment | 19.4 | |||
Total change | $ | 310.1 |
Change from 2007 | ||||
Employee compensation | $ | 125.5 | ||
Equipment, supplies and maintenance | 58.0 | |||
Fuel | 33.4 | |||
Frac sand and chemicals | 29.4 | |||
Self-insurance | 4.7 | |||
Other | 13.7 | |||
Total change | $ | 264.7 |
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38
Change from 2007 | ||||
Employee compensation (non-equity) | $ | 27.1 | ||
Equity-based compensation | 11.3 | |||
Legal fees and reserves | (2.2 | ) | ||
Professional fees | (12.3 | ) | ||
Other | 3.4 | |||
Total change | $ | 27.3 |
39
40
Change from 2006 | ||||
Well Servicing segment | $ | 63.5 | ||
Pressure Pumping segment | 51.9 | |||
Fishing and Rental segment | 0.4 | |||
Total change | $ | 115.8 |
Change from 2006 | ||||
Employee compensation | $ | 25.4 | ||
Pressure pumping supplies and equipment | 41.6 | |||
Well service acquisitions | 16.0 | |||
Self-insurance | (21.8 | ) | ||
Other | 3.8 | |||
Total change | $ | 65.0 |
41
Change from 2006 | ||||
Employee compensation | $ | 7.5 | ||
Acquisitions | 3.0 | |||
2006 legal settlement to the Company | 7.5 | |||
Professional fees | 9.6 | |||
Bad debt expense | 1.8 | |||
Other | 5.5 | |||
Total change | $ | 34.9 |
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Year Ended December 31, | ||||||||||||
Segments | 2008 | 2007 | Change | |||||||||
(In thousands, except for percentages) | ||||||||||||
Well Servicing | ||||||||||||
Revenue | $ | 1,509,823 | $ | 1,264,797 | $ | 245,026 | ||||||
Direct operating expenses | 939,893 | 738,694 | 201,199 | |||||||||
Direct operating expenses, as a percentage of revenue | 62.3 | % | 58.4 | % | ||||||||
Pressure Pumping | ||||||||||||
Revenue | $ | 344,993 | $ | 299,348 | $ | 45,645 | ||||||
Direct operating expenses | 239,833 | 189,645 | 50,188 | |||||||||
Direct operating expenses, as a percentage of revenue | 69.5 | % | 63.4 | % | ||||||||
Fishing and Rental | ||||||||||||
Revenue | $ | 117,272 | $ | 97,867 | $ | 19,405 | ||||||
Direct operating expenses | 70,601 | 57,275 | 13,326 | |||||||||
Direct operating expenses, as a percentage of revenue | 60.2 | % | 58.5 | % |
Change from 2007 | ||||
Employee compensation | $ | 110.9 | ||
Supplies, equipment and maintenance | 48.9 | |||
Fuel | 24.6 | |||
Self-insurance | 3.1 | |||
Other | 13.7 | |||
Total change | $ | 201.2 |
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Change from 2007 | ||||
Frac sand and chemicals | $ | 29.5 | ||
Employee compensation | 8.1 | |||
Fuel | 7.2 | |||
Supplies, equipment and maintenance | 3.6 | |||
Other | 1.8 | |||
Total Change | $ | 50.2 |
46
Change from 2007 | ||||
Employee compensation | $ | 6.5 | ||
Supplies, equipment and maintenance | 5.5 | |||
Fuel | 1.6 | |||
Other | (0.3 | ) | ||
Total Change | $ | 13.3 |
Year Ended December 31, | ||||||||||||
Segments | 2007 | 2006 | Change | |||||||||
(In thousands, except for percentages) | ||||||||||||
Well Servicing | ||||||||||||
Revenue | $ | 1,264,797 | $ | 1,201,228 | $ | 63,569 | ||||||
Direct operating expenses | 738,694 | 725,008 | 13,686 | |||||||||
Direct operating expenses, as a percentage of revenue | 58.4 | % | 60.4 | % | ||||||||
Pressure Pumping | ||||||||||||
Revenue | $ | 299,348 | $ | 247,489 | $ | 51,859 | ||||||
Direct operating expenses | 189,645 | 138,377 | 51,268 | |||||||||
Direct operating expenses, as a percentage of revenue | 63.4 | % | 55.9 | % | ||||||||
Fishing and Rental | ||||||||||||
Revenue | $ | 97,867 | $ | 97,460 | $ | 407 | ||||||
Direct operating expenses | 57,275 | 57,217 | 58 | |||||||||
Direct operating expenses, as a percentage of revenue | 58.5 | % | 58.7 | % |
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48
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities | $ | 367,164 | $ | 249,919 | ||||
Cash paid for capital expenditures | (218,994 | ) | (212,560 | ) | ||||
Cash paid for short-term investments | — | (121,613 | ) | |||||
Proceeds from the sale of short-term investments | 276 | 183,177 | ||||||
Investment in Geostream | (19,306 | ) | — | |||||
Acquisitions, net of cash acquired | (63,457 | ) | (157,955 | ) | ||||
Acquisition of fixed assets from asset purchases | (34,468 | ) | — | |||||
Other investing activities, net | 6,875 | 6,104 | ||||||
Proceeds from long-term debt, net of cash paid for debt issance costs | — | 461,600 | ||||||
Repayments of capital lease obligations | (11,506 | ) | (424,751 | ) | ||||
Borrowings under revolving credit facility | 172,813 | — | ||||||
Payments on revolving credit facility | (35,000 | ) | — | |||||
Repurchases of common stock | (139,358 | ) | (30,454 | ) | ||||
Other financing activities, net | 5,081 | 16,845 | ||||||
Effect of exchange rates on cash | 4,068 | (184 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | 34,188 | $ | (29,872 | ) | |||
49
50
Principal Payments | ||||
(In thousands) | ||||
2009 | $ | 16,500 | ||
2010 | 3,015 | |||
2011 | 2,000 | |||
2012 | 189,813 | |||
2013 | — | |||
2014 | 425,000 | |||
Total principal payments | 636,328 |
Year | Percentage | |||
2011 | 104.19 | % | ||
2012 | 102.09 | % | ||
2013 | 100.00 | % |
51
• | 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. |
52
53
2005 Senior Secured Credit Facility
On July 29, 2005, we entered into a $547.3 million credit agreement (the "2005 Senior Secured Credit Facility"), among Key Energy Services, Inc., as Borrower, the several lenders from time to time party thereto, Lehman Brothers Inc., as sole lead arranger and sole book runner, Lehman Commercial Paper Inc., as syndication agent, administrative agent and as collateral agent, and Wells Fargo Foothill, Inc., as revolving administrative agent. The 2005 Senior Secured Credit Facility consisted of (i) a revolving credit facility of up to an aggregate principal amount of $65.0 million, which was to mature on July 29, 2010, (ii) a senior term loan facility in the original aggregate amount of $400.0 million, which was payable in quarterly installments of $1.0 million each commencing March 31, 2006 with the unpaid balance due on June 30, 2012 and (iii) a prefunded letter of credit facility in the aggregate amount of $82.25 million, which was to mature on July 29, 2010. The revolving credit facility included a $25.0 million sub-facility for additional letters of credit. The 2005 Senior Secured Credit Facility was terminated on November 29, 2007 in connection with us entering into the 2007 Senior Secured Credit Facility.
As a result of our failure to timely file annual or quarterly reports with the SEC over the last several years, we do not have an effective shelf registration statement on file. Until we have timely filed all of our SEC reports for at least one year, our access to the public securities markets will be limited. See Item 1A. "Risk Factors" for a discussion of limitations on our ability to use "short-form" registration statements.
Off-Balance Sheet Arrangements
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Payments Due by Period | ||||||||||||||||||||
Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
Total | (2009) | (2010-2012) | (2013-2014) | (2015+) | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
8.375% Senior Notes due 2014 | $ | 425,000 | $ | — | $ | — | $ | 425,000 | $ | — | ||||||||||
Interest associated with 8.375% Senior Notes due 2014 | 213,668 | 35,595 | 106,883 | 71,190 | — | |||||||||||||||
Borrowings under Senior Secured Credit Facility | 187,813 | — | 187,813 | — | — | |||||||||||||||
Interest associated with Senior Secured Credit Facility(1) | 14,238 | 3,507 | 10,731 | — | — | |||||||||||||||
Commitment and availability fees associated with Senior Secured Credit Facility | 2,480 | 620 | 1,860 | — | — | |||||||||||||||
Notes payable — related party, excluding discount | 20,500 | 14,500 | 6,000 | — | — | |||||||||||||||
Interest associated with notes payable — related party(1) | 484 | 304 | 180 | — | — | |||||||||||||||
Capital lease obligations, excluding interest and executory costs | 23,149 | 9,386 | 13,440 | 323 | — | |||||||||||||||
Interest and executory costs associated with capital lease obligations(1) | 2,577 | 1,248 | 1,274 | 55 | — | |||||||||||||||
Other long-term indebtedness | 3,015 | 2,000 | 1,015 | — | — | |||||||||||||||
Interest associated with other long-term indebtedness | 70 | 60 | 10 | — | — | |||||||||||||||
Investment in Geostream Services Group(2) | 15,900 | 15,900 | — | — | — | |||||||||||||||
Non-cancellable operating leases | 28,229 | 6,312 | 14,242 | 5,639 | 2,036 | |||||||||||||||
FIN 48 liabilities | 5,600 | 3,200 | 1,800 | 600 | — | |||||||||||||||
Equity based compensation liability awards(3) | 2,556 | 898 | 1,658 | — | — | |||||||||||||||
Earnout payments(4) | 26,500 | 6,000 | 20,500 | — | — | |||||||||||||||
Sand purchse contract(5) | 5,176 | 2,545 | 2,631 | — | — | |||||||||||||||
Total | $ | 976,955 | $ | 102,075 | $ | 370,037 | $ | 502,807 | $ | 2,036 | ||||||||||
(1) | Interest costs on our floating rate debt were estimated using the rates in effect at December 31, 2008. |
54
Critical Accounting Policies
(2) | Based on the December 31, 2008 exchange rate. | |
(3) | Based on the Company’s stock price at December 31, 2008. | |
(4) | These amounts assume certain performance targets will be achieved. | |
(5) | These amounts assume the minimum required purchase and price for the remaining two years of the contract. |
• | Consolidated Interest Coverage Ratio — As calculated pursuant to the terms of the Senior Secured Credit Facility, we are required to maintain a ratio of trailing four quarters earnings before interest, tax, depreciation and amortization (“EBITDA”) to interest expense of at least 3.0 to 1.0. At December 31, 2008, the calculated consolidated interest coverage ratio was 11.8 to 1.0. Management believes that the Company will remain in compliance with this covenant through at least the end of 2009. | |
• | Consolidated Leverage Ratio — As calculated pursuant to the terms of the Senior Secured Credit Facility, we are required to maintain a ratio of total debt to trailing four quarters EBITDA of no greater than 3.5 to 1.0. At December 31, 2008, the calculated consolidated leverage ratio was 1.4 to 1.0. With total qualifying debt of $712.9 million at December 31, 2008, this covenant requires that our trailing four quarters EBITDA meet a minimum threshold of $203.7 million. Management believes that the Company will remain in compliance with the covenant through at least the end of 2009. Should the trailing four quarter EBITDA fall below the required threshold in the future, management may also utilize cash on hand to reduce debt outstanding to lower the EBITDA minimum and maintain compliance with this covenant. |
55
principal financial officer.
• | Estimate of reserves for workers’ compensation, vehicular liability and other self-insured reserves; | |
• | Accounting for contingencies; | |
• | Accounting for income taxes; | |
• | Estimate of fixed asset depreciable lives; | |
• | Valuation of tangible and intangible assets; and | |
• | Valuation of equity-based compensation. |
56
addition to higher premiums, future insurance coverage may be subject to higher deductibles and coverage restrictions.
57
We follow Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes,"("“SFAS 109"109”), which requires that we account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, yet deferred until future periods. Current taxes payable represent our liability related to our income tax
return for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.
58
On
59
long-lived assets, such as well-service rigs, drilling rigs, pressure pumping equipment, heavy duty trucks, investments, goodwill and identified intangible assets to evaluate whether our long-lived assets or goodwill may have been impaired.
Impairment tests may be required annually, as with goodwill, or as management identifies certain trigger events such as negative industry or economic trends, changes in our business strategy, and underperformance relative to historical or projected operating results.(“SFAS 144”), is performed based on an undiscounted cash flow analysis. To perform an impairment test, we make judgments, estimates and assumptions regarding long-term forecasts of revenues and expenses relating to assets subject to review or, in the case of goodwill, to our reporting units.review. Market conditions, energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on the estimates of management.
If the analysis determines that the assets of a reporting unit or asset grouping are impaired, then an impairment charge is recorded.
Year Ended December 31, | |||||||||||||||||||
| Year Ended December 31, | 2008 | 2007 | 2006 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||||||||||||||
Risk-free interest rate | 4.41 | % | 4.70 | % | 3.80 | % | 2.86 | % | 4.41 | % | 4.70 | % | |||||||
Expected life of options, years | 6 | 6 | 6 | 6 | 6 | 6 | |||||||||||||
Expected volatility of the Company's stock price | 39.49 | % | 48.80 | % | 53.85 | % | |||||||||||||
Expected volatility of the Company’s stock price | 36.86 | % | 39.49 | % | 48.80 | % | |||||||||||||
Expected dividends | none | none | none | none | none | none |
with our previous stock option grants. 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.
60
exercise of the Warrants. Due to our past failure to file our SEC reports in a timely manner, we dodid not have an effective registration statement covering the Warrants, and have beenwere required to make liquidated damages payments, and will continue to be required to make those payments until such time as we have an effective registration statement on file for exercise of the Warrants or the warrant shares issuable thereunder are eligible for resale without registration pursuant to SEC Rule 144 or otherwise.payments. The requirement to make liquidated damages payments constitutesconstituted 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.
Accounting Standards Not Yet Adopted in this Report
In February 2008, the FASB issued FASB Staff Position FIN 157-2 ("FSP FIN 157-2"), which delayed the effective date by which companies must adopt the provisions of SFAS 157. FSP FIN 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this standard isdid not anticipated to have a material impact on our consolidated financial position, results of operations, or cash flows.
statements.
61
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”). FSPSFAS 157-3 clarified the application of SFAS 157. FSPSFAS 157-3 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSPSFAS 157-3 was effective upon issuance, including 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.
acquisition. SFAS 141(R) also includes newestablishes disclosure requirements related to enable users to evaluate the nature and financial effects of the business combinations. This statementcombination. SFAS 141(R) applies prospectively to all 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, 2008,2008. SFAS 141(R) may have an impact on our consolidated financial statements. The nature and earlier adoption is prohibited. The Company is still in the process of determining the impactmagnitude of the adoptionspecific impact will depend upon the nature, terms, and size of this standard on the Company's financial position, results of operations, and cash flows.acquisitions consummated after the effective date.
62
See Item 8. "Consolidated Financial Statements and Supplementary Data," Note 1—"Organization and Summary of Significant Accounting Policies," for a discussion of accounting pronouncements issued, but not yet adopted and reflected in this report.
Impact of Inflation on Operations
We are of the opinion that inflation has not had a significant impact on Key's business.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
statement.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of December 31, 2007,2008, the weighted average interest rate on our outstanding variable-rate debt obligations was 5.9787%4.17%. A hypothetical 10% increase in that rate would increase the annual interest expense on those instruments by approximately $0.6$0.5 million.
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 all of the local currencies for our Argentinean, Mexican and Canadian subsidiaries and our Canadian and Russian investments would increasedecrease our net income by approximately $0.3$1.3 million. Our net assets would be unaffected by such an decrease because the changes in the value of our foreign subsidiaries' assets and liabilities would be offset by changes in accumulated other comprehensive income.
Equity-Based Compensation.
63
Equity-Method Investment in IROC. We currently possess a 19.7% ownership interest in IROC, a publicly-traded Canadian company. We exert significant influence over the operations of IROC, but we do not control it. As such, we account for our investment as an equity-method investment under the guidance provided by Accounting Principles Board Opinion ("APB") No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18").
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. Such future conditions could therefore result in a determination a decline in fair value is other than temporary. IROC's stock price is currently depressed. If we later determine the decline is other than temporary, we would record a write-down in the carrying value of our asset to the then current fair market value.
ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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64
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payments."
Taxes.
65
of spending, were approved by the appropriate level of management in accordance with their established policies. This is a result of a lack of appropriate approvals for expenditure transactions either made through the procurement system or made outside of the system.
