UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
000-19580
T-3 ENERGY SERVICES,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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76-0697390
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.)
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7135 Ardmore, Houston, Texas
(Address of Principal
Executive Offices)
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77054
(Zip Code)
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Registrants telephone number, including area code:
(713) 996-4110
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, par value $.001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act: None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant 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 o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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 definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates was approximately $152,821,000 at June 30,
2009. As of March 4, 2010, there were
13,038,143 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants proxy statement to be
furnished to stockholders in connection with its 2010 Annual
Meeting of Stockholders are incorporated by reference in
Part III,
Items 10-14
of this annual report on
form 10-K
for the year ending December 31, 2009 (this Annual
Report).
TABLE OF
CONTENTS
FORM 10-K
Unless otherwise indicated, all references to we,
us, our or T-3 include T-3
Energy Services, Inc. and its consolidated subsidiaries.
PART I
Our
Company
T-3 Energy Services, Inc. designs, manufactures, repairs and
services products used in the drilling and completion of new oil
and gas wells, the workover of existing wells, and the
production and transportation of oil and gas. Our products are
used in both onshore and offshore applications throughout the
world. Our customer base consists of other oilfield service
companies, major and independent oil and gas companies, national
energy companies and pipeline companies.
We are a publicly traded Delaware corporation with principal
executive offices located at 7135 Ardmore, Houston, Texas 77054.
Our common stock is traded on The NASDAQ Global Select Market
under the symbol TTES.
As of March 5, 2010, we had 25 facilities, 24 of which were
strategically located throughout North America and one of which
was located in India. Additionally, we participate in joint
ventures in Mexico and Dubai and have authorized repair centers,
for which we share our technical know-how and expertise, in both
Brazil and Norway. We focus on providing our customers rapid
response times and flexible engineering solutions for value
adding products and services. We believe that our original
equipment products and brand name have gained strong market
acceptance, resulting in greater sales to customers that use our
products in both domestic and international operations.
We have three product lines: pressure and flow control,
wellhead, and pipeline, which generated 74%, 20% and 6% of our
total revenue for the year ended December 31, 2009. We
offer original equipment products and aftermarket parts and
services for each product line. Aftermarket parts and services
include all remanufactured products and parts, repair and field
services. Original equipment products generated 83% and
aftermarket parts and services generated 17% of our total
revenues for the year ended December 31, 2009. For
additional information about our results of operations, please
read Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited financial statements beginning on
page F-1
of this report and incorporated into Item 8.
Financial Statements and Supplementary Data.
Pressure and Flow Control. We design,
manufacture and provide aftermarket parts and services for
pressure and flow control products used in the drilling,
completion, production and workover of onshore, offshore and
subsea applications. Our pressure and flow control products
include:
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blow-out preventers, or BOPs;
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BOP control systems;
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elastomer products;
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production, drilling and well service chokes;
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manifolds; and
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high pressure gate valves.
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Wellhead. We design, manufacture and provide
aftermarket parts and services for wellhead equipment used for
onshore oil and gas production. Our wellhead products include
wellheads, production chokes, manifolds and production valves.
Wellhead products are sold to oil and gas producers and are used
during both the drilling and completion phases of an oil or gas
well as well as during the productive life of a well.
Pipeline. We design, manufacture and provide
aftermarket parts and services for a wide variety of valves
primarily for onshore pipeline applications. Our pipeline
products include a wide variety of valves for pipeline
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applications, including low pressure gate, ball, control and
check valves. Our pipeline valves and related products are used
in field or gathering systems and in interstate pipeline
transmission systems.
Our
Industry
The oilfield services industry in which we operate has
historically experienced significant volatility and its activity
level and profitability can fluctuate significantly in a short
period of time. Demand for our products and services depends on
the levels of spending and capital expenditures by our
customers, which depends on the levels and complexity of
drilling and completion activity in the oil and gas industry.
Demand for our pipeline products and services is driven by
maintenance, repair and construction activities for pipeline
gathering and transmission systems. These activity levels depend
on factors including customers cash flow and ability to
raise capital on attractive terms, current prices of oil and gas
and customers expectations of oil and gas prices in the
future.
Please read Item 1A. Risk Factors Our
business depends on spending by the oil and gas industry, and
this spending and our business may be adversely affected by
industry conditions that are beyond our control, and
Managements Discussions and Analysis of Financial
Condition and Results of Operations Outlook
for more information regarding these industry factors and events.
Our
Products and Services
We design, manufacture, repair and service products used in the
drilling and completion of new oil and gas wells, the workover
of existing wells and the production and transportation of oil
and gas used in onshore, offshore and subsea applications. These
products include the following:
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BOPs. A BOP is a large pressure control device
located at the top of a well. During drilling operations, a
series of BOPs are installed to control the pressure in the
wellbore. When activated, BOPs seal the well and prevent fluids
and gases from escaping, protecting the safety of the crew and
maintaining the integrity of the rig and wellbore.
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BOP control systems. Our BOP control systems
are actuators that remotely open and close BOPs with hydraulic
pressure.
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Manifolds and control valves. Manifolds are
arrangements of piping and valves used to control, distribute
and monitor fluid flow. Control valves, which can be manually,
hydraulically or electrically actuated, are valves used to
control flow in a wide variety of oilfield and industrial
applications. Our manifolds and control valves are used in oil
and gas production, drilling and well servicing applications.
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Chokes. A choke is a valve used to control
fluid flow rates or reduce system pressure. Chokes are used in
oil and gas production, drilling and well servicing applications
and are often susceptible to erosion from exposure to abrasive
and corrosive fluids. Chokes are available for both fixed and
adjustable modes of operation.
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Custom protective coatings. Our protective
coatings consist of thin liquid or powder material that once
applied over a structure prevents corrosion, wear and leakage
problems. Our protective coatings are applied to a wide variety
of oilfield and industrial products.
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Elastomer products. Elastomer products, which
are constructed of molded rubber and metal, are the sealing
elements in BOPs and wellhead equipment. Elastomer products
require frequent replacement to ensure proper BOP functioning.
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Wellhead products. Our wellhead equipment
includes wellheads, production chokes and production valves used
for onshore oil and gas production. Wellhead equipment is
installed directly on top of a completed well to ensure the safe
and efficient flow of oil or gas from the wellbore to downstream
separation and pipeline equipment. Wellhead equipment generally
consists of a complex series of flanges, fittings and valves.
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Pipeline products. Our pipeline products
include a wide variety of valves for pipeline applications,
including gate, ball, control and check valves. Pipeline valves
and related products are used in gathering systems (pipelines
connecting individual wellheads to a larger pipeline system) and
interstate pipelines (pipelines used to deliver oil, gas and
refined products over long distances).
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Aftermarket parts and services. Equipment used
in the oil and gas industry operates in harsh conditions and
frequently requires new parts, ongoing refurbishment and repair
services. Our aftermarket parts and services are focused on
repair and remanufacture of BOPs, valves and other products and
the installation and repair of wellhead and pipeline products.
We provide aftermarket services for our products as well as
other brands, including BOPs sold by many of our major
competitors.
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Customers
and Markets
Our products are used in onshore, offshore and subsea
applications and are marketed throughout the world. Our customer
base consists of other oilfield service companies, major and
independent oil and gas companies, national energy companies and
pipeline companies. No single customer accounted for greater
than 10% of our total revenues during 2009, 2008 or 2007.
Financial
Information About Geographic Areas
Substantially all of our revenues are derived from domestic
sources, including multi-national companies that operate in the
United States and Canada, and all of our assets are held in the
United States, Canada and India. Our products are ultimately
deployed to substantially all oil and gas producing regions of
the world, including, in addition to the United States and
Canada, South America, Mexico, the Middle East, Africa, Europe
and Russia. See footnote 14 to the consolidated financial
statements included in this report for further discussion of our
geographic segments.
Marketing
We market our products through a direct sales force, which
consisted of 63 persons at December 31, 2009. We
believe that our proximity to customers is a key to maintaining
and expanding our business. Almost all of our sales are on a
purchase order basis at fixed prices on normal
30-day trade
terms. Large orders may be filled on negotiated terms
appropriate to the order. International sales may be made with
agent or representative arrangements, and significant
international sales may be secured by letters of credit.
Although we do not typically maintain supply or service
contracts with our customers, a significant portion of our sales
represents repeat business.
Suppliers
and Raw Materials
In each of our product lines, we acquire raw materials, new and
used inventory and related equipment and parts from suppliers,
including individual brokers, remanufacturing companies and
original equipment manufacturers. We believe that the loss of
any single supplier would not be significant to our business. We
have not experienced a shortage of products that we sell or
incorporate into our manufactured products. The prices we pay
for our raw materials may be affected by, among other things:
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energy, steel and other commodity prices;
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tariffs and duties on imported materials; and
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foreign currency exchange rates.
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We have generally been successful in our effort to mitigate the
financial impact of higher raw materials costs on our operations
by adjusting prices on the products we sell. However, there can
be no assurance that we will be able to continue to purchase
these raw materials on a timely basis or at acceptable prices or
that we would be able to pass on such increased prices to our
customers.
Insurance
We currently carry a variety of insurance for our operations. We
are partially self-insured for certain claims in amounts we
believe to be customary and reasonable. Although we believe we
currently maintain insurance coverage adequate for the risks
involved, there is a risk our insurance may not be sufficient to
cover any particular loss or that our insurance may not cover
all losses. Please read Item 1A. Risk
Factors We may be faced with product liability
claims, which could materially and adversely affect our
earnings and Uninsured or underinsured
claims or litigation or an increase in our insurance premiums
could adversely impact our results.
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Competition
Our products are sold in highly competitive markets. We compete
in all areas of our operations with a number of other companies
that have comparable or greater financial and other resources.
Our primary competitors are Cameron International Corporation,
National Oilwell Varco, Inc., GE Oil & Gas Group
(including Vetco Gray and Hydril) and FMC Technologies. We also
have numerous smaller competitors. We believe the principal
competitive factors are product acceptance, reputation, timely
delivery of products and services, price, manufacturing
capabilities, patents, performance and dependability. We believe
several factors give us a strong competitive position relative
to our competitors. Most significant are our rapid response
times to our customers original equipment product
manufacturing and aftermarket demands and the market acceptance
of our original equipment products with most of the leading
drilling contractors.
Backlog
As of December 31, 2009 and 2008, we had a backlog of
$34.5 million and $76.1 million, consisting of written
orders or commitments believed to be firm contracts. These
contracts are occasionally varied or modified by mutual consent
and in some instances we may allow the cancellation by the
customer on short notice without substantial penalty. As a
result, our backlog as of any particular date may not be
indicative of our actual operating results for any future
period. We believe that approximately 80% of all of the orders
and commitments included in backlog at December 31, 2009
will be completed by June 30, 2010, with the remaining 20%
being completed by December 31, 2010.
Patents
and Trademarks
Our business has historically relied upon technical know-how and
experience rather than patented technology. However, we own, or
have a license to use, a number of patents covering a variety of
products. We believe that these patents have improved our
reputation and may allow us to sell to customers and compete in
areas where we have expertise without patents. Through our
acquisition of HP&T Products, Inc., or HP&T, in
October of 2007, we acquired patents, which expire at various
dates between 2021 and 2023, related to valve and gate
technology and actuators that we consider to be important to the
continued growth of our business. See footnote 5 to the
consolidated financial statements included in this report for
further discussion of our patents and trademarks.
We also rely on trade secret protection for our confidential and
proprietary information. We routinely enter into confidentiality
agreements with our employees, partners and suppliers. There can
be no assurance, however, that others will not independently
obtain similar information or otherwise gain access to our trade
secrets.
Environmental
and Other Regulations
We operate facilities in the U.S. and abroad that are
subject to stringent federal, state, provincial and local laws
and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection.
These laws and regulations can affect our operations in many
ways, such as:
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requiring the acquisition of permits to conduct regulated
activities;
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restricting the manner in which we can release materials into
the environment;
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requiring capital expenditures to maintain compliance with laws;
and
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imposing substantial liabilities on us for pollution resulting
from our operations.
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Failure to comply with these laws and regulations may result in
the assessment of administrative, civil and criminal penalties,
the imposition of remedial obligations, and the issuance of
injunctions limiting or preventing some or all of our activities.
The trend in environmental regulation has been to place more
restrictions and limitations on activities that may affect the
environment, and thus, any changes in environmental laws and
regulations that result in more stringent and costly waste
handling, storage, transport, disposal or remediation
requirements could have a material adverse effect on our
business. In the event of future increases in costs, we may be
unable to pass on those increases to our customers. While we
believe that we are in substantial compliance with existing
environmental laws and regulations
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and that continued compliance with current requirements would
not have a material adverse effect on us, there is no assurance
that this trend will continue in the future.
In the U.S., the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, or CERCLA, also
known as Superfund, and comparable state laws impose
liability without regard to fault or the legality of the
original conduct, on certain classes of persons considered to be
responsible for the release of a hazardous substance into the
environment. Such classes of persons may include the current or
past owners or operators of sites where hazardous substances
were released, and companies that disposed or arranged for the
disposal of hazardous substances found at such sites. Under
CERCLA, these responsible persons may be subject to
strict and, in certain circumstances, joint and several
liability for the costs of cleaning up hazardous substances
released into the environment, for damages to natural resources,
and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly
caused by the release of the hazardous substances into the
environment. We also may incur liability under the Resource
Conservation and Recovery Act, as amended, or RCRA, which
imposes requirements related to the handling and disposal of
solid and hazardous wastes. We generate materials in the course
of our operations that may be regulated as hazardous substances
and/or solid
or hazardous wastes.
We currently own or lease, and have in the past owned or leased,
properties in the U.S. that for many years have been used
as manufacturing facilities for industrial purposes. Although we
used operating and disposal practices that were standard in the
industry at the time, petroleum hydrocarbons or wastes may have
been disposed of or released on or under such properties owned
or leased by us or on or under other locations where such
petroleum hydrocarbons or wastes have been taken for reclamation
or disposal. In addition, some of these properties have been
operated by third parties whose treatment and disposal or
release of petroleum hydrocarbons and other wastes was not under
our control. These properties and the materials disposed or
released on them may be subject to CERCLA, RCRA and analogous
state laws. Under such laws, we could be required to remove or
remediate previously disposed wastes or property contamination,
or to perform remedial activities to prevent future
contamination. While we have been identified as a potentially
responsible party, or PRP, with respect to one site identified
on the CERCLA National Priorities List designated for cleanup,
we believe that our involvement at that site has been minimal,
and that our liability for this matter will not have a material
adverse effect on our business. See Item 3. Legal
Proceedings and footnote 11 to the consolidated financial
statements included in this report for further discussion of
this PRP matter.
The Federal Water Pollution Control Act, as amended, also known
as the Clean Water Act, and analogous state laws impose
restrictions and controls on the discharge of pollutants into
waters of the U.S. or the states. Such discharges are
prohibited, except in accord with the terms of a permit issued
by the U.S. Environmental Protection Agency, or EPA, or
analogous state agencies. Spill prevention, control and
countermeasure requirements under federal law require
appropriate containment berms and similar structures to help
prevent the contamination of navigable waters in the event of a
hydrocarbon tank spill, rupture or leak. In addition, the Clean
Water Act and analogous state laws require individual permits or
coverage under general permits for discharges of stormwater from
certain types of facilities. These permits may require us to
monitor and sample the stormwater runoff. Discharges in
violation of the Clean Water Act could result in penalties, as
well as significant remedial obligations. We believe that our
U.S. facilities are in substantial compliance with this act.
The Clean Air Act, as amended, and comparable state laws
restrict the emission of air pollutants from many sources in the
U.S., including paint booths, and may require us to obtain
pre-approval for the construction or modification of certain
projects or facilities expected to produce air emissions, impose
stringent air permit requirements, or use specific equipment or
technologies to control emissions. We believe that our
U.S. operations are in material compliance with the Clean
Air Act.
In response to studies suggesting that emissions of certain
gases, including carbon dioxide and methane, may be contributing
to warming of the Earths atmosphere, many foreign nations,
including Canada, have agreed to limit emissions of these gases,
generally referred to as greenhouse gases, pursuant
to the United Nations Framework Convention on Climate Change,
also known as the Kyoto Protocol. The Kyoto Protocol
requires Canada to reduce its emissions of greenhouse
gases to 6% below 1990 levels by 2012. As a result, it is
possible that already stringent air emissions regulations
applicable to our operations in Canada will be replaced with
even stricter requirements
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prior to 2012. Although the United States is not participating
in the Kyoto Protocol, President Obama has expressed support
for, and Congress is actively considering climate change-related
legislation that would establish an economy-wide
cap-and-trade
program to reduce U.S. emissions of greenhouse gases. In
addition, at least one-third of the states, either individually
or through multi-state regional initiatives, have already taken
legal measures to reduce emissions of greenhouse gases,
primarily through the planned development of greenhouse gas
emission inventories
and/or
greenhouse gas cap and trade programs. Also, the
U.S. Environmental Protection Agency, or EPA, has
determined that greenhouse gases present an endangerment to
public health and the environment and, consequently, has
proposed regulations that would require a reduction in emissions
of greenhouse gases from motor vehicles and could trigger permit
review for greenhouse gas emissions from certain stationary
sources, as well as adopted regulations requiring the reporting
of greenhouse gas emissions from specified large greenhouse gas
sources in the United States. New federal, provincial, regional
or state restrictions on emissions of greenhouse gases that may
be imposed in areas of the United States or elsewhere in the
world, including Canada, where we conduct business could
adversely affect our operations and demand for our services and
products.
Because of our interests outside the United States, we must
comply with United States laws and other foreign jurisdiction
laws related to pursuing, owning, and exploiting foreign
investments, agreements and other relationships. We are subject
to all such laws, including, but not limited to, the Foreign
Corrupt Practices Act of 1977, or FCPA, and similar worldwide
anti-bribery laws in
non-U.S. jurisdictions
which generally prohibit companies and their intermediaries from
making improper payments to
non-U.S. officials
for the purpose of obtaining or retaining business. Our policies
mandate compliance with these anti-bribery laws. We operate in
many parts of the world that have experienced governmental
corruption to some degree, and in certain circumstances strict
compliance with anti-bribery laws may conflict with local
customs and practices. Despite our training and compliance
programs, our internal control policies and procedures may not
protect us from acts committed by our employees or agents.
Additionally, our U.S. operations are subject to the
requirements of the federal Occupational Safety and Health Act,
or OSHA, and comparable state laws that regulate the protection
of the health and safety of employees. In addition, OSHAs
hazard communication standard requires that information be
maintained about hazardous materials used or produced in our
operations and that this information be provided to employees,
state and local government authorities and citizens. We believe
that our U.S operations are in substantial compliance with these
OSHA requirements.
Our operations outside of the U.S. are potentially subject
to similar foreign governmental controls governing the discharge
of material into the environment and environmental protection.
We believe that our foreign operations are in substantial
compliance with current requirements of those governmental
entities, and that compliance with these existing requirements
has not had a materially adverse effect on our results of
operations or finances. However, there is no assurance that this
trend of compliance will continue in the future or that such
compliance will not be material. For instance, any future
restrictions on emissions of greenhouse gases that are imposed
in foreign countries in which we operate, such as in Canada,
pursuant to the Kyoto Protocol or other locally enforceable
requirements could adversely affect demand for our services and
products.
Employees
As of December 31, 2009, we had 628 employees, 223 of
whom were salaried and 405 of whom were paid on an hourly basis.
Substantially all of our work force is employed within the
United States, Canada and India. We consider our relations with
our employees to be good. None of our employees are covered by a
collective bargaining agreement.
Available
Information
We file annual, quarterly and current reports and other
information electronically with the United States Securities and
Exchange Commission, or SEC. You may read and copy any materials
we file with the SEC at the SECs Public Reference Room at
100 F. Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site (www.sec.gov) that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC,
including our filings.
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Our Internet address is www.t3energyservices.com. We make
available free of charge, on or through the Investor Relations
section of our Internet website, access to our filings of our
Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 with the SEC. Our website provides a hyperlink to a third
party SEC filings website where these reports may be viewed and
printed at no cost as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. You can also obtain information about us at the NASDAQ
Global Select Market internet site (www.nasdaq.com). The
contents of our website or any other website are not, and shall
not be deemed to be, incorporated into or otherwise a part of
this report.
Cautionary
Note Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference in
this Annual Report, our filings with the SEC and our public
releases, including, but not limited to, information regarding
the status and progress of our operating activities, the plans
and objectives of our management, assumptions regarding our
future performance and plans, and any financial guidance
provided therein are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, or
the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, or the Exchange Act. The words
believe, may, will,
estimate, continues,
anticipate, intend, budget,
predict, project, expect and
similar expressions identify these forward-looking statements,
although not all forward-looking statements contain these
identifying words. These forward-looking statements are made
subject to certain risks and uncertainties that could cause
actual results to differ materially from those stated including,
but not limited to, general economic and business conditions;
global economic growth and activity; oil and natural gas market
conditions; political and economic uncertainty; and other risks
and uncertainties described elsewhere in this Report, including
under Item 1A. Risk Factors included in this
Annual Report and our subsequent Commission filings.
These forward-looking statements are largely based on our
expectations and beliefs concerning future events, which reflect
estimates and assumptions made by our management. These
estimates and assumptions reflect our best judgment based on
currently known market conditions and other factors relating to
our operations and business environment, all of which are
difficult to predict and many of which are beyond our control.
Although we believe our estimates and assumptions to be
reasonable, they are inherently uncertain and involve a number
of risks and uncertainties that are beyond our control. Our
assumptions about future events may prove to be inaccurate. We
caution you that the forward-looking statements contained in
this Annual Report are not guarantees of future performance, and
we cannot assure you that those statements will be realized or
the forward-looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied
in the forward-looking statements due to the factors listed in
the section entitled Risk Factors included in this
Annual Report and our subsequent Commission filings. All
forward-looking statements speak only as of the date of this
report. We do not intend to publicly update or revise any
forward-looking statements as a result of new information,
future events or otherwise, except as required by law. These
cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
An investment in our securities involves a high degree of
risk. You should carefully consider the risk factors described
below, together with the other information included in this
Annual Report before you decide to invest in our securities. The
risks described below are the material risks of which we are
currently aware; however, they may not be the only risks that we
may face. Additional risks and uncertainties not currently known
to us or that we currently view as immaterial may also impair
our business. If any of these risks develop into actual events,
it could
7
materially and adversely affect our business, financial
condition, results of operations and cash flows, the trading
price of your shares could decline and you may lose all or part
of your investment.
Risks
Related to Our Business
A
decline in or substantial volatility of oil and gas prices could
adversely affect the demand and prices for our products and
services.
The demand for our products and services is substantially
influenced by current and anticipated oil and gas prices and the
related level of drilling activity and general production
spending in the areas in which we have operations. Volatility or
weakness in oil and gas prices (or the perception that oil and
gas prices will decrease) affects the spending patterns of our
customers and may result in the drilling of fewer new wells or
lower production spending for existing wells. This, in turn,
could result in lower demand and prices for our products and
services.
Historical prices for oil and gas have been volatile and are
expected to continue to be volatile. For example, over the last
two years West Texas Intermediate crude oil prices have ranged
from as low as $32.40 per barrel to as high as $145.31 per
barrel and were $80.21 per barrel on March 4, 2010.
Similarly, NYMEX Henry-Hub natural gas prices have ranged from
monthly averages as low as $3.30 per million British thermal
units, or MMBtu, to as high as $12.77 per MMBtu during the last
two years. This volatility has in the past and may in the future
adversely affect our business. A prolonged low level of activity
in the oil and gas industry will adversely affect the demand for
our products and services.
Our
business depends on spending by the oil and gas industry, and
this spending and our business may be adversely affected by
industry conditions that are beyond our control.
We depend on our customers ability and willingness to make
operating and capital expenditures to explore for, develop and
produce oil and gas. Industry conditions are influenced by
numerous factors over which we have no control, such as:
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the level of drilling activity;
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the level of oil and gas production;
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the demand for oil and gas related products;
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domestic and worldwide economic conditions;
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political instability in the Middle East and other oil producing
regions;
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the actions of the Organization of Petroleum Exporting Countries;
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the price of foreign imports of oil and gas, including liquefied
natural gas;
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natural disasters or weather conditions, such as hurricanes;
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technological advances affecting energy consumption;
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the level of oil and gas inventories;
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the cost of producing oil and gas;
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the price and availability of alternative fuels;
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merger and divestiture activity among oil and gas producers;
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the ability of our customers to obtain sufficient amounts of
capital; and
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governmental regulation.
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The volatility of the oil and gas industry and the consequent
impact on drilling activity could reduce the level of drilling
and workover activity by some of our customers. Any such
reduction could cause a decline in the demand for our products
and services.
8
Difficult
conditions in the global capital markets and the economy
generally may materially adversely affect our business and
results of operations.
Our results of operations are materially affected by volatility
in credit and capital markets, which may have an adverse effect
on us because our liquidity and ability to fund our capital
expenditures is dependent in part upon our bank borrowings and
access to the public capital markets. In the event of extreme
prolonged market events, such as the global credit crisis
experienced during the second half of 2007 that continued into
2009, we could incur significant losses. Even in the absence of
a market downturn, we are exposed to substantial risk of loss
due to market volatility.
Factors such as business investment, government spending, the
volatility and strength of the capital markets, and inflation
all affect the business and economic environment and,
ultimately, the profitability of our business. Purchasers of our
goods and services may delay or be unable to make timely
payments to us. Adverse changes in the economy could affect
earnings negatively and could have a material adverse effect on
our business, results of operations and financial condition. We
cannot predict whether or when such actions may occur, or what
impact, if any, such actions could have on our business.
Control
of oil and gas reserves by state-owned oil companies may impact
the demand for our services and create additional risks in our
operations.
Much of the worlds oil and gas reserves are controlled by
state-owned oil companies. State-owned oil companies may require
their contractors to meet local content requirements or other
local standards, such as joint ventures, that could be difficult
or undesirable for the Company to meet. The failure to meet the
local content requirements and other local standards may
adversely impact the Companys operations in those
countries.
In addition, many state-owned oil companies may require
integrated contracts or turn-key contracts that could require
the Company to provide services outside its core business.
Providing services on an integrated or turnkey basis generally
requires the Company to assume additional risks.
Our
inability to deliver our backlog on time could affect our future
sales and profitability and our relationships with our
customers.
At December 31, 2009, our backlog was approximately
$34.5 million. The ability to meet customer delivery
schedules for this backlog is dependent on a number of factors
including, but not limited to, access to the raw materials
required for production, an adequately trained and capable
workforce, project engineering expertise for certain projects,
sufficient manufacturing plant capacity and appropriate planning
and scheduling of manufacturing resources. Our failure to
deliver in accordance with customer expectations may result in
damage to existing customer relationships and result in
reputational damage, which could cause the loss of future
business. Failure to deliver backlog in accordance with
expectations could negatively impact our financial performance
and thus cause adverse changes in the market price of our
outstanding common stock. In addition, we may allow some of
these contracts to be cancelled by the customer on short notice
without substantial penalty. The cancellation by our customers
of existing backlog orders, as a result of an economic downturn
or otherwise, could adversely affect our business.
