KEG 8-K 12/31/2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 8-K
____________________
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): December 21, 2012
____________________
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
____________________
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| | | | |
| | | | |
Maryland | | 001-08038 | | 04-2648081 |
(State or other Jurisdiction of Incorporation) | | (Commission File Number) | | (IRS Employer Identification No.) |
1301 McKinney Street, Suite 1800
Houston, Texas 77010
(Address of principal executive offices and Zip Code)
713-651-4300
Registrant's telephone number, including area code)
____________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01. Other Items
Key Energy Services, Inc. (the "Company") is filing this Current Report on Form 8-K in connection with its filing with the Securities and Exchange Commission (the "SEC") of a Registration Statement on Form S-4, dated December 21, 2012, relating to its offer to exchange $200,000,000 of its 6.750% senior notes due 2021 that will be registered under the Securities Act of 1933, as amended (the "Securities Act"), for $200,000,000 of its unregistered 6.750% senior notes due 2021 that were issued in a private placement on March 8, 2012 (the "Exchange Offer").
On February 17, 2012, the Company announced its decision to sell its business and operations in Argentina (the "Argentina business"), as more fully described in the Current Report on Form 8-K filed with the SEC on that date. The Company discontinued depreciation and amortization of the property, plant and equipment of the Argentina business and recorded a pre-tax noncash impairment charge of $41.5 million ($26.9 million after tax) during the quarter ended March 31, 2012. On September 14, 2012, the Company sold its Argentina operations to Power Infrastructure LTD, a British Virgin Islands company. In accordance with applicable accounting requirements and guidance, the Company's unaudited financial statements in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 reclassified and presented the Argentina business as a discontinued operation for the relevant periods presented (including the comparable period of the prior year).
Pursuant to applicable rules and regulations of the SEC, the same reclassification of the Argentina business as a discontinued operation is required for previously issued annual financial statements for each of the three fiscal years included in our most recent Annual Report on Form 10-K, if those financial statements are incorporated by reference in subsequent filings with the SEC under the Securities Act, even though those financial statements relate to periods prior to the date of the sale of the Argentina business. In order to comply with this requirement, the Company is filing this report to revise its audited financial statements contained in the accompanying Exhibit 99.1 (the "Updated Financial Statements"). The Argentina business has, for all periods presented in the Updated Financial Statements, been reclassified as a discontinued operation for financial reporting purposes. The Company has also revised certain notes to conform to this presentation.
The Updated Financial Statements are filed as Exhibit 99.1 to this Current Report on Form 8-K. Except as described in this Item 8.01, this Current Report does not modify or update the disclosures or discussions of business activities or events in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). This Current Report and the exhibits hereto should be read in conjunction with the 2011 Form 10-K and the Company's filings made with the SEC subsequent to the filing of the 2011 Form 10-K, including the Quarterly Reports on Form 10-Q for the periods ended March 31, 2012, June 30, 2012 and September 30, 2012.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits.
23.1 Consent of Grant Thornton LLP
99.1 Financial Statements as of December 31, 2010 and 2011, and for the three years ended December 31, 2011.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KEY ENERGY SERVICES, INC.
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| |
| |
By: | /s/ T.M. WHICHARD III |
| T.M. Whichard III, |
| Senior Vice President and Chief Financial Officer (As duly authorized officer and Principal Financial Officer) |
Date: December 21, 2012
EXHIBIT INDEX
|
| |
| |
Exhibit No. | Description |
23.1 | Consent of Grant Thornton LLP |
99.1 | Financial Statements as of December 31, 2010 and 2011, and for the three years ended December 31, 2011. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated December 21, 2012, with respect to the consolidated financial statements included in the Current Report of Key Energy Services, Inc. on Form 8-K dated December 21, 2012. We hereby consent to the incorporation by reference of said report in the Registration Statements of Key Energy Services, Inc. on Forms S-8 (File No. 333-146293, effective September 25, 2007, File No. 333-146294, effective September 25, 2007, File No. 333-150098, effective April 4, 2008 and File No. 333-159794, effective June 5, 2009), and on Form S-3 (File No. 333-171322, effective December 21, 2010, and File No. 333-172532, effective March 1, 2011).
/s/ GRANT THORNTON LLP
Houston, Texas
December 21, 2012
Exhibit 99.1
Key Energy Services, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Key Energy Services, Inc. (the "Company") have been revised to reflect the Argentina business, included in the Company's 2011 Form 10-K, as a discontinued operation in the consolidated balance sheets, consolidated statements of operations and related notes for all periods presented in the consolidated financial statements as a result of the determination on February 17, 2012 to seek to sell such business and the sale of such business on September 14, 2012. These consolidated financial statements and footnotes filed on Form 8-K have been revised in connection with the anticipated filing with the Securities and Exchange Commission of a Registration Statement on Form S-4. The Registration Statement relates to the Company's anticipated offer to exchange $200,000,000 of its new 6.750% senior notes due 2021 that have been registered under the Securities Act of 1933, as amended, for $200,000,000 of its unregistered 6.750% senior notes due 2021 that were issued in a private placement on March 8, 2012.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Key Energy Services, Inc.
We have audited the accompanying consolidated balance sheets of Key Energy Services, Inc. (a Maryland corporation) and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Key Energy Services, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
On February 29, 2012, we previously reported on the financial statements referred to above. This report was issued prior to the discontinuance of the Company's Argentina operations set forth in Note 3 to the financial statements, wherein revisions of amounts previously reported as of December 31, 2011 and 2010, and for each of the three years in the period ended December 31, 2011 are described.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Key Energy Services, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 29, 2012 (not separately included herein) expressed an unqualified opinion on the effectiveness of internal control over financial reporting.
/s/ GRANT THORNTON LLP
Houston, Texas
December 21, 2012
Key Energy Services, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31, |
| 2011 | | 2010 |
| (in thousands, except share amounts) |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 35,443 |
| | $ | 56,628 |
|
Accounts receivable, net of allowance for doubtful accounts of $8,013 and $7,717 | 379,533 |
| | 234,650 |
|
Inventories | 25,968 |
| | 15,534 |
|
Prepaid expenses | 24,330 |
| | 19,422 |
|
Deferred tax assets | 54,646 |
| | 31,192 |
|
Other current assets | 20,300 |
| | 14,589 |
|
Current assets held for sale | 60,343 |
| | 42,005 |
|
Total current assets | 600,563 |
| | 414,020 |
|
Property and equipment, gross | 2,184,810 |
| | 1,789,571 |
|
Accumulated depreciation | (987,510 | ) | | (868,774 | ) |
Property and equipment, net | 1,197,300 |
| | 920,797 |
|
Goodwill | 622,773 |
| | 446,895 |
|
Other intangible assets, net | 81,867 |
| | 58,151 |
|
Deferred financing costs, net | 14,771 |
| | 7,806 |
|
Deposits | 43,685 |
| | 1,471 |
|
Equity method investments | 918 |
| | 5,940 |
|
Other assets | 14,360 |
| | 15,652 |
|
Non-current assets held for sale | 22,883 |
| | 22,204 |
|
TOTAL ASSETS | $ | 2,599,120 |
| | $ | 1,892,936 |
|
LIABILITIES AND EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 71,736 |
| | $ | 50,123 |
|
Accrued liabilities | 163,313 |
| | 195,105 |
|
Accrued interest | 10,870 |
| | 4,097 |
|
Current portion of capital lease obligations | 1,694 |
| | 3,979 |
|
Current liabilities directly associated with assets held for sale | 41,890 |
| | 28,331 |
|
Total current liabilities | 289,503 |
| | 281,635 |
|
Capital lease obligations, less current portion | 402 |
| | 2,121 |
|
Long-term debt | 773,573 |
| | 425,000 |
|
Workers’ compensation, vehicular and health insurance liabilities | 30,854 |
| | 30,110 |
|
Deferred tax liabilities | 261,072 |
| | 144,309 |
|
Other non-current accrued liabilities | 29,085 |
| | 27,958 |
|
Commitments and contingencies |
| |
|
Equity: | | | |
Common stock, $0.10 par value; 200,000,000 shares authorized, 150,733,022 and 141,656,426 shares issued and outstanding | 15,073 | | 14,166 |
Additional paid-in capital | 915,400 | | 775,601 |
Accumulated other comprehensive loss | (58,231) | | (51,334) |
Retained earnings | 312,114 | | 210,653 |
Total equity attributable to Key | 1,184,356 | | 949,086 |
Noncontrolling interest | 30,275 | | 32,717 |
Total equity | 1,214,631 | | 981,803 |
TOTAL LIABILITIES AND EQUITY | $2,599,120 | | $1,892,936 |
See the accompanying notes which are an integral part of these consolidated financial statements
Key Energy Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands, except per share amounts) |
REVENUES | $ | 1,729,211 |
| | $ | 1,062,595 |
| | $ | 887,074 |
|
COSTS AND EXPENSES: | | | | | |
Direct operating expenses | 1,085,190 |
| | 746,441 |
| | 609,807 |
|
Depreciation and amortization expense | 166,946 |
| | 133,898 |
| | 145,491 |
|
General and administrative expenses | 223,299 |
| | 186,188 |
| | 160,220 |
|
Asset retirements and impairments | — |
| | — |
| | 96,768 |
|
Operating income (loss) | 253,776 |
| | (3,932 | ) | | (125,212 | ) |
Loss on early extinguishment of debt | 46,451 |
| | — |
| | 472 |
|
Interest expense, net of amounts capitalized | 40,849 |
| | 41,240 |
| | 39,241 |
|