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands, except | ||||||||
share amounts) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 92,691 | $ | 58,503 | ||||
Accounts receivable, net of allowance for doubtful accounts of $11,468 and $13,501, respectively | 377,353 | 343,408 | ||||||
Inventories | 34,756 | 22,849 | ||||||
Prepaid expenses | 15,513 | 12,997 | ||||||
Deferred tax assets | 26,623 | 27,676 | ||||||
Income taxes receivable | 4,848 | 15,796 | ||||||
Other current assets | 7,338 | 6,636 | ||||||
Total current assets | 559,122 | 487,865 | ||||||
Property and equipment, gross | 1,858,307 | 1,595,225 | ||||||
Accumulated depreciation | (806,624 | ) | (684,017 | ) | ||||
Property and equipment, net | 1,051,683 | 911,208 | ||||||
Goodwill | 320,992 | 378,550 | ||||||
Other intangible assets, net | 42,345 | 45,894 | ||||||
Deferred financing costs, net | 10,489 | 12,117 | ||||||
Notes and accounts receivable — related parties | 336 | 173 | ||||||
Equity method investments | 24,220 | 11,217 | ||||||
Other assets | 7,736 | 12,053 | ||||||
TOTAL ASSETS | $ | 2,016,923 | $ | 1,859,077 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 46,185 | $ | 35,159 | ||||
Accrued liabilities | 197,116 | 183,364 | ||||||
Accrued interest | 4,368 | 3,895 | ||||||
Current portion of capital lease obligations | 9,386 | 10,701 | ||||||
Current notes payable — related parties, net of discount | 14,318 | 1,678 | ||||||
Current portion of long-term debt | 2,000 | — | ||||||
Total current liabilities | 273,373 | 234,797 | ||||||
Capital lease obligations, less current portion | 13,763 | 16,114 | ||||||
Notes payable — related parties, less current portion | 6,000 | 20,500 | ||||||
Long-term debt, less current portion | 613,828 | 475,000 | ||||||
Workers’ compensation, vehicular, health and other insurance claims | 43,151 | 43,818 | ||||||
Deferred tax liabilities | 188,581 | 160,068 | ||||||
Other non-current accrued liabilities | 17,495 | 19,531 | ||||||
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 | ||||||
Additional paid-in capital | 601,872 | 704,644 | ||||||
Accumulated other comprehensive loss | (46,550 | ) | (37,981 | ) | ||||
Retained earnings | 293,279 | 209,221 | ||||||
Total stockholders’ equity | 860,732 | 888,998 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,016,923 | $ | 1,859,077 | ||||
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(In thousands, except per share amounts) | ||||||||||||
REVENUES | $ | 1,972,088 | $ | 1,662,012 | $ | 1,546,177 | ||||||
COSTS AND EXPENSES: | ||||||||||||
Direct operating expenses | 1,250,327 | 985,614 | 920,602 | |||||||||
Depreciation and amortization expense | 170,774 | 129,623 | 126,011 | |||||||||
Impairment of goodwill and equity method investment | 75,137 | — | — | |||||||||
General and administrative expenses | 257,707 | 230,396 | 195,527 | |||||||||
Interest expense, net of amounts capitalized | 41,247 | 36,207 | 38,927 | |||||||||
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 | ||||||||
Total costs and expenses, net | 1,798,032 | 1,386,072 | 1,271,697 | |||||||||
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 | — | |||||||||
NET INCOME | $ | 84,058 | $ | 169,289 | $ | 171,033 | ||||||
EARNINGS PER SHARE: | ||||||||||||
Basic | $ | 0.68 | $ | 1.29 | $ | 1.30 | ||||||
Diluted | $ | 0.67 | $ | 1.27 | $ | 1.28 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||
Basic | 124,246 | 131,194 | 131,332 | |||||||||
Diluted | 125,565 | 133,551 | 134,064 |
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, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(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 | ) | — | |||||||
Depreciation and amortization expense | 170,774 | 129,623 | 126,011 | |||||||||
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 | — | — | |||||||||
Amortization of deferred financing costs and discount | 2,115 | 1,680 | 1,620 | |||||||||
Deferred income tax expense | 29,747 | 24,613 | 6,757 | |||||||||
Capitalized interest | (6,514 | ) | (5,296 | ) | (3,358 | ) | ||||||
(Gain) loss on sale of assets | (641 | ) | 1,752 | (4,323 | ) | |||||||
Loss on early extinguishment of debt | — | 9,557 | — | |||||||||
Share-based compensation | 24,233 | 9,355 | 6,345 | |||||||||
Excess tax benefits from share-based compensation | (1,733 | ) | (3,401 | ) | — | |||||||
Changes in working capital: | ||||||||||||
Accounts receivable | (34,906 | ) | (44,712 | ) | (60,801 | ) | ||||||
Share-based compensation liability awards | (516 | ) | 3,701 | — | ||||||||
Other current assets | (15,622 | ) | (424 | ) | 976 | |||||||
Accounts payable, accrued interest and accrued expenses | 46,375 | (1,360 | ) | 35,138 | ||||||||
Income tax refund receivable | — | (15,154 | ) | (642 | ) | |||||||
Cash paid for legal settlement with former chief executive officer | — | (21,200 | ) | — | ||||||||
Other assets and liabilities | (5,532 | ) | (8,185 | ) | (20,124 | ) | ||||||
Net cash provided by operating activities | 367,164 | 249,919 | 258,724 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures | (218,994 | ) | (212,560 | ) | (195,830 | ) | ||||||
Proceeds from sale of fixed assets | 7,961 | 8,427 | 11,658 | |||||||||
Investment in Geostream Services Group | (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 | ) | — | — | ||||||||
Cash paid for short-term investments | — | (121,613 | ) | (83,769 | ) | |||||||
Proceeds from the sale of short-term investments | 276 | 183,177 | 22,294 | |||||||||
Acquisition of intangible assets | (1,086 | ) | (2,323 | ) | — | |||||||
Net cash used in investing activities | (329,074 | ) | (302,847 | ) | (245,647 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Repayments of long-term debt | — | (396,000 | ) | (4,000 | ) | |||||||
Proceeds from long-term debt | — | 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 | ) | ||||||
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 | ) | ||||||
Repurchases of common stock | (139,358 | ) | (30,454 | ) | (1,180 | ) | ||||||
Proceeds from exercise of stock options | 6,688 | 13,444 | — | |||||||||
Excess tax benefits from share-based compensation | 1,733 | 3,401 | — | |||||||||
Net cash (used in) provided by financing activities | (7,970 | ) | 23,240 | (18,634 | ) | |||||||
Effect of exchange rates on cash | 4,068 | (184 | ) | (238 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 34,188 | (29,872 | ) | (5,795 | ) | |||||||
Cash and cash equivalents, beginning of period | 58,503 | 88,375 | 94,170 | |||||||||
Cash and cash equivalents, end of period | $ | 92,691 | $ | 58,503 | $ | 88,375 | ||||||
Accumulated | ||||||||||||||||||||||||
Common Stock | Additional | Other | Retained | |||||||||||||||||||||
Number of | Amount | Paid-in | Comprehensive | (Deficit) | ||||||||||||||||||||
Shares | at par | Capital | (Loss) Income | Earnings | 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 | |||||||||||||||||
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 | ) | ||||||||||||||||
Common stock purchases | (2,414 | ) | (241 | ) | (33,161 | ) | — | — | (33,402 | ) | ||||||||||||||
Exercise of stock options | 1,592 | 159 | 13,285 | — | — | 13,444 | ||||||||||||||||||
Exercise of warrants | 23 | 2 | (2 | ) | — | — | — | |||||||||||||||||
Share-based compensation | 318 | 32 | 9,323 | — | — | 9,355 | ||||||||||||||||||
Tax benefits from share-based compensation | — | — | 3,401 | — | — | 3,401 | ||||||||||||||||||
Net income | — | — | — | — | 169,289 | 169,289 | ||||||||||||||||||
BALANCE AT DECEMBER 31, 2007 | 131,143 | 13,114 | 704,644 | (37,981 | ) | 209,221 | 888,998 | |||||||||||||||||
Comprehensive loss, net of tax | — | — | — | (8,569 | ) | — | (8,569 | ) | ||||||||||||||||
Common stock purchases | (11,183 | ) | (1,118 | ) | (135,291 | ) | — | — | (136,409 | ) | ||||||||||||||
Exercise of stock options | 757 | 76 | 6,612 | — | — | 6,688 | ||||||||||||||||||
Exercise of warrants | 160 | 16 | (16 | ) | — | — | — | |||||||||||||||||
Share-based compensation | 428 | 43 | 24,190 | — | — | 24,233 | ||||||||||||||||||
Tax benefits from share-based compensation | — | — | 1,733 | — | — | 1,733 | ||||||||||||||||||
Net income | — | — | — | — | 84,058 | 84,058 | ||||||||||||||||||
BALANCE AT DECEMBER 31, 2008 | 121,305 | $ | 12,131 | $ | 601,872 | $ | (46,550 | ) | $ | 293,279 | $ | 860,732 | ||||||||||||
NOTE 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Key conducts onshore well servicing operations We operate in everymost major oil and natural gas producing region in the continental United States. We also provide limited drilling services in the Appalachian Basin with our well servicing equipment. We conduct pressure pumping and cementing operations in a number of major domestic producing regions including California, the Permian Basin, the San Juan Basin, the Mid-Continent region and in the Barnett Shale of North Texas. Our fishing and rental services are located primarily in the Gulf Coast and Permian Basin regions of Texas,the United States as well as in California and the Mid-Continent region. We also have limited operations offshore.
Internationally, we conduct onshore well servicing and contract drilling operationsinternationally in Argentina and duringMexico. We also own a technology development company based in Canada and have equity interests in oilfield service companies in Canada and the second quarter of 2007, we began conducting well servicing operations in the Northern region of Mexico. In September 2007, we acquired Advanced Measurements, Inc. ("AMI"), a privately-held Canadian technology company.
On October 25, 2007, Key Energy Services, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company, purchased all of the outstanding shares and membership interests of Moncla Well Service, Inc. and related entities ("Moncla"). In December 2007 we acquired the well servicing assets and related equipment of Kings Oil Tools, a privately-held well servicing company operating in California ("Kings"). See Note 2—"Acquisitions."
Russian Federation.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
component of direct expenses and that are now reportedother current assets in the accompanying consolidated balance sheets. In prior years, we presented these amounts as general and administrative. These reclassifications had no effect on previously reported income from continuing operations or net income. The following tables summarize the effectsa separate component of these reclassifications on previously reported amounts (in thousands):
| Year Ended December 31, 2006 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Amounts as Previously Reported | Effect of Reclassifications | Amounts as Currently Reported | |||||||
Well servicing costs | $ | 736,014 | $ | (11,006 | ) | $ | 725,008 | |||
Pressure pumping costs | 141,743 | (3,366 | ) | 138,377 | ||||||
Fishing and rental costs | 60,073 | (2,856 | ) | 57,217 | ||||||
General and administrative costs | 178,299 | 17,228 | 195,527 | |||||||
Total | $ | 1,116,129 | $ | — | $ | 1,116,129 | ||||
| Year Ended December 31, 2005 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Amounts as Previously Reported | Effect of Reclassifications | Amounts as Currently Reported | |||||||
Well servicing costs | $ | 635,442 | $ | (1,399 | ) | $ | 634,043 | |||
Pressure pumping costs | 92,323 | (22 | ) | 92,301 | ||||||
Fishing and rental costs | 54,361 | (462 | ) | 53,899 | ||||||
General and administrative costs | 149,420 | 1,883 | 151,303 | |||||||
Total | $ | 931,546 | $ | — | $ | 931,546 | ||||
In January 2005 we sold the majority of our contract drilling assets to Patterson-UTI Energy. We present the results of operations and cash flows related to these activities as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows for 2005.
We apply the provisions of EITF Emerging Issues Task Force (“EITF”) Issue04-10, "DeterminingDetermining Whether to Aggregate Operating Segments That Do Not Meet Quantitative Thresholds" ("Thresholds(“EITF 04-10"04-10”) for our segment reporting in “Note 18—"19. Segment Information."Information.” Under the provisions ofEITF 04-10, operating segments that do not individually meet the aggregation criteria described in Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 131, "DisclosuresDisclosures About Segments of an Enterprise and Related Information" ("Information(“SFAS 131"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“Corporate and Other"Other” segment in our segment reporting.
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Our ownership of AFTI declined to 48.73% during the fourth quarter of 2008 due to the issuance of additional shares by AFTI. As a result, we deconsolidated AFTI from our consolidated financial statements at December 31, 2008 and accounted for that interest under the equity method.
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.
Revenue is recognized
• | Evidence of an arrangement exists when a final understanding between the Company and its 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 has completed what is required pursuant to the terms of the arrangement and can be evidenced by a completed field ticket or service log. | |
• | 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 Company price book, a completed customer purchase order, or a completed customer field ticket. | |
• | Collectibility is reasonably assured as a result of the Company screening its customers and providing goods and services to customers that have been granted credit terms in accordance with the Company’s credit policy. |
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
arrangements. However, at December 31, 2007,2008, all of our obligations under the 2007our Senior Secured Credit Facility (hereinafter defined) 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.
accompanying consolidated balance sheets.
As of December 31, 2007 and 2006, the Company had no investments in debt or equity securities that were classified as "trading" or "held to maturity." In the third quarter of 2006, the Company began investing in Auction-Rate Securities ("ARS") and Variable-Rate Demand Notes ("VRDN"). These are investments in long-term bonds whose returns are tied to short-term interest rates that are periodically reset, with periods ranging from 7 days to 6 months. As a result of the long-term nature of the underlying security (bonds with contractual lives ranging from 20 to 30 years), the Company accounts for ARS and VRDN investments as "available for sale" securities. As of December 31, 2007 and 2006, the aggregate value of our investments in ARS and VRDN was zero and $44.4 million, respectively. We sold all of our ARS and VRDN investments during the third quarter of 2007 and used the proceeds to fund part of our acquisition of Moncla (see Note 2—"Acquisitions").
In addition to the ARS and VRDN investments, the Company also began investing in 270-day commercial paper and certain other bond investments. These instruments are treated as "available for sale" securities and are carried at fair value as short-term investments on the Company's consolidated balance sheets, because their maturity dates are within one year of the date of investment. Any unrealized holding gains or losses on these securities are recorded net of tax as a separate component of stockholders' equity in other comprehensive income until the date of maturity, at which point any gains or losses are reclassified into earnings. We use the specific identification method when determining the amount of realized gain or loss upon the date of maturity. The aggregate fair value of our available for sale investments was approximately $0.3 million and $61.8 million as of December 31, 2007 and 2006, respectively.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Historically, our credit losses have not been material.
Key's
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The Company leases certain of its operating assets under capital lease obligations whose terms generally run from 55 to 60 months.
Change in Estimate of Useful Lives.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table identifies the impact of this change in depreciation and amortization expense for the year ended December 31, 2007 (in thousands):
| Year Ended December 31, 2007 | |||
---|---|---|---|---|
Depreciation and amortization using prior lives | $ | 121,960 | ||
Impact of change | 7,663 | |||
Depreciation and amortization, as reported | $ | 129,623 | ||
Diluted earnings per share using prior lives | $ | 1.33 | ||
Impact of change on diluted earnings per share | (0.06 | ) | ||
Diluted earnings per share, as reported | $ | 1.27 | ||
As of December 31, 2007,2008, the estimated useful lives of the Company'sCompany’s asset classes are as follows:
Description | Years | |||||
Well service rigs and components | 3-15 | |||||
Oilfield trucks, | 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 |
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In connection with our well servicing activities, we operate a number of salt water 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. SWD facilities used in connection with our fluid hauling operations are subject to future costs associated with the abandonment of these properties. As a result, we have incurred costs associated with the proper storage and disposal of these materials.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Annual amortization of the assets associated with the asset retirement obligations was $0.6 million, $0.5 million and $0.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. A summary of changes in our asset retirement obligations is as follows (in thousands):
Balance at January 1, 2006 | $ | 9,634 | ||
Additions | 155 | |||
Costs incurred | (568 | ) | ||
Accretion expense | 508 | |||
Disposals | (107 | ) | ||
Balance at December 31, 2006 | $ | 9,622 | ||
Additions | 12 | |||
Costs incurred | (576 | ) | ||
Accretion expense | 585 | |||
Disposals | (345 | ) | ||
Balance at December 31, 2007 | $ | 9,298 | ||
Long-lived See“Note 7. Asset Impairments
We apply SFAS No. 144, "Accounting 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 impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of testing for impairment, we group our long-lived assets into divisions, which are based on geographical regions, and in some cases the services provided. We then compare the estimated future cash flows of each division to the division's net carrying value. The division level represents the lowest level for which identifiable cash flows are available. 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 include 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 of future cash flows and the determination of fair value for a division involves significant judgment and estimates. During 2007, 2006, and 2005, no trigger events were identified by management.
Retirement Obligations.”
Key Energy Services, Inc. The capitalized interest is added to the cost of the assets and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Gains and Losses on the Early Extinguishment of Debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. As further discussed in Note 11—"Long-Term Debt," we recognized a loss of approximately $9.6 million during the fourth quarter of 2007
Deferred Financing Costs. In connection with our long-term debt we capitalized costsare carried at cost and expensesare expensed over the term of approximately $13.4 million, $0.5 million and $13.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.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. Amortization of deferred financing costs totaled $1.7 million, $1.6 millionWe record gains and $1.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. Unamortized debt issuance costs written off and included in the determination of the gain or loss onlosses from the extinguishment of debt were $9.6 million, zero, and $8.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
as a part of continuing operations. See“Note 12. Long-Term Debt.”
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Our major classes of intangible assets subject to amortization under SFAS 142 consist of noncompete agreements, patents and trademarks, customer backlog, customer relationships and developed technology. Amortization expense for our noncompete agreements, patents and trademarks, and developed technology is calculated using the straight-line method over the period of the agreement or the estimated economic useful live of the intangible asset. Intangible assets related to customer relationships are amortized utilizing the estimated pattern of the consumption of the economic benefit over their estimated lives.
For all derivative contracts entered into, the Company analyzes the derivative contracts for embedded instruments and accounts for those instruments based on current guidance.
77
Contingencies.”
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. 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. LiabilitiesFor environmental reserve matters, including remediation efforts for expenditures of a non-capital naturecurrent locations and those relating to previously-disposed properties, we record liabilities when our remediation efforts are recorded when environmental assessment and/or remediation is 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 12—"13. Commitments and Contingencies" Contingencies”for further discussion.
reported claims.
We account
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We and our eligible subsidiaries file a consolidated U.S. federal income tax return. Certain foreign subsidiaries that are consolidatedliabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accounting purposes or whether such differences are not eligible to be included in the consolidated U.S. federal income tax return and are subject to the jurisdiction of a number of taxing authorities. The income earned in the various jurisdictions is taxed on differing bases.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.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
December 31, 2007 and 2006. Accordingly, no deferred taxes are provided on that subsidiary's current earnings during those years.
FIN No. 48 and FSP FIN 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 measurementare subject to management judgment related to the resolution of the tax benefit based on a "more likely than not" standard.
In May 2007positions and completion of audits by tax authorities in the FASB issued FASB Staff Position No. FIN 48-1, "Definitiondomestic and international tax jurisdictions in which we operate.
We adopted the provisions of FIN 48 and FSP FIN 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. less deductible expenses.
loss carryforwards.
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS 123 set forth alternative accounting and disclosure requirements for stock-based compensation arrangements. Companies were permitted to continue following the provisions of APB 25 to measure and recognize employee stock-based compensation prior to January 1, 2006; however, SFAS 123 required disclosure of pro forma net income and earnings per share that would have been reported under the fair value recognition provisions of SFAS 123. The table below illustrates the effect on net income and earnings per share if we had applied the fair value recognition principles of SFAS 123 to stock-based employee compensation in 2005. As noted above, while we followed the guidance established by APB 25 to measure stock-based compensation during that year, the stock-based compensation expense included in net income in the table below represents the compensation expense for 875,180 options, net of forfeitures, that were granted in prior years at strike prices ranging from $0.10 to $2.53 below the market price of our common stock on the date of grant. During the years in which we applied APB 25, we elected to amortize any compensation cost on a straight-line basis over the vesting period of the award, in accordance with FIN No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option
| Year Ended December 31, 2005 | ||||
---|---|---|---|---|---|
| (in thousands, except per share amounts) | ||||
Net income: | |||||
As reported | $ | 45,717 | |||
Add: stock-based compensation expense included in reported net income, net of related tax effects of $955 | 1,643 | ||||
Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects of $1,919 | (2,473 | ) | |||
Pro forma net income | $ | 44,887 | |||
Basic earnings per share: | |||||
As reported | $ | 0.34 | |||
Pro forma | $ | 0.34 | |||
Diluted earnings per share: | |||||
As reported | $ | 0.34 | |||
Pro forma | $ | 0.33 |
For additional information regarding the computations presented above, see Note 16—"Equity-Based Compensation."