We
intend to expand our business through strategic acquisitions.
Our acquisition strategy exposes us to various risks, including
those relating to difficulties in identifying suitable
acquisition opportunities and integrating businesses and the
potential for increased leverage or debt service
requirements.
We have pursued and intend to continue to pursue strategic
acquisitions of complementary assets and businesses.
Acquisitions involve numerous risks, including:
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unanticipated costs and exposure to unforeseen liabilities;
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difficulty in integrating the operations and assets of the
acquired businesses;
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potential loss of key employees and customers of the acquired
company;
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potential inability to properly establish and maintain effective
internal controls over an acquired company; and
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risk of entering markets in which we have limited prior
experience.
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Our failure to achieve consolidation savings, to incorporate the
acquired businesses and assets into our existing operations
successfully or to minimize any unforeseen operational
difficulties could have a material adverse effect on our
business.
In addition, we may incur indebtedness to finance future
acquisitions and also may issue equity securities in connection
with such acquisitions. Debt service requirements could
represent a burden on our results of operations and financial
condition and the issuance of additional equity securities could
be dilutive to our existing stockholders.
If we
are unable to successfully manage our growth and implement our
business plan, our results of operations will be adversely
affected.
We have experienced significant revenue growth in past years. We
believe this revenue growth was primarily attributable to our
business expansion and to our advantage of delivering original
equipment products and providing aftermarket services more
rapidly than our competitors. To continue our expansion while
maintaining our rapid response competitive advantage, we plan to
further expand our operations by upgrading existing facilities
and increasing manufacturing and repair capacity when
appropriate based on market conditions. We believe our future
success depends in part on our ability to manage this expansion
when it is relevant. The following factors could present
difficulties for us:
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inability to integrate operations between existing and new or
expanded facilities;
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lack of a sufficient number of qualified technical and operating
personnel;
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shortage of operating equipment and raw materials necessary to
operate our expanded business; and
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inability to manage the increased costs associated with our
expansion.
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If we
do not develop and commercialize new competitive products, our
revenues may decline.
To remain competitive in the market for pressure control
products and services, we must continue to develop and
commercialize new products. If we are not able to develop
commercially competitive products in a timely manner in response
to industry demands, our business and revenues will be adversely
affected. Our future ability to develop new products depends on
our ability to:
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design and commercially produce products that meet the needs of
our customers;
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successfully market new products; and
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protect our proprietary designs from our competitors.
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We may encounter resource constraints or technical or other
difficulties that could delay introduction of new products and
services. Our competitors may introduce new products before we
do and achieve a competitive advantage. Any such competitive
failure could have a material adverse effect on our business,
results of operations or financial condition.
The
cyclical nature of or a prolonged downturn in our industry could
affect the carrying value of our goodwill and/or long-lived
assets.
In 2008, we incurred goodwill impairments related to our
pressure and flow control reporting unit totaling
$23.5 million. See footnote 4 to the consolidated financial
statements included in this report for further discussion of our
goodwill impairment. There were no significant long-lived asset
impairments during 2007, 2008 or 2009, and there were no
goodwill impairments during 2007 or 2009. As of
December 31, 2009, we had approximately $88.8 million
of goodwill and $81.4 million of long-lived assets. Our
estimates of the value of our goodwill
and/or
long-lived assets could be further reduced as a result of our
assessment of various factors, if they are sustained,
10
which could have a material adverse effect on our business,
results of operations or financial condition. The most important
of these factors include:
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further, and sustained, deterioration in global economic
conditions;
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changes in our outlook for future profits and cash flows;
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reductions in the market price of our stock;
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increased costs of capital; and/or
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reductions in valuations of other public companies within our
industry or valuations observed in acquisition transactions
within our industry.
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One of
our competitive strengths is our established brand name, and to
the extent any joint venture that we participate in uses our
brand name and delivers products or services that are not up to
our standards of quality or service, this could diminish the
value of our brand name and adversely affect our
business.
We currently participate in international joint ventures that
use our brand name in which our rights and ability to control
the joint ventures are limited. One of our competitive strengths
is our established brand name and to the extent any such joint
venture uses our brand name and delivers products and services
that are not up to our standards of quality or service, our
reputation and credibility could be damaged. Any such
diminishment of the value of our brand name may lead to a loss
in customer confidence, damage existing customer relationships,
decrease market acceptance of our brand name, reduce demand for
our goods and services, result in the loss of future business or
impair our ability to expand in these markets, any of which
could adversely affect our business, financial condition and
results of operations.
We
rely on a few key employees whose absence or loss could disrupt
our operations or be adverse to our business.
Many key responsibilities within our business have been assigned
to a small number of employees. Our future success will depend
in substantial part on the continued service of our key
employees and our continued ability to attract, retain and
motivate outstanding and highly skilled individuals in the
competitive labor markets in which we compete. The loss of the
services of one or more of our key employees could impede
implementation and execution of our business strategy and result
in the failure to reach our goals.
Although we have employment and non-competition agreements with
our Chairman, President and Chief Executive Officer, and some of
our other key employees, as a practical matter, those agreements
will not assure the retention of our employees, and we may not
be able to enforce all of the provisions in any employment or
non-competition agreement. In addition, we do not maintain
key person life insurance policies on any of our
employees. As a result, we are not insured against any losses
resulting from the death or disability of our key employees.
Some
of our products require the use of elastomer products in their
manufacture. Any negative developments in the availability or
costs of these elastomer products could adversely affect our
business, financial conditions and results of
operations.
We are dependent upon third-party sources, including
competitors, for elastomer products used in the manufacture of
some of our products, the availability of which cannot be
assured. Any sustained interruption in the availability of these
elastomer products could impair the manufacturing of our
products and have a material adverse effect on our business,
financial condition and results of operations. If there is a
significant increase in the costs of such elastomer products and
we are unable to pass the increased costs on to our customers in
the form of higher prices, it could cause our cash flow and
results of operations to decline.
Shortages
of raw materials may restrict our operations.
The forgings, castings and outsourced coating services necessary
for us to make our products can be in high demand from our
competitors and from participants in other industries. There can
be no assurance that we will be
11
able to continue to purchase these raw materials on a timely
basis or at acceptable prices. Shortages could result in
increased prices that we may be unable to pass on to customers.
In addition, during periods of shortages, delivery times may be
substantially longer. Any significant delay in our obtaining raw
materials would have a corresponding delay in the manufacturing
and delivery of our products. Any such delay might jeopardize
our relationships with our customers and result in a loss of
future business.
The
oilfield service industry in which we operate is highly
competitive, which may result in a loss of market share or a
decrease in revenue or profit margins.
Our products and services are subject to competition from a
number of similarly sized or larger businesses. Factors that
affect competition include timely delivery of products and
services, reputation, price, manufacturing capabilities,
availability of plant capacity, performance and dependability.
Any failure to adapt to a changing competitive environment may
result in a loss of market share and a decrease in revenue and
profit margins. If we cannot maintain our rapid response times,
or if our competitors are able to reduce their response times,
we may lose future business. In addition, many of our
competitors have greater financial and other resources than we
do, which may allow them to address these factors more
effectively than we can or weather industry downturns more
easily than we can.
Liability
to customers under warranties may materially and adversely
affect our earnings.
We provide warranties as to the proper operation and conformance
to specifications of the products we manufacture. Failure of our
products to operate properly or to meet specifications may
increase our costs by requiring additional engineering resources
and services, replacement of parts and equipment or monetary
reimbursement to a customer. We have in the past received
warranty claims, and we expect to continue to receive them in
the future. To the extent that we incur substantial warranty
claims in any period, our reputation, our ability to obtain
future business and our earnings could be adversely affected.
We may
be faced with product liability claims, which could materially
and adversely affect our earnings.
Most of our products are used in hazardous drilling and
production applications where an accident or a failure of a
product can cause personal injury, loss of life, damage to
property, equipment or the environment or suspension of
operations. Despite our quality assurance measures, defects may
occur in our products. Any defects could give rise to liability
for damages, including consequential damages, and could impair
the markets acceptance of our products. Our contractual
disclaimers of responsibility for consequential damages may not
be effective. Although we carry product liability insurance as a
part of our commercial general liability coverage, our insurance
may not adequately cover our costs arising from defects in our
products or otherwise.
Uninsured
or underinsured claims or litigation or an increase in our
insurance premiums could adversely impact our
results.
We maintain insurance to cover potential claims and losses,
including claims for personal injury or death resulting from the
use of our products. We carry comprehensive insurance, including
business interruption insurance, subject to deductibles.
However, it is possible an unexpected judgment could be rendered
against us in cases in which we could be uninsured or
underinsured and beyond the amounts we currently have reserved
or anticipate incurring. Significant increases in the cost of
insurance and more restrictive coverage may have an adverse
impact on our results of operations. In addition, we may not be
able to maintain adequate insurance coverage at rates we believe
are reasonable.
Our
operations are subject to stringent environmental laws and
regulations that may expose us to significant costs and
liabilities.
Our operations in the U.S. and abroad are subject to
stringent federal, state, provincial and local environmental
laws and regulations governing the discharge of materials into
the environment and environmental protection. These laws and
regulations require us to acquire permits to conduct regulated
activities, to incur capital expenditures to limit or prevent
releases of materials from our facilities, and to respond to
liabilities for pollution resulting
12
from our operations. Governmental authorities enforce compliance
with these laws and regulations and the permits issued under
them, oftentimes requiring difficult and costly actions. Failure
to comply with these laws, regulations and permits may result in
the assessment of administrative, civil and criminal penalties,
the imposition of remedial obligations, and the issuance of
injunctions limiting or preventing some or all of our operations.
There is inherent risk of incurring significant environmental
costs and liabilities in our business due to our handling of
petroleum hydrocarbons and wastes, the release of air emissions
or water discharges in connection with our operations, and
historical industry operations and waste disposal practices
conducted by us or our predecessors. Strict and, under certain
circumstances, joint and several liability may be incurred in
connection with discharges or releases of petroleum hydrocarbons
and wastes on, under or from our properties and facilities, many
of which have been used for industrial purposes for a number of
years, oftentimes by third parties not under our control.
Private parties who use our products and facilities where our
petroleum hydrocarbons or wastes are taken for reclamation or
disposal may also have the right to pursue legal actions to
enforce compliance as well as to seek damages for non-compliance
with environmental laws and regulations and for personal injury
or property damage. In addition, changes in environmental laws
and regulations occur frequently, and any such changes that
result in more stringent and costly requirements could have a
material adverse effect on our business. We may not be able to
recover some or any of these costs from insurance.
Climate
change legislation or regulations restricting emissions of
greenhouse gases could result in increased operating
costs and reduced demand for our services and
products.
On December 15, 2009, the EPA published its findings that
emissions of carbon dioxide, methane and other greenhouse
gases present an endangerment to public health and the
environment because emissions of such gases are, according to
the EPA, contributing to warming of the earths atmosphere
and other climatic changes. These findings allow the EPA to
adopt and implement regulations that would restrict emissions of
greenhouse gases under existing provisions of the federal Clean
Air Act. Accordingly, the EPA has proposed regulations that
would require a reduction in emissions of greenhouse gases from
motor vehicles and could trigger permit review for greenhouse
gas emissions from certain stationary sources. In addition, on
October 30, 2009, the EPA published a final rule requiring
the reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources in the United States, including
sources emitting more than 25,000 tons of greenhouse gases on an
annual basis, beginning in 2011 for emissions occurring in 2010.
Also, on June 26, 2009, the U.S. House of
Representatives passed the American Clean Energy and
Security Act of 2009, or ACESA, which would
establish an economy-wide
cap-and-trade
program to reduce U.S. emissions of greenhouse gases,
including carbon dioxide and methane. ACESA would require a 17%
reduction in greenhouse gas emissions from 2005 levels by 2020
and just over an 80% reduction of such emissions by 2050. Under
this legislation, the EPA would issue a capped and steadily
declining number of tradable emissions allowances authorizing
emissions of greenhouse gases into the atmosphere. These
reductions would be expected to cause the cost of allowances to
escalate significantly over time. The net effect of ACESA will
be to impose increasing costs on the combustion of carbon-based
fuels such as oil, refined petroleum products, and natural gas.
The U.S. Senate has begun work on its own legislation for
restricting domestic greenhouse gas emissions and the Obama
Administration has indicated its support for legislation to
reduce greenhouse gas emissions through an emission allowance
system. At the state level, more than one-third of the states,
either individually or through multi-state regional initiatives,
already have begun implementing legal measures to reduce
emissions of greenhouse gases. The adoption and implementation
of any regulations imposing reporting obligations on, or
limiting emissions of greenhouse gases from, our equipment and
operations or those of customers for whom we provide oil and
natural gas-related manufactured products or associated repair
and maintenance services could require us to incur costs to
reduce emissions of greenhouse gases associated with our
operations or could adversely affect demand for our products and
services. Finally, it should be noted that some scientists have
concluded that increasing concentrations of greenhouse gases in
the Earths atmosphere may produce climate changes that
have significant physical effects, such as increased frequency
and severity of storms, droughts, and floods and other climatic
events; if any such effects were to occur, they could have an
adverse effect on our assets and operations.
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Federal
and state legislation and regulatory initiatives relating to
hydraulic fracturing could result in certain of our customers
encountering increased costs or additional operating
restrictions or delays in connection with their drilling
activities in shale formations throughout the United States.
This could negatively impact our operations and expansion
efforts in the Marcellus Shale region.
Congress is currently considering legislation to amend the
federal Safe Drinking Water Act to require the disclosure of
chemicals used by the oil and natural gas industry in the
hydraulic fracturing process. Hydraulic fracturing is an
important and commonly used process in the completion of
unconventional natural gas wells in shale formations. This
process involves the injection of water, sand and chemicals
under pressure into rock formations to stimulate natural gas
production. Sponsors of two companion bills, which are currently
pending in the Energy and Commerce Committee and the
Environmental and Public Works Committee of the House of
Representatives and Senate, respectively, have asserted that
chemicals used in the fracturing process could adversely affect
drinking water supplies. The proposed legislation would require
the reporting and public disclosure of chemicals used in the
fracturing process, which could make it easier for third parties
opposing the hydraulic fracturing process to initiate legal
proceedings based on allegations that specific chemicals used in
the fracturing process could adversely affect groundwater. In
addition, this legislation, if adopted, could establish an
additional level of regulation at the federal level that could
lead to operational delays or increased operating costs and
could result in additional regulatory burdens for companies
engaged in hydraulic fracturing activities.
The adoption of any future federal or state laws or
implementation of regulations imposing reporting obligations on,
or otherwise limiting, the hydraulic fracturing process could
make it more difficult for certain of our customers to complete
natural gas wells in shale formations, including the Marcellus
Shale in the northeastern United States, and increase the costs
of compliance and doing business for our customers operating in
these geographical areas. This could lead to a decrease in the
demand for our services and have a material negative impact on
our efforts to expand into the Marcellus Shale region, which we
began in 2009.
Certain
federal income tax deductions currently available with respect
to the oil and gas exploration and production activities of
certain of our customers may be eliminated as a result of future
legislation.
Among the changes contained in President Obamas budget
proposal for fiscal year 2011, released by the White House on
February 1, 2010, is the elimination of certain key
U.S. federal income tax preferences currently available to
oil and gas exploration and production companies. Such changes
include, but are not limited to, (i) the repeal of the
percentage depletion allowance for oil and gas properties;
(ii) the elimination of current deductions for intangible
drilling and development costs; (iii) the elimination of
the deduction for certain U.S. production activities; and
(iv) an extension of the amortization period for certain
geological and geophysical expenditures. It is unclear, however,
whether any such changes will be enacted or how soon such
changes could be effective.
The passage of any legislation as a result of the budget
proposal or any other similar change in U.S. federal income
tax law could eliminate certain tax deductions that are
currently available with respect to oil and gas exploration and
development, and any such change could negatively affect our
customers and cause them to reduce their capital expenditures.
This could lead to a decrease in the demand for our services and
have a material adverse impact on our financial condition and
results of operations.
We are
subject to political, economic and other uncertainties as we
expand our international operations.
We intend to continue our expansion into international markets.
Our international operations are subject to a number of risks
inherent in any business operating in foreign countries
including, but not limited to:
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political, social and economic instability;
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currency fluctuations; and
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government regulation that is beyond our control.
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Our exposure to these risks will increase as our international
operations expand. To the extent we make investments in foreign
facilities or receive revenues in currencies other than
U.S. dollars, the value of our assets and our income could
be adversely affected by fluctuations in the value of local
currencies.
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We
could be adversely affected by violations of the U.S. FCPA and
similar worldwide anti-bribery laws.
The U.S. FCPA and similar anti-bribery laws in other
jurisdictions generally prohibit companies and their
intermediaries from making improper payments to
non-U.S. officials
for the purpose of obtaining or retaining business. We operate
in many parts of the world that have experienced governmental
corruption to some degree and, in certain circumstances, strict
compliance with anti-bribery laws may conflict with local
customs and practices. If we are found to be liable for FCPA
violations (either due to our own acts or our inadvertence, or
due to the acts or inadvertence of others, including our
partners in our various strategic alliances), we could suffer
from civil and criminal penalties or other sanctions, which
could have a material adverse effect on our business, financial
condition, and results of operations.
Civil penalties under the antibribery provisions of the FCPA
could range up to $10,000 per violation, with a criminal fine up
to the greater of $2 million per violation or twice the
gross pecuniary gain to us or twice the gross pecuniary loss to
others, if larger. Civil penalties under the accounting
provisions of the FCPA can range up to $500,000 per violation
and a company that knowingly commits a violation can be fined up
to $25 million per violation. In addition, both the
Commission and the Department of Justice could assert that
conduct extending over a period of time may constitute multiple
violations for purposes of assessing the penalty amounts. Often,
dispositions for these types of matters result in modifications
to business practices and compliance programs and possibly a
monitor being appointed to review future business and practices
with the goal of ensuring compliance with the FCPA.
We could also face fines, sanctions and other penalties from
authorities in the relevant foreign jurisdictions, including
prohibition of our participating in or curtailment of business
operations in those jurisdictions and the seizure of rigs or
other assets. Our customers in those jurisdictions could seek to
impose penalties or take other actions adverse to our interests.
We could also face other third-party claims by directors,
officers, employees, affiliates, advisors, attorneys, agents,
stockholders, debt holders, or other interest holders or
constituents of our company. In addition, disclosure of the
subject matter of the investigation could adversely affect our
reputation and our ability to obtain new business or retain
existing business from our current clients and potential
clients, to attract and retain employees and to access the
capital markets.
Our
industry has historically experienced shortages in the
availability of qualified personnel. Any difficulty we
experience replacing or adding qualified personnel could
adversely affect our business.
Our operations require the services of employees having
technical training and experience in our business. As a result,
our operations depend on the continuing availability of such
personnel. Shortages of qualified personnel are possible in our
industry. If we should suffer any material loss of personnel to
competitors, or be unable to employ additional or replacement
personnel with the requisite level of training and experience,
our operations could be adversely affected. A significant
increase in the wages paid by other employers could result in a
reduction in our workforce, increases in wage rates, or both.
Risks
Relating to Our Common Stock
The
market price of our common stock may be volatile or may decline
regardless of our operating performance.
The market price of our common stock has experienced, and will
likely continue to experience, substantial volatility. During
2009, the sale prices of our common stock on The NASDAQ Global
Select Market ranged from a low of $9.00 to a high of $27.31 per
share. The closing sales price of our common stock on
March 4, 2010 was $25.22 per share. We expect our
common stock to continue to be subject to fluctuations. Broad
market and industry factors may adversely affect the market
price of our common stock, regardless of our actual operating
performance. Factors that could cause fluctuation in the stock
price may include, among other things:
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actual or anticipated variations in quarterly operating results;
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announcements of technological advances by us or our competitors;
|
|
|
|
current events affecting the political and economic environment
in the United States;
|
15
|
|
|
|
|
conditions or trends in our industry, including demand for our
products and services, technological advances and governmental
regulations;
|
|
|
|
litigation involving or affecting us;
|
|
|
|
changes in financial estimates by us or by any securities
analysts who might cover our stock; and
|
|
|
|
additions or departures of our key personnel.
|
The realization of any of these risks and other factors beyond
our control could cause the market price of our common stock to
decline significantly. In particular, the market price of our
common stock may be influenced by variations in oil and gas
prices, because demand for our services is closely related to
those prices.
Our
ability to issue preferred stock could adversely affect the
rights of holders of our common stock.
Our certificate of incorporation authorizes us to issue up to
25,000,000 shares of preferred stock in one or more series
on terms that may be determined at the time of issuance by our
board of directors. Accordingly, we may issue shares of any
series of preferred stock that would rank senior to the common
stock as to voting or dividend rights or rights upon our
liquidation, dissolution or winding up.
Certain
provisions in our charter documents have anti-takeover
effects.
Certain provisions of our certificate of incorporation and
bylaws may have the effect of delaying, deferring or preventing
a change in control of us. Such provisions, including those
regulating the nomination and election of directors (including
staggered elections for our board members) and limiting who may
call special stockholders meetings, together with the
possible issuance of our preferred stock without stockholder
approval, may make it more difficult for other persons, without
the approval of our board of directors, to make a tender offer
or otherwise acquire substantial amounts of our common stock or
to launch other takeover attempts that a stockholder might
consider to be in such stockholders best interest.
Because
we have no plans to pay any dividends for the foreseeable
future, investors must look solely to stock appreciation for a
return on their investment in us.
We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain any future earnings to support our
operations and growth. Any payment of cash dividends in the
future will be dependent on the amount of funds legally
available, our earnings, financial condition, capital
requirements and other factors that our board of directors may
deem relevant. Additionally, our senior credit facility
restricts the payment of dividends. Accordingly, investors must
rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any future
gains on their investment. Investors seeking cash dividends
should not purchase our common stock.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
16
We operated 25 facilities as of December 31, 2009. Our
facilities range in size from 2,000 square feet to
approximately 271,000 square feet of manufacturing,
warehouse and sales and administrative space, or an aggregate of
approximately 766,000 square feet. Of this total,
304,000 square feet of manufacturing and related space is
located in leased premises under leases expiring at various
dates through 2016.
|
|
|
|
|
|
|
|
|
Size
|
|
|
Facility
|
|
(Square Feet)
|
|
Leased/Owned
|
|
Alvarado, Texas
|
|
|
20,000
|
|
|
Leased
|
Broussard, Louisiana
|
|
|
9,956
|
|
|
Leased
|
Buffalo, Texas
|
|
|
10,200
|
|
|
Leased
|
Clymer, Pennsylvania
|
|
|
10,000
|
|
|
Leased
|
Conway, Arkansas
|
|
|
7,500
|
|
|
Leased
|
Elmira, New York
|
|
|
3,000
|
|
|
Leased
|
Fort Nelson, British Columbia, Canada
|
|
|
4,000
|
|
|
Leased
|
Houma, Louisiana Main Street
|
|
|
42,500
|
|
|
Owned
|
Houma, Louisiana Venture Boulevard
|
|
|
56,000
|
|
|
Owned
|
Houston, Texas Ardmore Street
|
|
|
271,000
|
|
|
Owned(1)
|
Houston, Texas Creekmont Drive
|
|
|
44,550
|
|
|
Owned/Leased
|
Houston, Texas Cypress N. Houston Road
|
|
|
35,000
|
|
|
Owned
|
Indiana, Pennsylvania
|
|
|
5,500
|
|
|
Leased
|
Indianapolis, Indiana
|
|
|
11,400
|
|
|
Leased
|
Jennings, Louisiana
|
|
|
25,000
|
|
|
Leased
|
Longview, Texas
|
|
|
44,500
|
|
|
Leased
|
Nisku, Alberta, Canada
|
|
|
33,000
|
|
|
Leased
|
Nisku, Alberta, Canada
|
|
|
13,000
|
|
|
Leased
|
Odessa, Texas
|
|
|
19,100
|
|
|
Owned
|
Oklahoma City, Oklahoma
|
|
|
16,000
|
|
|
Leased
|
Perryton, Texas
|
|
|
2,000
|
|
|
Leased
|
Pune, India
|
|
|
18,000
|
|
|
Leased
|
Robstown, Texas
|
|
|
10,000
|
|
|
Leased
|
Rock Springs, Wyoming
|
|
|
25,600
|
|
|
Leased
|
Shreveport, Louisiana
|
|
|
28,772
|
|
|
Leased
|
|
|
|
(1) |
|
We exercised our purchase option right for our Ardmore facility
during February 2008. The owner of this property contended that
we failed to timely exercise our purchase option right under the
base lease and a sublease, and we filed suit seeking a
declaratory judgment that the purchase option right was valid
and enforceable. The trial court granted summary judgment in our
favor, finding the purchase option enforceable. However, the
matter is currently on appeal. We have transferred the purchase
price for the Ardmore facility to an escrow account pending
final resolution of this dispute. If we are ultimately
unsuccessful in enforcing our purchase option right, we may be
required to find a new facility. In such an event, we believe
that appropriate alternative properties are available, although
likely at a higher cost. |
At the current time, we believe that we have the capacity to
meet our customers needs. During 2010, we may continue to
expand or shift capacity by opening additional facilities or
expanding current facilities for our pressure and flow control
and wellhead product lines in key locations in which we expect
increased industry activity.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved in various claims and litigation arising in the
ordinary course of business.
17
Our environmental remediation and compliance costs were not
material during any of the periods presented. As part of the
sale of a business in 2001, we agreed to indemnify the buyers
for certain environmental cleanup and monitoring activities
associated with a former manufacturing site. We and the buyers
have engaged a licensed engineering firm to conduct a
post-closure corrective action subsurface investigation on the
property and Phase II and III investigations. During
2009, we recorded approximately $280,000 for incurred and
estimated future Phase III investigation costs to determine
the location, nature and extent of any contamination. We
anticipate the environmental monitoring activities, for which we
bear partial liability, to continue at least through the year
2024. Additionally, we believe that it is more likely than not
that we will incur future remediation costs at this site and
during 2009 we accrued $100,000 for potential future remediation
costs based on the preliminary results of the Phase III
investigation. While no agency-approved final remediation plan
has been made of our liability for remediation costs with
respect to the site, management does not expect that its
ultimate remediation costs will have a material impact on our
financial position, results of operations or cash flows.