Other income, net | (8,977 | ) | | (2,807 | ) | | (624 | ) |
Income (loss) from continuing operations before tax | 175,453 |
| | (42,365 | ) | | (164,301 | ) |
Income tax (expense) benefit | (64,117 | ) | | 17,961 |
| | 61,532 |
|
Income (loss) from continuing operations | 111,336 |
| | (24,404 | ) | | (102,769 | ) |
Income (loss) from discontinued operations, net of tax | (10,681 | ) | | 94,753 |
| | (53,907 | ) |
Net income (loss) | 100,655 |
| | 70,349 |
| | (156,676 | ) |
Loss attributable to noncontrolling interest | (806 | ) | | (3,146 | ) | | (555 | ) |
INCOME (LOSS) ATTRIBUTABLE TO KEY | $ | 101,461 |
| | $ | 73,495 |
| | $ | (156,121 | ) |
Earnings (loss) per share from continuing operations attributable to Key: | | | | | |
Basic | $ | 0.77 |
| | $ | (0.16 | ) | | $ | (0.84 | ) |
Diluted | $ | 0.76 |
| | $ | (0.16 | ) | | $ | (0.84 | ) |
Earnings (loss) per share from discontinued operations: | | | | | |
Basic | $ | (0.07 | ) | | $ | 0.73 |
| | $ | (0.45 | ) |
Diluted | $ | (0.07 | ) | | $ | 0.73 |
| | $ | (0.45 | ) |
Earnings (loss) per share attributable to Key: | | | | | |
Basic | $ | 0.70 |
| | $ | 0.57 |
| | $ | (1.29 | ) |
Diluted | $ | 0.69 |
| | $ | 0.57 |
| | $ | (1.29 | ) |
Income (loss) from continuing operations attributable to Key: | | | | | |
Income (loss) from continuing operations | $ | 111,336 |
| | $ | (24,404 | ) | | $ | (102,769 | ) |
Loss attributable to noncontrolling interest | (806 | ) | | (3,146 | ) | | (555 | ) |
Income (loss) from continuing operations attributable to Key | $ | 112,142 |
| | $ | (21,258 | ) | | $ | (102,214 | ) |
Weighted Average Shares Outstanding: | | | | | |
Basic | 145,909 |
| | 129,368 |
| | 121,072 |
|
Diluted | 146,217 |
| | 129,368 |
| | 121,072 |
|
See the accompanying notes which are an integral part of these consolidated financial statements
Key Energy Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands) |
INCOME (LOSS) FROM CONTINUING OPERATIONS | $ | 111,336 |
| | $ | (24,404 | ) | | $ | (102,769 | ) |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation income (loss), net of tax of $(734), $(129), and $(347) | (7,194 | ) | | 738 |
| | 1,055 |
|
Deferred gain from available for sale investments, net of tax of $—, $—, and $— | — |
| | — |
| | 30 |
|
Gain on sale of equity method investment, net of tax of $(410), $—, and $— | 1,061 |
| | — |
| | — |
|
Total other comprehensive loss, net of tax | (6,133 | ) | | 738 |
| | 1,085 |
|
COMPREHENSIVE INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX | 105,203 |
| | (23,666 | ) | | (101,684 | ) |
Comprehensive income (loss) from discontinued operations, net of tax | (13,081 | ) | | 93,184 |
| | (59,205 | ) |
COMPREHENSIVE INCOME (LOSS) | 92,122 |
| | 69,518 |
| | (160,889 | ) |
Comprehensive income attributable to noncontrolling interest | 2,442 |
| | 3,406 |
| | 416 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO KEY | $ | 94,564 |
| | $ | 72,924 |
| | $ | (160,473 | ) |
See the accompanying notes which are an integral part of these consolidated financial statements
Key Energy Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income (loss) | $ | 100,655 |
| | $ | 70,349 |
| | $ | (156,676 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization expense | 169,604 |
| | 143,805 |
| | 169,562 |
|
Asset retirements and impairments | — |
| | — |
| | 159,802 |
|
Bad debt expense | 2,559 |
| | 3,849 |
| | 3,295 |
|
Accretion of asset retirement obligations | 594 |
| | 526 |
| | 533 |
|
(Income) loss from equity method investments | (266 | ) | | (396 | ) | | 1,057 |
|
Gain on sale of equity method investment | (4,783 | ) | | — |
| | — |
|
Amortization of deferred financing costs and discount | 2,150 |
| | 2,615 |
| | 2,182 |
|
Deferred income tax expense (benefit) | 85,792 |
| | (12,370 | ) | | (41,257 | ) |
Capitalized interest | (1,735 | ) | | (3,789 | ) | | (4,335 | ) |
(Gain) loss on disposal of assets, net | (3,726 | ) | | (153,822 | ) | | 401 |
|
Loss on early extinguishment of debt | 46,451 |
| | — |
| | 472 |
|
Loss on sale of available for sale investments, net | — |
| | — |
| | 30 |
|
Share-based compensation | 15,609 |
| | 12,111 |
| | 6,381 |
|
Excess tax benefits from share-based compensation | (4,859 | ) | | (2,069 | ) | | (580 | ) |
Changes in working capital: | | | | | |
Accounts receivable | (152,771 | ) | | (26,448 | ) | | 168,824 |
|
Other current assets | (22,110 | ) | | 36,731 |
| | 461 |
|
Accounts payable and accrued liabilities | 3,720 |
| | 61,671 |
| | (126,949 | ) |
Share-based compensation liability awards | 385 |
| | 1,297 |
| | 646 |
|
Other assets and liabilities | (48,964 | ) | | (4,255 | ) | | 988 |
|
Net cash provided by operating activities | 188,305 |
| | 129,805 |
| | 184,837 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Capital expenditures | (359,097 | ) | | (180,310 | ) | | (128,422 | ) |
Proceeds from sale of fixed assets | 14,100 |
| | 258,202 |
| | 5,580 |
|
Acquisitions, net of cash acquired of $886, $539, and $28,362, respectively | (187,058 | ) | | (86,688 | ) | | 12,007 |
|
Dividend from equity method investments | — |
| | 165 |
| | 199 |
|
Proceeds from sale of equity method investment | 11,965 |
| | — |
| | — |
|
Net cash used in investing activities | (520,090 | ) | | (8,631 | ) | | (110,636 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Repayments of long-term debt | (421,427 | ) | | (6,970 | ) | | (16,552 | ) |
Payment of bond tender premium | (39,082 | ) | | — |
| | — |
|
Proceeds from long-term debt | 475,000 |
| | — |
| | — |
|
Repayments of capital lease obligations | (4,016 | ) | | (8,493 | ) | | (9,847 | ) |
Proceeds from borrowings on revolving credit facility | 418,000 |
| | 110,000 |
| | — |
|
Repayments on revolving credit facility | (123,000 | ) | | (197,813 | ) | | (100,000 | ) |
Payment of deferred financing costs | (16,485 | ) | | — |
| | (2,474 | ) |
Repurchases of common stock | (5,681 | ) | | (3,098 | ) | | (488 | ) |
Proceeds from exercise of stock options and warrants | 8,000 |
| | 4,100 |
| | 1,306 |
|
Excess tax benefits from share-based compensation | 4,859 |
| | 2,069 |
| | 580 |
|
Other financing activities | 9,916 |
| | — |
| | — |
|
Net cash provided by (used in) financing activities | 306,084 |
| | (100,205 | ) | | (127,475 | ) |
Effect of changes in exchange rates on cash | 4,516 |
| | (1,735 | ) | | (2,023 | ) |
Net (decrease) increase in cash and cash equivalents | (21,185 | ) | | 19,234 |
| | (55,297 | ) |
Cash and cash equivalents, beginning of period | 56,628 |
| | 37,394 |
| | 92,691 |
|
Cash and cash equivalents, end of period | $ | 35,443 |
| | $ | 56,628 |
| | $ | 37,394 |
|
See the accompanying notes which are an integral part of these consolidated financial statements
Key Energy Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| COMMON STOCKHOLDERS | | Noncontrolling Interest | | Total |
Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | |
Number of Shares | | Amount at par | |
(in thousands) |
BALANCE AT DECEMBER 31, 2008 | 121,305 |
| | $ | 12,131 |
| | $ | 601,872 |
| | $ | (46,550 | ) | | $ | 293,279 |
| | $ | — |
| | $ | 860,732 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (4,213 | ) | | — |
| | (7 | ) | | (4,220 | ) |
Common stock purchases | (72 | ) | | (7 | ) | | (481 | ) | | — |
| | — |
| | — |
| | (488 | ) |
Exercise of stock options | 418 |
| | 42 |
| | 1,264 |
| | — |
| | — |
| | — |
| | 1,306 |
|
Issuance of warrants | — |
| | — |
| | 367 |
| | — |
| | — |
| | — |
| | 367 |
|
Share-based compensation | 2,342 |
| | 233 |
| | 5,781 |
| | — |
| | — |
| | — |
| | 6,014 |
|
Tax benefits from share-based compensation | — |
| | — |
| | (580 | ) | | — |
| | — |
| | — |
| | (580 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | (156,121 | ) | | (555 | ) | | (156,676 | ) |
Purchase of Geostream | — |
| | — |
| | — |
| | — |
| | — |
| | 36,685 |
| | 36,685 |
|
BALANCE AT DECEMBER 31, 2009 | 123,993 |
| | 12,399 |
| | 608,223 |
| | (50,763 | ) | | 137,158 |
| | 36,123 |
| | 743,140 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (571 | ) | | — |
| | (260 | ) | | (831 | ) |
Common stock purchases | (302 | ) | | (30 | ) | | (3,068 | ) | | — |
| | — |
| | — |
| | (3,098 | ) |
Exercise of stock options and warrants | 507 |
| | 50 |
| | 4,050 |
| | — |
| | — |
| | — |
| | 4,100 |
|
Issuance of shares in acquisition | 15,807 |
| | 1,581 |
| | 152,382 |
| | — |
| | — |
| | — |
| | 153,963 |
|
Share-based compensation | 1,651 |
| | 166 |
| | 11,945 |
| | — |
| | — |
| | — |
| | 12,111 |
|
Tax benefits from share-based compensation | — |
| | — |
| | 2,069 |
| | — |
| | — |
| | — |
| | 2,069 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 73,495 |
| | (3,146 | ) | | 70,349 |
|
BALANCE AT DECEMBER 31, 2010 | 141,656 |
| | 14,166 |
| | 775,601 |
| | (51,334 | ) | | 210,653 |
| | 32,717 |
| | 981,803 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (7,958 | ) | | — |
| | (1,636 | ) | | (9,594 | ) |
Common stock purchases | (384 | ) | | (39 | ) | | (5,642 | ) | | — |
| | — |
| | — |
| | (5,681 | ) |
Exercise of stock options and warrants | 728 |
| | 73 |
| | 7,927 |
| | — |
| | — |
| | — |
| | 8,000 |
|
Issuance of shares in acquisition | 7,549 |
| | 755 |
| | 117,164 |
| | — |
| | — |
| | — |
| | 117,919 |
|
Share-based compensation | 1,184 |
| | 118 |
| | 15,491 |
| | — |
| | — |
| | — |
| | 15,609 |
|
Tax benefits from share-based compensation | — |
| | — |
| | 4,859 |
| | — |
| | — |
| | — |
| | 4,859 |
|
Sale of equity method investment, net of tax | — |
| | — |
| | — |
| | 1,061 |
| | — |
| | — |
| | 1,061 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 101,461 |
| | (806 | ) | | 100,655 |
|
BALANCE AT DECEMBER 31, 2011 | 150,733 |
| | $ | 15,073 |
| | $ | 915,400 |
| | $ | (58,231 | ) | | $ | 312,114 |
| | $ | 30,275 |
| | $ | 1,214,631 |
|
See the accompanying notes which are an integral part of these consolidated financial statements
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Key Energy Services, Inc., its wholly owned subsidiaries and its controlled subsidiaries (collectively, “Key,” the “Company,” “we,” “us” and “our”) provide a full range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies. Our services include rig-based and coiled tubing-based well maintenance and workover services, well completion and recompletion services, fluid management services, fishing and rental services and other ancillary oilfield services. Additionally, certain of our rigs are capable of specialty drilling applications. We operate in most major oil and natural gas producing regions of the continental United States, and we have operations in Mexico, Colombia, the Middle East and Russia. In addition, we have a technology development and control systems business based in Canada.