In June 2005, the Company began granting shares of common stock to its non-employee directors and restricted stock to certain of its employees. These awards have vesting periods ranging from zero to three years. Subject to the provisions of SFAS 123(R), the Company recognizes expense in earnings related to these awards equal to the fair value of the shares vesting during the period, net of actual and estimated forfeitures.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2006, the Company began granting "Phantom Shares" to certain of its employees, which vest ratably over a four-year periodlosses arising from the datetranslation of grant. The Phantom Shares convey the right to the grantee to receive a cash payment on each anniversary of the grant date equal to the fair market value of the Phantom Shares vesting on that date. Grantees are not permitted to defer the payout to a later date. The Phantom Shares qualify as "liability" awards under SFAS 123(R) and the Company accounts for these awards at fair value, with the fair value of the Phantom Shares recorded as a liability in our consolidated balance sheets. Changes in the fair value of the liability, net of actual and estimated forfeitures, are recorded in earnings as compensation expense.
In August 2007, the Company issued stock appreciation rights ("SARs") to its executive officers. Each SAR award has a ten-year term from the date of grant and vests in equal annual installments on the first, second and third anniversaries of the date of grant. 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's 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's common stock. Prior to exercise, the SAR does not entitle the recipient to receive any shares of the Company's common stock and does not provide the recipient with any voting or other stockholder rights. The Company accounts for SARs as equity awards under SFAS 123(R) and recognizes compensation expense over the vesting period of the award based on their fair value on the date of issuance, net of estimated and actual forfeitures.
Foreign Currency Gains and Losses
The local currency is the functional currency for our foreign operations in Argentina, Mexico and Canada. The cumulative translation gains and losses resulting from translating each foreign subsidiary's financial statements from the functional currency to the U.S. dollarsDollar are included as a separate component of stockholders'stockholders’ equity in other comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity.
14. Accumulated Other Comprehensive Loss.”
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
December 31, 2007, 65,000 Warrants had been exercised, leaving 85,000 Warrants outstanding that were exercisable for an aggregate of approximately 1.2 million shares. Under the terms of the Warrants, we arewere required to maintain an effective registration statement covering the shares of common stock issuable upon exercise. If we are unable to maintain an effective registration statement, we are required to make semiannual liquidated damages payments for periods in which an effective registration statement is not maintained.
exercise of the Warrants. Due to our past failure to file our SEC reports in a timely manner, we dodid not have an effective registration statement covering the Warrants, and have beenwere required to make liquidated damages payments, and will continue to be required to make those payments until such time as we have an effective registration statement on file for exercise of the Warrants or the warrant shares issuable thereunder are eligible for resale without registration pursuant to SEC Rule 144 or otherwise.payments. The requirement to make liquidated damages payments constitutesconstituted 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.
Accounting Standards Not Yet Adopted in this Report
In February 2008, the FASB issued FASB Staff Position FIN 157-2 ("FSP FIN 157-2"), which delayed the effective date by which companies must adopt the provisions of SFAS 157. FSP FIN 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this standard isdid not anticipated to have a material impact on our consolidated financial position, results of operations, or cash flows.
statements.
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Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
liabilities assumed in a transactionrecognized at the acquisition-dateits fair value with limited exceptions. Specific changes in SFAS 141(R) from previously issued guidance include:
acquisition. SFAS 141(R) also includes newestablishes disclosure requirements related to enable users to evaluate the nature and financial effects of the business combinations. This statementcombination. SFAS 141(R) applies prospectively to all 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, 2008,2008. SFAS 141(R) may have an impact on our consolidated financial statements. The nature and earlier adoption is prohibited. The Company is still in the process of determining the impactmagnitude of the adoptionspecific impact will depend upon the nature, terms, and size of the standard onacquisitions consummated after the Company's financial position, results of operations, and cash flows.
effective date.
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NOTE 2. | ACQUISITIONS |
2. ACQUISITIONS
Moncla Well Service, Inc. and related entities
On October 25, 2007, we completed our acquisition of Moncla, which operates in Texas, Louisiana, Mississippi, Alabama, and Florida. Collectively, the Moncla assets included daylight rigs for well servicing and workovers and twenty-four hour rigs for shallow drilling, sidetracking and deep workovers. In addition, Moncla operated barge rigs, and owned rig-up, swab, hot oil and anchor trucks, tubing
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
testing units and rental equipment. The Moncla acquisition was made in order to expand our service offerings and meet our customers' service needs in Texas, Louisiana, Mississippi, Alabama and Florida.
(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 Moncla was approximately $146.0 million, which consistedas an asset purchase and did not result in the establishment of netgoodwill. The assets acquired include an identifiable intangible asset of $131.3$1.1 million related to customer relationships and assumed debt of $14.7 million. Amounts transferred at closing consisted of (i) $108.6 million of cash; (ii)is subject to amortization under SFAS No. 142. The asset will be amortized on a straight-line basis over two years from the issuance of an unsecured promissory note for $12.5 million that is payable in a lump sum on October 25, 2009, with accrued interest payable on each anniversary dateacquisition date.
The Moncla purchase agreement entitles the former owners of Moncla to receive earnout payments, on each of the next five anniversary dates of45 days from the closing date of the acquisition that resulted in additional consideration paid of up to $5.0 million (up to $25.0$0.1 million in total).May 2008. The earnout payments are basedCompany 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 the achievementhand.
a business combination. The total purchase price was allocated to Moncla's net tangiblethe assets acquired and identifiable intangible assetsliabilities 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 preliminary allocation of the purchase price was based upon preliminary valuations and estimates, and these areis subject to change as the valuations are finalized. The primary areasarea of the purchase price allocation which arethat is not yet finalized relaterelates to identifiable intangible assets, completion of the analysis of the acquired tax bases of the assets,pre-merger
83
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
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 | $ | 1,527 | ||
Other current assets | 28,633 | |||
Property and equipment | 101,862 | |||
Goodwill | 34,339 | |||
Intangible assets | 28,273 | |||
Other assets | 271 | |||
Total assets acquired | 194,905 | |||
Current liabilities | 21,548 | |||
Long-term debt and capital leases | 14,765 | |||
Other liabilities | 671 | |||
Deferred tax liability | 26,590 | |||
Total liabilities assumed | 63,574 | |||
Net assets acquired | $ | 131,331 | ||
The preliminary allocation of the purchase price is based upon the fair values of assets and liabilities acquired. 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
Allassumed liabilities.
84
2. ACQUISITIONS (Continued)
acquired workforce and potential expansion of our service offerings. Therefore, it was not allocated to the acquired assets and assumed liabilities. The unaudited financial information set forth below$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.
85
| Year Ended December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | ||||||||||||||||
| As reported | Proforma Adjustments | Proforma | As reported | Proforma Adjustments | Proforma | ||||||||||||
| (in thousands, except for per share data) | |||||||||||||||||
| (unaudited) | |||||||||||||||||
Revenues | $ | 1,662,012 | $ | 105,341 | $ | 1,767,353 | $ | 1,546,177 | $ | 104,282 | $ | 1,650,459 | ||||||
Net income | $ | 169,289 | $ | 7,418 | $ | 176,707 | $ | 171,033 | $ | 5,338 | $ | 176,371 | ||||||
Basic earnings per share | $ | 1.29 | $ | 0.06 | $ | 1.35 | $ | 1.30 | $ | 0.04 | $ | 1.34 | ||||||
Diluted earnings per share | $ | 1.27 | $ | 0.05 | $ | 1.32 | $ | 1.28 | $ | 0.04 | $ | 1.32 |
fourth quarter of 2008.
Tools. On December 7, 2007, the Company acquired the well service assets and related equipment of Kings Oil Tools, Inc. (“Kings”), a California-based well service company. The acquired assets, all of which are located in California, include 36 marketed well service rigs, 10 stacked well service rigs and related support equipment. We made this acquisition to expand our business in California. Total consideration paidcompany for the transaction was approximately $45.1 million in cash, including transaction-related costs. We analyzed this acquisition as required under SFAS No. 141, "Business Combinations" ("SFAS 141"), and determined thatmillion. During the acquired assets and facts and circumstances of this transaction metnine months ended September 30, 2008, the criteria of a "business" as that term is defined under EITF 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business" ("EITF 98-3"), and have accounted for this asset purchase as a business combination.
The following table summarizes the preliminary estimatedCompany revised its fair valuesvalue allocation of the assets acquired and liabilities assumed onby increasing the datefair value of acquisition (in thousands):
Property and equipment | $ | 17,563 | ||
Goodwill | 18,958 | |||
Intangible assets | 11,000 | |||
Total assets acquired | 47,521 | |||
Current liabilities | 2,400 | |||
Net assets acquired | $ | 45,121 | ||
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 preliminary allocation of purchase price to specific assets and liabilities is based uponallocation was finalized in the fair valuesfourth quarter of identified assets and liabilities acquired. The fair values of property and equipment was determined for property and equipment using a market or cost approach, depending on the asset being valued. The allocation is still preliminary at this time, and may potentially change by a material amount2008 .
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 | ||||
86
2. ACQUISITIONS (Continued)
as our purchase accounting
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. | PROPERTY AND EQUIPMENT |
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Major classes of property and equipment: | ||||||||
Well servicing equipment | $ | 1,431,624 | $ | 1,200,069 | ||||
Disposal wells | 60,508 | 56,576 | ||||||
Motor vehicles | 125,031 | 112,986 | ||||||
Furniture and equipment | 81,129 | 73,032 | ||||||
Buildings and land | 71,014 | 64,258 | ||||||
Work in progress | 89,001 | 88,304 | ||||||
Gross property and equipment | 1,858,307 | 1,595,225 | ||||||
Accumulated depreciation | (806,624 | ) | (684,017 | ) | ||||
Net property and equipment | $ | 1,051,683 | $ | 911,208 | ||||
87
Goodwill has been recognized as part of the acquisition of the assets of Kings as the purchase price exceeded the fair value of the acquired assets and liabilities absent the allocation of value to identified intangible assets. We believe that the goodwill associated with the acquisition is related primarily to the acquired workforce. Therefore, it was not allocated to the assets and liabilities acquired.
All of the $11.0 million of acquired intangible assets is related to a noncompete agreement and subject to amortization under SFAS 142 and has a weighted-average remaining useful life of 5 years. The $19.0 million of purchase price preliminarily associated with goodwill has been allocated to our well servicing segment. The entire amount is expected to be deductible for income tax purposes. We are not including the pro-forma effect of this acquisition because the impact is not material to our results of operations.
Advanced Measurements, Inc.
On September 5, 2007, the Company, through a wholly-owned Canadian subsidiary, purchased all of the outstanding shares of AMI, a privately-held Canadian technology company focused on oilfield service equipment controls, data acquisition, and digital information work flow. We made this acquisition in order to improve our access to oilfield services technology.
The purchase price was approximately $6.6 million in cash and approximately $2.9 million of assumed debt, which was repaid in September and November 2007. The purchase agreement also provided for deferred cash payments of up to $1.8 million related to the retention of key AMI employees. These deferred payments will be recognized as an expense over the period that the services are rendered.
On the date of acquisition, AMI owned a 48% interest in AFTI, a privately-held Canadian technology company focused on low-cost wireless gas well production monitoring. As part of the purchase of AMI, we were required to exercise an option to increase AMI's interest in AFTI to 51.46%. The cost to exercise this option was approximately $0.5 million. As a result, through our acquisition of AMI we now own a 51.46% interest in AFTI, and we consolidate AFTI into our financial statements, with the remaining 48.54% representing a minority interest.
2. ACQUISITIONS (Continued)
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Well servicing equipment | $ | 20,442 | $ | 19,687 | ||||
Motor vehicles | 9,271 | 5,938 | ||||||
Total | $ | 29,713 | $ | 25,625 | ||||
NOTE 5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Cash | $ | 672 | ||
Other current assets | 3,240 | |||
Property and equipment | 388 | |||
Goodwill | 4,523 | |||
Intangible assets | 5,894 | |||
Other assets | 824 | |||
Total assets acquired | 15,541 | |||
Current liabilities | 2,246 | |||
Long-term debt and capital leases | 2,884 | |||
Deferred tax liability | 2,804 | |||
Total liabilities assumed | 7,934 | |||
Minority interest | 357 | |||
Net assets acquired | $ | 7,250 | ||
The preliminary allocation of the purchase price is based upon the fair values of assets and liabilities acquired. The fair values of identified intangible assets were determined using an income approach to measure the present worth of anticipated economic benefits. We also performed a business enterprise valuation to confirm the values identified through the income approach. Goodwill was recognized as part of the acquisition of AMI as the purchase price exceeded the fair value of the acquired assets and liabilities. We believe that the goodwill associated with the AMI acquisition is related to the acquired workforce and the potential future development of technology by this workforce. Therefore, it was not allocated to the assets and liabilities acquired.
All of the $5.9 million of acquired identified intangible assets is subject to amortization under SFAS 142 and has a weighted-average remaining useful life of approximately 3.6 years. The intangible assets identified relate to developed technology ($4.8 million), customer backlog ($1.0 million) and noncompete agreements ($0.1 million). The $4.5 million of goodwill associated with the purchase has been allocated to our well servicing segment, as the technologies developed are anticipated to benefit these operations; of that amount, none is expected to be deductible for income tax purposes.
The preliminary allocation of the purchase price was based upon preliminary valuations and estimates, and these are subject to change as the valuations are finalized. The primary areas of the purchase price allocation which are not yet finalized relate to the completion of the analysis of the acquired tax bases of the assets. The final valuation of net assets is expected to be completed no later than the third quarter of 2008.
In connection with the acquisition of AMI, we also became party to a revolving credit agreement with a maximum outstanding amount of $0.9 million. This facility was extinguished in November 2007, and the outstanding balance was paid with cash.
We are not including the pro-forma effect of this acquisition because the impact is not material to our results of operations.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUPPLEMENTAL FINANCIAL INFORMATION
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (in thousands) | ||||||
Current accrued liabilities: | |||||||
Accrued payroll, taxes and employee benefits | $ | 56,744 | $ | 58,904 | |||
Accrued operating expenditures | 52,180 | 41,856 | |||||
Income, sales, use and other taxes | 35,310 | 30,282 | |||||
Self-insurance reserves | 25,208 | 24,378 | |||||
Unsettled legal claims | 6,783 | 28,754 | |||||
Phantom share liability | 2,458 | — | |||||
Assumed executory contract | 1,120 | — | |||||
Deferred revenue | 976 | — | |||||
Other | 2,585 | 5,396 | |||||
Total | $ | 183,364 | $ | 189,570 | |||
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (in thousands) | ||||||
Non-current accrued liabilities: | |||||||
Asset retirement obligations | $ | 9,298 | $ | 9,622 | |||
Environmental liabilities | 3,090 | 4,683 | |||||
Accrued rent | 2,829 | 3,241 | |||||
Accrued income taxes | 2,705 | 2,507 | |||||
Phantom share liability | 896 | — | |||||
Other | 713 | 1,203 | |||||
Total | $ | 19,531 | $ | 21,256 | |||
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | ||||||
| (in thousands) | |||||||
Major classes of property and equipment: | ||||||||
Well servicing equipment | $ | 1,200,069 | $ | 950,952 | ||||
Disposal wells | 56,576 | 47,942 | ||||||
Motor vehicles | 112,986 | 105,858 | ||||||
Furniture and fixtures | 73,032 | 78,143 | ||||||
Buildings and land | 64,258 | 58,786 | ||||||
Work in progress | 88,304 | 38,299 | ||||||
Gross property and equipment | 1,595,225 | 1,279,980 | ||||||
Accumulated depreciation | (684,017 | ) | (585,689 | ) | ||||
Net property and equipment | $ | 911,208 | $ | 694,291 | ||||
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUPPLEMENTAL FINANCIAL INFORMATION (Continued)
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | ||||||
| (in thousands) | |||||||
Carrying values of assets leased under capital lease obligations: | ||||||||
Well servicing equipment | $ | 19,687 | $ | 23,713 | ||||
Motor vehicles | 5,938 | 2,589 | ||||||
Total | $ | 25,625 | $ | 26,302 | ||||
| December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
Deferred financing costs: | |||||||||
Gross carrying value | $ | 12,262 | $ | 12,042 | |||||
Accumulated amortization | (145 | ) | (2,090 | ) | |||||
Net carrying value | $ | 12,117 | $ | 9,952 | |||||
| Year Ended December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||||
| (in thousands) | ||||||||
Noncash investing and financing activities: | |||||||||
Property and equipment acquired under captial lease obligations | $ | 12,003 | $ | 15,349 | $ | 18,267 | |||
Equity investment in IROC Systems Corp | — | — | 9,019 | ||||||
Asset retirement obligations | 12 | 155 | 119 | ||||||
Unrealized gain on short-term investments | — | 328 | — | ||||||
Unrealized gain on cash flow hedges | — | 185 | — | ||||||
Capital lease portion of sale-leaseback transactions | — | — | 4,663 | ||||||
Deferred gain on sale-leaseback transactions | — | — | 1,094 | ||||||
Accrued repurchases of common stock | 2,949 | — | — | ||||||
Debt assumed and issued in acquisitions | 40,149 | — | — | ||||||
Supplemental cash flow information: | |||||||||
Cash paid for interest | $ | 38,457 | $ | 44,534 | $ | 54,007 | |||
Cash paid for taxes | 96,327 | 99,048 | 17,156 |
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 2005 Senior Secured Credit Facility.
