Attached files
file | filename |
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EX-32 - SECTION 906 CERTIFICATIONS OF CEO AND CFO - TESCO CORP | tesco32.htm |
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - TESCO CORP | tesco311.htm |
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - TESCO CORP | tesco312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2009
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34090
Tesco Corporation
(Exact name of registrant as specified in its charter)
Alberta |
76-0419312 |
(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
3993 West Sam Houston Parkway North
Suite 100
Houston, Texas |
77043-1221 |
(Address of Principal Executive Offices) |
(Zip Code) |
713-359-7000
(Registrant’s telephone number, including area code)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ |
Accelerated Filer x |
Non-Accelerated Filer ¨ |
Smaller Reporting Company ¨ |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of October 30, 2009: 37,660,446
TABLE OF CONTENTS
Page | ||
PART I—FINANCIAL INFORMATION | ||
Item 1. |
1 | |
Item 2. |
24 | |
Item 3. |
43 | |
Item 4. |
44 | |
PART II—OTHER INFORMATION | ||
Item 1. |
45 | |
Item 1A. |
46 | |
Item 2. |
46 | |
Item 3. |
46 | |
Item 4. |
46 | |
Item 5. |
46 | |
Item 6. |
47 |
Caution Regarding Forward-Looking Information; Risk Factors
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Canadian and United States securities laws, including the United States Private Securities Litigation Reform Act of 1995. From time to time, our public filings, press releases and other communications (such as conference calls and presentations) will
contain forward-looking statements. Forward-looking information is often, but not always identified by the use of words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “forecast,” “target,” “project,” “may,” “will,” “should,” “could,” “estimate,” “predict” or similar words suggesting future outcomes or language suggesting an outlook.
Forward-looking statements in this quarterly report on Form 10-Q include, but are not limited to, statements with respect to expectations of our prospects, future revenues, earnings, activities and technical results.
Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information currently available to, us concerning anticipated financial performance, business prospects, strategies and regulatory developments. Although management considers these assumptions to be reasonable based on information currently
available to it, they may prove to be incorrect. The forward-looking statements in this quarterly report on Form 10-Q are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ
materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements.
These risks and uncertainties include, but are not limited to, the impact of changes in oil and natural gas prices and worldwide and domestic economic conditions on drilling activity and demand for and pricing of our products and services, other risks inherent in the drilling services industry (e.g. operational risks, potential delays or
changes in customers’ exploration or development projects or capital expenditures, the uncertainty of estimates and projections relating to levels of rental activities, uncertainty of estimates and projections of costs and expenses, risks in conducting foreign operations, the consolidation of our customers, and intense competition in our industry), and risks associated with our intellectual property and with the performance of our technology. These risks and uncertainties may cause our actual results, levels
of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Copies of our Canadian public filings are available at www.tescocorp.com and on SEDAR at www.sedar.com. Our U.S. public filings are available at www.tescocorp.com and on
EDGAR at www.sec.gov.
Please see Part I, Item 1A—Risk Factors of our annual report on Form 10-K for the year ended December 31, 2008 and Part II, Item 1A—Risk Factors of this quarterly report on Form 10-Q, for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible
for us to predict all such factors, nor to assess the impact such factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
PART I—FINANCIAL INFORMATION
ITEM 1. |
FINANCIAL STATEMENTS (UNAUDITED). |
TESCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
September 30,
2009 |
December 31,
2008 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and Cash Equivalents |
$ | 45,761 | $ | 20,619 | ||||
Accounts Receivable Trade, net |
48,725 | 97,747 | ||||||
Inventories, net |
97,716 | 96,013 | ||||||
Deferred Income Taxes |
17,512 | 10,996 | ||||||
Prepaid and Other Current Assets |
19,497 | 19,690 | ||||||
Total Current Assets |
229,211 | 245,065 | ||||||
Property, Plant and Equipment, net |
193,287 | 208,968 | ||||||
Goodwill |
29,240 | 28,746 | ||||||
Deferred Income Taxes |
13,190 | 9,066 | ||||||
Intangible and Other Assets, net |
5,818 | 7,545 | ||||||
TOTAL ASSETS |
$ | 470,746 | $ | 499,390 | ||||
LIABILITIES & SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Current Portion of Long Term Debt |
$ | 2,525 | $ | 10,171 | ||||
Accounts Payable |
21,581 | 38,946 | ||||||
Income Taxes Payable |
2,254 | 8,297 | ||||||
Deferred Revenues |
6,744 | 16,638 | ||||||
Accrued and Other Current Liabilities |
25,429 | 25,711 | ||||||
Total Current Liabilities |
58,533 | 99,763 | ||||||
Long Term Debt |
31,400 | 39,400 | ||||||
Deferred Income Taxes |
14,929 | 8,197 | ||||||
Total Liabilities |
104,862 | 147,360 | ||||||
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY |
||||||||
Common Shares |
174,345 | 171,384 | ||||||
Contributed Surplus |
15,272 | 15,708 | ||||||
Retained Earnings |
143,304 | 142,752 | ||||||
Accumulated Comprehensive Income |
32,963 | 22,186 | ||||||
Total Shareholders’ Equity |
365,884 | 352,030 | ||||||
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY |
$ | 470,746 | $ | 499,390 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TESCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share and share information)
Three Months Ended September 30, |
Nine Months Ended September 30,
|
|||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
REVENUE |
||||||||||||||||
Products |
$ | 25,186 | $ | 65,448 | $ | 117,015 | $ | 175,049 | ||||||||
Services |
47,423 | 74,573 | 154,205 | 220,497 | ||||||||||||
72,609 | 140,021 | 271,220 | 395,546 | |||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Cost of Sales and Services |
||||||||||||||||
Products |
18,319 | 39,069 | 86,712 | 110,279 | ||||||||||||
Services |
43,695 | 60,431 | 145,886 | 181,434 | ||||||||||||
62,014 | 99,510 | 232,598 | 291,713 | |||||||||||||
Selling, General and Administrative |
6,811 | 12,550 | 33,633 | 36,875 | ||||||||||||
Research and Engineering |
2,092 | 2,561 | 6,525 | 8,140 | ||||||||||||
Total Operating Expenses |
70,917 | 114,621 | 272,756 | 336,728 | ||||||||||||
OPERATING INCOME (LOSS) |
1,692 | 25,400 | (1,536 | ) | 58,818 | |||||||||||
OTHER EXPENSE |
||||||||||||||||
Interest expense |
497 | 1,098 | 1,451 | 3,552 | ||||||||||||
Interest income |
(847 | ) | (45 | ) | (896 | ) | (306 | ) | ||||||||
Foreign exchange losses |
808 | 422 | 1,106 | 748 | ||||||||||||
Other (income) expense |
(1 | ) | (99 | ) | 143 | (53 | ) | |||||||||
Total Other Expense |
457 | 1,376 | 1,804 | 3,941 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
1,235 | 24,024 | (3,340 | ) | 54,877 | |||||||||||
INCOME TAX PROVISION (BENEFIT) |
1,503 | 6,443 | (3,892 | ) | 13,939 | |||||||||||
NET (LOSS) INCOME |
$ | (268 | ) | $ | 17,581 | $ | 552 | $ | 40,938 | |||||||
(Loss) Earnings per share: |
||||||||||||||||
Basic |
$ | (0.01 | ) | $ | 0.47 | $ | 0.01 | $ | 1.10 | |||||||
Diluted |
$ | (0.01 | ) | $ | 0.46 | $ | 0.01 | $ | 1.08 | |||||||
Weighted average number of shares: |
||||||||||||||||
Basic |
37,620,269 | 37,473,597 | 37,567,286 | 37,125,680 | ||||||||||||
Diluted |
37,620,269 | 38,024,147 | 38,289,253 | 37,733,119 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TESCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine Months Ended
September 30, |
||||||||
2009 |
2008 |
|||||||
OPERATING ACTIVITIES |
||||||||
Net Income |
$ | 552 | $ | 40,938 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Depreciation and amortization |
27,423 | 24,476 | ||||||
Stock compensation expense |
3,048 | 4,603 | ||||||
Deferred income taxes |
(3,065 | ) | 1,366 | |||||
Amortization of financial items |
521 | 520 | ||||||
Gain on sale of operating assets |
(931 | ) | (15,687 | ) | ||||
Impairment of assets held for sale |
1,792 | –– | ||||||
Changes in components of working capital |
||||||||
Decrease (increase) in accounts receivable trade |
49,513 | (13,354 | ) | |||||
Decrease (increase) in inventories |
4,037 | (4,639 | ) | |||||
Increase in prepaid and other current assets |
(3,594 | ) | (5,151 | ) | ||||
Decrease in accounts payable |
(16,888 | ) | (11,888 | ) | ||||
(Decrease) increase in accrued and other current liabilities |
(6,978 | ) | 13,911 | |||||
(Decrease) increase in income taxes payable |
(6,043 | ) | 5,495 | |||||
Other, net |
(6 | ) | (1,427 | ) | ||||
Net cash provided by operating activities |
49,381 | 39,163 | ||||||
INVESTING ACTIVITIES |
||||||||
Additions to property, plant and equipment |
(13,981 | ) | (57,713 | ) | ||||
Proceeds on sale of operating assets |
4,795 | 19,783 | ||||||
Other, net |
(194 | ) | 221 | |||||
Net cash used in investing activities |
(9,380 | ) | (37,709 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Issuances of debt |
10,000 | 51,773 | ||||||
Repayments of debt |
(25,643 | ) | (78,468 | ) | ||||
Proceeds from exercise of stock options |
492 | 9,153 | ||||||
Debt issue costs |
— | (100 | ) | |||||
Excess tax benefit associated with equity based compensation |
— | 1,036 | ||||||
Net cash used in financing activities |
(15,151 | ) | (16,606 | ) | ||||
Effect of foreign exchange losses on cash balances |
292 | 5 | ||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
25,142 | (15,147 | ) | |||||
Net Cash and Cash Equivalents, beginning of period |
20,619 | 23,072 | ||||||
Net Cash and Cash Equivalents, end of period |
$ | 45,761 | $ | 7,925 | ||||
Supplemental Cash Flow Information |
||||||||
Cash paid during the period for interest |
$ | 877 | $ | 3,372 | ||||
Cash paid during the period for income taxes |
$ | 11,589 | $ | 6,649 | ||||
Cash receipts during the period for interest |
$ | 901 | $ | 295 | ||||
Cash receipts during the period for income taxes |
$ | 6,752 | $ | 391 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TESCO CORPORATION
Notes to Condensed Consolidated Financial Statements
Note 1—Summary of Significant Accounting Policies
Nature of Operations
Tesco Corporation (“TESCO” or the “Company”) is a global leader in the design, manufacture and service delivery of technology based solutions for the upstream energy industry. We seek to change the way people drill wells by delivering safer and more efficient solutions that add real value by reducing the costs of drilling
for and producing oil and gas. Our product and service offerings include proprietary technology, including TESCO CASING DRILLING® (“CASING DRILLING”), TESCO’s Casing Drive System™ (“CDS”) and TESCO’s Multiple Control Line Running System™ (“MCLRS”).
TESCO® is a registered trademark in Canada and the United States. TESCO CASING DRILLING® is a registered trademark in the United States. CASING DRILLING® is a registered trademark in Canada and CASING DRILLING™ is
a trademark in the United States. Casing Drive System™, CDS™, Multiple Control Line Running System™ and MCLRS™ are trademarks in Canada and the United States.
Basis of Presentation
These Condensed Consolidated Financial Statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
The condensed consolidated financial statements include the accounts of the Company and its majority owned domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company is organized under the laws of Alberta and is therefore subject to the Business
Corporation Act (Alberta). The Company is also a reporting issuer (or the equivalent) in each of the provinces of Canada. Effective December 31, 2006, the Company became a U.S. registrant and a domestic filer with the SEC.
The Company incurs costs directly and indirectly associated with its revenues at a business unit level. Direct costs include expenditures specifically incurred for the generation of revenue, such as personnel costs on location or transportation, maintenance and repair, and depreciation of its revenue-generating equipment. Overhead costs,
such as field administration and field operations support, are not directly associated with the generation of revenue within a particular business segment.
The Company has performed an evaluation of potential recognition or disclosure of events or transactions subsequent to September 30, 2009 through November 4, 2009, which is the date the financial statements were issued.
Market for Common Stock
TESCO’s common stock is traded on The Nasdaq Global Market (“NASDAQ”) under the symbol “TESO.” Until June 30, 2008, TESCO’s common stock was also traded on the Toronto Stock Exchange (“TSX”) under the symbol “TEO.”
Effective June 30, 2008, the Company voluntarily delisted its shares from the TSX.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of the Company’s worldwide operations except for its Canadian operations. For foreign operations where the local currency is the functional currency, specifically the Company’s Canadian operations, assets and liabilities denominated in foreign currencies are translated into U.S.
dollars at end-of-period exchange rates, and the resulting translation adjustments are reported, net of their related tax effects, as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity. Assets and liabilities denominated in currencies other than the functional currency are remeasured into the functional currency prior to translation into U.S. dollars, and the resulting exchange gains and losses are included in income in the period in which they occur. Income and expenses
are translated into U.S. dollars at the average exchange rates in effect during the period.
Revenue Recognition
The Company recognizes revenues when the earnings process is complete and collectability is reasonably assured. TESCO recognizes revenues for product sales when title and risk of loss of the equipment are transferred to the customer, with no right of return. Revenue in the Top Drive segment may be generated from contractual arrangements that
include multiple deliverables. Revenue from these arrangements is recognized as each item or service is delivered based on their relative fair value and when the delivered items or services have stand-alone value to the customer. For project management services, service and repairs and rental activities, TESCO recognizes revenues as the services are rendered based upon agreed daily, hourly or job rates.
The Company provides product warranties on equipment sold pursuant to manufacturing contracts and provides for the anticipated cost of its warranties in cost of sales when sales revenue is recognized. The accrual of warranty costs is an estimate based upon historical
experience and upon specific warranty issues as they arise. The Company periodically reviews its warranty provision to assess its adequacy in light of actual warranty costs incurred. Because the warranty accrual is an estimate, it is reasonably possible that future warranty issues could arise that could have a significant impact on the Company’s financial statements.
The following is a reconciliation of changes in the Company’s warranty accrual for the nine months ended September 30, 2009 and the year ended December 31, 2008 (in thousands):
Nine Months Ended
September 30, 2009 |
Year Ended
December 31, 2008 |
|||||||
Balance—beginning of period |
$ | 3,326 | $ | 3,045 | ||||
Charged to expense, net |
161 | 1,684 | ||||||
Charged to other accounts(a) |
73 | (129 | ) | |||||
Deductions |
(895 | ) | (1,274 | ) | ||||
Balance—end of period |
$ | 2,665 | $ | 3,326 |
(a) |
Represents currency translation adjustments and reclassifications. |
Deferred Revenues
The Company generally requires customers to pay a non-refundable deposit for a portion of the sales price for top drive units with their order. These customer deposits are deferred until the customer takes title and risk of loss of the product.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The primary factors used in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency and management’s estimate of ability to collect
outstanding receivables based on the number of days outstanding. At September 30, 2009 and December 31, 2008, the allowance for doubtful accounts on Trade Accounts Receivable was $2.2 million and $3.2 million, respectively.
Inventories
Inventory consists primarily of specialized tubular services and casing tool parts, spare parts, work in process, and raw materials to support the Company’s ongoing manufacturing operations and its installed base of specialized equipment used throughout the world. During the manufacturing process, the Company values its inventories
(work in progress and finished goods) primarily using standard costs, which approximate actual costs, and such costs include raw materials, direct labor and manufacturing overhead allocations.
Inventory costs for manufactured equipment are stated at the lower of cost or market using specific identification. Inventory costs for spare parts are stated at the lower of cost or market using the average cost method. The Company performs obsolescence reviews on its slow-moving and excess inventories and establishes reserves based on such
factors as usage of inventory on-hand, technical obsolescence and market conditions, as well as future expectations related to its manufacturing sales backlog, its installed base and the development of new products.