Basis of Presentation
The consolidated financial statements included in this Annual Report on Form 10-K present our financial position, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”).
The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves, (vii) provide allowances for our uncollectible accounts receivable, (viii) value our asset retirement obligations, and (ix) value our equity-based compensation. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the limitations inherent in this process, our actual results may differ materially from these estimates. We believe that our estimates are reasonable.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. We revised our reportable business segments effective in the first quarter of 2011, and in connection with the revision, have restated the corresponding items of segment information for all periods presented. The new operating segments are U.S. and International. We revised our segments to reflect changes in management’s resource allocation and performance assessment in making decisions regarding the Company. Our fluid management services, fishing and rental services, intervention services and domestic rig services businesses are aggregated within our U.S. segment. Our international rig services business and our Canadian technology development group are aggregated within our International segment. These changes reflect our current operating focus in compliance with Accounting Standards Codification (“ASC”) No. 280, Segment Reporting (“ASC 280”). These presentation changes did not impact our consolidated net income, earnings per share, total current assets, total assets or total stockholders’ equity.
We have evaluated events occurring after the balance sheet date included in this Current Report on Form 8-K for possible disclosure as a subsequent event. Management monitored for subsequent events through the date that these financial statements were issued. Subsequent events that were identified by management that required disclosure are described in “Note 26. Subsequent Events” of these financial statements.
On February 17, 2012, the Company announced its decision to sell its business and operations in Argentina (the "Argentina business") and on September 14, 2012 completed the sale of the Argentina business. In accordance with applicable accounting requirements and guidance, the Company reclassified and presented the Argentina business as a discontinued operation for all periods presented.
Principles of Consolidation
Within our consolidated financial statements, we include our accounts and the accounts of our majority-owned or controlled subsidiaries. We eliminate intercompany accounts and transactions. When we have an interest in an entity for which we do not have significant control or influence, we account for that interest using the cost method. When we have an interest in an entity and can exert significant influence but not control, we account for that interest using the equity method.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We apply ASC No. 810-10, Consolidation of Variable Interest Entities (revised December 2009) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), when determining whether or not to consolidate a Variable Interest Entity (“VIE”). ASC 810-10 requires the reporting entity to have the power to direct the activities of a VIE that most significantly impacts the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. A reporting entity that has these characteristics will be required to consolidate the VIE.
Acquisitions
From time to time, we acquire businesses or assets that are consistent with our long-term growth strategy. Results of operations for acquisitions are included in our financial statements beginning on the date of acquisition and are accounted for using the acquisition method. For all business combinations (whether partial, full or in stages), the acquirer records 100% of all assets and liabilities of the acquired business, including goodwill, at their fair values; including contingent consideration. Final valuations of assets and liabilities are obtained and recorded as soon as practicable no later than one year from the date of the acquisition.
Revenue Recognition
We recognize revenue when all of the following criteria have been met: (i) evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed and determinable and (iv) collectability is reasonably assured.
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• | Evidence of an arrangement exists when a final understanding between us and our customer has occurred, and can be evidenced by a completed customer purchase order, field ticket, supplier contract, or master service agreement. |
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• | Delivery has occurred or services have been rendered when we have completed requirements pursuant to the terms of the arrangement as evidenced by a field ticket or service log. |
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• | The price to the customer is fixed and determinable when the amount that is required to be paid is agreed upon. Evidence of the price being fixed and determinable is evidenced by contractual terms, our price book, a completed customer purchase order, or a field ticket. |
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• | Collectability is reasonably assured when we screen our customers and provide goods and services to customers according to determined credit terms that have been granted in accordance with our credit policy. |
We present our revenues net of any sales taxes collected by us from our customers that are required to be remitted to local or state governmental taxing authorities.
We review our contracts for multiple element revenue arrangements. Deliverables will be separated into units of accounting and assigned fair value if they have standalone value to our customer, have objective and reliable evidence of fair value, and delivery of undelivered items is substantially controlled by us. We believe that the negotiated prices for deliverables in our services contracts are representative of fair value since the acceptance or non-acceptance of each element in the contract does not affect the other elements.
Cash and Cash Equivalents
We consider short-term investments with an original maturity of less than three months to be cash equivalents. At December 31, 2011, we have not entered into any compensating balance arrangements, but all of our obligations under our amended 2011 Credit Facility (as defined below) with a syndicate of banks of which JPMorgan Chase Bank, N.A. is the administrative agent were secured by most of our assets, including assets held by our subsidiaries, which includes our cash and cash equivalents. We restrict investment of cash to financial institutions with high credit standing and limit the amount of credit exposure to any one financial institution.
We maintain our cash in bank deposit and brokerage accounts which exceed federally insured limits. As of December 31, 2011, accounts were guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 and substantially all of our accounts held deposits in excess of the FDIC limits.
Cash and cash equivalents held by our Russian and Middle East subsidiaries are subject to a noncontrolling interest and cannot be repatriated; absent these amounts, we believe that the cash held by our other foreign subsidiaries could be repatriated for general corporate use without material withholdings. From time to time and in the normal course of business in connection with our operations or ongoing legal matters, we are required to place certain amounts of our cash in deposit accounts with restrictions that limit our ability to withdraw those funds.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain of our cash accounts are zero-balance controlled disbursement accounts that do not have right of offset against our other cash balances. We present the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
We establish provisions for losses on accounts receivable if we determine that there is a possibility that we will not collect all or part of the outstanding balances. We regularly review accounts over 150 days past due from the invoice date for collectability and establish or adjust our allowance as necessary using the specific identification method. If we exhaust all collection efforts and determine that the balance will never be collected, we write off the accounts receivable and the associated provision for uncollectible accounts.
From time to time we are entitled to proceeds under our insurance policies for amounts that we have reserved in our self-insurance liability. We present these insurance receivables gross on our balance sheet as a component of other assets, separate from the corresponding liability.
Concentration of Credit Risk and Significant Customers
Our customers include major oil and natural gas production companies, independent oil and natural gas production companies, and foreign national oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.
During the years ended December 31, 2011 and 2010, no single customer accounted for more than 10% of our consolidated revenues. During the year ended December 31, 2009, the Mexican national oil company, Petróleos Mexicanos (“Pemex”), accounted for approximately 11% of our consolidated revenues. No other customer accounted for more than 10% of our consolidated revenues for the year ended December 31, 2009.
Receivables outstanding from Pemex were approximately 11% of our total accounts receivable as of December 31, 2011. No other customer accounted for more than 10% of our total accounts receivable as of December 31, 2010. Pemex accounted for approximately 28% of our total accounts receivable as of December 31, 2009. No other customers accounted for more than 10% of our total accounts receivable as of December 31, 2011 and 2009.
Inventories
Inventories, which consist primarily of equipment parts and spares for use in our operations and supplies held for consumption, are valued at the lower of average cost or market.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated depreciable lives of the assets using the straight-line method. Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $145.7 million, $122.7 million and $131.6 million, respectively. We depreciate our operational assets over their depreciable lives to their salvage value, which is a fair value higher than the assets’ value as scrap. Salvage value approximates 10% of an operational asset’s acquisition cost. When an operational asset is stacked or taken out of service, we review its physical condition, depreciable life and ultimate salvage value to determine if the asset is no longer operable and whether the remaining depreciable life and salvage value should be adjusted. When we scrap an asset, we accelerate the depreciation of the asset down to its salvage value. When we dispose of an asset, a gain or loss is recognized.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2011, the estimated useful lives of our asset classes are as follows:
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| |
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Description | Years |
Well service rigs and components | 3-15 |
Oilfield trucks, vehicles and related equipment | 5-10 |
Well intervention units and equipment | 10-12 |
Fishing and rental tools, tubulars and pressure control equipment | 3-10 |
Disposal wells | 15-30 |
Furniture and equipment | 3-7 |
Buildings and improvements | 15-30 |
We lease certain of our operating assets under capital lease obligations whose terms run from 55 to 60 months. These assets are depreciated over their estimated useful lives or the term of the capital lease obligation, whichever is shorter.
