Attached files
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EX-32 - SECTION 906 CERTIFICATIONS OF CEO AND CFO - TESCO CORP | tesco32.htm |
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - TESCO CORP | tesco311.htm |
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - TESCO CORP | tesco312.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q/A
(Amendment No.
1)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended September 30, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
file number: 001-34090
Tesco
Corporation
(Exact
name of registrant as specified in its charter)
Alberta
|
76-0419312
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
3993
West Sam Houston Parkway North
Suite
100
Houston,
Texas
|
77043-1221
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
713-359-7000
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer x
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company ¨
|
Indicate
by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date.
Number of
shares of Common Stock outstanding as of October 30, 2009:
37,660,446
Explanatory
Note
The
condensed consolidated financial statements for the three and nine months
ended September 30, 2009 and related disclosures in this Amendment No.1 to
Quarterly Report on Form 10-Q (this "Amendment") have been restated in
accordance with the changes described below.
In
February 2010, we concluded that it was necessary to amend our Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2009 (the "Original
Filing") in order to restate our condensed consolidated financial statements for
the period ended September 30, 2009 to record an additional tax
benefit of $2.9 million resulting from a change in Canadian tax law. In the
first quarter of 2009, Canada enacted a new tax law that allowed for the filing
of Tesco’s Canadian income tax return on a U.S. dollar basis. The effect of the
new tax law and Tesco’s election for adoption was required to be reflected in
Tesco's consolidated financial statements for the three months ended March
31, 2009. As such, we recorded a $1.6 million income tax benefit,
which thereby increased net income, during the first quarter of 2009 to account
for this change in tax law. During the preparation of the financial statements
for the year ended December 31, 2009, we determined that the $1.6 million income
tax benefit was calculated in error and identified an additional $2.9 million
income tax benefit which should have been recorded during the first quarter of
2009. See Note 2 to the Condensed Consolidated Financial Statements
included herein for additional information.
No
attempt has been made in this Amendment to modify or update the disclosures
in the Original Filing except for the changes to the condensed consolidated
financial statements described above, certain clarifying disclosures, and
related changes to Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Item 4. Controls and
Procedures.
As a
result of this Amendment, the certifications pursuant to Section 302 and Section
906 of the Sarbanes-Oxley Act of 2002, filed as exhibits to our Original Filing,
have been revised, re-executed and re-filed as of the date of this Amendment.
Except for the foregoing amended and restated information, this Amendment
continues to describe conditions as of the date of the Original Filing, and the
disclosures contained herein have not been updated to reflect events, results or
developments that have occurred after the Original Filing, or to modify or
update those disclosures affected by subsequent events unless otherwise
indicated in this Amendment. Among other things, forward-looking
statements made in the Original Filing have not been revised to reflect events,
results or developments that have occurred or facts that have become known to us
after the date of the Original Filing, and such forward-looking statements
should be read in their historical context. This Amendment should be read in
conjunction with our filings made with the SEC subsequent to the Original
Filing, including any amendments to those filings.
TABLE OF CONTENTS
Page
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PART
I—FINANCIAL INFORMATION
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Item
1.
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1
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Item
2.
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28
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Item
3.
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48
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Item
4.
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49
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PART
II—OTHER INFORMATION
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Item
1.
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50
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Item
1A.
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50
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Item
2.
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50
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Item
3.
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50
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Item
4.
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50
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Item
5.
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50
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Item
6.
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52
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i
Caution
Regarding Forward-Looking Information; Risk Factors
This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Canadian and United States securities laws, including the United
States Private Securities Litigation Reform Act of 1995. From time to time, our
public filings, press releases and other communications (such as conference
calls and presentations) will contain forward-looking statements.
Forward-looking information is often, but not always identified by the use of
words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “forecast,”
“target,” “project,” “may,” “will,” “should,” “could,” “estimate,” “predict” or
similar words suggesting future outcomes or language suggesting an outlook.
Forward-looking statements in this quarterly report on Form 10-Q include, but
are not limited to, statements with respect to expectations of our prospects,
future revenues, earnings, activities and technical results.
Forward-looking
statements and information are based on current beliefs as well as assumptions
made by, and information currently available to, us concerning anticipated
financial performance, business prospects, strategies and regulatory
developments. Although management considers these assumptions to be reasonable
based on information currently available to it, they may prove to be incorrect.
The forward-looking statements in this quarterly report on Form 10-Q are made as
of the date it was issued and we do not undertake any obligation to update
publicly or to revise any of the included forward-looking statements, whether as
a result of new information, future events or otherwise, except as required by
applicable law.
By their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, and risks that outcomes implied by
forward-looking statements will not be achieved. We caution readers not to place
undue reliance on these statements as a number of important factors could cause
the actual results to differ materially from the beliefs, plans, objectives,
expectations and anticipations, estimates and intentions expressed in such
forward-looking statements.
These
risks and uncertainties include, but are not limited to, the impact of changes
in oil and natural gas prices and worldwide and domestic economic conditions on
drilling activity and demand for and pricing of our products and services, other
risks inherent in the drilling services industry (e.g. operational risks,
potential delays or changes in customers’ exploration or development projects or
capital expenditures, the uncertainty of estimates and projections relating to
levels of rental activities, uncertainty of estimates and projections of costs
and expenses, risks in conducting foreign operations, the consolidation of our
customers, and intense competition in our industry), and risks associated with
our intellectual property and with the performance of our technology. These
risks and uncertainties may cause our actual results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. When relying on our forward-looking
statements to make decisions, investors and others should carefully consider the
foregoing factors and other uncertainties and potential events.
Copies of
our Canadian public filings are available at www.tescocorp.com and on
SEDAR at www.sedar.com.
Our U.S. public filings are available at www.tescocorp.com and on
EDGAR at www.sec.gov.
Please
see Part I, Item 1A—Risk Factors of our annual report on Form 10-K for the
year ended December 31, 2008 and Part II, Item 1A—Risk Factors of this
quarterly report on Form 10-Q, for further discussion regarding our exposure to
risks. Additionally, new risk factors emerge from time to time and it is not
possible for us to predict all such factors, nor to assess the impact such
factors might have on our business or the extent to which any factor or
combination of factors may cause actual results to differ materially from those
contained in any forward looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
PART
I—FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL STATEMENTS
(UNAUDITED).
