e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file no. 001-32693
Basic Energy Services, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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54-2091194
(I.R.S. Employer
Identification No.) |
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400 W. Illinois, Suite 800
Midland, Texas
(Address of principal executive offices)
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79701
(Zip code) |
Registrants telephone number, including area code:
(432) 620-5500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Act). (Check one)
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
40,895,967 shares of
the registrants Common Stock were outstanding as of November 7, 2007.
BASIC ENERGY SERVICES, INC.
Index to Form 10-Q
2
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains certain statements that are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
We have based these forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of our business. These
forward-looking statements are subject to a number of risks, uncertainties and assumptions,
including, among other things, the risk factors discussed in this quarterly report and other
factors, most of which are beyond our control.
The words believe, may, estimate, continue, anticipate, intend, plan, expect
and similar expressions are intended to identify forward-looking statements. All statements other
than statements of current or historical fact contained in this quarterly report are forward
looking-statements. Although we believe that the forward-looking statements contained in this
quarterly report are based upon reasonable assumptions, the forward-looking events and
circumstances discussed in this quarterly report may not occur and actual results could differ
materially from those anticipated or implied in the forward-looking statements.
Important factors that may affect our expectations, estimates or projections include:
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a decline in, or substantial volatility of, oil and gas prices, and any related changes
in expenditures by our customers; |
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the effects of future acquisitions on our business; |
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changes in customer requirements in markets or industries we serve; |
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competition within our industry; |
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general economic and market conditions; |
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our access to current or future financing arrangements; |
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our ability to replace or add workers at economic rates; and |
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environmental and other governmental regulations. |
Our forward-looking statements speak only as of the date of this quarterly report. Unless
otherwise required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
This quarterly report includes market share, industry data and forecasts that we obtained from
internal company surveys (including estimates based on our knowledge and experience in the industry
in which we operate), market research, consultant surveys, publicly available information, industry
publications and surveys. Industry surveys, publications, consultant surveys and forecasts
generally state that the information contained therein has been obtained from sources believed to
be reliable. Although we believe such information is accurate and reliable, we have not
independently verified any of the data from third party sources cited or used for our managements
industry estimates, nor have we ascertained the underlying economic assumptions relied upon
therein. For example, the number of onshore well servicing rigs in the U.S. could be lower than our
estimate to the extent our two larger competitors have continued to report as stacked rigs
equipment that is not actually complete or subject to refurbishment. Statements as to our position
relative to our competitors or as to market share refer to the most recent available data.
3
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Basic Energy Services, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
57,339 |
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$ |
51,365 |
|
Trade accounts receivable, net of allowance of $6,224 and $3,963, respectively |
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151,520 |
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129,381 |
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Accounts receivable related parties |
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88 |
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94 |
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Federal income tax receivable |
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2,212 |
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|
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Inventories |
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11,078 |
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|
8,409 |
|
Prepaid expenses |
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|
7,672 |
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|
8,873 |
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Other current assets |
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|
4,201 |
|
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|
3,210 |
|
Deferred tax assets |
|
|
10,455 |
|
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|
8,432 |
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|
|
|
|
|
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Total current assets |
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244,565 |
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|
209,764 |
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|
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Property and equipment, net |
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655,928 |
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475,431 |
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Deferred debt costs, net of amortization |
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6,345 |
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6,536 |
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Goodwill |
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217,076 |
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101,579 |
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Other assets |
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5,115 |
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2,950 |
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|
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$ |
1,129,029 |
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$ |
796,260 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
20,953 |
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$ |
20,335 |
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Accrued expenses |
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|
70,064 |
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|
43,719 |
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Income taxes payable |
|
|
|
|
|
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12,301 |
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Current portion of long-term debt |
|
|
16,085 |
|
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|
12,001 |
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Other current liabilities |
|
|
1,338 |
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|
|
1,430 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total current liabilities |
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|
108,440 |
|
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|
89,786 |
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|
|
|
|
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|
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|
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Long-term debt |
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405,324 |
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250,742 |
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Deferred tax liabilities |
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104,925 |
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73,413 |
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Other long-term liabilities |
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5,808 |
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3,069 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock; $.01 par value; 5,000,000 shares authorized; none
designated at September 30, 2007 and December 31, 2006, respectively |
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Common stock; $.01 par value; 80,000,000 shares authorized; 40,925,530
issued; 40,895,967 shares outstanding at September 30, 2007 and 38,297,605
issued; 38,297,605 shares outstanding at December 31, 2006, respectively |
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409 |
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383 |
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Additional paid-in capital |
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313,957 |
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256,527 |
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Retained earnings |
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190,166 |
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|
122,340 |
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Treasury stock, 29,563 shares at September 30, 2007, at cost |
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Total stockholders equity |
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504,532 |
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|
379,250 |
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|
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$ |
1,129,029 |
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$ |
796,260 |
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See accompanying notes to consolidated financial statements.
4
Basic Energy Services, Inc.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share amounts)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(Unaudited) |
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(Unaudited) |
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Revenues: |
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Well servicing |
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$ |
99,274 |
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$ |
88,221 |
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$ |
284,214 |
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$ |
242,840 |
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Fluid services |
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52,696 |
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50,742 |
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156,441 |
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142,724 |
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Completion
and remedial services |
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66,304 |
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42,109 |
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176,177 |
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110,503 |
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Well site construction services |
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10,958 |
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13,483 |
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34,586 |
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36,627 |
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Total revenues |
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229,232 |
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|
194,555 |
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651,418 |
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532,694 |
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Expenses: |
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Well servicing |
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59,319 |
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48,399 |
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|
170,495 |
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|
135,530 |
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Fluid services |
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|
33,299 |
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|
31,231 |
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|
|
97,943 |
|
|
|
86,879 |
|
Completion
and remedial services |
|
|
34,731 |
|
|
|
20,522 |
|
|
|
91,240 |
|
|
|
53,556 |
|
Well site construction services |
|
|
7,603 |
|
|
|
9,414 |
|
|
|
23,440 |
|
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|
25,877 |
|
General and administrative, including stock-based compensation
of $1,073 and $842 in three months ended in 2007 and 2006, and
$3,228 and $2,475 in nine months ended in 2007 and 2006,
respectively |
|
|
25,472 |
|
|
|
20,907 |
|
|
|
73,713 |
|
|
|
59,056 |
|
Depreciation and amortization |
|
|
23,582 |
|
|
|
16,706 |
|
|
|
66,814 |
|
|
|
44,665 |
|
(Gain) loss on disposal of assets |
|
|
58 |
|
|
|
(420 |
) |
|
|
233 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total expenses |
|
|
184,064 |
|
|
|
146,759 |
|
|
|
523,878 |
|
|
|
405,870 |
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|
|
|
|
|
|
|
|
|
|
|
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|
Operating income |
|
|
45,168 |
|
|
|
47,796 |
|
|
|
127,540 |
|
|
|
126,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(7,375 |
) |
|
|
(4,732 |
) |
|
|
(20,159 |
) |
|
|
(12,519 |
) |
Interest income |
|
|
830 |
|
|
|
603 |
|
|
|
1,713 |
|
|
|
1,517 |
|
Loss on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(230 |
) |
|
|
(2,705 |
) |
Other income |
|
|
23 |
|
|
|
75 |
|
|
|
124 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
38,646 |
|
|
|
43,742 |
|
|
|
108,988 |
|
|
|
113,247 |
|
Income tax expense |
|
|
(14,220 |
) |
|
|
(16,414 |
) |
|
|
(40,797 |
) |
|
|
(41,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
24,426 |
|
|
$ |
27,328 |
|
|
$ |
68,191 |
|
|
$ |
71,496 |
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|
|
|
|
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|
|
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Earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
$ |
0.60 |
|
|
$ |
0.81 |
|
|
$ |
1.71 |
|
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted |
|
$ |
0.59 |
|
|
$ |
0.71 |
|
|
$ |
1.66 |
|
|
$ |
1.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,426 |
|
|
$ |
27,328 |
|
|
$ |
68,191 |
|
|
$ |
71,496 |
|
Unrealized gains (losses) on hedging activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Comprehensive Income: |
|
$ |
24,426 |
|
|
$ |
27,328 |
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|
$ |
68,191 |
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|
$ |
71,260 |
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5
Basic Energy Services, Inc.
Consolidated Statements of Stockholders Equity
(in thousands, except share data)
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|
|
|
|
|
|
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Additional |
|
|
|
|
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Retained |
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Treasury |
|
|
Earnings |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Stock |
|
|
(Deficit) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
38,297,605 |
|
|
$ |
383 |
|
|
$ |
256,527 |
|
|
$ |
|
|
|
$ |
122,340 |
|
|
$ |
379,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of restricted stock |
|
|
229,100 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of share based
compensation |
|
|
|
|
|
|
|
|
|
|
3,137 |
|
|
|
|
|
|
|
|
|
|
|
3,137 |
|
Stock issued as compensation
to Chairman of the Board |
|
|
4,000 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Stock issued in JetStar Consolidated Holdings, Inc.
acquisition |
|
|
1,794,759 |
|
|
|
18 |
|
|
|
41,011 |
|
|
|
|
|
|
|
|
|
|
|
41,029 |
|
Stock issued in Sledge Drilling Holding Corp
acquisition |
|
|
430,191 |
|
|
|
4 |
|
|
|
10,161 |
|
|
|
|
|
|
|
|
|
|
|
10,165 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
(462 |
) |
Exercise of stock options |
|
|
169,875 |
|
|
|
2 |
|
|
|
3,032 |
|
|
|
462 |
|
|
|
(365 |
) |
|
|
3,131 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,191 |
|
|
|
68,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2007 (unaudited) |
|
|
40,925,530 |
|
|
$ |
409 |
|
|
$ |
313,957 |
|
|
$ |
|
|
|
$ |
190,166 |
|
|
$ |
504,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
Basic Energy Services, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
68,191 |
|
|
$ |
71,496 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
66,814 |
|
|
|
44,665 |
|
Accretion on asset retirement obligation |
|
|
85 |
|
|
|
69 |
|
Change in allowance for doubtful accounts |
|
|
2,261 |
|
|
|
992 |
|
Amortization of deferred financing costs |
|
|
717 |
|
|
|
589 |
|
Non-cash compensation |
|
|
3,228 |
|
|
|
2,475 |
|
Loss on early extinguishment of debt |
|
|
230 |
|
|
|
2,705 |
|
(Gain) loss on disposal of assets |
|
|
233 |
|
|
|
307 |
|
Deferred income taxes |
|
|
11,551 |
|
|
|
2,943 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,777 |
) |
|
|
(30,611 |
) |
Inventories |
|
|
(657 |
) |
|
|
(199 |
) |
Prepaid expenses and other current assets |
|
|
4,497 |
|
|
|
(6,549 |
) |
Other assets |
|
|
(768 |
) |
|
|
(219 |
) |
Accounts payable |
|
|
(2,450 |
) |
|
|
3,808 |
|
Excess tax benefits from exercise of employee stock options |
|
|
(2,164 |
) |
|
|
(3,626 |
) |
Income tax payable |
|
|
(12,349 |
) |
|
|
3,105 |
|
Other liabilities |
|
|
(901 |
) |
|
|
1,659 |
|
Accrued expenses |
|
|
14,214 |
|
|
|
14,738 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
143,955 |
|
|
|
108,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(82,113 |
) |
|
|
(75,557 |
) |
Proceeds from sale of assets |
|
|
3,082 |
|
|
|
3,548 |
|
Payments for other long-term assets |
|
|
(4,973 |
) |
|
|
(6,006 |
) |
Payments for businesses, net of cash acquired |
|
|
(194,430 |
) |
|
|
(132,853 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(278,434 |
) |
|
|
(210,868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt |
|
|
150,000 |
|
|
|
305,081 |
|
Payments of debt |
|
|
(11,461 |
) |
|
|
(201,678 |
) |
Purchase of treasury stock |
|
|
(462 |
) |
|
|
(227 |
) |
Offering costs related to initial public offering |
|
|
|
|
|
|
(3,218 |
) |
Excess tax benefits from exercise of employee stock options |
|
|
2,164 |
|
|
|
398 |
|
Exercise of employee stock options |
|
|
968 |
|
|
|
3,626 |
|
Deferred loan costs and other financing activities |
|
|
(756 |
) |
|
|
(5,086 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
140,453 |
|
|
|
98,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
5,974 |
|
|
|
(3,625 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period |
|
|
51,365 |
|
|
|
32,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
57,339 |
|
|
$ |
29,220 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
BASIC ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
September 30, 2007 (unaudited)
1. Basis of Presentation and Nature of Operations
Basis of Presentation
The accompanying unaudited consolidated financial statements of Basic Energy Services, Inc.
and subsidiaries (Basic or the Company) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have been made in the
accompanying unaudited financial statements.
Nature of Operations
Basic Energy Services, Inc. provides a range of well site services to oil and gas drilling and
producing companies, including well servicing, fluid services, completion and remedial services and
well site construction services. These services are primarily provided by Basics fleet of
equipment. Basics operations are concentrated in the major United States onshore oil and gas
producing regions in Texas, New Mexico, Oklahoma, Arkansas, Kansas and Louisiana, and the Rocky
Mountain states.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Basic and its
wholly-owned subsidiaries. Basic has no interest in any other organization, entity, partnership, or
contract that could require any evaluation under FASB Interpretation No. 46R or Accounting Research
Bulletin No. 51. All intercompany transactions and balances have been eliminated.
Revenue Recognition
Well Servicing Well servicing consists primarily of maintenance services, workover
services, drilling services, completion services and plugging and abandonment services. Basic
recognizes revenue when services are performed, collection of the relevant receivables is probable,
persuasive evidence of an arrangement exists and the price is fixed or determinable. Basic prices
well servicing by the hour or by the day of service performed.
Fluid Services Fluid services consists primarily of the sale, transportation, storage and
disposal of fluids used in drilling, production and maintenance of oil and natural gas wells. Basic
recognizes revenue when services are performed, collection of the relevant receivables is probable,
persuasive evidence of an arrangement exists and the price is fixed or determinable. Basic prices
fluid services by the job, by the hour or by the quantities sold, disposed of or hauled.
Completion and Remedial Services (formerly Drilling and Completion Services) Basic
recognizes revenue when services are performed, collection of the relevant receivables is probable,
persuasive evidence of an arrangement exists and the price is fixed or determinable. Basic prices
completion and remedial services by the hour, day, or project depending on the type of service
performed. When Basic provides multiple services to a customer, revenue is allocated to the
services performed based on the fair values of the services.
Well Site Construction Services Basic recognizes revenue when services are performed,
collection of the relevant receivables is probable, persuasive evidence of an arrangement exists
and the price is fixed or determinable. Basic prices well site construction services by the hour,
day, or project depending on the type of service performed.
8
Impairments
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are reviewed for
impairment at a minimum annually, or whenever, in managements judgment events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
such assets to estimated undiscounted future cash flows expected to be generated by the assets.
Expected future cash flows and carrying values are aggregated at their lowest identifiable level.
If the carrying amount of such assets exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of such assets exceeds the fair value of
the assets. Assets to be disposed of would be separately presented in the consolidated balance
sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities, if material, of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability sections of the
consolidated balance sheet. These assets are normally sold within a short period of time through a
third party auctioneer.