A long-lived asset or asset group should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. For purposes of testing for impairment, we group our long-lived assets along our lines of business based on the services provided, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We would record an impairment charge, reducing the net carrying value to an estimated fair value, if the asset group’s estimated future cash flows were less than its net carrying value. Events or changes in circumstance that 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, or changes of an asset group, such as its expected future life, intended use or physical condition, which could reduce the fair value of certain of our property and equipment. The development of future cash flows and the determination of fair value for an asset group involves significant judgment and estimates.
We did not identify any triggering events or record any asset impairments during 2010. During the third quarter of 2009, we identified a triggering event that required us to test our long-lived assets for potential impairment. As a result of those tests, we determined that the equipment for our pressure pumping operations was impaired. See “Note 7. Property and Equipment,” for further discussion.
Asset Retirement Obligations
We recognize a liability for the fair value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset. We depreciate the additional cost over the estimated useful life of the assets. Our obligations to perform our asset retirement activities are unconditional, despite the uncertainties that may exist surrounding an individual retirement activity. Accordingly, we recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. In determining the fair value, we examine the inputs that we believe a market participant would use if we were to transfer the liability. We probability-weight the potential costs a third-party would charge, adjust the cost for inflation for the estimated life of the asset, and discount this cost using our credit adjusted risk free rate. Significant judgment is involved in estimating future cash flows associated with such obligations, as well as the ultimate timing of those cash flows. If our estimates of the amount or timing of the cash flows change, such changes may have a material impact on our results of operations. See “Note 10. Asset Retirement Obligations.”
Deposits
Due to capacity constraints on equipment manufacturers, we have been required to make advanced payments for certain oilfield service equipment and other items used in the normal course of business. As of December 31, 2011, deposits totaled $43.7 million and consisted mostly of payments made related to high demand long-lead time items for our U.S. and Mexico operations, as well as, equipment deposits related to our recent acquisition of Edge Oilfield Services, LLC and Summit Oilfield Services, LLC (collectively, “Edge”). As of December 31, 2010, deposits totaled $1.5 million and consisted of escrow for workers’ compensation insurance and security deposits for leases.
Capitalized Interest
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. The capitalized interest is added to the cost of the assets and amortized to depreciation expense over the useful life of the assets, and is included in the depreciation and amortization line in the accompanying consolidated statements of operations.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Financing Costs
Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest method over the life of the related debt instrument. When the related debt instrument is retired, any remaining unamortized costs are included in the determination of the gain or loss on the extinguishment of the debt. We record gains and losses from the extinguishment of debt as a part of continuing operations. See “Note 15. Long-term Debt,” for further discussion.
Goodwill and Other Intangible Assets
Goodwill results from business combinations and represents the excess of the acquisition consideration over the fair value of the net assets acquired. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
During the fourth quarter of 2011, we adopted the provisions of ASU 2011-8, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount we will perform the two-step goodwill impairment test. In the first step of the test, a fair value is calculated for each of our reporting units, and that fair value is compared to the carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no impairment, and the second step of the test is not performed. If the carrying value exceeds the fair value for the reporting unit, then the second step of the test is required.
The second step of the test compares the implied fair value of the reporting unit’s goodwill to its carrying value. The implied fair value of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment is recorded. If the carrying value is in excess of the implied fair value, an impairment equal to the excess is recorded.
To assist management in the preparation and analysis of the valuation of our reporting units, we utilize the services of a third-party valuation consultant. The ultimate conclusions of the valuation techniques remain our sole responsibility. The determination of the fair value used in the test is heavily impacted by the market prices of our equity and debt securities, as well as the assumptions and estimates about our future activity levels, profitability and cash flows. We conduct our annual impairment test as of December 31 of each year. For the annual test completed as of December 31, 2011, no impairment of our goodwill was indicated. See “Note 8. Goodwill and Other Intangible Assets,” for further discussion.
Internal-Use Software
We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the software’s estimated useful life, generally five to seven years. Costs incurred related to selection or maintenance of internal-use software are expensed as incurred.
Litigation
When estimating our liabilities related to litigation, we take into account all available facts and circumstances in order to determine whether a loss is probable and reasonably estimable.
Various suits and claims arising in the ordinary course of business are pending against us. We conduct business throughout the continental United States and may be subject to jury verdicts or arbitrations that result in outcomes in favor of the plaintiffs. We are also exposed to various claims abroad. We continually assess our contingent liabilities, including potential litigation liabilities, as well as the adequacy of our accruals and our need for the disclosure of these items. We establish a provision for a contingent liability when it is probable that a liability has been incurred and the amount is reasonably estimable. See “Note 16. Commitments and Contingencies.”
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Environmental
Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants, and regulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. We record liabilities on an undiscounted basis when our remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated. While our litigation reserves reflect the application of our insurance coverage, our environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to the matters at issue. See “Note 16. Commitments and Contingencies.”
Self-Insurance
We are largely self-insured against physical damage to our equipment and automobiles as well as workers’ compensation claims. The accruals that we maintain on our consolidated balance sheet relate to these deductibles and self-insured retentions, which we estimate through the use of historical claims data and trend analysis. To assist management with the liability amount for our self-insurance reserves, we utilize the services of a third party actuary. The actual outcome of any claim could differ significantly from estimated amounts. We adjust loss estimates in the calculation of these accruals, based upon actual claim settlements and reported claims. See “Note 16. Commitments and Contingencies.”
Income Taxes
We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations, but which are deferred until future periods. Current taxes payable represent our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Management estimates the changes in both deferred tax assets and liabilities using the basis of assets and liabilities for financial reporting purposes and for enacted rates that management estimates will be in effect when the differences reverse. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatments of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.
We establish valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate.
See “Note 14. Income Taxes” for further discussion of accounting for income taxes, changes in our valuation allowance, components of our tax rate reconciliation and realization of loss carryforwards.
Earnings Per Share
Basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the treasury stock and “as if converted” methods. See “Note 9. Earnings Per Share.”
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share-Based Compensation
In the past, we have issued stock options, shares of restricted common stock, restricted stock units, stock appreciation rights (“SARs”), phantom shares and performance units to our employees as part of those employees’ compensation and as a retention tool. For our options, restricted shares and SARs, we calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The fair value of our stock option and SAR awards are estimated using a Black-Scholes fair value model. The valuation of our stock options and SARs requires us to estimate the expected term of award, which we estimated using the simplified method, as we did not have sufficient historical exercise information because of past legal restrictions on the exercise of our stock options. Additionally, the valuation of our stock option and SARs awards is also dependent on our historical stock price volatility, which we calculate using a lookback period equivalent to the expected term of the award, a risk-free interest rate, and an estimate of future forfeitures. The grant-date fair value of our restricted stock awards is determined using our stock price on the grant date. Our phantom shares and performance units are treated as “liability” awards and carried at fair value at each balance sheet date, with changes in fair value recorded as a component of compensation expense and an offsetting liability on our consolidated balance sheet. We record share-based compensation as a component of general and administrative and direct operating expense for the applicable individual. See “Note 20. Share-Based Compensation.”
Foreign Currency Gains and Losses
For our international locations in Mexico, Russia and Canada, where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the period. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. Dollar are included as a separate component of stockholders’ equity in other comprehensive income until a partial or complete sale or liquidation of our net investment in the foreign entity. See “Note 17. Accumulated Other Comprehensive Loss.”
From time to time our foreign subsidiaries may enter into transactions that are denominated in currencies other than their functional currency. These transactions are initially recorded in the functional currency of that subsidiary based on the applicable exchange rate in effect on the date of the transaction. At the end of each month, these transactions are remeasured to an equivalent amount of the functional currency based on the applicable exchange rates in effect at that time. Any adjustment required to remeasure a transaction to the equivalent amount of the functional currency at the end of the month is recorded in the income or loss of the foreign subsidiary as a component of other income, net.
Comprehensive Income
We display comprehensive income (loss) and its components in our financial statements, and we classify items of comprehensive income by their nature in our financial statements and display the accumulated balance of other comprehensive income separately in our stockholders’ equity.
Leases
We lease real property and equipment through various leasing arrangements. When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine whether the lease should be accounted for as an operating lease or a capital lease.
We periodically incur costs to improve the assets that we lease under these arrangements. If the value of the leasehold improvements exceeds our threshold for capitalization, we record the improvement as a component of our property and equipment and amortize the improvement over the useful life of the improvement or the lease term, whichever is shorter.