Included in the 2007 consolidated statement of cash flows are approximately $21.2 million in cash outflows related to the settlement of litigation with our former chief executive officer. The amount was previously accrued for in 2004.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents a summarization of the activity in our goodwill accounts for the years ended December 31, 20072008 and 2006:2007:
Pressure | Fishing and | |||||||||||||||
Well Servicing | Pumping | Rental Services | ||||||||||||||
Segment | Segment | Segment | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Balance at December 31, 2006 | $ | 252,975 | $ | 49,036 | $ | 18,901 | $ | 320,912 | ||||||||
Goodwill acquired during the period | 57,820 | — | — | 57,820 | ||||||||||||
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 | ) | |||||||||
Impact of foreign currency translation | (967 | ) | — | — | (967 | ) | ||||||||||
Balance at December 31, 2008 | $ | 320,992 | $ | — | $ | — | $ | 320,992 | ||||||||
88
| Well Servicing Segment | Pressure Pumping Segment | Fishing and Rental Segment | Total | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||||
December 31, 2005 | $ | 254,116 | $ | 47,905 | $ | 18,901 | $ | 320,922 | ||||||
Goodwill acquired during period | — | — | — | — | ||||||||||
Foreign currency translation and other | (10 | ) | — | — | (10 | ) | ||||||||
December 31, 2006 | $ | 254,106 | $ | 47,905 | $ | 18,901 | $ | 320,912 | ||||||
Goodwill acquired during period | 57,820 | — | — | 57,820 | ||||||||||
Foreign currency translation and other | (182 | ) | — | — | (182 | ) | ||||||||
December 31, 2007 | $ | 311,744 | $ | 47,905 | $ | 18,901 | $ | 378,550 | ||||||
| December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||||
| (in thousands) | ||||||||
Noncompete agreements: | |||||||||
Gross carrying value | $ | 18,402 | $ | 9,401 | |||||
Accumulated amortization | (2,772 | ) | (7,886 | ) | |||||
Net carrying value | $ | 15,630 | $ | 1,515 | |||||
Patents and trademarks: | |||||||||
Gross carrying value | $ | 4,150 | $ | 4,296 | |||||
Accumulated amortization | (2,526 | ) | (2,465 | ) | |||||
Net carrying value | $ | 1,624 | $ | 1,831 | |||||
Customer relationships: | |||||||||
Gross carrying value | $ | 25,139 | $ | — | |||||
Accumulated amortization | (1,649 | ) | — | ||||||
Net carrying value | $ | 23,490 | $ | — | |||||
Customer backlog: | |||||||||
Gross carrying value | $ | 999 | $ | — | |||||
Accumulated amortization | (214 | ) | — | ||||||
Net carrying value | $ | 785 | $ | — | |||||
Developed technology: | |||||||||
Gross carrying value | $ | 4,762 | $ | — | |||||
Accumulated amortization | (397 | ) | — | ||||||
Net carrying value | $ | 4,365 | $ | — | |||||
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
December 31, 2008 2007 (In thousands) Gross carrying value $ 16,309 $ 18,402 Accumulated amortization (4,699 ) (2,772 ) Net carrying value $ 11,610 $ 15,630 Gross carrying value $ 4,391 $ 4,150 Accumulated amortization (3,114 ) (2,526 ) Net carrying value $ 1,277 $ 1,624 Gross carrying value $ 39,225 $ 25,139 Accumulated amortization (12,359 ) (1,649 ) Net carrying value $ 26,866 $ 23,490 Gross carrying value $ 622 $ 999 Accumulated amortization (207 ) (214 ) Net carrying value $ 415 $ 785 Gross carrying value $ 3,598 $ 4,762 Accumulated amortization (1,421 ) (397 ) Net carrying value $ 2,177 $ 4,365
Year Ended December 31, | ||||||||||||||||||||||
| | Year Ended December 31, | 2008 | 2007 | 2006 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | (In thousands) | |||||||||||||||||
| | (in thousands) | ||||||||||||||||||||
Noncompete agreements | Noncompete agreements | $ | 1,919 | $ | 2,202 | $ | 2,955 | $ | 4,108 | $ | 1,919 | $ | 2,202 | |||||||||
Patents and trademarks | Patents and trademarks | 774 | 713 | 642 | 748 | 774 | 713 | |||||||||||||||
Customer relationships | Customer relationships | 1,649 | — | — | 10,710 | 1,649 | — | |||||||||||||||
Customer backlog | Customer backlog | 210 | — | — | 252 | 210 | — | |||||||||||||||
Developed technology | Developed technology | 389 | — | — | 1,803 | 389 | — | |||||||||||||||
Total intangible asset amortization expense | $ | 17,621 | $ | 4,941 | $ | 2,915 | ||||||||||||||||
Total intangible asset amortization expense | $ | 4,941 | $ | 2,915 | $ | 3,597 | ||||||||||||||||
89
| Weighted average remaining amortization period (years) | Expected Amortization Expense | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||
| | (in thousands) | ||||||||||||||||
Noncompete agreements | 4.8 | $ | 4,091 | $ | 3,192 | $ | 2,622 | $ | 2,606 | $ | 2,389 | |||||||
Patents and trademarks | 2.9 | 724 | 449 | 233 | 163 | 55 | ||||||||||||
Customer relationships | 9.8 | 7,877 | 4,900 | 3,201 | 2,208 | 1,648 | ||||||||||||
Customer backlog | 3.3 | 268 | 194 | 194 | 129 | — | ||||||||||||
Developed technology | 3.7 | 1,191 | 1,191 | 1,191 | 792 | — | ||||||||||||
Total | $ | 14,151 | $ | 9,926 | $ | 7,441 | $ | 5,898 | $ | 4,092 | ||||||||
Included
Weighted | ||||||||||||||||||||||||
Average Remaining | ||||||||||||||||||||||||
Amortization | Expected Amortization Expense | |||||||||||||||||||||||
Period (Years) | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Noncompete agreements | 5.9 | $ | 3,221 | $ | 2,652 | $ | 2,620 | $ | 2,423 | $ | 406 | |||||||||||||
Patents and trademarks | 4.5 | 489 | 273 | 203 | 96 | 40 | ||||||||||||||||||
Customer relationships | 9.3 | 8,113 | 5,232 | 3,808 | 2,818 | 2,069 | ||||||||||||||||||
Customer backlog | 2.3 | 797 | 668 | 423 | — | — | ||||||||||||||||||
Developed technology | 2.8 | 156 | 156 | 104 | — | — | ||||||||||||||||||
Total intangible asset amortization expense | $ | 12,776 | $ | 8,981 | $ | 7,158 | $ | 5,337 | $ | 2,515 | ||||||||||||||
5. EARNINGS PER SHARE
NOTE 6. | EARNINGS PER SHARE |
| Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||||||
| (in thousands, except per share data) | ||||||||||
Basic Earnings per Share Computation: | |||||||||||
Numerator | |||||||||||
Income from continuing operations | $ | 169,289 | $ | 171,033 | $ | 49,078 | |||||
Discontinued operations, net of tax | — | — | (3,361 | ) | |||||||
Net income | $ | 169,289 | $ | 171,033 | $ | 45,717 | |||||
Denominator | |||||||||||
Weighted average shares outstanding | 131,194 | 131,332 | 131,075 | ||||||||
Basic Earnings per Share: | |||||||||||
Income from continuing operations | $ | 1.29 | $ | 1.30 | $ | 0.37 | |||||
Discontinued operations, net of tax | — | — | (0.03 | ) | |||||||
Net income | $ | 1.29 | $ | 1.30 | $ | 0.34 | |||||
Diluted Earnings per Share Computation: | |||||||||||
Numerator | |||||||||||
Income from continuing operations | $ | 169,289 | $ | 171,033 | $ | 49,078 | |||||
Discontinued operations, net of tax | — | — | (3,361 | ) | |||||||
Net income | $ | 169,289 | $ | 171,033 | $ | 45,717 | |||||
Denominator | |||||||||||
Weighted average shares outstanding | 131,194 | 131,332 | 131,075 | ||||||||
Dilutive effect from stock options | 1,518 | 2,180 | 2,017 | ||||||||
Dilutive effect from unvested restricted stock | 256 | — | — | ||||||||
Dilutive effect from warrants | 565 | 552 | 503 | ||||||||
Dilutive effect from stock appreciation rights | 18 | — | — | ||||||||
133,551 | 134,064 | 133,595 | |||||||||
Diluted Earnings per Share: | |||||||||||
Income from continuing operations | $ | 1.27 | $ | 1.28 | $ | 0.37 | |||||
Discontinued operations, net of tax | — | — | (0.03 | ) | |||||||
Net income | $ | 1.27 | $ | 1.28 | $ | 0.34 | |||||
2006:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Basic EPS Computation: | ||||||||||||
Numerator | ||||||||||||
Net income | $ | 84,058 | $ | 169,289 | $ | 171,033 | ||||||
Denominator | ||||||||||||
Weighted average shares outstanding | 124,246 | 131,194 | 131,332 | |||||||||
Basic earnings per share | $ | 0.68 | $ | 1.29 | $ | 1.30 | ||||||
Diluted EPS Computation: | ||||||||||||
Numerator | ||||||||||||
Net income | $ | 84,058 | $ | 169,289 | $ | 171,033 | ||||||
Denominator | ||||||||||||
Weighted average shares outstanding | 124,246 | 131,194 | 131,332 | |||||||||
Stock options | 555 | 1,518 | 2,180 | |||||||||
Restricted stock | 254 | 256 | — | |||||||||
Warrants | 506 | 565 | 552 | |||||||||
Stock appreciation rights | 4 | 18 | — | |||||||||
125,565 | 133,551 | 134,064 | ||||||||||
Diluted earnings per share | $ | 0.67 | $ | 1.27 | $ | 1.28 |
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. EARNINGS PER SHARE (Continued)
respectively,such exercises on earnings per share in those periods would be anti-dilutive. Shares are considered anti-dilutive because their exercise prices exceeded the average price of the Company'sCompany’s stock during those yearsyears.
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Subsidiaries
We lease certain equipment such as tractors, trailers, frac tanks and forklifts from financial institutions under master lease agreements. Under our former master lease agreements, we were required to provide current annual and quarterly financial reports
NOTE 7. | ASSET RETIREMENT OBLIGATIONS |
We entered into two new master lease agreements on August 31, 2005 and October 14, 2005assets associated with a new lessor. Some of the equipment, whichasset retirement obligations was being leased from lessors that demanded settlement, was sold to this new lessor and subsequently leased back from that lessor, which we account for as capital leases. We received an aggregate amount of $5.8$0.6 million, in proceeds from the sale-leaseback transactions. We realized a gain of $1.1 million on one of the sale-leaseback transactions, which is being amortized over the term of the new lease. Amounts recognized in earnings related to the amortization of this deferred gain were $0.2 million, $0.2$0.6 million and $0.1$0.5 million for the years ended December 31, 2008, 2007 and 2006, and 2005, respectively. On the other sale-leaseback transaction, we realized a lossA summary of less than $0.1 million, which was immediately recognizedchanges in earnings.
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 | |||
Additions | 397 | |||
Costs incurred | (462 | ) | ||
Accretion expense | 594 | |||
Disposals | (478 | ) | ||
Balance at December 31, 2008 | $ | 9,349 | ||
NOTE 8. | EQUITY METHOD INVESTMENTS |
On July 22, 2004, we entered into an agreement (the "IROC Agreement") with IROC Energy Services Corp., an Alberta-based oilfield services company ("IROC"), to sell IROC ten remanufactured Skytop well service rigs, along with supporting equipment and inventory. We began delivery of the rigs in the fall of 2004, and these rigs are operated by IROC in Western Canada. The purchase price for the rigs was $7.0 million USD. This amount was converted at an agreed exchange rate of 0.7634 to $9.17 million CDN, and was paid by way of the issuance of 8,187,058 common shares of IROC stock at a deemed issuance price of $1.12 CDN per share. The final four rigs were delivered in 2005, and we recognized a gain of $1.9 million upon delivery, which represents the difference between the aggregate carrying value of the delivered rigs and the fair market value on the delivery date of the IROC shares we received as consideration for those four rigs.
In July 2005, we sold additional well service rig support equipment to IROC for $0.9 million USD. This amount was converted at an agreed exchange rate of 0.7937 to $1.1 million CDN, and was paid by way of the issuance of 547,411 shares of IROC common stock (the "Additional Shares") at a deemed issuance price of $2.09 CDN per share. We recognized a gain of $0.7 million related to this transaction, which represents the difference between the carrying value of the transferred equipment and the fair value of the Additional Shares on the transaction date.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENT IN IROC ENERGY SERVICES CORP. (Continued)
Exchange and had a closing price of $0.54 CDN and $0.74 CDN per share on December 31, 2007. Pursuant to the terms of the IROC Agreement,2008 and 2007, respectively. Mr. William Austin, our Chief Financial Officer,former chief financial officer, and Mr. Newton W. Wilson III, our General Counsel, were appointed toChief Operating Officer, serve on the board of directors of IROC.
We
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93
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
acquisition, AMI owned a portion of another Canadian company, AFTI. As part of the acquisition, AMI increased its ownership percentage of AFTI to 51.46%. At December 31, 2007 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 minority interest in our consolidated financial statements.
NOTE 9. | ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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, December 31, 2007 December 31, 2006 Carrying Value Fair Value Carrying Value Fair Value (in thousands) Financial assets: Notes receivable—related parties $ 173 $ 173 $ 287 $ 287 Cash flow hedges — — 185 185
Financial liabilities:
8.375% Senior Notes due 2014 $ 425,000 $ 434,563 $ — $ — 2007 Senior Secured Credit Facility Revolving Loans 50,000 50,000 — — 2005 Senior Secured Credit Facility Term Loans — — 396,000 396,000 Notes payable—related parties 22,178 22,178 — — December 31, 2008 December 31, 2007 Carrying Value Fair Value Carrying Value Fair Value (In thousands) Notes receivable — related parties $ 336 $ 336 $ 173 $ 173 8.375% Senior Notes due 2014 $ 425,000 $ 282,115 $ 425,000 $ 434,563 Senior Secured Credit Facility revolving loans 187,813 187,813 50,000 50,000 Notes payable — related parties 20,318 20,318 22,178 22,178 Cash flow hedges. The carrying value of our cash flow hedges is equal to the fair value of those instruments on December 31, 2006. We had no cash flow hedges on December 31, 2007.2007.2008. The carrying value of these notes as of December 31, 20072008 was $425.0 million and the fair value was $434.6$282.1 million. 2007 Senior Secured Credit Facility Revolving Loans.revolving loans. Because of their variable interest rates, the fair values of the revolving loans borrowed under our 2007 Senior Secured Credit Facility approximate their carrying values as of December 31, 2007.2008. The carrying and fair values of these loans as of December 31, 20072008 were approximately $50.0$187.8 million. 2005 Senior Secured Credit Facility Term Loans. Because of their variable interest rates, the fair values of the term loans borrowed under our 2005 Senior Secured Credit Facility approximate their carrying values as of December 31, 2006. The carrying and fair values of these loans as of December 31, 2006 were $396.0 million. The loans were repaid in November 2007 with the proceeds from our 8.375% Senior Notes due 2014. Notes payable—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"2. Acquisitions”). The carrying value of these notes approximate their fair values as of December 31, 2007.2008.
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NOTE 10. | DERIVATIVE FINANCIAL INSTRUMENTS |
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
$100.0 $100.0 million notional amount interest rate swaps to effectively fix the interest rate on a portion of this debt.the borrowings under our prior senior credit agreement, dated July 29, 2005 (the “Prior Credit Facility”). These swaps met the criteria of derivative instruments.
The Company uses a historic simulation based on regression analysis to assess the effectiveness of the swaps as a hedge of the future cash flows of the forecasted transaction, both on a historical and prospective basis. The simulation regresses the monthly changes in the cash flows associated with the hedging instrument and the hedged item. The results of the regression indicated the swaps were highly effective in offsetting the future cash flows of the items being hedged and could be reasonably assumed to be highly effective on an ongoing basis. Based on the results of this analysis and the Company's intent to use the instruments to reduce exposure to changes in future cash flows attributable to interest payments, the Company elected to account for the swaps as cash flow hedges.
The measurement of hedge ineffectiveness is based on a comparison of the cumulative change in the fair value of the actual swap designated as the hedging instrument and the cumulative change in fair value of a perfectly effective hypothetical derivative ("Perfect Hypothetical Derivative") (as defined in Derivatives Implementation Group ("DIG") Issue G7). The perfectly effective hypothetical swap mimics the terms of the debt with a fixed interest rate assumed to be the same as the hedge instrument. This method of measuring ineffectiveness is known as the "Hypothetical Derivative Method." Under this method, the actual swap is recorded at fair value on the Company's consolidated balance sheets and accumulated other comprehensive income is adjusted to a balance that reflects the lesser of either the cumulative change in the fair value of the actual swap or the cumulative change in the fair value of the Perfect Hypothetical Derivative. The amount of ineffectiveness, if any, is equal to the excess of the cumulative change in the fair value of the actual swap over the cumulative change in the fair value of the Perfect Hypothetical Derivative, and is recorded currently in earnings as a component of other income and expense on the Company's consolidated statements of operations.
Foreign Currency Instruments. In connection with our acquisition of AMI in September 2007 (see Note 2—"Acquisitions"), we became party to four swap arrangements that exchanged Singaporean Dollars for Canadian Dollars. These arrangements meet the definition of a derivative under SFAS 133.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
We have not elected to treat these derivatives as cash flow hedges and as a result, any gains or losses arising out of changes in the fair value of these contracts are recorded as unrealized gains or losses in our consolidated statements of operations as a component of other income and expense. As of December 31, 2007, the aggregate notional amount of these contracts was approximately $0.4 million USD and the aggregate fair value of these contracts was less than $0.1 million USD. The last of these contracts settled in January 2008. For the year ended December 31, 2007, the unrealized holding loss associated with these contracts was not material.