|
TESCO
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in
thousands)
September
30,
2009
(Restated)
Note 2
|
December
31,
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and Cash Equivalents
|
$ | 45,761 | $ | 20,619 | ||||
Accounts
Receivable Trade, net
|
48,725 | 97,747 | ||||||
Inventories,
net
|
97,716 | 95,192 | ||||||
Deferred
Income Taxes
|
8,230 | 10,916 | ||||||
Prepaid
and Other Current Assets
|
27,397 | 19,690 | ||||||
Total
Current Assets
|
227,829 | 244,164 | ||||||
Property,
Plant and Equipment, net
|
193,287 | 209,024 | ||||||
Goodwill
|
29,240 | 28,746 | ||||||
Deferred
Income Taxes
|
15,856 | 10,439 | ||||||
Intangible
and Other Assets, net
|
5,818 | 7,545 | ||||||
TOTAL
ASSETS
|
$ | 472,030 | $ | 499,918 | ||||
LIABILITIES &
SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Current
Portion of Long Term Debt
|
$ | 2,525 | $ | 10,171 | ||||
Accounts
Payable
|
21,581 | 38,946 | ||||||
Income
Taxes Payable
|
–– | 8,053 | ||||||
Deferred
Revenues
|
6,744 | 16,638 | ||||||
Accrued
and Other Current Liabilities
|
25,660 | 26,639 | ||||||
Total
Current Liabilities
|
56,510 | 100,447 | ||||||
Long
Term Debt
|
31,400 | 39,400 | ||||||
Deferred
Income Taxes
|
14,929 | 8,197 | ||||||
Total
Liabilities
|
102,839 | 148,044 | ||||||
COMMITMENTS
AND CONTINGENCIES
SHAREHOLDERS’
EQUITY
|
||||||||
Common
Shares
|
174,345 | 171,384 | ||||||
Contributed
Surplus
|
15,272 | 14,902 | ||||||
Retained
Earnings
|
145,668 | 141,957 | ||||||
Accumulated
Comprehensive Income
|
33,906 | 23,631 | ||||||
Total
Shareholders’ Equity
|
369,191 | 351,874 | ||||||
TOTAL
LIABILITIES & SHAREHOLDERS’ EQUITY
|
$ | 472,030 | $ | 499,918 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
TESCO
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in
thousands, except per share and share information)
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
(Restated)
Note 2
|
2008
|
2009
(Restated)
Note 2
|
2008
|
|||||||||||||
REVENUE
|
||||||||||||||||
Products
|
$ | 25,186 | $ | 65,448 | $ | 117,015 | $ | 175,049 | ||||||||
Services
|
47,423 | 74,573 | 154,205 | 220,497 | ||||||||||||
72,609 | 140,021 | 271,220 | 395,546 | |||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Cost
of Sales and Services
|
||||||||||||||||
Products
|
18,319 | 39,069 | 86,712 | 110,279 | ||||||||||||
Services
|
43,012 | 60,181 | 144,970 | 181,497 | ||||||||||||
61,331 | 99,250 | 231,682 | 291,776 | |||||||||||||
Selling,
General and Administrative
|
6,811 | 13,372 | 33,909 | 37,866 | ||||||||||||
Research
and Engineering
|
2,092 | 2,561 | 6,525 | 8,140 | ||||||||||||
Total
Operating Expenses
|
70,234 | 115,183 | 272,116 | 337,782 | ||||||||||||
OPERATING
INCOME (LOSS)
|
2,375 | 24,838 | (896 | ) | 57,764 | |||||||||||
OTHER
EXPENSE
|
||||||||||||||||
Interest
expense
|
497 | 1,098 | 1,451 | 3,552 | ||||||||||||
Interest
income
|
(847 | ) | (45 | ) | (896 | ) | (306 | ) | ||||||||
Foreign
exchange losses
|
1,002 | 422 | 1,480 | 747 | ||||||||||||
Other
(income) expense
|
(1 | ) | (99 | ) | 143 | (53 | ) | |||||||||
Total
Other Expense
|
651 | 1,376 | 2,178 | 3,940 | ||||||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
1,724 | 23,462 | (3,074 | ) | 53,824 | |||||||||||
INCOME
TAX PROVISION (BENEFIT)
|
1,329 | 6,293 | (6,785 | ) | 13,658 | |||||||||||
NET INCOME
|
$ | 395 | $ | 17,169 | $ | 3,711 | $ | 40,166 | ||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | 0.01 | $ | 0.46 | $ | 0.10 | $ | 1.08 | ||||||||
Diluted
|
$ | 0.01 | $ | 0.45 | $ | 0.10 | $ | 1.06 | ||||||||
Weighted
average number of shares:
|
||||||||||||||||
Basic
|
37,620,269 | 37,473,597 | 37,567,286 | 37,125,680 | ||||||||||||
Diluted
|
38,206,640 | 38,024,147 | 38,289,253 | 37,733,119 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
TESCO
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in
thousands)
Nine
Months Ended
September
30,
|
||||||||
2009
(Restated)
Note 2
|
2008
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
Income
|
$ | 3,711 | $ | 40,166 | ||||
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
27,199 | 24,476 | ||||||
Stock
compensation expense
|
3,048 | 5,425 | ||||||
Deferred
income taxes
|
3,950 | 1,366 | ||||||
Amortization
of financial items
|
521 | 520 | ||||||
Gain
on sale of operating assets
|
(931 | ) | (15,687 | ) | ||||
Impairment
of assets held for sale
|
1,792 | –– | ||||||
Changes
in components of working capital
|
||||||||
Decrease
(increase) in accounts receivable trade
|
49,513 | (13,354 | ) | |||||
Decrease
(increase) in inventories
|
3,216 | (4,639 | ) | |||||
Increase
in prepaid and other current assets
|
(3,594 | ) | (5,151 | ) | ||||
Decrease
in accounts payable
|
(16,888 | ) | (11,888 | ) | ||||
(Decrease)
increase in accrued and other current liabilities
|
(6,601 | ) | 13,861 | |||||
(Decrease)
increase in income taxes payable
|
(15,829 | ) | 5,495 | |||||
Other,
net
|
(6 | ) | (1,427 | ) | ||||
Net
cash provided by operating activities
|
49,101 | 39,163 | ||||||
INVESTING
ACTIVITIES
|
||||||||
Additions
to property, plant and equipment
|
(13,701 | ) | (57,713 | ) | ||||
Proceeds
on sale of operating assets
|
4,795 | 19,783 | ||||||
Other,
net
|
(194 | ) | 221 | |||||
Net
cash used in investing activities
|
(9,100 | ) | (37,709 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Issuances
of debt
|
10,000 | 51,773 | ||||||
Repayments
of debt
|
(25,643 | ) | (78,468 | ) | ||||
Proceeds
from exercise of stock options
|
492 | 9,153 | ||||||
Debt
issue costs
|
— | (100 | ) | |||||
Excess
tax benefit associated with equity based compensation
|
— | 1,036 | ||||||
Net
cash used in financing activities
|
(15,151 | ) | (16,606 | ) | ||||
Effect
of foreign exchange losses on cash balances
|
292 | 5 | ||||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
25,142 | (15,147 | ) | |||||
Net
Cash and Cash Equivalents, beginning of period
|
20,619 | 23,072 | ||||||
Net
Cash and Cash Equivalents, end of period
|
$ | 45,761 | $ | 7,925 | ||||
Supplemental
Cash Flow Information
|
||||||||
Cash
paid during the period for interest
|
$ | 877 | $ | 3,372 | ||||
Cash
paid during the period for income taxes
|
$ | 11,589 | $ | 6,649 | ||||
Cash
receipts during the period for interest
|
$ | 901 | $ | 295 | ||||
Cash
receipts during the period for income taxes
|
$ | 6,752 | $ | 391 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
TESCO
CORPORATION
Notes
to Condensed Consolidated Financial Statements
Note
1—Summary of Significant Accounting Policies
Nature
of Operations
Tesco
Corporation (“TESCO” or the “Company”) is a global leader in the design,
manufacture and service delivery of technology based solutions for the upstream
energy industry. We seek to change the way people drill wells by delivering
safer and more efficient solutions that add real value by reducing the costs of
drilling for and producing oil and gas. Our product and service offerings
include proprietary technology, including TESCO CASING DRILLING®
(“CASING DRILLING”), TESCO’s Casing Drive System™
(“CDS”) and TESCO’s Multiple Control Line Running System™
(“MCLRS”). TESCO® is a
registered trademark in Canada and the United States. TESCO CASING DRILLING® is a
registered trademark in the United States. CASING DRILLING® is a
registered trademark in Canada and CASING DRILLING™ is a
trademark in the United States. Casing Drive System™,
CDS™,
Multiple Control Line Running System™ and
MCLRS™ are
trademarks in Canada and the United States.