We have been identified as a potentially responsible party with
respect to the Lake Calumet Cluster site near Chicago, Illinois,
which has been designated for cleanup under CERCLA and Illinois
state law. We believe that our involvement at this site was
minimal. While no agency-approved final allocation has been made
of our liability with respect to the Lake Calumet Cluster site,
management does not expect that its ultimate share of
remediation costs will have a material impact on our financial
position, results of operations or cash flows.
In July 2003, a lawsuit was filed against us in the
U.S. District Court, Eastern District of Louisiana as
Chevron, U.S.A. v. Aker Maritime, Inc. The lawsuit
alleged that our wholly owned subsidiary, the assets and
liabilities of which were sold in 2004, failed to deliver the
proper bolts
and/or sold
defective bolts to the plaintiffs contractor to be used in
connection with a drilling and production platform in the Gulf
of Mexico. The plaintiff claimed that the bolts failed and were
replaced at a cost of approximately $3.0 million. The
complaint named the plaintiffs contractor and seven of its
suppliers and subcontractors (including our subsidiary) as the
defendants and alleged negligence on the part of all defendants.
The lawsuit was called to trial during June 2007 and resulted in
a jury finding of negligence against us and three other
defendants. The jury awarded the plaintiffs damages in the
amount of $2.9 million, of which we estimate our share to
be $1.0 million. We have appealed this decision and accrued
approximately $1.1 million, net of tax, for our share of
the damages and attorney fees, court costs and interest, as a
loss from discontinued operations in the consolidated statement
of operations during the year ended December 31, 2007.
While the ultimate outcome and impact of any ordinary course
proceedings and claims incidental to our business cannot be
predicted with certainty, our management does not believe that
the resolution of any of these matters, or the amount of the
liability, if any, ultimately incurred with respect to such
other proceedings and claims, will have a material adverse
effect on our financial position, liquidity, capital resources
or result of operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We did not submit any matters to a vote of our security holders
in the fourth quarter of 2009.
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock trades on The NASDAQ Global Select Market under
the symbol TTES.
The following table sets forth, for each of the periods
indicated, the high and low sale prices per share of our common
stock on The NASDAQ Global Select Market:
|
|
|
|
|
|
|
|
|
|
|
Price Range
|
|
|
High
|
|
Low
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
53.41
|
|
|
$
|
37.70
|
|
Second Quarter
|
|
$
|
80.28
|
|
|
$
|
41.06
|
|
Third Quarter
|
|
$
|
84.80
|
|
|
$
|
34.22
|
|
Fourth Quarter
|
|
$
|
38.49
|
|
|
$
|
8.05
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
14.88
|
|
|
$
|
9.00
|
|
Second Quarter
|
|
$
|
16.40
|
|
|
$
|
11.25
|
|
Third Quarter
|
|
$
|
21.98
|
|
|
$
|
10.89
|
|
Fourth Quarter
|
|
$
|
27.31
|
|
|
$
|
17.65
|
|
The closing sale price reported on The NASDAQ Global Select
Market of our common stock was $9.44 on December 31, 2008
and $25.50 on December 31, 2009.
As of the close of business on March 4, 2010,
13,038,143 shares of our common stock were outstanding and
there were approximately 149 record holders of our common stock,
not including the number of persons or entities who hold stock
in nominee or street name through various brokerage firms and
banks. On March 4, 2010, the last closing sale price
reported on The NASDAQ Global Select Market for our common stock
was $25.22 per share.
Dividend
Policy
We have not paid or declared dividends on our common stock since
our inception and do not anticipate paying any cash dividends in
the foreseeable future. We currently intend to retain future
earnings to support our operations and growth. Any future
dividends will be at the discretion of our board of directors
and will be dependent on the amount of funds legally available,
our earnings, financial condition, capital requirements and
other factors that our board of directors may deem relevant. In
addition, our senior credit facility restricts the payment of
dividends on our common stock.
Recent
Sales of Unregistered Securities; Issuer Purchases of Equity
Securities
We did not sell any unregistered securities nor did we make any
repurchases of our common stock during the year ended
December 31, 2009.
Securities
Authorized by Issuance under Equity Compensation Plans
See Part III, Item 12, Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
19
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data for each of
the five years in the period ended December 31, 2009 has
been derived from our audited annual consolidated financial
statements. The following information should be read in
conjunction with our consolidated financial statements and the
related notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except for per share amounts)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
218,461
|
|
|
$
|
285,329
|
|
|
$
|
217,434
|
|
|
$
|
163,145
|
|
|
$
|
103,218
|
|
Income from operations(1),(2),(3),(4),(5),(6)
|
|
|
22,497
|
|
|
|
29,175
|
|
|
|
41,399
|
|
|
|
28,754
|
|
|
|
13,813
|
|
Income from continuing operations(1),(2),(3),(4),(5),(6)
|
|
|
16,165
|
|
|
|
13,045
|
|
|
|
26,507
|
|
|
|
18,415
|
|
|
|
8,055
|
|
Loss from discontinued operations, net of tax(7)
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,257
|
)
|
|
|
(323
|
)
|
|
|
(3,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(1),(2),(3),(4),(5),(6),(7)
|
|
$
|
16,165
|
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
$
|
18,092
|
|
|
$
|
4,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.27
|
|
|
$
|
1.05
|
|
|
$
|
2.26
|
|
|
$
|
1.74
|
|
|
$
|
0.76
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.27
|
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
$
|
1.71
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations(1),(2),(3),(4),(5),(6)
|
|
$
|
1.26
|
|
|
$
|
1.02
|
|
|
$
|
2.19
|
|
|
$
|
1.68
|
|
|
$
|
0.75
|
|
Discontinued operations(7)
|
|
|
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1),(2),(3),(4),(5),(6),(7)
|
|
$
|
1.26
|
|
|
$
|
1.02
|
|
|
$
|
2.08
|
|
|
$
|
1.65
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,711
|
|
|
|
12,457
|
|
|
|
11,726
|
|
|
|
10,613
|
|
|
|
10,582
|
|
Diluted(8)
|
|
|
12,806
|
|
|
|
12,812
|
|
|
|
12,114
|
|
|
|
10,934
|
|
|
|
10,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
279,821
|
|
|
|
287,112
|
|
|
|
300,562
|
|
|
|
162,643
|
|
|
|
140,788
|
|
Long-term debt, less current maturities
|
|
|
|
|
|
|
18,753
|
|
|
|
61,423
|
|
|
|
|
|
|
|
7,058
|
|
|
|
|
(1) |
|
In 2009, we incurred approximately $3.9 million, or
$2.5 million net of tax or diluted EPS of $0.20 per share,
of costs relating to the March departure of Gus D. Halas, our
former Chairman and Chief Executive Officer. Additionally, we
incurred approximately $0.3 million, or $0.2 million
net of tax or diluted EPS of $0.02 per share, of costs related
to abandoned acquisitions as well as the acquisition of the
surface wellhead business of Azura Energy Systems Surface, Inc. |
|
(2) |
|
In 2008, we incurred approximately $4.7 million, or
$3.1 million net of tax or diluted EPS of $0.24 per share,
of costs related to the pursuit of strategic alternatives. |
|
(3) |
|
In 2008, we recorded a $23.5 million, or $20.5 million
net of tax or diluted EPS of $1.60 per share, charge to
continuing operations for the impairment of goodwill related to
our pressure and flow control reporting unit. |
|
(4) |
|
In 2007, we recorded a $2.5 million, or $1.9 million
net of tax or diluted EPS of $0.16 per share, charge associated
with a change of control payment and the immediate vesting of
previously unvested stock options and restricted stock held by
Gus D. Halas, our former Chairman and Chief Executive Officer,
pursuant to the terms of his then existing employment agreement. |
20
|
|
|
(5) |
|
In 2006, we recorded a $0.4 million, or $0.3 million
net of tax or diluted EPS of $0.02 per share, charge associated
with the
Form S-1
registration statement and subsequent amendments. The
Form S-1
registration statement was converted into a
Form S-3
registration statement in September 2006, which was used by
First Reserve Fund VIII to sell 4.5 million shares of
our common stock on November 30, 2006 in a series of block
trades. |
|
(6) |
|
In 2005, we recorded a $0.6 million, or $0.4 million
net of tax or diluted EPS of $0.04 per share, charge associated
with the termination of a public offering. |
|
(7) |
|
In 2007, we recorded a $1.8 million, or $1.1 million
net of tax or diluted EPS of $0.09 per share, charge due to a
jury verdict incurred against one of our discontinued
businesses. In 2005, we completed the sale of substantially all
of the assets of our distribution segment. The results of
operations attributable to those assets are reported as
discontinued operations. This resulted in a $2.8 million
goodwill and other intangibles impairment charge and a
$0.8 million long-lived asset impairment charge in 2005. |
|
(8) |
|
For the years ended December 31, 2009, 2008, 2007, 2006 and
2005 there were 863,836, 492,128, 208,000, 5,325 and 85,553
options and 0, 0, 0, 0 and 332,862 warrants that were not
included in the computation of diluted earnings per share
because their inclusion would have been anti-dilutive. For the
year ended December 31, 2008, there were 5,027 shares
of restricted stock that were not included in the computation of
diluted earnings per share because their inclusion would have
been anti-dilutive. For the year ended December 31, 2006,
there were 25,000 shares of unvested restricted stock that
were not included in the computation of diluted earnings per
share because the current market price at the end of the period
did not exceed the target market price. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with the Selected Financial Data and the
consolidated financial statements and related notes included
elsewhere in this Annual Report. This discussion contains
forward-looking statements reflecting our current expectations,
estimates and assumptions concerning events and financial trends
that may affect our future operating results or financial
position. Actual results and the timing of events may differ
materially from those contained in these forward-looking
statements due to a number of factors, including those discussed
in the sections entitled Risk Factors and
Forward-Looking Information appearing elsewhere in
this Annual Report.
Introduction
We design, manufacture, repair and service products used in the
drilling and completion of new oil and gas wells, the workover
of existing wells, and the production and transportation of oil
and gas. Our products are used in both onshore and offshore
applications throughout the world. Our customer base consists of
other oilfield service companies, major and independent oil and
gas companies, national energy companies and pipeline companies.
Significant
Events Affecting our Financial Results
During March 2009, we purchased the assets of the surface
wellhead business of Azura Energy Systems Surface, Inc., or
Azura, for $8.1 million in cash (subject to a customary
working capital adjustment) plus the assumption of accounts
payable and certain other liabilities. Azura, when consolidated
with our previously existing wellhead business, provided
additional geographic locations in key markets such as the
Marcellus and Barnett Shales and allowed consolidation of
several facilities where both Azura and we were historically
located.
During July 2008, we entered into a joint venture arrangement
with Aswan International Engineering Company LLC in the Middle
East to repair, manufacture, remanufacture and service equipment
for customers in the UAE, Kuwait, Qatar, Bahrain, Oman, Yemen,
Algeria, Egypt, Pakistan and Iraq. This joint venture became
operational in April 2009.
During May 2008, we exercised our option to purchase certain
fixed assets and inventory of HP&T in India for
approximately $0.5 million. We used these assets in the
creation of an India-based manufacturing facility that began
operations during September 2008.
21
During January 2008, we acquired Pinnacle Wellhead, Inc., or
Pinnacle, located in Oklahoma City, Oklahoma, for approximately
$2.4 million. Pinnacle assembles, tests, installs and
performs repairs on wellhead production products primarily in
Oklahoma.
During October 2007, we acquired Energy Equipment Corporation,
or EEC, for approximately $72.3 million and HP&T for
approximately $25.9 million. EEC manufactured valves,
chokes, control panels, and their associated parts for
sub-sea
applications, extreme temperatures, and highly corrosive
environments. HP&T designed gate valves, manifolds, chokes
and other products.
In April 2007, we closed an underwritten public offering
pursuant to which we sold 1,000,059 shares of our common
stock for net proceeds of approximately $22.2 million, and
First Reserve Fund VIII (a selling stockholder) sold
4,879,316 shares of common stock.
How We
Generate Our Revenue
We have three product lines: pressure and flow control, wellhead
and pipeline. Within each of those product lines, we sell
original equipment products and also provide aftermarket parts
and services. Original equipment products are those we
manufacture or have manufactured for us by others who use our
product designs. Aftermarket products and services include all
remanufactured products and parts and repair and field services.
Demand for our pressure and flow control and wellhead products
and services is driven by exploration and development activity
levels, which in turn are directly related to current and
anticipated oil and gas prices. Demand for our pipeline products
and services is driven by maintenance, repair and construction
activities for pipeline gathering and transmission systems.
We typically bid for original equipment product sales and repair
work. Field service work is offered at a fixed rate plus
expenses.
How We
Evaluate Our Operations
Our management uses the following financial and operational
measurements to analyze the performance of our business:
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revenue and facility output;
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material and labor expenses as a percentage of revenue;
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selling, general and administrative expenses as a percentage of
revenue;
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operating income;
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EBITDA;
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return on capital employed;
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financial and operational models; and
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other measures of performance.
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Revenue and Facility Output. We monitor our
revenue and facility output and analyze trends to determine the
relative performance of each of our facilities. Our analysis
enables us to more efficiently operate our facilities and
determine if we need to refine our processes and procedures at
any one location to improve operational efficiency.
Material and Labor Expenses as a Percentage of
Revenue. Material and labor expenses are composed
primarily of cost of materials, labor costs and the indirect
costs associated with our products and services. Our material
costs primarily include the cost of inventory consumed in the
manufacturing and remanufacturing of our products and in
providing repair services. We attempt where possible to pass
increases in our material costs on to our customers. However,
due to the timing of our marketing and bidding cycles, there
generally is a delay of several weeks or months from the time
that we incur an actual price increase until the time that we
can pass on that increase to our customers.
22
Our labor costs consist primarily of wages at our facilities.
Historically, as a result of increased activity in the oil and
gas industry, there have been shortages of qualified personnel.
In the event of increased industry activity, we may have to
raise wage rates to attract workers to expand our current work
force.
Selling, General and Administrative Expenses as a Percentage
of Revenue. Our selling, general and
administrative, or SG&A, expenses include administrative
and marketing costs, the costs of employee compensation and
related benefits, office and lease expenses, insurance costs and
professional fees, as well as other costs and expenses not
directly related to our operations. Our management continually
evaluates the level of our SG&A expenses in relation to our
revenue because these expenses have a direct impact on our
profitability.
Operating Income. We monitor operating income
as a measure for budgeting and for evaluating actual results
against our budgets.
EBITDA. We define EBITDA as income (loss) from
continuing operations before interest expense, net of interest
income, provision for income taxes and depreciation and
amortization expense. Our management uses EBITDA:
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as a measure of operating performance that assists us in
comparing our performance on a consistent basis because it
removes the impact of our capital structure and asset base from
our operating results;
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as a measure for budgeting and for evaluating actual results
against our budgets;
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to assess compliance with financial ratios and covenants
included in our senior credit facility;
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in communications with lenders concerning our financial
performance; and
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to evaluate the viability of potential acquisitions and overall
rates of return.
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Return on Capital Employed. We define Return
on Capital Employed as income from operations divided by capital
employed (defined as total stockholders equity plus debt
less cash). Our management uses this criterion to measure our
ability to achieve the income results targeted by our Annual
Business Plan while also managing our capital employed. Our
Compensation Committee also uses this metric as a performance
criteria in determining annual incentive bonus awards for our
executive officers. We believe this measure allows our
management team to evaluate the efficiency of our earnings.
Financial and Operational Models. We couple
our evaluation of financial data with performance data that
tracks financial losses due to safety incidents, product
warranty and quality control; customer satisfaction; employee
productivity; and management system compliance. We collect the
information in a proprietary statistical tracking program that
automatically compiles and statistically analyzes real-time
trends. This information helps us ensure that each of our
facilities improves with respect to safety performance and
customer and market demands.
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Loss Management. We incur operational losses
from employee injuries, product warranty claims and quality
control costs. We track both incident rates and costs. We also
track quality control and warranty expenses through specialized
software. All direct expenses incurred due to warranty, quality
control and safety incidents are statistically analyzed as a
percentage of sales.
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Customer Satisfaction. We monitor our
customers level of satisfaction regarding our delivery,
product quality, and service through customer surveys and other
data collection methods. We statistically compile all
information collected from the customer satisfaction assessments
to track annual performance. All customer complaints are
processed through a corrective action program.
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Employee Productivity. We provide each of our
facilities with a benchmark under which its employees are
evaluated through a collection of practical examinations,
written examinations, presentations and in-house training
videos. As the collected information is evaluated, we identify
deficiencies and take corrective actions.
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Management System Compliance. We currently use
four management programs designed to consistently manage all
aspects of our operations at each facility, while providing
useful tools to limit operational liabilities and improve
profitability. These programs incorporate various performance
standards that are useful in the evaluation of operational
performance in the pursuit of continual improvement. We evaluate
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compliance with the standards set forth in those programs
several times a year through a combination of customer audits,
third party audits and internal audits. We then evaluate each
facilitys compliance with the standards, analyze all
deficiencies identified and take corrective actions. We use
corrective actions at each facility to implement preventative
action at the remaining facilities.
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How We
Manage Our Operations
Our management team uses a variety of tools to monitor and
manage our operations, including:
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safety and environmental management systems;
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quality management systems;
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statistical tracking systems; and
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inventory turnover rates.
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Safety and Environmental Management
Systems. Our Safety Management System, or SMS,
monitors our training program as it relates to OSHA compliance.
Through a collection of regulatory audits and internal audits,
we can evaluate each facilitys compliance with regulatory
requirements and take corrective actions necessary to ensure
compliance.
We also use our SMS to ensure that we conduct employee training
on a regular basis. We manage several employee qualification
programs from our SMS to ensure that our employees perform their
duties as safely as possible. We evaluate all employees
individually with respect to their safety performance, and we
incorporate these evaluations into all annual employee reviews.
Similar to the SMS, our Environmental Management System monitors
compliance with environmental laws. We continually evaluate each
of our facilities against collected data to identify possible
deficiencies.
Quality Management Systems. We manage all
manufacturing processes, employee certification programs, and
inspection activities through our certified Quality Management
System, or QMS. Our electronic QMS is based on several different
industrial standards and is coupled with performance models to
ensure continual monitoring and improvement. To date our QMS has
been certified by the National Board of Boiler and Pressure
Vessel Inspectors, or NBIC, the American Petroleum Institute, or
API, and QMI Management Systems ISO 9001 Registrars. As such, we
maintain a quality management system ISO 9001 2000
license, a NBIC VR license for repair of pressure relief valves,
and several API licenses including API 6A, 6D, 16A, 16C, 16D,
& 17D. Each facility has a quality management team that is
charged with assuring that
day-to-day
operations are conducted consistently and within the protocols
outlined with the corporate QMS. To ensure that all QMS elements
are operating as designed and to provide an additional level of
support at each facility, we have assigned a Quality Manager at
each facility who monitors individual facility performance and
helps manage critical operations.
Statistical Tracking Systems. We have
developed a statistical tracking program that assists in the
real time compilation of data from each facility and then
automatically assesses the data through various data analysis
tools. We provide facility managers and operational executives
with summary reports, providing information about their
performance and how it compares to industrial and internal
benchmarks.
Inventory Turnover Rates. The cost of our
material inventory represents a significant portion of our cost
of revenue from our product lines. As a result, maintaining an
optimum level of inventory at each of our facilities is an
important factor in managing our operations. We continually
monitor the inventory turnover rates for each of our product
lines and adjust the frequency of inventory orders as
appropriate to maintain the optimum level of inventory based on
activity level for each product line.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements. We prepare these financial statements in conformity
with accounting principles generally accepted in the United
States. As such, we are required to make certain estimates,
judgments and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts
24
of revenues and expenses during the periods presented. We base
our estimates on historical experience, available information
and various other assumptions we believe to be reasonable under
the circumstances. We evaluate our estimates on an on-going
basis; however, actual results may differ from these estimates
under different assumptions or conditions. We describe our
significant accounting policies in our consolidated financial
statements included in this Annual Report beginning on
page F-1.
The accounting policies we believe to be the most critical to
our reporting of our financial condition and results of
operations and that require managements most difficult,
subjective or complex judgments and estimates are described
below.
Revenue Recognition. We sell our products and
services based upon purchase orders or contracts with the
customer that include fixed or determinable prices and that do
not include right of return or other similar provisions or other
significant post delivery obligations. We record revenue when we
have met all of the following criteria: evidence of an
arrangement exists; delivery to and acceptance by the customer
has occurred; the price to the customer is fixed or
determinable; and collectability is reasonably assured. Upon
performance of a service, we recognize revenue in accordance
with the related contract provisions. We defer the recognition
of revenue on customer advances or deposits until we have
completed all of our performance obligations related to the
sale. We include the amounts billed for shipping and handling
costs in revenue, and the related costs are included in costs of
sales.
Accounts Receivable and Customer Credit
Risk. We state accounts receivable at the
historical carrying amount, net of allowances for uncollectible
accounts. We establish an allowance for uncollectible accounts
based on specific customer collection issues we have identified.
We write off uncollectible accounts receivable upon reaching a
settlement for an amount less than the outstanding historical
balance or when we have determined the balance will not be
collected. Substantially all of our customers are engaged in the
energy industry. This concentration of customers may impact our
overall exposure to credit risk, either positively or
negatively, in that customers may be similarly affected by
changes in economic and industry conditions. We perform credit
evaluations of our customers and do not generally require
collateral in support of our domestic trade receivables. We may
require collateral to support our international customer
receivables. However, most of our international sales are to
large international or national companies for which we may not
require collateral. In 2009, 2008 and 2007, there was no
individual customer who accounted for 10% or greater of our
consolidated revenues.
Inventories. We state inventories at the lower
of cost or market. Cost includes, where applicable,
manufacturing labor and overhead. We use the
first-in,
first-out method to determine the cost of substantially all of
our inventories. We regularly review inventory quantities on
hand and record a provision for excess and slow moving inventory
to write down the recorded cost of inventory to its estimated
recoverable value. We base this analysis primarily on the length
of time the item has remained in inventory and managements
consideration of current and expected market conditions.
Long-Lived Assets. Long-lived assets include
property, plant and equipment and definite-lived intangibles. We
make judgments and estimates in conjunction with the carrying
value of these assets, including capitalized amounts,
depreciation and amortization methods, useful lives and the
valuation of acquired definite-lived intangibles. We test for
the impairment of long-lived assets upon the occurrence of a
triggering event based upon indicators such as changes in the
nature of the assets, the future economic benefit of the assets,
any historical or future profitability measurements and other
external market conditions or factors that may be present. If
these impairment indicators are present or other factors exist
that indicate the carrying amount of an asset may not be
recoverable, we determine whether an impairment has occurred
through the use of an undiscounted cash flows analysis of the
asset at the lowest level for which identifiable cash flows
exist. The undiscounted cash flow analysis consists of
estimating the future cash flows that are directly associated
with and expected to arise from the use and eventual disposition
of the asset over its remaining useful life. These cash flows
are inherently subjective and require significant estimates
based upon historical experience and future expectations
reflected in our budgets and internal projections. If the
undiscounted cash flows do not exceed the carrying value of the
long-lived asset, an impairment has occurred, and we recognize a
loss for the difference between the carrying amount and the
estimated fair value of the asset. We measure the fair value of
the asset using quoted market prices or, in the absence of
quoted market prices, upon an estimate of discounted cash flows.
We generally discount cash flows at an interest rate
commensurate with a weighted average cost of capital for a
similar asset. We have assessed the current market conditions
and have concluded, at the present time, that a triggering event
requiring an impairment analysis of long-
25
lived assets has not occurred. We will continue to monitor for
events or conditions that could change this assessment. For the
years ended December 31, 2009, 2008 and 2007, no
significant impairment charges were recorded for assets of
continuing operations.
Goodwill. We test for the impairment of
goodwill on at least an annual basis. Beginning in 2009, we
perform our annual test of impairment of goodwill as of
October 1. Our goodwill impairment test involves a
comparison of the fair value of each of our reporting units with
its carrying amount. The fair value is determined using
discounted cash flows and earnings multiples of comparable
publicly traded companies and recent acquisition transactions
within our industry. The key discounted cash flow assumptions
used to determine the fair value of our reporting units as of
October 1, 2009 included: a) cash flow periods of
5 years, b) terminal values calculated as 6.5 times
the terminal year EBITDA and c) a discount rate of 15.83%.
If the fair value of the reporting unit is less than the
carrying value, the goodwill for the reporting unit is further
evaluated for impairment. The amount of the impairment, if any,
is then determined based on an allocation of the reporting unit
fair values.
For the years ended December 31, 2009 and 2007, no
impairment occurred for goodwill of continuing operations. At
December 31, 2008, we completed the annual impairment test
and our calculations indicated the fair values of the wellhead
and pipeline reporting units exceeded their net book values and,
accordingly, we did not consider goodwill to be impaired.
However, due to a number of factors, including the then-existing
global economic environment, our estimate of our customers
drilling activities, increased costs of capital and the decrease
in our market capitalization, our calculations for the pressure
and flow control reporting unit indicated its net book value
exceeded its fair value and, accordingly, goodwill was further
evaluated for impairment. We used the estimated fair value of
the pressure and flow control reporting unit from the first step
as the purchase price in a hypothetical acquisition of the
reporting unit. The significant hypothetical purchase price
allocation adjustments made to the assets and liabilities of the
pressure and flow control reporting unit for this calculation
were in the following areas: (1) adjusting the carrying
value of property, plant and equipment to their estimated
aggregate fair values; (2) adjusting the carrying value of
other intangible assets to their estimated aggregate fair
values; and (3) recalculating deferred income taxes after
considering the likely tax basis a hypothetical buyer would have
in the assets and liabilities. As a result, we recognized a
goodwill impairment of $23.5 million for the year ended
December 31, 2008 related to our pressure and flow control
reporting unit. See note 4 to the consolidated financial
statements included in this report for further discussion of our
goodwill impairment for 2008. At October 1, 2009, goodwill
by reporting unit was $71.4 million, $13.6 million and
$3.6 million for the pressure and flow control, wellhead
and pipeline reporting units and the estimated fair value of the
pressure and flow control, wellhead and pipeline reporting units
exceeded the recorded net book value of these reporting units by
44%, 61% and 50%. Should our estimate of the fair value of any
of our reporting units decline in future periods due to
deterioration in global economic conditions, changes in our
outlook for future profits and cash flows, reductions in the
market price of our stock, increased costs of capital,
reductions in valuations of other public companies within our
industry or valuations observed in acquisition transactions
within our industry, impairment of goodwill could be required.
Self Insurance. We are self-insured up to
certain levels for our group medical coverage. We insure the
amounts in excess of the self-insured levels up to a limit. We
estimate liabilities associated with these risks by considering
our historical claims experience. Although we believe we have
provided adequate reserves for expected liabilities arising from
our self-insured obligations, there is a risk that our insurance
may not be sufficient to cover any particular loss or that our
insurance may not cover all losses. For example, while we
maintain product liability insurance, this type of insurance is
limited in coverage, and it is possible an adverse claim could
arise in excess of our coverage. Finally, insurance rates have
in the past been subject to wide fluctuation. Changes in
coverage, insurance markets and the industry may result in
increases in our cost and higher deductibles and retentions.