10. INCOME TAXES
NOTE 11. | INCOME TAXES |
| Year Ended December 31, | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||
Current income tax (expense) benefit: | |||||||||||||||||||||||
Federal and state | $ | (81,384 | ) | $ | (92,213 | ) | $ | (18,022 | ) | ||||||||||||||
Foreign | (771 | ) | (4,242 | ) | (3,610 | ) | Year Ended December 31, | ||||||||||||||||
2008 | 2007 | 2006 | |||||||||||||||||||||
(82,155 | ) | (96,455 | ) | (21,632 | ) | (In thousands) | |||||||||||||||||
Deferred income tax (expense) benefit: | |||||||||||||||||||||||
Current income tax expense: | |||||||||||||||||||||||
Federal and state | $ | (55,190 | ) | $ | (81,384 | ) | $ | (92,213 | ) | ||||||||||||||
Foreign | (5,306 | ) | (771 | ) | (4,242 | ) | |||||||||||||||||
Federal and state | (24,281 | ) | (7,906 | ) | (13,952 | ) | |||||||||||||||||
Foreign | (332 | ) | 914 | 264 | (60,496 | ) | (82,155 | ) | (96,455 | ) | |||||||||||||
Deferred income tax (expense) benefit: | |||||||||||||||||||||||
Federal and state | (30,363 | ) | (24,281 | ) | (7,906 | ) | |||||||||||||||||
Foreign | 616 | (332 | ) | 914 | |||||||||||||||||||
(24,613 | ) | (6,992 | ) | (13,688 | ) | (29,747 | ) | (24,613 | ) | (6,992 | ) | ||||||||||||
Total income tax expense | Total income tax expense | $ | (106,768 | ) | $ | (103,447 | ) | $ | (35,320 | ) | $ | (90,243 | ) | $ | (106,768 | ) | $ | (103,447 | ) | ||||
10. INCOME TAXES (Continued)
Year Ended December 31, | |||||||||||||||||||
| Year Ended December 31, | 2008 | 2007 | 2006 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||||||||||||||
Income tax computed at Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | |||||||
State taxes | 3.2 | 1.7 | 2.4 | 3.1 | 3.2 | 1.7 | |||||||||||||
Meals and entertainment | 0.9 | 0.8 | 2.1 | ||||||||||||||||
Executive and share-based compensation | 0.6 | 1.1 | 0.6 | ||||||||||||||||
Foreign rate differential | 0.2 | — | 1.3 | ||||||||||||||||
Non deductible goodwill | 12.8 | — | — | ||||||||||||||||
Change in valuation allowance | 0.2 | (0.5 | ) | — | (0.3 | ) | 0.2 | (0.5 | ) | ||||||||||
Other | (1.4 | ) | (0.4 | ) | 0.4 | 1.2 | 0.3 | 1.5 | |||||||||||
Effective income tax rate | 38.7 | % | 37.7 | % | 41.8 | % | 51.8 | % | 38.7 | % | 37.7 | % | |||||||
| December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | ||||||||||||||
| (in thousands) | |||||||||||||||
Deferred tax assets: | ||||||||||||||||
Net operating loss and tax credit carryforwards | $ | 6,000 | $ | 5,375 | ||||||||||||
Self-insurance reserves | 21,484 | 21,593 | December 31, | |||||||||||||
Allowance for doubtful accounts | 4,731 | 4,793 | 2008 | 2007 | ||||||||||||
Accrued liabilities | 15,600 | 24,287 | (In thousands) | |||||||||||||
Equity-based compensation | 3,876 | 2,736 | ||||||||||||||
Other | 488 | 18 | ||||||||||||||
Deferred tax assets: | ||||||||||||||||
Net operating loss and tax credit carryforwards | $ | 4,664 | $ | 6,000 | ||||||||||||
Self-insurance reserves | 20,944 | 21,484 | ||||||||||||||
Allowance for doubtful accounts | 4,023 | 4,731 | ||||||||||||||
Accrued liabilities | 14,681 | 15,600 | ||||||||||||||
Equity-based compensation | 10,116 | 3,876 | ||||||||||||||
Other | 3,085 | 488 | ||||||||||||||
Total deferred tax assets | Total deferred tax assets | 52,179 | 58,802 | 57,513 | 52,179 | |||||||||||
Valuation allowance for deferred tax assets | Valuation allowance for deferred tax assets | (1,458 | ) | (841 | ) | (844 | ) | (1,458 | ) | |||||||
Net deferred tax assets | Net deferred tax assets | 50,721 | 57,961 | 56,669 | 50,721 | |||||||||||
Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||
Property and equipment | (150,802 | ) | (121,314 | ) | ||||||||||||
Intangible assets | (31,993 | ) | (16,196 | ) | ||||||||||||
Other | (318 | ) | (309 | ) | ||||||||||||
Property and equipment | (190,675 | ) | (150,802 | ) | ||||||||||||
Intangible assets | (27,952 | ) | (31,993 | ) | ||||||||||||
Other | — | (318 | ) | |||||||||||||
Total deferred tax liabilities | Total deferred tax liabilities | (183,113 | ) | (137,819 | ) | (218,627 | ) | (183,113 | ) | |||||||
Net deferred tax liability, net of valuation allowance | Net deferred tax liability, net of valuation allowance | $ | (132,392 | ) | $ | (79,858 | ) | $ | (161,958 | ) | $ | (132,392 | ) | |||
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (Continued)
96
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (Continued)
the regular corporate tax rate of 28%. Tax expense will beis calculated under both methods and if the flat tax is greater than the regular tax, the additional tax expense above the regular tax will beis assessed in addition to the regular tax calculation. We haveIn 2007, we recorded a full valuation allowance related to our Mexico net operating loss carryforwards of $0.6 million, at December 31, 2007, as management believesbelieved that, because ofdue to the enactment of the Mexico flat tax, all of our net operating loss carryforwards related to the Mexico operations arewere not more likely than not to be fully realized in the future based onfuture. It was determined the future reversalCompany would not be in a flat tax position in 2008 and all of deferred tax liabilities. Thethe 2007 regular net operating loss expireswill be utilized against 2008 regular Mexico income. Accordingly, the valuation allowance of $0.6 million set up in 2017.
2007 was released in 2008.
97
We adopted the provisions
As part of the acquisitions we made during 2007, the Company acquired or assumed unrecognized tax benefits, as defined by FIN 48. The cumulative effect of the acquisition of the unrecognized tax benefits was $3.2 million, which consisted primarily of rig refurbishment and meals and entertainment expense.
As of January 1, 2007 and December 31, 2007 we had approximately $3.8$5.6 million, $6.8 million and $6.8$3.4 million, respectively, of unrecognized tax benefits net of federal benefitbenefits which, if recognized, would impact our effective tax rate. We have accrued approximately $2.1 million, $2.3 million and $1.0 million for the payment of
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (Continued)
interest and penalties as of December 31, 2008, December 31, 2007 and January 1, 2007, respectively. While itWe believe that is reasonably possible for changes to occur due to settlementthat approximately $2.8 million of examinations orour currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the expirationend of 2008 as a result of a lapse of the statute of limitations, we do not anticipate significant changes in our unrecognized tax benefit liability in the next 12 months.
limitations.
There were no
these statute expirations.
Balance at January 1, 2007 | $ | 4,123 | ||
Additions based on tax positions related to the current year | — | |||
Additions based on tax positions related to prior years | 104 | |||
Increases in unrecognized tax benefits acquired or assumed in business combinations | 2,403 | |||
Reductions for tax positions from prior years | — | |||
Settlements | (908 | ) | ||
Balance at December 31, 2007 | $ | 5,722 | ||
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 American Jobs CreationThe Economic Stimulus Act of 2004.2008. The American Jobs CreationEconomic Stimulus Act of 2004 added2008 permits a bonus first-year depreciation deduction of 50% of the Section 199 deduction to the Internal Revenue Code. This allows for tax deduction on qualifying domestic production activities, as definedadjusted basis of qualified property (most personal property and limitedsoftware) acquired and placed in the Internal Revenue Code. We concluded we will receive benefits of $2.0 million, $1.6 million and $0.6 million from this deduction for the years endedservice after December 31, 2007 2006 and 2005, respectively.before January 1, 2009. We have
98
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT
NOTE 12. | LONG-TERM DEBT |
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (in thousands) | ||||||
8.375% Senior Notes due 2014 | $ | 425,000 | $ | — | |||
2007 Senior Secured Credit Facility revolving loans due 2012 | 50,000 | — | |||||
Notes payable—related party, net of fair value discount | 22,178 | — | |||||
2005 Senior Secured Credit Facility term loans | — | 396,000 | |||||
Capital lease obligations | 26,815 | 25,794 | |||||
523,993 | 421,794 | ||||||
Less: current portion | (12,379 | ) | (15,714 | ) | |||
Total long-term debt and capital lease obligations, net of fair value discount | $ | 511,614 | $ | 406,080 | |||
December 31, 2008 2007 (In thousands) 8.375% Senior Notes due 2014 $ 425,000 $ 425,000 Senior Secured Credit Facility revolving loans due 2012 187,813 50,000 Other long-term indebtedness 3,015 — Notes payable — related party, net of discount of $182 and $322 20,318 22,178 Capital lease obligations 23,149 26,815 659,295 523,993 Less current portion (25,704 ) (12,379 ) Total long-term debt and capital lease obligations, net of fair value discount $ 633,591 $ 511,614
The Notes are general unsecured senior obligations of Key. Accordingly, they will 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.
99
Year | Percentage | Percentage | |||||
---|---|---|---|---|---|---|---|
2011 | 104.188 | % | 104.19 | % | |||
2012 | 102.094 | % | 102.09 | % | |||
2013 | 100.000 | % | 100.00 | % |
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
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.
These covenants are subject to certain exceptions and qualifications. In addition, substantially all of the covenants will terminate before the Notes mature if one of two specified ratings agencies assigns the Notes an investment grade rating in the future and no events of default exist under the Indenture. 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 Notes later falls below an investment grade rating.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
100
equipment.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
101
Interest expense for the years ended December 31, 2008 and 2007 was $1.2 million and $0.2 million, respectively, on the two notes in aggregate.
2005 Senior Secured Credit Facility
On July 29, 2005, we entered into a Credit Agreement (the "2005 Senior Secured Credit Facility"). The 2005 Senior Secured Credit Facility consisted of (i) a revolving credit facility of up to an aggregate principal amount of $65.0 million, which wasdiscount remaining to mature on July 29, 2010; (ii) a senior term loan facility in the original aggregate principal amount of $400.0 million, which was to mature on June 30, 2012; and (iii) a prefunded letter of credit facility in the aggregate amount of $82.3 million, which was to mature on July 29, 2010. The revolving credit facility included a $25.0 million sub-facility for additional letters of credit. The proceeds from the term loan facility, along with cash on hand, were used to redeem or repay our Previous Senior Notes (defined below).
Borrowings under the 2005 Senior Secured Credit Facility through December 31, 2005 bore interest upon the outstanding principal balance, at the Company's option, at the prime rate plus a margin of 1.75% or a Eurodollar rate plus a margin of 2.75%. These margins were increased on December 31, 2005 by 0.50% and again on June 30, 2006 by 0.50% because the Company did not meet
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
certain filing targets for our 2003 Annual Report on Form 10-K. We were also required to pay certain fees in connection with the credit facilities, including a commitment fee as a percentage of aggregate commitments.
Between November 1, 2005 and July 27, 2007, we amended the 2005 Senior Secured Credit Facility three times in order to, among other things, (i) extend the filing deadlines for our 2006 Annual Report on Form 10-K and quarterly reports for 2005, 2006, and the first two quarters of 2007, (ii) reduce the Eurodollar spreads and commitment fees associated with the term loans under the facility, (iii) increase the limitations on our capital expenditures, (iv) increase the permitted stock repurchase basket under the agreement, (v) increase and subsequently eliminate the permitted acquisitions basket under the agreement, and (vi) eliminate provisions requiring the Company to prepay term loans under the facility with excess cash flow. We paid a total of approximately $1.7 million in fees for these amendments.
On November 29, 2007, the Company issued the Notes, and used the proceeds to retire the term loan amounts then outstanding under the 2005 Senior Secured Credit Facility. We recognized a loss of approximately $9.6 million upon the extinguishment of the 2005 Senior Secured Credit Facility.
2003 Senior Secured Credit Facility
On November 10, 2003, we entered into a Fourth Amended and Restated Credit Agreement (the "2003 Senior Secured Credit Facility"). The 2003 Senior Secured Credit Facility consisted of a $175.0 million revolving loan facility with the entire amount being available for letters of credit. We previously had the right, subject to certain terms and conditions, to increase the total commitment under the facility to $225.0 million if we were unable to obtain additional lending commitments.
Our failure to file our 2003 Annual Report on Form 10-K on a timely basis violated the covenants of the 2003 Senior Secured Credit Facility. Between March 31, 2004 and July 20, 2005, we amended the terms of the 2003 Senior Secured Credit facility six times to waive the covenants and extend the due date for our 2003 Annual Report on Form 10-K and other filings. During 2005 we paid a total of $1.1 million in fees related to the various amendments to the 2003 Senior Secured Credit Facility. On July 29, 2005, we entered into the 2005 Senior Secured Credit Facility, which replaced the 2003 Senior Secured Credit Facility.
Previous Senior Notes
On May 14, 2003, we completed a public offering of $150.0 million of 6.375% Senior Notes due May 1, 2013 (the "6.375% Senior Notes"). The proceeds from the public offering, net of fees and expenses, were used to repay the balance of the revolving loan facility then outstanding under our then-existing credit facility, with the remainder being used for general corporate purposes. The 6.375% Senior Notes required semi-annual interest payments on May 1 and November 1 of each year. Interest of $8.9 million was paid on these notes during 2005.
On March 6, 2001, we completed a private placement of $175.0 million of 8.375% Senior Notes due March 1, 2008 (the "8.375% Senior Notes"; together with the 6.375% Senior Notes, the "Previous Senior Notes"). The net cash proceeds from the private placement were used to repay all of the remaining balance of prior term loans and a portion of the revolving credit facility then outstanding under our then-existing credit facility. On March 1, 2002, we completed the public offering of an additional $100.0 million of 8.375% Senior Notes. The net cash proceeds were used to repay the
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
outstanding balance of the revolving loan facility under our then-existing credit facility. The 8.375% Senior Notes required semi-annual interest payments on March 1 and September 1 of each year. Interest of $27.3 million was paid on these notes during 2005.
Defaults Under Previous Senior Note Indentures and Repayment of Previous Senior Notes
Our failure to file our 2003 Annual Report on Form 10-K with the SEC and deliver it to the trustee under the indentures for the Previous Senior Notes before March 30, 2004 constituted a default under those indentures. During 2004 and 2005 we amended the terms of each of the indentures three times to waive the covenant non-compliance and extend the due date for our 2003 Annual Report on Form 10-K and other filings. In order to obtain these amendments and consents we incurred costs totaling $9.0 million during 2005. The final amendment to the indentures established due dates of May 31, 2005 for filing our 2003 Annual Report on Form 10-K and of July 31, 2005 for filing our 2004 Annual Report on Form 10-K and 2004 quarterly reports on Form 10-Q. The consents also provided a due date of October 31, 2005 for filing our quarterly reports on Form 10-Q for the first and second quarters of 2005. We failed to meet these deadlines, and on June 6, 2005 the trustee for the Previous Senior Notes sent us notice of the financial reporting violation, which the triggered a 60-day cure period. Due to our failure to cure this default, on September 28, 2005 we received a valid acceleration notice from the trustee for the 6.375% Senior Notes.
The 6.375% Senior Notes were repaid on October 5, 2005, at a price of 100% of the outstanding principal amount plus accrued and unpaid interest to the repayment date, resulting in a net cash outlay of $154.1 million. We redeemed all $275.0 million outstanding principal amount of the 8.375% Senior Notes on November 8, 2005. The 8.375% Senior Notes were redeemed at a price of 104.188% of the principal amount plus accrued and unpaid interest to the redemption date, for a net cash outlay of $290.9 million. resulting in a loss of $14.1 million. We recognized losses totaling $16.4 million related to these transactions. Proceeds from the 2005 Senior Secured Credit Facility and cash on hand were used to repay the Previous Senior Notes.
Default Under Lease Agreements
As discussed in Note 6—"Sale-Leaseback Transactions," we lease certain equipment such as tractors, trailers, frac tanks and forklifts from financial institutions under master lease agreements. Under certain of these master lease agreements, we were required to provide current annual and quarterly financial reports. For certain of these leases, we obtained a series of waivers from the financial institutions regarding the filing of these reports, the last of which allowed us until September 30, 2006 to file an Annual Report on Form 10-K for 2003. Due to our inability to provide audited financial statements for the year ended December 31, 2003 that comply with SEC rules, we are not in compliance with the terms of these equipment leases. We do not intend to seek additional waivers from the financial institutions, and as a result the equipment lessors may demand that the leases be repaid. As of December 31, 2007, no formal demands for repayment had been made by the lessors. As of December 31, 2007, the total amount outstanding under such lease agreements was approximately $2.7 million. We have recorded a current liability of $1.7 million in our consolidated balance sheetsamortized as of December 31, 2008 and 2007 which represents our obligation under these lease agreements that are accountedwas $0.2 million and $0.3 million, respectively, for as capital leases.both notes in the aggregate. The remaining $1.0total amount of discount amortization included in interest expense related to the notes for the years ended December 31, 2008 and 2007 was approximately $0.1 million represents the remaining payments under leases with those lessors that we account for as operating leases.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
less than $0.1 million, respectively.
| | Principal Amount of Long-Term Debt | |||||||
---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | Principal Amount of Long-Term Debt | ||||||
2008 | $ | 2,000 | |||||||
(In thousands) | |||||||||
2009 | 2009 | 14,500 | $ | 16,500 | |||||
2010 | 2010 | 2,000 | 3,015 | ||||||
2011 | 2011 | 2,000 | 2,000 | ||||||
2012 | 2012 | 52,000 | 189,813 | ||||||
2013 | — | ||||||||
Thereafter | Thereafter | 425,000 | 425,000 | ||||||
Total principal payments | 497,500 | ||||||||
Total principal payments | 636,328 | ||||||||
Less: fair value discount | Less: fair value discount | (322 | ) | 182 | |||||
Total long-term debt | Total long-term debt | $ | 497,178 | $ | 636,146 | ||||
102
| Capital Lease Obligation Minimum Lease Payments | |||
---|---|---|---|---|
| (in thousands) | |||
2008 | $ | 13,142 | ||
2009 | 9,251 | |||
2010 | 6,066 | |||
2011 | 2,950 | |||
2012 | 244 | |||
Thereafter | — | |||
Total minimum lease payments | 31,653 | |||
Less: executory costs | (2,696 | ) | ||
Net minimum lease payments | 28,957 | |||
Less: amounts representing interest | (2,142 | ) | ||
Present value of minimum lease payments | $ | 26,815 | ||
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LONG-TERM DEBT (Continued)
Capital Lease Obligation Minimum Lease Payments (In thousands) 2009 $ 10,635 2010 7,913 2011 4,832 2012 1,969 2013 378 Thereafter — Total minimum lease payments 25,727 Less: executory costs (729 ) Net minimum lease payments 24,998 Less: amounts representing interest (1,849 ) Present value of minimum lease payments $ 23,149
Year Ended December 31, | ||||||||||||||||||||||
| Year Ended December 31, | 2008 | 2007 | 2006 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | (In thousands) | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||
Cash payments | $ | 33,964 | $ | 40,290 | $ | 39,098 | $ | 45,211 | $ | 33,964 | $ | 40,290 | ||||||||||
Commitment and agency fees paid | 2,232 | 4,244 | 14,909 | 102 | 2,232 | 4,244 | ||||||||||||||||
Amortization of discount and premium, net | — | — | (212 | ) | ||||||||||||||||||
Amortization of debt issuance costs | 1,680 | 1,620 | 1,351 | |||||||||||||||||||
Amortization of discount, net | 140 | — | — | |||||||||||||||||||
Amortization of deferred financing costs | 1,975 | 1,680 | 1,620 | |||||||||||||||||||
Settlement of interest rate swaps | 2,261 | — | — | — | 2,261 | — | ||||||||||||||||
Net change in accrued interest | 1,366 | (3,869 | ) | (3,581 | ) | 333 | 1,366 | (3,869 | ) | |||||||||||||
Capitalized interest | (5,296 | ) | (3,358 | ) | (1,266 | ) | (6,514 | ) | (5,296 | ) | (3,358 | ) | ||||||||||
Total interest expense | $ | 36,207 | $ | 38,927 | $ | 50,299 | $ | 41,247 | $ | 36,207 | $ | 38,927 | ||||||||||
103
12. COMMITMENTS AND CONTINGENCIES
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Deferred financing costs: | ||||||||
Gross carrying value | $ | 12,609 | $ | 12,262 | ||||
Accumulated amortization | (2,120 | ) | (145 | ) | ||||
Net carrying value | $ | 10,489 | $ | 12,117 | ||||
NOTE 13. | COMMITMENTS AND CONTINGENCIES |
| Lease Payments | ||||||
---|---|---|---|---|---|---|---|
2008 | $ | 7,428 | |||||
Lease Payments | |||||||
2009 | 5,569 | $ | 6,312 | ||||
2010 | 3,823 | 5,664 | |||||
2011 | 1,719 | 4,578 | |||||
2012 | 1,540 | 4,000 | |||||
2013 | 2,996 | ||||||
Thereafter | 4,145 | 4,679 | |||||
$ | 24,224 | $ | 28,229 | ||||
104
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
employees for travel time between the yard and the wellhead and that certain employees were denied meal and rest periods between shifts. We haveperiods. 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 matterlawsuit, and do not expect that the conclusionsubsequent settlement of this matter willin 2008 did not have a material impact on our financial position, results of operations or cash flows.
