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Goodwill and Other Intangible Assets and Liabilities | 12 Months Ended
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Dec. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract] |
Goodwill and Other Intangible Assets and Liabilities | GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES Goodwill The carrying amount of goodwill as of December 31, 2014 is detailed below by reporting unit (in millions):
| December 31, 2014 |  | December 31, 2013
| Gross Carrying Amount |  | Accumulated Impairment Losses |  | Net Carrying Amount |  | Gross Carrying Amount |  | Accumulated Impairment Losses |  | Net Carrying Amount
Floaters |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 3,081.4 |  |  | $ | — |  |  | $ | 3,081.4 |  |  | $ | 3,081.4 |  |  | $ | — |  |  | $ | 3,081.4 |
Loss on impairment | — |  |  | (2,997.9 | ) |  | (2,997.9 | ) |  | — |  |  | — |  |  | — |
Balance, end of period | $ | 3,081.4 |  |  | $ | (2,997.9 | ) |  | $ | 83.5 |  |  | $ | 3,081.4 |  |  | $ | — |  |  | $ | 3,081.4 |
Jackups |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 192.6 |  |  | $ | — |  |  | $ | 192.6 |  |  | $ | 192.6 |  |  | $ | — |  |  | $ | 192.6 |
Loss on impairment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period | $ | 192.6 |  |  | $ | — |  |  | $ | 192.6 |  |  | $ | 192.6 |  |  | $ | — |  |  | $ | 192.6 |
Impairment of Goodwill Our business consists of three operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups and (3) Other, which consists of management services on rigs owned by third-parties. Our two reportable segments, Floaters and Jackups, provide one service, contract drilling. We test goodwill for impairment on an annual basis or when events or changes in circumstances indicate that a potential impairment exists. During the second quarter, demand for floaters deteriorated as a result of a continued reduction in capital spending by operators in addition to announced delays in operators’ drilling programs. The reduction in demand, combined with increasing supply from newbuild floater deliveries, led to a very competitive market. In general, contracting activity for floaters declined significantly and day rates and utilization came under pressure, especially for older, less capable floaters. Management considered the adverse change in the floater business climate, the commitment to a plan to sell five floaters in May 2014, and the impairment charge on the "held for sale" floaters during the second quarter and concluded that a triggering event had occurred. We performed an interim goodwill impairment test to evaluate the recoverability of the Floaters reporting unit goodwill balance of $3.1 billion as of May 31, 2014. Based on the valuation performed, the Floaters reporting unit estimated fair value exceeded the carrying value by approximately 7%; therefore, we concluded that the goodwill balance was not impaired. As part of our annual goodwill impairment test as of December 31, 2014, we considered the significant decline in commodity prices during the fourth quarter of 2014. Specifically, Brent crude oil prices declined from approximately $95 per barrel at September 30, 2014 to near $55 per barrel at December 31, 2014. These declines resulted in further reductions in capital spending by operators, including the cancellation or deferral of planned drilling programs. We expect that this reduction in demand will cause further deterioration in day rates and utilization and that current market dynamics will create a challenging contracting environment into 2016. Our stock price also declined significantly during the latter half of 2014, reaching a five-year low of $25.88 on December 16th. Our stock price traded between $25.88 and $41.99 during the fourth quarter of 2014 and averaged $35.23 during this period. Management considered the adverse changes in the current floater business climate, the sustained decline in stock price and the impairment charge on older, less capable floaters during the fourth quarter and concluded it was more-likely-than-not that the fair value of the Floater reporting unit was less than its carrying amount. As a result, we estimated the fair value of the reporting unit using a blended income and market approach. Based on the valuation performed as of December 31, 2014, the reporting unit estimated fair value was less than the carrying value; therefore, we concluded that the Floater goodwill balance was impaired. We compared the estimated fair value of the reporting unit to the fair value of all assets and liabilities of the reporting unit to calculate the implied fair value of goodwill. As a result, we recorded a non-cash loss on impairment totaling $3.0 billion which was included in loss on impairment in our consolidated statement of operations for the year ended December 31, 2014. The income approach was based on a discounted cash flow model, which utilized present values of cash flows to estimate fair value. The future cash flows were projected based on our estimates of future day rates, utilization, operating costs, capital requirements, growth rates and terminal values. Forecasted day rates and utilization take into account current market conditions and our anticipated business outlook, both of which have been impacted by the adverse changes in the floater business environment during 2014. The day rates reflected contracted rates during the respective contracted periods and management's estimate of market day rates in uncontracted periods. The forecasted market day rates were held constant in the near-term but were forecasted to grow in the longer-term and terminal period. Operating costs were forecasted using a combination of our historical average operating costs and expected future costs, adjusted for an estimated inflation factor. Capital requirements in the discounted cash flow model were based on management's estimates of future capital costs, taking into consideration our historical trends. The estimated capital requirements included cash outflows for new rig construction, rig enhancements and minor upgrades and improvements. A terminal period was used to reflect our estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 3.0%, which includes an estimated inflation factor. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital ("WACC") of 11.0%. These assumptions were derived from unobservable inputs and reflect management's judgments and assumptions. The market approach was based upon the application of price-to-earnings multiples to management's estimates of future earnings adjusted for a control premium. The price-to-earnings multiples used in the market valuation ranged from 6.0 x to 6.8 x and were based on market participant multiples. Management's earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as described in the income approach. The estimated fair value of the Floaters reporting unit determined under the income approach was consistent with the estimated fair value determined under the market approach. For purposes of the goodwill impairment test, we calculated the Floaters reporting unit estimated fair value as the average of the values calculated under the income approach and the market approach. We evaluated the estimated fair value of our reporting units compared to our market capitalization as of December 31, 2014. To perform this assessment, we used a market approach to estimate the fair value of the Jackups reporting unit. The aggregate fair values of our reporting units exceeded our market capitalization, and we believe the resulting implied control premium was reasonable based on recent market transactions within our industry or other relevant benchmark data. We performed a qualitative assessment for our Jackup reporting unit as of December 31, 2014. Goodwill impairment tests performed during prior years indicated that the fair value of the Jackup reporting unit significantly exceeded its carrying amount. Despite the adverse changes in the offshore drilling climate, we concluded that the fair value remains substantially in excess of the carrying value of the reporting unit, as evidenced by the estimated fair value of the Jackup reporting unit calculated for the purpose of reconciling the fair value of our reporting units to our market capitalization. Therefore, we concluded that it remains more-likely-than-not that the Jackup reporting unit was not impaired. The estimates used to determine the fair value of the Floaters reporting unit reflect management's best estimates, and we believe they are reasonable. Future declines in the Floaters reporting unit's operating performance or our anticipated business outlook may reduce the estimated fair value of our Floaters reporting unit and result in additional impairments. Factors that could have a negative impact on the fair value of the Floaters reporting unit include, but are not limited to:
• | decreases in estimated market day rates and utilization due to greater-than-expected market pressures, downtime and other risks associated with offshore rig operations;
• | sustained declines in our stock price;
• | decreases in revenue due to our inability to attract and retain skilled personnel;
• | changes in worldwide rig supply and demand, competition or technology, including changes as a result of newbuild rig deliveries;
• | changes in future levels of drilling activity and expenditures, whether as a result of global capital markets and liquidity, prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs;
• | possible cancellation or suspension of drilling contracts as a result of mechanical difficulties, performance or other reasons;
• | delays in contract commencement dates;
• | the outcome of litigation, legal proceedings, investigations or other claims or contract disputes resulting in significant cash outflows;
• | governmental, regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations (such as the Gulf of Mexico during hurricane season);
• | increases in the market-participant risk-adjusted WACC;
• | declines in anticipated growth rates.
Adverse changes in one or more of these factors could result in additional goodwill impairments in future periods. Drilling Contract Intangibles In connection with the Pride acquisition, we recorded intangible assets and liabilities representing the estimated fair values of the acquired company's firm drilling contracts in place at the date of acquisition with favorable or unfavorable contract terms as compared to then-current market day rates for comparable drilling rigs. The gross carrying amounts of our drilling contract intangibles, which we consider to be definite-lived intangibles assets and intangible liabilities, and accumulated amortization as of December 31, 2014 and 2013 were as follows (in millions):
| December 31, 2014 |  | December 31, 2013
| Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Amount |  | Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Amount
Drilling contract intangible assets |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 209.0 |  |  | $ | (130.6 | ) |  | $ | 78.4 |  |  | $ | 209.0 |  |  | $ | (88.3 | ) |  | $ | 120.7 |
Amortization | — |  |  | (32.7 | ) |  | (32.7 | ) |  | — |  |  | (42.3 | ) |  | (42.3 | )
Balance, end of period | $ | 209.0 |  |  | $ | (163.3 | ) |  | $ | 45.7 |  |  | $ | 209.0 |  |  | $ | (130.6 | ) |  | $ | 78.4 |
Drilling contract intangible liabilities |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 278.0 |  |  | $ | (208.9 | ) |  | $ | 69.1 |  |  | $ | 278.0 |  |  | $ | (160.0 | ) |  | $ | 118.0 |
Amortization | — |  |  | (28.4 | ) |  | (28.4 | ) |  | — |  |  | (48.9 | ) |  | (48.9 | )
Balance, end of period | $ | 278.0 |  |  | $ | (237.3 | ) |  | $ | 40.7 |  |  | $ | 278.0 |  |  | $ | (208.9 | ) |  | $ | 69.1 |
The various factors considered in the determination of the fair values of our drilling contract intangibles were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the date of acquisition. The intangible assets and liabilities were calculated based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated then-current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate. We amortize the drilling contract intangibles to operating revenues over the respective remaining drilling contract terms on a straight-line basis. The estimated net (reduction) increase to future operating revenues related to the amortization of these intangible assets and liabilities as of December 31, 2014, is as follows (in millions):
2015 |  | $ | (4.5 | )
2016 |  | (.8 | )
2017 |  | .3 |
Total |  | $ | (5.0 | )

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- Definition The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=26713463&loc=d3e16323-109275 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35741047&loc=d3e13816-109267 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=26713463&loc=d3e16265-109275 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=26713463&loc=d3e16373-109275 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35741047&loc=d3e13854-109267 + Details
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