Basis
of Presentation
These
Condensed Consolidated Financial Statements have been prepared by management in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). All references to US$ or $ are to U.S. dollars and
references to C$ are to Canadian dollars.
The
condensed consolidated financial statements include the accounts of the Company
and its majority owned domestic and foreign subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company is organized under the laws of Alberta and is therefore subject to
the Business Corporation
Act (Alberta). The Company is also a reporting issuer (or the equivalent)
in each of the provinces of Canada. Effective December 31, 2006, the
Company became a U.S. registrant and a domestic filer with the SEC.
The
Company incurs costs directly and indirectly associated with its revenues at a
business unit level. Direct costs include expenditures specifically incurred for
the generation of revenue, such as personnel costs on location or
transportation, maintenance and repair, and depreciation of its
revenue-generating equipment. Overhead costs, such as field administration and
field operations support, are not directly associated with the generation of
revenue within a particular business segment.
Market
for Common Stock
TESCO’s
common stock is traded on The Nasdaq Global Market (“NASDAQ”) under the symbol
“TESO.” Until June 30, 2008, TESCO’s common stock was also traded on the Toronto
Stock Exchange (“TSX”) under the symbol “TEO.” Effective June 30, 2008, the
Company voluntarily delisted its shares from the TSX.
Foreign
Currency Translation
The U.S.
dollar is the functional currency for all of the Company’s worldwide operations
except for its Canadian operations. For foreign operations where the local
currency is the functional currency, specifically the Company’s Canadian
operations, assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at end-of-period exchange rates, and the resulting
translation adjustments are reported, net of their related tax effects, as a
component of Accumulated Other Comprehensive Income in Stockholders’
Equity. Assets and liabilities denominated in currencies other than
the functional currency are remeasured into the functional currency prior to
translation into U.S. dollars, and the resulting exchange gains and losses are
included in income in the period in which they occur. Income and expenses are
translated into U.S. dollars at the average exchange rates in effect during the
period.
Revenue
Recognition
The
Company recognizes revenues when the earnings process is complete and
collectability is reasonably assured. TESCO recognizes revenues for product
sales when title and risk of loss of the equipment are transferred to the
customer, with no right of return. Revenue in the Top Drive segment may be
generated from contractual arrangements that include multiple deliverables.
Revenue from these arrangements is recognized as each item or service is
delivered based on their relative fair value and when the delivered items or
services have stand-alone value to the customer. For project management
services, service and repairs and rental activities, TESCO recognizes revenues
as the services are rendered based upon agreed daily, hourly or job
rates.
The Company
provides product warranties on equipment sold pursuant to manufacturing
contracts and provides for the anticipated cost of its warranties in cost of
sales when sales revenue is recognized. The accrual of warranty costs is an
estimate based upon historical experience and upon specific warranty issues as
they arise. The Company periodically reviews its warranty provision to assess
its adequacy in light of actual warranty costs incurred. Because the warranty
accrual is an estimate, it is reasonably possible that future warranty issues
could arise that could have a significant impact on the Company’s financial
statements.
The
following is a reconciliation of changes in the Company’s warranty accrual for
the nine months ended September 30, 2009 and the year ended December 31, 2008
(in thousands):
Nine
Months Ended
September
30, 2009
|
Year
Ended
December
31, 2008
|
|||||||
Balance—beginning
of period
|
$ | 3,326 | $ | 3,045 | ||||
Charged
to expense, net
|
161 | 1,684 | ||||||
Charged
to other accounts(a)
|
73 | (129 | ) | |||||
Deductions
|
(895 | ) | (1,274 | ) | ||||
Balance—end
of period
|
$ | 2,665 | $ | 3,326 |
(a)
|
Represents
currency translation adjustments and
reclassifications.
|
Deferred
Revenues
The
Company generally requires customers to pay a non-refundable deposit for a
portion of the sales price for top drive units with their order. These customer
deposits are deferred until the customer takes title and risk of loss of the
product.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company’s customers to make required
payments. The primary factors used in determining the allowance needed for
accounts receivable are customer bankruptcies, delinquency and management’s
estimate of ability to collect outstanding receivables based on the number of
days outstanding. At September 30, 2009 and December 31, 2008, the
allowance for doubtful accounts on Trade Accounts Receivable was $2.2 million
and $3.2 million, respectively.
Inventories
Inventory
consists primarily of specialized tubular services and casing tool parts, spare
parts, work in process, and raw materials to support the Company’s ongoing
manufacturing operations and its installed base of specialized equipment used
throughout the world. During the manufacturing process, the Company values its
inventories (work in progress and finished goods) primarily using standard
costs, which approximate actual costs, and such costs include raw materials,
direct labor and manufacturing overhead allocations.
Inventory
costs for manufactured equipment are stated at the lower of cost or market using
specific identification. Inventory costs for spare parts are stated at the lower
of cost or market using the average cost method. The Company performs
obsolescence reviews on its slow-moving and excess inventories and establishes
reserves based on such factors as usage of inventory on-hand, technical
obsolescence and market conditions, as well as future expectations related to
its manufacturing sales backlog, its installed base and the development of new
products.
At
September 30, 2009 and December 31, 2008, inventories, net of reserves for
excess and obsolete inventories, by major classification were as follows (in
thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Raw
materials
|
$ | 37,450 | $ | 26,049 | ||||
Work
in progress
|
2,835 | 2,648 | ||||||
Finished
goods
|
57,431 | 66,495 | ||||||
$ | 97,716 | $ | 95,192 |
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost. Maintenance and repairs are expensed as
incurred. The costs of replacements, betterments and renewals are capitalized.