At September 30, 2009 and December 31, 2008, inventories, net of reserves for excess and obsolete inventories, by major classification were as follows (in thousands):
September 30,
2009 |
December 31,
2008 |
|||||||
Raw materials |
$ | 37,450 | $ | 26,049 | ||||
Work in progress |
2,835 | 2,648 | ||||||
Finished goods |
57,431 | 67,316 | ||||||
$ | 97,716 | $ | 96,013 |
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Maintenance and repairs are expensed as incurred. The costs of replacements, betterments and renewals are capitalized. When properties and equipment, other than top drive units in the Company’s rental fleet, are sold, retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the books and the resulting gain or loss is recognized in the accompanying Condensed Consolidated Statements of Income. When top drive units in the Company’s rental fleet are sold, the sales proceeds are included in revenues and the net book value of the equipment sold is included in Cost of Sales and Services in the accompanying Condensed Consolidated Statements of Income.
Drilling equipment includes related manufacturing costs and overhead. The net book value of used top drive rental equipment sold included in Cost of Sales and Services in the accompanying Condensed Consolidated Statements of Income was $1.9 million and $0.6 million for the three months ended September 30, 2009 and 2008, respectively and $2.9
million and $2.3 million for the nine months ended September 30, 2009 and 2008, respectively. During the three and nine months ended September 30, 2009, the Company recognized net gains of $1.6 million and $1.1 million, respectively related to the sales of ancillary operating equipment.
Depreciation and amortization expense is included in the Condensed Consolidated Statements of Income as follows (in thousands):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Cost of sales and services |
$ | 8,730 | $ | 8,812 | $ | 26,370 | $ | 23,618 | ||||||||
Selling, general and administrative expense |
308 | 236 | 989 | 774 | ||||||||||||
Research and engineering |
40 | 19 | 64 | 84 | ||||||||||||
$ | 9,078 | $ | 8,437 | $ | 27,423 | $ | 24,476 |
Assets Held for Sale
During the year ended December 31, 2008, the Company listed for sale a building and land located in Canada. The Company incurred approximately $0.3 million and $0.9 million in soil remediation costs to prepare the property for sale during the three and nine months ended September 30, 2008, and $0.1 million and $0.1 million in soil remediation
costs to prepare the property for sale during the three and nine months ended September 30, 2009. These costs were capitalized and reported as an increase in the property’s net book value as of September 30, 2009. The property has a carrying value of $2.0 million and $1.7 million, net of accumulated depreciation as of September 30, 2009 and December 31, 2008, respectively, and is included in Property, Plant and Equipment in the accompanying Condensed Consolidated Balance Sheets.
During the three months ended June 30, 2009, the Company made the decision to sell operating assets located in North America within the next 12 months for an amount expected to be less than their current carrying amount. As a result, the Company recorded a pre-tax impairment loss of approximately $1.8 million to write down the
fixed assets to their estimated realizable value of $0.2 million as of June 30, 2009. The impairment loss is included in the Tubular Services segment as a part of Cost of Sales and Services in the accompanying Condensed Consolidated Statements of Income for the nine months ended September 30, 2009. The Company ceased depreciating the assets at the time they were classified as held for sale and has reflected the current carrying amount in Property, Plant and Equipment in the accompanying Condensed Consolidated
Balance Sheets.
Investments
The Company's securities are considered available-for-sale and are reported at fair value based upon quoted market prices in the accompanying Condensed Consolidated Balance Sheets. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in Accumulated
Other Comprehensive Income within Shareholders’ Equity. Realized gains and losses on sales of investments based on specific identification of securities sold are included in Other Expense in the Condensed Consolidated Statements of Income. The Company held no investments in securities during the three and nine months ended September 30, 2009 or 2008.
Goodwill and Other Intangible Assets
Goodwill, which represents the value of businesses acquired by the Company in excess of the fair market value of all of the identifiable tangible and intangible net assets of the acquired businesses at the time of their acquisition, is carried at the lower of cost or fair value. The Company’s goodwill has an indefinite useful life and
is subject to an annual impairment test in the fourth quarter of each year or the occurrence of a triggering event. Any resulting impairment loss is charged to income and disclosed separately in the Condensed Consolidated Statements of Income.
During the three months ended June 30, 2009, the Company performed an interim impairment test of its goodwill due to events and changes in circumstances during the second quarter of 2009 that indicated an impairment might have occurred. The primary factor deemed by management to have constituted a potential impairment triggering event was
a significant decline in revenues experienced in the second quarter of 2009. For purposes of the analysis, the Company made significant management assumptions including sales volumes and prices, costs of products and services, capital spending, working capital changes, terminal value multiples and the discount rate. The discount rate is commensurate with the risk inherent in the projected cash flows and reflects the rate of return required by an investor in the current economic conditions. Inherent in the Company’s
projections are key assumptions relative to how long the current downward economic cycle might last. Furthermore, the financial and credit market volatility directly impacts the fair value measurement through the weighted-average cost of capital that was used to determine the discount rate. During times of volatility, significant judgment must be applied to determine whether credit changes are a short term or long term trend. No impairment losses were incurred as a result of this interim test. However, if actual
results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, the Company could be exposed to future impairment losses that could be material to its results of operations.
The Company determined that no such triggering event occurred during the three months ended September 30, 2009, and accordingly, did not perform an impairment analysis on its goodwill during the current period. The change in the carrying amount of goodwill of $0.5 million from December 31, 2008 to September 30, 2009 is due to the
effect of foreign currency exchange rates.
The Company has capitalized certain identified intangible assets, primarily customer relationships, patents, licenses, and non-compete agreements, based on their estimated fair value at the date acquired. The customer relationships intangible assets are amortized on a straight-line basis over an estimated economic life of four to seven years,
the patents are amortized on a straight-line basis over an estimated economic life of 10 to 14 years, and the non-compete agreements are amortized on a straight-line basis over the term of the agreements of four years. These amortizable intangible assets are reviewed at least annually for impairment or when circumstances indicate their carrying value may not be recoverable based on a comparison of fair value to carrying value. The Company determined that no such circumstance existed during the three or nine months
ended September 30, 2009, and accordingly, did not perform an impairment analysis on its intangible assets. No impairment losses were incurred during the nine months ended September 30, 2009 or the year ended December 31, 2008. If a future impairment loss is recognized, it will be charged to income and disclosed separately in the Condensed Consolidated Statements of Income.
Derivative Financial Instruments
As a result of its worldwide operations, the Company is exposed to market risks from changes in interest and foreign currency exchange rates, which may affect its operating results and financial position. The Company manages its risks from fluctuations in interest and foreign currency exchange rates through its normal operating and financing
activities. However, from time to time, the Company may manage its interest and foreign exchange rate risks through the use of derivative financial instruments. The Company does not use derivative financial instruments for trading or speculative purposes.
During the nine months ended September 30, 2008, the Company entered into a series of 14 monthly foreign currency forward contracts with notional amounts aggregating C$50.8 million. The Company subsequently settled two of these contracts and terminated the remaining 12 contracts, and recognized a loss of $0.2 million for the nine months
ended September 30, 2008, which was included in Foreign exchange losses in the Condensed Consolidated Statements of Income. In the Consolidated Statement of Cash Flows, cash receipts or payments related to these exchange contracts are classified consistent with the cash flows from the transaction being hedged.
The Company was not party to any derivative financial instruments as of September 30, 2009 or December 31, 2008.
Fair Value Measurement
The Company measures and reports its financial assets and liabilities at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available for certain financial instruments and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve some degree of judgment and as a result are not necessarily indicative of the amounts the Company
would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts. These valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The Company uses a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value
measurements:
Level 1 Inputs—Quoted prices for identical instruments in active markets.
Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs—Instruments with primarily unobservable value drivers.
The Company held no assets or liabilities carried at fair value as of December 31, 2008. During the three months ended June 30, 2009, the Company made the decision to sell operating assets located in North America within the next 12 months. These fixed assets had a carrying amount of $2.0 million, and were written down to their
estimated realizable value of $0.2 million during the nine months ended September 30, 2009. The estimated realizable fair value was derived from observable market prices in the form of quotations received from independent third parties (“Level 2” inputs). The resulting impairment charge of $1.8 million is included in Cost of Sales and Services in the accompanying Condensed Consolidated Statements of Income for the nine months ended September 30, 2009. The following table presents the Company’s
assets at fair value and the basis for determining their fair values (in thousands):
As of
September 30,
2009 |
Quoted Prices in Active Markets
for Identical
Assets |
Significant
Other
Observable
Inputs |
Significant
Unobservable
Inputs |
Total
Losses |
||||||||||||||||
Assets held for sale |
$ | 200 | $ | — | $ | 200 | — | $ | 1,800 |
The Company was party to derivative contracts during the nine months ended September 30, 2008. The Company uses a market approach to value the assets and liabilities for outstanding derivative contracts, which historically consisted solely of foreign currency forward contracts as discussed in Note 1 above. These contracts are valued
using current market information in the form of foreign currency spot rates as of the reporting date. The Company recognizes the unrealized net gains or losses on these contracts on the accrual basis in Foreign exchange losses in the Condensed Consolidated Statements of Income. The Company was not party to any derivative financial instruments as of September 30, 2009 or December 31, 2008.
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short-term period to maturity of the instruments.
The fair value of the Company’s long term debt depends primarily on current market interest rates for debt issued with similar maturities by companies with risk profiles similar to TESCO. The fair value of its debt related to the Company’s credit facility at September 30, 2009 of $31.4 million is estimated to be $29.8 million.
The Company also has short term debt in the form of a term loan. The fair value of the Company’s term loan of $2.5 million at September 30, 2009 is estimated to be $2.5 million.
Accounting for Operating Leases
The Company has entered into non-cancelable operating lease agreements primarily involving office space. Certain of these leases contain escalating lease payments and the Company recognizes expense on a straight line basis which is more representative of the time pattern in which the leased property is physically employed. In certain instances
the Company is also entitled to reimbursements for part or all of leasehold improvements made and records a deferred credit for such reimbursements which is amortized over the remaining life of the lease term as a reduction in lease expense.
Research and Engineering Expenses
The Company expenses research and engineering costs when incurred. Payments received from third parties, including payments for the use of equipment prototypes, during the research or development process are recognized as a reduction in research and engineering expense when the payments are received.
Severance Costs
During the three and nine months ended September 30, 2009, the Company eliminated approximately 50 and 490 employee positions, respectively, due to a review of its personnel structure and recorded $0.3 million and $3.2 million, respectively, in termination benefits associated with the reductions. These severance costs were recorded in Cost
of Sales and Services ($0.2 million and $1.5 million for the three and nine months ended September 30, 2009, respectively), Research and Engineering expense ($0.1 million and $0.4 million for the three and nine months ended September 30, 2009, respectively) and Selling, General and Administrative expense ($0 million and $1.3 million for the three and nine months ended September 30, 2009, respectively) in the accompanying Condensed Consolidated Statements of Income based on the respective functions performed by
those employees who were terminated during the period. These costs were recorded in the Company’s operating segments as follows (in thousands):
Three Months Ended
September 30, 2009 |
Nine Months Ended
September 30, 2009 |
|||||||
Top Drive |
$ | 171 | $ | 1,059 | ||||
Tubular Services |
50 | 398 | ||||||
Casing Drilling |
18 | 157 | ||||||
Research and Engineering |
91 | 417 | ||||||
Corporate and Other |
–– | 1,193 | ||||||
Total Severance Costs |
$ | 330 | $ | 3,224 |
Accrued severance costs were included in Accrued and Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheets as follows (in thousands):
Three Months Ended
September 30, 2009 |
Nine Months Ended
September 30, 2009 |
|||||||
Balance—beginning of period |
$ | 589 | $ | –– | ||||
Charged to expense |
330 | 3,224 | ||||||
Payments |
(794 | ) | (3,099 | ) | ||||
Balance—end of period |
$ | 125 | $ | 125 |
During the nine months ended September 30, 2008, the Company eliminated approximately 100 employee positions due to a review of its personnel structure and recorded termination benefits of $1.1 million associated with the reduction. These severance costs are recorded in Cost of Sales and Services ($0.1 million and $0.9 million for the three
and nine months ended September 30, 2008, respectively), Research and Engineering expense ($0.0 million and $0.1 million for the three and nine months ended September 30, 2008, respectively) and Selling, General and Administrative expense ($0.0 million and $0.1 million for the three and nine months ended September 30, 2008, respectively) in the accompanying Condensed Consolidated Statements of Income based on the respective functions performed by those employees who were terminated during the period.
Income Taxes
Stock-Based Compensation
On May 18, 2007, the Company’s shareholders approved amendments to its 2005 Incentive Plan to, among other things, provide for a variety of forms of equity compensation awards to be granted to employees, directors and other persons. As a result, the Company changed the method by which it provides stock-based compensation to its employees
by reducing the number of stock options granted and instead issuing restricted stock awards as a form of compensation. The Company has granted two different types of restricted stock awards: restricted stock units (“RSU”s) which are subject to time based vesting criteria and performance share units (“PSU”s) which contain both time and performance based criteria. Both RSUs and PSUs may be settled by delivery of shares or the payment of cash equal to the market value of TESCO shares that
would otherwise be deliverable at the time of settlement at the discretion of the Company. For further description of the Company’s stock-based compensation plan, see Note 4 below.
The Company measures stock-based compensation cost for equity-classified awards as of grant date or the employee start date for pre-employment grants, based on the estimated fair value of the award less an estimated rate for pre-vesting forfeitures, and recognizes compensation expense on a graded basis over the vesting period. Compensation
expense is recognized with an offsetting credit to Contributed Surplus, which is then transferred to Common Shares when the award is distributed or the option is exercised. Consideration received on the exercise of stock options is credited to Common Shares. For stock option grants, the Company uses a Black-Scholes valuation model to determine the estimated fair value.
During the preparation of the Company’s financial statements for the three months ended June 30, 2009, the Company determined that Canadian dollar-denominated stock option awards previously issued to non-Canadian employees qualify for liability classification due to the Company’s voluntary delisting from the TSX effective June
30, 2008. Accordingly, the fair value of these awards was reclassified from Contributed Surplus to Accrued and Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2009, and is adjusted to fair value at the end of each subsequent reporting period. The impact to the Company’s financial statements for the three month periods ended September 30, 2008, December 31, 2008 and March 31, 2009 and for the year ended December 31, 2008 was not material. At September 30,
2009, the fair value of these awards was approximately $0.8 million.
Stock compensation expense is recorded in Cost of Sales and Services, Research and Engineering expense and Selling, General and Administrative expense in the accompanying Condensed Consolidated Statements of Income based on the respective functions for those employees receiving stock option grants. Stock compensation expense is included
in the Condensed Consolidated Statements of Income as follows (in thousands):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Cost of Sales and Services |
$ | 168 | $ | 306 | $ | 627 | $ | 1,230 | ||||||||
Selling, General and Administrative Expense |
78 | 958 | 2,207 | 2,991 | ||||||||||||
Research and Engineering |
43 | 105 | 214 | 382 | ||||||||||||
$ | 289 | $ | 1,369 | $ | 3,048 | $ | 4,603 |
During the three and nine months ended September 30, 2009, the Company recorded a reversal of approximately $0.7 million and $0.9 million, respectively, in stock compensation expense related to performance stock units in response to the current year’s operating results.