Goodwill and intangible assets not subject to amortization are tested annually for impairment,
and are tested for impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds
the assets fair value.
Basic had no impairment expense in the nine months ended September 30, 2007 and 2006.
Deferred Debt Costs
Basic capitalizes certain costs in connection with obtaining its borrowings, such as lenders
fees and related attorneys fees. These costs are being amortized to interest expense using the
effective interest method.
Deferred debt costs of approximately $7.6 million at September 30, 2007 and $7.1 million at
December 31, 2006, represent debt issuance costs and are recorded net of accumulated amortization
of $1.2 million and $523,000 at September 30, 2007 and December 31, 2006, respectively.
Amortization of deferred debt costs totaled approximately $245,000 and $40,000 for the three months
ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and
2006, amortization of deferred debt costs totaled approximately $717,000 and $589,000,
respectively.
Goodwill
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142) eliminates the amortization of goodwill and other intangible assets with
indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means
will continue to be amortized over their useful lives. 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. SFAS No. 142 requires a two-step
process for testing impairment. First, the fair value of each reporting unit is compared to its
carrying value to determine whether an indication of impairment exists. If impairment is indicated,
then the fair value of the reporting units goodwill is determined by allocating the units fair
value to its assets and liabilities (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination. The amount of impairment for goodwill
is measured as the excess of its carrying value over its fair value. Basic completed its assessment
of goodwill impairment as of the date of adoption and completed a subsequent annual impairment
assessment as of December 31 each year thereafter. The assessments did not result in any
indications of goodwill impairment.
Basic has identified its reporting units to be well servicing, fluid services, completion and
remedial services and well site construction services. The goodwill allocated to such reporting
units as of September 30, 2007 is $47.1 million, $39.3 million, $127.0 million and $3.7 million,
respectively. The change in the carrying amount of goodwill for the nine months ended September 30,
2007 of $115.5 million relates to goodwill from acquisitions and payments pursuant to contingent
earn-out agreements, with approximately $25.0 million,
$1.0 million and $89.5 million of goodwill
additions relating to the well servicing, fluid services and completion and remedial units,
respectively.
9
Stock-Based Compensation
On January 1, 2006, Basic adopted Statement of Financial Accounting Standards No. 123 (revised
2004) Share-Based Payment (SFAS No. 123R). Prior to January 1, 2006, the Company accounted for
share-based payments under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock issued to Employees (APB No. 25) which was permitted
by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123).
Basic adopted SFAS No. 123R using both the modified prospective method and the prospective
method as applicable to the specific awards granted. The modified prospective method was applied to
awards granted subsequent to the Company becoming a public company. Awards granted prior to the
Company becoming public and which were accounted for under APB No. 25 were adopted by using the
prospective method. The results of prior periods have not been restated. Compensation expense cost
of the unvested portion of awards granted as a private company and outstanding as of January 1,
2006 will continue to be based upon the intrinsic value method calculated under APB No. 25.
Under SFAS No. 123R, entities using the minimum value method and the prospective application
are not permitted to provide the pro forma disclosures (as was required under SFAS No. 123)
subsequent to adoption of SFAS No. 123R since they do not have the fair value information required
by SFAS No. 123R. Therefore, in accordance with SFAS No. 123R, Basic will no longer include pro
forma disclosures that were required by SFAS No. 123.
Concentrations of Credit Risk
Financial instruments, which potentially subject Basic to concentration of credit risk,
consist primarily of temporary cash investments and trade receivables. Basic restricts investment
of temporary cash investments to financial institutions with high credit standing. Basics customer
base consists primarily of multi-national and independent oil and natural gas producers. It
performs ongoing credit evaluations of its customers but generally does not require collateral on
its trade receivables. Credit risk is considered by management to be limited due to the large
number of customers comprising its customer base. Basic maintains an allowance for potential credit
losses on its trade receivables, and such losses have been within managements expectations.
Basic did not have any one customer which represented 10% or more of consolidated revenue
during the nine months ended September 30, 2007 or 2006.
Asset Retirement Obligations
As of January 1, 2003, Basic adopted Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligation (SFAS No. 143). SFAS No. 143 requires Basic to
record the fair value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived assets and
capitalize an equal amount as a cost of the asset depreciating it over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the obligation is
adjusted at the end of each quarter to reflect the passage of time, changes in the estimated future
cash flows underlying the obligation, acquisition or construction of assets, and settlements of
obligations.
Basic owns and operates salt water disposal sites, brine water wells, gravel pits and land
farm sites, each of which is subject to rules and regulations regarding usage and eventual closure.
The following table reflects the changes in the liability during the nine months ended September
30, 2007 (in thousands):
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
1,336 |
|
|
|
|
|
|
Additional asset retirement obligations recognized through acquisitions |
|
|
101 |
|
Accretion expense |
|
|
85 |
|
|
|
|
|
Balance, September 30, 2007 |
|
$ |
1,522 |
|
|
|
|
|
10
Environmental
Basic is subject to extensive federal, state and local environmental laws and regulations.
These laws, which are constantly changing, regulate the discharge of materials into the environment
and may require Basic to remove or mitigate the adverse environmental effects of disposal or
release of petroleum, chemical and other substances at various sites. Environmental expenditures
are expensed or capitalized depending on the future economic benefit. Expenditures that relate to
an existing condition caused by past operations and that have no future economic benefits are
expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable and the costs can be reasonably estimated.
Litigation and Self-Insured Risk Reserves
Basic estimates its reserves related to litigation and self-insured risks based on the facts
and circumstances specific to the litigation and self-insured claims and its past experience with
similar claims in accordance with Statement of Financial Accounting Standard No. 5 Accounting for
Contingencies. Basic maintains accruals in the consolidated balance sheets to cover self-insurance
retentions (See note 6).
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken, in a tax return. Our adoption in January 2007 of FIN 48 did not result in any
change to retained earnings or any additional unrecognized tax benefit. Interest will be recorded
in interest expense and penalties will be recorded in income tax expense. We had no interest or
penalties related to an uncertain tax position during the nine months ended September 30, 2007. The
company files federal income tax returns and state income tax returns in Texas and other state tax
jurisdictions. In general, the companys tax returns for fiscal years after 2002 currently remain
subject to examination by appropriate taxing authorities. None of the companys income tax returns
are under examination at this time.
In September 2006, the FASB issued SFAS No. 157, Fair value Measurements (SFAS 157), which
will become effective for the company on January 1, 2008. This standard defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements but would apply to assets
and liabilities that are required to be recorded at fair value under other accounting standards.
The impact, if any, to the company from the adoption of SFAS 157 in 2008 will depend on the
companys assets and liabilities at that time that are required to be measured at fair value.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159), which becomes effective for the company on January 1, 2008. This
standard permits companies to choose to measure many financial instruments and certain other items
at fair value and report unrealized gains and losses in earnings. Such accounting is optional and
is generally to be applied instrument by instrument. The Company does not anticipate that the
adoption of SFAS 159 will have a material effect on its results of operations or consolidated
financial position.
11
3. Acquisitions
In 2007 and 2006, Basic acquired either substantially all of the assets or all of the
outstanding capital stock of each of the following businesses, each of which were accounted for
using the purchase method of accounting (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Paid (net of |
|
|
|
Closing Date |
|
cash acquired) |
|
|
|
|
|
|
|
|
|
|
LeBus Oil Field Services Co. |
|
January 31, 2006 |
|
$ |
24,618 |
|
G&L Tool, Ltd. |
|
February 28, 2006 |
|
|
58,514 |
|
Arkla Cementing, Inc. |
|
March 27, 2006 |
|
|
5,012 |
|
Globe Well Service, Inc. |
|
May 30, 2006 |
|
|
11,674 |
|
Hydro-Static Tubing Testers, Inc. |
|
July 6, 2006 |
|
|
1,143 |
|
Hennessey Rental Tools, Inc. |
|
August 1, 2006 |
|
|
8,205 |
|
Stimulation Services, LLC |
|
August 1, 2006 |
|
|
4,500 |
|
Chaparral Service, Inc. |
|
August 15, 2006 |
|
|
17,605 |
|
Reddline Services, LLC |
|
August 24, 2006 |
|
|
1,900 |
|
Rebel Testers, Ltd. |
|
September 14, 2006 |
|
|
2,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2006 |
|
|
|
|
|
$ |
135,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parker Drilling Offshore USA, LLC |
|
January 3, 2007 |
|
|
20,500 |
|
Davis Tool Company, Inc. |
|
January 17, 2007 |
|
|
4,026 |
|
JetStar Consolidated Holdings, Inc. |
|
March 6, 2007 |
|
|
79,828 |
|
Sledge Drilling Holding Corp. |
|
April 2, 2007 |
|
|
50,433 |
|
Eagle Frac Tank Rentals, LP |
|
May 30, 2007 |
|
|
3,800 |
|
Wildhorse Services, Inc. |
|
June 1, 2007 |
|
|
17,405 |
|
Bilco Machine, Inc. |
|
June 21, 2007 |
|
|
491 |
|
Steve Carter Inc. and Hughes Services Inc. |
|
September 26, 2007 |
|
|
17,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total through September 30, 2007 |
|
|
|
|
|
$ |
194,430 |
|
|
|
|
|
|
|
|
|
The operations of each of the acquisitions listed above are included in Basics statement of
operations as of each respective closing date. The acquisitions of G&L Tool, Ltd. in 2006 and
JetStar Consolidated Holdings, Inc. and Sledge Drilling Holding Corp. in 2007 have been deemed
material and are discussed below in further detail.
Contingent Earn-out Arrangements and Purchase Price Allocations
Contingent earn-out arrangements are generally arrangements entered into on certain
acquisitions to encourage the owner/manager to continue operating and building the business after
the purchase transaction. The contingent earn-out arrangements of the related acquisitions are
generally linked to certain financial measures and performance of the assets acquired in the
various acquisitions. All amounts paid or reasonably accrued for related to the contingent earn-out
payments are reflected as increases to the goodwill associated with the acquisition or compensation
expense depending on the terms and conditions of the earn-out arrangement.
G&L Tool, Ltd.
On February 28, 2006, Basic acquired substantially all of the assets of G&L Tool, Ltd. (G&L)
for $58.5 million plus a contingent earn-out payment not to exceed $21.0 million. The contingent
earn-out payment will be equal to
fifty percent of the amount by which the annual EBITDA (as defined in the purchase agreement)
earned by the G&L assets exceeds an annual targeted EBITDA. There is no guarantee or assurance that
the targeted EBITDA will be reached. This acquisition provided a platform to expand into the rental
and fishing tool market. The cost of the G&L acquisition was allocated $40.8 million to property
and equipment, $5.2 million to inventory, $12.5 million to goodwill, all of which is expected to be
deductible for tax purposes, and $51,000 to non-compete agreements.
12
JetStar Consolidated Holdings, Inc.
On March 6, 2007, Basic acquired all of the capital stock of JetStar Consolidated Holdings,
Inc. (JetStar). The results of JetStars operations have been included in the financial
statements since that date. The aggregate purchase price was approximately $121.2 million,
including $80.2 million in cash which included the retirement of JetStars outstanding debt. Basic
issued 1,794,759 shares of common stock, at a fair value of $22.86 per share for a total fair value
of approximately $41 million. The value of the 1,794,759 shares issued was determined based on the
average market price of Basics common shares over the 2-day period before and after the date the
number of shares were determined. This acquisition allowed us to enter into the Kansas market and
increased our presence in North Texas. JetStar will operate in Basics completion and remedial
segment. The purchase price will be adjusted and finalized when the Company completes its analysis
of identifiable intangible assets. The following table summarizes the preliminary estimated fair
value of the assets acquired and liabilities assumed at the date of acquisition for JetStar (in
thousands):
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
$ |
11,639 |
|
Property and Equipment |
|
|
60,283 |
|
Goodwill (1) |
|
|
73,078 |
|
|
|
|
|
|
|
|
|
|
Total Assets Acquired |
|
|
145,000 |
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
(10,538 |
) |
Deferred Income Taxes |
|
|
(13,270 |
) |
Current and Long Term Debt (2) |
|
|
(37,563 |
) |
|
|
|
|
|
|
|
|
|
Total Liabilities Assumed |
|
|
(61,371 |
) |
|
|
|
|
|
|
|
|
|
Net Assets Acquired |
|
|
83,629 |
|
|
|
|
|
|
|
|
(1) |
|
Approximately $24 million is expected to be deductible for tax purposes |
|
(2) |
|
Total balance was paid by Basic on the closing date |
Sledge Drilling Holding Corp.
On April 2, 2007, Basic acquired all of the capital stock of Sledge Drilling Holding Corp.
(Sledge). The results of Sledges operations have been included in the financial statements since
that date. The aggregate purchase price was approximately $61.8 million, including $51.6 million in
cash which included the retirement of Sledges outstanding debt. Basic issued 430,191 shares of
common stock at a fair value of $23.63 per share for a total fair value of approximately $10.2
million. The value of the 430,191 shares issued was determined based on the average market price of
Basics common shares over the 2-day period before and after the date the number shares were
determined. This acquisition allowed Basic to expand its drilling operations in the Permian Basin.
The purchase price will be adjusted and finalized when Basic receives an appraisal of fair value of
property and equipment received and completes its analysis of identifiable intangible assets. The
following table summarizes the preliminary estimated fair value of the assets acquired and
liabilities assumed at the date of acquisition for Sledge (in thousands):
13
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
$ |
6,029 |
|
Property and Equipment |
|
|
36,681 |
|
Long Term Assets |
|
|
20 |
|
Goodwill (1) |
|
|
23,164 |
|
|
|
|
|
|
|
|
|
|
Total Assets Acquired |
|
|
65,894 |
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
(285 |
) |
Deferred Income Taxes |
|
|
(3,866 |
) |
Current and Long Term Debt (2) |
|
|
(19,093 |
) |
|
|
|
|
|
|
|
|
|
Total Liabilities Assumed |
|
|
(23,244 |
) |
|
|
|
|
|
|
|
|
|
Net Assets Acquired |
|
|
42,650 |
|
|
|
|
|
|
|
|
(1) |
|
None of which is expected to be deducted for tax purposes |
|
(2) |
|
Total balance was paid by Basic on the closing date |
Revisions to the fair values, which may be significant, will be recorded by the Company as
further adjustments to the purchase price allocations.
The following unaudited pro-forma results of operations have been prepared as though the
JetStar, Sledge, and G&L acquisitions had been completed on January 1, 2006. Pro forma amounts are
based on the purchase price allocations of the significant acquisitions and are not necessarily
indicative of the results that may be reported in the future (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
673,977 |
|
|
$ |
608,272 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
73,597 |
|
|
$ |
85,710 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
$ |
1.85 |
|
|
$ |
2.57 |
|
Earnings per common share diluted |
|
$ |
1.80 |
|
|
$ |
2.23 |
|
Basic does not believe the pro-forma effect of the remainder of the acquisitions completed in
2006 or 2007 are material, either individually or when aggregated, to the reported results of
operations.