On July 6, 2007, we delivered a notice to Mr. Loftis, through his counsel, of our intention to treat his termination of employment effective July 8, 2004 as "for cause" under his employment agreement. On August 17, 2007, the Company filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract and breach of fiduciary duties. In its counterclaims, the Company seeks 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, as well asand damages relating to the allegations of malpractice and breach of fiduciary duties. The case was transferred to and is now pending in the U.S. District Court for the Eastern District of Pennsylvania and is currently set for trial 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.
exercised. In resolving a separate lawsuit between the Company and Mr. John, Mr. John 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.
We are vigorously defending againstcurrently set for trial in both of these claims; however, we cannot predictmatters in the outcomesecond quarter of 2009. We have not recorded a liability for these matters and do not believe that the lawsuits.
conclusion of these matters will have a material impact on our financial position, results of operations or cash flows.
105
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
and misleading statements and omitted material information from our public statements and SEC reports during the class period, in violation of the Securities Exchange Act of 1934, including alleged: (i) overstatement of revenues, net income, and earnings per share, (ii) failure to take write-downs of assets, consisting of primarily idle equipment, (iii) failure to amortize the Company's goodwill, (iv) failure to disclose that the Company lacked adequate internal controls and therefore was unable to ascertain the true financial condition of the Company, (v) material inflation of the Company's financial results at all relevant times, (vi) misrepresentation of the value of acquired businesses, and (vii) failure to disclose misappropriation of funds by employees.
Four shareholderstockholder derivative actions were also filed, by certain of our shareholders, purporting to actpurportedly on our behalf, asserting various claims against the named officer and director defendants. The derivative actions generally allegealleging the same facts as those in the shareholderconsolidated stockholder class action suits. Those suits also allege breach of fiduciary duty, abuse of control, waste of corporate assets, and unjust enrichment by these defendants.
action. On September 7, 2007, we reached agreements in principle to settle all pending securitiesof 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 Key will be required to paythe Company paid approximately $1.1 million. FinalWe received final approval of the settlement of the shareholder andstockholder class action claims by the court is anticipated to occuron March 6, 2008, and final court approval on the derivative settlement was received on August 8, 2008. All litigation in the first quarter of 2008. We have recorded an appropriate liability for this matter.
stockholder class action and derivative matters has been concluded.
2008.
106
We do not expect that the ultimate resolution of the matter will result in a loss materially in excess of the amount already accrued.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
incurred. We estimate general liability claims on acase-by-case basis. We maintain insurance policies for workers'workers’ compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers'workers’ compensation, vehicular liability and general liability claims. As of December 31, 20072008 and December 31, 2006,2007, we have recorded $69.0$68.9 million and $69.0 million, respectively, of self-insurance reserves related to workers'workers’ compensation, vehicular liabilities and general liability claims. Partially offsetting these liabilities, we had approximately $8.1$10.8 million and $5.7$8.1 million of insurance receivables as of December 31, 2008 and 2007, respectively. We feel that the liabilities we have recorded are appropriate based on the known facts and 2006, respectively.
circumstances and do not expect further losses materially in excess of the amounts already accrued for existing claims.
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.
107
NOTE 14. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
13. FOREIGN CURRENCY TRANSLATION
follows:
December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Foreign currency translation loss | $ | (46,520 | ) | $ | (37,959 | ) | ||
Deferred loss from available for sale investments | (30 | ) | (22 | ) | ||||
Accumulated other comprehensive loss | $ | (46,550 | ) | $ | (37,981 | ) | ||
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. FOREIGN CURRENCY TRANSLATION (Continued)
financial statements and the cumulative currency translation gains and losses, net of tax, for each of our foreign subsidiaries:
| Argentina | Mexico | Canada(1) | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for conversion ratios) | ||||||||||
As of December 31, 2007: | |||||||||||
Conversion ratio | 3.15 : 1 | 10.92 : 1 | 0.98 : 1 | n/a | |||||||
Cumulative translation adjustment | $ | (38,181 | ) | $(143 | ) | $365 | $ | (37,959 | ) | ||
As of December 31, 2006: | |||||||||||
Conversion ratio | 3.1 : 1 | n/a | 1.17 : 1 | n/a | |||||||
Cumulative translation adjustment | $ | (36,896 | ) | $— | $218 | $ | (36,678 | ) |
14. EMPLOYEE BENEFIT PLANS
currency:
Argentine Peso | Mexican Peso | Canadian Dollar | Euro | Russian Rouble | Total | |||||||||||||||||||
(In thousands, except for conversion ratios) | ||||||||||||||||||||||||
As of December 31, 2008: | ||||||||||||||||||||||||
Conversion ratio | 3.46:1 | 13.78:1 | 1.22:1 | 0.71:1 | 29.48:1 | n/a | ||||||||||||||||||
Cumulative translation adjustment | $ | (43,654 | ) | $ | (1,663 | ) | $ | (917 | ) | $ | (286 | ) | $ | — | $ | (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. | EMPLOYEE BENEFIT PLANS |
Employees are fully vested in the matching contributions when they are made by the Company.
108
15. STOCKHOLDERS' EQUITY
NOTE 16. | STOCKHOLDERS’ EQUITY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. STOCKHOLDERS' EQUITY (Continued)
Tax Withholding.Withholding
109
16. EQUITY-BASED COMPENSATION
NOTE 17. | SHARE-BASED COMPENSATION |
Under the 1997 Incentive Plan, Key was allowed to grant the following awards to certain key employees, directors who are not employees ("Outside Directors") and consultants of Key, our controlled subsidiaries, and our parent corporation, if any: (i) incentive stock options ("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), (ii)"nonstatutory" stock options ("NSOs"), (iii) stock appreciation rights ("SARs"), (iv) shares of restricted stock, (v) performance shares and performance units, (vi) other stock-based awards and (vii) supplemental tax bonuses. The number and kind of securities that were issued under the 1997 Incentive Plan and pursuant to then-outstanding incentive awards are subject to adjustments to prevent
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. EQUITY-BASED COMPENSATION (Continued)
enlargement or dilution of rights resulting from stock dividends, stock splits, recapitalizations, reorganization or similar transactions.
110
Subject to adjustment, the total number of shares of the Company's commonCompany’s outstanding unvested stock par value $0.10 per share, that will be available for the grant of Awards under the 2007 Incentive Plan may not exceed 4,000,000 shares; however, 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. Subject to adjustment, no Participant will be granted, during any one year period, options to purchase common stock and/or stock appreciation rights with respect to more than 500,000 shares of common stock. Stock available for distribution under the 2007 Incentive Plan will come from authorized and unissued shares or shares reacquired by the Company in any manner.
Awards may be in the form of options (incentive stock options and nonstatutory stock options), restricted stock, restricted stock units, performance compensationoption 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 towhich affected approximately 280 employees.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. EQUITY-BASED COMPENSATION (Continued)
The 2007 Incentive Plan provides that in the event of certain corporate events or changes in the Company's common stock, Awards and the maximum number of shares subject to all Awards under the 2007 Incentive Plan and the maximum number of shares that can be awarded to any one person will be adjusted to reflect such event. Any such adjustment made to an incentive stock option will be made in accordance with Section 424(a) of the Code and any such adjustment made to a nonstatutory option will be made so as not to violate Section 409A of the Code.
In the event of a Change in Control (as defined in the 2007 Incentive Plan), unless otherwise provided in an Award agreement, all options and stock appreciation rights will become immediately exercisable with respect to 100% of the shares subject to such option or stock appreciation rights, and the restrictions will expire immediately with respect to 100% of shares of restricted stock or restricted stock units subject to such Award (including a waiver of any applicable performance goals). In addition, unless otherwise provided in an Award agreement, all incomplete performance periods in respect of a performance compensation award will end upon the Change in Control, and the Administrator will (a) determine the extent to which performance goals with respect to each such performance period have been met, (b) cause to be paid to the applicable participant partial or full performance compensation awards with respect to performance goals for each such performance period based upon the Administrator's determination of the degree of attainment of performance goals and (c) cause the Award, if previously deferred, to be settled in full as soon as possible. Further, in the event of a Change in Control, the Administrator may in its discretion and upon advance notice to the affected persons, cancel any outstanding Awards and pay to the holders thereof, in cash or stock, or any combination thereof, the value of such Awards based upon the price per share of the Company's common stock received or to be received by other shareholders of the Company in the event.
Upon exercise, payment or delivery pursuant to an Award, the participant will be required to certify that the participant has not engaged in any Detrimental Activity (as defined in the 2007 Incentive Plan). Subject to the terms of the applicable Award agreement, the Administrator may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid or deferred Awards at any time if the participant engages in any Detrimental Activity. If a participant engages in Detrimental Activity after any exercise, payment or delivery pursuant to an Award, during any period for which any restrictive covenant prohibiting such activity is applicable to the participant, such exercise, payment or delivery may be rescinded within one year thereafter. In the event of any such rescission, the participant will pay to the Company the amount of any gain realized or payment received as As a result of the exercise, payment or delivery,acceleration, the Company recorded a pre-tax charge of approximately $10.9 million in such mannergeneral and on such terms and conditions as may be required by the Company.
The Board at any time, and from time to time, may amend or terminate the 2007 Incentive Plan. However, except as provided otherwiseadministrative expense in the 2007 Incentive Plan, no amendment will be effective unless approved by the stockholdersaccompanying consolidated statement of the Company to the extent stockholder approval is necessary to satisfy any applicable law or securities exchange listing requirements. As of December 31, 2007, no Awards had been granted under the 2007 Incentive Plan.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. EQUITY-BASED COMPENSATION (Continued)
Year Ended December 31, 2008 | ||||||||||||
Weighted Average | Weighted Average | |||||||||||
Options | Exercise Price | Fair Value | ||||||||||
Outstanding at beginning of period | 4,594 | $ | 11.01 | $ | 5.32 | |||||||
Granted | 1,379 | $ | 14.76 | $ | 5.43 | |||||||
Exercised | (757 | ) | $ | 8.81 | $ | 4.81 | ||||||
Cancelled or expired | (255 | ) | $ | 14.53 | $ | 6.15 | ||||||
Outstanding at end of period | 4,961 | $ | 12.21 | $ | 5.38 | |||||||
Exercisable at end of period | 4,911 | $ | 12.30 | $ | 5.42 |
Year Ended December 31, 2007 | ||||||||||||
Weighted Average | Weighted Average | |||||||||||
Options | Exercise Price | Fair Value | ||||||||||
Outstanding at beginning of period | 5,829 | $ | 9.46 | $ | 4.94 | |||||||
Granted | 1,195 | $ | 14.41 | $ | 5.98 | |||||||
Exercised | (1,592 | ) | $ | 8.45 | $ | 4.58 | ||||||
Cancelled or expired | (838 | ) | $ | 10.36 | $ | 5.03 | ||||||
Outstanding at end of period | 4,594 | $ | 11.01 | $ | 5.32 | |||||||
Exercisable at end of period | 2,615 | $ | 8.34 | $ | 4.47 |
111
| Year Ended December 31, 2007 | |||||||
---|---|---|---|---|---|---|---|---|
| Options | Weighted Average Exercise Price | Weighted Average 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 |
| Year Ended December 31, 2006 | |||||||
---|---|---|---|---|---|---|---|---|
| Options | Weighted Average Exercise Price | Weighted Average Fair Value | |||||
Outstanding at beginning of period | 9,275 | $ | 8.68 | $ | 4.79 | |||
Granted | 833 | $ | 15.03 | $ | 7.21 | |||
Exercised | — | $ | — | $ | — | |||
Cancelled or expired(1) | (4,279 | ) | $ | 8.86 | $ | 5.06 | ||
Outstanding at end of period | 5,829 | $ | 9.46 | $ | 4.94 | |||
Exercisable at end of period | 4,791 | $ | 8.42 | $ | 4.51 |
| Year Ended December 31, 2005 | |||||||
---|---|---|---|---|---|---|---|---|
| Options | Weighted Average Exercise Price | Weighted Average Fair Value | |||||
Outstanding at beginning of period | 10,408 | $ | 8.47 | $ | 4.77 | |||
Granted | 385 | $ | 12.20 | $ | 6.09 | |||
Exercised | — | $ | — | $ | — | |||
Cancelled or expired | (1,518 | ) | $ | 8.16 | $ | 4.97 | ||
Outstanding at end of period | 9,275 | $ | 8.68 | $ | 4.79 | |||
Exercisable at end of period | 8,628 | $ | 8.49 | $ | 4.75 |
Key Energy Services, Inc. and Subsidiaries
16. EQUITY-BASED COMPENSATION (Continued)
Year Ended December 31, 2006 | ||||||||||||
Weighted Average | Weighted Average | |||||||||||
Options | Exercise Price | Fair Value | ||||||||||
Outstanding at beginning of period | 9,275 | $ | 8.68 | $ | 4.79 | |||||||
Granted | 833 | $ | 15.03 | $ | 7.21 | |||||||
Exercised | — | $ | — | $ | — | |||||||
Cancelled or expired(1) | (4,279 | ) | $ | 8.86 | $ | 5.06 | ||||||
Outstanding at end of period | 5,829 | $ | 9.46 | $ | 4.94 | |||||||
Exercisable at end of period | 4,791 | $ | 8.42 | $ | 4.51 |
(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. |
| Options Outstanding | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Remaining Contractual Life (Years) | Number of Options Outstanding | Weighted Average Exercise Price | Weighted Average Fair Value | |||||||
Range of Exercise Prices: | |||||||||||
$ 3.00 - $ 7.44 | 1.46 | 749 | $ | 4.80 | $ | 3.42 | |||||
$ 7.45 - $ 9.37 | 3.45 | 980 | $ | 8.34 | $ | 4.82 | |||||
$ 9.38 - $13.10 | 6.40 | 933 | $ | 11.27 | $ | 4.98 | |||||
$13.11 - $14.70 | 9.56 | 1,196 | $ | 14.31 | $ | 5.98 | |||||
$14.71 - $18.90 | 8.26 | 736 | $ | 15.20 | $ | 7.26 | |||||
4,594 | $ | 11.01 | $ | 5.32 | |||||||
Aggregate intrinsic value (in thousands) | $ | 16,153 |
| Options Exercisable | | |||||||
---|---|---|---|---|---|---|---|---|---|
| Number of Options Outstanding | Weighted Average Exercise Price | Weighted Average Fair Value | ||||||
Range of Exercise Prices: | |||||||||
$ 3.00 - $ 7.44 | 749 | $ | 4.80 | $ | 3.42 | ||||
$ 7.45 - $ 9.37 | 958 | $ | 8.35 | $ | 4.84 | ||||
$ 9.38 - $13.10 | 882 | $ | 9.49 | $ | 4.88 | ||||
$13.11 - $14.51 | 26 | $ | 14.29 | $ | 7.07 | ||||
2,615 | $ | 8.34 | $ | 4.47 | |||||
Aggregate intrinsic value (in thousands) | $ | 15,992 |
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 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 |
112
2008 was $6.7 million with recognition of associated tax benefits in the amount of $5.2 million.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. EQUITY-BASED COMPENSATION (Continued)
The last tranche of shares associated with this award vested during 2008.
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 | ||||||||||
113
| Year Ended December 31, 2007 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Outstanding | Weighted Average Issuance Price | Vested | Weighted Average 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, 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, 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 | ||||||||||
(1) | Shares of common stock issued to our non-employee directors vest immediately upon issuance. |
| Year Ended December 31, 2006 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Outstanding | Weighted Average Issuance Price | Vested | Weighted Average 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, 2005 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Outstanding | Weighted Average Issuance Price | Vested | Weighted Average Issuance Price | ||||||
Shares at beginning of year | — | $ | — | — | $ | — | ||||
Shares issued during year(1) | 543 | $ | 11.90 | 43 | $ | 11.90 | ||||
Previously issued shares vesting during year | — | $ | — | — | $ | — | ||||
Shares repurchased during year | — | $ | — | — | $ | — | ||||
Shares at end of year | 543 | $ | 11.90 | 43 | $ | 11.90 | ||||
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. EQUITY-BASED COMPENSATION (Continued)
vest, we recognizethe Company recognizes compensation expense ratably over the vesting period of the grant, net of estimated and actual forfeitures. For the years ended December 31, 2008, 2007 and 2006, and 2005, wethe Company recognized $6.1 million, $5.6 million $3.6 million and $2.5$3.6 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. In connection with the expense related to common stock awards recognized during the year ended December 31, 2007, we2008, the Company recognized tax benefits of approximately $1.2$1.5 million. For the unvested common stock awards outstanding as of December 31, 2007,2008, the Company anticipates that it will recognize approximately $5.2$5.5 million of pre-tax expense over the next 0.651.5 years.
114
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. EQUITY-BASED COMPENSATION (Continued)
in future periods associated with these awards.
| Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | ||||
Risk-free interest rate | 4.41 | % | 4.70 | % | 3.80 | % | |
Expected life of options, years | 6 | 6 | 6 | ||||
Expected volatility of the Company's stock price | 39.49 | % | 48.80 | % | 53.85 | % | |
Expected dividends | none | none | none |
17. TRANSACTIONS WITH RELATED PARTIES
Year Ended December 31, 2008 2007 2006 Risk-free interest rate 2.86 % 4.41 % 4.70 % Expected life of options, years 6 6 6 Expected volatility of the Company’s stock price 36.86 % 39.49 % 48.80 % Expected dividends none none none
NOTE 18. | TRANSACTIONS WITH RELATED PARTIES |
115
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. TRANSACTIONS WITH RELATED PARTIES (Continued)
The discount will be recognized as interest expense over the life of the promissory notes using the effective interest method.
18. SEGMENT INFORMATION
NOTE 19. | SEGMENT INFORMATION |
All inter-segment sales pricing is based on current market conditions.