Per Share Information
The following table reconciles basic and diluted weighted average shares (in thousands):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Basic weighted average number of shares outstanding |
37,620 | 37,474 | 37,567 | 37,126 | ||||||||||||
Dilutive effect of stock compensation awards |
–– | 550 | 722 | 607 | ||||||||||||
Diluted weighted average number of shares outstanding |
37,620 | 38,024 | 38,289 | 37,733 | ||||||||||||
Weighted average anti-dilutive options excluded from calculation due to exercise prices |
944 | 87 | 3,850 | 1,034 | ||||||||||||
Weighted average anti-dilutive options excluded from calculation due to reported net loss |
656 | –– | –– | –– |
For the three months ended September 30, 2009, the weighted average diluted shares outstanding excluded 656,388 shares because the Company reported a loss during the period, and including them would have had an anti-dilutive effect on loss per share.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“Codification”) became the single source of authoritative U.S. GAAP. The Codification did not create any new U.S. GAAP standards but incorporated existing accounting and reporting standards into a new topical structure with a new referencing system to identify authoritative accounting standards, replacing the prior references to Statement of Financial Accounting Standards (“SFAS”), Emerging Issues Task Force (“EITF”), FASB Staff Position (“FSP”) and other publications. Authoritative standards included in the Codification are designated by their Accounting Standards Codification (“ASC”) topical reference, and new standards will be designated as Accounting Standards Updates (ASU), with a year and assigned sequence number. Beginning with this interim report for the third quarter of 2009, references to prior standards have been updated to reflect the new referencing system.
In October 2009, the FASB issued updated guidance that allows for more flexibility in determining the value of separate elements in revenue arrangements with multiple deliverables. This guidance modifies the requirements for determining whether a deliverable can
be treated as a separate unit of accounting by removing the criteria that verifiable and objective evidence of fair value exists for the undelivered elements. All entities must adopt no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Upon adoption, entities may choose between the prospective application for transactions entered into or materially modified after the date of adoption, or the retroactive application for all revenue arrangements for all periods
presented. Disclosures will be required when changes in either those judgments or the application of this guidance significantly affect the timing or amount of revenue recognition. The Company will adopt these provisions on January 1, 2011. The Company is currently evaluating the potential impact these standards may have on the consolidated financial statements.
In June 2009, the FASB issued new accounting guidance that clarifies the characteristics that identify a variable interest entity (“VIE”) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based
on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This guidance requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk
exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. This update is effective for fiscal years beginning after November 15, 2009. The Company will adopt these provisions on January 1, 2010 and the adoption is not expected to have a material impact on the consolidated financial statements.
In June 2009, the FASB issued new accounting guidance that enhances the information provided to financial statement users to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. Under this Statement, many types of transferred financial
assets that would have been derecognized previously are no longer eligible for derecognition. This Statement requires enhanced disclosures about the risks to which a transferor continues to be exposed due to its continuing involvement in transferred financial assets. This Statement also clarifies and improves certain provisions in previously issued statements that have resulted in inconsistencies in the application of the principles on which that Statement is based. These updates are effective for annual reporting
periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will adopt these provisions on January 1, 2010 and the adoption is not expected to have a material impact on the consolidated financial statements.
In May 2009, the FASB issued new accounting guidance which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events.
The Company adopted the new disclosure requirements of its financial statements issued for the period ended June 30, 2009 and the adoption did not have a material impact on the consolidated financial statements. See “Basis of Presentation,” above.
In April 2009, the FASB issued new guidance that requires that a registrant to disclose the fair value of all financial instruments for interim reporting periods and in its financial statements for annual reporting periods, whether recognized or not recognized in the statement of financial position. The Company adopted the updated guidance
for the interim reporting period ended March 31, 2009 and the adoption did not have a material impact on the Company’s consolidated financial statements as the Statement required additional disclosures but no change in accounting policy. See “Fair Value Measurement,” above.
In April 2008, the FASB issued an update to existing accounting standards that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the update is to improve the consistency between the useful life of a recognized
intangible asset under existing accounting standards and the period of expected cash flows used to measure the fair value of the asset under accounting guidance for business combinations and other applicable accounting literature. The Company adopted the updated guidance on January 1, 2009 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued an update to existing accounting standards enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under previously issued
standards and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company adopted the provisions of the updated guidance on January 1, 2009 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued an update to previously issued accounting guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, this Statement requires that consolidated net income include the amounts attributable to both the parent and the noncontrolling interest. The Company adopted the updated guidance on January 1, 2009 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued a revision to previously issued accounting standards which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
The update also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This guidance is effective on a prospective basis to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and early adoption is
prohibited. In February 2009, the FASB issued additional updates which amended the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under the guidance. The Company adopted both of the updates on a prospective basis effective January 1, 2009 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued new accounting guidance that affirms that the objective of fair value when the market for an asset is not active; clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset in an inactive market; eliminates the proposed presumption
that all transactions are distressed and requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the guidance. The updated guidance must be applied prospectively and retrospective application is not permitted. The Company elected to adopt the updated guidance in the first quarter of 2009, and the adoption did not have a material impact on the Company’s consolidated financial statements.
Note 2—Out of Period Adjustments
During the preparation of the Company’s financial statements for the nine months ended September 30, 2009, the Company discovered errors in the financial statements for the years ended December 31, 2007 and 2008. The errors related to foreign currency
translation adjustments of deferred tax assets and understated accrued liabilities. As a result of these errors, deferred tax assets were overstated by $1.3 million and understated by $1.0 million as of December 31, 2007 and 2008, respectively, and accrued liabilities as of December 31, 2008 were understated by $0.6 million. In addition, net income for the years ended December 31, 2007 and 2008 was understated by $0.2 million and overstated by $2.7 million, respectively, and other comprehensive
income was overstated by $3.3 million and understated by $1.7 million, respectively.
The Company assessed the materiality of the errors mentioned above and aggregated with other identified errors and concluded that they were immaterial to previously reported annual or interim amounts and that the correction of the errors in 2009 would not be material to estimated full year 2009 results of operations. Accordingly, the Company
corrected these errors in the financial statements for the nine months ended September 30, 2009 and did not restate its consolidated financial statements for the years ended December 31, 2007 and 2008. The effect of recording these corrections in the accompanying Condensed Consolidated Income Statement was a decrease in net income of $0.7 million for the nine months ended September 30, 2009.
The Company has revised its Condensed Consolidated Balance Sheet as of December 31, 2008 to correct an error in the classification of Prepaid Value Added Taxes (“VAT”). This revision does not impact the Condensed Consolidated Statements of Operations or the Consolidated Statement of Cash Flows for any period. During the preparation
of the Company’s financial statements for the three months ended June 30, 2009, the Company noted that the December 31, 2008 balance for outstanding prepaid VAT was misclassified on the balance sheet. The Company assessed the materiality of the error and concluded that it was immaterial to previously reported financial statements. Accordingly, the Company corrected this error in the accompanying Condensed Consolidated Balance Sheets and did not restate its Consolidated Financial Statements for
the year ended December 31, 2008. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2008 is presented in revised form by increasing prepaid and other current assets by $6.2 million and increasing accrued liabilities by $6.2 million.
Note 3—Long Term Debt
Long term debt consists of the following (in thousands):
September 30,
2009 |
December 31,
2008 |
|||||||
Secured Revolver, maturity date of June 5, 2012, 1.50% and 1.99% interest rate at
September 30, 2009 and December 31, 2008, respectively |
$ | 31,400 | $ | 39,400 | ||||
Secured Term Loan, maturity date of October 31, 2009, 1.50% and 4.44% interest rate at
September 30, 2009 and December 31, 2008, respectively |
2,525 | 10,018 | ||||||
Other |
— | 153 | ||||||
Total Debt |
33,925 | 49,571 | ||||||
Less—Current Portion of Long Term Debt |
(2,525 | ) | (10,171 | ) | ||||
Non-Current Portion of Long Term Debt |
$ | 31,400 | $ | 39,400 |
Amounts outstanding under the Secured Term Loan issued under the Company’s credit agreement require quarterly payments on the principal amount outstanding.
On June 5, 2007, the Company and its existing lenders entered into an amended and restated credit agreement (the “Amended Credit Agreement”) to provide up to $100 million in revolving loans including up to $15 million of swingline loans (collectively, the “Revolver”) and a term loan which had a balance of $25.0 million
as of June 5, 2007 with required quarterly payments through October 31, 2009. The Amended Credit Agreement has a term of five years and all outstanding borrowings on the Revolver will be due and payable on June 5, 2012. In December 2007, the Company entered into the first amendment to the Amended and restated Credit agreement to increase the Revolver to provide up to $145 million. In March 2008, it entered into a second amendment to the Amended Credit Agreement in order to increase the limit on permitted
capital expenditures during the quarters ending March 31, June 30 and September 30, 2008 from 70% to 85% of consolidated EBITDA (as defined in the Amended Credit Agreement). Amounts available under the Revolver are reduced by letters of credit issued under the Amended Credit Agreement not to exceed $20 million in the aggregate of all undrawn amounts and amounts that have yet to be disbursed under all existing letters of credit. The availability of future borrowings may be limited in order to maintain certain
financial ratios required under the covenants. Amounts available under the swingline loans may also be reduced by letters of credit or by means of a credit to a general deposit account of the applicable borrower.
Note 4—Shareholders’ Equity and Stock-Based Compensation
Common Stock
The following summarizes the activity in the Company’s common shares during the nine months ended September 30, 2009 and for the year ended December 31, 2008 (dollar amounts in thousands):
Nine Months Ended
September 30, 2009 |
Year Ended
December 31, 2008 |
|||||||||||||||
No. of shares |
Amount |
No. of shares |
Amount |
|||||||||||||
Balance—beginning of period |
37,513,861 | $ | 171,384 | 36,844,763 | $ | 154,332 | ||||||||||
Issued on exercise of options |
43,000 | 542 | 626,535 | 15,698 | ||||||||||||
Issuance from settlement of restricted stock |
84,586 | 2,285 | 31,159 | 1,129 | ||||||||||||
Other issuance of common stock |
17,539 | 134 | 11,404 | 225 | ||||||||||||
Balance—end of period |
37,658,986 | $ | 174,345 | 37,513,861 | $ | 171,384 |
Stock-Based Compensation
Under the terms of the Company’s stock option plan, as amended, 3,765,899 shares of common stock were authorized as of September 30, 2009 for the grant of stock and stock options to eligible directors, officers, employees and other persons. At September 30, 2009, the Company had approximately 1,584,170 shares available for future grants.
In May 2007, the Company amended and restated its incentive plan, now called the Amended and Restated Tesco Corporation 2005 Incentive Plan (the “Restated Plan”). Prior to May 2007, the Company granted stock options denominated only in Canadian dollars. Under the Restated Plan, stock options and other stock based awards may be
denominated in Canadian dollars or U.S. dollars, at the Company’s discretion. During the preparation of the Company’s financial statements for the three months ended June 30, 2009, the Company determined that Canadian dollar-denominated stock option awards previously issued to non-Canadian employees qualify for liability classification due to the Company’s voluntary delisting from the TSX effective June 30, 2008. Accordingly, the fair value of these awards was reclassified from Contributed Surplus
to Accrued and Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2009, and is adjusted to fair value at the end of each reporting period. The impact to the Company’s financial statements for the three month periods ended September 30, 2008, December 31, 2008 and March 31, 2009 and for the year ended December 31, 2008 was not material. At September 30, 2009, the fair value of these awards was approximately $0.8 million. No payments were made for stock-based
awards classified as liabilities during the three and nine months ended September 30, 2009.
With all shares of common stock being traded on the NASDAQ, the Company plans to denominate all future grants of equity-based awards in U.S. dollars. Options granted by the Company have historically vested ratably over a three year period and expired no later
than seven years from the date of grant, although the Board of Directors may choose different parameters in the future. The exercise price of stock options under the plan may not be less than the fair value on the date of the grant, as defined in the Restated Plan.
Stock Options
The following summarizes option activity for the options issued in Canadian dollars during the nine months ended September 30, 2009 and 2008:
Nine Months Ended
September 30, 2009 |
Nine Months Ended
September 30, 2008 |
|||||||||||||||
No. of options |
Weighted-average
exercise
price |
No. of options |
Weighted-Average
Exercise
price |
|||||||||||||
Outstanding—beginning of period |
831,954 | C$ | 20.69 | 1,593,962 | C$ | 18.62 | ||||||||||
Granted |
— | C$ | — | 46,300 | C$ | 24.44 | ||||||||||
Exercised |
(20,000 | ) | C$ | 9.89 | (626,535 | ) | C$ | 14.87 | ||||||||
Cancelled |
(121,759 | ) | C$ | 20.25 | (174,033 | ) | C$ | 23.41 | ||||||||
Outstanding—end of period |
690,195 | C$ | 21.08 | 839,694 | C$ | 20.75 | ||||||||||
Exercisable—end of period |
595,397 | C$ | 20.58 | 525,919 | C$ | 18.43 |
The following summarizes option activity for the options issued in U.S. dollars during the nine months ended September 30, 2009 and 2008:
Nine Months Ended
September 30, 2009 |
Nine Months Ended
September 30, 2008 |
|||||||||||||||
No. of options |
Weighted-Average
Exercise
price |
No. of options |
Weighted-Average
Exercise
price |
|||||||||||||
Outstanding—beginning of period |
647,100 | $ | 13.15 | — | $ | — | ||||||||||
Granted |
45,000 | $ | 8.60 | 195,800 | $ | 28.54 | ||||||||||
Exercised |
(23,000 | ) | $ | 7.51 | — | $ | — | |||||||||
Cancelled |
(82,067 | ) | $ | 11.29 | (26,900 | ) | $ | 25.65 | ||||||||
Outstanding—end of period |
587,033 | $ | 13.28 | 168,900 | $ | 29.00 | ||||||||||
Exercisable—end of period |
51,521 | $ | 29.41 | — | $ | — |
The assumptions used in the Black-Scholes option pricing model during the nine months ended September 30, 2009 and 2008 were:
U.S. Dollar Options
Nine Months Ended
September 30, |
Canadian Dollar Options
Nine Months Ended
September 30, |
|||||||||||||||
Assumptions |
2009 |
2008 |
2009
(Note A) |
2008 |
||||||||||||
Weighted average risk-free interest rate |
2.20 | % | 3.01 | % | 2.32 | % | 3.50 | % | ||||||||
Expected dividend |
$ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||
Expected option life (years) |
4.5 | 4.5 | 1.8 | 4.5 | ||||||||||||
Weighted average expected volatility |
66 | % | 50 | % | 79 | % | 51 | % | ||||||||
Weighted average expected forfeiture rate |
8 | % | 9 | % | 11 | % | 17 | % |
Note A: |
Assumptions used in the Black-Scholes pricing model during the nine months ended September 30, 2009 for Canadian dollar options were used for revaluing liability-classified stock option awards to fair value. |
Restricted Stock
Beginning in 2007, the Company began granting two different types of stock-based awards: Restricted Stock Units (“RSU”s), which vest equally in three annual installments from date of grant and entitle the grantee to receive the value of one share of TESCO common stock upon vesting, and Performance Stock Units (“PSU”s),
which vest in full after three years and include a performance measure. PSU awards entitle the grantee to receive the value of one share of TESCO common stock for each PSU, subject to adjustments based on the performance measure. The PSU performance objective multiplier can range from zero when threshold performance is not met to a maximum of 2.5 times the initial award. Both RSUs and PSUs may be settled by delivery of shares or the payment of cash based on the market value of a TESCO share at the time of settlement
at the discretion of the Company.
The following summarizes restricted stock activity during the nine months ended September 30, 2009:
U.S. Dollars |
Canadian Dollars |
|||||||||||||||
Shares |
Weighted-
Average
grant date
fair value |
Shares |
Weighted-
Average
Grant date
fair value |
|||||||||||||
Outstanding—beginning of period |
625,200 | $ | 12.22 | 119,407 | C$ | 33.10 | ||||||||||
Granted |
22,500 | $ | 8.64 | — | C$ | — | ||||||||||
Vested |
(45,309 | ) | $ | 23.09 | (39,277 | ) | C$ | 32.99 | ||||||||
Cancelled |
(83,335 | ) | $ | 11.46 | (9,535 | ) | C$ | 33.57 | ||||||||
Outstanding—end of period |
519,056 | $ | 11.23 | 70,595 | C$ | 33.10 | ||||||||||
The following summarizes restricted stock activity during the nine months ended September 30, 2008:
U.S. Dollars |
Canadian Dollars |
|||||||||||||||
Shares |
Weighted-
Average
grant date
fair value |
Shares |
Weighted-
Average
Grant date
fair value |
|||||||||||||
Outstanding—beginning of period |
–– | $ | –– | 141,100 | C$ | 36.15 | ||||||||||
Granted |
156,400 | $ | 27.22 | 35,600 | C$ | 24.67 | ||||||||||
Vested |
–– | $ | –– | (31,159 | ) | C$ | 36.22 | |||||||||
Cancelled |
(19,100 | ) | $ | 25.12 | (25,200 | ) | C$ | 34.30 | ||||||||
Outstanding—end of period |
137,300 | $ | 27.51 | 120,341 | C$ | 33.13 |
The weighted average expected forfeiture rate is 14% for RSUs and 5% for PSUs.