14
4. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
4,391 |
|
|
$ |
2,913 |
|
Buildings and improvements |
|
|
20,476 |
|
|
|
13,293 |
|
Well service units and equipment |
|
|
389,399 |
|
|
|
283,084 |
|
Fluid services equipment |
|
|
92,372 |
|
|
|
87,139 |
|
Brine and fresh water stations |
|
|
8,728 |
|
|
|
8,710 |
|
Frac/test tanks |
|
|
84,992 |
|
|
|
49,582 |
|
Pressure pumping equipment |
|
|
135,814 |
|
|
|
67,540 |
|
Construction equipment |
|
|
28,243 |
|
|
|
27,342 |
|
Disposal facilities |
|
|
27,059 |
|
|
|
25,913 |
|
Vehicles |
|
|
37,097 |
|
|
|
32,215 |
|
Rental equipment |
|
|
34,584 |
|
|
|
32,548 |
|
Aircraft |
|
|
4,119 |
|
|
|
4,119 |
|
Other |
|
|
13,421 |
|
|
|
8,807 |
|
|
|
|
|
|
|
|
|
|
|
880,695 |
|
|
|
643,205 |
|
Less accumulated depreciation and amortization |
|
|
224,767 |
|
|
|
167,774 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
655,928 |
|
|
$ |
475,431 |
|
|
|
|
|
|
|
|
15
Basic is obligated under various capital leases for certain vehicles and equipment that expire
at various dates during the next five years. The gross amount of property and equipment and related
accumulated amortization recorded under capital leases and included above consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Light vehicles |
|
$ |
25,179 |
|
|
$ |
23,843 |
|
Well service units and equipment |
|
|
1,099 |
|
|
|
808 |
|
Fluid services equipment |
|
|
32,606 |
|
|
|
26,460 |
|
Pressure pumping equipment |
|
|
3,622 |
|
|
|
1,820 |
|
Construction equipment |
|
|
3,559 |
|
|
|
3,559 |
|
Software |
|
|
5,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,677 |
|
|
|
56,490 |
|
Less accumulated amortization |
|
|
19,868 |
|
|
|
13,785 |
|
|
|
|
|
|
|
|
|
|
$ |
51,809 |
|
|
$ |
42,705 |
|
|
|
|
|
|
|
|
Amortization of assets held under capital leases of approximately $6,083,000 and $3,808,000
for the nine months ended September 30, 2007 and 2006 and $2,263,000 and $1,432,000 for the three
months ended September 30, 2007 and 2006 respectively, is included in depreciation and amortization
expense in the consolidated statements of operations.
5. Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Credit Facilities: |
|
|
|
|
|
|
|
|
Revolver |
|
$ |
150,000 |
|
|
$ |
|
|
7.125% Senior Notes |
|
|
225,000 |
|
|
|
225,000 |
|
Capital leases and other notes |
|
|
46,409 |
|
|
|
37,743 |
|
|
|
|
|
|
|
|
|
|
|
421,409 |
|
|
|
262,743 |
|
Less current portion |
|
|
16,085 |
|
|
|
12,001 |
|
|
|
|
|
|
|
|
|
|
$ |
405,324 |
|
|
$ |
250,742 |
|
|
|
|
|
|
|
|
Senior Notes
On April 12, 2006, the Company issued $225.0 million of 7.125% Senior Notes due April 2016 in
a private placement. Proceeds from the sale of the Senior Notes were used to retire the outstanding
balance on the $90.0 million Term B Loan and to pay down approximately $96.0 million under the
revolving credit facility, which amounts may be reborrowed to fund future acquisitions or for
general corporate purposes. Interest payments on the Senior Notes are due semi-annually, on April
15 and October 15, which began on October 15, 2006. The Senior Notes are unsecured. Under the terms
of the sale of the Senior Notes, the Company was required to take appropriate steps to offer to
exchange other Senior Notes with the same terms that have been registered with the Securities and
Exchange Commission for the private placement Senior Notes. The Company completed the exchange
offer for all of the Senior Notes on October 16, 2006.
The Senior Notes are redeemable at the option of the Company on or after April 15, 2011 at the
specified redemption price as described in the Indenture. Prior to April 15, 2011, the Company may
redeem, in whole or in part, at a redemption price equal to 100% of the principal amount of the
Senior Notes redeemed plus the Applicable Premium as defined in the Indenture. Prior to April 15,
2009, the Company may redeem up to 35% of the Senior Notes with the proceeds of certain equity
offerings at a redemption price equal to 107.125% of the principal amount
16
of the 7.125% Senior Notes, plus accrued and unpaid interest to the date of redemption. This
redemption must occur less than 90 days after the date of the closing of any such equity offering.
Following a change of control, as defined in the Indenture, the Company will be required to
make an offer to repurchase all or any portion of the 7.125% Senior Notes at a purchase price of
101% of the principal amount, plus accrued and unpaid interest to the date of repurchase.
Pursuant to the Indenture, the Company is subject to covenants that limit the ability of the
Company and its restricted subsidiaries to, among other things: incur additional indebtedness, pay
dividends or repurchase or redeem capital stock, make certain investments, incur liens, enter into
certain types of transactions with affiliates, limit dividends or other payments by restricted
subsidiaries, and sell assets or consolidate or merge with or into other companies. These
limitations are subject to a number of important qualifications and exceptions set forth in the
Indenture. The Company was in compliance with the restrictive covenants at September 30, 2007.
As part of the issuance of the above-mentioned Senior Notes, the Company incurred debt
issuance costs of approximately $4.6 million, which are being amortized to interest expense using
the effective interest method over the term of the Senior Notes.
The Senior Notes are jointly and severally guaranteed by the Company and all of its restricted
subsidiaries. Basic Energy Services, Inc., the ultimate parent company, does not have any
independent operating assets or operations. Subsidiaries other than the restricted subsidiaries
that are guarantors are minor.
2007 Credit Facility
On February 6, 2007, Basic entered into a $225 million Fourth Amended and Restated Credit
Agreement with a syndicate of lenders (the 2007 Credit Facility), which refinanced all of the
existing credit facilities. Under the 2007 Credit Facility, Basic Energy Services, Inc. is the sole
borrower and each of our subsidiaries is a subsidiary guarantor. The 2007 Credit Facility provides
for a $225 million revolving line of credit (Revolver). The 2007 Credit Facility includes
provisions allowing us to request an increase in commitments of up to $100.0 million aggregate
principal amount at any time. Additionally, the 2007 Credit Facility permits us to make greater
expenditures for acquisitions, capital expenditures and capital leases and to incur greater
purchase money obligations, acquisition indebtedness and general unsecured indebtedness. The
commitment under the Revolver provides for (1) the borrowing of funds, (2) the issuance of up to
$30 million of letters of credit and (3) $2.5 million of swing-line loans. All of the outstanding
amounts under the Revolver are due and payable on December 15, 2010. The 2007 Credit Facility is
secured by substantially all of our tangible and intangible assets. Basic incurred approximately
$0.7 million in debt issuance costs in connection with the 2007 Credit Facility.
At Basics option, borrowings under the Revolver bears interest at either (1) the Alternative
Base Rate (i.e., the higher of the banks prime rate or the federal funds rate plus .50% per year)
plus a margin ranging from 0.25% to 0.5% or (2) an Adjusted LIBOR Rate (equal to (a) the London
Interbank Offered Rate (the LIBOR rate) as determined by the Administrative Agent in effect for
such interest period divided by (b) one minus the Statutory Reserves, if any, for such borrowing
for such interest period) plus a margin ranging from 1.25% to 1.5%. The margins vary depending on
our leverage ratio. Fees on the letters of credit are due quarterly on the outstanding amount of
the letters of credit at a rate ranging from 1.25% to 1.5% for participation fees and 0.125% for
fronting fees. A commitment fee is due quarterly on the available borrowings under the Revolver at
a rate of 0.375%.
At September 30, 2007, Basic, under its Revolver, had outstanding $150.0 million of borrowings
and $15.5 million of letters of credit and no amounts outstanding in swing-line loans. At September
30, 2007, Basic had availability under its Revolver of $59.5 million.
Pursuant to the 2007 Credit Facility, Basic must apply proceeds from certain specified events
to reduce principal outstanding borrowings under the Revolver, from (a) assets sales greater than
$2.0 million individually or $7.5 million in the aggregate on an annual basis, (b) 100% of the net
cash proceeds from any debt issuance, including certain permitted unsecured senior or senior
subordinated debt, but excluding certain other permitted debt issuances
17
and (c) 50% of the net cash proceeds from any equity issuance (including equity issued upon
the exercise of any warrant or option).
The 2007 Credit Facility contains various restrictive covenants and compliance requirements,
which include (a) limitations on the incurrence of additional indebtedness, (b) restrictions on
mergers, sales or transfer of assets without the lenders consent (c) limitations on dividends and
distributions and (d) various financial covenants, including (1) a maximum leverage ratio of 3.50
to 1.00, reducing to 3.25 to 1.00 on April 1, 2007, and (2) a minimum interest coverage ratio of
3.00 to 1.00. At September 30, 2007, Basic was in compliance with its covenants.
2005 Credit Facility
On December 15, 2005, Basic entered into a $240 million Third Amended and Restated Credit
Agreement with a syndicate of lenders (2005 Credit Facility), which refinanced all of its then
existing credit facilities. The 2005 Credit Facility, as amended effective March 28, 2006, provided
for a $90 million Term B Loan (2005 Term B Loan) and a $150 million revolving line of credit
(Revolver). The commitment under the Revolver allowed for (a) the borrowing of funds (b) issuance
of up to $30 million of letters of credit and (c) $2.5 million of swing-line loans (next day
borrowing). The amounts outstanding under the 2005 Term B Loan required quarterly amortization at
various amounts during each quarter with all amounts outstanding on December 15, 2011 being due and
payable in full. All the outstanding amounts under the Revolver were due and payable on December
15, 2010. The 2005 Credit Facility was secured by substantially all of Basics tangible and
intangible assets. Basic incurred approximately $1.8 million in debt issuance costs in obtaining
the 2005 Credit Facility.
At Basics option, borrowings under the 2005 Term B Loan bore interest at either the (a)
Alternative Base Rate (i.e. the higher of the banks prime rate or the federal funds rate plus .5% per annum) plus 1% or (b) the LIBOR rate plus 2.0%. At December 31, 2006, Basic had paid
outstanding borrowings under the Term B Loan in full; therefore, a Term B Loan weighted average
interest rate was not calculated. However, at December 31, 2005, Basics weighted average interest
rate on its Term B Loan was 6.4%.
At Basics option, borrowings under the 2005 Revolver bore interest at either the (a)
Alternative Base Rate (i.e. the higher of the banks prime rate or the federal funds rate plus .5% per annum) plus a margin ranging from .50% to 1.25% or (b) the LIBOR rate plus a margin ranging
from 1.5% to 2.25%. The margins vary depending on Basics leverage ratio. At December 31, 2006,
Basics margin on Alternative Base Rates and LIBOR tranches was .75% and 1.75%, respectively. Fees
on the letters of credit are due quarterly on the outstanding amount of the letters of credit at a
rate ranging from 1.5% to 2.25% for participation fees and .125% for fronting fees. A commitment
fee was due quarterly on the available borrowings under the Revolver
at rates ranging from .375% to .5%.
At December 31, 2006, Basic, under its Revolver, had no outstanding borrowings and $10.6
million of letters of credit and no amounts outstanding in swing-line loans. At December 31, 2006,
Basic had availability under its Revolver of $139.4 million. On February 6, 2007, Basic amended and
restated its 2005 Credit Facility by entering into its 2007 Credit Facility, as described above.
Other Debt
Basic has a variety of other capital leases and notes payable outstanding that are generally
customary in its business. None of these debt instruments are individually material.
Basics interest expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Interest expense on outstanding debt |
|
$ |
17,446 |
|
|
$ |
10,674 |
|
Interest expense on capital leases |
|
|
1,186 |
|
|
|
1,123 |
|
Commitment and other fees |
|
|
492 |
|
|
|
566 |
|
Amortization of debt issuance costs |
|
|
717 |
|
|
|
589 |
|
Gain on hedging activity |
|
|
|
|
|
|
(433 |
) |
Other |
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,159 |
|
|
$ |
12,519 |
|
|
|
|
|
|
|
|
18
Losses on Extinguishment of Debt
In February 2007 and April 2006, Basic recognized a loss on the early extinguishment of debt.
In February 2007, Basic wrote off unamortized debt issuance costs of approximately $230,000, which
related to the 2005 Credit Facility. In April 2006, Basic wrote off unamortized debt issuance costs
of approximately $2.7 million, which related to the prepayment of the Term B loan.
6. Commitments and Contingencies
Environmental
Basic is subject to various federal, state and local environmental laws and regulations that
establish standards and requirements for protection of the environment. Basic cannot predict the
future impact of such standards and requirements which are subject to change and can have
retroactive effectiveness. Basic continues to monitor the status of these laws and regulations.
Management believes that the likelihood of the disposition of any of these items resulting in a
material adverse impact to Basics financial position, liquidity, capital resources or future
results of operations is remote.
Currently, Basic has not been fined, cited or notified of any environmental violations that
would have a material adverse effect upon its financial position, liquidity or capital resources.
However, management does recognize that by the very nature of its business, material costs could be
incurred in the near term to bring Basic into total compliance. The amount of such future
expenditures is not determinable due to several factors including the unknown magnitude of possible
contamination, the unknown timing and extent of the corrective actions which may be required, the
determination of Basics liability in proportion to other responsible parties and the extent to
which such expenditures are recoverable from insurance or indemnification.
Litigation
From time to time, Basic is a party to litigation or other legal proceedings that Basic
considers to be a part of the ordinary course of business. Basic is not currently involved in any
legal proceedings that it considers probable or reasonably possible, individually or in the
aggregate, to result in a material adverse effect on its financial condition, results of operations
or liquidity.
Self-Insured Risk Accruals
Basic is self-insured up to retention limits as it relates to workers compensation and
medical and dental coverage of its employees. Basic, generally, maintains no physical property
damage coverage on its workover rig fleet, with the exception of certain of its 24-hour workover
rigs and newly manufactured rigs. Basic has deductibles per occurrence for workers compensation
and medical and dental coverage of $250,000 and $175,000, respectively. Basic has lower deductibles
per occurrence for automobile liability and general liability. Basic maintains accruals in the
accompanying consolidated balance sheets related to self-insurance retentions by using third-party
data and claims history.
At September 30, 2007 and December 31, 2006, self-insured risk accruals totaled approximately
$15.8 million and $12.6 million, net of a $652,000 receivable for medical and dental coverage,
respectively.
7. Stockholders Equity
Common Stock
In February 2004, Basic granted certain officers and directors 837,500 restricted shares of
common stock. The shares vest 25% per year for four years from the award date and are subject to
other vesting and forfeiture provisions. The estimated fair value of the restricted shares was $5.8
million at the date of the grant and was recorded as deferred compensation, a component of
stockholders equity. This amount is being charged to expense over the respective vesting period
and totaled approximately $278,000 and $272,000 for the three months ended September 30, 2007 and
2006, respectively. For the nine months ended September 30, 2007 and 2006, the amount charged to
expense over the respective vesting period totaled approximately $955,000 and $966,000,
respectively.
19
In December 2005, Basic issued 5,000,000 shares of common stock during the Companys initial
public offering to a group of investors for $100 million or $20 per share. After deducting fees,
this resulted in net proceeds to Basic totaling approximately $91.5 million.