Income Taxes. We provide for income taxes
taking into account the differences between financial statement
treatment and tax treatment of certain transactions. We
recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. We recognize the effect
of a change in tax rates as income or expense in the period that
includes the enactment date. Our effective tax rates for 2009,
2008 and 2007 were 30.6%, 52.4% and 36.0%.
26
We operate in several domestic tax jurisdictions and certain
foreign tax jurisdictions. As a result, we are subject to
domestic and foreign tax jurisdictions and tax agreements and
treaties among the various taxing authorities. Determination of
taxable income in any jurisdiction requires the interpretation
of the related tax laws and regulations and the use of estimates
and assumptions regarding significant future events. Changes in
tax laws, regulations, agreements and treaties, foreign currency
exchange restrictions or our level of operations or
profitability in each taxing jurisdiction could have an impact
upon the amount of income taxes that we must pay during any
given year.
We record a valuation allowance to reduce the carrying value of
our deferred tax assets when it is more likely than not that
some or all of the deferred tax assets will expire before
realization of the benefit or that future deductibility is not
probable. Also, we do not record deferred tax assets for the
excess of the tax basis over the book basis for our equity
investments in our corporate joint ventures. The ultimate
realization of the deferred tax assets depends upon our ability
to generate sufficient taxable income of the appropriate
character in the future. This requires us to use estimates and
make assumptions regarding significant future events such as the
taxability of entities operating in the various taxing
jurisdictions. In evaluating our ability to recover our deferred
tax assets, we consider all reasonably available positive and
negative evidence, including our past operating results, the
existence of cumulative losses in the most recent years and our
forecast of future taxable income. In estimating future taxable
income, we develop assumptions, including the amount of future
state, federal and international pretax operating income, the
reversal of temporary differences and the implementation of
feasible and prudent tax planning strategies. These assumptions
require significant judgment. When the likelihood of the
realization of existing deferred tax assets changes, adjustments
to the valuation allowance are charged in the period in which
the determination is made.
As of December 31, 2009, we had gross deferred tax assets
of $11.2 million offset by a valuation allowance of
$3.1 million.
We adopted accounting principles that clarified the accounting
for uncertainty in income taxes on January 1, 2007.
Generally accepted accounting principles in the United States
define criteria that an individual tax position must meet to
recognize any part of the benefit of that position in the
financial statements. Additionally, these principles provide
guidance on the measurement, derecognition, classification and
disclosure of tax positions, along with accounting for the
related interest and penalties. Unrecognized tax benefits at
December 31, 2009 totaled approximately $1.0 million.
Stock-Based Compensation. We incur stock-based
compensation expense related to our share-based payment awards,
including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights.
We use the Black-Scholes option pricing model to estimate the
fair value of stock options granted to employees on the date of
grant. We use the grant date closing price of our stock to
determine the fair value of restricted stock awards. We amortize
to selling, general and administrative expense, on a
straight-line basis over the vesting period, the fair value of
options and restricted stock awards. We record an estimate for
forfeitures of awards of stock options and restricted stock and
adjust this estimate if actual forfeitures differ from the
estimate. We recognized $6.8 million, $5.5 million and
$3.2 million of employee stock-based compensation expense
related to stock options and restricted stock during the years
ended December 31, 2009, 2008 and 2007.
Contingencies. We record an estimated loss
from a loss contingency when information available prior to the
issuance of our financial statements indicates that it is
probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount
of the loss can be reasonably estimated. Accounting for
contingencies such as environmental, legal and income tax
matters requires us to use judgment. While we believe that our
accruals for these matters are adequate, the actual loss from a
loss contingency could be significantly different than the
estimated loss, resulting in an adverse effect on our results of
operations and financial position.
Foreign Currency Translation. The functional
currency for our Indian operations and our Dubai affiliate is
the United States dollar. The functional currency for our
Canadian operations and our Mexico affiliate is their respective
local currency. We maintain the accounting records for all of
our international subsidiaries in local currencies.
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We translate the results of operations for foreign subsidiaries
with functional currencies other than the United States dollar
using average exchange rates during the period. We translate
assets and liabilities of these foreign subsidiaries using the
exchange rates in effect at the balance sheet dates, and the
resulting translation adjustments are included as Accumulated
Other Comprehensive Income, a component of stockholders
equity.
For our
non-U.S. subsidiaries
where the functional currency is the United States dollar, we
translate our inventories, property, plant and equipment and
other non-monetary assets and liabilities, together with their
related elements of revenue and expense, at historical rates of
exchange. We translate monetary assets and liabilities at
current exchange rates. We translate all other revenues and
expenses at average exchange rates. We recognize translation
gains and losses for these subsidiaries in our results of
operations during the period incurred. We reflect the gain or
loss related to individual foreign currency transactions in
results of operations when incurred.
New
Accounting Pronouncements
In September 2006, new accounting principles were issued that
define fair value, establish a framework for measuring fair
value under generally accepted accounting principles, and expand
disclosures about fair value measurements. We adopted these
principles on January 1, 2008. The adoption of the new
principles did not have any impact on our consolidated financial
position, results of operations and cash flows. On
January 1, 2009, these new principles became effective on a
prospective basis for non-financial assets and liabilities for
which companies do not measure fair value on a recurring basis.
The application of the new principles to our non-financial
assets and liabilities will primarily relate to assets acquired
and liabilities assumed in business combinations and asset
impairments, including goodwill and long-lived assets occurring
subsequent to the effective date. The initial application of the
new principles did not have a material impact on our
consolidated financial position, results of operations and cash
flows, nor do we expect the impact to future periods to be
material.
In December 2007, new accounting principles were issued that
change the requirements for an acquirers recognition and
measurement of the assets acquired and the liabilities assumed
in a business combination. These new principles became effective
for annual periods beginning after December 15, 2008, with
prospective application for all business combinations entered
into after the date of adoption. We adopted these new principles
on January 1, 2009. Due to the adoption of these new
principles during the first quarter of 2009, approximately
$125,000 of transaction costs were expensed that, prior to the
issuance of these new principles, would have been capitalized.
The effect of this adoption for periods beyond the first quarter
of 2009 will be dependent upon acquisitions at that time and
therefore is not currently estimable. We do not expect the
provisions of these new principles that modify the income
statement recognition associated with changes to deferred tax
valuation allowances and tax uncertainties established in
connection with prior business combinations to have a material
impact on our consolidated financial position, results of
operations and cash flows.
In May 2009, new accounting principles were issued that
establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before
financial statements are issued or available to be issued. These
new principles became effective for interim and annual periods
ending after June 15, 2009 and set forth the period after
the balance sheet date during which we should evaluate events or
transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under
which the we should recognize events or transactions occurring
after the balance sheet date in our financial statements and the
disclosures that we should make about events or transactions
that occurred after the balance sheet date. We adopted these new
principles on June 30, 2009. The adoption of these new
principles did not have any impact on our consolidated financial
position, results of operations and cash flows.
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Outlook
Our business is driven by the level and complexity of worldwide
oil and natural gas drilling and completion, which is, in turn,
primarily driven by current and anticipated price levels for oil
and natural gas. We believe that oil and gas market prices and
the drilling rig count in the United States, Canada and
international markets serve as key indirect indicators of demand
for the products we manufacture and sell and for the services we
provide. The following table sets forth average oil and gas
price information and average monthly rig count data for each
fiscal quarter for the past two years:
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WTI
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Henry Hub
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United States
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Canada
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International
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Quarter Ended:
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Oil
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Gas
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Rig Count
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Rig Count
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Rig Count
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March 31, 2008
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$
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97.94
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$
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8.72
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1,770
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507
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1,046
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June 30, 2008
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$
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126.35
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$
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11.47
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1,864
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169
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1,084
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September 30, 2008
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$
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118.05
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$
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9.00
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1,978
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432
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1,096
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December 31, 2008
|
|
$
|
58.35
|
|
|
$
|
6.38
|
|
|
|
1,898
|
|
|
|
408
|
|
|
|
1,090
|
|
March 31, 2009
|
|
$
|
42.91
|
|
|
$
|
4.49
|
|
|
|
1,326
|
|
|
|
329
|
|
|
|
1,025
|
|
June 30, 2009
|
|
$
|
59.44
|
|
|
$
|
3.80
|
|
|
|
936
|
|
|
|
90
|
|
|
|
982
|
|
September 30, 2009
|
|
$
|
68.20
|
|
|
$
|
3.42
|
|
|
|
973
|
|
|
|
187
|
|
|
|
969
|
|
December 31, 2009
|
|
$
|
76.06
|
|
|
$
|
4.93
|
|
|
|
1,108
|
|
|
|
278
|
|
|
|
1,011
|
|
Source: West Texas Intermediate Crude Average Spot Price for the
Quarter indicated: Department of Energy, Energy Information
Administration (www.eia.doe.gov); NYMEX Henry Hub Natural
Gas Average Spot Price for the Quarter indicated:
(www.oilnergy.com); Average Rig count for the Quarter
indicated: Baker Hughes, Inc. (www.bakerhughes.com).
As noted in the table above, the average worldwide rig count has
declined from prior peaks, and the 2009 average rig count was
31% below the prior year average. Activity levels were
particularly affected in the United States, where average
drilling during 2009 decreased approximately 42% from the prior
year average. As anticipated from this significant decline in
activity levels, our revenues and backlog have declined during
the year. Our backlog at December 31, 2009 was
$34.5 million, which is down $6.7 million from
September 30, 2009 and $41.6 million from
December 31, 2008.
As mentioned, international activity has been relatively
stronger than in the United States. We have been particularly
successful selling to international markets, and approximately
56% of 2009 revenues came from orders destined for use outside
of the United States, which is up from 43% in 2008. These
international successes include one unusually large order of
$9.0 million that shipped during the fourth quarter. More
importantly for the intermediate term future, the rig count has
been generally increasing since July of 2009 and has continued
to increase into 2010. Although our revenues will continue to
fall in the near term as we lose benefit of the unusually large
order and we sell from our decreased backlog, the activity
improvements have already affected our order intake, or
bookings. Bookings levels have increased
incrementally since the second quarter of 2009, and we booked
approximately $45.7 million in the fourth quarter of 2009,
which is up from $43.3 million in the third quarter of 2009
and $41.8 million in the second quarter of 2009. Looking
forward into 2010, we believe the continued increases in rig
counts experienced since the second quarter of 2009 indicate
that our bookings should continue to recover, which would
eventually increase our revenues.
Please read Item 1A. Risk Factors Our
business depends on spending by the oil and gas industry, and
this spending and our business may be adversely affected by
industry conditions that are beyond our control and
A decline in or substantial volatility of oil
and gas prices could adversely affect the demand and prices for
our products and services.
Results
of Operations
Year
Ended December 31, 2009 Compared with Year Ended
December 31, 2008
Revenues. Revenues decreased
$66.9 million, or 23.4%, in the year ended
December 31, 2009 compared to the year ended
December 31, 2008. Our pressure and flow control products
revenue decreased approximately
29
$48.6 million, or 23.3%, from the year ended
December 31, 2008, primarily due to decreased purchases by
our customers, due to decreased demand for our pressure and flow
control products and services resulting from lower drilling
activities. Our wellhead product line revenues increased
approximately $0.6 million, or 1.5%, from the year ended
December 31, 2008, primarily due to the integration of
Azura and the shipment of an unusually large international order
during the fourth quarter of 2009. Partially offsetting this
wellhead year over year revenue increase is a decrease of our
traditional North American business, which saw decreased
purchases by our customers due to the depressed global economy
and lower activity in 2009 by certain larger customers. Our
pipeline product line revenues decreased approximately
$18.9 million, or 58.0%, from the year ended
December 31, 2008, due to a decrease in bookings for larger
pipeline-related projects period over period. Across all three
product lines, we have experienced pricing pressures that have
resulted in a decrease in our standard pricing on some of our
product offerings. Additionally, our wellhead and pipeline
product line businesses are closely tied to North American
drilling and production activities, and the drop in their
revenues resulted from the 46% decrease in the 2009 average
North American rig counts from its third quarter of 2008 high.
Gross Profit. Gross profit as a percentage of
revenues was 36.4% in the year ended December 31, 2009
compared to 38.9% in the year ended December 31, 2008.
Gross profit margin was lower in 2009 primarily due to pricing
pressure across all three product lines, an increase in our
slow-moving inventory reserve for all three product lines,
volume decreases for our pipeline product line and delays in our
ability to secure low-cost country sourcing for some of our
wellhead product offerings. Our gross profit margins for our
pressure and flow control, wellhead and pipeline product lines
were 38.3%, 30.6% and 28.9% for the year ended December 31,
2009 compared to 38.9%, 40.0% and 37.0% for the year ended
December 31, 2008.
Operating Expenses. Operating expenses consist
of selling, general and administrative expenses for 2009 and
2008 and a charge for goodwill impairment during 2008. For the
year ended December 31, 2008, we recognized a goodwill
impairment of $23.5 million related to our pressure and
flow control reporting unit. See footnote 4 to the consolidated
financial statements included in this report for further
discussion of our goodwill impairment. Selling, general and
administrative expenses were flat for the year ended
December 31, 2009 compared to the year ended
December 31, 2008. Selling, general and administrative
expenses for the year ended December 31, 2009 included
$3.9 million of separation costs for our former President,
Chief Executive Officer and Chairman of the Board, as well as
$0.1 million related to Azura acquisition costs. Selling,
general and administrative expenses for the year ended
December 31, 2008 included $4.7 million of costs
related to the pursuit of strategic alternatives. Selling,
general and administrative expenses, excluding the separation
and Azura costs in 2009 and the strategic alternatives costs in
2008, increased $0.6 million primarily due to increased
employee-based stock compensation of $0.6 million,
increased insurance costs of $0.5 million, abandoned
acquisition costs of $0.2 million, facility closure costs
of $0.2 million, increased fixed asset write-offs of
$0.1 million and increased bad debt reserves of
$0.1 million, partially offset by decreased third party
sales commissions of $0.6 million and decreased
depreciation and amortization expenses of $0.6 million.
Equity in Earnings of Unconsolidated
Affiliates. Equity in earnings of unconsolidated
affiliates for the year ended December 31, 2009 was
$1.2 million compared to $0.1 million in the year
ended December 31, 2008. The increase was primarily
attributable to our share of the earnings resulting from our
newly-formed Dubai joint venture during the year ended
December 31, 2009.
Interest Expense. Interest expense for the
year ended December 31, 2009 was $0.8 million compared
to $2.4 million in the year ended December 31, 2008.
The decrease was attributable to lower outstanding debt levels
during 2009.
Other Income, net. Other income, net for the
year ended December 31, 2009 was $1.6 million compared
to $0.5 million for the year ending December 31, 2008.
The increase was primarily attributable to income of
$1.5 million related to the settlement of business
interruption insurance claims for Hurricanes Gustav and Ike.
Income Taxes. Income tax expense for the year
ended December 31, 2009 was $7.1 million as compared
to $14.4 million in the year ended December 31, 2008.
The decrease was due to a decrease in income before taxes, as
well as non-deductible goodwill impairment incurred in 2008 but
not in 2009. Our effective tax rate was 30.6% for the year ended
December 31, 2009 compared to 52.4% for the year ended
December 31, 2008. The tax rate was lower than the
statutory tax rate in 2009 primarily due to benefits relating to
tax positions taken in prior years for
30
which the statute of limitations has expired, lower state taxes
incurred relating to adjustments from the prior year, benefits
from lower tax rates in international jurisdictions, R&D
credits, domestic manufacturing deductions and a reduction in
valuation allowances. The tax rate in 2008 was higher than the
statutory rate primarily due to a non-deductible impairment of
goodwill as well as non-deductible employee compensation costs.
These were partially offset by extraterritorial income tax
deductions, R&D credits and domestic manufacturing
deductions.
Income from Continuing Operations. Income from
continuing operations was $16.2 million in the year ended
December 31, 2009 compared with $13.0 million in the
year ended December 31, 2008 as a result of the foregoing
factors.
Year
Ended December 31, 2008 Compared with Year Ended
December 31, 2007
Revenues. Revenues increased
$67.9 million, or 31.2%, in the year ended
December 31, 2008 compared to the year ended
December 31, 2007. Excluding the acquisitions of EEC and
HP&T, which were completed in October 2007, and Pinnacle,
which was completed in January 2008, revenues increased
approximately $9.2 million, or 4.4%, from the year ended
December 31, 2007. Excluding EEC and HP&T, our
pressure and flow control products revenue increased
approximately $6.1 million from the year ended
December 31, 2007. This revenue increase was attributable
to improved demand for our pressure and flow control products
and services resulting from higher levels of construction of new
drilling rigs and refurbishment of existing drilling rigs that
require the type of equipment we manufacture. This increase in
the pressure and flow control products and services was
partially offset by a $4.1 million decrease in our Canadian
pressure and flow control revenues from the year ended
December 31, 2007 due to continued weakness in the region.
Our pipeline product line revenues increased approximately
$3.5 million from the year ended December 31, 2007,
due to an increase in the number of original equipment products
we manufacture. Excluding Pinnacle, our wellhead product line
revenues decreased approximately $0.4 million from the year
ended December 31, 2007, due to lower activity with certain
of our larger customers in 2008. We believe that our T-3 branded
pressure and flow control and pipeline products have gained
market acceptance, resulting in greater bookings and sales to
customers that use our products in both their domestic and
international operations. For example, backlog for our pressure
and flow control (including EEC and HP&T) and pipeline
product lines has increased approximately 17.4% from
$64.8 million at December 31, 2007 to
$76.1 million at December 31, 2008. Also, as a
percentage of revenues, our original equipment product revenues
accounted for approximately 80% of total revenues during the
year ended December 31, 2008, as compared to approximately
76% of total revenues during the same period in 2007.
Gross Profit. Gross profit as a percentage of
revenues was 38.9% in the year ended December 31, 2008
compared to 36.8% in the year ended December 31, 2007.
Gross profit margin was higher in 2008 due to increased sales of
higher margin products and services and operational
efficiencies, partially offset by costs of approximately
$1.4 million associated with lost absorption, downtime pay
and minimal property damage due to the impact of Hurricanes
Gustav and Ike. Gross profit margin was also lower in 2007 due
to 2007 gross profit margins being affected by 2006 pricing
on choke orders and cost overruns on large bore BOPs quoted in
2006 at one of our pressure and flow control facilities where
the manufacturing capacity expansion had not yet been completed.
Our gross profit margins for our pressure and flow control,
wellhead and pipeline product lines were 38.9%, 40.0% and 37.0%
for the year ended December 31, 2008 compared to 36.7%,
38.1% and 35.6% for the year ended December 31, 2007.
Operating Expenses. Operating expenses consist
of selling, general and administrative expenses and a charge for
goodwill impairment during 2008. For the year ended
December 31, 2008, we recognized a goodwill impairment of
$23.5 million related to our pressure and flow control
reporting unit. See footnote 4 to the consolidated financial
statements included in this report for further discussion of our
goodwill impairment. Selling, general and administrative
expenses increased $19.1 million, or 48.7%, in the year
ended December 31, 2008 compared to the year ended
December 31, 2007. The acquisitions of EEC, HP&T and
Pinnacle accounted for $6.1 million, or 32.0%, of this
increase in total selling, general and administrative expenses.
Selling, general and administrative expenses for the year ended
December 31, 2008 included $4.7 million of costs
incurred related to the pursuit of strategic alternatives.
Selling, general and administrative expenses for the year ended
December 31, 2007 included a $2.5 million compensation
charge related to the payment to Mr. Halas of the
$1.6 million change of control payment and the immediate
vesting of previously unvested stock options and restricted
stock held by Mr. Halas pursuant to the terms of his then
existing employment agreement. Selling, general and
administrative
31
expenses, excluding the strategic alternatives costs in 2008 and
the compensation charge in 2007, as a percentage of revenues
were 18.8% in the year ended December 31, 2008 compared to
16.9% in the year ended December 31, 2007. The increase in
selling, general and administrative expenses as a percentage of
revenues, excluding the strategic alternatives costs in 2008 and
the compensation charge in 2007, as compared to the year ended
December 31, 2007, is primarily due to increased other
intangible assets amortization costs of $2.1 million
primarily incurred as a result of the October 2007 acquisitions
of EEC and HP&T and the January 2008 acquisition of
Pinnacle, as well as increased employee stock-based compensation
expense of $2.3 million and increased health insurance and
payroll costs associated with an increase in headcount.
Equity in Earnings of Unconsolidated
Affiliates. Equity in earnings of unconsolidated
affiliates for the year ended December 31, 2008 was
$0.1 million compared to $0.6 million in the year
ended December 31, 2007. The decrease was attributable to
our share of the lower earnings of our joint venture in Mexico
during the year ended December 31, 2008 in comparison to
December 31, 2007.
Interest Expense. Interest expense for the
year ended December 31, 2008 was $2.4 million compared
to $1.2 million in the year ended December 31, 2007.
The increase was primarily attributable to higher debt levels
during 2008, incurred in connection with our 2007 acquisitions
of EEC and HP&T and our 2008 acquisition of Pinnacle.
Interest Income. Interest income for the year
ended December 31, 2008 was $0.1 million compared to
$0.9 million in the year ended December 31, 2007. The
decrease was primarily attributable to lower levels of cash held
in our bank accounts, due to greater levels of debt repayments
during 2008.
Income Taxes. Income tax expense for the year
ended December 31, 2008 was $14.4 million as compared
to $14.9 million in the year ended December 31, 2007.
The decrease was due to a decrease in income before taxes,
primarily related to goodwill impairment recognized for our
pressure and flow control reporting unit for the year ended
December 31, 2008. Also, during the fourth quarter of 2008,
we recorded a tax benefit of $0.9 million as a result of
the deductibility of $2.6 million of strategic alternative
costs, of which $2.2 million was recorded in the third
quarter of 2008 and $0.4 million was recorded in the second
quarter of 2008. These strategic alternative costs were
previously determined to be non-deductible during the third
quarter of 2008. Our effective tax rate was 52.4% in the year
ended December 31, 2008 compared to 36.0% in the year ended
December 31, 2007. The higher rate in 2008 resulted
primarily from approximately $15.0 million of the
$23.5 million goodwill impairment not being deductible,
partially offset by higher deductions for certain expenses
related to production activities, the utilization of R&D
tax credits during 2008 and extraterritorial income exclusion
tax deductions available for years prior to 2007. In March and
June 2008, we filed amended tax returns for the years 2006, 2005
and 2004, which resulted in an income tax expense reduction of
$1.0 million. In addition, the 2007 effective tax rate
included approximately $0.6 million of income tax expense
related to certain compensation expenses that were
non-deductible under Section 162(m) of the Internal Revenue
Code, whereas the 2008 effective tax rate included approximately
$0.1 million of income tax expense for such non-deductible
compensation. These decreases were partially offset by
additional income tax expense due to a $0.3 million
increase in our liability for unrecognized tax benefits, and an
increase in income tax expense of approximately
$0.1 million related to a portion of the change in our
valuation allowance.
Income from Continuing Operations. Income from
continuing operations was $13.0 million in the year ended
December 31, 2008 compared with $26.5 million in the
year ended December 31, 2007 as a result of the foregoing
factors.
Discontinued Operations. During 2004 and 2005,
we sold substantially all of the assets of our products and
distribution segments. These assets constituted businesses and
thus their results of operations are reported as discontinued
operations for all periods presented. Loss from discontinued
operations, net of tax for the year ended December 31, 2008
was $0.1 million as compared to $1.3 million in the
year ended December 31, 2007. The decrease in loss in 2008
is primarily due to a jury verdict of $1.1 million, net of
tax, during 2007 against one of our discontinued businesses.
32
Liquidity
and Capital Resources
At December 31, 2009, we had working capital of
$72.1 million, net available cash of $11.7 million, no
long-term debt, availability under our senior credit facility of
$118.1 million and stockholders equity of
$239.1 million. Historically, our principal liquidity
requirements and uses of cash have been for debt service,
capital expenditures, working capital and acquisitions, and our
principal sources of liquidity and cash have been from cash
flows from operations, borrowings under our senior credit
facility and issuances of equity securities.
Net Cash Provided by Operating Activities. Net
cash provided by operating activities was $39.9 million for
the year ended December 31, 2009 compared to
$43.1 million in 2008 and $14.0 million in 2007. The
decrease in net cash provided by operating activities for 2009
as compared to 2008 was primarily attributable to lower profit,
decreased customer prepayments for our products and reductions
in accounts payable, partially offset by reductions in accounts
receivable and inventory levels. The increase in net cash
provided by operating activities for 2008 as compared to 2007
was primarily attributable to increased profit and improved
accounts receivable collections, as well as increased customer
prepayments for our products. Partially offsetting these
increases were increased tax deposits due to higher taxable
income during 2008 and lower inventory turns during 2008.
Net Cash Used in Investing Activities. Our
principal uses of cash are for capital expenditures and
acquisitions. For the years ended December 31, 2009, 2008
and 2007, we made capital expenditures of approximately
$6.2 million, $11.3 million and $7.0 million.
Cash consideration paid for business acquisitions, net of cash
acquired, was $7.5 million, $2.7 million and
$90.9 million for the years ended December 31, 2009,
2008 and 2007. See Note 2 to our consolidated financial
statements for more information.
Net Cash Provided by (Used in) Financing
Activities. Sources of cash from financing
activities primarily include borrowings under our senior credit
facility, proceeds from issuances of common stock and proceeds
from the exercise of stock options and warrants. Principal uses
of cash include payments on our senior credit facility.
Financing activities used $14.4 million and
$37.8 million of net cash for the years ended
December 31, 2009 and 2008 and provided $90.8 million
of net cash for the year ended December 31, 2007. We made
repayments on our revolving credit facility of
$37.0 million and $45.0 million for the years ended
December 31, 2009 and 2008, but made no such repayments
during 2007. We had borrowings under our revolving credit
facility of $19.0 million, $5.0 million and
$58.0 million and net borrowings (repayments) under our
swing line credit facility of ($0.8) million,
($2.7) million and $3.3 million in the years ended
December 31, 2009, 2008 and 2007. We received net proceeds
of $22.2 million from the common stock issued and
$4.0 million from the warrants exercised in connection with
our April 2007 equity offering. See Note 12 to our
consolidated financial statements for more information. We had
proceeds from the exercise of stock options of
$3.9 million, $3.2 million and $2.3 million and
excess tax benefits from stock-based compensation of
$0.6 million, $1.8 million and $2.0 million in
the years ended December 31, 2009, 2008 and 2007.