Note 5—Comprehensive Income
Comprehensive income includes unrealized gains and losses of the Company which have been recognized during the period as a separate component of Shareholders’ Equity. The Company’s total comprehensive income for the three and nine months ended September 30, 2009 and 2008 were as follows (in thousands):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Net (Loss) Income |
$ |
(268 |
) |
$ |
17,581 |
$ |
552 |
$ |
40,938 |
|||||||
Foreign currency translation adjustment, net of income taxes |
5,233 |
(2,260 |
) |
10,777 |
(4,049 |
) | ||||||||||
Total Comprehensive Income |
$ |
4,965 |
$ |
15,321 |
$ |
11,329 |
$ |
36,889 |
Note 6—Income Taxes
Tesco Corporation is an Alberta (Canada) corporation. The Company and its subsidiaries conduct business and are taxable on profits earned in a number of jurisdictions around the world. Income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted or in which TESCO or its subsidiaries
are considered resident for income tax purposes.
The Company’s income tax provision for the three and nine month periods ended September 30, 2009 and 2008 consisted of the following (in thousands):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2009 |
2008 |
2009 |
2008 |
|||||||||||||
Current |
$ | (5,787 | ) | $ | 5,503 | $ | (827 | ) | $ | 12,573 | ||||||
Deferred |
7,290 | 940 | (3,065 | ) | 1,366 | |||||||||||
Income tax provision |
$ | 1,503 | $ | 6,443 | $ | (3,892 | ) | $ | 13,939 |
The Company’s effective tax rate for the three and nine months ended September 30, 2009 was 122% and 117% respectively, compared to 27% and 25%, respectively, for the same periods in 2008. The effective tax rate for the three months ended September 30, 2009 reflects a $1.1 million charge related to tax provision to return adjustments as a result of filing an amended 2008 tax return in Canada and the Company's 2008 U.S. income
tax returns. The effective tax rate for the nine months ended September 30, 2009 reflects the recognition of a $1.6 million tax benefit associated with a Canadian tax law change that occurred during the first quarter of 2009, a $0.4 million tax benefit for research and development credits generated during 2009 and cumulative net tax benefits of $2.5 million related to earnings or losses generated in jurisdictions with statutory tax rates higher or lower than the Canadian federal and provincial statutory tax rates.
The effective tax rate for the nine months ended September 30, 2009 also includes a $0.4 million charge related to an audit assessment received in a foreign jurisdiction, a $0.5 million charge related to provision to return adjustments as a result of filing the Company’s U.S. income tax returns in September 2009 and $0.5 million of tax expense associated with a reduction in deferred tax assets attributable to a change in the period in which we expect to utilize such assets.
As of September 30, 2009 and December 31, 2008, the Company had an accrual for uncertain tax positions of $1.1 million and $1.2 million, respectively. This liability is offset by the Company’s net income tax receivables and is included in Income Taxes Payable in the accompanying Condensed Consolidated Balance Sheets as the Company
anticipates that these uncertainties will be resolved in the next twelve months. The resolution of these uncertainties should not have a material impact on the Company’s effective tax rate.
TESCO and its subsidiaries are subject to Canada federal and provincial income tax and have concluded substantially all Canada federal and provincial tax matters for tax years through 2001. TESCO and its subsidiaries are also subject to U.S. federal and state income tax and have concluded substantially all U.S. federal income tax matters
for tax years through 2005. One U.S. subsidiary has been audited through the tax year ended October 31, 2005. During the nine months ended September 30, 2009, an audit of the Company’s consolidated tax return for the year 2006 was concluded with no impact to the Company’s financial position, results of operations or cash flows.
TESCO has been advised by the Mexican tax authorities that they believe significant expenses incurred by the Company’s Mexican operations from 1996 through 2002 are not deductible for Mexican tax purposes. Between 2002 and 2008, formal reassessments disallowing these deductions were issued for each of these years, all of which the Company
appealed to the Mexican court system. TESCO has obtained final court rulings deciding all years in dispute in the Company’s favor, except for 1996 (discussed below), and 2001 and 2002, both of which are currently before the Mexican Tax Court. The outcome of such appeals is uncertain. However, TESCO recorded an accrual of $0.3 million during 2008 for the Company’s anticipated exposure on these issues ($0.2 million related to interest and penalties was included in Other Income and $0.1 million was included
in Income Tax Expense). TESCO continues to believe that the basis for these reassessments was incorrect, and that the ultimate resolution of those outstanding matters that remain will likely not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
In May 2002, TESCO paid a deposit of $3.3 million with the Mexican tax authorities in order to appeal the reassessment for 1996. In 2007 the Company requested and received a refund of approximately $3.7 million (the original deposit amount of $3.3 million plus $0.4 million in interest). Therefore, in the third quarter of 2007 the Company
reversed an accrual for taxes, interest and penalties ($1.4 million related to interest and penalties was included in Other Income and $0.7 million benefit in Income Tax Expense). With the return of the $3.3 million deposit, the Mexican tax authorities issued a resolution indicating that TESCO was owed an additional $3.4 million in interest but this amount had been retained by the tax authorities to satisfy a second reassessment for 1996. The Company believes the second reassessment is invalid, and has appealed
it to the Mexican Tax Court. In January 2009, the Tax Court issued a decision accepting the Company’s arguments in part, which is now final, and may entitle the Company to request an additional refund. Due to uncertainty regarding the ultimate outcome, TESCO has not recognized the additional interest in dispute as an asset.
In addition to the material jurisdictions above, other state and foreign tax filings remain open to examination. TESCO believes that any assessment on these filings will not have a material impact to the Company’s financial position, results of operations or cash flows. TESCO believes that appropriate provisions for all outstanding
issues have been made for all jurisdictions and all open years. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Therefore, additional provisions on tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
Note 7—Commitments and Contingencies
Legal Contingencies
The Company, in the normal course of its business, is subject to legal proceedings brought against it and its subsidiaries. The estimates below represent management’s best estimates based on consultation with internal and external legal counsel. There can be no assurance as to the eventual outcome or the amount of loss the Company may
suffer as a result of these proceedings.
The amount of loss the Company may suffer as a result of these proceedings is not generally reasonably estimable until settlement is reached or judgment obtained. Management does not believe that any such proceedings currently underway against the Company, either individually or in the aggregate, will have a material adverse effect on the
Company’s consolidated financial position, results of operations or cash flows.
Varco I/P, Inc. (“Varco”) filed suit against TESCO in April 2005 in the U.S. District Court for the Western District of Louisiana, alleging that our CDS infringes certain of Varco’s U.S. patents. Varco seeks monetary damages and an injunction against further infringement. The Company filed a countersuit against Varco in
June 2005 in the U.S. District Court for the Southern District of Texas, Houston Division seeking invalidation of the Varco patents in question. In July 2006, the Louisiana case was transferred to the federal district court in Houston, and as a result, the issues raised by Varco have been consolidated into a single proceeding in which we are the plaintiff. The Company also filed a request with the U.S. Patent and Trademark Office (“USPTO”) for reexamination of the patents on which Varco’s claim
of infringement is based. The USPTO accepted the Varco patents for reexamination, and the district court stayed the patent litigation pending the outcome of the USPTO reexamination. In May 2009, the USPTO issued a final action rejecting all of the Varco patent claims that TESCO had contested. Varco has appealed this decision with the USPTO. The outcome and amount of any future financial impacts from this litigation are not determinable at this time.
Frank’s International, Inc. and Frank’s Casing Crew and Rental Tools, Inc. (“Franks”) filed suit against TESCO in the U.S. District Court for the Eastern District of Texas, Marshall Division, on January 10, 2007, alleging that its Casing Drive System infringes two patents held by Franks. TESCO filed a response
denying the Franks allegation and asserting the invalidity of its patents. In May 2008, Franks withdrew its claims with respect to one of the patents, and, in July 2008, TESCO filed a request with the USPTO for reexamination of the other patent. In September 2008, the USPTO ordered a reexamination of that patent. During the nine months ended September 30, 2009, TESCO, Franks, and a third party from whom TESCO had a license agreed on terms of a settlement, pursuant to which TESCO paid $1.8 million to Franks and
$0.4 million to the third party. Under the terms of the settlement, TESCO received from the third party a release of any royalty obligation under the license and received from Franks a fully-paid, perpetual, world-wide nonexclusive license under the two patents at issue. Franks requested the court to dismiss its lawsuit with prejudice. TESCO accrued and paid this $2.2 million settlement during the nine months ended September 30, 2009.
Weatherford International, Inc. and Weatherford/Lamb Inc. (“Weatherford”) filed suit against TESCO in the U.S. District Court for the Eastern District of Texas, Marshall Division, on December 5, 2007, alleging that various TESCO technologies infringe 10 different patents held by Weatherford. Weatherford seeks monetary damages
and an injunction against further infringement. The TESCO technologies referred to in the claim include the CDS, the CASING DRILLING system and method, a float valve, and the locking mechanism for the controls of the tubular handling system. The Company has filed a general denial seeking a judicial determination that it does not infringe the patents in question and/or that the patents are invalid. In November 2008, the Company filed requests with the USPTO, seeking invalidation of substantially all of the Weatherford
patent claims in the suit. The trial is set for May 2011. The outcome and amount of any future financial impacts from this litigation are not determinable at this time.
In July 2006, the Company received a claim for withholding tax, penalties and interest related to payments over the periods from 2000 to 2004 in a foreign jurisdiction. The Company disagrees with this claim and is currently litigating this matter. However, at June 30, 2006 the Company accrued its estimated pre-tax exposure on this matter
at $3.8 million, with $2.6 million of expense included in Other (income) expense and $1.2 million included in Interest expense. During 2008 and the nine months ended September 30, 2009, the Company accrued an additional $0.2 million and $0.2 million, respectively, of interest expense related to this claim.
In August 2008, the Company received a claim in Mexico for $1.1 million in fines and penalties related to the exportation of certain temporarily imported equipment that remained in Mexico beyond the authorized time limit for its return. The Company disagrees with this claim and is currently litigating the matter. Due to considerable uncertainty
regarding the ultimate outcome of this matter, the Company has not provided an accrual for this contingency.
A former employee of one of TESCO’s U.S. subsidiaries filed suit in the U.S. District Court for the Southern District of Texas—Houston Division on January 29, 2009 on behalf of a number of similarly situated claimants, alleging the Company failed to comply with certain wage and hour regulations under the U.S. Fair Labor Standards
Act. The lawsuit was dismissed on July 22, 2009 on the basis that several of the plaintiffs were bound to arbitrate their claims against the Company pursuant to the TESCO Dispute Resolution Program (“Plan”). Five plaintiffs not covered by the Plan re-filed their lawsuit on July 30, 2009 in the same court. No trial date has been set. The 22 plaintiffs covered under the Plan have subsequently initiated arbitration proceeding with the American Arbitration Association in Houston. Additional plaintiffs
have subsequently joined both proceedings. TESCO intends to vigorously defend all the allegations asserted in both proceedings. The outcome and amount of any potential financial impact from the litigation and arbitration proceedings are not determinable at this time.
Other Contingencies
The Company is contingently liable under letters of credit and similar instruments that it is required to provide from time to time in connection with the importation of equipment to foreign countries and to secure its performance on certain contracts. At September 30, 2009 and December 31, 2008, the total exposure to the Company under outstanding
letters of credit was $6.5 million and $6.4 million, respectively.
Business Segments
Historically, the Company organized its activities into three business segments: Top Drives, Casing Services and Research and Engineering. Effective December 31, 2008, the Company determined that the CASING DRILLING segment no longer met the criteria which allowed it to be aggregated with Tubular Services in the Casing Services segment
and therefore changed the presentation of its Tubular Services activities and CASING DRILLING activities into two separate segments. The financial and operating data for the three and nine months ended September 30, 2008 have been recast to be presented consistently with this structure. The Company’s four business segments are: Top Drives, Tubular Services, CASING DRILLING and Research and Engineering. The Top Drive business is comprised of top drive sales, top drive rentals and after-market sales and service.
The Tubular Services business includes both our proprietary and conventional Tubular Services. The CASING DRILLING segment consists of our proprietary CASING DRILLING technology, and the Research and Engineering segment is comprised of our research and development activities related to Tubular Services technology, CASING DRILLING technology and top drive model development.
These segments report their results of operations to the level of operating income. Certain functions, including certain sales and marketing activities and corporate general and administrative expenses, are provided centrally from the corporate office. The costs of these functions, together with Other expense and Income tax provision (benefit),
are not allocated to these segments. Assets are allocated to the Top Drive, Tubular Services, CASING DRILLING or Research and Engineering segments to which they specifically relate. All of the Company’s goodwill has been allocated to the Tubular Services segment. The Company’s chief operating decision maker is not provided a measure of assets by business segment and as such this information is not presented.
The Company incurs costs directly and indirectly associated with its revenues at a business unit level. Direct costs include expenditures specifically incurred for the generation of revenue, such as personnel costs on location or transportation, maintenance and repair, and depreciation of the Company’s revenue-generating equipment.
Overhead costs, such as field administration and field operations support, are not directly associated with the generation of revenue within a particular business segment.
At the end of 2008, the Company identified sales of certain accessories that were previously included as part of top drive after-market support activities. However, since these accessories are directly related to its proprietary and patented Tubular Services technology, the Company now includes them with its proprietary information. Accordingly,
the Company has reclassified prior year revenues of approximately $0.4 million and $1.4 million for the three and nine months ended September 30, 2008, respectively, and operating income of approximately $0.3 million and $1.0 million for the three and nine months ended September 30, 2008, respectively, related to these sales from top drive after-market support to proprietary Tubular Services to conform to current year presentation.