On October 5, 2006, all outstanding common stock warrants issued to a group of related
investors in 2002 were exercised to purchase an aggregate of 4,350,000 shares of Basics common
stock. In connection with the exercise of the warrants, Basic received an aggregate of $17.4
million from the warrant holders in satisfaction of the exercise price of the warrants
(representing an exercise price of $4.00 per share of Basics common stock acquired).
During year ended 2006, Basic issued 293,350 shares of common stock from treasury stock for
the exercise of stock options. Also, Basic issued 15,670 shares of newly-issued common stock for
the exercise of stock options.
During the first nine months of 2007, Basic issued 169,875 shares of newly-issued common stock
and 21,550 shares of treasury stock for the exercise of stock options.
In March and April 2007, Basic issued 1,794,759 and 430,191 shares of common stock in
connection with the acquisitions of JetStar Consolidated Holdings, Inc. and Sledge Drilling Holding
Corp., respectively. (See note 3).
In March 2007, Basic granted various employees 217,100 unvested shares of common stock which
vest over a five year period. Also, in March 2007, Basic granted the Chairman of the Board 4,000
shares of common stock. In July 2007, Basic granted a vice president 12,000 shares of unvested
shares of common stock which vest over a four year period.
Preferred Stock
At September 30, 2007 and December 31, 2006, Basic had 5,000,000 shares of $.01 par value
preferred stock authorized, of which none is designated.
8. Incentive Plan
In May 2003, Basics board of directors and stockholders approved the Basic 2003 Incentive
Plan (as amended effective April 22, 2005) (the Plan), which provides for granting of incentive
awards in the form of stock options, restricted stock, performance awards, bonus shares, phantom
shares, cash awards and other stock-based awards to officers, employees, directors and consultants
of Basic. The Plan assumed awards of the plans of Basics successors that were awarded and remained
outstanding prior to adoption of the Plan. The Plan provides for the issuance of 5,000,000 shares.
The Plan is administered by the Plan committee, and in the absence of a Plan committee, by the
Board of Directors, which determines the awards, and the associated terms of the awards and
interprets its provisions and adopts policies for implementing the Plan. The number of shares
authorized under the Plan and the number of shares subject to an award under the Plan will be
adjusted for stock splits, stock dividends, recapitalizations, mergers and other changes affecting
the capital stock of Basic.
On March 15, 2006, the board of directors granted various employees and directors options to
purchase 418,000 shares of common stock of Basic at an exercise price of $26.84 per share. All of
the 418,000 options granted in 2006 vest over a five-year period and expire 10 years from the date
they were granted. These option awards were granted with an exercise price equal to the market
price of the Companys stock at the date of grant. On March 15, 2007, the board of directors
granted various employees options to purchase 92,000 shares of common stock of Basic at an exercise
price of $22.66 per share. All of the 92,000 options granted in 2007 vest over a five-year period
and expire 10 years from the date they were granted. These option awards were granted with an
exercise price equal to the market price of the Companys stock at the date of grant.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model that uses the subjective assumptions noted in the
following table. Since the Company has only been public since December 2005, expected volatility
for options granted during 2006 is an implied volatility based upon a peer group. Expected
volatility for options granted during 2007 is a combination of the Companys historical data
20
and implied volatility based upon a peer group. The expected term of options granted
represents the period of time that options granted are expected to be outstanding. For options
granted in 2007 and 2006, the Company used the simplified method to calculate the expected term.
For options granted in 2007 and 2006, the risk-free rate for periods within the contractual life of
the options is based on the U.S. Treasury yield curve in effect at the time of grant. The estimates
involve inherent uncertainties and the application of management judgment. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for those options
expected to vest. During the three months ended September 30, 2007 and 2006 compensation expense
related to share-based arrangements was approximately $1.1 million and $842,000, respectively. For
compensation expense recognized during the three months ended September 30, 2007 and 2006, Basic
recognized a tax benefit of approximately $395,000 and $316,000 respectively. During the nine
months ended September 30, 2007 and 2006, compensation expense related to share-based arrangements
was approximately $3.2 million and $2.5 million, respectively. For compensation expense recognized
during the nine months ended September 30, 2007 and 2006, Basic recognized a tax benefit of
approximately $1.2 million and $912,000, respectively.
The fair value of each option award accounted for under SFAS No. 123R is estimated on the date
of grant using the Black-Scholes-Merton option-pricing model that uses the assumptions noted in the
following table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
Risk-free interest rate |
|
|
4.5 |
% |
|
|
4.7 |
% |
Expected term |
|
|
6.65 |
|
|
|
6.65 |
|
Expected volatility |
|
|
45.3 |
% |
|
|
47.0 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Options granted under the Plan expire 10 years from the date they are granted, and generally
vest over a three-to-five year service period.
The following table reflects the summary of stock options outstanding at September 30, 2007
and the changes during the nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Average |
|
|
Remaining |
|
|
Instrinsic |
|
|
|
Options |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
|
|
Granted |
|
|
Price |
|
|
Term (Years) |
|
|
(000's) |
|
Non-statutory stock
options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period |
|
|
2,457,780 |
|
|
$ |
9.05 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
92,000 |
|
|
$ |
22.66 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(90,125 |
) |
|
$ |
16.87 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(191,425 |
) |
|
$ |
5.14 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of
period |
|
|
2,268,230 |
|
|
$ |
9.60 |
|
|
|
6.55 |
|
|
$ |
28,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of
period |
|
|
1,233,272 |
|
|
$ |
4.69 |
|
|
|
5.35 |
|
|
$ |
20,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected
to vest, end of
period |
|
|
2,263,630 |
|
|
$ |
9.57 |
|
|
|
6.54 |
|
|
$ |
28,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The weighted-average grant date fair value of share options granted during the nine months
ended September 30, 2007 and 2006 was $11.85 and $14.47, respectively. The total intrinsic value of
share options exercised during the nine months ended September 30, 2007 and 2006 was approximately
$3.6 million and $5.8 million, respectively.
A summary of the status of the Companys non-vested share grants at September 30, 2007 and
changes during the nine months ended September 30, 2007 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant Date Fair |
|
Nonvested Shares |
|
Shares |
|
|
Value Per Share |
|
|
Nonvested at beginning
of period |
|
|
361,250 |
|
|
$ |
6.98 |
|
Granted during period |
|
|
229,100 |
|
|
|
22.70 |
|
Vested during period |
|
|
(180,625 |
) |
|
|
6.98 |
|
Forfeited during period |
|
|
(30,725 |
) |
|
|
15.96 |
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
379,000 |
|
|
$ |
15.75 |
|
|
|
|
|
|
|
|
|
As of September 30, 2007, there was approximately $11.5 million of total unrecognized
compensation related to non-vested share-based compensation arrangements granted under the Plan.
That cost is expected to be recognized over a weighted-average period of 2.68 years. The total fair
value of share-based awards vested during the nine months ended September 30, 2007 and 2006 was
approximately $10.8 million and $11.6 million, respectively.
Cash received from share option exercises under the incentive plan was approximately $983,000
and $398,000 for the nine months ended September 30, 2007 and 2006, respectively. The actual tax
benefit realized for the tax deductions from options exercised was $2.2 million and $3.6 million,
respectively, for the nine months ended September 30, 2007 and 2006, respectively.
The Company has a history of issuing Treasury and newly-issued shares to satisfy share option
exercises.
9. Related Party Transactions
Basic had receivables from employees of approximately $88,000 and $94,000 as of September 30,
2007 and December 31, 2006, respectively. During 2006, Basic entered into a lease agreement with
Darle Vuelta Cattle Co., LLC, an affiliate of the Chief Executive Officer, for approximately
$69,000. The term of the lease is five years and will continue on a year-to-year basis unless
terminated by either party.
10. Earnings Per Share
Basic presents earnings per share information in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128). Under SFAS No.
128, basic earnings per common share are determined by dividing net earnings applicable to common
stock by the weighted average number of common shares actually outstanding during the year. Diluted
earnings per common share is based on the increased number of shares that would be outstanding
assuming conversion of dilutive outstanding securities using the as if converted method. The
following table sets forth the computation of basic and diluted earnings per share (in thousands,
except share data):
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(in thousands, except share data): |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator (both basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,426 |
|
|
$ |
27,328 |
|
|
$ |
68,191 |
|
|
$ |
71,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share |
|
|
40,515,934 |
|
|
|
33,537,355 |
|
|
|
39,843,159 |
|
|
|
33,394,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
791,290 |
|
|
|
990,044 |
|
|
|
857,971 |
|
|
|
1,050,764 |
|
Unvested restricted stock |
|
|
283,504 |
|
|
|
211,800 |
|
|
|
259,560 |
|
|
|
225,660 |
|
Common stock warrants |
|
|
|
|
|
|
3,703,160 |
|
|
|
|
|
|
|
3,727,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share |
|
|
41,590,728 |
|
|
|
38,442,359 |
|
|
|
40,960,690 |
|
|
|
38,397,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
$ |
0.60 |
|
|
$ |
0.81 |
|
|
$ |
1.71 |
|
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
$ |
0.59 |
|
|
$ |
0.71 |
|
|
$ |
1.66 |
|
|
$ |
1.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Business Segment Information
Basics reportable business segments are well servicing, fluid services, completion and
remedial services and well site construction services. The following is a description of the
segments:
Well Servicing: This business segment encompasses a full range of services performed with a
mobile well servicing rig, including the installation and removal of downhole equipment and
elimination of obstructions in the well bore to facilitate the flow of oil and gas. These services
are performed to establish, maintain and improve production throughout the productive life of an
oil and gas well and to plug and abandon a well at the end of its productive life. Basic well
servicing equipment and capabilities are essential to facilitate most other services performed on a
well. Also included in this segment is our contract drilling segment which provides shallow and
medium-depth drilling rigs to customers on a contract basis.
Fluid Services: This segment utilizes a fleet of trucks and related assets, including
specialized tank trucks, storage tanks, water wells, disposal facilities and related equipment.
Basic employs these assets to provide, transport, store and dispose of a variety of fluids. These
services are required in most workover, completion and remedial projects as well as part of daily
producing well operations.
Completion and Remedial Services: This segment utilizes a fleet of pressure pumping units, air
compressor packages specially configured for underbalanced drilling operations, cased-hole wireline
units and an array of specialized rental equipment and fishing tools. The largest portion of this
business consists of pressure pumping services focused on cementing, acidizing and fracturing
services in niche markets.
Well Site Construction Services: This segment utilizes a fleet of power units, dozers,
trenchers, motor graders, backhoes and other heavy equipment. Basic employs these assets to provide
services for the construction and maintenance of oil and gas production infrastructure, such as
preparing and maintaining access roads and well locations, installation of small diameter gathering
lines and pipelines and construction of temporary foundations to support drilling rigs.
Basics management evaluates the performance of its operating segments based on operating
revenues and segment profits. Corporate expenses include general corporate expenses associated with
managing all reportable operating segments. Corporate assets consist principally of working capital
and debt financing costs.
23
The following table sets forth certain financial information with respect to Basics
reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion and |
|
|
Well Site |
|
|
|
|
|
|
|
|
|
Well |
|
|
Fluid |
|
|
Remedial |
|
|
Construction |
|
|
Corporate |
|
|
|
|
|
|
Servicing |
|
|
Services |
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
99,274 |
|
|
$ |
52,696 |
|
|
$ |
66,304 |
|
|
$ |
10,958 |
|
|
|
|
|
|
$ |
229,232 |
|
Direct operating costs |
|
|
(59,319 |
) |
|
|
(33,299 |
) |
|
|
(34,731 |
) |
|
|
(7,603 |
) |
|
|
|
|
|
|
(134,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
39,955 |
|
|
$ |
19,397 |
|
|
$ |
31,573 |
|
|
$ |
3,355 |
|
|
$ |
|
|
|
$ |
94,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
11,092 |
|
|
$ |
5,212 |
|
|
$ |
5,305 |
|
|
$ |
1,022 |
|
|
$ |
951 |
|
|
$ |
23,582 |
|
Capital expenditures,
(excluding acquisitions) |
|
$ |
13,763 |
|
|
$ |
6,466 |
|
|
$ |
6,582 |
|
|
$ |
1,268 |
|
|
$ |
1,180 |
|
|
$ |
29,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
88,221 |
|
|
$ |
50,742 |
|
|
$ |
42,109 |
|
|
$ |
13,483 |
|
|
$ |
|
|
|
$ |
194,555 |
|
Direct operating costs |
|
|
(48,399 |
) |
|
|
(31,231 |
) |
|
|
(20,522 |
) |
|
|
(9,414 |
) |
|
|
|
|
|
|
(109,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
39,822 |
|
|
$ |
19,511 |
|
|
$ |
21,587 |
|
|
$ |
4,069 |
|
|
$ |
|
|
|
$ |
84,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
7,539 |
|
|
$ |
4,335 |
|
|
$ |
3,246 |
|
|
$ |
1,013 |
|
|
$ |
573 |
|
|
$ |
16,706 |
|
Capital expenditures,
(excluding acquisitions) |
|
$ |
12,063 |
|
|
$ |
6,936 |
|
|
$ |
5,193 |
|
|
$ |
1,621 |
|
|
$ |
917 |
|
|
$ |
26,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
284,214 |
|
|
$ |
156,441 |
|
|
$ |
176,177 |
|
|
$ |
34,586 |
|
|
$ |
|
|
|
$ |
651,418 |
|
Direct operating costs |
|
|
(170,495 |
) |
|
|
(97,943 |
) |
|
|
(91,240 |
) |
|
|
(23,440 |
) |
|
|
|
|
|
|
(383,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
113,719 |
|
|
$ |
58,498 |
|
|
$ |
84,937 |
|
|
$ |
11,146 |
|
|
$ |
|
|
|
$ |
268,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
31,427 |
|
|
$ |
14,766 |
|
|
$ |
15,030 |
|
|
$ |
2,896 |
|
|
$ |
2,695 |
|
|
$ |
66,814 |
|
Capital expenditures,
(excluding acquisitions) |
|
$ |
38,624 |
|
|
$ |
18,147 |
|
|
$ |
18,471 |
|
|
$ |
3,559 |
|
|
$ |
3,312 |
|
|
$ |
82,113 |
|
Identifiable assets |
|
$ |
355,599 |
|
|
$ |
184,274 |
|
|
$ |
284,275 |
|
|
$ |
33,480 |
|
|
$ |
271,401 |
|
|
$ |
1,129,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
242,840 |
|
|
$ |
142,724 |
|
|
$ |
110,503 |
|
|
$ |
36,627 |
|
|
$ |
|
|
|
$ |
532,694 |
|
Direct operating costs |
|
|
(135,530 |
) |
|
|
(86,879 |
) |
|
|
(53,556 |
) |
|
|
(25,877 |
) |
|
|
|
|
|
|
(301,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
107,310 |
|
|
$ |
55,845 |
|
|
$ |
56,947 |
|
|
$ |
10,750 |
|
|
$ |
|
|
|
$ |
230,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
20,157 |
|
|
$ |
11,590 |
|
|
$ |
8,677 |
|
|
$ |
2,709 |
|
|
$ |
1,532 |
|
|
$ |
44,665 |
|
Capital expenditures,
(excluding acquisitions) |
|
$ |
34,099 |
|
|
$ |
19,607 |
|
|
$ |
14,679 |
|
|
$ |
4,581 |
|
|
$ |
2,591 |
|
|
$ |
75,557 |
|
Identifiable assets |
|
$ |
229,026 |
|
|
$ |
158,015 |
|
|
$ |
127,502 |
|
|
$ |
32,640 |
|
|
$ |
202,448 |
|
|
$ |
749,631 |
|
24
The following table reconciles the segment profits reported above to the operating income as
reported in the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits |
|
$ |
94,280 |
|
|
$ |
84,989 |
|
|
$ |
268,300 |
|
|
$ |
230,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(25,472 |
) |
|
|
(20,907 |
) |
|
|
(73,713 |
) |
|
|
(59,056 |
) |
Depreciation and amortization |
|
|
(23,582 |
) |
|
|
(16,706 |
) |
|
|
(66,814 |
) |
|
|
(44,665 |
) |
Gain (loss) on disposal of assets |
|
|
(58 |
) |
|
|
420 |
|
|
|
(233 |
) |
|
|
(307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
45,168 |
|
|
$ |
47,796 |
|
|
$ |
127,540 |
|
|
$ |
126,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Supplemental Schedule of Cash Flow Information
The following table reflects non-cash financing and investing activity during the following
periods:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Capital leases issued for equipment |
|
$ |
20,127 |
|
|
$ |
19,286 |
|
Value of Shares that may be issued |
|
$ |
2,194 |
|
|
$ |
|
|
Contingent earnout accrual |
|
$ |
1,214 |
|
|
$ |
1,449 |
|
Asset retirement obligation additions |
|
$ |
101 |
|
|
$ |
744 |
|
Value of common stock issued in business combinations |
|
$ |
51,193 |
|
|
$ |
|
|
Basic paid income taxes of approximately $37.8 million and $33.5 million during the nine
months ended September 30, 2007 and 2006, respectively. Basic paid interest of approximately $13.6
million and $3.6 million during the nine months ended September 20, 2007 and 2006, respectively.