When properties and equipment, other than top drive units in the Company’s
rental fleet, are sold, retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the books and the resulting gain or
loss is recognized in the accompanying Condensed Consolidated Statements of
Income. When top drive units in the Company’s rental fleet are sold, the sales
proceeds are included in revenues and the net book value of the equipment sold
is included in Cost of Sales and Services in the accompanying Condensed
Consolidated Statements of Income.
Drilling
equipment includes related manufacturing costs and overhead. The net book value
of used top drive rental equipment sold included in Cost of Sales and Services
in the accompanying Condensed Consolidated Statements of Income was $1.9 million
and $0.6 million for the three months ended September 30, 2009 and 2008,
respectively and $2.9 million and $2.3 million for the nine months ended
September 30, 2009 and 2008, respectively. During the three and nine months
ended September 30, 2009, the Company recognized net gains of $1.6 million and
$1.1 million, respectively related to the sales of ancillary operating
equipment.
Depreciation
and amortization expense is included in the Condensed Consolidated Statements of
Income as follows (in thousands):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of sales and services
|
$ | 8,506 | $ | 8,182 | $ | 26,146 | $ | 23,618 | ||||||||
Selling,
general and administrative expense
|
308 | 236 | 989 | 774 | ||||||||||||
Research
and engineering
|
40 | 19 | 64 | 84 | ||||||||||||
$ | 8,854 | $ | 8,437 | $ | 27,199 | $ | 24,476 |
Assets
Held for Sale
During
the year ended December 31, 2008, the Company listed for sale a building and
land located in Canada. The Company incurred approximately $0.3 million and $0.9
million in soil remediation costs to prepare the property for sale during the
three and nine months ended September 30, 2008, and $0.1 million and $0.1
million in soil remediation costs to prepare the property for sale during the
three and nine months ended September 30, 2009. These costs were
capitalized and reported as an increase in the property’s net book value as of
September 30, 2009. The property has a carrying value of $2.0 million and $1.7
million, net of accumulated depreciation as of September 30, 2009 and December
31, 2008, respectively, and is included in Property, Plant and Equipment in the
accompanying Condensed Consolidated Balance Sheets.
During
the three months ended June 30, 2009, the Company made the decision to sell
operating assets located in North America within the next 12 months for an
amount expected to be less than their current carrying amount. As a
result, the Company recorded a pre-tax impairment loss of approximately $1.8
million to write down the fixed assets to their estimated realizable value of
$0.2 million as of June 30, 2009. The impairment loss is included in the Tubular
Services segment as a part of Cost of Sales and Services in the accompanying
Condensed Consolidated Statements of Income for the nine months ended September
30, 2009. The Company ceased depreciating the assets at the time they
were classified as held for sale and has reflected the current carrying amount
in Property, Plant and Equipment in the accompanying Condensed Consolidated
Balance Sheets.
Investments
The
Company's securities are considered available-for-sale and are reported at fair
value based upon quoted market prices in the accompanying Condensed Consolidated
Balance Sheets. Unrealized gains and losses arising from the revaluation of
available-for-sale securities are included, net of applicable deferred income
taxes, in Accumulated Other Comprehensive Income within Shareholders’
Equity. Realized gains and losses on sales of investments based on
specific identification of securities sold are included in Other Expense in the
Condensed Consolidated Statements of Income. The Company held no investments in
securities during the three and nine months ended September 30, 2009 or
2008.
Goodwill
and Other Intangible Assets
Goodwill,
which represents the value of businesses acquired by the Company in excess of
the fair market value of all of the identifiable tangible and intangible net
assets of the acquired businesses at the time of their acquisition, is carried
at the lower of cost or fair value. The Company’s goodwill has an indefinite
useful life and is subject to an annual impairment test in the fourth quarter of
each year or the occurrence of a triggering event. Any resulting impairment loss
is charged to income and disclosed separately in the Condensed Consolidated
Statements of Income.
During
the three months ended June 30, 2009, the Company performed an interim
impairment test of its goodwill due to events and changes in circumstances
during the second quarter of 2009 that indicated an impairment might have
occurred. The primary factor deemed by management to have constituted a
potential impairment triggering event was a significant decline in revenues
experienced in the second quarter of 2009. For purposes of the analysis, the
Company made significant management assumptions including sales volumes and
prices, costs of products and services, capital spending, working capital
changes, terminal value multiples and the discount rate. The discount rate is
commensurate with the risk inherent in the projected cash flows and reflects the
rate of return required by an investor in the current economic conditions.
Inherent in the Company’s projections are key assumptions relative to how long
the current downward economic cycle might last. Furthermore, the financial and
credit market volatility directly impacts the fair value measurement through the
weighted-average cost of capital that was used to determine the discount rate.
During times of volatility, significant judgment must be applied to determine
whether credit changes are a short term or long term trend. No impairment losses
were incurred as a result of this interim test. However, if actual results are
not consistent with our assumptions and judgments used in estimating future cash
flows and asset fair values, the Company could be exposed to future impairment
losses that could be material to its results of operations.
The
Company determined that no such triggering event occurred during the three
months ended September 30, 2009, and accordingly, did not perform an impairment
analysis on its goodwill during the current period. The change in the
carrying amount of goodwill of $0.5 million from December 31, 2008 to September
30, 2009 is due to the effect of foreign currency exchange rates.
The
Company has capitalized certain identified intangible assets, primarily customer
relationships, patents, licenses, and non-compete agreements, based on their
estimated fair value at the date acquired. The customer relationships intangible
assets are amortized on a straight-line basis over an estimated economic life of
four to seven years, the patents are amortized on a straight-line basis over an
estimated economic life of 10 to 14 years, and the non-compete agreements are
amortized on a straight-line basis over the term of the agreements of four
years. These amortizable intangible assets are reviewed at least annually for
impairment or when circumstances indicate their carrying value may not be
recoverable based on a comparison of fair value to carrying value. The Company
determined that no such circumstance existed during the three or nine months
ended September 30, 2009, and accordingly, did not perform an impairment
analysis on its intangible assets. No impairment losses were incurred during the
nine months ended September 30, 2009 or the year ended December 31, 2008. If a
future impairment loss is recognized, it will be charged to income and disclosed
separately in the Condensed Consolidated Statements of Income.
Derivative
Financial Instruments
As a
result of its worldwide operations, the Company is exposed to market risks from
changes in interest and foreign currency exchange rates, which may affect its
operating results and financial position. The Company manages its risks from
fluctuations in interest and foreign currency exchange rates through its normal
operating and financing activities. However, from time to time, the Company may
manage its interest and foreign exchange rate risks through the use of
derivative financial instruments. The Company does not use derivative financial
instruments for trading or speculative purposes.