Significant financial information relating to these segments is as follows (in thousands):
Three Months Ended September 30, 2009 |
||||||||||||||||||||||||
Top
Drive |
Tubular
Services |
CASING
DRILLING |
Research &
Engineering |
Corporate and
Other |
Total |
|||||||||||||||||||
Revenues |
$ | 45,192 | $ | 24,285 | $ | 3,132 | $ | — | $ | — | $ | 72,609 | ||||||||||||
Depreciation and amortization |
1,898 | 4,992 | 1,115 | 40 | 1,033 | 9,078 | ||||||||||||||||||
Operating income (loss) |
13,370 | (1,440 | ) | (3,072 | ) | (2,092 | ) | (5,074 | ) | 1,692 | ||||||||||||||
Other expense |
457 | |||||||||||||||||||||||
Income before income taxes |
$ | 1,235 |
Three Months Ended September 30, 2008 |
||||||||||||||||||||||||
Top
Drive |
Tubular
Services |
CASING
DRILLING |
Research &
Engineering |
Corporate and
Other |
Total |
|||||||||||||||||||
Revenues |
$ | 90,700 | $ | 42,784 | $ | 6,537 | $ | — | $ | — | $ | 140,021 | ||||||||||||
Depreciation and amortization |
2,239 | 4,472 | 1,150 | 19 | 557 | 8,437 | ||||||||||||||||||
Operating income (loss) |
32,090 | 7,396 | (3,055 | ) | (2,560 | ) | (8,471 | ) | 25,400 | |||||||||||||||
Other expense |
1,376 | |||||||||||||||||||||||
Income before income taxes |
$ | 24,024 |
Nine Months Ended September 30, 2009 |
||||||||||||||||||||||||
Top
Drive |
Tubular
Services |
CASING
DRILLING |
Research &
Engineering |
Corporate and
Other |
Total |
|||||||||||||||||||
Revenues |
$ | 171,118 | $ | 89,210 | $ | 10,892 | $ | — | $ | — | $ | 271,220 | ||||||||||||
Depreciation and amortization |
5,667 | 15,645 | 3,491 | 64 | 2,556 | 27,423 | ||||||||||||||||||
Operating income (loss) |
39,511 | (484 | ) | (9,298 | ) | (6,525 | ) | (24,740 | ) | (1,536 | ) | |||||||||||||
Other expense |
1,804 | |||||||||||||||||||||||
Loss before income taxes |
$ | (3,340 | ) |
Nine Months Ended September 30, 2008 |
||||||||||||||||||||||||
Top
Drive |
Tubular
Services |
CASING
DRILLING |
Research &
Engineering |
Corporate and
Other |
Total |
|||||||||||||||||||
Revenues |
$ | 251,414 | $ | 123,439 | $ | 20,693 | $ | — | $ | — | $ | 395,546 | ||||||||||||
Depreciation and amortization |
6,136 | 13,624 | 2,953 | 84 | 1,679 | 24,476 | ||||||||||||||||||
Operating income (loss) |
82,227 | 16,960 | (9,184 | ) | (8,140 | ) | (23,045 | ) | 58,818 | |||||||||||||||
Other expense |
3,941 | |||||||||||||||||||||||
Income before income taxes |
$ | 54,877 |
Geographic Areas
The Company attributes revenues to geographic regions based on the location of the customer. Generally, for service activities, this will be the region in which the service activity occurs and, for equipment sales, this will be the region in which the customer’s
purchasing office is located. The Company’s revenues occurred in the following areas of the world (in thousands):
Three Months Ended
September 30, |
||||||||
2009 |
2008 |
|||||||
United States |
$ | 26,108 | $ | 72,636 | ||||
Europe, Africa and Middle East |
11,223 | 17,731 | ||||||
Asia Pacific |
10,256 | 12,489 | ||||||
Canada |
7,885 | 13,640 | ||||||
Mexico |
9,291 | 7,546 | ||||||
South America |
7,846 | 15,979 | ||||||
Total |
$ | 72,609 | $ | 140,021 | ||||
Nine Months Ended
September 30, |
||||||||
2009 | 2008 | |||||||
United States |
$ | 123,718 | $ | 203,786 | ||||
Europe, Africa and Middle East |
39,989 | 38,502 | ||||||
Asia Pacific |
33,128 | 52,839 | ||||||
Canada |
26,058 | 43,633 | ||||||
Mexico |
25,488 | 15,765 | ||||||
South America |
22,839 | 41,021 | ||||||
Total |
$ | 271,220 | $ | 395,546 | ||||
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see “Caution Regarding Forward-Looking Information;
Risk Factors” above and “Risk Factors” below and in our Annual Report on Form 10-K for the year ended December 31, 2008, for a discussion of the uncertainties, risks and assumptions associated with these statements.
OVERVIEW
Business
TESCO is a global leader in the design, manufacture and service delivery of technology based solutions for the upstream energy industry. We seek to change the way people drill wells by delivering safer and more efficient solutions that add real value by reducing the costs of drilling for and producing oil and gas. Our product and service
offerings include proprietary technology, including TESCO CASING DRILLING® (“CASING DRILLING”), TESCO’s Casing Drive System™ (“CDS”) and TESCO’s Multiple Control Line Running System™ (“MCLRS”). TESCO® is
a registered trademark in Canada and the United States. TESCO CASING DRILLING® is a registered trademark in the United States. CASING DRILLING® is a registered trademark in Canada and CASING DRILLING™ is a trademark in the United States. Casing Drive System™,
CDS™, Multiple Control Line Running System™ and MCLRS™ are trademarks in Canada and the United States.
Our four business segments are: Top Drives, Tubular Services, CASING DRILLING and Research and Engineering. Prior to December 31, 2008, we organized our activities into three business segments: Top Drives, Casing Services and Research and Engineering. Effective December 31, 2008, we determined that CASING DRILLING no longer met the criteria
which allowed it to be aggregated with Tubular Services within the Casing Services segment and therefore changed the presentation of our Tubular Services activities and CASING DRILLING activities into two separate segments. The financial and operating data for the three and nine months ended September 30, 2008 have been recast to be presented consistently with this structure.
Our Top Drive segment sells equipment and provides services to drilling contractors and oil and gas operating companies throughout the world. We primarily manufacture top drives that are used in drilling operations to rotate the drill string while suspended from the derrick above the rig floor. We also provide top drive rental services on
a day-rate basis for land and offshore drilling rigs, and we provide after-market sales and support for our customers.
Our Tubular Services business includes both proprietary and conventional services, which are typically offered as a “call out” service on a well-by-well basis.
Our proprietary Tubular Service business is based on our Proprietary Casing Running Service technology, which uses certain components of our CASING DRILLING technology, in particular the CDS, and provides an efficient method for running casing and, if required, reaming the casing into the hole. Additionally, our proprietary Tubular Service
business includes the installation service of deep water smart well completion equipment using our MCLRS, a proprietary and patented technology which improves the quality of the installation of high-end well completions.
Our conventional Tubular Service business provides equipment and personnel for the installation of tubing and casing, including power tongs, pick-up/lay-down units, torque monitoring services, connection testing services and power swivels for new well construction and in work-over and re-entry operations.
Our CASING DRILLING business is based on our proprietary CASING DRILLING technology, which uses patented equipment and processes to allow an oil or gas well to be drilled using standard well casing pipe. In contrast, conventional or straight practice rotary drilling requires the use of specialized drill pipe and drillstring components. The
demonstrated benefits of using well casing to drill the well compared with conventional drilling include a reduction in the risk of unscheduled downhole events that typically result in non-productive time and additional cost and operational risk to the drilling contractor and well operator.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2009 and 2008
Our revenues, operating income and net income for the three months ended September 30, 2009 decreased compared to the same period in 2008, primarily due to decreased top drive product sales, decreased top drive rental activities, decreased Tubular Services revenues, and decreased CASING DRILLING activity, partially offset by decreased operating
expenses. Revenues, operating income and net income for the three months ended September 30, 2009 and 2008 were as follows:
Three Months Ended September 30, |
%
Change |
|||||||||||||||||||
2009 |
2008 |
|||||||||||||||||||
% of
Revenues |
% of
Revenues |
|||||||||||||||||||
REVENUES |
||||||||||||||||||||
Top Drive |
||||||||||||||||||||
-Sales |
$ | 14,343 | $ | 45,958 | (69 | ) | ||||||||||||||
-Rental services |
20,005 | 27,720 | (28 | ) | ||||||||||||||||
-After-market sales and service(1) |
10,844 | 17,022 | (36 | ) | ||||||||||||||||
Total Top Drive |
45,192 | 62 | 90,700 | 65 | (50 | ) | ||||||||||||||
Tubular Services(2) |
||||||||||||||||||||
-Conventional |
4,052 | 18,882 | (79 | ) | ||||||||||||||||
-Proprietary(1) |
20,233 | 23,902 | (15 | ) | ||||||||||||||||
Total Tubular Services |
24,285 | 33 | 42,784 | 31 | (43 | ) | ||||||||||||||
CASING DRILLING |
3,132 | 4 | 6,537 | 4 | (52 | ) | ||||||||||||||
Total Revenues |
$ | 72,609 | 100 | $ | 140,021 | 100 | (48 | ) | ||||||||||||
OPERATING INCOME |
||||||||||||||||||||
Top Drive |
$ | 13,370 | 30 | $ | 32,090 | 35 | (58 | ) | ||||||||||||
Tubular Services |
(1,440 | ) | (6 | ) | 7,396 | 17 | (119 | ) | ||||||||||||
CASING DRILLING |
(3,072 | ) | (98 | ) | (3,055 | ) | (47 | ) | 1 | |||||||||||
Research and Engineering |
(2,092 | ) | n/a | (2,560 | ) | n/a | 18 | |||||||||||||
Corporate and Other |
(5,074 | ) | n/a | (8,471 | ) | n/a | 40 | |||||||||||||
Total Operating Income |
$ | 1,692 | 2 | $ | 25,400 | 18 | (93 | ) | ||||||||||||
NET (LOSS) INCOME |
$ | (268 | ) | (0 | ) | $ | 17,581 | 13 | (102 | ) | ||||||||||
(1) |
At the end of 2008, we identified sales of certain accessories that were previously included as part of our top drive after-market support activities. However, since these accessories are directly related to our proprietary and patented Tubular Services technology, we now include them with our proprietary information. Accordingly, we have reclassified prior year revenues and operating income of approximately $0.4 million
and $0.3 million, respectively, related to these sales from top drive after-market support to proprietary Tubular Services to conform to our current year presentation. |
(2) |
At the end of 2008, we commenced the presentation of our Tubular Services business and CASING DRILLING as two separate segments. Accordingly, we have reclassified prior year revenues of approximately $6.5 million and prior year operating losses of approximately $3.1 million from the former Casing Services segment to the CASING DRILLING segment to conform to the current year presentation. |
Revenues for the three months ended September 30, 2009 were $72.6 million, compared to $140.0 million in the same period in 2008, a decrease of $67.4 million, or 48%. This decrease is due to a $45.5 million decrease in the Top Drive segment, an $18.5 million decrease in the Tubular Services segment and a $3.4 million decrease in the CASING
DRILLING segment. Each segment is discussed in further detail below.
Operating Income for the three months ended September 30, 2009 was $1.7 million, compared to $25.4 million in the three months ended September 30, 2008, a decrease of $23.7 million, or 93%. This decrease is primarily due to lower revenues in all of our segments, decreased margins due to ongoing pricing pressures associated with depressed
drilling activity and $0.3 million in severance costs, partially offset by a $1.6 million gain on the sale of operating equipment, as discussed further below.
Net Loss for the three months ended September 30, 2009 was $0.3 million, compared to income of $17.6 million in the same period in 2008, a decrease of $17.9 million, or 102%. This decrease is primarily due to decreased operating income as discussed above and a $0.4 million increase in foreign exchange losses and an increase in our effective tax rate during the current year’s period, partially offset by a $0.6 million
decrease in interest expense and a $0.8 million increase in interest income, as discussed below.
Top Drive Segment
Our Top Drive segment consists of top drive sales, after-market sales and service and top drive rental service activities.
Revenues—Revenues for the three months ended September 30, 2009 decreased $45.5 million, or 50%, compared to the same period in 2008, primarily driven by a $31.6 million decrease in top drive sales, a $7.7 million decrease in top drive rental operations and a $6.2 million decrease
in after-market sales and service.
Revenues from top drive sales decreased $31.6 million to $14.3 million for the three months ended September 30, 2009 as compared to the same period in 2008. This decrease is primarily due to a decrease in the number of Top Drive units sold during the current year in connection with the current downturn in the drilling industry. We
sold 13 units (10 new and 3 used) during the three months ended September 30, 2009, compared to 38 units sold (32 new and 6 used) during the same period in 2008. Revenues related to the sale of used top drive units during the three months ended September 30, 2009 were $2.9 million, down from $7.1 million during the three months ended September 30, 2008.
Revenues from top drive rental service activities decreased $7.7 million to $20.0 million during the three months ended September 30, 2009 as compared to the same period in 2008, primarily due to a decrease in the number of rental operating days, primarily in North America, during the current year’s period. Our rental fleet worked 4,441
operating days during the three months ended September 30, 2009, down from 6,014 operating days in the same period last year. Demand for our top drive rental services is directly tied to active rig count; on a year-over-year basis, we estimate that the worldwide active rig count has declined approximately 40%. At September 30, 2009, we had 123 top drives in our rental fleet.
Revenues from after-market sales and service decreased $6.2 million to $10.8 million for the three months ended September 30, 2009 as compared to the same period in 2008, primarily due to the decline in industry conditions during the current year’s period compared to the prior year. During 2009, weakened economic conditions resulted
in a marked decrease in active rig count and drilling activities. Accordingly, our customers have decreased their demand for after-market parts and maintenance and repair services. This decrease in demand has resulted in pricing pressures and thus, decreased revenues per job.
Operating Income—Top Drive operating income for the three months ended September 30, 2009 decreased $18.7 million to $13.4 million as compared to the same period in 2008. The decrease in operating income during the current period is primarily due to the decrease in the number
of top drives sold during the current period, as discussed above. In addition, operating margins were negatively impacted by pricing pressures on our after-market sales and service businesses, as described above. This was partially offset by a $1.6 million gain on the sale of certain ancillary Top Drive equipment.
Outlook—We had a third-party backlog of three top drive units as of September 30, 2009 compared to a third-party backlog of 10 units as of June 30, 2009 and 65 units as of December 31, 2008. With this drop in backlog, we have downsized our manufacturing operations substantially
to better reflect current market conditions. We have maintained a core team, which can continue to deliver a reasonable number of top drives each month to meet current and expected demand. We plan to minimize our costs for the next several quarters and improve our business processes so as to substantially improve efficiencies as the business turns around. While we have seen an increase in activity, particularly in the rental portion of our business, our customers have maintained their focus on lowering project
costs and, given the continued pricing pressures, we expect to see continued margin compression over the remainder of 2009 and throughout 2010. We will continue to monitor our operations and cost structure in response to any further changes in demand.
Tubular Services Segment
Revenues—Revenues for the three months ended September 30, 2009 decreased $18.5 million, or 43%, to $24.3 million as compared to the same period in 2008. This was primarily due to a $14.8 million decrease in our conventional Tubular Services business and a $3.7 million decrease
in our proprietary service offerings. The decrease in our revenues is due to a significant decline in North American drilling activity over the past 12 months. Our conventional business is primarily conducted in North America and has been severely impacted by the decline in active rig count discussed above. We continue to shift our customers to our proprietary product offerings. We completed 683 jobs during the three months ended September 30, 2009, up 38% compared to 496 jobs during the three months
ended September 30, 2008. While the number of jobs performed has increased, revenue per job has been negatively impacted by pricing pressures resulting from decreased drilling activity.
Operating Income—Tubular Services’ operating income for the three months ended September 30, 2009 decreased $8.8 million to a $1.4 million loss compared to income of $7.4 million for the same period in 2008, primarily due to the decrease in revenues described above.
Outlook—We expect the current year’s operations will remain depressed in the near term due to the current status of worldwide economies and the current excess supply of oil and natural gas. Our customers have maintained their focus on lowering project costs and accordingly,
given the continued pricing pressures, we expect to see continuing margin compression over the remainder of 2009 and throughout 2010. We will continue to monitor our operations and cost structure in response to any further changes in demand. We continue to believe that the fundamentals driving our global business remain intact and that our financial condition will enable us to weather the current conditions and poise us for future growth when conditions improve.
CASING DRILLING Segment
Revenues—Revenues for the three months ended September 30, 2009 were $3.1 million compared to $6.5 million in the same period last year, a decrease of $3.4 million or 52%. This decrease was due to a continuing decline in available work in connection with current industry operating
conditions. As mentioned above, worldwide active rig count has declined approximately 40% during the past 12 months.
Operating Income—CASING DRILLING’s operating loss for the three months ended September 30, 2009 was $3.1 million, virtually unchanged from last year. While revenues decreased as discussed above, operating losses were minimized by reducing headcount in locations
experiencing significant activity declines, combining under-performing operations and streamlining internal processes.
Outlook—As mentioned above, we expect the current year’s operations will continue to decline in the near term due to the current status of the drilling industry. We remain confident that our CASING DRILLING business will be a valuable part of our future operations. Accordingly,
we are focusing on maintaining our existing infrastructure around the world while reducing headcount in locations experiencing significant activity declines, combining under-performing operations and streamlining internal processes.
Research and Engineering Segment
Research and Engineering’s operating expenses are comprised of our activities related to the design and enhancement of our top drive models and proprietary equipment and were $2.1 million for the three months ended September 30, 2009, a decrease of $0.5 million from operating expenses of $2.6 million for the three months ended September
30, 2008. This decrease is primarily due to our focus on reducing costs during the current year’s period, partially offset by $0.1 million in severance costs incurred during the current quarter. We will continue to invest in the development, commercialization and enhancements of our proprietary technologies.