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Managements Overview
We provide a wide range of well site services to oil and gas drilling and producing companies,
including well servicing, fluid services, completion and remedial services and well site
construction services. Our results of operations since the beginning of 2002 reflect the impact of
our acquisition strategy as a leading consolidator in the domestic land-based well services
industry during this period. Our acquisitions have increased our breadth of service offerings at
the well site and expanded our market presence. In implementing this strategy, we have purchased
businesses and assets in 53 separate acquisitions from January 1, 2001 to September 30, 2007. Our
weighted average number of well servicing rigs has increased from 126 in 2001 to 383 in the third
quarter of 2007, and our weighted average number of fluid service trucks has increased from 156 to
653 in the same period.
Our operating revenues from each of our segments, and their relative percentages of our total
revenues, consisted of the following (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well servicing |
|
$ |
284.2 |
|
|
|
44 |
% |
|
$ |
242.9 |
|
|
|
46 |
% |
Fluid services |
|
|
156.4 |
|
|
|
24 |
% |
|
|
142.7 |
|
|
|
27 |
% |
Completion and Remedial |
|
|
176.2 |
|
|
|
27 |
% |
|
|
110.5 |
|
|
|
21 |
% |
Well site construction services |
|
|
34.6 |
|
|
|
5 |
% |
|
|
36.6 |
|
|
|
6 |
% |
|
|
|
|
|
Total revenues |
|
$ |
651.4 |
|
|
|
100 |
% |
|
$ |
532.7 |
|
|
|
100 |
% |
|
|
|
|
|
Our core businesses depend on our customers willingness to make expenditures to produce,
develop and explore for oil and gas in the United States. Industry conditions are influenced by
numerous factors, such as the supply of and demand for oil and gas, domestic and worldwide economic
conditions, political instability in oil producing countries and merger and divestiture activity
among oil and gas producers. The volatility of the oil and gas industry, and the consequent impact
on exploration and production activity, could adversely impact the level of drilling and workover
activity by some of our customers. This volatility affects the demand for our services and the
price of our services. In addition, the discovery rate of new oil and gas reserves in our market
areas also may have an impact on our business, even in an environment of stronger oil and gas
prices.
We derive a majority of our revenues from services supporting production from existing oil and
gas operations. Demand for these production-related services, including well servicing and fluid
services, tends to remain relatively stable, even in moderate oil and gas price environments, as
ongoing maintenance spending is required to sustain production. As oil and gas prices reach higher
levels, demand for all of our services generally increases as our customers engage in more well
servicing activities relating to existing wells to maintain or increase oil and gas production from
those wells. Because our services are required to support drilling and workover activities, we are
also subject to changes in capital spending by our customers as oil and gas prices increase or
decrease.
We believe that the most important performance measures for our lines of business are as
follows:
|
|
|
Well Servicing rig hours, rig utilization rate, revenue per rig hour and segment
profits as a percent of revenues; |
|
|
|
|
Fluid Services revenue per truck and segment profits as a percent of revenues; |
|
|
|
|
Completion and Remedial Services segment profits as a percent of revenues; and |
|
|
|
|
Well Site Construction Services segment profits as a percent of revenues. |
26
Segment profits are computed as segment operating revenues less direct operating costs. These
measurements provide important information to us about the activity and profitability of our lines
of business. For a detailed analysis of these indicators for our company, see below in Segment
Overview.
We intend to continue growing our business through selective acquisitions, continuing a
newbuild program and/or upgrading our existing assets. Our capital investment decisions are
determined by an analysis of the projected return on capital employed of each of those
alternatives, which is substantially driven by the cost to acquire existing assets from a third
party, the capital required to build new equipment and the point in the oil and gas commodity price
cycle. Based on these factors, we make capital investment decisions that we believe will support
our long-term growth strategy. While we believe our costs of integration for prior acquisitions
have been reflected in our historical results of operations, integration of acquisitions may result
in unforeseen operational difficulties or require a disproportionate amount of our managements
attention. As discussed below in Liquidity and Capital Resources, we also must meet certain
financial covenants in order to borrow money under our existing credit agreement to fund future
acquisitions
Selected 2006 Acquisitions
During 2006, we made several acquisitions that complemented our existing lines of business and
increased our presence in the rental tool business. These included, among others:
LeBus Oil Field Service Co.
On January 31, 2006, we acquired all of the outstanding capital stock of LeBus Oil Field
Service Co. for an acquisition price of $26 million, subject to adjustments. This acquisition
significantly expanded our fluid services line of business in the Ark-La-Tex region. The cash used
to acquire LeBus was primarily from borrowings under our senior credit facility.
G&L Tool, Ltd.
On February 28, 2006, we acquired substantially all of the operating assets of G&L Tool, Ltd.
for total cash consideration of $58.5 million. This acquisition provided an entry into the rental
and fishing tool market and operates within our completion and remedial line of business. The
purchase agreement also contained an earn-out agreement based on annual EBITDA targets. The cash
used to acquire G&L was primarily from borrowings under our senior credit facility.
Chaparral Service, Inc.
On August 15, 2006, we acquired all of the outstanding capital stock and substantially all
operating assets of the subsidiaries of Chaparral Service, Inc. for total cash consideration of $19
million, subject to adjustments. This acquisition expanded our well servicing and fluid services
capabilities in the eastern New Mexico portion of the Permian Basin. The cash used to acquire
Chaparral was primarily from operating cash.
Selected 2007 Acquisitions
During the first nine months of 2007, we made several acquisitions that complemented our
existing lines of business and increased our presence in the rental tool business. These included,
among others:
Parker Drilling Offshore USA, LLC
On January 3, 2007, we acquired two barge-mounted workover rigs and related equipment from
Parker Drilling Offshore USA, LLC for total consideration of $20.5 million cash. The acquired rigs
operate in the inland waters of Louisiana and Texas as a part of Basic Marine Services.
27
JetStar Consolidated Holdings, Inc.
On March 6, 2007, we acquired all of the outstanding capital stock of JetStar Consolidated
Holdings, Inc. (JetStar) for an aggregate purchase price of approximately $121.2 million,
including $80.2 million in cash, of which approximately $37.6 million was used for the retirement
of JetStars outstanding debt. As part of the purchase price, we issued 1,794,759 shares of common
stock, at a fair value of $22.86 per share for a total fair value of approximately $41 million.
This acquisition operates in our completion and remedial line of business.
Sledge Drilling Holding Corp.
On April 2, 2007, we acquired all of the outstanding capital stock of Sledge Drilling Holding
Corp. (Sledge) for an aggregate purchase price of approximately $61.8 million, including $51.6
million in cash, of which approximately $19 million was used for the repayment of Sledges
outstanding debt. As part of the purchase price, we issued 430,191 shares of common stock at a fair
value of $23.63 per share for a total fair value of approximately $10.2 million. This acquisition
allowed us to expand our drilling operations in the Permian Basin and operates in our well
servicing line of business.
Segment Overview
Well Servicing
During the first nine months of 2007, our well servicing segment represented 44% of our
revenues. Revenue in our well servicing segment is derived from maintenance, workover, completion,
contract drilling and plugging and abandonment services. We provide maintenance-related services as
part of the normal, periodic upkeep of producing oil and gas wells. Maintenance-related services
represent a relatively consistent component of our business. Workover and completion services
generate more revenue per hour than maintenance work due to the use of auxiliary equipment, but
demand for workover and completion services fluctuates more with the overall activity level in the
industry.
We typically charge our customers for services on an hourly basis at rates that are determined
by the type of service and equipment required, market conditions in the region in which the rig
operates, the ancillary equipment provided on the rig and the necessary personnel. Depending on the
type of job, we may also charge by the project or by the day. We measure our activity levels by the
total number of hours worked by all of the rigs in our fleet. We monitor our fleet utilization
levels, with full utilization deemed to be 55 hours per week per rig. Our fleet has increased from
a weighted average number of 353 rigs in the third quarter of 2006 to
392 in the third quarter of
2007 through a combination of new build purchases and the remainder through acquisitions and other
individual equipment purchases.
The following is an analysis of our well servicing operations for each of the quarters ended
December 31, 2006, and the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
Average |
|
|
|
|
|
Rig |
|
|
|
|
|
Profits |
|
|
|
|
Number of |
|
Rig |
|
Utilization |
|
Revenue Per |
|
Per Rig |
|
Segment |
|
|
Rigs |
|
Hours |
|
Rate |
|
Rig Hour |
|
Hour |
|
Profits % |
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
327 |
|
|
|
209,000 |
|
|
|
89.4 |
% |
|
$ |
352 |
|
|
$ |
152 |
|
|
|
43.4 |
% |
Second Quarter |
|
|
341 |
|
|
|
221,800 |
|
|
|
91.0 |
% |
|
$ |
366 |
|
|
$ |
161 |
|
|
|
43.9 |
% |
Third Quarter |
|
|
353 |
|
|
|
230,100 |
|
|
|
91.2 |
% |
|
$ |
383 |
|
|
$ |
173 |
|
|
|
45.1 |
% |
Fourth Quarter |
|
|
362 |
|
|
|
218,900 |
|
|
|
84.6 |
% |
|
$ |
401 |
|
|
$ |
169 |
|
|
|
42.1 |
% |
Full Year |
|
|
346 |
|
|
|
879,800 |
|
|
|
88.9 |
% |
|
$ |
376 |
|
|
$ |
164 |
|
|
|
43.6 |
% |
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
367 |
|
|
|
215,000 |
|
|
|
81.9 |
% |
|
$ |
412 |
|
|
$ |
166 |
|
|
|
40.3 |
% |
Second Quarter |
|
|
379 |
|
|
|
221,900 |
|
|
|
81.9 |
% |
|
$ |
434 |
|
|
$ |
172 |
|
|
|
39.5 |
% |
Third Quarter |
|
|
392 |
|
|
|
229,000 |
|
|
|
81.9 |
% |
|
$ |
434 |
|
|
$ |
174 |
|
|
|
40.2 |
% |
28
We gauge activity levels in our well servicing segment based on rig utilization rate, revenue
per rig hour and segment profits per rig hour.
We have been able to increase our revenue per rig hour from $383 in the third quarter of 2006
to $434 in the third quarter of 2007 mainly as a result of the expansion of our well servicing
fleet, which has contributed to our improved revenue. However, declining market conditions since
2006 combined with adverse weather conditions have reduced utilization for our services.
Fluid Services
During the first nine months of 2007, our fluid services segment represented 24% of our
revenues. Revenues in our fluid services segment are earned from the sale, transportation, storage
and disposal of fluids used in the drilling, production and maintenance of oil and gas wells. The
fluid services segment has a base level of business consisting of transporting and disposing of
salt water produced as a by-product of the production of oil and gas. These services are necessary
for our customers and generally have a stable demand but typically produce lower relative segment
profits than other parts of our fluid services segment. Fluid services for completion and workover
projects typically require fresh or brine water for making drilling mud, circulating fluids or frac
fluids used during a job, and all of these fluids require storage tanks and hauling and disposal.
Because we can provide a full complement of fluid sales, trucking, storage and disposal required on
most drilling and workover projects, the add-on services associated with drilling and workover
activity enable us to generate higher segment profits contributions. The higher segment profits are
due to the relatively small incremental labor costs associated with providing these services in
addition to our base fluid services segment. We typically price fluid services by the job, by the
hour or by the quantities sold, disposed of or hauled.
The following is an analysis of our fluid services operations for each of the quarters ended
December 31, 2006 and the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
Weighted |
|
|
|
|
|
Profits |
|
|
|
|
Average |
|
|
|
|
|
Per |
|
|
|
|
Number of |
|
Revenue Per |
|
Fluid |
|
|
|
|
Fluid Service |
|
Fluid Service |
|
Service |
|
Segment |
|
|
Trucks |
|
Truck |
|
Truck |
|
Profits % |
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
529 |
|
|
$ |
82 |
|
|
$ |
32 |
|
|
|
39.0 |
% |
Second Quarter |
|
|
568 |
|
|
$ |
86 |
|
|
$ |
34 |
|
|
|
39.9 |
% |
Third Quarter |
|
|
614 |
|
|
$ |
83 |
|
|
$ |
32 |
|
|
|
38.5 |
% |
Fourth Quarter |
|
|
640 |
|
|
$ |
81 |
|
|
$ |
32 |
|
|
|
39.3 |
% |
Full Year |
|
|
588 |
|
|
$ |
332 |
|
|
$ |
130 |
|
|
|
39.2 |
% |
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
652 |
|
|
$ |
79 |
|
|
$ |
30 |
|
|
|
38.4 |
% |
Second Quarter |
|
|
657 |
|
|
$ |
79 |
|
|
$ |
29 |
|
|
|
37.0 |
% |
Third Quarter |
|
|
653 |
|
|
$ |
81 |
|
|
$ |
30 |
|
|
|
36.8 |
% |
We gauge activity levels in our fluid services segment based on revenue and segment profits
per fluid service truck.
We have increased our fluid services truck fleet through internal expansion, as well as the
expansion of this segment with the acquisition of LeBus in 2006.
The decrease in revenue per fluid service truck from $83,000 in the third quarter of 2006 to
$81,000 in the third quarter of 2007 is due primarily to an overall increase in the competition in
the industry as well as a larger portion of the revenue of this segment being from truck services
versus frac tank rentals and disposal fees.