Certain of our operating lease agreements are structured to include scheduled and specified rent increases over the term of the lease agreement. These increases may be the result of an inducement or “rent holiday” conveyed to us early in the lease, or are included to reflect the anticipated effects of inflation. We recognize scheduled and specified rent increases on a straight-line basis over the term of the lease agreement. In addition, certain of our operating lease agreements contain incentives to induce us to enter into the lease agreement, such as up-front cash payments to us, payment by the lessor of our costs, such as moving expenses, or the assumption by the lessor of our pre-existing lease agreements with third parties. Any payments made to us or on our behalf represent incentives that we consider to be a reduction of our rent expense, and are recognized on a straight-line basis over the term of the lease agreement.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
New Accounting Standards Adopted in this Report
ASU 2009-13. In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements where products or services are accounted for separately rather than as a combined unit, and addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. As a result of ASU 2009-13, multiple-deliverable arrangements will be separated in more circumstances than under prior guidance. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price will be based on vendor-specific objective evidence (“VSOE”) if it is available, on third-party evidence if VSOE is not available, or on an estimated selling price if neither VSOE nor third-party evidence is available. ASU 2009-13 also requires that an entity determine its best estimate of selling price in a manner that is consistent with that used to determine the selling price of the deliverable on a stand-alone basis, and increases the disclosure requirements related to an entity’s multiple-deliverable revenue arrangements. ASU 2009-13 must be prospectively applied to all revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Entities may elect, but are not required, to adopt the amendments retrospectively for all periods presented. We adopted the provisions of ASU 2009-13 on January 1, 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2009-14. In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 was issued to address concerns relating to the accounting for revenue arrangements that contain tangible products and software that is “more than incidental” to the product as a whole. ASU 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements to exclude those where the software components are essential to the tangible products’ core functionality. In addition, ASU 2009-14 also requires that hardware components of a tangible product containing software components always be excluded from the software revenue recognition guidance, and provides guidance on how to determine which software, if any, relating to tangible products is considered essential to the tangible products’ functionality and should be excluded from the scope of software revenue recognition guidance. ASU 2009-14 also provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that contains tangible products and software that is not essential to the product’s functionality. ASU 2009-14 was issued concurrently with ASU 2009-13 and also requires entities to provide the disclosures required by ASU 2009-13 that are included within the scope of ASU 2009-14. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Entities may also elect, but are not required, to adopt ASU 2009-14 retrospectively to prior periods, and must adopt ASU 2009-14 in the same period and using the same transition methods that it uses to adopt ASU 2009-13. We adopted the provisions of ASU 2009-14 on January 1, 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2010-13. In April 2010, the FASB issued ASU No. 2010-13, Compensation — Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This ASU codifies the consensus reached in EITF Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years beginning on or after December 15, 2010. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. We adopted the provisions of ASU 2010-13 on January 1, 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ASU 2010-28. In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We adopted the provisions of ASU 2010-28 on January 1, 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2010-29. In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted the provisions of ASU 2010-29 on January 1, 2011, and the adoption of this standard required us to modify and expand disclosures related to our 2011 acquisition, but it did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2011-05. In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this ASU allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-5 should be applied retrospectively for interim and annual reporting periods beginning after December 15, 2011 with early adoption permitted. We early adopted the provisions of ASU 2011-05 during the fourth quarter of 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2011-12. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendment to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU defers the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by components in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-5 and did not change the effective date of ASU 2011-05. ASU 2011-12 should be applied consistently with ASU 2011-05; accordingly, this ASU is to be applied retrospectively for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted. We early adopted the provisions of ASU 2011-12 during the fourth quarter of 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
ASU 2011-08. In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles — Goodwill and Other. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted the provisions of ASU 2011-08 during the fourth quarter of 2011, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Standards Not Yet Adopted in this Report
ASU 2011-04. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the IASB on measuring fair value and for disclosing information about fair value measurements. The amendments in this ASU clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and changes particular principles or requirements for measuring fair value and for disclosing information about fair value measurements. ASU 2011-4 is effective prospectively for interim and annual reporting periods beginning after December 15, 2011. We adopted the provisions of ASU 2011-04 on January 1, 2012, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
NOTE 2. ACQUISITIONS
2011 Acquisitions
Edge Oilfield Services, LLC and Summit Oilfield Services, LLC (collectively, “Edge”). On August 5, 2011, we completed the acquisition of Edge. We accounted for this acquisition as a business combination. The results of operations for Edge have been included in our consolidated financial statements from the acquisition date.
The total consideration for the acquisition was approximately $305.9 million consisting of approximately 7.5 million shares of our common stock and approximately $187.9 million in cash, which included $26.3 million to reimburse Edge for growth capital expenditures incurred between March 1, 2011 and the date of closing, net of working capital adjustments of $1.8 million. Edge primarily rents frac stack equipment used to support hydraulic fracturing operations and the associated flowback of frac fluids, proppants, oil and natural gas. It also provides well testing services, rental equipment such as pumps and power
swivels, and oilfield fishing services. This transaction complements our existing fishing and rental services business and significantly increases our fleet of rental equipment. The acquisition-date fair value of the consideration transferred totaled $305.9 million which consisted of the following (in thousands):
|
| | | |
| |
Cash | $ | 189,696 |
|
Key common stock | 117,919 |
|
Consideration transferred | $ | 307,615 |
|
Working capital adjustment | (1,752 | ) |
Total | $ | 305,863 |
|
The fair value of the 7.5 million common shares issued was $15.62 per share based on the closing price on the acquisition date (August 5, 2011). We finalized the purchase accounting related to this acquisition as of June 30, 2012. The following table summarizes the fair values of the assets acquired and liabilities assumed.
|
| | | |
| |
| (in thousands) |
At August 5, 2011: | |
Cash and cash equivalents | $ | 886 |
|
Accounts receivable | 21,124 |
|
Other current assets | 234 |
|
Property and equipment | 87,185 |
|
Intangible assets | 49,310 |
|
Other long term assets | 3,826 |
|
Total identifiable assets acquired | 162,565 |
|
Current liabilities | 19,406 |
|
Total liabilities assumed | 19,406 |
|
Net identifiable assets acquired | 143,159 |
|
Goodwill | 162,704 |
|
Net assets acquired | $ | 305,863 |
|
Of the $49.3 million of acquired intangible assets, $40.0 million was assigned to customer relationships that will be amortized as the value of the relationships are realized using expected rates of 12.5%, 30.0%, 30.0%, 11.0%, 6.4%, 3.8%, 2.5%, 1.7%, 1.2%, and 0.8% from 2011 through 2020. In addition, $5.1 million of acquired intangible assets was assigned to tradenames which are not amortized. The remaining $4.2 million of acquired intangible assets were assigned to non-compete agreements that will be amortized on a straight-line basis over 38 months.
The fair value and gross contractual amount of accounts receivable acquired on August 5, 2011 was $21.1 million. We do not expect any of these receivables to be uncollectible.
All of the goodwill acquired was assigned to our fishing and rental business, which is part of our U.S. reportable segment. We believe the goodwill recognized is attributable primarily to the acquired workforce and expansion of a growing service line. All of the goodwill is expected to be deductible for income tax purposes. The fair value of the acquired goodwill is preliminary pending receipt of the final valuation.
Transaction costs related to this acquisition were $3.6 million for the year ended December 31, 2011, and are included in general and administrative expenses on the consolidated statements of operations.
Included in our consolidated statements of operations for the year ended December 31, 2011, related to this acquisition are revenues of $52.5 million and operating income of $14.7 million from the acquisition date through December 31, 2011.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following represents the pro forma consolidated income statement as if the Edge acquisition had been included in our consolidated results as of January 1, 2010 for the years ended December 31, 2011 and 2010:
|
| | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 |
| (unaudited) (in thousands, except per share amounts) |
REVENUES | $ | 1,803,768 |
| | $ | 1,130,854 |
|
COSTS AND EXPENSES: | | | |
Direct operating expenses | 1,115,770 |
| | 773,701 |
|
Depreciation and amortization expense[1] | 176,298 |
| | 149,930 |
|
General and administrative expenses[2] | 227,652 |
| | 198,973 |
|
Operating income | 284,048 |
| | 8,250 |
|
Loss on early extinguishment of debt | 46,451 |
| | — |
|
Interest expense, net of amounts capitalized | 42,389 |
| | 43,688 |
|
Other (income) expense, net | (7,585 | ) | | 613 |
|
Income (loss) from continuing operations before tax | 202,793 |
| | (36,051 | ) |
Income tax (expense) benefit[3] | (76,169 | ) | | 15,285 |
|
Income (loss) from continuing operations | 126,624 |
| | (20,766 | ) |
Income from discontinued operations, net of tax | (10,303 | ) | | 95,113 |
|
Net income | 116,321 |
| | 74,347 |
|
Loss attributable to noncontrolling interest | (806 | ) | | (3,146 | ) |
INCOME ATTRIBUTABLE TO KEY | $ | 117,127 |
| | $ | 77,493 |
|
Earnings per share attributable to Key: | | | |
Basic | $ | 0.79 |
| | $ | 0.57 |
|
Diluted | $ | 0.79 |
| | $ | 0.57 |
|
Weighted average shares outstanding[4]: | | | |
Basic | 150,397 |
| | 136,917 |
|
Diluted | 150,705 |
| | 136,917 |
|
Pro Forma Adjustments
| |
[1] | Depreciation and amortization expense for all periods has been adjusted to reflect the additional expense that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied on January 1, 2010. |
| |
[2] | General and administrative expenses for the years ended December 31, 2011 and 2010 have been adjusted for 3.6 million of transaction costs. The costs were removed from 2011 and included in 2010. |
| |
[3] | Income tax (expense) benefit for all periods has been adjusted to reflect applicable corporate tax as if Edge had been acquired and converted from its LLC status on January 1, 2010. |
| |
[4] | Weighted average shares outstanding has been adjusted to reflect the issuance of shares in the Edge transaction as if the transaction occurred on January 1, 2010. |
These unaudited pro forma results, based on assumptions deemed appropriate by management, have been prepared for informational purposes only and are not necessarily indicative of our results if the acquisition had occurred on January 1, 2010 for the years ended December 31, 2011 and 2010. These amounts have been calculated after applying our accounting policies and adjusting the results of Edge as if these changes had been applied on January 1, 2010, together with the consequential tax effects.
Equity Energy Company (“EEC”). In January 2011, we acquired 10 saltwater disposal (“SWD”) wells from EEC for approximately $14.3 million. Most of these SWD wells are located in North Dakota. We accounted for this purchase as an asset acquisition.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2010 Acquisitions
Enhanced Oilfield Technologies, LLC (“EOT”). In December 2010, we acquired 100% of the equity interests in EOT, a privately held oilfield technology company, for a cash payment of $11.7 million and a performance earn-out equal to 8% of adjusted revenue over five years from the acquisition date. We have estimated our liability under the earn-out agreement to be $2.8 million. We accounted for this acquisition as a business combination. The acquired business was at the time of acquisition, and continues to be, in the developmental stage. The goodwill acquired of $10.1 million was assigned to fishing and rental services, which is included in our U.S. reportable segment. The acquired intangible asset of $4.4 million was assigned to developed technology and will be amortized on a straight line basis over a period of 20 years. We finalized the third-party valuations of the intangible assets during the fourth quarter of 2011, and our acquisition accounting is final.