During
the nine months ended September 30, 2008, the Company entered into a series of
14 monthly foreign currency forward contracts with notional amounts aggregating
C$50.8 million. The Company subsequently settled two of these contracts and
terminated the remaining 12 contracts, and recognized a loss of $0.2 million for
the nine months ended September 30, 2008, which was included in Foreign exchange
losses in the Condensed Consolidated Statements of Income. In the Consolidated
Statement of Cash Flows, cash receipts or payments related to these exchange
contracts are classified consistent with the cash flows from the transaction
being hedged.
The
Company was not party to any derivative financial instruments as of September
30, 2009 or December 31, 2008.
Fair
Value Measurement
The
Company measures and reports its financial assets and liabilities
at fair
value, defined as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. To obtain fair values,
observable market prices are used if available. In some instances, observable
market prices are not readily available for certain financial instruments and
fair value is determined using present value or other techniques appropriate for
a particular financial instrument. These techniques involve some degree of
judgment and as a result are not necessarily indicative of the amounts the
Company would realize in a current market exchange. The use of different
assumptions or estimation techniques may have a material effect on the estimated
fair value amounts. These valuation techniques are based on observable and
unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect the Company’s market
assumptions. The Company uses a three-level hierarchy for disclosure to show the
extent and level of judgment used to estimate fair value
measurements:
Level 1 Inputs—Quoted prices
for identical instruments in active markets.
Level 2 Inputs—Quoted prices
for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations
whose inputs are observable or whose significant value drivers are
observable.
Level 3 Inputs—Instruments
with primarily unobservable value drivers.
The
Company held no assets or liabilities carried at fair value as of December 31,
2008. During the three months ended June 30, 2009, the Company made the decision
to sell operating assets located in North America within the next 12
months. These fixed assets had a carrying amount of $2.0 million, and
were written down to their estimated realizable value of $0.2 million during the
nine months ended September 30, 2009. The estimated realizable fair value was
derived from observable market prices in the form of quotations received from
independent third parties (“Level 2” inputs). The resulting impairment charge of
$1.8 million is included in Cost of Sales and Services in the accompanying
Condensed Consolidated Statements of Income for the nine months ended September
30, 2009. The following table presents the Company’s assets at fair value and
the basis for determining their fair values (in thousands):
As
of
September
30,
2009
|
Quoted Prices in
Active Markets
for Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Total
Losses
|
||||||||||||||||
Assets
held for sale
|
$ | 200 | $ | — | $ | 200 | — | $ | 1,800 |
The
Company was party to derivative contracts during the nine months ended September
30, 2008. The Company uses a market approach to value the assets and
liabilities for outstanding derivative contracts, which historically consisted
solely of foreign currency forward contracts as discussed in Note 1 above. These
contracts are valued using current market information in the form of foreign
currency spot rates as of the reporting date. The Company recognizes the
unrealized net gains or losses on these contracts on the accrual basis in
Foreign exchange losses in the Condensed Consolidated Statements of Income. The
Company was not party to any derivative financial instruments as of September
30, 2009 or December 31, 2008.
The
carrying value of cash, accounts receivable, accounts payable and accrued
liabilities approximate their fair value due to the relatively short-term period
to maturity of the instruments.
The fair
value of the Company’s long term debt depends primarily on current market
interest rates for debt issued with similar maturities by companies with risk
profiles similar to TESCO. The fair value of its debt related to the Company’s
credit facility at September 30, 2009 of $31.4 million is estimated to be $29.8
million. The Company also has short term debt in the form of a term loan. The
fair value of the Company’s term loan of $2.5 million at September 30, 2009 is
estimated to be $2.5 million.
Accounting
for Operating Leases
The
Company has entered into non-cancelable operating lease agreements primarily
involving office space. Certain of these leases contain escalating lease
payments and the Company recognizes expense on a straight line basis which is
more representative of the time pattern in which the leased property is
physically employed. In certain instances the Company is also entitled to
reimbursements for part or all of leasehold improvements made and records a
deferred credit for such reimbursements which is amortized over the remaining
life of the lease term as a reduction in lease expense.
Research
and Engineering Expenses
The
Company expenses research and engineering costs when incurred. Payments received
from third parties, including payments for the use of equipment prototypes,
during the research or development process are recognized as a reduction in
research and engineering expense when the payments are received.
Severance
Costs
During
the three and nine months ended September 30, 2009, the Company eliminated
approximately 50 and 490 employee positions, respectively, due to a review of
its personnel structure and recorded $0.3 million and $3.2 million,
respectively, in termination benefits associated with the reductions. These
severance costs were recorded in Cost of Sales and Services ($0.2 million and
$1.5 million for the three and nine months ended September 30, 2009,
respectively), Research and Engineering expense ($0.1 million and $0.4 million
for the three and nine months ended September 30, 2009, respectively) and
Selling, General and Administrative expense ($0 million and $1.3 million for the
three and nine months ended September 30, 2009, respectively) in the
accompanying Condensed Consolidated Statements of Income based on the respective
functions performed by those employees who were terminated during the period.
These costs were recorded in the Company’s operating segments as follows (in
thousands):
Three
Months Ended
September
30, 2009
|
Nine
Months Ended
September
30, 2009
|
|||||||
Top
Drive
|
$ | 171 | $ | 1,059 | ||||
Tubular
Services
|
50 | 398 | ||||||
Casing
Drilling
|
18 | 157 | ||||||
Research and
Engineering
|
91 | 417 | ||||||
Corporate and Other | — | 1,193 | ||||||
Total
Severance Costs
|
$ | 330 | $ | 3,224 |
Accrued
severance costs were included in Accrued and Other Current Liabilities in the
accompanying Condensed Consolidated Balance Sheets as follows (in
thousands):
Three
Months Ended
September
30, 2009
|
Nine
Months Ended
September
30, 2009
|
|||||||
Balance—beginning
of
period
|
$ | 589 | $ | –– | ||||
Charged
to
expense
|
330 | 3,224 | ||||||
Payments
|
(794 | ) | (3,099 | ) | ||||
Balance—end
of
period
|
$ | 125 | $ | 125 |
During
the nine months ended September 30, 2008, the Company eliminated approximately
100 employee positions due to a review of its personnel structure and recorded
termination benefits of $1.1 million associated with the reduction. These
severance costs are recorded in Cost of Sales and Services ($0.1 million and
$0.9 million for the three and nine months ended September 30, 2008,
respectively), Research and Engineering expense ($0.0 million and $0.1 million
for the three and nine months ended September 30, 2008, respectively) and
Selling, General and Administrative expense ($0.0 million and $0.1 million for
the three and nine months ended September 30, 2008, respectively) in the
accompanying Condensed Consolidated Statements of Income based on the respective
functions performed by those employees who were terminated during the
period.