29
Completion and Remedial Services
During the first nine months of 2007, our completion and remedial services segment represented
27% of our revenues. Revenues from our completion and remedial services segment are generally
derived from a variety of services designed to stimulate oil and gas production or place cement
slurry within the wellbores. Our completion and remedial services segment includes pressure
pumping, cased-hole wireline services, underbalanced drilling and rental and fishing tool
operations.
Our pressure pumping operations concentrate on providing single truck, lower-horsepower
cementing, acidizing and fracturing services in selected markets. We entered the market for
pressure pumping in East Texas during late 2002, and we expanded our presence with the acquisition
of New Force in January 2003. We entered this market in the Rocky Mountain states with the
acquisition of FESCO, which had a small cementing business based in Gillette, Wyoming. In December
2003, we acquired the assets of Graham Acidizing and integrated these assets into our North Texas
and East Texas operations. On March 6, 2007, we acquired all of the outstanding capital stock of
JetStar Consolidated Holdings, Inc. This acquisition allowed us to enter into the Kansas market and
increased our presence in North Texas. Our total hydraulic horsepower capacity for our pressure
pumping operations was 121,000 at September 30, 2007 compared to 119,000 at June 30, 2007, and
60,000 at September 30, 2006.
We entered the wireline business in 2004 as part of our acquisition of AWS Wireline, a
regional firm based in North Texas. We entered the underbalanced drilling services business in 2004
through our acquisition of Energy Air Drilling Services, a business operating in northwest New
Mexico and the western slope of Colorado markets.
We entered the rental and fishing tool business through our acquisition of G&L in the first
quarter of 2006. This acquisition added 16 stores in the North Texas, West Texas and Oklahoma
markets.
In this segment, we generally derive our revenues on a project-by-project basis in a
competitive bidding process. Our bids are generally based on the amount and type of equipment and
personnel required, with the materials consumed billed separately. During periods of decreased
spending by oil and gas companies, we may be required to discount our rates to remain competitive,
which would cause lower segment profits.
The following is an analysis of our completion and remedial services segment for each of the
quarters December 31, 2006 and the quarters ended March 31, 2007, June 30, 2007 and September 30,
2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
Revenues |
|
Profits % |
2006: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
27,455 |
|
|
|
49.5 |
% |
Second Quarter |
|
$ |
40,939 |
|
|
|
53.1 |
% |
Third Quarter |
|
$ |
42,109 |
|
|
|
51.3 |
% |
Fourth Quarter |
|
$ |
43,909 |
|
|
|
51.2 |
% |
Full Year |
|
$ |
154,412 |
|
|
|
51.5 |
% |
2007: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
46,137 |
|
|
|
49.9 |
% |
Second Quarter |
|
$ |
63,735 |
|
|
|
47.6 |
% |
Third Quarter |
|
$ |
66,304 |
|
|
|
47.6 |
% |
We gauge the performance of our completion and remedial services segment based on the
segments operating revenues and segment profits.
Well Site Construction Services
During the first nine months of 2007, our well site construction services segment represented
5% of our revenues. Revenues from our well site construction services segment are derived primarily
from preparing and maintaining access roads and well locations, installing small diameter gathering
lines and pipelines, constructing foundations to support drilling rigs and providing maintenance
services for oil and gas facilities. These services are independent of our other services and,
while offered to some customers utilizing other services, are not offered on a bundled basis. We
entered the well site construction services segment during the fourth quarter of 2003 in the Gulf
Coast through the acquisition of PWI and in the Rocky Mountain states through our acquisition of
FESCO.
30
Within this segment, we generally charge established hourly rates or competitive bid for
projects depending on customer specifications and equipment and personnel requirements. This
segment allows us to perform services to customers outside the oil and gas industry, since
substantially all of our power units are general purpose construction equipment. However, the
majority of our current business in this segment is with customers in the oil and gas industry. If
our customer base has the demand for certain types of power units that we do not currently own, we
generally purchase or lease them without significant delay.
The following is an analysis of our well site construction services segment for each of the
quarters ended December 31, 2006 and the quarters ended March 31, 2007, June 30, 2007 and September
30, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
Revenues |
|
Profits % |
2006: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10,265 |
|
|
|
25.5 |
% |
Second Quarter |
|
$ |
12,879 |
|
|
|
31.5 |
% |
Third Quarter |
|
$ |
13,483 |
|
|
|
30.2 |
% |
Fourth Quarter |
|
$ |
13,748 |
|
|
|
33.1 |
% |
Full Year |
|
$ |
50,375 |
|
|
|
30.5 |
% |
2007: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
12,548 |
|
|
|
33.9 |
% |
Second Quarter |
|
$ |
11,080 |
|
|
|
31.9 |
% |
Third Quarter |
|
$ |
10,958 |
|
|
|
30.6 |
% |
We gauge the performance of our well site construction services segment based on the segments
operating revenues and segment profits. While we monitor our levels of idle equipment, we do not
focus on revenues per piece of equipment.
Operating Cost Overview
Our operating costs are comprised primarily of labor, including workers compensation and
health insurance, repair and maintenance, fuel and insurance. A majority of our employees are paid
on an hourly basis. With a reduced pool of workers in the industry, it is possible that we will
have to raise wage rates to attract workers from other fields and retain or expand our current work
force. We believe we will be able to increase service rates to our customers to compensate for wage
rate increases. We also incur costs to employ personnel to sell and supervise our services and
perform maintenance on our fleet. These costs are not directly tied to our level of business
activity. Compensation for our administrative personnel in local operating yards and in our
corporate office is accounted for as general and administrative expenses. Repair and maintenance is
performed by our crews, company maintenance personnel and outside service providers. Insurance is
generally a fixed cost regardless of utilization and relates to the number of rigs, trucks and
other equipment in our fleet, employee payroll and safety record.
Critical Accounting Policies and Estimates
Our consolidated financial statements are impacted by the accounting policies used and the
estimates and assumptions made by management during their preparation. A complete summary of these
policies is included in note 2 of the notes to our historical consolidated financial statements.
The following is a discussion of our critical accounting policies and estimates.
Critical Accounting Policies
We have identified below accounting policies that are of particular importance in the
presentation of our financial position, results of operations and cash flows and which require the
application of significant judgment by management.
31
Property and Equipment. Property and equipment are stated at cost, or at estimated fair value
at acquisition date if acquired in a business combination. Expenditures for repairs and maintenance
are charged to expense as incurred. We also review the capitalization of refurbishment of workover
rigs as described in note 2 of the notes to our historical consolidated financial statements.
Impairments. We review our assets for impairment at a minimum annually, or whenever, in
managements judgment, events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recovered over its remaining service life. Provisions for asset
impairment are charged to income when the sum of the estimated future cash flows, on an
undiscounted basis, is less than the assets carrying amount. When impairment is indicated, an
impairment charge is recorded based on an estimate of future cash flows on a discounted basis.
Self-Insured Risk Accruals. We are self-insured up to retention limits with regard to workers
compensation and medical and dental coverage of our employees. We generally maintain no physical
property damage coverage on our workover rig fleet, with the exception of certain of our 24-hour
workover rigs and newly manufactured rigs. We have deductibles per occurrence for workers
compensation and medical and dental coverage of $250,000 and $175,000 respectively. We have lower
deductibles per occurrence for automobile liability and general liability. We maintain accruals in
our consolidated balance sheets related to self-insurance retentions by using third-party actuarial
data and historical claims history.
Revenue Recognition. We recognize revenues when the services are performed, collection of the
relevant receivables is probable, persuasive evidence of the arrangement exists and the price is
fixed and determinable.
Income Taxes. We account for income taxes based upon Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in the period that includes the statutory enactment date. A valuation allowance
for deferred tax assets is recognized when it is more likely than not that the benefit of deferred
tax assets will not be realized.
Critical Accounting Estimates
The preparation of our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management to make
certain estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet
date and the amounts of revenues and expenses recognized during the reporting period. We analyze
our estimates based on historical experience and various other assumptions that we believe to be
reasonable under the circumstances. However, actual results could differ from such estimates. The
following is a discussion of our critical accounting estimates.
Depreciation and Amortization. In order to depreciate and amortize our property and equipment
and our intangible assets with finite lives, we estimate the useful lives and salvage values of
these items. Our estimates may be affected by such factors as changing market conditions,
technological advances in industry or changes in regulations governing the industry.
Impairment of Property and Equipment. Our impairment of property and equipment requires us to
estimate undiscounted future cash flows. Actual impairment charges are recorded using an estimate
of discounted future cash flows. The determination of future cash flows requires us to estimate
rates and utilization in future periods and such estimates can change based on market conditions,
technological advances in industry or changes in regulations governing the industry.
Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an
analysis of historical collection activity and specific identification of overdue accounts. Factors
that may affect this estimate include (1) changes in the financial positions of significant customers and (2) a decline in
commodity prices that could affect the entire customer base.
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Litigation and Self-Insured Risk Reserves. We estimate our reserves related to litigation and
self-insured risk based on the facts and circumstances specific to the litigation and self-insured
risk claims and our past experience with similar claims. The actual outcome of litigated and
insured claims could differ significantly from estimated amounts. As discussed in Self-Insured
Risk Accruals above with respect to our critical accounting policies, we maintain accruals on our
balance sheet to cover self-insured retentions. These accruals are based on certain assumptions
developed using third-party data and historical data to project future losses. Loss estimates in
the calculation of these accruals are adjusted based upon actual claim settlements and reported
claims.
Fair Value of Assets Acquired and Liabilities Assumed. We estimate the fair value of assets
acquired and liabilities assumed in business combinations, which involves the use of various
assumptions. These estimates may be affected by such factors as changing market conditions,
technological advances in industry or changes in regulations governing the industry. The most
significant assumptions, and the ones requiring the most judgment, involve the estimated fair value
of property and equipment, intangible assets and the resulting amount of goodwill, if any. Our
adoption of SFAS No. 142 on January 1, 2002 requires us to test annually for impairment the
goodwill and intangible assets with indefinite useful lives recorded in business combinations. This
requires us to estimate the fair values of our own assets and liabilities at the reporting unit
level. Therefore, considerable judgment, similar to that described above in connection with our
estimation of the fair value of acquired company, is required to assess goodwill and certain
intangible assets for impairment.
Cash Flow Estimates. Our estimates of future cash flows are based on the most recent available
market and operating data for the applicable asset or reporting unit at the time the estimate is
made. Our cash flow estimates are used for asset impairment analyses.
Stock-Based Compensation. On January 1, 2006, we adopted the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R).
Prior to January 1, 2006, we accounted for share-based payments under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for stock Issued
to Employees (APB No. 25) which was permitted by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS No. 123).
We adopted SFAS No. 123R using both the modified prospective method and the prospective method
as applicable to the specific awards granted. The modified prospective method was applied to awards
granted subsequent to the Company becoming a public company. Awards granted prior to the Company
becoming public and which were accounted for under APB No. 25 were adopted by using the prospective
method. The results of prior periods have not been restated. Compensation expense of the unvested
portion of awards granted as a private company and outstanding as of January 1, 2006 will continue
to be based upon the intrinsic value method calculated under APB No. 25.
The fair value of common stock for options granted from July 1, 2004 through September 30,
2005 was estimated by management using an internal valuation methodology. We did not obtain
contemporaneous valuations by an unrelated valuation specialist because we were focused on internal
growth and acquisitions and because we had consistently used our internal valuation methodology for
previous stock awards.
Income Taxes. The amount and availability of our loss carryforwards (and certain other tax
attributes) are subject to a variety of interpretations and restrictive tests. The utilization of
such carryforwards could be limited or lost upon certain changes in ownership and the passage of
time. Accordingly, although we believe substantial loss carryforwards are available to us, no
assurance can be given concerning the realization of such loss carryforwards, or whether or not
such loss carryforwards will be available in the future.
Asset Retirement Obligations. SFAS No. 143 requires us to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets and to capitalize an equal amount as a cost of
the asset, depreciating it over the life of the asset. Subsequent to the initial measurement of the
asset retirement obligation, the obligation is adjusted at the end of each quarter to reflect the
passage of time, changes in the estimated future cash flows underlying the obligation, acquisition
or construction of assets, and settlement of obligations.
33
Results of Operations
The results of operations between periods may not be comparable, primarily due to the
significant number of acquisitions made and their relative timing in the year acquired. See note 3
of the notes to our historical consolidated financial statements for more detail.
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Revenues. Revenues increased by 18% to $229.2 million during the third quarter of 2007 from
$194.6 million during the same period in 2006. This increase was primarily due to the internal
expansion of our business segments, particularly well servicing where we added 24 rigs throughout
the period (excluding the Sledge acquisition) and fluid services where we added 43 trucks. In
addition to internal expansion, total revenue also increased through acquisitions. The JetStar
acquisition added revenues of approximately $18 million and the Sledge acquisition added revenues
of approximately $8 million.
Well servicing revenues increased by 13% to $99.3 million during the third quarter of 2007
compared to $88.2 million during the same period in 2006. The increase was due mainly to our
acquisition of Sledge which added approximately $8 million in revenues. Revenue also increased as a
result of internal growth of this segment as we added 24 rigs throughout the period (excluding the
Sledge acquisition) as well as an increase in our revenue per rig hour of approximately 13%, from
$383 per hour to $434 per hour. The growth in the segment was partially offset by a decrease in
utilization from 91.2% during the third quarter of 2006 to 81.9% in the same period in 2007. Wet
weather conditions in Texas and Oklahoma, where the majority of our services are provided,
negatively impacted our rig utilization rate. In addition, flattening or declining drilling
activity in several of our markets and new equipment has balanced supply and current demand which
also contributed to the decline in utilization from 2006.
Fluid services revenues increased by 4% to $52.7 million during the third quarter of 2007
compared to $50.7 million in the same period of 2006. This increase was primarily due to our modest
price increases and our increase in equipment available during the period. Our weighted average
number of fluid service trucks increased to 653 in the third quarter of 2007 compared to 614 in
same period in 2006, an increase of approximately 6%.
Completion and remedial services revenues increased by 57% to $66.3 million during the third
quarter of 2007 as compared to $42.1 million in the same period in 2006. The increase in revenue
between these periods was primarily the result of the acquisition of JetStar in March 2007, which
added approximately $18 million in revenues.
Well site construction services revenues decreased 19% to $11.0 million during the third
quarter in 2007 as compared to $13.5 million in the same period in 2006.
Direct Operating Expenses. Direct operating expenses, which primarily consist of labor,
including workers compensation and health insurance, and maintenance and repair costs, increased by
23% to $135.0 million during the third quarter of 2007 from $109.6 million in the same period in
2006 as a result of additional rigs and trucks, higher personnel related costs and higher repair
and maintenance costs. The JetStar acquisition added approximately $10 million and the Sledge
acquisition added approximately $4 million to direct operating expenses during the quarter.
Direct operating expenses for the well servicing segment increased by 23% to $59.3 million
during the third quarter of 2007 as compared to $48.4 million for the same period in 2006 due
primarily due to the internal growth of this segment. Segment profits decreased to 40% of revenues
during the third quarter of 2007 compared to 45% for the same period in 2006, due primarily to
decreased rig utilization from 91.2% during the third quarter of 2006
to 81.9% for the same period
in 2007, higher personnel related costs and higher repair and maintenance costs. The Sledge
acquisition added approximately $4 million of direct operating expenses during the quarter.