Principal Debt Instruments. Our senior credit
facility provides for a $180 million revolving line of
credit, maturing October 26, 2012, that can be increased by
up to $70 million (not to exceed a total commitment of
$250 million) with the approval of the senior lenders. The
senior credit facility consists of a U.S. revolving credit
facility that includes a swing line subfacility and a letter of
credit subfacility up to $25 million and $50 million.
The senior credit facility also provides for a separate Canadian
revolving credit facility, which includes a swing line
subfacility of up to U.S. $5 million and a letter of
credit subfacility of up to U.S. $5 million. The
revolving credit facility matures on the same date as the senior
credit facility and is subject to the same covenants and
restrictions. As of December 31, 2009, we had no
outstanding borrowings under our senior credit facility or
Canadian revolving credit facility. However, at
December 31, 2009, we used the senior credit facility for
letters of credit of approximately $0.1 million that mature
at various dates throughout 2010. As of December 31, 2009,
availability under our senior credit facility was
$118.1 million.
Our availability in future periods is limited to the lesser of
(a) three times our EBITDA on a trailing-twelve-months
basis, which totals $118.2 million at December 31,
2009, less our outstanding borrowings, standby letters of
credits and other debt (as each of these terms are defined under
our senior credit facility) and (b) the amount of
additional borrowings that would result in interest payments on
all of our debt that exceed one third of our EBITDA on a
trailing-twelve-months basis. As such, given the industry
outlook and our internal projections for 2010, we expect
availability to continue to decrease for the first half of 2010.
33
Our leverage ratio governs the applicable interest rate of the
senior credit facility and ranges from the Base Rate (as defined
in the senior credit facility) to the Base Rate plus 1.25% or
LIBOR plus 1.00% to LIBOR plus 2.25%. We have the option to
choose between Base Rate and LIBOR when borrowing under the
revolver portion of our senior credit facility, whereas any
borrowings under the swing line portion of our senior credit
facility are at prime. At December 31, 2009, we had no
outstanding borrowings under the revolver and swing line
portions of our senior credit facility. The effective interest
rate of our senior credit facility, including amortization of
deferred loan costs, was 7.0% during 2009. The effective
interest rate, excluding amortization of deferred loan costs,
was 5.0% during 2009. We are required to prepay the senior
credit facility under certain circumstances with the net cash
proceeds of certain asset sales, insurance proceeds and equity
issuances subject to certain conditions. The senior credit
facility also limits our ability to secure additional forms of
debt, with the exception of secured debt (including capital
leases) with a principal amount not exceeding 10% of our
consolidated net worth at any time.
The senior credit facility provides, among other covenants and
restrictions, that we comply with the following financial
covenants: a minimum interest coverage ratio of 3.0 to 1.0, a
maximum leverage ratio of 3.0 to 1.0 and a limitation on capital
expenditures of no more than 75% of current year EBITDA. As of
December 31, 2009, we were in compliance with the covenants
under the senior credit facility, with an interest coverage
ratio of 61.5 to 1.0, a leverage ratio of 0.0 to 1.0, and
year-to-date
capital expenditures of $6.2 million, which represented 16%
of current year EBITDA. Substantially all of our assets
collateralize the senior credit facility.
We believe that cash generated from operations and amounts
available under our senior credit facility will be sufficient to
fund existing operations, working capital needs, capital
expenditure requirements, continued new product development and
expansion of our geographic areas of operation, and financing
obligations during 2010.
We intend to make strategic acquisitions but cannot predict the
timing, size or success of any strategic acquisition and the
related potential capital commitments. We expect to fund future
acquisitions primarily with cash flow from operations and
borrowings, including the unborrowed portion of our senior
credit facility or new debt issuances, but we may also issue
additional equity either directly or in connection with an
acquisition. There can be no assurance that acquisition funds
will be available at terms acceptable to us.
Capital Expenditures. Our budgeted capital
expenditures for 2010 (excluding acquisitions) are approximately
$5.0 million. Our budget for 2010 is subject to further
review and may be reduced or increased from $5.0 million
based on market conditions. Excluded from this budget is
approximately $2.1 million of capital expenditures expected
to be incurred in 2010 that were budgeted in prior years.
Contractual
Obligations
A summary of our outstanding contractual obligations and other
commercial commitments at December 31, 2009 is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
2011-2012
|
|
|
2013-2014
|
|
|
Thereafter
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
5,898
|
|
|
|
2,315
|
|
|
|
2,402
|
|
|
|
1,177
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
5,898
|
|
|
$
|
2,315
|
|
|
$
|
2,402
|
|
|
$
|
1,177
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, our unrecognized tax benefits
related to uncertain tax positions totaled $1.0 million. We
have excluded these unrecognized tax benefits from the above
table because we cannot reliably estimate the period of cash
settlement with respective taxing authorities.
Related
Party Transactions
We have transactions in the ordinary course of business with
certain related parties. Management believes we made these
transactions at the prevailing market rates or terms.
34
We lease certain buildings under noncancelable operating leases
from certain of our employees. Lease commitments under these
leases are approximately $0.6 million for 2010 through
2012. Rent expense to related parties was $0.4 million,
$0.4 million and $0.1 million for the years ended
December 31, 2009, 2008 and 2007.
We sell pressure control products to and perform services for
our unconsolidated affiliates in Mexico and Dubai. Our
unconsolidated affiliate in Mexico is a joint venture between us
and Servicios Y Maquinaria De Mexico, S.A. de C.V., or SYMMSA, a
subsidiary of GRUPO R, a conglomerate of companies that provides
services to the energy and industrial sectors in Mexico. The
total amount of these sales to the Mexico joint venture was
approximately $0.3 million, $0.4 million and
$2.1 million for the years ended December 31, 2009,
2008 and 2007, and the total accounts receivable due from the
Mexico joint venture was approximately $74,000 and $50,000 at
December 31, 2009 and 2008. Our unconsolidated affiliate in
Dubai, which we formed in 2009, is a joint venture between us
and Aswan International Engineering Company LLC. The total
amount of these sales to the Dubai joint venture was
approximately $0.6 million for the year ended
December 31, 2009 and the total accounts receivable due
from the Dubai joint venture was approximately $0.7 million
at December 31, 2009.
Any reportable transactions between related parties and us other
than in the ordinary course of business will be reviewed and
approved in advance by our Audit Committee.
Inflation
Inflation is a factor in the United States economy and may
increase the cost to acquire or replace property, plant and
equipment and may increase the costs of labor and supplies.
Although we believe that inflation has not had any material
effect on our operating results, our business may be affected by
inflation in the future. To the extent permitted by competition,
regulation and our existing agreements, we have and will
continue to pass through increased costs to our customers in the
form of higher fees.
Seasonality
We believe that our business is not subject to any significant
seasonal factors, and we do not anticipate significant
seasonality in the future although severe weather and natural
phenomena can temporarily affect the manufacturing and provision
of as well as demand for our products and services. Several of
our manufacturing facilities are concentrated near the Gulf of
Mexico and can suffer interruptions from hurricanes, which could
adversely impact operations.
Subsequent
Events
We evaluate subsequent events for events or transactions that
have occurred after December 31, 2009 through the date of
the filing of this
Form 10-K.
No events or transactions have occurred during this period that
we feel should be recognized or disclosed in the
December 31, 2009 financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market risk generally represents the risk that losses may occur
in the value of financial instruments as a result of movements
in interest rates, foreign currency exchange rates and commodity
prices.
We are exposed to some market risk due to the floating interest
rate under our senior credit facility and our Canadian revolving
credit facility. As of December 31, 2009, our senior credit
facility and our Canadian revolving credit facility did not have
an outstanding principal balance, and therefore, we did not have
any exposure to rising interest rates.
The foreign currency exchange rates related to our Canadian and
Indian operations and our unconsolidated affiliates in Mexico
and Dubai also expose us to some market risk. However, the
changes in foreign currency in relation to the United States
dollar impact less than 1% of our net assets.
The functional currency for our Indian operations and our Dubai
affiliate is the United States dollar. The functional currency
for our Canadian operations and our Mexico affiliate is their
respective local currency. We maintain the accounting records
for all of our international subsidiaries in local currencies.
35
We translate the results of operations for foreign subsidiaries
with functional currencies other than the United States dollar
using average exchange rates during the period. We translate
assets and liabilities of these foreign subsidiaries using the
exchange rates in effect at the balance sheet dates, and the
resulting translation adjustments are included as Accumulated
Other Comprehensive Income, a component of stockholders
equity. We recorded a $1.8 million adjustment to our equity
account for the year ended December 31, 2009 to reflect the
net impact of the change in foreign currency exchange rate
related to our international operations.
For our
non-U.S. subsidiaries
where the functional currency is the United States dollar, we
translate our inventories, property, plant and equipment and
other non-monetary assets, together with their related elements
of expense, at historical rates of exchange. We translate
monetary assets and liabilities at current exchange rates. We
translate all other revenues and expenses at average exchange
rates. We recognize translation gains and losses for these
subsidiaries in our results of operations during the period
incurred. We reflect the gain or loss related to individual
foreign currency transactions in results of operations when
incurred. We recorded a loss of approximately $152,000 during
the year ended December 31, 2009.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The financial statements and supplementary data required
hereunder are included in this report as set forth in the
Index to Consolidated Financial Statements on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed
to ensure that material information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934, or
Exchange Act, is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange
Commission, or SEC, and that any material information relating
to us is recorded, processed, summarized and reported to our
management including our Chief Executive Officer, or CEO, and
our Chief Financial Officer, or CFO, as appropriate to allow
timely decisions regarding required disclosures. In designing
and evaluating our disclosure controls and procedures, our
management recognizes that controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving desired control objectives. In reaching a
reasonable level of assurance, our management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by
Rule 13a-15(b)
of the Exchange Act, our management carried out an evaluation,
with the participation of our principal executive officer (our
CEO) and our principal financial officer (our CFO), of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
and
Rule 15d-15(e)
of the Exchange Act) as of the end of the period covered by this
report. Based on those evaluations, our CEO and CFO have
concluded that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed
by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and
that such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2009 is set forth on
page F-2
of this Annual Report and is incorporated by reference herein.
Ernst & Young LLP, the independent registered
accounting firm that audited our financial statements included
in this Annual Report, has issued an audit report on our
internal control over financial reporting as of
December 31, 2009. This report appears on
page F-3
of this Annual Report.
36
Changes
in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over
financial reporting during the quarter ended December 31,
2009 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance
|
The information required by this item is incorporated herein by
reference to the material appearing in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders which will
be filed with the SEC pursuant to Regulation 14A no later
than 120 days after the end of the fiscal year covered by
this Annual Report.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated herein by
reference to the material appearing in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders which will
be filed with the SEC pursuant to Regulation 14A no later
than 120 days after the end of the fiscal year covered by
this Annual Report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated herein by
reference to the material appearing in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders which will
be filed with the SEC pursuant to Regulation 14A no later
than 120 days after the end of the fiscal year covered by
this Annual Report.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated herein by
reference to the material appearing in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders which will
be filed with the SEC pursuant to Regulation 14A no later
than 120 days after the end of the fiscal year covered by
this Annual Report.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated herein by
reference to the material appearing in our definitive proxy
statement for the 2010 Annual Meeting of Stockholders which will
be filed with the SEC pursuant to Regulation 14A no later
than 120 days after the end of the fiscal year covered by
this Annual Report.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) The following documents are filed as part of this
report:
1. Financial Statements
See Index to Consolidated Financial Statements set
forth on
page F-1.
2. Financial Statement Schedules
None.
3. Exhibits
See the Exhibit Index appearing on
page EX-1.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
None.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15
(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the
5th
day of March, 2010.
T-3 ENERGY SERVICES, INC.
|
|
|
|
By:
|
/s/ James
M. Mitchell
|
James M. Mitchell
(Chief Financial Officer and Senior Vice President)
POWER OF
ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Steven W. Krablin and James M. Mitchell and each of
them, his true and lawful attorney-in-fact and agent, with full
powers of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments
to this Annual Report of
Form 10-K,
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission granting to said attorney-in-fact, and each
of them, full power and authority to perform any other act on
behalf of the undersigned required to be done in connection
therewith.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated on the
5th
day of March, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
By:
|
|
/s/ Steven
W. Krablin
Steven
W. Krablin
|
|
President, Chief Executive Officer and Chairman (Principal
Executive Officer)
|
|
|
|
|
|
By:
|
|
/s/ James
M. Mitchell
James
M. Mitchell
|
|
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
|
|
|
|
By:
|
|
/s/ James
M. Tidwell
James
M. Tidwell
|
|
Director
|
|
|
|
|
|
By:
|
|
/s/ Lisa
W. Rodriguez
Lisa
W. Rodriguez
|
|
Director
|
|
|
|
|
|
By:
|
|
/s/ Robert
L. Ayers
Robert
L. Ayers
|
|
Director
|
|
|
|
|
|
By:
|
|
/s/ Thomas
R. Bates, Jr.
Thomas
R. Bates, Jr.
|
|
Director
|
38
T-3
ENERGY SERVICES, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
T-3 Energy Services, Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
F-1
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting as such term is defined in the Securities Exchange Act
of 1934
Rule 13a-15(f).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and Board of Directors regarding the reliability of financial
reporting and the preparation and fair presentation of financial
statements for external purposes in accordance with
U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In making its assessment, management has utilized the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management has
concluded that, as of December 31, 2009, the Companys
internal control over financial reporting is effective to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles.
Ernst & Young LLP, the independent registered public
accounting firm that audited the Companys financial
statements included in this annual report, has issued an audit
report on the Companys internal control over financial
reporting as of December 31, 2009. This report appears on
the following page.
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
T-3 Energy Services, Inc.
We have audited T-3 Energy Services, Inc.s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
T-3 Energy Services, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, T-3 Energy Services, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of T-3 Energy Services, Inc. as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2009, and our report dated March 5, 2010
expressed an unqualified opinion thereon.
Houston, Texas
March 5, 2010
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
T-3 Energy Services, Inc.
We have audited the accompanying consolidated balance sheets of
T-3 Energy Services, Inc. as of December 31, 2009 and 2008,
and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of T-3 Energy Services, Inc. and subsidiaries
at December 31, 2009 and 2008, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, in 2007 the Company changed its method of accounting
for income taxes.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), T-3
Energy Services, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 5, 2010
expressed an unqualified opinion thereon.
Houston, Texas
March 5, 2010
F-4
T-3
ENERGY SERVICES, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,747
|
|
|
$
|
838
|
|
Accounts receivable trade, net
|
|
|
28,450
|
|
|
|
47,822
|
|
Inventories
|
|
|
53,689
|
|
|
|
58,422
|
|
Deferred income taxes
|
|
|
2,485
|
|
|
|
5,131
|
|
Prepaids and other current assets
|
|
|
7,311
|
|
|
|
4,585
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
103,682
|
|
|
|
116,798
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
49,353
|
|
|
|
46,071
|
|
Goodwill, net
|
|
|
88,779
|
|
|
|
87,929
|
|
Other intangible assets, net
|
|
|
32,091
|
|
|
|
33,477
|
|
Other assets
|
|
|
5,916
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
279,821
|
|
|
$
|
287,112
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
$
|
17,213
|
|
|
$
|
26,331
|
|
Accrued expenses and other
|
|
|
14,359
|
|
|
|
19,274
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,572
|
|
|
|
45,610
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
|
|
|
|
18,753
|
|
Other long-term liabilities
|
|
|
1,144
|
|
|
|
1,628
|
|
Deferred income taxes
|
|
|
8,009
|
|
|
|
10,026
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 25,000,000 shares
authorized, no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 50,000,000 shares
authorized, 13,038,143 and 12,547,458 shares issued and
outstanding at December 31, 2009 and 2008
|
|
|
13
|
|
|
|
13
|
|
Warrants, 10,157 issued and outstanding at December 31,
2009 and 2008
|
|
|
20
|
|
|
|
20
|
|
Additional paid-in capital
|
|
|
181,115
|
|
|
|
171,042
|
|
Retained earnings
|
|
|
56,201
|
|
|
|
40,036
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,747
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
239,096
|
|
|
|
211,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
279,821
|
|
|
$
|
287,112
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
T-3
ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
186,075
|
|
|
$
|
241,328
|
|
|
$
|
176,579
|
|
Services
|
|
|
32,386
|
|
|
|
44,001
|
|
|
|
40,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,461
|
|
|
|
285,329
|
|
|
|
217,434
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
119,896
|
|
|
|
148,667
|
|
|
|
112,566
|
|
Services
|
|
|
18,986
|
|
|
|
25,784
|
|
|
|
24,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,882
|
|
|
|
174,451
|
|
|
|
137,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79,579
|
|
|
|
110,878
|
|
|
|
79,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
|
|
|
|
23,500
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
58,239
|
|
|
|
58,318
|
|
|
|
39,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,239
|
|
|
|
81,818
|
|
|
|
39,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
1,157
|
|
|
|
115
|
|
|
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
22,497
|
|
|
|
29,175
|
|
|
|
41,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(830
|
)
|
|
|
(2,357
|
)
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
24
|
|
|
|
148
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
1,612
|
|
|
|
453
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
23,303
|
|
|
|
27,419
|
|
|
|
41,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
7,138
|
|
|
|
14,374
|
|
|
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
16,165
|
|
|
|
13,045
|
|
|
|
26,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,165
|
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.27
|
|
|
$
|
1.05
|
|
|
$
|
2.26
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.27
|
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.26
|
|
|
$
|
1.02
|
|
|
$
|
2.19
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.26
|
|
|
$
|
1.02
|
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,711
|
|
|
|
12,457
|
|
|
|
11,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,806
|
|
|
|
12,812
|
|
|
|
12,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
T-3
ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Year Ended December 31, 2009, 2008 and
2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Warrants
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
Balance, December 31, 2006
|
|
|
10,762
|
|
|
$
|
11
|
|
|
|
328
|
|
|
$
|
644
|
|
|
$
|
126,054
|
|
|
$
|
2,672
|
|
|
$
|
779
|
|
|
$
|
130,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,250
|
|
|
|
|
|
|
|
25,250
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,346
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,250
|
|
|
|
2,346
|
|
|
|
27,596
|
|
Issuance of stock from Public Offering
|
|
|
1,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
22,156
|
|
|
|
|
|
|
|
|
|
|
|
22,157
|
|
Issuance of restricted stock
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock from exercise of stock options
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
Issuance of stock from exercise of warrants
|
|
|
315
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
(618
|
)
|
|
|
4,646
|
|
|
|
|
|
|
|
|
|
|
|
4,028
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
2,019
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,223
|
|
|
|
|
|
|
|
|
|
|
|
3,223
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(883
|
)
|
|
|
|
|
|
|
(883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
12,320
|
|
|
$
|
12
|
|
|
|
13
|
|
|
$
|
26
|
|
|
$
|
160,446
|
|
|
$
|
27,039
|
|
|
$
|
3,125
|
|
|
$
|
190,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,997
|
|
|
|
|
|
|
|
12,997
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,141
|
)
|
|
|
(3,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,997
|
|
|
|
(3,141
|
)
|
|
|
9,856
|
|
Issuance of restricted stock
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock from exercise of stock options
|
|
|
205
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
3,211
|
|
Issuance of stock from exercise of warrants
|
|
|
3
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Tax benefit from exercise of stock options and vesting of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
12,547
|
|
|
$
|
13
|
|
|
|
10
|
|
|
$
|
20
|
|
|
$
|
171,042
|
|
|
$
|
40,036
|
|
|
$
|
(16
|
)
|
|
$
|
211,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,165
|
|
|
|
|
|
|
|
16,165
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,763
|
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,165
|
|
|
|
1,763
|
|
|
|
17,928
|
|
Issuance of restricted stock, net of forfeitures
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock from exercise of stock options
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,861
|
|
|
|
|
|
|
|
|
|
|
|
3,861
|
|
Deferred tax adjustment related principally to the expiration of
unexercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,106
|
)
|
Tax benefit from exercise of stock options and vesting of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
558
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,760
|
|
|
|
|
|
|
|
|
|
|
|
6,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
13,038
|
|
|
$
|
13
|
|
|
|
10
|
|
|
$
|
20
|
|
|
$
|
181,115
|
|
|
$
|
56,201
|
|
|
$
|
1,747
|
|
|
$
|
239,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
T-3
ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,165
|
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
48
|
|
|
|
1,257
|
|
Bad debt expense
|
|
|
488
|
|
|
|
384
|
|
|
|
151
|
|
Depreciation and amortization
|
|
|
8,932
|
|
|
|
8,349
|
|
|
|
4,971
|
|
Amortization and/or write-off of deferred loan costs
|
|
|
228
|
|
|
|
212
|
|
|
|
277
|
|
Loss (gain) on sale of assets
|
|
|
65
|
|
|
|
(26
|
)
|
|
|
12
|
|
Deferred taxes
|
|
|
(585
|
)
|
|
|
(2,900
|
)
|
|
|
(732
|
)
|
Employee stock-based compensation expense
|
|
|
6,753
|
|
|
|
5,529
|
|
|
|
3,223
|
|
Excess tax benefits from stock-based compensation
|
|
|
(558
|
)
|
|
|
(1,820
|
)
|
|
|
(2,019
|
)
|
Equity in earnings of unconsolidated affiliate
|
|
|
(1,157
|
)
|
|
|
(115
|
)
|
|
|
(638
|
)
|
Write-off of inventory and property and equipment, net
|
|
|
1,119
|
|
|
|
416
|
|
|
|
177
|
|
Impairment of goodwill
|
|
|
|
|
|
|
23,500
|
|
|
|
|
|
Changes in assets and liabilities, net of effect of acquisitions
and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
21,128
|
|
|
|
(4,247
|
)
|
|
|
(6,026
|
)
|
Inventories
|
|
|
6,109
|
|
|
|
(12,174
|
)
|
|
|
(9,092
|
)
|
Prepaids and other current assets
|
|
|
(2,695
|
)
|
|
|
896
|
|
|
|
229
|
|
Other assets
|
|
|
(103
|
)
|
|
|
(414
|
)
|
|
|
(136
|
)
|
Accounts payable trade
|
|
|
(10,933
|
)
|
|
|
5,714
|
|
|
|
497
|
|
Accrued expenses and other
|
|
|
(5,098
|
)
|
|
|
6,789
|
|
|
|
(3,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
39,858
|
|
|
|
43,138
|
|
|
|
13,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(6,230
|
)
|
|
|
(11,300
|
)
|
|
|
(7,045
|
)
|
Proceeds from sales of property and equipment
|
|
|
195
|
|
|
|
94
|
|
|
|
101
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(7,474
|
)
|
|
|
(2,732
|
)
|
|
|
(90,893
|
)
|
Equity investments in unconsolidated affiliates
|
|
|
(2,039
|
)
|
|
|
|
|
|
|
(467
|
)
|
Collections on notes receivable
|
|
|
31
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(15,517
|
)
|
|
|
(13,923
|
)
|
|
|
(98,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under swing line credit facility
|
|
|
(750
|
)
|
|
|
(2,665
|
)
|
|
|
3,330
|
|
Borrowings under revolving credit facility
|
|
|
19,000
|
|
|
|
5,000
|
|
|
|
58,000
|
|
Repayments under revolving credit facility
|
|
|
(37,000
|
)
|
|
|
(45,000
|
)
|
|
|
|
|
Payments on long-term debt
|
|
|
(113
|
)
|
|
|
(97
|
)
|
|
|
(68
|
)
|
Debt financing costs
|
|
|
|
|
|
|
(78
|
)
|
|
|
(1,062
|
)
|
Proceeds from exercise of stock options
|
|
|
3,861
|
|
|
|
3,211
|
|
|
|
2,348
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
22,157
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
38
|
|
|
|
4,028
|
|
Excess tax benefits from stock-based compensation
|
|
|
558
|
|
|
|
1,820
|
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(14,444
|
)
|
|
|
(37,771
|
)
|
|
|
90,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,012
|
|
|
|
(34
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
|
|
|
|
(94
|
)
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
(94
|
)
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
10,909
|
|
|
|
(8,684
|
)
|
|
|
6,129
|
|
Cash and cash equivalents, beginning of year
|
|
|
838
|
|
|
|
9,522
|
|
|
|
3,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
11,747
|
|
|
$
|
838
|
|
|
$
|
9,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of T-3 Energy Services, Inc., and its wholly owned
subsidiaries (the Company). The Company accounts for
its 50% investments in its unconsolidated Mexico and Dubai
affiliates under the equity method of accounting. The Company
has eliminated all significant intercompany accounts and
transactions in consolidation.
Reclassifications
The Company has made certain reclassifications to conform prior
year financial information to the current period presentation.
Cash and
Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. As of December 31, 2009 and 2008, there were
no cash equivalents.
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash,
accounts receivable, accounts payable, accrued expenses and
long-term debt. The carrying amounts of cash, accounts
receivable, accounts payable and accrued expenses approximate
their respective fair values because of the short maturities of
those instruments. The Companys long-term debt consists of
its revolving credit facility. The December 31, 2008
carrying value of the revolving credit facility approximates
fair value because of its variable short-term interest rates.
Accounts
Receivable and Allowance for Uncollectible Accounts
The Company states accounts receivable at the historical
carrying amount, net of allowances for uncollectible accounts.
The Company establishes an allowance for uncollectible accounts
based on specific customer collection issues the Company has
identified. The Company writes off uncollectible accounts
receivable upon reaching a settlement for an amount less than
the outstanding historical balance or when the Company has
determined the balance will not be collected. The below table
presents the Companys allowance for uncollectible accounts
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
351
|
|
|
$
|
285
|
|
|
$
|
294
|
|
Charged to expense
|
|
|
488
|
|
|
|
384
|
|
|
|
182
|
|
Write-offs
|
|
|
(709
|
)
|
|
|
(318
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
130
|
|
|
$
|
351
|
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major
Customers and Credit Risk
Substantially all of the Companys customers are engaged in
the energy industry. This concentration of customers may impact
the Companys overall exposure to credit risk, either
positively or negatively, in that customers may be similarly
affected by changes in economic and industry conditions. The
Company performs credit evaluations of its customers and does
not generally require collateral in support of its domestic
trade receivables. The Company may require collateral to support
its international customer receivables. However, most of the
Companys international sales are to large international or
national companies for which the
F-9
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company may not require collateral. In 2009, 2008 and 2007,
there was no individual customer who accounted for 10% or
greater of consolidated revenues.
Inventories
The Company states inventories at the lower of cost or market.