Corporate and Other Segment
Corporate and Other Expenses primarily consist of the corporate level general and administrative expenses and certain operating level selling and marketing expenses. Corporate and Other’s operating expenses for the three months ended September 30, 2009 decreased $3.4 million to $5.1 million, compared to $8.5 million for the same period
in 2008. This decrease is primarily due to decreased legal expenses and employee compensation costs during the current year’s period. In addition, our non-cash stock compensation expense decreased $0.7 million during the current period related to performance stock units, which declined in value in response to the current year’s operating levels.
Net (Loss) Income
Net (loss) income for the three months ended September 30, 2009 and 2008 was as follows (in thousands):
Three Months Ended September 30, |
||||||||||||||||
2009 |
2008 |
|||||||||||||||
% of
revenue |
% of
revenue |
|||||||||||||||
Operating Income |
$ | 1,692 | 2 | $ | 25,400 | 18 | ||||||||||
Interest expense |
497 | 1 | 1,098 | 1 | ||||||||||||
Interest income |
(847 | ) | — | (45 | ) | — | ||||||||||
Foreign exchange losses (gains) |
808 | — | 422 | –– | ||||||||||||
Other (income) |
(1 | ) | — | (99 | ) | — | ||||||||||
Income taxes |
1,503 | 2 | 6,443 | 4 | ||||||||||||
Net (Loss) Income |
$ | (268 | ) | (0 | ) | $ | 17,581 | 13 | ||||||||
Interest Expense—Interest expense for the three months ended September 30, 2009 decreased $0.6 million compared to the same period in 2008. During the three months ended September 30, 2009, average daily
debt balances were $42.6 million, approximately $25.3 million lower than the same period last year. In addition, the weighted average interest rate decreased by 277 basis points during the current year due to market conditions, resulting in lower interest expense during the current year period.
Interest Income—Interest income for the three months ended September 30, 2009 increased $0.8 million compared to the same period in 2008, primarily due to $0.8 million in interest received on an overpayment of prior years’ U.S. federal income taxes.
Foreign Exchange Losses —Foreign exchange losses increased to $0.8 million during the three months ended September 30, 2009 from $0.4 million during the same period in 2008, primarily due to the comparative weakening of the Canadian dollar versus the U.S. dollar.
Other (Income) Expense—Other (income) expense for the three months ended September 30, 2009 was relatively flat compared to the same period during 2008.
Income Taxes—TESCO is an Alberta, Canada corporation. We conduct business and are taxed on profits earned in a number of jurisdictions around the world. Our income tax expense is provided based on the laws and rates in effect in the countries in which operations are conducted
or in which TESCO and/or its subsidiaries are considered residents for income tax purposes. Income tax expense as a percentage of pre-tax earnings fluctuates from year to year based on the level of profits earned in each jurisdiction in which we operate and the tax rates applicable to such profits. Please see Note 6 to the Condensed Consolidated Financial Statements included in Item 1, “Financial Statements (Unaudited),” above for a description of our Mexican tax matters.
Our effective tax rate for the three months ended September 30, 2009 was 122% compared to 27% for the same period in 2008. The effective tax rate for the three months ended September 30, 2009 reflects a $1.1 million charge related to tax provision to return adjustments as a result of filing an amended 2008 tax return in Canada and our 2008
U.S. income tax returns.
As discussed in Note 6 to the Condensed Consolidated Financial Statements included in Item 1 above, our tax returns are subject to examination in each of the jurisdictions in which we operate, and the audit outcomes and the timing of audit settlements are subject to significant uncertainty. Therefore, additional provisions on tax-related
matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
29
For the Nine Months Ended September 30, 2009 and 2008
Our revenues, operating income and net income for the nine months ended September 30, 2009 decreased compared to the same period in 2008 primarily due to decreased top drive product sales, decreased top drive rental activities, decreased conventional Tubular Services revenues, and decreased CASING DRILLING activity, partially offset by increased
activities in proprietary Tubular Services. Revenues, operating income and net income for the nine months ended September 30, 2009 and 2008 were as follows:
Nine Months Ended September 30, |
%
Change |
|||||||||||||||||||
2009 |
2008 |
|||||||||||||||||||
% of
Revenues |
% of
Revenues |
|||||||||||||||||||
REVENUES |
||||||||||||||||||||
Top Drive |
||||||||||||||||||||
-Sales |
$ | 70,903 | $ | 121,037 | (41 | ) | ||||||||||||||
- Rental services |
61,660 | 82,201 | (25 | ) | ||||||||||||||||
- After-market sales and service(1) |
38,555 | 48,176 | (20 | ) | ||||||||||||||||
Total Top Drive |
171,118 | 63 | 251,414 | 64 | (32 | ) | ||||||||||||||
Tubular Services(2) |
||||||||||||||||||||
-Conventional |
18,147 | 62,582 | (71 | ) | ||||||||||||||||
-Proprietary(1) |
71,063 | 60,857 | 17 | |||||||||||||||||
Total Tubular Services |
89,210 | 33 | 123,439 | 31 | (28 | ) | ||||||||||||||
CASING DRILLING |
10,892 | 4 | 20,693 | 5 | (47 | ) | ||||||||||||||
Total Revenues |
$ | 271,220 | 100 | $ | 395,546 | 100 | (31 | ) | ||||||||||||
OPERATING (LOSS) INCOME |
||||||||||||||||||||
Top Drive |
$ | 39,511 | 23 | $ | 82,227 | 33 | (52 | ) | ||||||||||||
Tubular Services |
(484 | ) | (1 | ) | 16,960 | 14 | (103 | ) | ||||||||||||
CASING DRILLING |
(9,298 | ) | (84 | ) | (9,184 | ) | (44 | ) | (1 | ) | ||||||||||
Research and Engineering |
(6,525 | ) | n/a | (8,140 | ) | n/a | 20 | |||||||||||||
Corporate and Other |
(24,740 | ) | n/a | (23,045 | ) | n/a | (7 | ) | ||||||||||||
Total Operating (Loss) Income |
$ | (1,536 | ) | (1 | ) | $ | 58,818 | 15 | (103 | ) | ||||||||||
NET INCOME |
$ | 552 | –– | $ | 40,938 | 10 | (99 | ) | ||||||||||||
(1) |
At the end of 2008, we identified sales of certain accessories that were previously included as part of our top drive after-market support activities. However, since these accessories are directly related to our proprietary and patented Tubular Services technology, we now include them with our proprietary information. Accordingly, we have reclassified prior year revenues and operating income of approximately $1.4 million
and $1.0 million, respectively, related to these sales from top drive after-market support to proprietary Tubular Services to conform to our current year presentation. |
(2) |
At the end of 2008, we commenced the presentation of our Tubular Services business and CASING DRILLING as two separate segments. Accordingly, we have reclassified prior year revenues of approximately $20.7 million and prior year operating losses of approximately $9.2 million from the former Casing Services segment to the CASING DRILLING segment to conform to the current year presentation. |
Revenues for the nine months ended September 30, 2009 were $271.2 million, compared to $395.5 million in the same period in 2008, a decrease of $124.3 million, or 31%. This decrease is due to a $80.3 million decrease in the Top Drive segment, a $34.2 million decrease
in the Tubular Services segment and a $9.8 million decrease in the CASING DRILLING segment. Each segment is discussed in further detail below.
Operating (Loss) Income for the nine months ended September 30, 2009 was a loss of $1.5 million, compared to income of $58.8 million in the nine months ended September 30, 2008, a decrease of $60.3 million, or 103%. This decrease is primarily due to lower revenues in all of our segments, decreased margins due to severe pricing pressures associated
with the current economic environment, $2.2 million in expenses for a litigation settlement, increased legal fees of $2.3 million associated with ongoing litigation, a $1.8 million impairment of fixed assets held for sale, $3.2 million in severance costs and $1.1 million in reserves recorded related to a legal claim in North America, partially offset by a $2.3 million decrease in bonus accruals recorded during the current year’s period and a $1.1 million gain recognized on the sale of operating assets.
Net Income for the nine months ended September 30, 2009 was $0.6 million, compared to income of $40.9 million in the same period in 2008, a decrease of $40.4 million or 99%. This decrease is due primarily to decreased operating income as discussed above, partially offset by a $17.8 million decrease in our provision for income taxes and
a $2.1 million decrease in interest expense, as discussed below.
Top Drive Segment
Our Top Drive segment consists of top drive sales, after-market sales and service and top drive rental service activities.
Revenues—Revenues for the nine months ended September 30, 2009 decreased $80.3 million, or 32%, compared to the same period in 2008, primarily driven by a $50.1 million decrease in top drive sales, a $20.6 million decrease in top drive rental operations and a $9.6 million decrease
in after-market sales and service.
Revenues from top drive sales decreased $50.1 million to $70.9 million for the nine months ended September 30, 2009 as compared to the same period in 2008 in connection with the current downturn in the drilling industry. We sold 73 units (68 new and 5 used) during the nine months ended September 30, 2009, compared to 99 units sold (81 new
and 18 used) during the same period in 2008. Revenues related to the sale of used top drive units during the nine months ended September 30, 2009 and 2008 were $4.9 million and $19.0 million, respectively.
Revenues from top drive rental service activities decreased $20.6 million to $61.7 million during the nine months ended September 30, 2009 as compared to the same period in 2008, primarily due to a decrease in the number of rental operating days during the current year’s period, particularly in North America where active drilling activity
declined approximately 40% over the past 12 months. Our rental fleet worked 12,796 operating days during the nine months ended September 30, 2009, down from 17,363 operating days in the same period last year. Demand for our top drive rental services is directly tied to active rig count; on a year-over-year basis, we estimate that the worldwide active rig count has declined approximately 30%. At September 30, 2009, we had 123 top drive units in our rental fleet.
Revenues from after-market sales and service decreased $9.6 million to $38.5 million for the nine months ended September 30, 2009 as compared to the same period in 2008, primarily due to the current year’s decline in active rig count and drilling activities. Accordingly, our customers have decreased their demand for after-market parts
and maintenance and repair services. This decrease in demand has resulted in pricing pressures and thus, decreased revenues per job.
Operating Income—Top Drive operating income for the nine months ended September 30, 2009 decreased $42.7 million to $39.5 million as compared to the same period in 2008.
The decrease in operating income during the current period is primarily due to the decrease in the number of top drives sold during the current period, as discussed above. Top drive operating income was also unfavorably affected by a decrease in the number of used top drive units sold during the nine months ended September 30, 2009. We sold five used units during the current period, compared to 18 used units last year. Used units sold are typically our older units that operated in our rental fleet,
and they have a lower basis, resulting in higher margins from the sales compared to the sales of new units. In addition, operating margins were negatively impacted by pricing pressures on our after-market sales and service businesses, as described above. We also recorded a reserve of $1.1 million during the nine months ended September 30, 2009 in connection with a legal claim in North America and severance costs of $1.1 million. This was partially offset by a $1.6 million gain on the sale of certain ancillary
Top Drive equipment.
Tubular Services Segment
Revenues—Revenues for the nine months ended September 30, 2009 decreased $34.2 million, or 28%, to $89.2 million as compared to the same period in 2008. This was primarily due to a $44.4 million decrease in our conventional Tubular Services business, partially offset by a $10.2
million increase in our proprietary service offerings. The decrease in our conventional revenues is due to a 40% industry decline in North America over the past 12 months and our continued focus to shift our customers to proprietary product offerings. Our conventional business is primarily conducted in North America and is directly tied to the active rig count which has declined sharply over the past 12 months. We continue to focus on shifting our customer service to our proprietary product offerings.
We completed 1,787 jobs during the nine months ended September 30, 2009, up 28% compared to 1,401 jobs during the nine months ended September 30, 2008. While the number of jobs performed has increased, revenue per job has been negatively impacted by pricing pressures resulting from decreased drilling activity.
Operating Income—Tubular Services’ operating income for the nine months ended September 30, 2009 decreased $17.5 million to a $0.5 million loss compared to income of $17.0 million for the same period in 2008, primarily due to the decrease in revenues described above, a $1.8
million impairment of fixed assets held for sale and $0.4 million in severance costs recorded during the current period. During the nine months ended September 30, 2009, we recorded a pre-tax impairment loss of approximately $1.8 million to write down fixed assets held for sale to their estimated realizable value of $0.2 million.
CASING DRILLING Segment
Revenues—Revenues for the nine months ended September 30, 2009 were $10.9 million compared to $20.7 million in the same period last year, a decrease of $9.8 million or 47%. This decrease was due to a decline in available work, particularly in Latin America and the U.S., in connection
with current industry operating conditions.
Operating Income—CASING DRILLING’s operating loss of $9.3 million for the nine months ended September 30, 2009 was flat compared to last year. This was primarily due to decreased revenues as described above and a loss on the sale of operating assets in the amount
of $0.5 million, partially offset by reduced management and overhead expenses.
Research and Engineering Segment
Research and Engineering’s operating expenses are comprised of our activities related to the design and enhancement of our top drive models and proprietary equipment. These expenses were $6.5 million for the nine months ended September 30, 2009, a decrease of $1.6 million from operating expenses of $8.1 million for the nine
months ended September 30, 2008. This decrease is primarily due to our focus on reducing costs during the current year’s period, partially offset by $0.4 million in severance costs and $0.2 million in relocation costs incurred during the nine months ended September 30, 2009. We will continue to invest in the development, commercialization and enhancements of our proprietary technologies.
Corporate and Other Segment
Corporate and Other Expenses primarily consist of the corporate level general and administrative expenses and certain operating level selling and marketing expenses. Corporate and Other’s operating expenses for the nine months ended September 30, 2009 increased $1.7 million to $24.7 million, compared to $23.0 million for the same period
in 2008. This increase is primarily due to a $2.2 million legal settlement, a $2.3 million increase in legal expenses related to ongoing litigation and $1.2 million in severance costs, partially offset by decreased audit fees and other corporate expenses from the same period in 2008. In addition, our non-cash stock compensation expense decreased $0.9 million during the current period related to performance stock units, which declined in value in response to the current year’s operating levels.
Net Income
Net income for the nine months ended September 30, 2009 and 2008 was as follows (in thousands):
Nine Months Ended September 30, |
||||||||||||||||
2009 |
2008 |
|||||||||||||||
% of
revenue |
% of
revenue |
|||||||||||||||
Operating (Loss) Income |
$ | (1,536 | ) | –– | $ | 58,818 | 15 | |||||||||
Interest expense |
1,451 | — | 3,552 | 1 | ||||||||||||
Interest income |
(896 | ) | — | (306 | ) | — | ||||||||||
Foreign exchange losses |
1,106 | — | 748 | — | ||||||||||||
Other (income) expense |
143 | — | (53 | ) | — | |||||||||||
Income taxes |
(3,892 | ) | (1 | ) | 13,939 | 3 | ||||||||||
Net Income |
$ | 552 | –– | $ | 40,938 | 10 | ||||||||||
Interest Expense—Interest expense for the nine months ended September 30, 2009 decreased $2.1 million compared to the same period in 2008. During the nine months ended September 30, 2009, average daily debt balances were $43.8 million, approximately $30.0 million lower than the
same period last year. In addition, the weighted average interest rate decreased by 312 basis points during the current year due to market conditions, resulting in lower interest expense during the current year period.
Interest Income—Interest income for the nine months ended September 30, 2009 increased $0.6 million compared to the same period in 2008, primarily due to $0.8 million in interest received on an overpayment of prior years’ U.S. federal income taxes.
Foreign Exchange Losses—Foreign exchange losses increased $0.4 million compared to the same period in 2008, primarily due to the comparative strengthening of the Canadian dollar versus the U.S. dollar.
Other (Income) Expense— Other expense for the nine months ended September 30, 2009 was $0.1 million compared to other income of $0.1 million in the same period during 2008, an increase of $0.2 million.