Direct operating expenses for the fluid services segment increased by 7% to $33.3 million
during the third quarter of 2007 as compared to $31.2 million for the same period in 2006 due
primarily to expansion of our fluid
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services fleet. Segment profits decreased to 37% of revenues during the third quarter of 2007
compared to 39% for the same period in 2006, due primarily to higher personnel related costs and
higher repair and maintenance costs.
Direct operating expenses for the completion and remedial services segment increased by 69% to
$34.7 million during the third quarter of 2007 as compared to $20.5 million for the same period in
2006 due primarily to expansion of our services and equipment, including the JetStar acquisition.
Our segment profits decreased to 48% of revenues during the third quarter of 2007 compared to 51%
for the same period in 2006, due to higher personnel related costs and higher repair and
maintenance costs. The JetStar acquisition added approximately $10 million of direct operating
expenses during the quarter.
Direct operating expenses for the well-site construction services segment decreased by 19% to
$7.6 million during the third quarter of 2007 as compared to $9.4 million for the same period in
2006. Segment profits for this segment increased to 31% of revenues during the third quarter of
2007 as compared to 30% for the same period in 2006.
General and Administrative Expenses. General and administrative expenses increased by 22% to
$25.5 million during the third quarter of 2007 from $20.9 million for the same period in 2006,
which included $1.1 million and $842,000 of stock-based compensation expense in 2007 and 2006,
respectively. The increase primarily reflects higher salary and office expenses related to the
expansion of our business.
Depreciation and Amortization Expenses. Depreciation and amortization expenses were $23.6
million during the third quarter of 2007 as compared to $16.7 million for the same period in 2006,
reflecting the increase in the size of and investment in our asset base. We invested $18 million
for acquisitions during the third quarter of 2007 and an additional $36.7 million for capital
expenditures during the third quarter of 2007 (including capital leases).
Interest Expense. Interest expense increased by 57% to $7.4 million during the third quarter
of 2007 compared to $4.7 million for the same period in 2006. The increase was due primarily to an
increase in the amount of long-term debt outstanding during the period.
Income Tax Expense. Income tax expense was $14.2 million during the third quarter of 2007 as
compared to $16.4 million for the same period in 2006. Our effective tax rate during the third
quarter of 2007 and for the same period in 2006 was approximately 37% and 38%, respectively.
Net Income. Our net income was $24.4 million during the third quarter of 2007 compared to
$27.3 million for the same period in 2006. Increases in revenues from Sledge and JetStar
acquisitions were offset by higher expenses as discussed above.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Revenues. Revenues increased by 22% to $651.4 million during the first nine months of 2007
from $532.7 million during the same period in 2006. This increase was primarily due to the internal
expansion of our business segments, particularly well servicing which added 30 rigs (excluding the
Sledge acquisition) and fluid services which added 85 trucks, and in part due to the JetStar
acquisition which added approximately $39.9 million in revenues and the Sledge acquisition which
added approximately $18 million in revenues.
Well servicing revenues increased by 17% to $284.2 million during the first nine months of
2007 compared to $242.8 million during the same period in 2006. The increase was due mainly to our
internal growth of this segment as well as an increase in our revenue per rig hour of approximately
16%, from $367 per hour to $427 per hour. Our weighted average number
of rigs increased to 379 in
the first nine months of 2007 compared to 340 in the same period in 2006, an increase of
approximately 12%. Revenues attributable to the Sledge acquisition were approximately $18 million.
Rig utilization averaged 81.9% during the first nine months of 2007 compared to 90.5% in same
period in 2006. Adverse weather conditions in Texas and Oklahoma during the first nine months of
2007, where the majority of our services are provided, negatively impacted our rig utilization
rate. In addition, flattening or declining drilling activity in several of our markets and new
equipment has balanced supply and current demand which also contributed to the decline in
utilization from 2006.
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Fluid services revenues increased by 10% to $156.4 million during the first nine months of
2007 compared to $142.7 million in the same period of 2006. This increase was primarily due to our
internal growth. Our weighted average number of fluid service trucks increased to 654 in the first
nine months of 2007 compared to 570 in same period in 2006, an increase of approximately 15%.
Completion and remedial services revenues increased by 59% to $176.2 million during the first
nine months of 2007 as compared to $110.5 million in the same period in 2006. The increase in
revenue between these periods was primarily the result of the acquisition of JetStar in March 2007,
which added approximately $39.9 million in revenues, and the improved pricing and demand for our
services.
Well site construction services revenues decreased 6% to $34.6 million during the first nine
months of 2007 as compared to $36.6 million in the same period in 2006.
Direct Operating Expenses. Direct operating expenses, which primarily consist of labor,
including workers compensation and health insurance, and maintenance and repair costs, increased by
27% to $383.1 million during the first nine months of 2007 from $301.8 million in the same period
in 2006 as a result of additional rigs and trucks, higher personnel related costs and higher repair
and maintenance costs. The JetStar acquisition added approximately $20.8 million and the Sledge
acquisition added approximately $8.0 million of direct operating expenses during the first nine
months of 2007.
Direct operating expenses for the well servicing segment increased by 26% to $170.5 million
during first nine months of 2007 as compared to $135.5 million for the same period in 2006 due
primarily due to the internal growth of this segment. Segment profits decreased to 40% of revenues
during the first nine months of 2007 compared to 44% for the same period in 2006, due to decreased
rig utilization, higher personnel related costs and higher repair and maintenance costs. The Sledge
acquisition added approximately $8.0 million of direct operating expenses during the first nine
months of 2007.
Direct operating expenses for the fluid services segment increased by 13% to $97.9 million
during the first nine months of 2007 as compared to $86.9 million for the same period in 2006 due
primarily to expansion of our fluid services fleet. Segment profits decreased to 37% of revenues
during the first nine months of 2007 compared to 39% for the same period in 2006, due to higher
personnel related costs and higher repair and maintenance costs.
Direct operating expenses for the completion and remedial services segment increased by 70% to
$91.2 million during first nine months of 2007 as compared to $53.6 million for the same period in
2006 due primarily to expansion of our services and equipment, including the JetStar acquisition.
Our segment profits decreased to 48% of revenues during the first nine months of 2007 from 52% for
the same period in 2006, due to higher personnel related costs and higher repair and maintenance
costs. The JetStar acquisition added approximately $20.8 million of direct operating expenses
during the first nine months of 2007.
Direct operating expenses for the well-site construction services segment decreased by 9% to
$23.4 million during the first nine months of 2007 as compared to $25.9 million for the same period
in 2006. Segment profits for this segment increased to 32% of revenues during the first nine months
of 2007 as compared to 29% for the same period in 2006.
General and Administrative Expenses. General and administrative expenses increased by 25% to
$73.7 million during the first nine months of 2007 from $59.1 million for the same period in 2006,
which included $3.2 million and $2.5 million of stock-based compensation expense in 2007 and 2006,
respectively. The increase primarily reflects higher salary and office expenses related to the
expansion of our business as well as additional staffing and other costs to enhance internal
controls as a public company.
Depreciation and Amortization Expenses. Depreciation and amortization expenses were $66.8
million during the first nine months of 2007 as compared to $44.7 million for the same period in
2006, reflecting the increase in the size of and investment in our asset base. We invested $194.4
million for acquisitions during the first nine months of
36
2007 and an additional $103.3 million for
capital expenditures during the first nine months of 2007 (including capital leases).
Interest Expense. Interest expense increased by 61% to $20.2 million during the first nine
months of 2007 as compared to $12.5 million for the same period in 2006. The increase was due
primarily to an increase in the amount of long-term debt outstanding during the period. During the
first nine months of 2007, we increased the amount outstanding under the revolver to $150.0
million.
Income Tax Expense. Income tax expense was $40.8 million during the first nine months of 2007
as compared to $41.8 million for the same period in 2006. Our effective tax rate during the first
nine months of 2007 and for the same period in 2006 was approximately 37%.
Net Income. Our net income decreased for the first nine months of 2007 to $68.2 as compared to
$71.5 million for the same period in 2006. This was due primarily to the factors described above,
including our increased asset base and related revenues offset by the increase in cost for
qualified personnel and maintenance as well as a decrease in utilization due to weather stoppages.
Liquidity and Capital Resources
Currently, our primary capital resources are net cash flows from our operations, utilization
of capital leases as allowed under our 2007 Credit Facility and availability under our 2007 Credit
Facility, of which approximately $59.5 million was available at September 30, 2007. As of September
30, 2007, we had cash and cash equivalents of $57.3 million compared to $51.4 million as of
December 31, 2006. We have utilized, and expect to utilize in the future, bank and capital lease
financing and sales of equity to obtain capital resources. When appropriate, we will consider
public or private debt and equity offerings and non-recourse transactions to meet our liquidity
needs.
Net Cash Provided by Operating Activities
Cash flow from operating activities was $144.0 million for the nine months ended September 30,
2007 as compared to $108.3 million during the same period in 2006. The increase in operating cash
flows for the first nine months in 2007 compared to the same period in 2006 was primarily due to
expansion of our fleet, acquisitions completed and improvements in the segment profits and
utilization of our equipment.
Capital Expenditures
Capital expenditures are the main component of our investing activities. Cash capital
expenditures (including for acquisitions) during the first nine months of 2007 were $276.5 million
as compared to $208.4 million in the same period of 2006. Cash capital expenditures (excluding for
acquisitions) during the first nine months of 2007 were $82.1 million.
For
2007, we currently have planned approximately $93 million in cash capital expenditures and
$22 million through capital leases, none of which is planned for acquisitions. We do not budget
acquisitions in the normal course of business, but we believe that we may continue to spend a
significant amount for acquisitions in 2007. The $115 million of capital expenditures planned for
property and equipment is primarily for (1) purchase of additional equipment to expand our
services, (2) continued refurbishment of our well servicing rigs and (3) replacement of existing
equipment. We regularly engage in discussions related to potential acquisitions related to the well
services industry.
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Capital Resources and Financing
Our current primary capital resources are cash flow from our operations, the ability to enter
into capital leases of up to an additional $90.4 million at September 30, 2007, the availability
under our credit facility of $59.5 million at September 30, 2007 and a cash balance of $57.3
million at September 30, 2007. During the first nine months of 2007, we financed activities in
excess of cash flow from operations primarily through the use of bank debt and capital leases.
At September 30, 2007, of the $225.0 million in financial commitments under the revolving line
of credit under our senior credit facility, there was only $59.5 million of available capacity due
to the outstanding balance of $150.0 million and the $15.5 million of outstanding standby letters
of credit. The 2007 Credit Facility includes provisions allowing us to request an increase in
commitments of up to $100.0 million aggregate principal amount at any time. Additionally, the 2007
Credit Facility permits us to make greater expenditures for acquisitions, capital expenditures and
capital leases and to incur greater purchase money obligations, acquisition indebtedness and
general unsecured indebtedness.
Our ability to access additional sources of financing will be dependent on our operating cash
flows and demand for our services, which could be negatively impacted due to the extreme volatility
of commodity prices.
Senior Notes
In April 2006, we completed a private offering for $225,000,000 aggregate principal amount of
7.125% Senior Notes due April 15, 2016. The Senior Notes are jointly and severally guaranteed by
each of our subsidiaries. The net proceeds from the offering were used to retire the outstanding
Term B Loan balance and to pay down the outstanding balance under the revolving credit facility.
Remaining proceeds were used for general corporate purposes, including acquisitions.
We issued the Senior Notes pursuant to an indenture, dated as of April 12, 2006, by and among
us, the guarantor parties thereto and The Bank of New York Trust Company, N.A., as trustee.
Interest on the Senior Notes accrues from and including April 12, 2006 at a rate of 7.125% per
year. Interest on the Senior Notes is payable in cash semi-annually in arrears on April 15 and
October 15 of each year, commencing on October 15, 2006. The Senior Notes mature on April 15, 2016.
The Senior Notes and the guarantees are unsecured and rank equally with all of our and the
guarantors existing and future unsecured and unsubordinated obligations. The Senior Notes and the
guarantees rank senior in right of payment to any of our and the guarantors existing and future
obligations that are, by their terms, expressly subordinated in right of payment to the Senior
Notes and the guarantees. The Senior Notes and the guarantees are effectively subordinated to our
and the guarantors secured obligations, including our senior secured credit facilities, to the
extent of the value of the assets securing such obligations.
The indenture contains covenants that limit the ability of us and certain of our subsidiaries
to:
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incur additional indebtedness; |
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pay dividends or repurchase or redeem capital stock; |
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make certain investments; |
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incur liens; |
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enter into certain types of transactions with affiliates; |
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limit dividends or other payments by restricted subsidiaries; and |
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sell assets or consolidate or merge with or into other companies. |
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These limitations are subject to a number of important qualifications and exceptions.
Upon an Event of Default (as defined in the indenture), the trustee or the holders of at least
25% in aggregate principal amount of the Senior Notes then outstanding may declare all of the
amounts outstanding under the Senior Notes to be due and payable immediately.
We may, at our option, redeem all or part of the Senior Notes, at any time on or after April
15, 2011 at a redemption price equal to 100% of the principal amount thereof, plus a premium
declining ratably to par and accrued and unpaid interest, if any, to the date of redemption.
At any time or from time to time prior to April 15, 2009, we, at our option, may redeem up to
35% of the outstanding Senior Notes with money that we raise in one or more equity offerings at a
redemption price of 107.125% of the principal amount of the Senior Notes redeemed, plus accrued and
unpaid interest, as long as:
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at least 65% of the aggregate principal amount of Senior Notes issued under the
indenture remains outstanding immediately after giving effect to any such redemption; and |
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we redeem the Senior Notes not more than 90 days after the closing date of any such
equity offering. |
If we experience certain kinds of changes of control, holders of the Senior Notes will be
entitled to require us to purchase all or a portion of the Senior Notes at 101% of their principal
amount, plus accrued and unpaid interest.
Credit Facilities
2007 Credit Facility
On February 6, 2007, we amended and restated our existing credit agreement by entering into a
Fourth Amended and Restated Credit Agreement with a syndicate of lenders (the 2007 Credit
Facility). The amendments contained in the 2007 Credit Facility included:
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eliminating the $90 million class of Term B Loans; |
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creating a new class of Revolving Loans, which increased the lenders total revolving
commitments from $150 million to $225 million |
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increasing the Incremental Revolving Commitments under the 2007 Credit Facility from
$75.0 million to an aggregate principal amount of $100 million; |
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changing the applicable margins for Alternative Base Rate or Eurodollar revolving
loans; |
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amending our negative covenants relating to our ability to incur indebtedness and
liens, to add tests based on a percentage of our consolidated tangible assets in addition
to fixed dollar amounts, or to increase applicable dollar limits on baskets or other tests
for permitted indebtedness or liens; |
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amending our negative covenants relating to our ability to pay dividends, or repurchase
or redeem our capital stock, in order to conform more closely with permitted payments under
our senior notes; and |
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Eliminating certain restrictions on our ability to create or incur certain lease
obligations. |
Under the 2007 Credit Facility, Basic Energy Services, Inc. is the sole borrower and each of
our subsidiaries is a subsidiary guarantor. The 2007 Credit Facility provides for a $225 million
revolving line of credit (Revolver). The 2007 Credit Facility includes provisions allowing us to
request an increase in commitments of up to $100.0 million aggregate principal amount at any time.