Cost includes, where applicable, manufacturing labor and
overhead. The Company used the
first-in,
first-out method to determine the cost of substantially all of
the inventories at December 31, 2009 and 2008. Inventories
consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
5,304
|
|
|
$
|
8,063
|
|
Work in process
|
|
|
11,891
|
|
|
|
14,680
|
|
Finished goods and component parts
|
|
|
36,494
|
|
|
|
35,679
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,689
|
|
|
$
|
58,422
|
|
|
|
|
|
|
|
|
|
|
The Company regularly reviews inventory quantities on hand and
records a provision for excess and slow moving inventory. The
Company bases this analysis primarily on the length of time the
item has remained in inventory and managements
consideration of current and expected market conditions. During
2009, 2008 and 2007, the Company recorded $2,459,000, $1,950,000
and $1,026,000 in charges to earnings to write down the recorded
cost of inventory to its estimated recoverable value.
Prepaids
and Other Current Assets
Prepaids and other current assets consist of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Vendor deposits
|
|
$
|
619
|
|
|
$
|
1,198
|
|
Prepaid insurance
|
|
|
2,314
|
|
|
|
2,127
|
|
Federal tax deposits
|
|
|
1,302
|
|
|
|
|
|
State tax deposits
|
|
|
1,275
|
|
|
|
|
|
Other current assets
|
|
|
1,801
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,311
|
|
|
$
|
4,585
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
The Company states property and equipment at cost less
accumulated depreciation. For property and equipment acquired as
a result of business combinations (see Note 2), cost is
determined based upon fair values as of the acquisition dates.
The Company computes depreciation using the straight-line method
over estimated useful lives. The Company capitalizes
expenditures for replacements and major improvements and
expenses as incurred expenditures for maintenance, repairs and
minor replacements. The Company amortizes leasehold improvements
over the lesser of the estimated useful life or term of the
lease.
Long-Lived
Assets
Long-lived assets include property, plant and equipment and
definite-lived intangibles. The Company makes judgments and
estimates in conjunction with the carrying value of these
assets, including amounts to be capitalized, depreciation and
amortization methods, useful lives and the valuation of acquired
definite-lived intangibles. The Company tests for the impairment
of long-lived assets upon the occurrence of a triggering event.
For long-lived assets to be held and used, the Company bases its
evaluation on impairment indicators such as the nature of the
assets, the future economic benefit of the assets, any
historical or future profitability measurements and other
F-10
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
external market conditions or factors that may be present. If
these impairment indicators are present or other factors exist
that indicate the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has
occurred through the use of an undiscounted cash flows analysis
of the asset at the lowest level for which identifiable cash
flows exist. The undiscounted cash flow analysis consists of
estimating the future cash flows that are directly associated
with and expected to arise from the use and eventual disposition
of the asset over its remaining useful life. These cash flows
are inherently subjective and require significant estimates
based upon historical experience and future expectations
reflected in the Companys budgets and internal
projections. If the undiscounted cash flows do not exceed the
carrying value of the
long-lived
asset, impairment has occurred, and the Company recognizes a
loss for the difference between the carrying amount and the
estimated fair value of the asset. The Company measures the fair
value of the asset using quoted market prices or, in the absence
of quoted market prices, upon an estimate of discounted cash
flows. The Company generally discounts cash flows at an interest
rate commensurate with a weighted average cost of capital for a
similar asset. The Company has assessed the current market
conditions and has concluded, at the present time, that a
triggering event has not occurred that requires an impairment
analysis of long-lived assets. The Company will continue to
monitor for events or conditions that could change this
assessment. For the years ended December 31, 2009, 2008 and
2007, no significant impairment charges were recorded for assets
of continuing operations.
Goodwill
The Company tests for the impairment of goodwill on at least an
annual basis. Beginning in 2009, the Company performs its annual
test of impairment of goodwill as of October 1. The
Companys goodwill impairment test involves a comparison of
the fair value of each of the Companys reporting units
with its carrying amount. The fair value is determined using
discounted cash flows and other market-related valuation models,
including earnings multiples of comparable publicly traded
companies and recent acquisition transactions within the
Companys industry. Certain estimates and judgments,
including future earnings and cash flow levels, future interest
rates and future stock market valuation levels, are required in
the application of the fair value models. If the fair value of
the reporting unit is less than the carrying value, the goodwill
for the reporting unit is further evaluated for impairment. The
amount of the impairment, if any, is then determined based on an
allocation of the reporting unit fair values. For the years
ended December 31, 2009 and 2007, no impairment occurred
for goodwill of continuing operations. For the year ended
December 31, 2008, the Company recognized a goodwill
impairment of $23.5 million related to its pressure and
flow control reporting unit. See footnote 4 for further
discussion of the Companys 2008 goodwill impairment.
Should the Companys estimate of the fair value of any of
its reporting units decline in future periods, due to
deterioration in global economic conditions, changes in the
Companys outlook for future profits and cash flows,
reductions in the market price of the Companys stock,
increased costs of capital, reductions in valuations of other
public companies within the Companys industry or
valuations observed in acquisition transactions within the
Companys industry, future impairment of goodwill could be
required.
Other
Intangible Assets
Other intangible assets include non-compete agreements, customer
lists, patents and technology and other similar items. The
Company assigns useful lives to its intangible assets based on
the periods over which it expects the assets to contribute
directly or indirectly to the future cash flows of the Company.
The Company makes judgments and estimates in conjunction with
determining the fair value and useful lives of these intangible
assets. The Companys estimates require assumptions about
demand for the Companys products and services, future
market conditions and technological developments. The estimates
are dependent upon assumptions regarding oil and gas prices, the
general outlook for economic growth, available financing for the
Companys customers, political stability in major oil and
gas producing areas, and the potential obsolescence of various
types of equipment the Company sells, among other factors. If
the Companys assumptions regarding these factors change,
the Company may be required to recognize an asset impairment or
modify the amortization period with respect to the intangible
assets impacted by the assumption changes.
F-11
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Loan Costs
The Company incurred deferred loan costs in connection with the
arrangement of the Companys senior credit facility (see
Note 7). Net deferred loan costs of $0.7 million and
$0.9 million are included in Other Assets on the
December 31, 2009 and 2008 balance sheets. The Company
amortizes deferred loan costs over the term of the senior credit
facility, which is five years. Accumulated amortization was
$0.5 million and $0.3 million at December 31,
2009 and 2008. Amortization of deferred loan costs for the years
ended December 31, 2009, 2008 and 2007, which the Company
classifies as interest expense, was $0.2 million for each
of these years. Accumulated amortization and interest expense
also included the write-off of deferred loan costs of
$0.05 million for the year ended December 31, 2007.
This write-off of deferred loan costs related to the Company
amending and restating its senior credit facility in October
2007.
Self-Insurance
The Company is self-insured up to certain levels for its group
medical coverage. The Company insures for amounts in excess of
the self-insured levels, up to a limit. The Company estimates
liabilities associated with these risks by considering
historical claims experience. Although management believes
adequate reserves have been provided for expected liabilities
arising from the Companys self-insured obligations, there
is a risk that the Companys insurance may not be
sufficient to cover any particular loss or that its insurance
may not cover all losses. For example, while the Company
maintains product liability insurance, this type of insurance is
limited in coverage, and it is possible an adverse claim could
arise in excess of the Companys coverage. Finally,
insurance rates have in the past been subject to wide
fluctuation. Changes in coverage, insurance markets and the
industry may result in increases in the Companys cost and
higher deductibles and retentions.
Income
Taxes
The Company follows the liability method of accounting for
income taxes. Under this method, the Company records deferred
income taxes based upon the differences between the financial
reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect upon recovery or settlement of the underlying assets or
liabilities.
The Company records a valuation allowance in each reporting
period when management believes that it is more likely than not
that it will not realize any deferred tax asset created.
Management will continue to evaluate the appropriateness of the
allowance in the future based upon the operating results of the
Company, among other factors. The Company does not record
deferred tax assets for the excess of the tax basis over the
book basis for its equity investments in corporate joint
ventures.
In June 2006, new accounting principles were issued which
clarified the accounting for uncertainty in income taxes
recognized. The Company adopted these principles on
January 1, 2007, as required. The Company recorded the
cumulative effect of adopting these principles in retained
earnings and other accounts as applicable.
In accounting for income taxes, the Company estimates a
liability for future income taxes. The calculation of the
Companys tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. The
Company recognizes liabilities for anticipated tax audit issues
in the U.S. and other tax jurisdictions based on its
estimate of whether, and the extent to which, additional taxes
will be due. If the Company ultimately determines that payment
of these amounts is unnecessary, the Company reverses the
liability and recognizes a tax benefit during the period in
which it determines that the liability is no longer necessary.
The Company records an additional charge in its provision for
taxes in the period in which it determines that the recorded tax
liability is less than it expects the ultimate assessment
to be.
F-12
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contingencies
The Company records an estimated loss from a loss contingency
when information available prior to the issuance of its
financial statements indicates that it is probable that an asset
has been impaired or a liability has been incurred at the date
of the financial statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as
environmental, legal and income tax matters requires the Company
to use its judgment. While the Company believes that its
accruals for these matters are adequate, the actual loss from a
loss contingency could be significantly different than the
estimated loss, resulting in an adverse effect on the results of
operations and financial position of the Company.
Revenue
Recognition
The Company sells its products and services based upon purchase
orders or contracts with the customer that include fixed or
determinable prices and that do not include right of return or
other similar provisions or other significant post delivery
obligations. The Company records revenue when all of the
following criteria have been met: evidence of an arrangement
exists; delivery to and acceptance by the customer has occurred;
the price to the customer is fixed or determinable; and
collectability is reasonably assured. Upon the performance of a
service, the Company recognizes revenue in accordance with the
related contract provisions. The Company defers and recognizes
customer advances or deposits as revenue when the Company has
completed all of its performance obligations related to the
sale. The amounts billed for shipping and handling costs are
included in revenue and the related costs are included in costs
of sales.
Foreign
Currency Translation
The functional currency for the Companys Indian operations
and its Dubai affiliate is the United States dollar. The
functional currency for the Companys Canadian operations
and its Mexico affiliate is their respective local currency. The
Company maintains the accounting records for all of its
international subsidiaries in local currencies.
The Company translates the results of operations for foreign
subsidiaries with functional currencies other than the United
States dollar using average exchange rates during the period.
The Company translates assets and liabilities of these foreign
subsidiaries using the exchange rates in effect at the balance
sheet dates, and the resulting translation adjustments are
included as Accumulated Other Comprehensive Income, a component
of stockholders equity.
For the Companys
non-U.S. subsidiaries
where the functional currency is the United States dollar, the
Company translates inventories, property, plant and equipment
and other non-monetary assets and liabilities, together with
their related elements of revenue and expense, at historical
rates of exchange. The Company translates monetary assets and
liabilities at current exchange rates. The Company translates
all other revenues and expenses at average exchange rates. The
Company recognizes translation gains and losses for these
subsidiaries in the Companys results of operations during
the period incurred. The Company reflects the gain or loss
related to individual foreign currency transactions in results
of operations when incurred.
Stock-Based
Compensation
The Company incurs stock-based compensation expense related to
its share-based payment awards, including shares issued under
employee stock purchase plans, stock options, restricted stock
and stock appreciation rights. The Company uses the
Black-Scholes option pricing model to estimate the fair value of
stock options granted to employees on the date of grant. The
Company uses the grant date closing price of the Companys
stock to determine the fair value of restricted stock awards.
The Company amortizes to selling, general and administrative
expense, on a straight-line basis over the vesting period, the
fair value of options and restricted stock awards. The Company
has recorded an estimate for forfeitures of awards of stock
options and restricted stock. The Company adjusts this estimate
if actual forfeitures differ from the estimate.
F-13
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
Flows
Supplemental disclosures of cash flow information is presented
in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
641
|
|
|
$
|
2,408
|
|
|
$
|
527
|
|
Income taxes
|
|
|
12,254
|
|
|
|
14,277
|
|
|
|
11,373
|
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Management bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those
estimates.
New
Accounting Pronouncements
In September 2006, new accounting principles were issued that
define fair value, establish a framework for measuring fair
value under generally accepted accounting principles, and expand
disclosures about fair value measurements. The Company adopted
these principles on January 1, 2008. The adoption of the
new principles did not have any impact on the Companys
consolidated financial position, results of operations and cash
flows. On January 1, 2009, these new principles became
effective on a prospective basis for non-financial assets and
liabilities for which companies do not measure fair value on a
recurring basis. The application of the new principles to the
Companys non-financial assets and liabilities will
primarily relate to assets acquired and liabilities assumed in
business combinations and asset impairments, including goodwill
and long-lived assets occurring subsequent to the effective
date. The initial application of the new principles did not have
a material impact on the Companys consolidated financial
position, results of operations and cash flows, nor does the
Company expect the impact in future periods to be material.
In December 2007, new accounting principles were issued that
change the requirements for an acquirers recognition and
measurement of the assets acquired and the liabilities assumed
in a business combination. These new principles became effective
for annual periods beginning after December 15, 2008, with
prospective application for all business combinations entered
into after the date of adoption. The Company adopted these new
principles on January 1, 2009. Due to the adoption of these
new principles during the first quarter of 2009, approximately
$125,000 of transaction costs were expensed that, prior to the
issuance of these new principles, would have been capitalized.
The effect of this adoption for periods beyond the first quarter
of 2009 will be dependent upon acquisitions at that time and
therefore is not currently estimable. Management does not expect
the provisions of these new principles that modify the income
statement recognition associated with changes to deferred tax
valuation allowances and tax uncertainties established in
connection with prior business combinations to have a material
impact on the Companys consolidated financial position,
results of operations and cash flows.
In May 2009, new accounting principles were issued that
establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before
financial statements are issued or available to be issued. These
new principles became effective for interim and annual periods
ending after June 15, 2009 and set forth the period after
the balance sheet date during which management of the Company
should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
the circumstances under which the Company should recognize
events or transactions occurring after the balance sheet date in
its financial statements and the disclosures that the Company
should make about events or transactions that occurred
F-14
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
after the balance sheet date. The Company adopted these new
principles on June 30, 2009. The adoption of these new
principles did not have any impact on the Companys
consolidated financial position, results of operations and cash
flows.
|
|
2.
|
BUSINESS
COMBINATIONS AND DISPOSITIONS:
|
Business
Combinations
On March 4, 2009, the Company purchased the assets of the
surface wellhead business of Azura Energy Systems Surface, Inc.
(Azura) for $8.1 million in cash (subject to a
customary working capital adjustment) plus the assumption of
accounts payable and other liabilities. During the third quarter
of 2009, the Company finalized the working capital adjustment
and subsequently adjusted the purchase amount to
$7.4 million. This business, which has been consolidated
with the Companys current wellhead business, provides
additional geographic locations in key markets such as the
Marcellus and Barnett Shales. The Company funded the purchase of
these assets from its working capital and the use of its senior
credit facility.
On May 29, 2008, the Company exercised its option to
purchase certain fixed assets and inventory of HP&T
Products, Inc. in India (HP&T India) at their
estimated fair value of $0.4 million. During the first
quarter of 2009, the Company made a further payment of
$0.1 million based on the final fair market valuation of
the fixed assets and inventory. The Company funded the purchase
of these assets from the Companys working capital and the
use of its senior credit facility.
On January 24, 2008, the Company completed the purchase of
Pinnacle Wellhead, Inc. (Pinnacle) for approximately
$2.3 million, net of cash acquired. Pinnacle is located in
Oklahoma City, Oklahoma and has been in business for over twenty
years as a service provider that assembles, tests, installs and
performs repairs on wellhead production products, primarily in
Oklahoma. The Company funded this acquisition from the
Companys working capital and the use of its senior credit
facility.
On October 30, 2007, the Company completed the purchases of
all of the outstanding stock of Energy Equipment Corporation
(EEC), and HP&T Products, Inc.
(HP&T), for approximately $72.3 million
and $25.9 million. EEC manufactures valves, chokes, control
panels, and their associated parts for
sub-sea
applications, extreme temperatures, and highly corrosive
environments. HP&T designs gate valves, manifolds, chokes
and other products. The acquisitions of EEC and HP&T
demonstrate the Companys commitment to developing
engineered products for both surface and subsea applications.
These acquisitions evolve from the Companys growth
strategy focused on improving its geographic presence and
enhancing its product mix through complementary patented product
additions. The Company funded these acquisitions from the
Companys working capital and the use of its senior credit
facility.
The acquisitions discussed above were accounted for using the
purchase method of accounting. Results of operations for the
above acquisitions are included in the accompanying consolidated
financial statements since the dates of acquisition. The Company
allocated the purchase prices to the net assets acquired based
upon their estimated fair values at the dates of acquisition.
The Company recorded as goodwill the excess of the purchase
price over the net assets acquired. The Company considers the
balances included in the consolidated balance sheet at
December 31, 2009 related to the EEC, HP&T, Pinnacle
and HP&T India acquisitions to be final. The Company
considers the balances included in the consolidated balance
sheet at December 31, 2009 related to the Azura acquisition
to be based on preliminary information and subject to change
when final asset valuations are determined and the potential for
liabilities has been evaluated. The Azura acquisition is not
material to the Companys consolidated financial
statements, and therefore a preliminary purchase price
allocation is not presented.
F-15
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following schedule summarizes investing activities related
to the Companys acquisitions presented in the consolidated
statements of cash flows for the years ended December 31,
2009, 2008 and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fair value of tangible and intangible assets, net of cash
acquired
|
|
$
|
8,865
|
|
|
$
|
2,801
|
|
|
$
|
68,811
|
|
Goodwill recorded
|
|
|
|
|
|
|
758
|
|
|
|
40,756
|
|
Total liabilities assumed
|
|
|
(1,391
|
)
|
|
|
(827
|
)
|
|
|
(18,674
|
)
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
$
|
7,474
|
|
|
$
|
2,732
|
|
|
$
|
90,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquisitions of HP&T, Pinnacle, HP&T India and
Azura were not material to the Companys consolidated
financial statements, and therefore the Company does not present
pro forma information. The following presents the consolidated
financial information for the Company on a pro forma basis
assuming the acquisition of EEC had occurred as of
January 1, 2007. The Company has adjusted historical
financial information to give effect to pro forma items that are
directly attributable to the acquisition and expected to have a
continuing impact on the consolidated results. These items
include adjustments to record the incremental amortization and
depreciation expense related to the increase in fair value of
the acquired assets, interest expense related to the borrowing
under the Companys senior credit facility and to
reclassify certain items to conform to the Companys
financial reporting presentation.
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2007
|
|
|
(In thousands, except
|
|
|
per share amounts)
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
271,921
|
|
Income from continuing operations
|
|
$
|
27,137
|
|
Basic Earnings per share from continuing operations
|
|
$
|
2.31
|
|
Diluted Earnings per share from continuing operations
|
|
$
|
2.24
|
|
Included in the pro forma results above for the year ended
December 31, 2007 are retention bonuses paid to EEC
employees by the former owners, totaling $3.7 million, net
of tax, or $0.31 per diluted share, amortization expense for
intangibles created as part of the purchase of EEC, totaling
$0.8 million, net of tax, or $0.07 per diluted share and
interest expense of $1.7 million, net of tax, or $0.14 per
diluted share.
Dispositions
During 2004 and 2005, the Company sold substantially all of the
assets of its products and distribution segments. The assets of
the products and distribution segments sold constituted
businesses and thus the Company reported their results of
operations as discontinued operations. The Company now operates
under the one remaining historical reporting segment, pressure
control. Accordingly, all historical segment results reflect
this operating structure.
F-16
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operating results of discontinued operations are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
46
|
|
|
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
(46
|
)
|
|
|
(1,928
|
)
|
Interest expense
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income taxes
|
|
|
|
|
|
|
(67
|
)
|
|
|
(1,930
|
)
|
Benefit for income taxes
|
|
|
|
|
|
|
(19
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
|
|
|
$
|
(48
|
)
|
|
$
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no income or loss from discontinued operations
in 2009. The loss incurred in 2008 is primarily attributable to
the results of a state sales tax audit against one of the
Companys discontinued businesses. The loss incurred in
2007 is primarily attributable to a jury verdict during 2007
against one of the Companys discontinued businesses.
|
|
3.
|
PROPERTY
AND EQUIPMENT:
|
A summary of property and equipment and the estimated useful
lives is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
|
|
$
|
951
|
|
|
$
|
901
|
|
Buildings and improvements
|
|
3-40 years
|
|
|
14,454
|
|
|
|
13,465
|
|
Machinery and equipment
|
|
3-15 years
|
|
|
44,928
|
|
|
|
37,882
|
|
Vehicles
|
|
5-10 years
|
|
|
1,092
|
|
|
|
948
|
|
Furniture and fixtures
|
|
3-10 years
|
|
|
1,330
|
|
|
|
1,249
|
|
Computer equipment
|
|
3-7 years
|
|
|
6,140
|
|
|
|
5,200
|
|
Construction in progress
|
|
|
|
|
3,959
|
|
|
|
4,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,854
|
|
|
|
64,216
|
|
Less Accumulated depreciation
|
|
|
|
|
(23,501
|
)
|
|
|
(18,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
49,353
|
|
|
$
|
46,071
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2009,
2008 and 2007, was $6,258,000, $5,130,000 and $3,892,000.
Included in computer equipment costs are capitalized computer
software development costs of $1,837,000 and $1,468,000 at
December 31, 2009 and 2008. Depreciation expense related to
capitalized computer software development costs was $300,000,
$240,000 and $182,000 for the years ended December 31,
2009, 2008 and 2007 and is included in depreciation expense
above.
Goodwill represents the excess of the cost over the net tangible
and identifiable intangible assets of acquired businesses. The
Company records identifiable intangible assets acquired in
business combinations based upon fair value at the date of
acquisition.
F-17
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company tests for the impairment of goodwill on at least an
annual basis. Starting in 2009, the Companys performs its
annual test of impairment of goodwill as of October 1. The
test for goodwill impairment is a two-step approach. The first
step is to compare the estimated fair value of any reporting
units within the Company that have recorded goodwill with the
recorded net book value (including the goodwill) of the
reporting unit. If the estimated fair value of the reporting
unit is higher than the recorded net book value, no impairment
is deemed to exist and no further testing is required. If,
however, the estimated fair value of the reporting unit is below
the recorded net book value, then the Company must perform a
second step to determine the goodwill impairment required, if
any. In this second step, the Company uses the estimated fair
value from the first step as the purchase price in a
hypothetical acquisition of the reporting unit. The Company
follows business combination accounting rules to determine a
hypothetical purchase price allocation to the reporting
units assets and liabilities. The Company then compares
the residual amount of goodwill that results from this
hypothetical purchase price allocation to the recorded amount of
goodwill for the reporting unit, and the recorded amount is
written down to the hypothetical amount, if lower.
Generally accepted accounting principles in the United States
define a reporting unit as an operating segment or one level
below an operating segment (referred to as a component), and
states that two or more components of an operating segment shall
be aggregated and deemed a single reporting unit if the
components have similar economic characteristics. Management
evaluates the operating results of its pressure control
reporting segment based upon its three product lines: pressure
and flow control, wellhead and pipeline. The Companys
operating segments of pressure and flow control, wellhead and
pipeline have been aggregated into one reporting segment as the
operating segments have the following commonalities: economic
characteristics, nature of the products and services, type or
class of customer, and methods used to distribute their products
and provide services. The Company has determined that its three
operating segments, for purposes of the goodwill impairment
test, constitute its reporting units.
The Company estimates the fair value of its reporting units
using discounted cash flows and earnings multiples of comparable
publicly traded companies and recent acquisition transactions
within the Companys industry. The key discounted cash flow
assumptions used to determine the fair value of the
Companys reporting units as of October 1, 2009
included: a) cash flow periods of 5 years,
b) terminal values calculated at 6.5 times the terminal
year EBITDA and c) a discount rate of 15.83%.
Because quoted market prices for the Companys individual
operating segments was not available, management must apply
judgment in determining the estimated fair value of its
reporting units for purposes of performing the annual goodwill
impairment test. Management uses all available information to
make these fair value determinations, including the discounting
of reporting units projected cash flow and publicly traded
company multiples. A key component of these fair value
determinations is an assessment of the fair value using
discounted cash flows and other market-related valuation models
in relation to the Companys market capitalization.
The accounting principles regarding goodwill acknowledge that
the observed market prices of individual trades of a
Companys stock (and thus its computed market
capitalization) may not be representative of the fair value of
the Company as a whole. Substantial value may arise from the
ability to take advantage of synergies and other benefits that
flow from control over another entity. Consequently, measuring
the fair value of a collection of assets and liabilities that
operate together in a controlled entity is different from
measuring the fair value of that entitys individual common
stock. In most industries, including the Companys, an
acquiring entity typically is willing to pay more for equity
securities that give it a controlling interest than an investor
would pay for a number of equity securities representing less
than a controlling interest. Therefore, the Company compares the
above fair value calculations using discounted cash flows and
other market-related valuation models to market capitalization
plus a control premium.
For the year ended December 31, 2009, the Company has
determined no impairment of its pressure and flow control,
wellhead and pipeline reporting units exist; however, should the
Companys estimate of the fair value of any of its
reporting units decline in future periods, due to deterioration
in global economic conditions, changes in the Companys
outlook for future profits and cash flows, reductions in the
market price of the Companys stock, increased costs of
capital, reductions in valuations of other public companies
within the Companys industry or
F-18
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
valuations observed in acquisition transactions within the
Companys industry, an impairment of goodwill could be
required. At October 1, 2009, goodwill by reporting unit
was $71.4 million, $13.6 million and $3.6 million
for the pressure and flow control, wellhead and pipeline
reporting units. At October 1, 2009, the estimated fair
value of the pressure and flow control, wellhead and pipeline
reporting units exceeded the recorded net book value of these
reporting units by 44%, 61% and 50%. The Company will continue
to test on a consistent measurement date unless events occur or
circumstances change between annual impairment tests that would
more likely than not reduce fair value of a reporting unit below
its carrying value.
At December 31, 2008, the Company completed the annual
impairment test. The Companys calculations indicated the
fair values of the wellhead and pipeline reporting units
exceeded their net book values and, accordingly, goodwill was
not considered to be impaired. However, due to a number of
factors, including the then-existing current global economic
environment, the Companys current estimate of its
customers drilling activities, increased costs of capital
and the decrease in the Companys market capitalization,
the Companys calculations for the pressure and flow
control reporting unit indicated its net book value exceeded its
fair value and, accordingly, goodwill was considered to be
impaired. The Company used the estimated fair value of the
pressure and flow control reporting unit from the first step as
the purchase price in a hypothetical acquisition of the
reporting unit. The significant hypothetical purchase price
allocation adjustments made to the assets and liabilities of the
pressure and flow control reporting unit for this calculation
were in the following areas: (1) adjusting the carrying
value of property, plant and equipment to their estimated
aggregate fair values; (2) adjusting the carrying value of
other intangible assets to their estimated aggregate fair
values; and (3) recalculating deferred income taxes, after
considering the likely tax basis a hypothetical buyer would have
in the assets and liabilities. Based on this analysis, it was
determined that $23.5 million of goodwill impairment
existed for the pressure and flow control group. The Company
recorded this impairment in operating expenses in the
consolidated statement of operations for the year ended
December 31, 2008. This non-cash charge did not impact the
Companys liquidity position, debt covenants or cash flows.