Income Taxes—TESCO is an Alberta, Canada corporation. We conduct business and are taxed on profits earned in a number of jurisdictions around the world. Our income tax expense is provided based on the laws and rates in effect
in the countries in which operations are conducted or in which TESCO and/or its subsidiaries are considered residents for income tax purposes. Income tax expense as a percentage of pre-tax earnings fluctuates from year to year based on the level of profits earned in each jurisdiction in which we operate and the tax rates applicable to such profits. Please see Note 6 to the condensed consolidated financial statements included in Item 1, “Financial Statements (Unaudited),” above for a description
of our Mexican tax matters.
Our effective tax rate for the nine months ended September 30, 2009 was 117% compared to 25% for the same period in 2008. The effective tax rate for the nine months ended September 30, 2009 reflects the recognition of a $1.6 million tax benefit associated with a Canadian tax law change that occurred during the first quarter of 2009, a $0.4
million tax benefit for research and development credits generated during 2009 and cumulative net tax benefits of $2.5 million related to earnings or losses generated in jurisdictions with statutory tax rates higher or lower than the Canadian federal and provincial statutory tax rates. The effective tax rate for the nine months ended September 30, 2009 also includes a $0.4 million charge related to an audit assessment received in a foreign jurisdiction, a $0.5 million charge related to provision to return adjustments
as a result of filing our U.S. income tax returns in September 2009 and $0.5 million of tax expense associated with a reduction in deferred tax assets attributable to a change in the period in which we expect to utilize such assets.
Recent Quarterly Trends
Revenues for the three months ended September 30, 2009 were $72.6 million, compared to $88.4 million for the three months ended June 30, 2009, a decrease of $15.8 million, or 18%. This decrease is due to a $12.6 million decrease in the Top Drive segment, a $3.6 million decrease in the Tubular Services segment, partially offset by a $0.4 million
increase in the CASING DRILLING segment. The decrease in the Top Drive segment is primarily the result of the sale of 13 units (10 new and 3 used) during the three months ended September 30, 2009 as compared to 28 top drive units (27 new and 1 used) during the three months ended June 30, 2009. The decrease in Tubular Services revenues was primarily due to a decline in proprietary equipment sales during the three months ended September 30, 2009 compared to the three months ended June 30, 2009. The increase
in our CASING DRILLING revenues was due to a recovery in available work, particularly in Latin America and the Asia Pacific region.
Operating Income for the three months ended September 30, 2009 was $1.7 million, compared to a loss of $7.2 million in the three months ended June 30, 2009, an increase of $8.9 million. This increase is primarily due to a $3.2 million increase in the Top Drive segment, a $0.3 million increase in operating income in the Tubular Services segment,
a $1.8 million increase in the CASING DRILLING segment and a $3.9 million increase in the Corporate and Other segment, partially offset by a $0.2 million decrease in losses in the Research and Engineering segment. The increase in Top Drive operating income was primarily due to the sale of three used units during the current quarter and a $1.6 million gain on the sale of ancillary operating equipment, compared to the sale of one used unit during the three months ended June 30, 2009. The increase in
Tubular Services operating income was primarily due to a $1.8 million impairment of fixed assets held for sale incurred during the three months ended June 30, 2009. The decrease in CASING DRILLING operating loss was primarily due to a $0.9 million improvement in bad debt expense during the three months ended September 30, 2009. The decrease in Corporate and Other’s expenses of $3.9 million was primarily due to a $1.9 million decrease in legal fees, a $0.6 million decrease in severance costs and a $0.7 million
decrease in non-cash stock compensation expense during the current period.
Net Loss for the three months ended September 30, 2009 was $0.3 million, compared to a loss of $3.6 million in the three months ended June 30, 2009, an improvement of $3.3 million. This change is due primarily to increased operating income as discussed above and $0.8 million in interest income recorded during the three months ended September
30, 2009, partially offset by an increase in our effective tax rate from 56% for the three months ended June 30, 2009 to 122% for the three months ended September 30, 2009. The effective tax rate for the three months ended September 30, 2009 reflects the recognition of a $0.6 million charge related to provision to return adjustments as a result of filing an amended 2008 Canadian income tax return and a $0.5 million charge related to provision to return adjustments as a result of filing our 2008 U.S. income tax
returns.
LIQUIDITY AND CAPITAL RESOURCES
Our Net Cash (Debt) position at September 30, 2009 and December 31, 2008 was as follows (in thousands):
September 30,
2009 |
December 31,
2008 |
|||||||
Cash |
$ | 45,761 | $ | 20,619 | ||||
Current portion of long term debt |
(2,525 | ) | (10,171 | ) | ||||
Long term debt |
(31,400 | ) | (39,400 | ) | ||||
Net Cash (Debt) |
$ | 11,836 | $ | (28,952 | ) | |||
The conversion from a Net Debt position to a Net Cash position during the nine months ended September 30, 2009 was primarily the result of collecting accounts receivable that were outstanding as of December 31, 2008, partially offset by using cash collected to fund our operations.
We have reported Net Cash (Debt) because we regularly review Net Cash (Debt) as a measure of our performance. However, the measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the measurement.
On June 5, 2007, we and our existing lenders entered into an amended and restated credit agreement (the “Amended Credit Agreement”) to provide up to $100 million in revolving loans including up to $15 million of swingline loans (collectively, the “Revolver”) and a term loan which had a balance of $25.0 million
as of June 5, 2007 with required quarterly payments through October 31, 2009. The Amended Credit Agreement has a term of five years and all outstanding borrowings on the Revolver will be due and payable on June 5, 2012. In December 2007, we entered into the first amendment to the Amended and Restated Credit agreement to increase the Revolver to provide up to $145 million. In March 2008, we entered into a second amendment to the Amended Credit Agreement in order to increase the limit on permitted
capital expenditures during the quarters ending March 31, June 30 and September 30, 2008 from 70% to 85% of consolidated EBITDA (as defined in the Amended Credit Agreement). Amounts available under the Revolver are reduced by letters of credit issued under the Amended Credit Agreement not to exceed $20 million in the aggregate of all undrawn amounts and amounts that have yet to be disbursed under all existing letters of credit. Amounts available under the swingline loans may also be reduced
by letters of credit or by means of a credit to a general deposit account of the applicable borrower. As of September 30, 2009, we had $5.6 million in letters of credit outstanding under our credit facility and $108.0 million available under the Revolver.
The Amended Credit Agreement contains covenants that we consider usual and customary for an agreement of this type, including a leverage ratio, a minimum net worth, and a fixed charge coverage ratio. Pursuant to the terms of the Amended Credit Agreement, we are prohibited from incurring any additional
indebtedness outside the existing Credit Facility, in excess of $15 million, paying cash dividends to shareholders and other restrictions which are standard to the industry. The Amended Credit Agreement is secured by substantially all our assets. All of our direct and indirect material subsidiaries in the United States and Canada are guarantors of any borrowings under the Amended Credit Agreement. Additionally, our capital expenditures are limited to 70% of consolidated EBITDA plus net proceeds from asset sales.
The capital expenditure limit decreases to 60% of consolidated EBITDA plus net proceeds from asset sales for fiscal quarters ending after June 30, 2010. The availability of future borrowings may be limited in order to maintain certain financial ratios required under the covenants. We were in compliance with our bank covenants at September 30, 2009.
Outstanding borrowings under our revolving credit facility were $31.4 million and the outstanding balance on our term loan was $2.5 million as of September 30, 2009. Our credit facility is maintained by a syndicate of seven banks, and we are not aware of any insolvency issues with respect to our syndicate banks.
Our investment in working capital, excluding cash and current portion of long term debt, decreased $7.5 million to $127.4 million at September 30, 2009 from $134.9 million at December 31, 2008. The decrease during the nine months ended September 30, 2009 was primarily due to a decrease in accounts receivable, partially offset by
a decrease in our accounts payable.
Following is the calculation of working capital, excluding cash and the current portion of long term debt, as of September 30, 2009 and December 31, 2008 (in thousands):
September 30,
2009 |
December 31,
2008 |
|||||||
Current assets |
$ | 229,211 | $ | 245,065 | ||||
Current liabilities |
(58,533 | ) | (99,763 | ) | ||||
Working capital |
170,678 | 145,302 | ||||||
Less: |
||||||||
Cash and cash equivalents |
(45,761 | ) | (20,619 | ) | ||||
Current portion of long term debt |
2,525 | 10,171 | ||||||
Working capital, excluding cash and current portion of long term debt |
$ | 127,442 | $ | 134,854 | ||||
During the nine months ended September 30, 2009, cash provided by operating activities was $49.4 million compared to cash provided by operating activities of $39.2 million in the same period in 2008. This increase is primarily due to the changes in working capital discussed above. We believe our
operations will continue to generate cash and these amounts, along with amounts available under our existing credit facilities, will be sufficient to fund our working capital needs and capital expenditures.
We are also monitoring the creditworthiness and ability of our customers to obtain financing in order to mitigate any adverse impact on our revenues, cash flows and earnings.
OFF BALANCE SHEET ARRANGEMENTS
As of September 30, 2009 and December 31, 2008, we had no off balance sheet arrangements.
SIGNIFICANT ACCOUNTING POLICIES
The preparation and presentation of our financial statements requires management to make estimates that significantly affect the results of operations and financial position reflected in the financial statements. In making these estimates, management applies accounting policies and principles that it believes will provide the most meaningful
and reliable financial reporting. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty attached to the estimate. Management considers the most significant of these estimates and their impact to be:
Foreign Currency Translation—The U.S. dollar is the functional currency for most of our worldwide operations. For foreign operations where the local currency is the functional currency, specifically our Canadian operations, assets and liabilities denominated in foreign currencies
are translated into U.S. dollars at end-of-period exchange rates, and the resultant translation adjustments are reported, net of their related tax effects, as a component of accumulated other comprehensive income in shareholders’ equity. Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured into the functional currency prior to translation into U.S. dollars, and the resultant exchange gains and losses are included in income in the period in which they
occur. Income and expenses are translated into U.S. dollars at the average exchange rates in effect during the period. Our primary exposure with respect to foreign currency exchange rate risk is the change in the U.S. dollar/Canadian dollar exchange rate. Historically, this exchange rate has fluctuated within approximately 20% of the U.S. dollar, and we have recognized a corresponding foreign exchange gain or loss. We cannot accurately predict the amount or variability of future exchange rate fluctuations. Accordingly,
the amount of gains or losses recognized in the future may vary significantly from historically reported amounts.
Revenue Recognition—We recognize revenues from product sales when the earnings process is complete and collectability is reasonably assured when title and risk of loss of the equipment is transferred to the customer, with no right of return. Revenue in the Top Drive segment may
be generated from contractual arrangements that include multiple deliverables. Revenue from these arrangements is recognized as each item or service is delivered based on their relative fair value and when the delivered items or services have stand-alone value to the customer. For revenues other than product sales, we recognize revenues as the services are rendered based upon agreed daily, hourly or job rates.
We provide product warranties on equipment sold pursuant to manufacturing contracts and provide for the anticipated cost of such warranties in cost of sales when sales revenue is recognized. The accrual of warranty costs is an estimate based upon historical experience and upon specific warranty issues as they arise. We periodically review
our warranty provision to assess its adequacy in the light of actual warranty costs incurred. The key factors with respect to estimating our product warranty accrual are our assumptions regarding the quantity and estimated cost of potential warranty exposure. Historically, our warranty expense has fluctuated based on the identification of specifically identified technical issues, and warranty expense does not necessarily move in concert with sales levels. In the past, we have not recognized a material adjustment
from our original estimates of potential warranty costs. However, because the warranty accrual is an estimate, it is reasonably possible that future warranty issues could arise that could have a significant impact on our financial statements.
Deferred Revenues—We generally require customers to pay a non-refundable deposit for a portion of the sales price for top drive units with their order. These customer deposits are deferred until the customer takes title and risk of loss of the product.
Accounting for Stock-Based Compensation—We recognize compensation expense on stock-based awards to employees, directors and others. For those awards that we intend to settle in stock, compensation expense is based on the calculated
fair value of each stock-based award at its grant date, the estimation of which may require us to make assumptions about the future volatility of our stock price, rates of forfeiture, future interest rates and the timing of grantees’ decisions to exercise their options. Certain of our stock options awarded prior to our voluntary delisting from the Toronto Stock Exchange effective June 30, 2008 were denominated in Canadian dollars and have been determined to be liability classified awards. Accordingly, they
are remeasured at fair value at the end of each reporting period, which may result in volatility in future compensation expense. The fair value of option awards is estimated using the Black-Scholes option pricing model. Key assumptions in the Black-Scholes option pricing model, some of which are based on subjective expectations, are subject to change. A change in one or more of these assumptions would impact the expense associated with future grants. These assumptions bear the risk of change as they require significant
judgment and they have inherent uncertainties that management may not be able to control. These key assumptions include the weighted average risk-free interest rate, the expected life of options, the volatility of our common shares and the weighted average expected forfeiture rate. We base our assumptions on our historical experience; however, future activity may vary significantly from our estimates.
Allowance for Doubtful Accounts Receivable—We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts
is established based upon specific situations and overall industry conditions. Many of our customers are located in international areas that are inherently subject to risks of economic, political and civil instabilities, which may impact management’s ability to collect those accounts receivable. The main factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency, and management’s estimate of ability to collect outstanding receivables based on the number
of days outstanding. We make assumptions regarding current market conditions and how they may affect our customers’ ability to pay outstanding receivables. These assumptions are based on the length of time that a receivable remains unpaid, our historical experiences with the customers, the financial condition of the individual customers and the international areas in which they operate. Historically, our estimates have not differed materially from the ultimate amounts recognized for bad debts. However,
these allowances are based on estimates. If actual results are not consistent with our assumptions and judgments used, we may be exposed to additional write offs of accounts receivable that could be material to our results of operations.
Excess and Obsolete Inventory Provisions—Our inventory consists primarily of specialized tubular services and casing tool parts, spare parts, work in process, and raw materials to support our ongoing manufacturing operations and our installed base of specialized equipment used
throughout the world. Customers rely on us to stock these specialized items to ensure that their equipment can be repaired and serviced in a timely manner. Our estimated carrying value of inventory therefore depends upon demand driven by oil and gas drilling activity, which depends in turn upon oil and gas prices, the general outlook for economic growth worldwide, available financing for our customers, political stability in major oil and gas producing areas and the potential obsolescence of various types of
equipment we sell, among other factors. Quantities of inventory on hand are reviewed periodically to ensure they remain active part numbers and the quantities on hand are not excessive based on usage patterns and known changes to equipment or processes. Our primary exposure with respect to estimating our provision for excess and obsolete inventory is our assumption regarding the projected quantity usage patterns. These estimates are based on historical usage and operating forecasts and are reviewed for reasonableness
on a periodic basis. Historically, our estimates have not differed materially from the amount of inventory ultimately expensed as excess or obsolete. However, significant or unanticipated changes in business conditions and (or) changes in technologies could impact the amount and timing of any additional provision for excess or obsolete inventory that may be required.
Impairment of Intangible and Other Long-Lived Assets and Goodwill —Long-lived assets, which include property, plant and equipment, goodwill and intangible and other assets, comprise a substantial portion of our assets. The carrying value of these assets is reviewed for impairment
on an annual basis or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. This requires us to forecast future cash flows to be derived from the utilization of these assets based upon assumptions about future business conditions or technological developments. Significant, unanticipated changes in circumstances could make these assumptions invalid and require changes to the carrying value of our long-lived assets.
Long-lived assets, such as property, plant and equipment, and intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value of the assets contained in our financial statements may not be recoverable. When evaluating long-lived assets and intangible assets for potential impairment, we
first compare the carrying value of the asset to the asset’s estimated, future net cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate and recognize an impairment loss. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset. Restoration of
a previously recognized impairment loss is prohibited.
Our impairment loss calculations require management to apply judgments in estimating future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that represents the risk inherent in future cash flows. We had no impairment charges on long-lived assets during the year ended December
31, 2008 or the nine months ended September 30, 2009. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations.
We test consolidated goodwill for impairment using a fair value approach at the reporting unit level and perform our goodwill impairment test annually or upon the occurrence of a triggering event. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.