Additionally, the 2007 Credit Facility permits us to make greater expenditures for acquisitions,
capital expenditures and capital leases and to incur greater purchase money
39
obligations, acquisition indebtedness and general unsecured indebtedness. The commitment under
the Revolver provides for (1) the borrowing of funds, (2) the issuance of up to $30 million of
letters of credit and (3) $2.5 million of swing-line loans. All of the outstanding amounts under
the Revolver are due and payable on December 15, 2010. The 2007 Credit Facility is secured by
substantially all of our tangible and intangible assets. We incurred approximately $0.7 million in
debt issuance costs in connection with the 2007 Credit Facility.
At our option, borrowings under the Revolver bears interest at either (1) the Alternative
Base Rate (i.e., the higher of the banks prime rate or the federal funds rate plus .50% per year)
plus a margin ranging from 0.25% to 0.5% or (2) an Adjusted LIBOR Rate (equal to (a) the London
Interbank Offered Rate (the LIBOR rate) as determined by the Administrative Agent in effect for
such interest period divided by (b) one minus the Statutory Reserves, if any, for such borrowing
for such interest period) plus a margin ranging from 1.25% to 1.5%. The margins vary depending on
our leverage ratio. Fees on the letters of credit are due quarterly on the outstanding amount of
the letters of credit at a rate ranging from 1.25% to 1.5% for participation fees and 0.125% for
fronting fees. A commitment fee is due quarterly on the available borrowings under the Revolver at
a rate of 0.375%.
Pursuant to the 2007 Credit Facility, we must apply proceeds from certain specified events to
reduce principal outstanding borrowings under the Revolver, including:
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assets sales greater than $2.0 million individually or $7.5 million in the aggregate on
an annual basis; |
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100% of the net cash proceeds from any debt issuance, including certain permitted
unsecured senior or senior subordinated debt, but excluding certain other permitted debt
issuances; and |
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50% of the net cash proceeds from any equity issuance (including equity issued upon the
exercise of any warrant or option). |
The 2007 Credit Facility contains various restrictive covenants and compliance requirements,
including the following:
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limitations on the incurrence of additional indebtedness; |
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restrictions on mergers, sales or transfer of assets without the lenders consent; |
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limitations on dividends and distributions; and |
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various financial covenants, including: |
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a maximum leverage ratio of 3.50 to 1.00, reducing to 3.25 to 1.00 on April 1, 2007,
and |
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a minimum interest coverage ratio of 3.00 to 1.00. |
2005 Credit Facility
Under our Third Amended and Restated Credit Agreement with a syndicate of lenders (the 2005
Credit Facility), as amended effective March 28, 2006, Basic Energy Services, Inc. was the sole
borrower and each of our subsidiaries was a subsidiary guarantor. The 2005 Credit Facility provided
for a $90 million Term B Loan (Term B Loan), which outstanding balance was repaid in April 2006,
and provided for a $150 million revolving line of credit (Revolver). The 2005 Credit Facility
included provisions allowing us to request an increase in commitments of up to $75 million at any
time. The commitment under the Revolver provides for (1) the borrowing of funds, (2) the issuance
of up to $30 million of letters of credit and (3) $2.5 million of swing-line loans. The amounts
outstanding under the Term B Loan required quarterly amortization at various amounts during each
quarter with all amounts outstanding being due and payable in full on December 15, 2011. All the
outstanding amounts under the Revolver were due and payable on December 15, 2010. The 2005 Credit
Facility was secured by substantially all of our tangible and intangible assets.
40
The 2005 Credit Facility contained customary events of default, which are subject to customary
grace periods and materiality standards, including, among others, events of default upon the
occurrence of: (1) non-payment of any amounts payable under the 2005 Credit Facility when due; (2)
any representation or warranty made in connection with the 2005 Credit Facility being incorrect in
any material respect when made or deemed made; (3) default in the observance or performance of any
covenant, condition or agreement contained in the 2005 Credit Facility or related loan documents
and such default shall continue unremedied or shall not be waived for 30 days; (4) failure to make
payments on other indebtedness involving in excess of $1.0 million; (5) voluntary or involuntary
bankruptcy, insolvency or reorganization of us or any of our subsidiaries; (6) entry of fines or
judgments against us for payment of an amount in excess of $2.5 million; (7) an ERISA event which
could reasonably be expected to cause a material adverse effect or the imposition of a lien on any
of our assets; (8) any security agreement or document under the 2005 Credit Facility ceases to
create a lien on any assets securing the 2005 Credit Facility; (9) any guarantee ceases to be in
full force and effect; (10) any material provision of the 2005 Credit Facility ceases to be valid
and binding or enforceable; (11) a change of control as defined in the 2005 Credit Agreement; and
(12) any determination, ruling, decision, decree or order of any governmental authority, which
prohibits or restrains Basic and its subsidiaries from conducting business and that could
reasonably be expected to cause a material adverse effect.
Other Debt
We have a variety of other capital leases and notes payable outstanding that is generally
customary in our business. None of these debt instruments are material individually or in the
aggregate. As of September 30, 2007, we had total capital leases of approximately $46.4 million.
Credit Rating Agencies
In April 2006, we received credit ratings of Baa3 from Moodys and B+ from Standard & Poors
for our 2005 Credit Facility. Also, we received ratings of B1 from Moodys and B from Standard &
Poors for our Senior Notes. None of our debt or other instruments is dependent upon our credit
ratings. However, the credit ratings may affect our ability to obtain financing in the future. On
February 6, 2007, we received credit ratings of Ba1 from Moodys and BB from Standard & Poors for
our 2007 Credit Facility.
Preferred Stock
At September 30, 2007 and December 31, 2006, we had 5,000,000 shares of $.01 par value
preferred stock authorized, of which none was designated.
Other Matters
Net Operating Losses
We used all of our then-available net operating losses for federal income tax purposes when we
completed a recapitalization in December 2000, which included a significant amount of debt
forgiveness. In 2002, our profitability suffered and, when combined with a significant level of
capital expenditures, we ended 2002 with a net operating loss, or NOL, of $30.4 million. In 2003,
we returned to profitability, but we again made significant investments in existing equipment,
additional equipment and acquisitions. Due to these events, we again reported a tax loss in 2003
and ended the year with a $50.7 million NOL, including $7.0 million that was included in the
purchase of FESCO. As of December 31, 2006, we had approximately $4.0 million of NOL carryforwards
related to the pre-acquisition period of FESCO, which is subject to an annual limitation of
approximately $900,000. The carryforwards begin to expire in 2017.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement
attribute for the financial statement
41
recognition and measurement of a tax position taken or expected to be taken, in a tax return.
Our adoption in January 2007 of FIN 48 did not result in any change to retained earnings or any
additional unrecognized tax benefit. Interest will be recorded in interest expense and penalties
will be recorded in income tax expense. We had no interest or penalties related to an uncertain tax
position during the nine months ended September 30, 2007. The company files federal income tax
returns and state income tax returns in Texas and other state tax jurisdictions. In general, the
companys tax returns for fiscal years after 2002 currently remain subject to examination by
appropriate taxing authorities. None of the companys income tax returns are under examination at
this time.
In September 2006, the FASB issued SFAS No. 157, Fair value Measurements (SFAS 157), which
will become effective for the company on January 1, 2008. This standard defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements but would apply to assets
and liabilities that are required to be recorded at fair value under other accounting standards.
The impact, if any, to the company from the adoption of SFAS 157 in 2008 will depend on the
companys assets and liabilities at that time that are required to be measured at fair value.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159), which becomes effective for the company on January 1, 2008. This
standard permits companies to choose to measure many financial instruments and certain other items
at fair value and report unrealized gains and losses in earnings. Such accounting is optional and
is generally to be applied instrument by instrument. The company does not anticipate that election,
if any, of this fair-value option will have a material effect on its results of operations or
consolidated financial position.
Impact of Inflation on Operations
Management is of the opinion that inflation has not had a significant impact on our business.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2007, we had $150.0 million outstanding under the revolving portion of our
credit facility subject to variable interest rate risk. The impact of a 1% increase in interest
rates on this amount of debt would result in increased interest expense of approximately $1.5
million annually and a decrease in net income of approximately $939,000.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to
ensure that information required to be disclosed in reports that we file or submit under the
Exchange Act are recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms and effective to ensure that information required to be disclosed in such
reports is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there have been no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Basic is a party to litigation or other legal proceedings that Basic
considers to be a part of the ordinary course of business. Basic is not currently involved in any
legal proceedings that it considers probable or reasonably possible, individually or in the
aggregate, to result in a material adverse effect on its financial condition, results of operations
or liquidity.
ITEM 1A. RISK FACTORS
For information regarding risks that may affect our business, see the risk factors included in
our most recent annual report on Form 10-K under the heading Risk Factors.
43
ITEM 6. EXHIBITS
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Exhibit |
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No. |
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Description |
2.1*
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Agreement and Plan of Merger, dated as of January 8, 2007, by and among
Basic Energy Services, Inc. (the Company), JS Acquisition LLC and JetStar
Consolidated Holdings, Inc. (Incorporated by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K (SEC File No. 001-32693), filed on
March 8, 2007) |
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2.2*
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Amendment to Merger Agreement, dated as of March 5, 2007, by and among the
Company, JS Acquisition LLC and JetStar Consolidated Holdings, Inc.
(Incorporated by reference to Exhibit 2.2 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on March 8, 2007) |
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3.1*
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Amended and Restated Certificate of Incorporation of the Company, dated
September 22, 2005. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (SEC File No. 333-127517),
filed on September 28, 2005) |
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3.2*
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Amended and Restated Bylaws of the Company, dated December 14, 2005.
(Incorporated by reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on December 14, 2005) |
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4.1*
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Specimen Stock Certificate representing common stock of the Company.
(Incorporated by reference to Exhibit 3.1 of the Companys Registration
Statement on Form S-1 (SEC File No. 333-127517), filed on November 4, 2005) |
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4.2*
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Indenture dated April 12, 2006, among the Company, the guarantors party
thereto, and The Bank of New York Trust Company, N.A., as trustee.
(Incorporated by reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on April 13, 2006) |
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4.3*
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Form of 7.125% Senior Note due 2016. (Incorporated by reference to Exhibit
4.2 of the Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on April 13, 2006) |
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4.4*
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First Supplemental Indenture dated as of July 14, 2006 to Indenture dated as
of April 12, 2006 among the Company, as Issuer, the Subsidiary Guarantors
named therein and The Bank of New York Trust Company, N.A., as trustee.
(Incorporated by reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K (SEC File No. 001-32693), filed on July 20, 2006) |
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4.5*
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Second Supplemental Indenture dated as of April 26, 2007 and effective as of
March 7, 2007 to Indenture dated as of April 12, 2006 among the Company as
Issuer, the Subsidiary Guarantors named therein and the Bank of New York
Trust Company, N.A., as trustee. (Incorporated by reference to Exhibit 4.1
of the Companys Current Report on form 8-K (SEC File No 001-32693), filed
on May 1, 2007) |
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4.6*
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Third Supplemental Indenture dated as of April 26, 2007 to Indenture dated
as of April 12, 2006 among the Company as Issuer, the Subsidiary Guarantors
named therein and the Bank of New York Trust Company, N.A., as trustee.
(Incorporated by reference to Exhibit 4.2 of the Companys Current Report on
form 8-K (SEC File No 001-32693), filed on May 1, 2007) |
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31.1
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Certification by Chief Executive Officer required by Rule 13a-14(a) and
15d-14(a) under the Exchange Act |
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31.2
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Certification by Chief Financial Officer required by Rule 13a-14(a) and
15d-14(a) under the Exchange Act Certification by Chief Executive Officer
pursuant to 18 U.S.C. |
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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* |
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Incorporated by reference |
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Management contract or compensatory plan or arrangement |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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BASIC ENERGY SERVICES, INC.
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By: |
/s/ Kenneth V. Huseman
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Name: |
Kenneth V. Huseman |
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Title: |
President, Chief Executive Officer and Director
(Principal Executive Officer) |
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By: |
/s/ Alan Krenek
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Name: |
Alan Krenek |
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Title: |
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer) |
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Date:
November 9, 2007
45
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
2.1*
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Agreement and Plan of Merger, dated as of January 8, 2007, by and among
Basic Energy Services, Inc. (the Company), JS Acquisition LLC and
JetStar Consolidated Holdings, Inc. (Incorporated by reference to Exhibit
2.1 of the Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on March 8, 2007) |
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2.2*
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Amendment to Merger Agreement, dated as of March 5, 2007, by and among the
Company, JS Acquisition LLC and JetStar Consolidated Holdings, Inc.
(Incorporated by reference to Exhibit 2.2 of the Companys Current Report
on Form 8-K (SEC File No. 001-32693), filed on March 8, 2007) |
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3.1*
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Amended and Restated Certificate of Incorporation of the Company, dated
September 22, 2005. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement on Form S-1 (SEC File No. 333-127517),
filed on September 28, 2005) |
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3.2*
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Amended and Restated Bylaws of the Company, dated December 14, 2005.
(Incorporated by reference to Exhibit 3.1 to the Companys Current Report
on Form 8-K (SEC File No. 001-32693), filed on December 14, 2005) |
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4.1*
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Specimen Stock Certificate representing common stock of the Company.
(Incorporated by reference to Exhibit 3.1 of the Companys Registration
Statement on Form S-1 (SEC File No. 333-127517), filed on November 4,
2005) |
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4.2*
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Indenture dated April 12, 2006, among the Company, the guarantors party
thereto, and The Bank of New York Trust Company, N.A., as trustee.
(Incorporated by reference to Exhibit 4.1 of the Companys Current Report
on Form 8-K (SEC File No. 001-32693), filed on April 13, 2006) |
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4.3*
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Form of 7.125% Senior Note due 2016. (Incorporated by reference to Exhibit
4.2 of the Companys Current Report on Form 8-K (SEC File No. 001-32693),
filed on April 13, 2006) |
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4.4*
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First Supplemental Indenture dated as of July 14, 2006 to Indenture dated
as of April 12, 2006 among the Company, as Issuer, the Subsidiary
Guarantors named therein and The Bank of New York Trust Company, N.A., as
trustee. (Incorporated by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K (SEC File No. 001-32693), filed on July 20,
2006) |
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4.5*
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Second Supplemental Indenture dated as of April 26, 2007 and effective as
of March 7, 2007 to Indenture dated as of April 12, 2006 among the Company
as Issuer, the Subsidiary Guarantors named therein and the Bank of New
York Trust Company, N.A., as trustee. (Incorporated by reference to
Exhibit 4.1 of the Companys Current Report on form 8-K (SEC File No
001-32693), filed on May 1, 2007) |
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4.6*
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|
Third Supplemental Indenture dated as of April 26, 2007 to Indenture dated
as of April 12, 2006 among the Company as Issuer, the Subsidiary
Guarantors named therein and the Bank of New York Trust Company, N.A., as
trustee. (Incorporated by reference to Exhibit 4.2 of the Companys
Current Report on form 8-K (SEC File No 001-32693), filed on May 1, 2007) |
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31.1
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Certification by Chief Executive Officer required by Rule 13a-14(a) and
15d-14(a) under the Exchange Act |
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31.2
|
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Certification by Chief Financial Officer required by Rule 13a-14(a) and
15d-14(a) under the Exchange Act |
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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* |
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Incorporated by reference |
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Management contract or compensatory plan or arrangement |