Five J.A.B., Inc. and Affiliates (“5 JAB”). In November 2010, we acquired 13 rigs and associated equipment from 5 JAB for cash consideration of approximately $14.6 million. We have accounted for this acquisition as a business combination. The goodwill acquired was assigned to rig-based services and is included in our U.S. reportable segment. We completed the valuations of the property and equipment and intangible assets acquired during the second quarter of 2011, and our acquisition accounting is final.
OFS Energy Services, LLC (“OFS”). In October 2010, we acquired certain subsidiaries, together with associated assets, owned by OFS, an oilfield services company owned by ArcLight Capital Partners, LLC. The total consideration for the acquisition was 15.8 million shares of our common stock and a cash payment of $75.9 million including a final working capital adjustment of $0.1 million. We accounted for this acquisition as a business combination. The results of operations for the acquired businesses have been included in our consolidated financial statements since the date of acquisition. We finalized the third-party valuations of the tangible and intangible assets during the second quarter of 2011, and our acquisition accounting is final.
Other Acquisitions. We also completed an asset acquisition during 2010 as part of our business strategy. In June 2010, we acquired five large-diameter capable coiled tubing units and associated equipment for approximately $12.7 million in cash from Express Energy Services, a privately held oilfield services company.
2009 Acquisitions
Geostream Services Group (“Geostream”). On September 1, 2009, we acquired an additional 24% interest in Geostream for $16.4 million. This was our second investment in Geostream pursuant to an agreement dated August 26, 2008, as amended. This second investment brought our total investment in Geostream to 50%. Prior to the acquisition of the additional interest, we accounted for our ownership in Geostream as an equity method investment. Upon acquiring the 50% interest, we also obtained majority representation on Geostream’s board of directors and a controlling interest. We accounted for this acquisition as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the acquisition date, with the portion outside of our control forming a noncontrolling interest.
The acquisition date fair value of the consideration transferred totaled approximately $35.0 million, which consisted of cash consideration in the second investment and the fair value of our previous equity interest. The acquisition date fair value of our previous equity interest was approximately $18.3 million. We recognized a loss of $0.2 million as a result of remeasuring our prior equity interest in Geostream held before the business combination, which is included in the line item “other income, net” in the 2009 consolidated statements of operations.
All of the purchase price allocations for 2009 acquisitions were finalized in 2010 without significant changes.
NOTE 3. DISCONTINUED OPERATIONS
In February 2012, we announced our decision to sell our Argentina operations and began marketing this business to potential buyers. As a result of our plan to sell this business, the Argentina operations met the held for sale classification. At that time, we discontinued depreciation and amortization of Argentina's property, plant and equipment. We recorded a pre-tax noncash impairment charge of $41.5 million ($26.9 million after tax) during the first quarter of 2012.
On September 14, 2012, we sold our Argentina operations to Power Infrastructure LTD, a company duly organized, validly existing and in good standing under the laws of the British Virgin Islands. We are reporting our operations with respect to the Argentina business as a discontinued operations for all periods presented.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the assets and liabilities of this disposal group as of December 31, 2011 and 2010:
|
| | | | | | | |
| December 31, 2011 | | December 31, 2010 |
| (in thousands) |
Current assets held for sale: | | | |
Accounts receivable, net of allowance for doubtful accounts of $69 and $74 | $ | 41,682 |
| | $ | 27,168 |
|
Inventories | 8,018 |
| | 7,982 |
|
Prepaid expenses | 1,198 |
| | 1,056 |
|
Deferred tax assets | 2,454 |
| | 854 |
|
Other current assets | 6,991 |
| | 4,945 |
|
Total current assets held for sale | 60,343 |
| | 42,005 |
|
Noncurrent assets held for sale: | | | |
Property and equipment, gross | 39,292 |
| | 42,872 |
|
Accumulated depreciation | (26,296 | ) | | (26,925 | ) |
Property and equipment, net | 12,996 |
| | 15,947 |
|
Goodwill | 661 |
| | 714 |
|
Deposits | 7 |
| | 7 |
|
Other assets | 9,219 |
| | 5,536 |
|
Total noncurrent assets held for sale | 22,883 |
| | 22,204 |
|
TOTAL ASSETS | 83,226 |
| | 64,209 |
|
Liabilities directly associated with assets held for sale: |
| |
|
Accounts payable | 7,101 |
| | 6,187 |
|
Other current liabilities | 34,789 |
| | 22,144 |
|
Total liabilities directly associated with assets held for sale | 41,890 |
| | 28,331 |
|
TOTAL NET ASSETS HELD FOR SALE FROM DISCONTINUED OPERATIONS | $ | 41,336 |
| | $ | 35,878 |
|
The following table presents the results of operations for the business sold in this transaction for the three years ended December 31, 2011, 2010 and 2009:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands) |
REVENUES | $ | 117,672 |
| | $ | 91,089 |
| | $ | 68,625 |
|
COSTS AND EXPENSES: | | | | | |
Direct operating expenses | 111,893 |
| | 88,571 |
| | 66,135 |
|
Depreciation and amortization expense | 2,658 |
| | 3,149 |
| | 3,742 |
|
General and administrative expenses | 14,769 |
| | 12,083 |
| | 11,920 |
|
Asset retirements and impairments | — |
| | — |
| | 267 |
|
Operating (loss) | (11,648 | ) | | (12,714 | ) | | (13,439 | ) |
Interest expense, net of amounts capitalized | 1,694 |
| | 719 |
| | 164 |
|
Other (income) expense, net | 3,159 |
| | 110 |
| | (682 | ) |
Loss before taxes | (16,501 | ) | | (13,543 | ) | | (12,921 | ) |
Income tax benefit | 5,820 |
| | 2,551 |
| | 4,442 |
|
Net (loss) | $ | (10,681 | ) | | $ | (10,992 | ) | | $ | (8,479 | ) |
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On October 1, 2010, we completed the sale of our pressure pumping and wireline businesses to Patterson-UTI Energy (“Patterson-UTI”). Management determined to sell these businesses because they were not aligned with our core business strategy of well intervention and international expansion. For the periods presented in this report, we show the results of operations related to these businesses as discontinued operations for all periods. Prior to the sale, the businesses sold to Patterson-UTI were reported as part of our U.S. segment. The sale of these businesses represented the sale of a significant portion of a reporting unit which requires the reassessment of goodwill. However, due to previous impairment charges, there was no goodwill related to this segment remaining in 2010. Because the agreed-upon purchase price for the businesses exceeded the carrying value of the assets being sold, we did not record a write-down on these assets on the date that they became classified as held for sale. The carrying value of the assets sold was $76.5 million as of September 30, 2010 and $74.3 million as of December 31, 2009. We discontinued depreciation and amortization of our pressure pumping and wireline property and equipment at June 30, 2010 when they were classified as held for sale.
The following table presents the results of discontinued operations for the businesses sold in connection with this transaction:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands) |
REVENUES | $ | — |
| | $ | 197,704 |
| | $ | 122,966 |
|
COSTS AND EXPENSES: | | | | | |
Direct operating expenses | — |
| | 154,369 |
| | 103,515 |
|
Depreciation and amortization expense | — |
| | 6,758 |
| | 20,329 |
|
General and administrative expenses | — |
| | 11,734 |
| | 6,556 |
|
Asset retirements and impairments | — |
| | — |
| | 62,767 |
|
Operating income (loss) | — |
| | 24,843 |
| | (70,201 | ) |
Interest expense, net of amounts capitalized | — |
| | (262 | ) | | (336 | ) |
Other (income) expense, net | — |
| | (75 | ) | | 714 |
|
Gain on sale of discontinued operations | — |
| | (154,355 | ) | | — |
|
Income (loss) before taxes | — |
| | 179,535 |
| | (70,579 | ) |
Income tax (expense) benefit | — |
| | (73,790 | ) | | 25,151 |
|
Net income (loss) | $ | — |
| | $ | 105,745 |
| | $ | (45,428 | ) |
NOTE 4. CURRENT ACCRUED LIABILITIES AND OTHER NON-CURRENT LIABILITIES
The table below presents comparative detailed information about our current accrued liabilities at December 31, 2011 and 2010:
|
| | | | | | | |
| December 31, 2011 | | December 31, 2010 |
| (in thousands) |
Current Accrued Liabilities: | | | |
Accrued payroll, taxes and employee benefits | $ | 51,558 |
| | $ | 21,499 |
|
Accrued operating expenditures | 40,635 |
| | 36,785 |
|
Income, sales, use and other taxes | 27,764 |
| | 89,416 |
|
Self-insurance reserves | 32,030 |
| | 30,195 |
|
Insurance premium financing | 8,358 |
| | 7,443 |
|
Unsettled legal claims | — |
| | 2,600 |
|
Share-based compensation liabilities | 2,968 |
| | 1,146 |
|
Other | — |
| | 6,021 |
|
Total | $ | 163,313 |
| | $ | 195,105 |
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below presents comparative detailed information about our other non-current accrued liabilities at December 31, 2011 and 2010:
|
| | | | | | | |
| December 31, 2011 | | December 31, 2010 |
| (in thousands) |
Non-Current Accrued Liabilities: | | | |
Asset retirement obligations | $ | 11,928 |
| | $ | 11,003 |
|
Environmental liabilities | 3,953 |
| | 4,011 |
|
Accrued rent | 1,977 |
| | 1,998 |
|
Accrued sales, use and other taxes | 7,191 |
| | 8,397 |
|
Other | 4,036 |
| | 2,549 |
|
Total | $ | 29,085 |
| | $ | 27,958 |
|
NOTE 5. OTHER INCOME, NET
The table below presents comparative detailed information about our other income and expense from continuing operations for the years ended December 31, 2011, 2010 and 2009:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands) |
Interest income | $ | (26 | ) | | $ | (130 | ) | | $ | (481 | ) |
Foreign exchange gain | (3,058 | ) | | (1,681 | ) | | (1,536 | ) |
Gain on sale of equity method investment | (4,783 | ) | | — |
| | — |
|
Other expense (income), net | (1,110 | ) | | (996 | ) | | 1,393 |
|
Total | $ | (8,977 | ) | | $ | (2,807 | ) | | $ | (624 | ) |
NOTE 6. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The table below presents a rollforward of our allowance for doubtful accounts for the years ended December 31, 2011, 2010 and 2009:
|
| | | | | | | | | | | | | | | | | | | |
| | | Additions | | |
| Balance at Beginning of Period | | Charged to Expense | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| (in thousands) |
As of December 31, 2011 | $ | 7,717 |
| | $ | 2,559 |
| | $ | 519 |
| | $ | (2,782 | ) | | $ | 8,013 |
|
As of December 31, 2010 | 5,380 |
| | 3,833 |
| | 896 |
| | (2,392 | ) | | 7,717 |
|
As of December 31, 2009 | 11,336 |
| | 3,295 |
| | — |
| | (9,251 | ) | | 5,380 |
|
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
| | | | | | | |
| December 31, |
| 2011 | | 2010 |
| (in thousands) |
Major classes of property and equipment: | | | |
Oilfield service equipment | $ | 1,701,303 |
| | $ | 1,381,792 |
|
Disposal wells | 88,998 |
| | 68,834 |
|
Motor vehicles | 114,047 |
| | 86,896 |
|
Furniture and equipment | 110,668 |
| | 103,493 |
|
Buildings and land | 61,278 |
| | 59,737 |
|
Work in progress | 108,516 |
| | 88,819 |
|
Gross property and equipment | 2,184,810 |
| | 1,789,571 |
|
Accumulated depreciation | (987,510 | ) | | (868,774 | ) |
Net property and equipment | $ | 1,197,300 |
| | $ | 920,797 |
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We capitalize costs incurred during the application development stage of internal-use software. These costs are capitalized to work in progress until such time the application is put in service. For the years ended December 31, 2011, 2010 and 2009, we capitalized costs in the amount of $1.2 million, $14.7 million and $13.1 million, respectively.
Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using an effective interest rate based on related debt until the underlying assets are placed into service. Capitalized interest for the years ended December 31, 2011, 2010 and 2009 was $1.7 million, $3.5 million, and $4.0 million, respectively.
We are obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next two years. The carrying value of assets acquired under capital leases consists of the following:
|
| | | | | | | |
| December 31, |
| 2011 | | 2010 |
| (in thousands) |
Values of assets leased under capital lease obligations: | | | |
Well servicing equipment | $ | 59 |
| | $ | 281 |
|
Motor vehicles | 18,121 |
| | 18,620 |
|
Furniture and fixtures | 3,153 |
| | 3,153 |
|
Gross values | 21,333 |
| | 22,054 |
|
Accumulated depreciation | (17,741 | ) | | (15,738 | ) |
Carrying value of leased assets | $ | 3,592 |
| | $ | 6,316 |
|
Depreciation of assets held under capital leases was $2.8 million, $3.2 million, and $3.5 million for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
There were no asset impairment charges for the years ended December 31, 2011 and 2010.
During the third quarter of 2009, we removed from service and retired a portion of our U.S. rig fleet and associated support equipment, resulting in the recording of a pre-tax asset retirement charge of $65.9 million. We retired these rigs in order to better align supply with demand for well servicing as market activity remained low. The asset retirement charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. These assets were reported under our U.S. segment.
Also, during the third quarter of 2009, we performed an assessment of the fair value of the other assets in our U.S. segment. This assessment resulted in the recording of a pre-tax impairment charge of $31.1 million during the third quarter of 2009. The asset impairment charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of our goodwill for the years ended December 31, 2011 and 2010 are as follows:
|
| | | | | | | | | | | |
| U.S. | | International | | Total |
| (in thousands) |
December 31, 2009 | $ | 316,513 |
| | $ | 28,846 |
| | $ | 345,359 |
|
Purchase price allocation and other adjustments, net | 3,750 |
| | — |
| | 3,750 |
|
Goodwill acquired during the period | 97,784 |
| | — |
| | 97,784 |
|
Impact of foreign currency translation | — |
| | 2 |
| | 2 |
|
December 31, 2010 | 418,047 |
| | 28,848 |
| | 446,895 |
|
Purchase price allocation and other adjustments, net | 16,705 |
| | — |
| | 16,705 |
|
Goodwill acquired during the period | 160,297 |
| | — |
| | 160,297 |
|
Impact of foreign currency translation | — |
| | (1,124 | ) | | (1,124 | ) |
December 31, 2011 | $ | 595,049 |
| | $ | 27,724 |
| | $ | 622,773 |
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of our other intangible assets as of December 31, 2011 and 2010 are as follows:
|
| | | | | | | |
| December 31, 2011 | | December 31, 2010 |
| (in thousands) |
Noncompete agreements: | | | |
Gross carrying value | $ | 19,242 |
| | $ | 15,058 |
|
Accumulated amortization | (12,278 | ) | | (8,224 | ) |
Net carrying value | $ | 6,964 |
| | $ | 6,834 |
|
Patents, trademarks and tradename: | | | |
Gross carrying value | $ | 13,393 |
| | $ | 17,461 |
|
Accumulated amortization | (655 | ) | | (927 | ) |
Net carrying value | $ | 12,738 |
| | $ | 16,534 |
|
Customer relationships and contracts: | | | |
Gross carrying value | $ | 101,064 |
| | $ | 60,057 |
|
Accumulated amortization | (43,098 | ) | | (26,059 | ) |
Net carrying value | $ | 57,966 |
| | $ | 33,998 |
|
Developed technology: | | | |
Gross carrying value | $ | 7,592 |
| | $ | 3,106 |
|
Accumulated amortization | (3,393 | ) | | (2,476 | ) |
Net carrying value | $ | 4,199 |
| | $ | 630 |
|
Customer backlog: | | | |
Gross carrying value | $ | 778 |
| | $ | 762 |
|
Accumulated amortization | (778 | ) | | (607 | ) |
Net carrying value | $ | — |
| | $ | 155 |
|
Total: | | | |
Gross carrying value | $ | 142,069 |
| | $ | 96,444 |
|
Accumulated amortization | (60,202 | ) | | (38,293 | ) |
Net carrying value | $ | 81,867 |
| | $ | 58,151 |
|
Amortization expense for our intangible assets with determinable lives was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) |
2011 | | 2010 | | 2009 |
Noncompete agreements | $ | 4,154 |
| | $ | 2,707 |
| | $ | 3,222 |
|
Patents, trademarks and tradename | 202 |
| | 262 |
| | 489 |
|
Customer relationships and contracts | 15,830 |
| | 7,349 |
| | 8,679 |
|
Developed technology | 883 |
| | 752 |
| | 659 |
|
Customer backlog | 162 |
| | 184 |
| | 167 |
|
Total intangible asset amortization expense | $ | 21,231 |
| | $ | 11,254 |
| | $ | 13,216 |
|
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Of our intangible assets at December 31, 2011, $12.4 million are indefinite-lived tradenames and not subject to amortization. The weighted average remaining amortization periods and expected amortization expense for the next five years for our definite lived intangible assets are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| Weighted average remaining amortization period (years) | | Expected Amortization Expense |
2012 | | 2013 | | 2014 | | 2015 | | 2016 |
| | | (in thousands) |
Noncompete agreements | 2.2 |
| | $ | 3,854 |
| | $ | 1,758 |
| | $ | 1,352 |
| | $ | — |
| | $ | — |
|
Patents, trademarks and tradename | 4.3 |
| | 179 |
| | 123 |
| | 123 |
| | 54 |
| | 40 |
|
Customer relationships and contracts | 8.3 |
| | 18,708 |
| | 16,866 |
| | 8,501 |
| | 5,577 |
| | 3,530 |
|
Developed technology | 19.0 |
| | 221 |
| | 221 |
| | 221 |
| | 221 |
| | 221 |
|
Total intangible asset amortization expense | | | $ | 22,962 |
| | $ | 18,968 |
| | $ | 10,198 |
| | $ | 5,852 |
| | $ | 3,791 |
|
Certain of our goodwill and intangible assets are denominated in currencies other than U.S. Dollars and, as such, the values of these assets are subject to fluctuations associated with changes in exchange rates. Additionally, certain of these assets are also subject to purchase accounting adjustments. The estimated fair values of intangible assets obtained through the Edge acquisition are based on preliminary information which is subject to change until the final valuation is obtained. Additions to goodwill and intangibles during 2011 relate to the Edge acquisition, and are subject to purchase accounting adjustments. Purchase accounting adjustments in 2011 relate to reduction of fixed assets and intangibles acquired from OFS in 2010, and adjustments to the goodwill and intangibles related to the EOT and 5 JAB acquisitions. We do not believe the impact of these purchase accounting adjustments is material to our consolidated financial statements for the year ended December 31, 2010.
We performed our qualitative analysis of goodwill impairment as of December 31, 2011. Based on this analysis, our rig services, fluid management services, intervention services, fishing and rental services and our Canadian reporting unit did not have triggering events that would indicate it was not “more likely than not” that the fair value of these reporting units was higher than the carrying amount. However, we determined it was necessary to perform the first step of the goodwill impairment test for our Russia reporting unit. Under the first step of the goodwill impairment test, we compared the fair value of each reporting unit to its carrying amount, including goodwill. Based on the results of step 1, the fair value of our Russian reporting unit exceeded its carrying value. A key assumption in our model is that revenue related to this reporting unit will increase in future years based on growth and pricing increases. Potential events that could affect this assumption are the level of development, exploration and production activity of, and corresponding capital spending by, oil and natural gas companies in Russia, oil and natural gas production costs, government regulations and conditions in the worldwide oil and natural gas industry. Other possible events that could affect this assumption are the ability to acquire additional assets and deployment of these assets into the region. As this test concluded that the fair value of the Russian reporting unit exceeded its carrying value, the second step of the goodwill impairment test was not required. Because the fair value of the reporting unit exceeded its carrying value, we determined that no impairment of our goodwill associated with our reporting unit existed as of December 31, 2011, and that step two of the impairment test was not required.