Income
Taxes
Stock-Based
Compensation
On May
18, 2007, the Company’s shareholders approved amendments to its 2005 Incentive
Plan to, among other things, provide for a variety of forms of equity
compensation awards to be granted to employees, directors and other persons. As
a result, the Company changed the method by which it provides stock-based
compensation to its employees by reducing the number of stock options granted
and instead issuing restricted stock awards as a form of compensation. The
Company has granted two different types of restricted stock awards: restricted
stock units (“RSU”s) which are subject to time based vesting criteria and
performance share units (“PSU”s) which contain both time and performance based
criteria. Both RSUs and PSUs may be settled by delivery of shares or the payment
of cash equal to the market value of TESCO shares that would otherwise be
deliverable at the time of settlement at the discretion of the Company. For
further description of the Company’s stock-based compensation plan, see Note 4
below.
The Company
measures stock-based compensation cost for equity-classified awards as of grant
date or the employee start date for pre-employment grants, based on the
estimated fair value of the award less an estimated rate for pre-vesting
forfeitures, and recognizes compensation expense on a graded basis over the
vesting period. Compensation expense is recognized with an offsetting credit to
Contributed Surplus, which is then transferred to Common Shares when the award
is distributed or the option is exercised. Consideration received on the
exercise of stock options is credited to Common Shares. For stock option grants,
the Company uses a Black-Scholes valuation model to determine the estimated fair
value.
Canadian
dollar-denominated stock option awards issued to non-Canadian employees qualify
for liability classification due to the Company’s voluntary delisting from the
TSX effective June 30, 2008. Accordingly, the fair value of these awards is
included in Accrued and Other Current Liabilities in the accompanying Condensed
Consolidated Balance Sheet. At September 30, 2009 and December 31, 2008,
the fair value of these awards was approximately $0.8 million.
Stock
compensation expense is recorded in Cost of Sales and Services, Research and
Engineering expense and Selling, General and Administrative expense in the
accompanying Condensed Consolidated Statements of Income based on the respective
functions for those employees receiving stock option grants. Stock compensation
expense is included in the Condensed Consolidated Statements of Income as
follows (in thousands):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of Sales and Services
|
$ | 168 | $ | 306 | $ | 627 | $ | 1,230 | ||||||||
Selling,
General and Administrative Expense
|
78 | 1,780 | 2,207 | 3,813 | ||||||||||||
Research
and Engineering
|
43 | 105 | 214 | 382 | ||||||||||||
$ | 289 | $ | 2,191 | $ | 3,048 | $ | 5,425 |
During
the three and nine months ended September 30, 2009, the Company recorded a
reversal of approximately $0.7 million and $0.9 million, respectively, in stock
compensation expense related to performance stock units in response to the
current year’s operating results.
Per
Share Information
The
following table reconciles basic and diluted weighted average shares (in
thousands):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Basic
weighted average number of shares outstanding
|
37,620 | 37,474 | 37,567 | 37,126 | ||||||||||||
Dilutive
effect of stock compensation awards
|
–– | 550 | 722 | 607 | ||||||||||||
Diluted
weighted average number of shares outstanding
|
37,620 | 38,024 | 38,289 | 37,733 | ||||||||||||
Weighted
average anti-dilutive options excluded from calculation due to exercise
prices
|
944 | 87 | 3,850 | 1,034 | ||||||||||||
Weighted
average anti-dilutive options excluded from calculation due to reported
net loss
|
656 | –– | –– | –– |
For the
three months ended September 30, 2009, the weighted average diluted shares
outstanding excluded 656,388 shares because the Company reported a loss during
the period, and including them would have had an anti-dilutive effect on loss
per share.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“Codification”) became the single source of authoritative U.S. GAAP. The Codification did not create any new U.S. GAAP standards but incorporated existing accounting and reporting standards into a new topical structure with a new referencing system to identify authoritative accounting standards, replacing the prior references to Statement of Financial Accounting Standards (“SFAS”), Emerging Issues Task Force (“EITF”), FASB Staff Position (“FSP”) and other publications. Authoritative standards included in the Codification are designated by their Accounting Standards Codification (“ASC”) topical reference, and new standards will be designated as Accounting Standards Updates (ASU), with a year and assigned sequence number. Beginning with this interim report for the third quarter of 2009, references to prior standards have been updated to reflect the new referencing system.
In October 2009, the
FASB issued updated guidance that allows for more flexibility in determining the
value of separate elements in revenue arrangements with multiple
deliverables. This guidance modifies the requirements for determining
whether a deliverable can be treated as a separate unit of accounting by
removing the criteria that verifiable and objective evidence of fair value
exists for the undelivered elements. All entities must adopt no later
than the beginning of their first fiscal year beginning on or after June 15,
2010. Upon adoption, entities may choose between the prospective application for
transactions entered into or materially modified after the date of adoption, or
the retroactive application for all revenue arrangements for all periods
presented. Disclosures will be required when changes in either those
judgments or the application of this guidance significantly affect the timing or
amount of revenue recognition. The Company will adopt these
provisions on January 1, 2011. The Company is currently evaluating the potential
impact these standards may have on the consolidated financial
statements.
In June
2009, the FASB issued new accounting guidance that clarifies the
characteristics that identify a variable interest entity (“VIE”) and changes how
a reporting entity identifies a primary beneficiary that would consolidate the
VIE from a quantitative risk and rewards calculation to a qualitative approach
based on which variable interest holder has controlling financial interest and
the ability to direct the most significant activities that impact the VIE’s
economic performance. This guidance requires the primary beneficiary
assessment to be performed on a continuous basis. It also requires additional
disclosures about an entity’s involvement with VIE, restrictions on the VIE’s
assets and liabilities that are included in the reporting entity’s consolidated
balance sheet, significant risk exposures due to the entity’s involvement with
the VIE, and how its involvement with a VIE impacts the reporting entity’s
consolidated financial statements. This update is effective for fiscal years
beginning after November 15, 2009. The Company will adopt these provisions
on January 1, 2010 and the adoption is not expected to have a material impact on
the consolidated financial statements.
In June
2009, the FASB issued new accounting guidance that enhances the information
provided to financial statement users to provide greater transparency about
transfers of financial assets and a transferor’s continuing involvement, if any,
with transferred financial assets. Under this Statement, many types of
transferred financial assets that would have been derecognized previously are no
longer eligible for derecognition. This Statement requires enhanced disclosures
about the risks to which a transferor continues to be exposed due to its
continuing involvement in transferred financial assets. This Statement also
clarifies and improves certain provisions in previously issued statements that
have resulted in inconsistencies in the application of the principles on which
that Statement is based. These updates are effective for annual reporting
periods beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company will adopt these provisions on
January 1, 2010 and the adoption is not expected to have a material impact on
the consolidated financial statements.
In May
2009, the FASB issued new accounting guidance which establishes general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events. The Company adopted the new disclosure
requirements of its financial statements issued for the period ended June 30,
2009 and the adoption did not have a material impact on the consolidated
financial statements. See “Basis of Presentation,” above.
In April
2009, the FASB issued new guidance that requires that a registrant to disclose
the fair value of all financial instruments for interim reporting periods and in
its financial statements for annual reporting periods, whether recognized or not
recognized in the statement of financial position. The Company adopted the
updated guidance for the interim reporting period ended March 31, 2009 and
the adoption did not have a material impact on the Company’s consolidated
financial statements as the Statement required additional disclosures but no
change in accounting policy. See “Fair Value Measurement,” above.