For purposes of our analysis, we estimate the fair value for the reporting unit based on discounted cash flows (the income approach). The income approach is dependent on a number of significant management assumptions including markets and market share, sales volumes and prices, costs
to produce, capital spending, working capital changes, terminal value multiples and the discount rate. The discount rate is commensurate with the risk inherent in the projected cash flows and reflects the rate of return required by an investor in the current economic conditions. Based on our analysis performed for the year ended December 31, 2008 and the interim analysis performed at June 30, 2009, if we were to increase the discount rate by 200 basis points while keeping all other assumptions constant,
there would be no impairment in the reporting unit. We determined that no triggering event occurred during the three months ended September 30, 2009, and accordingly, did not perform an impairment analysis on its goodwill during the current period. Inherent in our projections are key assumptions relative to how long the current downward cycle might last. Furthermore, the financial and credit market volatility directly impacts our fair value measurement through our weighted-average cost of capital that
we use to determine our discount rate. During times of volatility, significant judgment must be applied to determine whether credit changes are a short term or long term trend. While we believe the assumptions made are reasonable and appropriate, we will continue to monitor these, and update our impairment analysis if the cycle downturn continues for longer than expected.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to additional impairment losses that could be material to our results of operations.
Income Taxes—We use the liability method which takes into account the differences between financial statement treatment and tax treatment of certain transactions, assets and liabilities. 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. By their nature, tax laws are often subject to interpretation. Further complicating matters is that in those cases where a tax position is open to interpretation, differences of opinion can result in differing conclusions as to the amount of tax benefits to be recognized under FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes.” Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the tax asset will not be realized. Estimates of future taxable income and ongoing tax planning have been considered in assessing the utilization of available tax losses and credits. Unforeseen events and industry conditions may impact forecasts of future taxable income which, in turn, can affect the carrying value of the deferred tax assets and liabilities
and impact our future reported earnings. The level of evidence and documentation necessary to support a position prior to being given recognition and measurement within the financial statements is a matter of judgment that depends on all available evidence. A change in our forecast of future taxable income, or changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with our deferred tax assets, which could have a material effect
on net income.
CHANGES IN ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“Codification”) became the single source of authoritative U.S. GAAP. The Codification did not create any new U.S. GAAP standards but incorporated existing accounting and reporting standards into a new
topical structure with a new referencing system to identify authoritative accounting standards, replacing the prior references to Statement of Financial Accounting Standards (“SFAS”), Emerging Issues Task Force (“EITF”), FASB Staff Position (“FSP”) and other publications. Authoritative standards included in the Codification are designated by their Accounting Standards Codification (“ASC”) topical reference, and new standards will be designated as Accounting
Standards Updates (ASU), with a year and assigned sequence number. Beginning with this interim report for the third quarter of 2009, references to prior standards have been updated to reflect the new referencing system.
In October 2009, the FASB issued updated guidance that allows for more flexibility in determining the value of separate elements in revenue arrangements with multiple deliverables. This guidance modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria
that verifiable and objective evidence of fair value exists for the undelivered elements. All entities must adopt no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Upon adoption, entities may choose between the prospective application for transactions entered into or materially modified after the date of adoption, or the retroactive application for all revenue arrangements for all periods presented. Disclosures will be required when changes in either
those judgments or the application of this guidance significantly affect the timing or amount of revenue recognition. We will adopt these provisions on January 1, 2011. We are currently evaluating the potential impact these standards may have on the consolidated financial statements.
In June 2009, the FASB issued new accounting guidance that clarifies the characteristics that identify a variable interest entity (“VIE”) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable
interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This guidance requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to
the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. This update is effective for fiscal years beginning after November 15, 2009. We will adopt these provisions on January 1, 2010 and the adoption is not expected to have a material impact on the consolidated financial statements.
41
In June 2009, the FASB issued new accounting guidance that enhances the information provided to financial statement users to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. Under this Statement, many types of transferred financial
assets that would have been derecognized previously are no longer eligible for derecognition. This Statement requires enhanced disclosures about the risks to which a transferor continues to be exposed due to its continuing involvement in transferred financial assets. This Statement also clarifies and improves certain provisions in previously issued statements that have resulted in inconsistencies in the application of the principles on which that Statement is based. These updates are effective for annual reporting
periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We will adopt these provisions on January 1, 2010 and the adoption is not expected to have a material impact on the consolidated financial statements.
In May 2009, the FASB issued new accounting guidance which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events. We
adopted the new disclosure requirements in our financial statements issued for the period ended June 30, 2009 and the adoption did not have a material impact on the consolidated financial statements.
In April 2009, the FASB issued new guidance that requires that a registrant to disclose the fair value of all financial instruments for interim reporting periods and in its financial statements for annual reporting periods, whether recognized or not recognized in the statement of financial position. We adopted the updated guidance for the
interim reporting period ended March 31, 2009 and the adoption did not have a material impact on our consolidated financial statements as the Statement required additional disclosures but no change in accounting policy.
In April 2008, the FASB issued an update to existing accounting standards that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the update is to improve the consistency between the useful life of a recognized intangible
asset under existing accounting standards and the period of expected cash flows used to measure the fair value of the asset under accounting guidance for business combinations and other applicable accounting literature. We adopted the updated guidance on January 1, 2009 and the adoption did not have a material impact on our consolidated financial statements.
In March 2008, the FASB issued an update to existing accounting standards enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under previously issued
standards and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. We adopted the provisions of the updated guidance on January 1, 2009 and the adoption did not have a material impact on our consolidated financial statements.
In December 2007, the FASB issued an update to previously issued accounting guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. Additionally, this Statement requires that consolidated net income include the amounts attributable to both the parent and the noncontrolling interest. We adopted the updated guidance on January 1, 2009 and the adoption did not have a material impact on our consolidated financial statements.
In December 2007, the FASB issued a revision to previously issued accounting standards which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
The update also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This guidance is effective on a prospective basis to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and early adoption is
prohibited. In February 2009, the FASB issued additional updates which amended the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under the guidance. We adopted both of the updates on a prospective basis effective January 1, 2009 and the adoption did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued new accounting guidance that affirms that the objective of fair value when the market for an asset is not active; clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset in an inactive market; eliminates the proposed presumption
that all transactions are distressed and requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the guidance. The updated guidance must be applied prospectively and retrospective application is not permitted. We elected to adopt the updated guidance in the first quarter of 2009, and the adoption did not have a material impact on our consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
From time to time, we may utilize derivative financial instruments in the management of our foreign currency and interest rate exposures. We do not use derivative financial instruments for trading or speculative purposes and account for all such instruments using the fair value method. Currency exchange exposures on foreign currency denominated
balances and anticipated cash flows may be managed by foreign exchange forward contracts when it is deemed appropriate. Exposures arising from changes in prevailing levels of interest rates relative to the contractual rates on our debt may be managed by entering into interest rate swap agreements when it is deemed appropriate.
As of December 31, 2007, we had entered into a series of 25 bi-weekly foreign currency forward contracts with notional amounts aggregating C$43.8 million. During the three months ended March 31, 2008, we terminated these bi-weekly foreign currency forward contracts and recognized a loss of $0.6 million. We replaced them with
14 monthly foreign currency forward contracts with notional amounts aggregating C$50.8 million. We subsequently settled two of these contracts and terminated the remaining 12 contracts, and recognized a loss of $0.2 million for the nine months ended September 30, 2008. We were not party to any derivative financial instruments as of September 30, 2009 or December 31, 2008.
The carrying value of cash, investments in short-term commercial paper and other money market instruments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short-term period to maturity of the instruments.
The fair value of our long term debt depends primarily on current market interest rates for debt issued with similar maturities by companies with risk profiles similar to us. The fair value of our debt related to our credit facility at September 30, 2009 was approximately $29.8 million. We also have short-term debt in the form of a term loan.
The fair value of our term loan debt at September 30, 2009 was approximately $2.5 million. A one percent change in interest rates would increase or decrease interest expense $0.3 million annually based on amounts outstanding at September 30, 2009.
Our accounts receivable are principally with oil and gas service and exploration and production companies and are subject to normal industry credit risks. Please see Part I, Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2008 for a detailed discussion of the risk factors affecting
us and Item 1A. “Risk Factors,” below for further discussion of recent risks.
CONTROLS AND PROCEDURES. |
In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2009 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include
controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS. |
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of these proceedings involves a claim for damages exceeding ten percent of the current assets of TESCO and its subsidiaries on a consolidated basis. Please see Part I, Item 3—“Legal Proceedings”
in our Annual Report on Form 10-K for the year ended December 31, 2008 for a summary of our ongoing legal proceedings. The estimates below represent management’s best estimates based on consultation with internal and external legal counsel. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.
Varco I/P, Inc. (“Varco”) filed suit against TESCO in April 2005 in the U.S. District Court for the Western District of Louisiana, alleging that our CDS infringes certain of Varco’s U.S. patents. Varco seeks monetary damages and an injunction against further infringement. We filed a countersuit against Varco in June 2005
in the U.S. District Court for the Southern District of Texas, Houston Division seeking invalidation of the Varco patents in question. In July 2006, the Louisiana case was transferred to the federal district court in Houston, and as a result, the issues raised by Varco have been consolidated into a single proceeding in which we are the plaintiff. We also filed a request with the U.S. Patent and Trademark Office (“USPTO”) for reexamination of the patents on which Varco’s claim of infringement
is based. The USPTO accepted the Varco patents for reexamination, and the district court stayed the patent litigation pending the outcome of the USPTO reexamination. In May 2009, the USPTO issued a final action rejecting all of the Varco patent claims that TESCO had contested. Varco has appealed this decision with the USPTO. The outcome and amount of any future financial impacts from this litigation are not determinable at this time.
Frank’s International, Inc. and Frank’s Casing Crew and Rental Tools, Inc. (“Franks”) filed suit against TESCO in the U.S. District Court for the Eastern District of Texas, Marshall Division, on January 10, 2007, alleging that its Casing Drive System infringes two patents held by Franks. TESCO filed a response
denying the Franks allegation and asserting the invalidity of its patents. In May 2008, Franks withdrew its claims with respect to one of the patents, and, in July 2008, TESCO filed a request with the USPTO for reexamination of the other patent. In September 2008, the USPTO ordered a reexamination of that patent. During the nine months ended September 30, 2009, TESCO, Franks, and a third party from whom TESCO had a license agreed on terms of a settlement, pursuant to which TESCO paid $1.8 million to Franks and
$0.4 million to the third party. Under the terms of the settlement, TESCO received from the third party a release of any royalty obligation under the license and received from Franks a fully-paid, perpetual, world-wide nonexclusive license under the two patents at issue. Franks requested the court to dismiss its lawsuit with prejudice. TESCO accrued and paid this $2.2 million settlement during the nine months ended September 30, 2009.
In July 2006, we received a claim for withholding tax, penalties and interest related to payments over the periods from 2000 to 2004 in a foreign jurisdiction. We disagree with this claim and are currently litigating this matter. However, at June 30, 2006 we accrued our estimated pre-tax exposure on this matter at $3.8 million, with
$2.6 million included in other expense and $1.2 million included in interest expense. During 2008 and the nine months ended September 30, 2009, we accrued an additional $0.2 million and $0.1 million, respectively, of interest expense related to this claim.
In February 2009 we received notification of a regulatory review of our payroll practices in one of our North American business districts. Based on information currently available, we do not expect a material financial impact upon the conclusion of this review.
A former employee of one of TESCO’s U.S. subsidiaries filed suit in the U.S. District Court for the Southern District of Texas—Houston Division on January 29, 2009 on behalf of a number of similarly situated claimants, alleging we failed to comply with certain wage and hour regulations under the U.S. Fair Labor Standards
Act. The lawsuit was dismissed on July 22, 2009 on the basis that several of the plaintiffs were bound to arbitrate their claims against us pursuant to the TESCO Dispute Resolution Program (“Plan”). Five plaintiffs not covered by the Plan re-filed their lawsuit on July 30, 2009 in the same court. No trial date has been set. The 22 plaintiffs covered under the Plan have subsequently initiated arbitration proceeding with the American Arbitration Association in Houston. . Additional plaintiffs
have subsequently joined both proceedings. We intend to vigorously defend all the allegations asserted in both proceedings. The outcome and amount of any potential financial impact from the litigation and arbitration proceedings are not determinable at this time.
ITEM 1A. |
RISK FACTORS. |
See Part I, Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2008 for a detailed discussion of the risk factors affecting the Company. The information below provides updates to the previously disclosed risk factors and should be read in conjunction with the risk factors and
information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
We face risks related to pandemic diseases, which could materially and adversely disrupt our operations and affect travel required for our worldwide operations.
A portion of our business involves the movement of people and certain parts and supplies to or from foreign locations. Any restrictions on travel or shipments to and from foreign locations, due to an epidemic or outbreak of diseases, including the recent H1N1 Flu (commonly known as Swine Flu), in these locations could significantly disrupt
our operations and decrease our ability to provide services to our customers. In addition, our local workforce could be affected by such an outbreak which could also significantly disrupt our operations and decrease our ability to provide services to our customers.
Restrictions imposed by our credit agreement may limit our ability to finance future operations or capital needs.
The amount of borrowings available under our credit agreement is limited by the maintenance of certain financial ratios. Decreases in our financial performance could prohibit us from borrowing available amounts under our revolver or could force us to make repayments of outstanding total debt in order to remain in compliance with our credit
agreements. These restrictions may negatively impact our ability to finance future operations, implement our business strategy or fund our capital needs. Compliance with these financial ratios may be affected by events beyond our control, including the risks and uncertainties described in the other risk factors and elsewhere in this report.
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
ITEM 5. |
OTHER INFORMATION. |
None.
ITEM 6. |
Exhibits
Exhibit No. |
Description | |
3.1* |
Articles of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated by reference to Exhibit 4.1 to Tesco Corporation’s Registration Statement on Form S-8 (File No. 333-139610) filed with the SEC on December 22, 2006) | |
3.2* |
Amended and Restated By-laws of Tesco Corporation (incorporated by reference to Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22, 2007) | |
4.1* |
Form of Common Share Certificate for Tesco Corporation (incorporated by reference to Exhibit 4.3 to Tesco Corporation’s Registration Statement on Form S-8 filed with the SEC on November 13, 2008) | |
4.2* |
Shareholder Rights Plan Agreement between Tesco Corporation and Computershare Trust Company of Canada, as Rights Agent, Amended and Restated as of May 20, 2008 (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22, 2008) | |
31.1 |
Rule 13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation | |
31.2 |
Rule 13a-14(a)/15d-14(a) Certification, executed by Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation | |
32 |
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation and Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation |
* |
Incorporated by reference to the indicated filing |
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TESCO CORPORATION | ||||
By: |
/s/ JULIO M. QUINTANA | |||
Julio M. Quintana,
President and Chief Executive Officer |
||||
Date: November 4, 2009 | ||||
TESCO CORPORATION | ||||
By: |
/s/ ROBERT L. KAYL | |||
Robert L. Kayl,
Senior Vice President and Chief Financial Officer |
||||
Date: November 4, 2009 |
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
Exhibit No. |
Description | |
3.1* |
Articles of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated by reference to Exhibit 4.1 to Tesco Corporation’s Registration Statement on Form S-8 (File No. 333-139610) filed with the SEC on December 22, 2006) | |
3.2* |
Amended and Restated By-laws of Tesco Corporation (incorporated by reference to Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22, 2007) | |
4.1* |
Form of Common Share Certificate for Tesco Corporation (incorporated by reference to Exhibit 4.3 to Tesco Corporation’s Registration Statement on Form S-8 filed with the SEC on November 13, 2008) | |
4.2* |
Shareholder Rights Plan Agreement between Tesco Corporation and Computershare Trust Company of Canada, as Rights Agent, Amended and Restated as of May 20, 2008 (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22, 2008) | |
31.1 |
Rule 13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation | |
31.2 |
Rule 13a-14(a)/15d-14(a) Certification, executed by Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation | |
32 |
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation and Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation |
* |
Incorporated by reference to the indicated filing |