116
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. SEGMENT INFORMATION (Continued)
subsidiaries, accounts and notes receivable from subsidiaries, the Company'sCompany’s 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 |
117
�� | Well Servicing | Pressure Pumping | Fishing and Rental | Corporate / Other | Discontinued Operations | Eliminations | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||||||||||||
As of and for the year ended December 31, 2007: | ||||||||||||||||||||||
Operating revenues | $ | 1,264,797 | $ | 299,348 | $ | 97,867 | $ | — | $ | — | $ | — | $ | 1,662,012 | ||||||||
Gross margin | 526,103 | 109,703 | 40,592 | — | — | — | 676,398 | |||||||||||||||
Depreciation and amortization | 90,274 | 16,854 | 8,742 | 13,753 | — | — | 129,623 | |||||||||||||||
Interest expense | (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 Servicing | Pressure Pumping | Fishing and Rental | Corporate / Other | Discontinued Operations | Eliminations | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||||||||||||
As of and for the year ended December 31, 2006: | ||||||||||||||||||||||
Operating revenues | $ | 1,201,228 | $ | 247,489 | $ | 97,460 | $ | — | $ | — | $ | — | $ | 1,546,177 | ||||||||
Gross margin | 476,220 | 109,112 | 40,243 | — | — | — | 625,575 | |||||||||||||||
Depreciation and amortization | 95,673 | 12,416 | 6,787 | 11,135 | — | — | 126,011 | |||||||||||||||
Interest expense | (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 Servicing | Pressure Pumping | Fishing and Rental | Corporate / Other | Discontinued Operations | Eliminations | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||||||||||||
As of and for the year ended December 31, 2005: | ||||||||||||||||||||||
Operating revenues | $ | 956,457 | $ | 152,320 | $ | 81,667 | $ | — | $ | — | $ | — | $ | 1,190,444 | ||||||||
Gross margin | 322,414 | 60,019 | 27,768 | — | — | — | 410,201 | |||||||||||||||
Depreciation and amortization | 85,772 | 8,785 | 6,024 | 11,307 | — | — | 111,888 | |||||||||||||||
Interest expense | 86 | (328 | ) | 35 | 50,506 | — | — | 50,299 | ||||||||||||||
Net income (loss) | 175,576 | 51,661 | 14,926 | (193,085 | ) | (3,361 | ) | — | 45,717 | |||||||||||||
Property and equipment, net | 479,972 | 71,688 | 27,214 | 31,467 | — | — | 610,341 | |||||||||||||||
Total assets | 919,887 | 151,683 | 67,082 | 450,709 | 658 | (260,775 | ) | 1,329,244 | ||||||||||||||
Capital expenditures, excluding acquisitions | (79,410 | ) | (27,258 | ) | (4,070 | ) | (7,408 | ) | — | — | (118,146 | ) |
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 | 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 |
118
| Argentina | Mexico | Canada | Total Foreign | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
As of and for the year ended December 31, 2007: | ||||||||||||
Operating revenues | $ | 93,925 | $ | 8,956 | $ | 2,938 | $ | 105,819 | ||||
Total assets | 82,550 | 12,870 | 8,876 | 104,296 | ||||||||
As of and for the year ended December 31, 2006: | ||||||||||||
Operating revenues | $ | 78,321 | $ | — | $ | — | $ | 78,321 | ||||
Total assets | 77,878 | — | — | 77,878 | ||||||||
As of and for the year ended December 31, 2005: | ||||||||||||
Operating revenues | $ | 68,183 | $ | — | $ | — | $ | 68,183 | ||||
Total assets | 58,816 | — | — | 58,816 |
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. | 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 |
19. UNAUDITED SUPPLEMENTARY INFORMATION—QUARTERLY RESULTS OF OPERATIONS
NOTE 21. | UNAUDITED SUPPLEMENTARY INFORMATION — QUARTERLY RESULTS OF OPERATIONS |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter(2) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31, 2007: | ||||||||||||||
Revenues | $ | 408,919 | $ | 410,511 | $ | 413,967 | $ | 428,615 | ||||||
Gross margin | 173,406 | 172,288 | 156,485 | 174,219 | ||||||||||
Income before income taxes | 84,694 | 78,471 | 59,832 | 52,943 | ||||||||||
Net income | 52,190 | 48,136 | 35,896 | 33,067 | ||||||||||
Earnings per share(1): | ||||||||||||||
Basic | $ | 0.40 | $ | 0.37 | $ | 0.27 | $ | 0.25 | ||||||
Diluted | $ | 0.39 | $ | 0.36 | $ | 0.27 | $ | 0.25 |
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
Year Ended December 31, 2008: | ||||||||||||||||
Revenues | $ | 456,399 | $ | 502,003 | $ | 535,620 | $ | 478,066 | ||||||||
Direct operating expenses | 281,641 | 322,488 | 342,195 | 304,003 | ||||||||||||
Impairment of goodwill and equity method investment | — | — | — | 75,137 | ||||||||||||
Income (loss) before income taxes | 56,907 | 71,247 | 77,541 | (31,639 | ) | |||||||||||
Net income (loss) | 34,484 | 44,012 | 48,462 | (42,900 | ) | |||||||||||
Earnings per share(1): | ||||||||||||||||
Basic | $ | 0.27 | $ | 0.35 | $ | 0.39 | $ | (0.35 | ) | |||||||
Diluted | $ | 0.27 | $ | 0.35 | $ | 0.39 | $ | (0.35 | ) |
First Quarter | Second Quarter | Third Quarter | Fourth Quarter(2) | |||||||||||||
Year Ended December 31, 2007: | ||||||||||||||||
Revenues | $ | 408,919 | $ | 410,511 | $ | 413,967 | $ | 428,615 | ||||||||
Direct operating expenses | 235,513 | 238,223 | 257,482 | 254,396 | ||||||||||||
Income before income taxes | 84,694 | 78,471 | 59,832 | 52,943 | ||||||||||||
Net income | 52,190 | 48,136 | 35,896 | 33,067 | ||||||||||||
Earnings per share(1): | ||||||||||||||||
Basic | $ | 0.40 | $ | 0.37 | $ | 0.27 | $ | 0.25 | ||||||||
Diluted | $ | 0.39 | $ | 0.36 | $ | 0.27 | $ | 0.25 |
(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.” |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31, 2006: | ||||||||||||||
Revenues | $ | 347,958 | $ | 372,036 | $ | 417,600 | $ | 408,583 | ||||||
Gross margin | 129,336 | 151,975 | 180,199 | 164,065 | ||||||||||
Income before income taxes | 48,430 | 63,920 | 98,822 | 63,308 | ||||||||||
Net income | 30,063 | 39,582 | 60,885 | 40,503 | ||||||||||
Earnings per share(1): | ||||||||||||||
Basic | $ | 0.23 | $ | 0.30 | $ | 0.46 | $ | 0.31 | ||||||
Diluted | $ | 0.22 | $ | 0.29 | $ | 0.45 | $ | 0.31 |
20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
NOTE 22. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
120
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 | |||||||||
121
| December 31, 2007 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
| (in thousands) | |||||||||||||||
Assets: | ||||||||||||||||
Current assets | $ | 39,501 | $ | 378,865 | $ | 69,499 | $ | — | $ | 487,865 | ||||||
Net property and equipment | — | 880,907 | 30,301 | — | 911,208 | |||||||||||
Goodwill | — | 373,283 | 5,267 | — | 378,550 | |||||||||||
Deferred costs, net | 12,117 | — | — | — | 12,117 | |||||||||||
Intercompany receivables and investments 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 | ||||||
Long-term debt | 475,000 | — | — | — | 475,000 | |||||||||||
Capital lease obligations | — | 15,998 | 116 | — | 16,114 | |||||||||||
Long-term notes payable— related party | — | 20,500 | — | — | 20,500 | |||||||||||
Intercompany payables | 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 | |||||
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 | |||||||||
122
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 | ||||||||
123
| Year Ended December 31, 2007 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| (in thousands) | ||||||||||||||||
Revenues | $ | — | $ | 1,561,059 | $ | 105,819 | $ | (4,866 | ) | 1,662,012 | |||||||
Costs and expenses: | |||||||||||||||||
Direct expenses | — | 906,254 | 82,980 | (3,620 | ) | 985,614 | |||||||||||
Depreciation and amortization | — | 123,821 | 5,802 | — | 129,623 | ||||||||||||
General and administrative | 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 | (49,667 | ) | 323,009 | 2,598 | — | 275,940 | |||||||||||
Income tax (expense) benefit | (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, 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 | |||||||||
124
| Year Ended December 31, 2007 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
| (in thousands) | |||||||||||||||
Net cash provided by operating activities | $ | (3,401 | ) | $ | 264,275 | $ | (10,955 | ) | $ | — | $ | 249,919 | ||||
Net cash used in investing activities | (473,412 | ) | (732,359 | ) | (5,160 | ) | 908,084 | (302,847 | ) | |||||||
Net cash provided by financing activities | 476,813 | 429,809 | 24,702 | (908,084 | ) | 23,240 | ||||||||||
Effect of exchange rates on cash | — | — | (184 | ) | — | (184 | ) | |||||||||
Net (decrease) increase in cash | — | (38,275 | ) | 8,403 | — | (29,872 | ) | |||||||||
Cash at beginning of period | — | 84,633 | 3,742 | — | 88,375 | |||||||||||
Cash at end of period | $ | — | $ | 46,358 | $ | 12,145 | $ | — | $ | 58,503 | ||||||
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 | ||||||||||
Year Ended December 31, 2007 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | ||||||||||||||||||
Company | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash (used in) provided by operating activities | $ | (3,401 | ) | $ | 264,275 | $ | (10,955 | ) | $ | — | $ | 249,919 | ||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Capital expenditures | — | (207,400 | ) | (5,160 | ) | — | (212,560 | ) | ||||||||||||
Acquisitions, net of cash acquired | — | (157,955 | ) | — | — | (157,955 | ) | |||||||||||||
Investment in available for sale securities | — | (121,613 | ) | — | — | (121,613 | ) | |||||||||||||
Proceeds from the sale of available of sale securities | — | 183,177 | — | — | 183,177 | |||||||||||||||
Intercompany notes and accounts | (473,412 | ) | (434,672 | ) | — | 908,084 | — | |||||||||||||
Other investing activities, net | — | 6,104 | — | — | 6,104 | |||||||||||||||
Net cash (used in) provided by investing activities | (473,412 | ) | (732,359 | ) | (5,160 | ) | 908,084 | (302,847 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Repayment of long-term debt | (396,000 | ) | — | — | — | (396,000 | ) | |||||||||||||
Proceeds from long-term debt | 425,000 | — | — | — | 425,000 | |||||||||||||||
Borrowings on revolving credit facility | 50,000 | — | — | — | 50,000 | |||||||||||||||
Common stock acquired by purchase | (30,454 | ) | — | — | — | (30,454 | ) | |||||||||||||
Intercompany notes and accounts | 424,822 | 458,560 | 24,702 | (908,084 | ) | — | ||||||||||||||
Other financing activities, net | 3,445 | (28,751 | ) | — | — | (25,306 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 476,813 | 429,809 | 24,702 | (908,084 | ) | 23,240 | ||||||||||||||
Effect of changes in exchange rates on cash | — | — | (184 | ) | — | (184 | ) | |||||||||||||
Net (decrease) increase in cash | — | (38,275 | ) | 8,403 | — | (29,872 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | — | 84,633 | 3,742 | — | 88,375 | |||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 46,358 | $ | 12,145 | $ | — | $ | 58,503 | ||||||||||
126
None.
ITEM 9A. Controls and Procedures
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9A. | CONTROLS AND PROCEDURES |
period.
Improvements in 2007 for our internal control over financial reporting that remediated the 2006 weaknesses included adding a process for and controls over the accrual and recording of expenditures with appropriate reconciliations and review, an overall program of account reconciliations and review and a process, including controls and appropriate review, for our accounting for income taxes.
In other instances, the controls that were implemented during 2007 were not sufficient to effectively remediate the material weakness, or there were not sufficient instances of the controls in operation to make a determination that these controls were operating effectively. The actions taken with respect to the material weaknesses identified as of December 31, 2006 but not remediated at December 31, 2007 are discussed below in "Management'sManagement’s Report on Internal Control Over Financial Reporting."
Management's Report on Internal Control Over Financial Reporting
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 the transactions and dispositions of the assets of the Company; (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 receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company'sCompany’s assets that could have a material effect on the financial statements.
127
Financial Close and Reporting: In our 2006 Report, we identified2008 due to a material weakness at December 31, 2006 in our financial close and reportingdescribed below.
Management believes that the control activities put in place in 2007 are sufficient to remediate previously identified deficiencies and that with the passage of sufficient close and reporting cycles to evidence effective operation of these controls the material weakness will be remediated.
Authorizations of Expenditures: In our 2006 Report, we determined that at December 31, 2006 multiple control deficiencies existed regarding our ability to appropriately ensure and evidence that expenditures, covering substantially all aspects of spending, were approved by the appropriate level of management in accordance with our established policies and, as a result, we identified this as a material weakness. Deficiencies related to authorizations for payroll were among the deficiencies identified in 2006; for 2007, those are discussed separately below. During 2007, changes were made that included the establishment of approval authorities and automated controls in our procurement system. Notwithstanding these changes, certain deficiencies remained at December 31, 2007. The remaining deficiencies resulting in our material weakness are our inability to ensure and evidence that (i) timely approvals occurred for expenditures made through our procurement system or (ii) that expenditures not made through our procurement system were appropriately approved in accordance with our policies. In addition to the changes previously discussed, we also instituted compensating controls in 2007, such as analytical procedures; however, these compensating controls were not all in place and evidenced as operating effectively until the financial close and reporting for the fourth quarter of 2007. As a result, sufficient instances of these controls in operation had not occurred for the controls to be assessed as effective at December 31, 2007.
We are continuing to make enhancements to our procurement processes and controls and believe that these changes, coupled with the passage of sufficient close and reporting cycles for compensating controls put in place in 2007 to be evidenced as operating effectively, will remediate this weakness.
Recording of Revenues: In our 2006 Report, we determined that a material weakness existed at December 31, 2006 regarding the recording of revenues, as our revenue process is heavily dependent on manual reviews and approvals of credit terms, amounts to be billed and recorded and adjustments for bad debts. At December 31, 2007, we determined that a material weakness remained in our revenue process, as manual approvals at the field level necessary to evidence the recognition of revenues and sufficient evidence of those approvals could not be adequately substantiated. We put compensating controls in place in 2007, such as analytical reviews of accrued revenues, analysis of aged receivables and account reconciliations of our revenue systems and general ledger. Sufficient instances had not occurred for all of these compensating controls to be assessed as effective at December 31, 2007. As a result, we have concluded that a material weakness identified in our 2006 Report remained in 2007.
Management believes that the compensating controls put in place in 2007 should be sufficient to compensate for the identified deficiencies in approvals and that with the passage of sufficient close and reporting cycles to evidence operation of these controls the material weakness will be remediated.
Property, Plant & Equipment (PP&E): In our 2006 Report, we determined that a material weakness existed at December 31, 2006 regarding the recording of PP&E. In 2007, substantial changes were made to our processes and controls; however, for two areas of our accounting for PP&E—the timing of assets being placed in service and the timing of recognition of gains and losses and approval for asset dispositions—a material weakness remained at December 31, 2007. Due to the design and utilization of our procurement system and practices, certain final costs for an asset may not be captured in a timely manner. As a result of this, the asset may be physically placed in service prior to all cost information being received. This delay in accumulating necessary cost information may delay the beginning of depreciation expense. Additionally, while we have implemented controls, including counts and observations, to ensure that information regarding asset dispositions is captured and recorded, obtaining evidence of appropriate approval for the disposition as well as the timing of the receipt of that information may result in delays in the recording of the disposition which could cross reporting periods.
Management is making enhancements to our procurement processes and practices and believes that these changes, coupled with compensating controls for the identified deficiencies, including reconciliations and analytical reviews of balances and depreciation expense will remediate this weakness.
User Developed Applications: In the course of preparing our consolidated financial statements, numerous spreadsheets and database programs ("User Developed Applications") are employed. The User Developed Applications are utilized by us in calculating estimates, reconciling payroll hours, tracking inventory costs and making cost allocations, among other things. At December 31, 2006, we identified a material weakness as most User Developed Applications were not secured as to access, logical security, changes or data integrity. To mitigate the associated risk for situations where the above controls could not be implemented, compensating controls were put in place; however, for many of these compensating controls, sufficient instances had not occurred for these controls to be assessed as effective at December 31, 2007. As a result, we have concluded that this material weakness identified in our 2006 Report remained in 2007.
In 2007, management began an effort to identify all of its User Developed Applications and remediate the weakness through controls in the User Developed Applications themselves or compensating controls. These efforts, along with elimination of User Developed Applications from critical processes, continue into 2008. Management believes that with the passage of sufficient close and reporting cycles to evidence operation of these compensating controls the material weakness will be remediated.
Application Access and Segregation of Duties: In our 2006 Report, we determined that material weaknesses existed at December 31, 2006 in four aspects of information technology general controls over security and segregation of duties of our primary financial systems. These include security administration procedures, administrator access privileges, database and file access and password controls. The weaknesses in these information technology general control areas were further evidenced by or related to deficiencies in our various access controls at the financial system level, causing inappropriate access and segregation of duties issues in significant processes. In 2007 we implemented management reports for business owner review as well as administrative controls and procedures. These controls were not fully effective in remediating the identified weakness. We put compensating controls in place in 2007, such as analytical reviews. Sufficient instances had not occurred for these controls to be assessed as effective at December 31, 2007. As a result, we have concluded that this material weakness identified in our 2006 Report remained in 2007.
Management believes that the compensating controls put in place are sufficient to compensate for the identified deficiencies in access and segregation of duties and that with the passage of sufficient close and reporting cycles to evidence operation of these controls the risk associated with the material weakness will be remediated. Management will also be implementing additional activities around business owner review of access and segregation of duties across the systems we utilize.
Payroll: We determined that at December 31, 2007ineffective control activities surrounding our payroll process constituted a material weakness in our system of internal control as of December 31, 2008. In particular, personnel involved in the process,these control activities pertained to documentation and approvals of employee master file data, proper documentationevidence concerning approval of hours worked or rate changes coupled withand deficiencies with reconciliations where payroll data was a major component, constituted acomponent. The actions taken and the controls that were in place and operating during 2008 with respect to this material weakness, in our system of internal controls. These deficiencies had been previouslywhich was identified in our 2006 Reportprevious years, were not sufficient to effectively remediate this material weakness as part of Account Reconciliationsand Authorization for Expenditures.
December 31, 2008. In 2007,2008, we continued our process to improve our data quality and controls surrounding our payroll process beginningthat 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 system enhancements and organizational changes. In late 2007,new personnel. We also increased the overall size of the payroll department upon its relocation to Houston. With this change, we initiated another phase of this process, which will encompass changes toalso added new payroll practices further organizational changes and procedures. Additionally, throughout 2008, we worked on the replacement of our currentexisting payroll system.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 these
changes, whichas 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, and increase our efficiency as well asin processing payroll and provide transparency intoof payroll related data, will remediateallowing for the remediation of this deficiency. We anticipate that this process will be completed in the third quarter of 2008.
material weakness.
128
ITEM 9B. | OTHER INFORMATION |
129
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
ITEM 11. Executive Compensation
2008.
ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
2008.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
2008.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 14. Principal Accountant Fees and Services
2008.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
2008.
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
• | Schedule II — Valuation and other Qualifying Accounts |
Exhibit No. | Description | |||
3 | .1 | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, FileNo. 001-08038.) | ||
3 | .2 | Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting the designation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2000, FileNo. 001-08038.) |
130
Exhibit No. | Description | |||
3 | .3 | Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on September 22, 2006, FileNo. 001-08038.) | ||
3 | .4 | Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on November 2, 2007, FileNo. 001-08038.) | ||
3 | .5 | Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, FileNo. 001-08038.) | ||
4 | .1 | Warrant Agreement, dated as of January 22, 1999, between Key Energy Services, Inc. and the Bank of New York, a New York banking corporation as warrant agent. (Incorporated by reference to Exhibit 99(b) of the Company’s Current Report onForm 8-K filed on February 3, 1999, FileNo. 001-08038.) | ||
4 | .2 | Warrant Registration Rights Agreement dated January 22, 1999, by and among Key Energy Services, Inc., the Guarantors named therein, Lehman Brothers Inc., Bear, Stearns & Co., Inc., F.A.C. / Equities, a division of First Albany Corporation, and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. (Incorporated by reference to Exhibit 99(e) of the Company’s Current Report onForm 8-K filed on February 3, 1999, FileNo. 001-08038.) | ||
4 | .3 | Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
4 | .4 | Registration Rights Agreement dated as of November 29, 2007, among Key Energy Services, Inc., the subsidiary guarantors of the Company party thereto, and Lehman Brothers Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the several initial purchasers named therein. (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
4 | .5 | First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2008, FileNo. 001-08038.) | ||
4 | .6* | Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. | ||
10 | .1† | Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of the Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of the Company’s Schedule 14A Proxy Statement filed November 26, 1997, FileNo. 001-08038.) | ||
10 | .2† | Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, FileNo. 001-08038.) | ||
10 | .3† | The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) | ||
10 | .4† | Form of Award Agreement under the 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) | ||
10 | .5† | Form of Stock Appreciation Rights Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 99.1 of the Company’s Current Report onForm 8-K filed on August 24, 2007, FileNo. 001-08038.) | ||
10 | .6† | Form of Non-Plan Option Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement onForm S-8 filed on September 25, 2007, FileNo. 333-146294.) |
131
Exhibit No. | Description | |||
10 | ||||
Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of the | ||||
10 | .8† | Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.8 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2007 filed on February 28, 2008, FileNo. 001-08038.) | ||
10 | .9† | Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key Energy Services, Inc. and Key Energy Shared Services, | ||
10 | .10† | Acknowledgment and Waiver by Richard J. Alario, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.1 of the | ||
10 | .11† | Restated Employment Agreement, dated effective as of December 31, 2007, among William M. Austin, Key Energy Services, Inc. and Key Energy Shared Services, | ||
10 | .12† | Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key Energy Services, Inc. and Key Energy Shared Services, | ||
10 | .13† | Acknowledgment and Waiver by Newton W. Wilson III, dated March 25, 2005, regarding rescinded option | ||
10 | .14†* | Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key Energy Services, Inc. and Key Energy Shared Services, LLC. | ||
10 | .15† | Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services, Inc. and Key Energy Shared Services, LLC (Incorporated by | ||
10 | .16† | Employment Agreement, dated as of January 1, 2004, between Key Energy Services, Inc. and Jim D. | ||
10 | .17† | First Amendment to Employment Agreement, dated November 26, 2007, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by | ||
10 | .18† | Employment Agreement, dated November 17, 2004, between Key Energy Services, Inc. and Phil |
10 | .19† | First Amendment to Employment Agreement, | ||
10 | .20† | Amended and Restated Employment Agreement, dated December 31, 2007, between Key Energy Services, Inc. and Don D. | ||
10 | .21† | Employment Agreement, dated August 14, 2007, between | ||
10 | .22† | Employment Agreement, dated August 14, 2007, between |
132
Exhibit No. | Description | |||
10 | .23†* | Restated Employment Agreement, effective August 1, 2007, between Key Energy Shared Services, LLC and Tommy Pipes. | ||
10 | .24†* | Employment Agreement, effective August 1, 2007, between Key Energy Services, Inc. and John Carnett. | ||
10 | .25 | Office Lease, effective as of January 20, 2005, between Crescent 1301 McKinney, L.P. and Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated January 26, 2005, FileNo. 001-08038.) | ||
10 | .26 | First Amendment to Office Lease, dated as of March 15, 2005, between Crescent 1301 McKinney, L.P. and Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated June 30, 2005, FileNo. 001-08038.) | ||
10 | .27 | Second Amendment to Office Lease, dated as of July 24, 2005, between Crescent 1301 McKinney, L.P. and Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated June 30, 2005, FileNo. 001-08038.) | ||
10 | .28 | Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
10 | .29 | Stock and Membership Interest Purchase Agreement, dated as of September 19, 2007, between and among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 20, 2007, FileNo. 001-08038.) | ||
10 | .30 | First Amendment to Stock and Membership Interest Purchase Agreement, dated as of October 25, 2007, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2007, FileNo. 001-08038.) | ||
10 | .31* | Second Amendment to Stock and Membership Interest Purchase Agreement, dated as of September 30, 2008, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. | ||
10 | .32 | Purchase Agreement, dated November 14, 2007, by and among the Company, certain of its domestic subsidiaries, and Lehman Brothers, Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the initial purchasers. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed on November 15, 2007, FileNo. 001-08038.) | ||
10 | .33 | Asset Purchase Agreement, dated December 7, 2007, among Key Energy Services, LLC, Kings Oil Tools, Inc. and Thomas Fowler. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on December 13, 2007, FileNo. 001-08038.) | ||
10 | .34 | Purchase Agreement, dated April 3, 2008, among Key Energy Services, LLC, Western Drilling Holdings, Inc., and Fred S. Holmes and Barbara J. Holmes. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, FileNo. 001-08038.) | ||
10 | .35 | Stock Purchase Agreement, dated May 30, 2008, by and among Key Energy Services, LLC, and E. Kent Tolman, Nita Tolman, Ronald D. Jones and Melinda Jones. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on June 5, 2008, FileNo. 001-08038.) | ||
10 | .36 | Asset Purchase Agreement, dated July 22, 2008, by and among Key Energy Pressure Pumping Services, LLC, Leader Energy Services Ltd., Leader Energy Services USA Ltd., and CementRite, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on July 24, 2008, FileNo. 001-08038.) |
133
Exhibit No. | Description | |||
10 | .37 | Master Agreement, dated August 26, 2008, by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 2, 2008, FileNo. 001-08038.) | ||
21 | * | Significant Subsidiaries of the Company. | ||
23 | * | Consent of Independent Registered Public Accounting Firm. | ||
31 | .1* | Certification of CEO pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. of 2002. | ||
31 | .2* | Certification of Principal Financial Officer pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | * | Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
134
By: | /s/ J. Marshall Dodson |
Signature | Title | Date | ||||
/s/ Richard J. Alario Richard J. Alario | Chairman of the Board of Directors, President and Chief Executive Officer | February | ||||
/s/ J. Marshall Dodson J. Marshall Dodson | Vice President and Chief Accounting Officer | February | ||||
/s/ David J. Breazzano David J. Breazzano | Director | February | ||||
/s/ Lynn R. Coleman Lynn R. Coleman | Director | February | ||||
/s/ Kevin P. Collins Kevin P. Collins | Director | February |
/s/ William D. Fertig William D. Fertig | Director | February | ||||
/s/ W. Phillip Marcum W. Phillip Marcum | Director | February |
Signature | Title | Date | ||||
/s/ Michael, Ralph S. Michael, III | Director | February | ||||
/s/ William F. Owens William F. Owens | Director | February | ||||
/s/ Arlene M. Yocum Arlene M. Yocum | Director | February | ||||
/s/ Robert K. Reeves Robert K. Reeves | Director | February | ||||
/s/ J. Robinson West |
Additions | ||||||||||||||||||||||||
Balance at | Charged to | |||||||||||||||||||||||
Beginning of | Charged to | Other | Balance at | |||||||||||||||||||||
Period | Expense | Accounts | Acquisitions | Deductions | End of Period | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||||||||||
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 | |||||||||||||||||
As of December 31, 2006 | 10,843 | 1,854 | 301 | — | — | 12,998 |
(in thousands)
S-2
Exhibit No. | Description | |||
3 | .1 | Articles of Restatement of Key Energy Services, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, FileNo. 001-08038.) | ||
3 | .2 | Unanimous consent of the Board of Directors of Key Energy Services, Inc., dated January 11, 2000, limiting the designation of the additional authorized shares to common stock. (Incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2000, FileNo. 001-08038.) | ||
3 | .3 | Second Amended and Restated By-laws of Key Energy Services, Inc., adopted September 21, 2006. (Incorporated by reference to Exhibit 3.1 of the Company’sForm 8-K filed on September 22, 2006, FileNo. 001-08038.) | ||
3 | .4 | Amendment to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted November 2, 2007. (Incorporated by reference to Exhibit 3.1 of the Company’sForm 8-K filed on November 2, 2007, FileNo. 001-08038.) | ||
3 | .5 | Amendments to Second Amended and Restated By-laws of Key Energy Services, Inc., adopted April 4, 2008. (Incorporated by reference to Exhibit 3.1 of the Company’sForm 8-K filed on April 9, 2008, FileNo. 001-08038.) | ||
4 | .1 | Warrant Agreement, dated as of January 22, 1999, between Key Energy Services, Inc. and the Bank of New York, a New York banking corporation as warrant agent. (Incorporated by reference to Exhibit 99(b) of the Company’s Current Report onForm 8-K filed on February 3, 1999, FileNo. 001-08038.) | ||
4 | .2 | Warrant Registration Rights Agreement dated January 22, 1999, by and among Key Energy Services, Inc., the Guarantors named therein, Lehman Brothers Inc., Bear, Stearns & Co., Inc., F.A.C. / Equities, a division of First Albany Corporation, and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. (Incorporated by reference to Exhibit 99(e) of the Company’s Current Report onForm 8-K filed on February 3, 1999, FileNo. 001-08038.) | ||
4 | .3 | Indenture, dated as of November 29, 2007, among Key Energy Services, Inc., the guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
4 | .4 | Registration Rights Agreement dated as of November 29, 2007, among Key Energy Services, Inc., the subsidiary guarantors of the Company party thereto, and Lehman Brothers Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the several initial purchasers named therein. (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
4 | .5 | First Supplemental Indenture, dated as of January 22, 2008, among Key Marine Services, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.5 of the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2008, FileNo. 001-08038.) | ||
4 | .6* | Second Supplemental Indenture, dated as of January 13, 2009, among Key Energy Mexico, LLC, the existing Guarantors and The Bank of New York Trust Company, N.A., as trustee. | ||
10 | .1† | Key Energy Group, Inc. 1997 Incentive Plan, as an amendment and restatement effective November 17, 1997 of the Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan. (Incorporated by reference to Exhibit B of the Company’s Schedule 14A Proxy Statement filed November 26, 1997, FileNo. 001-08038.) | ||
10 | .2† | Form of Restricted Stock Award Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 10.15 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, FileNo. 001-08038.) | ||
10 | .3† | The 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) | ||
10 | .4† | Form of Award Agreement under the 2006 Phantom Share Plan of Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) |
| | Additions | | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at Beginning of Period | Charged to Expense | Charged to Other Accounts | Acquisitions | Deductions | Balance at End of Period | |||||||||||||
Allowance for doubtful accounts: | |||||||||||||||||||
As of December 31, 2007 | $ | 12,998 | $ | 3,675 | $ | — | $ | 1,251 | $ | (4,423 | ) | $ | 13,501 | ||||||
As of December 31, 2006 | 10,843 | 1,854 | 301 | — | — | 12,998 | |||||||||||||
As of December 31, 2005 | 8,990 | 1,853 | — | — | — | 10,843 |
Exhibit No. | Description | |||
10 | .5† | Form of Stock Appreciation Rights Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 99.1 of the Company’s Current Report onForm 8-K filed on August 24, 2007, FileNo. 001-08038.) | ||
10 | .6† | Form of Non-Plan Option Agreement under Key Energy Group, Inc. 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement onForm S-8 filed on September 25, 2007, FileNo. 333-146294.) | ||
10 | .7† | Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan. (Incorporated by Reference to Appendix A of the Company’s Schedule 14A Proxy Statement filed on November 1, 2007, FileNo. 001-08038.) | ||
10 | .8† | Form of Nonstatutory Stock Option Agreement under 2007 Equity and Cash Incentive Plan. (Incorporated by reference to Exhibit 10.8 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2007 filed on February 28, 2008, FileNo. 001-08038.) | ||
10 | .9† | Restated Employment Agreement, dated effective as of December 31, 2007, among Richard J. Alario, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) | ||
10 | .10† | Acknowledgment and Waiver by Richard J. Alario, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated March 29, 2005, FileNo. 001-08038.) | ||
10 | .11† | Restated Employment Agreement, dated effective as of December 31, 2007, among William M. Austin, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) | ||
10 | .12† | Restated Employment Agreement, dated effective as of December 31, 2007, among Newton W. Wilson III, Key Energy Services, Inc. and Key Energy Shared Services, LLC. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) | ||
10 | .13† | Acknowledgment and Waiver by Newton W. Wilson III, dated March 25, 2005, regarding rescinded option grant. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated March 29, 2005, FileNo. 001-08038.) | ||
10 | .14†* | Amended and Restated Employment Agreement, dated October 22, 2008, between Kimberly R. Frye, Key Energy Services, Inc. and Key Energy Shared Services, LLC. | ||
10 | .15† | Restated Employment Agreement dated effective as of December 31, 2007, among Kim B. Clarke, Key Energy Services, Inc. and Key Energy Shared Services, LLC (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report onForm 8-K filed on January 7, 2008, FileNo. 001-08038.) | ||
10 | .16† | Employment Agreement, dated as of January 1, 2004, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) | ||
10 | .17† | First Amendment to Employment Agreement, dated November 26, 2007, between Key Energy Services, Inc. and Jim D. Flynt. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
10 | .18† | Employment Agreement, dated November 17, 2004, between Key Energy Services, Inc. and Phil Coyne. (Incorporated by reference to Exhibit 10.8 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) | ||
10 | .19† | First Amendment to Employment Agreement, effective as of January 24, 2005, between Key Energy Services, Inc. and Phil Coyne. (Incorporated by reference to Exhibit 10.9 of the Company’s Current Report onForm 8-K dated October 19, 2006, FileNo. 001-08038.) | ||
10 | .20† | Amended and Restated Employment Agreement, dated December 31, 2007, between Key Energy Services, Inc. and Don D. Weinheimer. (Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2007 filed on February 28, 2008, FileNo. 001-08038.) |
Exhibit No. | Description | |||
10 | .21† | Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and J. Marshall Dodson. (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2007, FileNo. 001-08038.) | ||
10 | .22† | Employment Agreement, dated August 14, 2007, between Key Energy Shared Services, LLC and D. Bryan Norwood. (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2007, FileNo. 001-08038.) | ||
10 | .23†* | Restated Employment Agreement, effective August 1, 2007, between Key Energy Shared Services, LLC and Tommy Pipes. | ||
10 | .24†* | Employment Agreement, effective August 1, 2007, between Key Energy Services, Inc. and John Carnett. | ||
10 | .25 | Office Lease, effective as of January 20, 2005, between Crescent 1301 McKinney, L.P. and Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated January 26, 2005, FileNo. 001-08038.) | ||
10 | .26 | First Amendment to Office Lease, dated as of March 15, 2005, between Crescent 1301 McKinney, L.P. and Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K dated June 30, 2005, FileNo. 001-08038.) | ||
10 | .27 | Second Amendment to Office Lease, dated as of July 24, 2005, between Crescent 1301 McKinney, L.P. and Key Energy Services, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K dated June 30, 2005, FileNo. 001-08038.) | ||
10 | .28 | Credit Agreement, dated as of November 29, 2007, among Key Energy Services, Inc., each lender from time to time party thereto, Bank of America, N.A., as Paying Agent, Co-Administrative Agent, Swing Line Lender and L/C Issuer, and Wells Fargo Bank, National Association, as Co-Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on November 30, 2007, FileNo. 001-08038.) | ||
10 | .29 | Stock and Membership Interest Purchase Agreement, dated as of September 19, 2007, between and among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 20, 2007, FileNo. 001-08038.) | ||
10 | .30 | First Amendment to Stock and Membership Interest Purchase Agreement, dated as of October 25, 2007, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2007, FileNo. 001-08038.) | ||
10 | .31* | Second Amendment to Stock and Membership Interest Purchase Agreement, dated as of September 30, 2008, among Key Energy Services, LLC, the Sellers named therein, and Moncla Well Service, Inc. and certain other affiliated companies named therein. | ||
10 | .32 | Purchase Agreement, dated November 14, 2007, by and among the Company, certain of its domestic subsidiaries, and Lehman Brothers, Inc., Banc of America Securities LLC and Morgan Stanley & Co. Incorporated, as representatives of the initial purchasers. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report onForm 8-K filed on November 15, 2007, FileNo. 001-08038.) | ||
10 | .33 | Asset Purchase Agreement, dated December 7, 2007, among Key Energy Services, LLC, Kings Oil Tools, Inc. and Thomas Fowler. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on December 13, 2007, FileNo. 001-08038.) | ||
10 | .34 | Purchase Agreement, dated April 3, 2008, among Key Energy Services, LLC, Western Drilling Holdings, Inc., and Fred S. Holmes and Barbara J. Holmes. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on April 9, 2008, FileNo. 001-08038.) | ||
10 | .35 | Stock Purchase Agreement, dated May 30, 2008, by and among Key Energy Services, LLC, and E. Kent Tolman, Nita Tolman, Ronald D. Jones and Melinda Jones. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on June 5, 2008, FileNo. 001-08038.) |
Exhibit No. | Description | |||
10 | .36 | Asset Purchase Agreement, dated July 22, 2008, by and among Key Energy Pressure Pumping Services, LLC, Leader Energy Services Ltd., Leader Energy Services USA Ltd., and CementRite, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on July 24, 2008, FileNo. 001-08038.) | ||
10 | .37 | Master Agreement, dated August 26, 2008, by and among Key Energy Services, Inc., Key Energy Services Cyprus Ltd., OOO Geostream Assets Management and L-Group. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report onForm 8-K filed on September 2, 2008, FileNo. 001-08038.) | ||
21 | * | Significant Subsidiaries of the Company. | ||
23 | * | Consent of Independent Registered Public Accounting Firm. | ||
31 | .1* | Certification of CEO pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. of 2002. | ||
31 | .2* | Certification of Principal Financial Officer pursuant to Securities Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | * | Certification of CEO and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
† | Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. | |
* | Filed herewith. |