Upon completion of the 2010 assessment, the fair value of our rig services, coiled tubing services, fluid management services reporting units and our Russian and Canadian reporting units substantially exceeded their carrying values. Because the fair value of the reporting units substantially exceeded their carrying values, we determined that no potential for impairment of our goodwill associated with those reporting units existed as of December 31, 2010, and that step two of the impairment test was not required.
In 2009, we identified triggering events which required us to test our goodwill for impairment during the third quarter of 2009. Upon completion of the 2009 assessment, we recorded a pre-tax impairment charge of $0.5 million to our U.S. segment. The impairment charge is included in the line item “asset retirements and impairments” in the consolidated statements of operations for the year ended December 31, 2009. We tested our goodwill for potential impairment again on the 2009 annual testing date. The results of that test indicated that none of our reporting units that had goodwill had a fair value which was not substantially in excess of its carrying value, and no goodwill existed at any of our reporting units that were at risk of failing step one of the goodwill impairment test.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9. EARNINGS PER SHARE
The following table presents our basic and diluted earnings per share for the years ended December 31, 2011, 2010 and 2009:
|
| | | | | | | | | | | |
| Year Ended December 31, |
2011 | | 2010 | | 2009 |
(in thousands, except per share amounts) |
Basic EPS Calculation: | | | | | |
Numerator | | | | | |
Income (loss) from continuing operations attributable to Key | $ | 112,142 |
| | $ | (21,258 | ) | | $ | (102,214 | ) |
Income (loss) from discontinued operations, net of tax | (10,681 | ) | | 94,753 |
| | (53,907 | ) |
Income (loss) attributable to Key | $ | 101,461 |
| | $ | 73,495 |
| | $ | (156,121 | ) |
Denominator | | | | | |
Weighted average shares outstanding | 145,909 |
| | 129,368 |
| | 121,072 |
|
Basic earnings (loss) per share from continuing operations attributable to Key | $ | 0.77 |
| | $ | (0.16 | ) | | $ | (0.84 | ) |
Basic earnings (loss) per share from discontinued operations | (0.07 | ) | | 0.73 |
| | (0.45 | ) |
Basic earnings (loss) per share attributable to Key | $ | 0.70 |
| | $ | 0.57 |
| | $ | (1.29 | ) |
Diluted EPS Calculation: | | | | | |
Numerator | | | | | |
Income (loss) from continuing operations attributable to Key | $ | 112,142 |
| | $ | (21,258 | ) | | $ | (102,214 | ) |
Income (loss) from discontinued operations, net of tax | (10,681 | ) | | 94,753 |
| | (53,907 | ) |
Income (loss) attributable to Key | $ | 101,461 |
| | $ | 73,495 |
| | $ | (156,121 | ) |
Denominator | | | | | |
Weighted average shares outstanding | 145,909 |
| | 129,368 |
| | 121,072 |
|
Stock options | 201 |
| | — |
| | — |
|
Warrants | 48 |
| | — |
| | — |
|
Stock appreciation rights | 59 |
| | — |
| | — |
|
Total | 146,217 |
| | 129,368 |
| | 121,072 |
|
Diluted earnings (loss) per share from continuing operations attributable to Key | $ | 0.76 |
| | $ | (0.16 | ) | | $ | (0.84 | ) |
Diluted earnings (loss) per share from discontinued operations | (0.07 | ) | | 0.73 |
| | (0.45 | ) |
Diluted earnings (loss) per share attributable to Key | $ | 0.69 |
| | $ | 0.57 |
| | $ | (1.29 | ) |
Stock options, warrants and SARs are included in the computation of diluted earnings per share using the treasury stock method. Restricted stock awards are legally considered issued and outstanding when granted and are included in basic weighted average shares outstanding. The diluted earnings per share calculation for the years ended December 31, 2011, 2010 and 2009 excludes the potential exercise of 1.3 million, 2.8 million and 3.5 million stock options, respectively, because the effect would be anti-dilutive. For 2011, these options were considered anti-dilutive because the exercise prices exceeded the average price of our stock. None of our SARs were anti-dilutive for the year ended December 31, 2011. The diluted earnings per share calculation for the years ended December 31, 2010 and 2009 each exclude the potential exercise of 0.4 million SARs because the effects of such exercises on earnings per share in those periods would be anti-dilutive. For 2010 and 2009, these options and SARs would be anti-dilutive because of our net loss from continuing operations in those years.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 10. ASSET RETIREMENT OBLIGATIONS
In connection with our well servicing activities, we operate a number of SWD facilities. Our operations involve the transportation, handling and disposal of fluids in our SWD facilities that are by-products of the drilling process. SWD facilities used in connection with our fluid hauling operations are subject to future costs associated with the retirement of these properties. As a result, we have incurred costs associated with the proper storage and disposal of these materials.
Annual amortization of the assets associated with the asset retirement obligations was $0.6 million, $0.5 million, and $0.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. A summary of changes in our asset retirement obligations is as follows (in thousands):
|
| | | |
| |
Balance at December 31, 2009 | $ | 10,045 |
|
Additions | 1,023 |
|
Costs incurred | (342 | ) |
Accretion expense | 525 |
|
Disposals | (248 | ) |
Balance at December 31, 2010 | 11,003 |
|
Additions | 741 |
|
Costs incurred | (400 | ) |
Accretion expense | 594 |
|
Disposals | (10 | ) |
Balance at December 31, 2011 | $ | 11,928 |
|
NOTE 11. EQUITY METHOD INVESTMENTS
IROC Energy Services Corp.
In April 2011, we sold all of our equity interest (approximately 8.7 million shares) in IROC Energy Services Corp. (“IROC”), an Alberta-based oilfield services company, for $12.0 million, net of fees. We recorded a net gain on sale of $4.8 million (including the write-off of the cumulative translation adjustment of $1.1 million, net of tax) during the second quarter of 2011, as the proceeds received exceeded the carrying value of our investment.
NOTE 12. VARIABLE INTEREST ENTITIES
On March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services LLC (“AlMansoori”) to form the joint venture AlMansoori Key Energy Services LLC under the laws of Abu Dhabi, UAE. The purpose of the joint venture is to engage in conventional workover and drilling services, pressure pumping services, coiled tubing services, fishing and rental tools and services, rig monitoring services, pipe handling services, fluids, waste treatment, and handling services, and wireline services. AlMansoori holds a 51% interest in the joint venture while we hold a 49% interest. Future capital contributions to the joint venture will be made on equal terms and in equal amounts, and any future share capital increases will be issued in proportion to the initial share capital percentages but paid for by AlMansoori and Key in equal amounts. Also, we share the profits and losses of the joint venture on equal terms and in equal amounts with AlMansoori. However, we hold three of the five board of directors seats and a controlling financial interest. The joint venture does not have sufficient resources to carry on its activities without our financial support; accordingly, we have determined it to be a variable interest entity of which we are the primary beneficiary. We consolidate the entity in our financial statements.
For the years ended December 31, 2011 and 2010, we recognized $10.2 million and $1.0 million of revenue, respectively, and $0.3 million of net income and $1.5 million of net loss, respectively, associated with this joint venture. Also, we have guaranteed the performance of the joint venture under its sole services contract valued at $2.0 million. At December 31, 2011 and 2010, there were $12.4 million and $2.5 million of assets, respectively, and $13.4 million and $4.0 million of liabilities associated with the joint venture. Also, creditors of the joint venture have no recourse against us other than the $2.0 million performance guarantee previously mentioned.
Key Energy Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of December 31, 2011 and 2010.
Cash, cash equivalents, accounts payable and accrued liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet date.
|
| | | | | | | | | | | | | | | |
| December 31, 2011 | | December 31, 2010 |
Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(in thousands) |
Financial assets: | | | | | | | |
Notes and accounts receivable — related parties | $ | 735 |
| | $ | 735 |
| | $ | 1,198 |
| | $ | 1,198 |
|
Financial liabilities: | | | | | | | |
6.75% Senior Notes | $ | 475,000 |
| | $ | 472,625 |
| | $ | — |
| | $ | — |
|
8.375% Senior Notes | 3,573 |
| | 3,731 |
| | 425,000 |
| | 450,500 |
|
Credit Facility revolving loans | 295,000 |
| | 295,000 |
| | — |
| | — |
|
Notes receivable-related parties. The amounts reported relate to notes receivable from certain of our employees related to relocation and retention agreements and certain trade accounts receivable with affiliates. The carrying values of these items approximate their fair values as of the applicable balance sheet dates.
6.75% Senior Notes due 2021. The fair value of our 2021 Notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of December 31, 2011 was $475.0 million, and the fair value was $472.6 million (99.5% of carrying value).
8.375% Senior Notes due 2014. The fair value of our 2014 Notes is based upon the quoted market prices for those securities as of the dates indicated. The carrying value of these notes as of December 31, 2011 was $3.6 million and the fair value was $3.7 million (104.43% of carrying value).
Credit Facility Revolving Loans. Because of their variable interest rates, the fair values of the revolving loans borrowed under our amended 2011 Credit Facility approximate their carrying values. The carrying and fair values of these loans as of December 31, 2011 were $295 million.
NOTE 14. INCOME TAXES
The components of our income tax expense are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2011 | | 2010 | | 2009 |
| (in thousands) |
Current income tax (expense) benefit: | | | | | |
Federal and state | $ | 28,291 |
| | $ | 11,134 |
| | $ | 38,878 |
|
Foreign | (796 | ) | | (3,218 | ) | | (4,558 | ) |
| 27,495 |
| | 7,916 |
| | 34,320 |
|
Deferred income tax (expense) benefit: | | | | | |
Federal and state | (89,421 | ) | | (2,959 | ) | |