The changes in the carrying amount of goodwill for the years
ended December 31, 2009 and 2008 are as follows (in
thousands):
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
112,249
|
|
Impairment of goodwill
|
|
|
(23,500
|
)
|
Acquisition of Pinnacle
|
|
|
758
|
|
Adjustments
|
|
|
(1,578
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
87,929
|
|
Adjustments
|
|
|
850
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
88,779
|
|
|
|
|
|
|
During 2009, the Company increased goodwill by $0.9 million
as a result of foreign currency translation adjustments. During
2008, the Company decreased goodwill by $24.3 million,
primarily as a result of goodwill impairment of
$23.5 million, a $1.6 million decrease in goodwill as
a result of foreign currency translation adjustments and a
$0.3 million decrease related to a tax adjustment.
Partially offsetting these decreases were increases of
$0.8 million and $0.3 million related to the
acquisitions of Pinnacle and EEC.
F-19
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
OTHER
INTANGIBLE ASSETS:
|
Other intangible assets include non-compete agreements, customer
lists, patents and technology and other similar items, as
described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Covenants not to compete
|
|
$
|
5,365
|
|
|
$
|
5,226
|
|
Customer lists
|
|
|
12,719
|
|
|
|
12,588
|
|
Patents and technology
|
|
|
22,646
|
|
|
|
22,538
|
|
Other intangible assets
|
|
|
2,399
|
|
|
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,129
|
|
|
|
41,575
|
|
Less: Accumulated amortization
|
|
|
(11,038
|
)
|
|
|
(8,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,091
|
|
|
$
|
33,477
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company allocated value to the intangible
assets acquired in the Azura acquisition. The Company allocated
$1,165,000 to other intangible assets, and will amortize these
assets over a period of 10 years.
During 2008, the Company allocated value to the intangible
assets acquired in the Pinnacle acquisition. The Company
allocated $1,486,500 to customer lists, and will amortize these
assets over a period of 15 years.
The Company amortizes covenants not to compete on a
straight-line basis over the terms of the agreements, which
range from one to five years. Accumulated amortization was
$4,453,000 and $4,041,000 at December 31, 2009 and 2008.
The Company recorded amortization expense of $268,000, $402,000
and $311,000 for the years ended December 31, 2009, 2008
and 2007 as operating expense in the Consolidated Statements of
Operations.
The Company acquired customer lists as part of the acquisitions
of Oilco, KC Machine, EEC and Pinnacle and recorded these
customer lists based upon their fair value at the acquisition
dates. The Company amortizes customer lists on a straight-line
basis over periods ranging from five to twenty years.
Accumulated amortization was $2,429,000 and $1,524,000 at
December 31, 2009 and 2008. The Company recorded
amortization expense of $794,000, $809,000 and $335,000 for the
years ended December 31, 2009, 2008 and 2007 as operating
expense in the Consolidated Statements of Operations.
The Company acquired patents and technology primarily as part of
the acquisition of HP&T and recorded these patents and
technology intangibles based upon their fair value at the
acquisition date. The Company amortizes these patents and
technology on a straight-line basis over fifteen years.
Accumulated amortization was $3,238,000 and $1,759,000 at
December 31, 2009 and 2008. The Company recorded
amortization expense of $1,479,000, $1,478,000 and $263,000 for
the years ended December 31, 2009, 2008 and 2007 as
operating expense in the Consolidated Statements of Operations.
The Company acquired other intangible assets primarily as part
of the acquisitions of Azura, HP&T and EEC and recorded
these other intangible assets based upon their fair value at the
acquisition date. The Company amortizes these other intangible
assets on a straight-line basis over periods ranging from
8 months to ten years. Accumulated amortization was
$918,000 and $774,000 at December 31, 2009 and 2008. The
Company recorded amortization expense of $133,000, $530,000 and
$170,000 for the years ended December 31, 2009, 2008 and
2007 as operating expense in the Consolidated Statements of
Operations.
F-20
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes estimated aggregate amortization
expense for other intangible assets subject to amortization for
each of the five succeeding fiscal years (in thousands):
|
|
|
|
|
Year ending December 31
|
|
|
|
|
2010
|
|
|
2,351
|
|
2011
|
|
|
2,249
|
|
2012
|
|
|
2,231
|
|
2013
|
|
|
2,231
|
|
2014
|
|
|
2,231
|
|
Excluded from the above amortization expense is
$1.3 million of covenants not to compete and patents for
which the amortization period has not yet begun.
Accrued liabilities consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued payroll and related benefits
|
|
$
|
5,752
|
|
|
$
|
5,005
|
|
Accrued medical costs
|
|
|
895
|
|
|
|
826
|
|
Accrued taxes
|
|
|
1,482
|
|
|
|
3,106
|
|
Customer deposits/unearned revenue
|
|
|
1,961
|
|
|
|
4,928
|
|
Accrued legal
|
|
|
1,810
|
|
|
|
1,874
|
|
Accrued acquisition costs
|
|
|
|
|
|
|
515
|
|
Other accrued liabilities
|
|
|
2,459
|
|
|
|
3,020
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,359
|
|
|
$
|
19,274
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt from financial institutions consists of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Wells Fargo revolver
|
|
$
|
|
|
|
$
|
18,000
|
|
Wells Fargo swing line
|
|
|
|
|
|
|
750
|
|
Other Note Payables
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
18,758
|
|
Less Current maturities of long-term debt
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
18,753
|
|
|
|
|
|
|
|
|
|
|
The Companys senior credit facility provides for a
$180 million revolving line of credit, maturing
October 26, 2012 that can be increased by up to
$70 million (not to exceed a total commitment of
$250 million) with the approval of the senior lenders. The
senior credit facility consists of a U.S. revolving credit
facility that includes a swing line subfacility and a letter of
credit subfacility up to $25 million and $50 million.
The senior credit facility also provides for a separate Canadian
revolving credit facility, which includes a swing line
subfacility of up to U.S. $5 million and a letter of
credit subfacility of up to U.S. $5 million. The
revolving credit facility matures on the same date as the senior
credit facility and is subject to the same covenants and
restrictions. As of December 31, 2009, the Company had no
outstanding borrowings under its senior credit facility or
Canadian revolving credit facility. However, at
December 31, 2009, the Company used the senior credit
facility for letters of credit of approximately
$0.1 million that mature at various dates throughout 2010.
F-21
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, the Companys availability
under its senior credit facility was $118.1 million. The
Companys availability in future periods is limited to the
lesser of (a) three times the Companys EBITDA on a
trailing-twelve-months basis, which totals $118.2 million
at December 31, 2009, less the Companys outstanding
borrowings, standby letters of credits and other debt (as each
of these terms are defined under the Companys senior
credit facility) and (b) the amount of additional
borrowings that would result in interest payments on all of the
Companys debt that exceed one third of the Companys
EBITDA on a trailing-twelve-months basis.
The Company expects to use the proceeds from any advances made
pursuant to the senior credit facility for working capital
purposes, for capital expenditures, to fund acquisitions and for
general corporate purposes. The applicable interest rate of the
senior credit facility is governed by the Companys
leverage ratio and ranges from the Base Rate (as defined in the
senior credit facility) to the Base Rate plus 1.25% or LIBOR
plus 1.00% to LIBOR plus 2.25%. The Company has the option to
choose between Base Rate and LIBOR when borrowing under the
revolver portion of its senior credit facility, whereas any
borrowings under the swing line portion of the senior credit
facility are made using prime. The senior credit facilitys
effective interest rate, including amortization of deferred loan
costs, was 7.0% during 2009. The effective interest rate,
excluding amortization of deferred loan costs, was 5.0% during
2009. The Company is required to prepay the senior credit
facility under certain circumstances with the net cash proceeds
of certain asset sales, insurance proceeds and equity issuances
subject to certain conditions. The senior credit facility also
limits the Companys ability to secure additional forms of
debt, with the exception of secured debt (including capital
leases) with a principal amount not exceeding 10% of the
Companys net worth at any time. The senior credit facility
provides, among other covenants and restrictions, that the
Company complies with the following financial covenants: a
minimum interest coverage ratio of 3.0 to 1.0, a maximum
leverage ratio of 3.0 to 1.0 and a limitation on capital
expenditures of no more than 75% of current year EBITDA (as
defined under the senior credit facility). As of
December 31, 2009, the Company was in compliance with the
covenants under the senior credit facility, with an interest
coverage ratio of 61.5 to 1.0, a leverage ratio of 0.0 to 1.0,
and
year-to-date
capital expenditures of $6.2 million, which represents 16%
of current year EBITDA. Substantially all of the Companys
assets collateralize the senior credit facility.
The Company computes basic net income per common share by
dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net income per
common share is the same as basic but includes dilutive stock
options, restricted stock and warrants using the treasury stock
method. The following table reconciles the numerators and
denominators of the basic and diluted per common share
computations for net income for the years ended
December 31, 2009, 2008 and 2007, as follows (in thousands
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
16,165
|
|
|
$
|
13,045
|
|
|
$
|
26,507
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(48
|
)
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,165
|
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
12,711
|
|
|
|
12,457
|
|
|
|
11,726
|
|
Shares for dilutive stock options, restricted stock and warrants
|
|
|
95
|
|
|
|
355
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
12,806
|
|
|
|
12,812
|
|
|
|
12,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.27
|
|
|
$
|
1.05
|
|
|
$
|
2.26
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.27
|
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.26
|
|
|
$
|
1.02
|
|
|
$
|
2.19
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.26
|
|
|
$
|
1.02
|
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2009, 2008 and 2007, there were 863,836, 492,128 and 208,000
options that were not included in the computation of diluted
earnings per share because their inclusion would have been
anti-dilutive. For the year ended December 31, 2008, there
were 5,027 shares of restricted stock that were not
included in the computation of diluted earnings per share
because their inclusion would have been anti-dilutive.
The components of the provision (benefit) for income taxes for
the years ended December 31 are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
7,624
|
|
|
$
|
16,449
|
|
|
$
|
14,163
|
|
Deferred
|
|
|
(334
|
)
|
|
|
(2,836
|
)
|
|
|
(229
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
111
|
|
|
|
782
|
|
|
|
808
|
|
Deferred
|
|
|
(53
|
)
|
|
|
7
|
|
|
|
10
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(12
|
)
|
|
|
43
|
|
|
|
648
|
|
Deferred
|
|
|
(198
|
)
|
|
|
(71
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes from continuing operations
|
|
$
|
7,138
|
|
|
$
|
14,374
|
|
|
$
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes from discontinued operations
|
|
$
|
|
|
|
$
|
(19
|
)
|
|
$
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the actual tax rate to the statutory
U.S. tax rate for the years ended December 31 is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income tax expense at the statutory federal rate
|
|
$
|
8,156
|
|
|
$
|
9,597
|
|
|
$
|
14,488
|
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
5,250
|
|
|
|
|
|
Nondeductible expenses
|
|
|
276
|
|
|
|
397
|
|
|
|
765
|
|
State income taxes, net of federal benefit
|
|
|
236
|
|
|
|
786
|
|
|
|
532
|
|
Change in valuation allowance
|
|
|
(295
|
)
|
|
|
138
|
|
|
|
|
|
Section 199 deduction
|
|
|
(247
|
)
|
|
|
(624
|
)
|
|
|
(531
|
)
|
International rate differences
|
|
|
(234
|
)
|
|
|
53
|
|
|
|
(6
|
)
|
ETI deduction
|
|
|
|
|
|
|
(713
|
)
|
|
|
|
|
R&D credit
|
|
|
(204
|
)
|
|
|
(514
|
)
|
|
|
(155
|
)
|
Other tax credits
|
|
|
(2
|
)
|
|
|
(241
|
)
|
|
|
(126
|
)
|
Changes in uncertain tax positions
|
|
|
(484
|
)
|
|
|
299
|
|
|
|
52
|
|
Other
|
|
|
(64
|
)
|
|
|
(54
|
)
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,138
|
|
|
$
|
14,374
|
|
|
$
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense for the year ended December 31, 2009 was
$7.1 million as compared to $14.4 million in the year
ended December 31, 2008. The decrease was due to a decrease
in income before taxes, as well as non-deductible goodwill
impairment incurred in 2008 but not in 2009, benefits relating
to tax positions taken in prior years for which the statute of
limitations has expired, lower state taxes incurred relating to
adjustments from the prior year, and benefits from lower tax
rates in international jurisdictions. The Companys
effective tax rate was 30.6% in the year ended December 31,
2009 compared to 52.4% in the year ended December 31, 2008.
Income tax expense for the year ended December 31, 2008 was
$14.4 million as compared to $14.9 million in the year
ended December 31, 2007. The decrease was due to a decrease
in income before taxes, primarily related to goodwill impairment
recognized for the Companys pressure and flow control
reporting unit for the year ended December 31, 2008. See
Note 4 for further discussion of the Companys
goodwill impairment. The Companys effective tax rate was
52.4% in the year ended December 31, 2008 compared to
36.0% in the year ended December 31, 2007. The higher
rate in 2008 resulted primarily from a non-deductible impairment
of goodwill, partially offset by higher deductions for certain
expenses related to production activities, the utilization of
R&D tax credits during 2008 and extraterritorial income
exclusion tax deductions available for years prior to 2007. In
March and June 2008, the Company filed amended tax returns for
the years 2006, 2005 and 2004, which resulted in an income tax
expense reduction of $1.0 million. In addition, the 2007
effective tax rate included approximately $0.6 million of
income tax expense related to certain compensation expenses that
were non-deductible under Section 162(m) of the Internal
Revenue Code, whereas the 2008 effective tax rate included
approximately $0.1 million of income tax expense for such
non-deductible compensation. Partially offsetting these
decreases was additional income tax expense due to a
$0.3 million increase in the Companys liability for
unrecognized tax benefits, and an increase in income tax expense
of approximately $0.1 million related to a portion of the
change in the Companys valuation allowance.
The components of deferred taxes as of December 31 are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,776
|
|
|
$
|
4,111
|
|
Other carryforwards
|
|
|
23
|
|
|
|
0
|
|
Accrued expenses
|
|
|
1,536
|
|
|
|
1,474
|
|
Inventories
|
|
|
2,533
|
|
|
|
1,920
|
|
Allowance for doubtful accounts
|
|
|
63
|
|
|
|
244
|
|
Stock-based compensation
|
|
|
3,125
|
|
|
|
2,232
|
|
Other
|
|
|
125
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,181
|
|
|
|
10,460
|
|
Valuation allowance
|
|
|
(3,116
|
)
|
|
|
(3,451
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
8,065
|
|
|
|
7,009
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(6,146
|
)
|
|
|
(4,756
|
)
|
Intangible assets
|
|
|
(6,565
|
)
|
|
|
(6,009
|
)
|
Prepaid expenses
|
|
|
(797
|
)
|
|
|
(741
|
)
|
Other
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(13,508
|
)
|
|
|
(11,904
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(5,443
|
)
|
|
$
|
(4,895
|
)
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file a consolidated federal
income tax return. At December 31, 2009, the Company had
net operating loss (NOL) carryforwards of
approximately $10.1 million for federal income tax purposes
that expire beginning in 2020 and are subject to annual
limitations under Section 382 of the Internal Revenue Code.
At December 31, 2009, the Company had NOL carryforwards of
approximately $1.5 million for
F-24
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
state income tax purposes that expire between 2010 and 2029. At
December 31, 2009, the Company had NOL carryforwards of
approximately $0.6 million for foreign income tax purposes
that do not expire. At December 31, 2009, the Company also
has foreign capital losses of $0.2 million that do not
expire. In 2009 and 2008, the Companys NOL utilization
resulted in a $330,000 reduction in both years in the deferred
tax asset associated with these carryforwards. In connection
with the utilization of the federal NOLs in 2009 and 2008, the
Company recorded $330,000 of reductions to its valuation
allowance against income tax expense in 2009 and against
goodwill in 2008. Additionally, in 2008 the Company recorded a
reduction of $11,000 to its net operating loss carryforwards and
valuation allowance as a result of state NOLs of $11,000 that
can be used in 2008. These 2008 decreases were partially offset
by a $149,000 increase in the NOL carryforwards and valuation
allowance related to net operating losses for certain foreign
operations.
The Company operates in a number of domestic tax jurisdictions
and certain foreign tax jurisdictions under various legal forms.
As a result, the Company is subject to domestic and foreign tax
jurisdictions and tax agreements and treaties among the various
taxing authorities. Determination of taxable income in any
jurisdiction requires the interpretation of the related tax laws
and regulations and the use of estimates and assumptions
regarding significant future events. Changes in tax laws,
regulations, agreements and treaties, foreign currency exchange
restrictions or the Companys level of operations or
profitability in each taxing jurisdiction could have an impact
upon the amount of income taxes that the Company provides during
any given year. The Company has provided additional taxes for
the anticipated repatriation of earnings of certain foreign
subsidiaries and equity investments where management has
determined that the foreign subsidiaries and equity investments
earnings are not indefinitely reinvested. For foreign
subsidiaries and equity investments whose earnings are deemed to
be indefinitely reinvested, no provision for U.S. federal
and state income taxes has been provided. Upon distribution of
these earnings in the form of dividends or otherwise, the
Company may be subject to U.S. income taxes (subject to
adjustment for foreign tax credits) and foreign withholding
taxes. It is not practical, however, to estimate the amount of
taxes that may be payable on the eventual remittance of these
earnings after consideration of available foreign tax credits.
The Companys income from continuing operations before
provision for income taxes is comprised of $23.0 million
domestic income and $0.3 million foreign income for the
year ended December 31, 2009.
At December 31, 2009, the Company had $28.3 million in
goodwill, net of accumulated amortization that will be tax
deductible in future periods.
The changes in unrecognized tax benefits for the years ended
December 31, 2009 and 2008 is as follows (dollars in
thousands):
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
859
|
|
Additions based on tax positions during the year
|
|
|
544
|
|
Additions for tax positions of prior years
|
|
|
164
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(347
|
)
|
Settlements with taxing authorities
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,220
|
|
|
|
|
|
|
Additions based on tax positions during the year
|
|
|
177
|
|
Additions for tax positions of prior years
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(401
|
)
|
Settlements with taxing authorities
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
996
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits at
December 31, 2009 and 2008, are $0.8 million and
$0.9 million of tax positions that, if recognized in future
periods, would impact the Companys effective tax rate. The
Company recognizes potential accrued interest and penalties
related to unrecognized tax benefits as a
F-25
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
component of income tax expense in the consolidated statement of
operations. This is an accounting policy election made by the
Company that is a continuation of the Companys historical
policy and will continue to be consistently applied in the
future. The Company has accrued $0.1 million and
$0.4 million as of December 31, 2009 and 2008 for the
potential payment of interest and penalties. During the year
ended December 31, 2009 and 2008, the Company recognized
$0.1 million and $0.1 million in potential interest
and penalties associated with uncertain tax positions. Also,
during the year ended December 31, 2009 and 2008, the
Company recognized $0.4 million and $0.1 million in
tax benefits related to the derecognition of previously accrued
interest and penalties on tax positions in which the statute of
limitations lapsed.
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal income tax examinations by
tax authorities for years before 2006 and is no longer subject
to state and local income tax examinations by tax authorities
for years before 2006. All years for foreign jurisdictions are
subject to tax examinations by tax authorities. The Company
anticipates that total unrecognized tax benefits will decrease
by approximately $0.4 million during the next twelve months
due to the expiration of statute of limitations.
Section 162(m) of the Internal Revenue Code denies the
Company a tax deduction for annual compensation in excess of
$1 million paid to any of its Named Executive Officers,
unless the compensation is based on performance criteria that
are established by a committee of outside directors and
approved, as to their material terms, by the Companys
stockholders. Based on this authority, the Companys
ability to deduct compensation expense generated in connection
with the exercise of options granted under its stock incentive
plan should not be limited by Section 162(m). The
Companys has designed its stock incentive plan to provide
flexibility with respect to whether restricted stock awards will
qualify as performance-based compensation under
Section 162(m) and, therefore, be exempt from the deduction
limit. If the forfeiture restrictions relating to a restricted
stock award are based solely upon the satisfaction of one of the
performance criteria set forth in the stock incentive plan, then
the compensation expense relating to the award should be
deductible by the Company if the restricted stock award becomes
vested. However, compensation expense deductions relating to a
restricted stock award will be subject to the
Section 162(m) deduction limitation if the award becomes
vested based upon any other criteria set forth in the award
(such as vesting based upon continued employment with the
Company or upon a change of control). A portion of the
restricted stock awards granted to the Companys former
Chief Executive Officer in 2006, which were subject to vesting
based on continued employment with the Company, and which have
since become fully vested pursuant to a change of control
provision in the former Chief Executive Officers then
existing employment agreement, were subject to the
Section 162(m) deduction limitation. In addition, the
portion of total salary and bonus compensation that exceeded one
million dollars for the Companys former Chief Executive
Officer did not so qualify and was subject to the limitation on
deductibility under Section 162(m). As a result, the
$2.5 million change of control compensation charge recorded
by the Company during the year ended December 31, 2007, and
the $0.3 million compensation expense related to the 2008
vesting of 10,000 shares of restricted stock awards granted
to the Companys former Chief Executive Officer in 2007,
was not fully deductible.
The Company is currently under examination by the Internal
Revenue Service for the tax year 2007. The Company does not
expect that the results of the examination will have a material
impact on its financial position, results of operations or cash
flows.
|
|
10.
|
RELATED-PARTY
TRANSACTIONS:
|
The Company has transactions in the ordinary course of business
with certain related parties. Management believes these
transactions were made at the prevailing market rates or terms.
The Company leases certain buildings under noncancelable
operating leases from employees of the Company. Lease
commitments under these leases are approximately
$0.6 million for 2010 through 2012. Rent expense to related
parties was $0.4 million, $0.4 million, and
$0.1 million for the years ended December 31, 2009,
2008 and 2007.
F-26
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company sells pressure control products to and perform
services for its unconsolidated affiliates in Mexico and Dubai.
The Companys unconsolidated affiliate in Mexico is a joint
venture between the Company and Servicios Y Maquinaria De
Mexico, S.A. de C.V., or SYMMSA, a subsidiary of GRUPO R, a
conglomerate of companies that provides services to the energy
and industrial sectors in Mexico. The total amount of these
sales to the Mexico joint venture was approximately
$0.3 million, $0.4 million and $2.1 million for
the years ended December 31, 2009, 2008 and 2007, and the
total accounts receivable due from the Mexico joint venture was
approximately $74,000 and $50,000 at December 31, 2009 and
2008. The Companys unconsolidated affiliate in Dubai,
which was formed in 2009, is a joint venture between the Company
and Aswan International Engineering Company LLC. The total
amount of these sales to the Dubai joint venture was
approximately $0.6 million for the year ended
December 31, 2009 and the total accounts receivable due
from the Dubai joint venture was approximately $0.7 million
at December 31, 2009.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES:
|
Lease
Commitments
The Company leases certain buildings, equipment and vehicles
under noncancelable operating leases with related parties and
other third parties. Total expense related to these leases
included in the accompanying statements of operations for the
years ended December 31, 2009, 2008 and 2007 were
$2,910,000, $2,689,000 and $2,130,000. Aggregate minimum rental
commitments for noncancelable operating leases with terms
exceeding one year, net of minimum sublease income, are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
$
|
2,315
|
|
2011
|
|
|
|
|
|
|
1,437
|
|
2012
|
|
|
|
|
|
|
965
|
|
2013
|
|
|
|
|
|
|
692
|
|
2014
|
|
|
|
|
|
|
485
|
|
Thereafter
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
|
|
|
$
|
5,898
|
|
Less: minimum sublease income
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
|
|
|
$
|
5,783
|
|
|
|
|
|
|
|
|
|
|
Contingencies
The Company is involved in various legal actions arising in the
ordinary course of business.
The Companys environmental remediation and compliance
costs have not been material during any of the periods
presented. As part of the sale of a business in 2001, the
Company agreed to indemnify the buyers for certain environmental
cleanup and monitoring activities associated with a former
manufacturing site. The Company and the buyers have engaged a
licensed engineering firm to conduct a post-closure corrective
action subsurface investigation on the property and
Phase II and III investigations. During 2009, the
Company recorded approximately $280,000 for incurred and
estimated future Phase III investigation costs to determine
the location, nature and extent of any contamination. The
Company anticipates the environmental monitoring activities, for
which the Company bears partial liability, to continue at least
through the year 2024. Additionally, the Company currently
believes that it is more likely than not that it will incur
future remediation costs at this site and has accrued, during
2009, $100,000 for potential future remediation costs based on
the preliminary results of the Phase III investigation.
While no agency-approved final remediation plan has been made of
the Companys liability for remediation costs with respect
to the site, management does not expect that its ultimate
remediation costs will have a material impact on its financial
position, results of operations or cash flows.
F-27
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has been identified as a potentially responsible
party with respect to the Lake Calumet Cluster site near
Chicago, Illinois, which has been designated for cleanup under
CERCLA and Illinois state law. Management believes that the
Companys involvement at this site was minimal. While no
agency-approved final allocation has been made of the
Companys liability with respect to the Lake Calumet
Cluster site, management does not expect that its ultimate share
of remediation costs will have a material impact on its
financial position, results of operations or cash flows.
In July 2003, a lawsuit was filed against the Company in the
U.S. District Court, Eastern District of Louisiana as
Chevron, U.S.A. v. Aker Maritime, Inc. The lawsuit
alleged that a wholly owned subsidiary of the Company, the
assets and liabilities of which were sold in 2004, failed to
deliver the proper bolts
and/or sold
defective bolts to the plaintiffs contractor to be used in
connection with a drilling and production platform in the Gulf
of Mexico. The plaintiff claimed that the bolts failed and were
replaced at a cost of approximately $3.0 million. The
complaint named the plaintiffs contractor and seven of its
suppliers and subcontractors (including the Companys
subsidiary) as the defendants and alleged negligence on the part
of all defendants. The lawsuit was called to trial during June
2007 and resulted in a jury finding of negligence against the
Company and three other defendants. The jury awarded the
plaintiffs damages in the amount of $2.9 million, of which
the Company estimates its share to be $1.0 million. The
Company has appealed this decision and has accrued approximately
$1.1 million, net of tax, for its share of the damages and
attorney fees, court costs and interest, as a loss from
discontinued operations in the consolidated statement of
operations during the year ended December 31, 2007.
