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Goodwill

12 Months Ended

Dec. 31, 2011

8. Goodwill

Goodwill acquired in connection with business combinations represents the excess of consideration over the fair value of tangible and identifiable intangible net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting units.

We perform our goodwill impairment test every year, or whenever events indicate impairment may have occurred, to determine if the estimated recoverable value of each of our reporting units exceeds the net carrying value of the reporting unit, including the applicable goodwill.

The first step in performing a goodwill impairment test is to compare the estimated fair value of each reporting unit with its recorded net book value (including the goodwill). If the estimated fair value of the reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the reporting unit is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition of the reporting unit. Business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill for the reporting unit, and the recorded amount is written down to the hypothetical amount, if lower.

Because quoted market prices for our reporting units are not available, management must apply judgment in determining the estimated fair value of these reporting units for purposes of performing the annual goodwill impairment test. Management uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets.

We determine the fair value of our reporting units using both the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital of each reporting unit. The market approach uses a market multiple on the reporting units’ earnings before interest, tax, depreciation and amortization.

As discussed in Note 2, on June 2, 2009, PDVSA commenced taking possession of our assets and operations in Venezuela. As of the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela. We determined that this event could indicate an impairment of our international contract operations and aftermarket services reporting units’ goodwill and therefore performed a goodwill impairment test for these reporting units in the second quarter of 2009.

Our international contract operations reporting unit failed step one of the goodwill impairment test and we recorded an impairment of goodwill in our international contract operations reporting unit of $150.8 million in the second quarter of 2009. The $32.6 million of goodwill related to our Venezuela contract operations and aftermarket services businesses was also written off in the second quarter of 2009 as part of our loss from discontinued operations. The decrease in value of our international contract operations reporting unit was primarily caused by the loss of our operations in Venezuela.

As a result of the level of decline in our stock price and corresponding market capitalization in the third quarter of 2011, we performed a goodwill impairment test of our aftermarket services and fabrication reporting units’ goodwill as of September 30, 2011. We determined the fair value of these reporting units using the expected present value of future cash flows. This decline in our market capitalization led us to increase the estimate of the market’s implied weighted average cost of capital and reduce the present value of the forecasted cash flows. The test indicated that our aftermarket services and fabrication reporting units’ goodwill was impaired and therefore we recorded a full impairment of the goodwill associated with these reporting units in the third quarter of 2011.

The table below presents the change in the net carrying amount of goodwill for the years ended December 31, 2011 and 2010 (in thousands):


	North America contract operations			International contract operations			Aftermarket services			Fabrication			Total
Balance as of December 31, 2009:
Goodwill	$	1,148,371		$	150,778		$	62,471		$	220,262		$	1,581,882
Accumulated impairment losses		(1,148,371	)		(150,778	)		—			(87,569	)		(1,386,718	)

		—			—			62,471			132,693			195,164
Impact of foreign currency Translation		—			—			624			892			1,516

Balance as of December 31, 2010:
Goodwill		1,148,371			150,778			63,095			221,154			1,583,398
Accumulated impairment losses		(1,148,371	)		(150,778	)		—			(87,569	)		(1,386,718	)

		—			—			63,095			133,585			196,680

Goodwill acquired during year		—			—			447			218			665
Impairment losses		—			—			(63,299	)		(133,508	)		(196,807	)
Impact of foreign currency translation		—			—			(243	)		(295	)		(538	)

Balance as of December 31, 2011:
Goodwill		1,148,371			150,778			63,299			221,077			1,583,525
Accumulated impairment losses		(1,148,371	)		(150,778	)		(63,299	)		(221,077	)		(1,583,525	)

	$	—		$	—		$	—		$	—		$	—