In April
2008, the FASB issued an update to existing accounting standards that amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. The intent
of the update is to improve the consistency between the useful life
of a recognized intangible asset under existing accounting standards and the
period of expected cash flows used to measure the fair value of the asset under
accounting guidance for business combinations and other applicable accounting
literature. The Company adopted the updated guidance on January 1, 2009 and
the adoption did not have a material impact on the Company’s consolidated
financial statements.
In March
2008, the FASB issued an update to existing accounting standards enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how: (a) an entity uses derivative
instruments; (b) derivative instruments and related hedged items are
accounted for under previously issued standards and (c) derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The Company adopted the provisions of the
updated guidance on January 1, 2009 and the adoption did not have a
material impact on the Company’s consolidated financial statements.
In December
2007, the FASB issued an update to previously issued accounting guidance to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Additionally, this Statement requires that consolidated
net income include the amounts attributable to both the parent and the
noncontrolling interest. The Company adopted the updated guidance on
January 1, 2009 and the adoption did not have a material impact on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued a revision to previously issued accounting
standards which significantly changes the principles and requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The update also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This guidance is effective on a prospective basis to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and
early adoption is prohibited. In February 2009, the FASB issued additional
updates which amended the provisions related to the initial recognition and
measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under the guidance. The
Company adopted both of the updates on a prospective basis effective
January 1, 2009 and the adoption did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued new accounting guidance that affirms that the objective of
fair value when the market for an asset is not active; clarifies and includes
additional factors for determining whether there has been a significant decrease
in market activity for an asset in an inactive market; eliminates the proposed
presumption that all transactions are distressed and requires an entity to
disclose a change in valuation technique (and the related inputs) resulting from
the application of the guidance. The updated guidance must be
applied prospectively and retrospective application is not permitted. The
Company elected to adopt the updated guidance in the first quarter of 2009, and
the adoption did not have a material impact on the Company’s consolidated
financial statements.
In February
2009, Canada enacted a new tax law that allowed for the filing of Tesco’s
Canadian income tax return on a U.S. dollar basis. The effect of the new tax law
and Tesco’s election for adoption was required to be reflected in Tesco's
consolidated financial statements for the first quarter of 2009. As
such, Tesco recorded a $1.6 million income tax benefit, which thereby increased
net income, during the first quarter of 2009 to account for this change in tax
law. The Company has determined that the $1.6 million income tax benefit was
calculated in error and that an additional $2.9 million income tax benefit
should have been recorded during the first quarter of 2009. In
addition, $0.4 million of foreign exchange loss should not have been recorded in
Tesco’s income statement in the first three quarters of 2009. This
error resulted from the incorrect re-measurement and translation into U.S.
dollars of one of the Company’s foreign assets.
As a result of these errors, the Company has restated the condensed consolidated financial statements and filed amended Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009, June 30, 2009 and September 30, 2009.
Additionally,
the Company has identified certain immaterial errors that originated in prior
periods. The company considered the impact of the misstatements on
each of the quarterly periods affected and on a cumulative basis and concluded
the items were not material to its interim results for each of the quarters in
2008 or to the annual results for the year ended December 31,
2008. However, the correction of the results would have been material
to the Company’s interim results for each of the quarters and the annual results
in the year ended December 31, 2009. As a result of this evaluation,
the Company has revised its financial results for the three and nine months
ended September 30, 2008 and the condensed consolidated balance sheet as of
December 31, 2008 to reflect the cumulative impact of this correction. The
Company does not consider the aforementioned changes to the condensed
consolidated financial statements as of December 31, 2008 and for the three
months and nine months ended September 30, 2008 to be
material.
Changes in
the notes to the condensed consolidated financial statements have been made to
reflect the corresponding impact of the restatement and the revision of the
immaterial errors as discussed above.
The following table
summarizes the effects of the restatement and the revision of the immaterial
errors on the condensed consolidated financial statements as of and for the
three and nine month periods ended September 30, 2009 (in
thousands):
As
of September 30, 2009
|
|||||||||||||
September
30,
2009
as
previously reported
|
Adjustments
|
September
30,
2009
as
restated
|
|||||||||||
ASSETS
|
|||||||||||||
CURRENT
ASSETS
|
|||||||||||||
Cash
and Cash Equivalents
|
$ | 45,761 | $ | - | $ | 45,761 | |||||||
Accounts
Receivable Trade, net
|
48,725 | - | 48,725 | ||||||||||
Inventories,
net
|
97,716 | - | 97,716 | ||||||||||
Deferred
Income Taxes
|
17,512 | (9,282 | ) |
(d)
|
8,230 | ||||||||
Prepaid
and Other Assets
|
19,497 | 7,900 |
(d)
|
27,397 | |||||||||
Total
Current Assets
|
229,211 | (1,382 | ) | 227,829 | |||||||||
Property,
Plant and Equipment, net
|
193,287 | - | 193,287 | ||||||||||
Goodwill
|
29,240 | - | 29,240 | ||||||||||