At December 31, 2009, the Company had no significant
letters of credit outstanding.
|
|
12.
|
STOCKHOLDERS
EQUITY:
|
On April 23, 2007, the Company closed an underwritten
offering among the Company, First Reserve Fund VIII (at the
time the Companys largest stockholder) and Bear,
Stearns & Co. Inc., Simmons & Company
International, and Pritchard Capital Partners, LLC (the
Underwriters), pursuant to which the Company sold
1,000,059 shares of its common stock for net proceeds of
approximately $22.2 million, and First Reserve
Fund VIII sold 4,879,316 shares of common stock
pursuant to an effective shelf registration statement on
Form S-3,
as amended and supplemented by the prospectus supplement dated
April 17, 2007. Of the shares sold by First Reserve
Fund VIII, 313,943 had been acquired through First Reserve
Fund VIIIs exercise of warrants to purchase the
Companys common stock for $12.80 per share. As a result,
the Company received proceeds of approximately $4.0 million
through the exercise by First Reserve Fund VIII of these
warrants.
The sale of the Companys common stock by First Reserve
Fund VIII in November 2006 coupled with its sale of common
stock in the offering described above constituted a change
of control pursuant to the terms of the Companys
then existing employment agreement with the Companys
former Chairman, President and Chief Executive Officer. As a
result, the Companys former CEO was contractually entitled
to a change of control payment from the Company of
$1.6 million, which is two times the average of his salary
and bonus over the past two years, and the immediate vesting of
66,667 unvested stock options with an exercise price of $12.31
and 75,000 unvested shares of restricted stock held by the
former CEO. In the second quarter of 2007, the Company incurred
a compensation charge of approximately $1.9 million, net of
tax, or $0.16 per diluted share for the year ended
December 31, 2007, related to the payment to the former CEO
of the $1.6 million change of control payment and the
immediate vesting of previously unvested stock options and
restricted stock held by him pursuant to the terms of his then
existing employment agreement.
Common
Stock
The Company issued 490,685 shares of common stock during
the year ended December 31, 2009 primarily as a result of
367,685 stock options exercised by option holders under the
Companys 2002 Stock Incentive Plan, the granting of
128,000 shares of restricted stock to Company employees and
members of the Companys Board of Directors less the
forfeiture of 5,000 shares of restricted stock granted in
2009.
F-28
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants
No warrants were exercised during the year ended
December 31, 2009. At December 31, 2009, warrants to
acquire 10,157 shares of common stock at $12.80 per share
remain outstanding. Each of these warrants expire on
December 17, 2011.
Additional
Paid-In Capital
During the year ended December 31, 2009, additional paid-in
capital increased as a result of the employee stock-based
compensation cost recorded, stock options exercised by employees
under the Companys 2002 Stock Incentive Plan (as discussed
above), and the excess tax benefits from the stock options
exercised and vesting of restricted stock. Partially offsetting
these increases to additional paid-in capital is a decrease
principally related to the expiration of unexercised options.
|
|
13.
|
EMPLOYEE
BENEFIT PLANS:
|
T-3
Energy Services, Inc. 2002 Stock Incentive Plan
The T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as
amended (the Plan) provides officers, employees and
non-employee directors equity-based incentive awards, including
stock options and restricted stock. The Plan, after an amendment
approved by the stockholders on June 4, 2009, provides for
the issuance of up to 2,623,000 shares of common stock
thereunder, and will remain in effect until December 31,
2011, unless terminated earlier. Stock options granted will
reduce the number of available shares under the Plan on a one
share for one share basis, whereas restricted stock will reduce
the number of available shares under the Plan on a
1.22 shares for one share basis. As of December 31,
2009, the Company had 388,842 equivalent shares available for
issuance as stock options or 318,723 equivalent shares available
for issuance as restricted stock in connection with the Plan.
Outstanding stock options and unvested restricted stock awards
under the Plan as of December 31, 2009 were
1,068,706 shares and 129,700 shares.
The Company recognized $6,753,000, $5,529,000 and $3,223,000 of
employee stock-based compensation expense related to stock
options and restricted stock during the years ended
December 31, 2009, 2008 and 2007. The stock-based
compensation expense for the year ended December 31, 2009
includes a charge of $651,000 related to the immediate vesting
of 50,000 unvested stock options held by the Companys
former President, Chief Executive Officer and Chairman of the
Board, pursuant to the terms of his separation agreement. The
stock-based compensation expense for the year ended
December 31, 2007, includes a charge of $922,000 related to
the immediate vesting of 66,667 unvested stock options and
75,000 unvested shares of restricted stock held by our former
President, Chief Executive Officer and Chairman of the Board,
pursuant to the terms of his then existing employment agreement
as described in Note 12. The related income tax benefit
recognized during the years ended December 31, 2009, 2008
and 2007 was $2,363,000, $1,815,000 and $917,000.
Stock
Option Awards
Stock options under the Companys Plan generally expire
10 years from the grant date and vest over three to four
years from the grant date. The Company uses the Black-Scholes
option pricing model to estimate the fair value of stock options
granted to employees on the date of grant. The Company amortizes
to selling, general and administrative expense, on a
straight-line basis over the vesting period, the fair value of
the options. The Company has recorded an estimate for
forfeitures of awards of stock options. The Company will adjust
this estimate as actual forfeitures differ from the estimate.
The Company estimated the fair value of each stock option on the
grant date using the Black-Scholes option pricing model using
the assumptions noted in the following table. The Company
estimated the expected volatility based on historical and
implied volatilities of the Companys stock and historical
and implied volatilities of comparable companies. The Company
based the expected term on historical employee exercises of
options. The Company based the risk-free interest rate upon the
U.S. Treasury yield curve in effect at
F-29
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the time of grant. The Company does not expect to pay any
dividends on its common stock. Assumptions used for stock
options granted during the years ended December 31, 2009,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected volatility
|
|
|
57.96
|
%
|
|
|
50.00
|
%
|
|
|
40.00
|
%
|
Risk-free interest rate
|
|
|
2.33
|
%
|
|
|
2.28
|
%
|
|
|
4.50
|
%
|
Expected term (in years)
|
|
|
4.5
|
|
|
|
4.7
|
|
|
|
5.0
|
|
A summary of option activity under the Plan as of
December 31, 2009, and changes during the year then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at January 1, 2009
|
|
|
1,345,708
|
|
|
$
|
28.06
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
207,500
|
|
|
|
15.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(367,685
|
)
|
|
|
10.50
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(116,817
|
)
|
|
|
36.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,068,706
|
|
|
$
|
30.67
|
|
|
|
7.89
|
|
|
$
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2009
|
|
|
1,021,955
|
|
|
$
|
30.57
|
|
|
|
7.87
|
|
|
$
|
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
461,540
|
|
|
$
|
31.25
|
|
|
|
7.22
|
|
|
$
|
2,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during the years ended December 31, 2009, 2008 and 2007 was
$7.65, $19.13 and $12.15. The intrinsic value of options
exercised during the years ended December 31, 2009, 2008
and 2007 was $2,463,000, $6,193,000 and $6,643,000.
As of December 31, 2009, total unrecognized compensation
costs related to nonvested stock options was $5.1 million.
The Company expects to recognize this cost over a weighted
average period of one year. The total fair value of stock
options vested was $6.0 million, $2.9 million and
$1.3 million during the years ended December 31, 2009,
2008 and 2007.
On June 4, 2009, the Company converted phantom stock
options awarded to Steven W. Krablin, representing the value of
the right to acquire 100,000 shares of the Companys
stock to 100,000 stock options granted pursuant to the Plan. The
Company originally awarded these phantom stock options on
March 23, 2009, in connection with Mr. Krablins
appointment as President, Chief Executive Officer and Chairman
of the Board, and they had a strike price of $14.85, which was
equal to the fair market value of the Companys common
stock on March 23, 2009. The terms and conditions of the
stock options are unchanged from the terms and conditions of the
phantom stock options. These stock options will vest one-half on
March 23, 2010 and one-half on March 23, 2011,
conditioned on Mr. Krablins continued employment with
the Company. For further discussion of Mr. Krablins
Employment Agreement, please refer to Note 16.
Restricted
Stock Awards
On June 4, 2009, the Company converted a phantom
10,000 share restricted stock grant to Mr. Krablin to
a grant of 10,000 shares of restricted stock granted
pursuant to the Plan. The Company originally awarded this
phantom restricted stock grant on March 23, 2009, in
connection with Mr. Krablins appointment with the
Company. The Company determined the fair value of these
restricted shares based on the closing price of the
Companys stock on June 4, 2009. This restricted stock
grant will vest one-half on March 23, 2010, with the other
half vesting March 23, 2011, conditioned on
Mr. Krablins continued employment with the Company.
For further discussion of Mr. Krablins Employment
Agreement, please refer to Note 16.
F-30
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additionally, on June 4, 2009, the Company granted
102,000 shares of restricted stock to certain employees of
the Company and 16,000 shares of restricted stock to
non-executive members of the Board of Directors. The Company
determined the fair value of these restricted shares based on
the closing price of the Companys stock on the grant date.
The shares granted to employees will vest annually in one-third
increments beginning on June 4, 2011, and the shares
granted to the Board members will vest on June 4, 2010.
A summary of the status of the Companys restricted stock
awards as of December 31, 2009 and changes during the
period then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
Restricted Stock
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-Vested at January 1, 2009
|
|
|
18,680
|
|
|
$
|
65.79
|
|
Granted
|
|
|
128,000
|
|
|
|
15.43
|
|
Vested
|
|
|
(11,980
|
)
|
|
|
56.22
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
15.43
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at December 31, 2009
|
|
|
129,700
|
|
|
$
|
18.91
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of shares of
restricted stock granted during the years ended
December 31, 2009, 2008 and 2007 was $15.43, $65.79 and
$32.00.
As of December 31, 2009, there was $1.8 million of
total unrecognized compensation cost related to the
Companys restricted stock. The Company expects to
recognize this cost over a weighted average period of two years.
Defined
Contribution Plans
The Company sponsors a defined contribution retirement plan for
most full-time and some part-time employees. The plan provides
for matching contributions up to 50% of the first 6% of covered
employees salaries or wages contributed and for
discretionary contributions. Contributions to this plan totaled
approximately $550,000, $597,000 and $479,000 for the years
ended December 31, 2009, 2008 and 2007.
The Companys determination of reportable segments
considers the strategic operating units under which the Company
sells various types of products and services to various
customers. Financial information for purchase transactions is
included in the segment disclosures only for periods subsequent
to the dates of acquisition.
Management evaluates the operating results of its pressure
control reporting segment based upon its three product lines:
pressure and flow control, wellhead and pipeline. The
Companys operating segments of pressure and flow control,
wellhead and pipeline have been aggregated into one reporting
segment, pressure control, as the operating segments have the
following commonalities: economic characteristics, nature of the
products and services, type or class of customer, and methods
used to distribute their products and provide services. The
pressure control segment manufactures, remanufactures and
repairs high pressure, severe service products including valves,
chokes, actuators, blowout preventers, manifolds and wellhead
equipment; manufactures accumulators and rubber goods; and
applies custom coating to customers products used
primarily in the oil and gas industry. No single customer
accounted for 10% or more of consolidated revenues during the
three years ended December 31, 2009.
The accounting policies of the segment are the same as those of
the Company as described in Note 1. The Company evaluates
performance based on income from operations excluding certain
corporate costs not allocated to the segment. Substantially all
revenues are from domestic sources and Canada and all assets are
held in the United States, Canada and India.
F-31
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure
|
|
|
|
|
|
|
Control
|
|
Corporate
|
|
Consolidated
|
|
|
|
|
(In thousands)
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
218,461
|
|
|
$
|
|
|
|
$
|
218,461
|
|
Depreciation and amortization
|
|
|
8,012
|
|
|
|
920
|
|
|
|
8,932
|
|
Income (loss) from operations
|
|
|
42,599
|
|
|
|
(20,102
|
)
|
|
|
22,497
|
|
Total assets
|
|
|
227,115
|
|
|
|
52,706
|
|
|
|
279,821
|
|
Capital expenditures
|
|
|
5,620
|
|
|
|
610
|
|
|
|
6,230
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
285,329
|
|
|
$
|
|
|
|
$
|
285,329
|
|
Depreciation and amortization
|
|
|
7,230
|
|
|
|
1,119
|
|
|
|
8,349
|
|
Income (loss) from operations
|
|
|
52,353
|
|
|
|
(23,178
|
)
|
|
|
29,175
|
|
Total assets
|
|
|
247,058
|
|
|
|
40,054
|
|
|
|
287,112
|
|
Capital expenditures
|
|
|
7,664
|
|
|
|
3,636
|
|
|
|
11,300
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
217,434
|
|
|
$
|
|
|
|
$
|
217,434
|
|
Depreciation and amortization
|
|
|
3,674
|
|
|
|
1,297
|
|
|
|
4,971
|
|
Income (loss) from operations
|
|
|
56,430
|
|
|
|
(15,031
|
)
|
|
|
41,399
|
|
Total assets
|
|
|
273,578
|
|
|
|
26,984
|
|
|
|
300,562
|
|
Capital expenditures
|
|
|
6,100
|
|
|
|
945
|
|
|
|
7,045
|
|
Geographic
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Long-Lived Assets
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
199,152
|
|
|
$
|
270,967
|
|
|
$
|
199,985
|
|
|
$
|
161,198
|
|
|
$
|
160,912
|
|
|
$
|
176,952
|
|
Canada
|
|
|
19,309
|
|
|
|
14,362
|
|
|
|
17,449
|
|
|
|
7,034
|
|
|
|
6,277
|
|
|
|
10,435
|
|
India
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,991
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
218,461
|
|
|
$
|
285,329
|
|
|
$
|
217,434
|
|
|
$
|
170,223
|
|
|
$
|
167,477
|
|
|
$
|
187,387
|
|
The Companys Indian operations reflect no revenue for 2009
and their initial year of 2008, as all sales are intercompany
and thus eliminate in consolidation.
F-32
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED):
|
Summarized quarterly financial data for 2009 and 2008 is as
follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
62,786
|
|
|
$
|
55,748
|
|
|
$
|
47,490
|
|
|
$
|
52,437
|
|
Gross profit
|
|
|
24,026
|
|
|
|
20,662
|
|
|
|
16,622
|
|
|
|
18,269
|
|
Income from operations
|
|
|
6,142
|
|
|
|
7,553
|
|
|
|
4,105
|
|
|
|
4,697
|
|
Net income
|
|
|
3,820
|
|
|
|
4,888
|
|
|
|
4,079
|
|
|
|
3,378
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.30
|
|
|
|
.39
|
|
|
|
.32
|
|
|
|
.26
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
.30
|
|
|
|
.39
|
|
|
|
.32
|
|
|
|
.26
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.30
|
|
|
|
.38
|
|
|
|
.32
|
|
|
|
.26
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
.30
|
|
|
|
.38
|
|
|
|
.32
|
|
|
|
.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
69,170
|
|
|
$
|
67,690
|
|
|
$
|
69,838
|
|
|
$
|
78,631
|
|
Gross profit
|
|
|
27,171
|
|
|
|
27,080
|
|
|
|
26,298
|
|
|
|
30,329
|
|
Income (loss) from operations
|
|
|
14,529
|
|
|
|
11,573
|
|
|
|
10,396
|
|
|
|
(7,323
|
)
|
Income (loss) from continuing operations
|
|
|
9,513
|
|
|
|
7,516
|
|
|
|
4,706
|
|
|
|
(8,690
|
)
|
Loss from discontinued operations
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(28
|
)
|
Net income (loss)
|
|
|
9,511
|
|
|
|
7,507
|
|
|
|
4,697
|
|
|
|
(8,718
|
)
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.77
|
|
|
|
.60
|
|
|
|
.38
|
|
|
|
(.69
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
.77
|
|
|
|
.60
|
|
|
|
.38
|
|
|
|
(.69
|
)
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.75
|
|
|
|
.58
|
|
|
|
.37
|
|
|
|
(.69
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
.75
|
|
|
|
.58
|
|
|
|
.37
|
|
|
|
(.69
|
)
|
The results of operations for the quarter ended
December 31, 2009 included physical inventory count
adjustments related to the Companys wellhead product line
of $0.8 million, or $0.04 per diluted share after tax. The
results of operations for the quarter ended September 30,
2009 included the benefit of an insurance claim settlement
related to Hurricane Ike of $1.1 million, or $0.05 per
diluted share after tax. The results of operations for the
quarter ended March 31, 2009 included pre-tax charges for
severance-related costs of $3.9 million, or $0.20 per
diluted share after tax, and for acquisition-related costs of
$0.3 million, or $0.02 per diluted share after tax. The
results of operations for the quarter ended December 31,
2008 reflect the goodwill impairment charge of
$23.5 million, or $1.62 per diluted share after tax. See
Note 4 for a further discussion of the goodwill impairment
charge. Also, during the quarter ended December 31, 2008,
the Company recorded a tax benefit of $0.9 million as a
result of the
F-33
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deductibility of $2.6 million of strategic alternative
costs, of which $2.2 million was recorded in the quarter
ended September 30, 2008 and $0.4 million was recorded
in the quarter ended June 30, 2008. Prior to the fourth
quarter of 2008, these strategic alternative costs were deemed
to be non-deductible. The results of operations for the quarter
ended September 30, 2008 include strategic alternative
costs of approximately $2.2 million, or $0.18 per diluted
share after tax. Additionally, the results of operations for the
quarter ended June 30, 2008 include strategic alternative
costs of approximately $2.5 million, or $0.12 per diluted
share after tax. The sum of the individual quarterly net income
per common share amounts may not agree with the
year-to-date
net income per common share as the Company bases each quarterly
computation upon the weighted average number of common shares
outstanding during that period.
Resignation
of Gus D. Halas
On March 23, 2009, Gus D. Halas resigned as President,
Chief Executive Officer and Chairman of the Board. In connection
with his resignation, the Company and Mr. Halas entered
into a Separation Agreement dated March 23, 2009. The
Separation Agreement, which was negotiated by the Compensation
Committee and approved by the Board, entitled Mr. Halas to
certain payments. In April 2009, Mr. Halas received a
severance payment of $2,783,438, a payment of $148,500 for the
fair value of the restricted shares granted to him under a
share-based award agreement in December 2008, a payment of
$112,329 representing the accrued portion of
Mr. Halas annual bonus for the current fiscal year
that is projected to be payable (based on the current operating
results of the Company), and a lump-sum payment of $75,000
representing all amounts otherwise due and payable under
Mr. Halas employment agreement. Additionally, 50,000
unvested stock options previously granted to Mr. Halas were
immediately vested in connection with the Separation Agreement.
In consideration for the foregoing separation payments,
Mr. Halas agreed to release the Company and certain of its
related parties from any claims, costs, expenses and similar
liabilities Mr. Halas may have had against the Company or
its related parties related to his employment or subsequent
resignation, except for claims Mr. Halas may have against
the Company in enforcing its obligations under the Separation
Agreement.
Appointment
of Steven W. Krablin
On March 23, 2009, the Company entered into an Employment
Agreement (the Agreement) with Steven W. Krablin to
replace Mr. Halas as President, Chief Executive Officer and
Chairman of the Board, effective March 23, 2009. The
Agreement has a two year term with an annual base salary of
$500,000 and an annual bonus to be awarded based on achievement
of performance goals to be established annually by the Board.
Mr. Krablin was also granted phantom stock options
representing the value of the right to acquire
100,000 shares of the Companys common stock at a
strike price equal to the fair market value of the
Companys common stock on the date of grant, and phantom
restricted stock grants of 10,000 shares, with each share
of phantom restricted stock representing the same value as a
share of restricted stock granted pursuant to the Plan. On
June 4, 2009, the Company converted these phantom stock
options and phantom restricted stock grants to stock options and
restricted stock grants under the Plan.
In the event that Mr. Krablin is terminated for reasons
other than for cause, death, disability or change in control,
the Company shall pay him an amount equal to the sum of his then
current annual base pay and bonus, and all stock options and
restricted stock grants shall fully vest. In the event of a
change in control, all unvested stock options and unvested
restricted stock grants that Mr. Krablin was awarded shall
fully vest. If Mr. Krablin is terminated within twelve
months of a change of control, he shall be entitled to an amount
equal to two times the sum of his then current base salary and
bonus as defined.
F-34
T-3
ENERGY SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Change in
Accounting Principle
During the quarter ended March 31, 2009, the Company
changed the date of its annual goodwill impairment assessment
from December 31 to October 1. This change was effected to
allow more time and better support the completion of the
assessment prior to the Companys filing requirements for
its Annual Report on
Form 10-K
as an accelerated filer. The Company believes that the resulting
change in accounting principle related to the annual testing
date will not delay, accelerate or avoid an impairment charge.
The Company determined that the change in accounting principle
related to the annual testing date is preferable under the
circumstances and does not result in adjustments to the
financial statements when applied retrospectively.
Strategic
Alternatives Costs
During 2008, the Company incurred approximately
$4.7 million of costs related to the pursuit of strategic
alternatives for the Company. The Company classified these costs
as selling, general and administrative expenses within the
Companys condensed consolidated statements of operations
for the year ended December 31, 2008. The Company did not
incur any similar costs during the year ended December 31,
2009.
Subsequent
Events
The Companys management has evaluated subsequent events
for events or transactions that have occurred after
December 31, 2009 through the date of the filing of this
Form 10-K.
No events or transactions have occurred during this period that
the Company feels should be recognized or disclosed in the
December 31, 2009 financial statements.
F-35
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Identification of Exhibit
|
|
|
3
|
.1
|
|
|
|
Certificate of Incorporation of T-3 Energy Services, Inc.
(incorporated herein by reference to Exhibit 3.1 to the
Companys Current Report on
Form 8-K
dated December 31, 2001).
|
|
3
|
.2
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation of
T-3 Energy Services, Inc. (incorporated herein by reference to
Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2005).
|
|
3
|
.3
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation of
T-3 Energy Services, Inc. (incorporated herein by reference to
Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2006).
|
|
3
|
.4
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation of
T-3 Energy Services, Inc. (incorporated herein by reference to
Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2007).
|
|
3
|
.5
|
|
|
|
Amended and Restated Bylaws of T-3 Energy Services, Inc.
(incorporated herein by reference to Exhibit 3.1 to the
Companys Current Report on
Form 8-K
dated December 11, 2007).
|
|
4
|
.1
|
|
|
|
Specimen Certificate of Common Stock, $.001 par value, of
the Company (incorporated herein by reference to
Exhibit 4.1 to the Companys 2001 Annual Report on
Form 10-K).
|
|
4
|
.2
|
|
|
|
Form of warrant to purchase 327,862 shares of the
Companys Common Stock at $12.80 per share issued to former
T-3 shareholders in connection with the merger of T-3 and
Industrial Holdings, Inc. (incorporated herein by reference to
Annex VII to the Definitive Proxy Statement on
Schedule 14A of T-3 dated November 9, 2001).
|
|
10
|
.1+
|
|
|
|
T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended
and restated effective June 4, 2009 (incorporated herein by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K
dated June 5, 2009).
|
|
10
|
.2+
|
|
|
|
Form of Employee Non-Statutory Stock Option Agreement under the
Companys 2002 Stock Incentive Plan, as amended and
restated effective July 30, 2002 (incorporated herein by
reference to Exhibit 10.4 to the Companys Current
Report on
Form 8-K
dated January 18, 2006).
|
|
10
|
.3+
|
|
|
|
Form of Non-Employee Director Non-Statutory Stock Option
Agreement under the Companys 2002 Stock Incentive Plan, as
amended and restated effective July 30, 2002 (incorporated
herein by reference to Exhibit 10.5 to the Companys
Current Report on
Form 8-K
dated January 18, 2006).
|
|
10
|
.4
|
|
|
|
Stock Purchase Agreement by and Among T-3 Energy Services, Inc.,
Energy Equipment Corporation, Energy Equipment Group, Inc. and
the Stockholders of Energy Equipment Group, Inc. (incorporated
herein by reference to Exhibit 2.1 to the Companys
Current Report on
Form 8-K
dated October 31, 2007).
|
|
10
|
.5
|
|
|
|
Stock Purchase Agreement by and among T-3 Energy Services, Inc.,
HP&T Products, Inc., Federal International (2000) Ltd,
George Anderson, Vijay Chatufale and Joe Gruba (incorporated
herein by reference to Exhibit 2.2 to the Companys
Current Report on
Form 8-K
dated October 31, 2007).
|
|
10
|
.6+
|
|
|
|
Form of Restricted Stock Award Agreement (incorporated herein by
reference to Exhibit 10.2 to the Companys Quarterly
Report on
Form 10-Q
for the period ended September 30, 2007).
|
|
10
|
.7
|
|
|
|
Second Amended and Restated Credit Agreement dated as of
October 26, 2007, among T-3 Energy Services, Inc. as U.S.
Borrower, T-3 Energy Services (formerly known as T-3 Oilco
Energy Services Partnership) as Canadian Borrower, Wells Fargo
Bank, National Association as U.S. Administrative Agent, U.S.
Issuing Lender and U.S. Swingline Lender, and as Lead Arranger,
Comerica Bank as Canadian Administrative Agent, Canadian Issuing
Lender and Canadian Swingline Lender, and the Lenders
(incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated October 31, 2007).
|
|
10
|
.8+
|
|
|
|
Employment Agreement by and between James M. Mitchell and T-3
Energy Services, Inc. (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
dated July 2, 2008).
|
|
10
|
.9+
|
|
|
|
Restricted Stock Award Agreement of James M. Mitchell
(incorporated herein by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
dated July 2, 2008).
|
|
10
|
.10+
|
|
|
|
Employment Agreement by and between Keith A. Klopfenstein and
T-3 Energy Services, Inc. (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
dated November 5, 2008).
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Identification of Exhibit
|
|
|
10
|
.11+
|
|
|
|
Separation Agreement by and between Gus D. Halas and T-3 Energy
Services, Inc., effective as of March 23, 2009
(incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated March 25, 2009).
|
|
10
|
.12+
|
|
|
|
Employment Agreement by and between Steven W. Krablin and T-3
Energy Services, Inc., effective as of March 23, 2009
(incorporated herein by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
dated March 25, 2009).
|
|
14
|
.1
|
|
|
|
Senior Executive Ethics Policy (incorporated herein by reference
to Exhibit 14.1 to the Companys 2003 Annual Report on
Form 10-K).
|
|
21
|
.1*
|
|
|
|
Subsidiaries of the Company.
|
|
23
|
.1*
|
|
|
|
Consent of Ernst & Young LLP with respect to the
audited consolidated financial statements of T-3 Energy
Services, Inc. and subsidiaries.
|
|
31
|
.1*
|
|
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
|
31
|
.2*
|
|
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
|
32
|
.1**
|
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
Of 2002 (Chief Executive Officer).
|
|
32
|
.2**
|
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
Of 2002 (Chief Financial Officer).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
+ |
|
Management contract or compensatory plan or arrangement |