Deferred
Income Taxes
|
13,190 | 2,666 |
(d)
|
15,856 | |||||||||
Intangible
and Other Assets
|
5,818 | - | 5,818 | ||||||||||
TOTAL
ASSETS
|
$ | 470,746 | $ | 1,284 | $ | 472,030 | |||||||
LIABILITIES &
SHAREHOLDERS’ EQUITY
|
|||||||||||||
CURRENT
LIABILITIES
|
|||||||||||||
Current
Portion of Long Term Debt
|
$ | 2,525 | $ | - | $ | 2,525 | |||||||
Accounts
Payable
|
21,581 | - | 21,581 | ||||||||||
Income
Taxes Payable
|
2,254 | (2,254 | ) |
(d)
|
- | ||||||||
Deferred
Revenues
|
6,744 | - | 6,744 | ||||||||||
Accrued
and Other Current Liabilities
|
25,429 | 231 | (a,b) | 25,660 | |||||||||
Total
Current Liabilities
|
58,533 | (2,023 | ) | 56,510 | |||||||||
Long
Term Debt
|
31,400 | - | 31,400 | ||||||||||
Deferred
Income Taxes
|
14,929 | - | 14,929 | ||||||||||
Total
Liabilities
|
104,862 | (2,023 | ) | 102,839 | |||||||||
COMMITMENTS
AND CONTINGENCIES
|
|||||||||||||
SHAREHOLDERS’
EQUITY
|
|||||||||||||
Common
Shares
|
174,345 | - | 174,345 | ||||||||||
Contributed
Surplus
|
15,272 | - | 15,272 | ||||||||||
Retained
Earnings
|
143,304 | 2,364 | 145,668 | ||||||||||
Accumulated
Comprehensive Income
|
32,963 | 943 |
(c,d)
|
33,906 | |||||||||
Total
Shareholders’ Equity
|
365,884 | 3,307 | 369,191 | ||||||||||
TOTAL
LIABILITIES & SHAREHOLDERS’ EQUITY
|
$ | 470,746 | $ | 1,284 | $ | 472,030 | |||||||
For
the Three Months Ended September 30, 2009
|
|||||||||||||
September
30,
2009
as
previously reported
|
Adjustments
|
September
30,
2009
as
Restated
|
|||||||||||
REVENUES
|
|||||||||||||
Products
|
$ | 25,186 | $ | - | $ | 25,186 | |||||||
Services
|
47,423 | - | 47,423 | ||||||||||
72,609 | - | 72,609 | |||||||||||
OPERATING
EXPENSES
|
|||||||||||||
Cost
of Sales and Services
|
|||||||||||||
Products
|
18,319 | - | 18,319 | ||||||||||
Services
|
43,695 | (683 | ) |
(a)
|
43,012 | ||||||||
62,014 | (683 | ) | 61,331 | ||||||||||
Selling,
General and Administrative
|
6,811 | - |
|
6,811 | |||||||||
Research
and Engineering
|
2,092 | - | 2,092 | ||||||||||
Total
Operating Expenses
|
70,917 | (683 | ) | 70,234 | |||||||||
OPERATING
INCOME
|
1,692 | 683 | 2,375 | ||||||||||
OTHER
EXPENSE
|
|||||||||||||
Interest
expense
|
497 | - | 497 | ||||||||||
Interest
income
|
(847 | ) | - | (847 | ) | ||||||||
Foreign
exchange (gains) losses
|
808 | 194 |
(c)
|
1,002 | |||||||||
Other
income
|
(1 | ) | - | (1 | ) | ||||||||
Total
Other Expense
|
457 | 194 | 651 | ||||||||||
(LOSS)
INCOME BEFORE INCOME TAXES
|
1,235 | 489 | 1,724 | ||||||||||
INCOME
TAX PROVISION
|
1,503 | (174 | ) |
(d)
|
1,329 | ||||||||
NET
(LOSS) INCOME
|
$ | (268 | ) | $ | 663 | $ | 395 | ||||||
(Loss)
Earnings per share:
|
|||||||||||||
Basic
|
$ | (0.01 | ) | $ | 0.02 | $ | 0.01 | ||||||
Diluted
|
$ | (0.01 | ) | $ | 0.02 | $ | 0.01 | ||||||
Weighted
average number of shares:
|
|||||||||||||
Basic
|
37,620,269 | 37,620,269 | 37,620,269 | ||||||||||
Diluted
|
37,620,269 | 37,620,269 | 38,206,640 |
For
the Nine Months Ended September 30, 2009
|
|||||||||||||
September
30,
2009
as
previously reported
|
Adjustments
|
September
30,
2009
as
Restated
|
|||||||||||
REVENUES
|
|||||||||||||
Products
|
$ | 117,015 | $ | - | $ | 117,015 | |||||||
Services
|
154,205 | - | 154,205 | ||||||||||
271,220 | - | 271,220 | |||||||||||
OPERATING
EXPENSES
|
|||||||||||||
Cost
of Sales and Services
|
|||||||||||||
Products
|
86,712 | - | 86,712 | ||||||||||
Services
|
145,886 | (916 | ) |
(a)
|
144,970 | ||||||||
232,598 | (916 | ) | 231,682 | ||||||||||
Selling,
General and Administrative
|
33,633 | 276 |
(b)
|
33,909 | |||||||||
Research
and Engineering
|
6,525 | - | 6,525 | ||||||||||
Total
Operating Expenses
|
272,756 | (640 | ) | 272,116 | |||||||||
OPERATING
LOSS
|
(1,536 | ) | 640 | (896 | ) | ||||||||
OTHER
EXPENSE
|
|||||||||||||
Interest
expense
|
1,451 | - | 1,451 | ||||||||||
Interest
income
|
(896 | ) | - | (896 | ) | ||||||||
Foreign
exchange losses
|
1,106 | 374 |
(c)
|
1,480 | |||||||||
Other
income
|
143 | - | 143 | ||||||||||
Total
Other Expense
|
1,804 | 374 | 2,178 | ||||||||||
LOSS
BEFORE INCOME TAXES
|
(3,340 | ) | 266 | (3,074 | ) | ||||||||
INCOME
TAX PROVISION (BENEFIT)
|
(3,892 | ) | (2,893 | ) |
(d)
|
(6,785 | ) | ||||||
NET
INCOME
|
$ | 552 | $ | 3,159 | $ | 3,711 | |||||||
Earnings
per share:
|
|||||||||||||
Basic
|
$ | 0.01 | $ | 0.09 | $ | 0.10 | |||||||
Diluted
|
$ | 0.01 | $ | 0.09 | $ | 0.10 | |||||||
Weighted
average number of shares:
|
|||||||||||||
Basic
|
37,567,286 | 37,567,286 | 37,567,286 | ||||||||||
Diluted
|
38,289,253 | 38,289,253 | 38,289,253 |
For the Nine Months Ended
September 30,
2009
|
|||||||||||||
September
30, 2009
as
previously reported
|
Adjustments
|
September
30,
2009
as
restated
|
|||||||||||
Net
cash provided by operating activities
|
$ | 49,381 | $ | (280 | ) |
(a)
|
$ | 49,101 | |||||
Net
cash used in investing activities
|
(9,380 | ) | 280 |
(a)
|
(9,100 | ) | |||||||
Net
cash (used in) provided by financing activities
|
(15,151 | ) | - | (15,151 | ) |
(a)
|
The
Company over accrued certain costs related to litigation reserves, workers
compensation, payroll taxes and capital expenditures for the three and
nine months ended September 30, 2009. As a result of these errors, Cost of
Sales and Services was misstated. The Company recorded a
decrease of $0.7 million and $0.9 million for the three and nine months
ended September 30, 2009, respectively, with corresponding adjustments to
Accrued and Other Current Liabilities to correct this
misstatement.
|
(b)
|
The
Company under accrued certain costs related to compensation for the nine
months ended September 30, 2009. As a result of this error,
Selling, General & Administrative expenses were
misstated. The Company recorded an increase to expense of $0.3
million for the nine months ended September 30, 2009 with a corresponding
adjustment to Accrued and Other Current Liabilities to correct this
misstatement.
|
(c)
|
The
Company did not properly record foreign exchange losses for the three
and nine months ended September 30, 2009 related to the re-measurement of
certain intercompany accounts. As a result of this error,
Foreign Exchange (Gains) Losses were misstated. The Company
recorded an increase to expense of $0.2 million and $0.4 million for the
three and nine months ended September 30, 2009,
respectively, with a corresponding adjustment to Accumulated
Comprehensive Income to correct this misstatement.
|
(d)
|
As
a result of the restatement of the $2.9 million tax error described above
related to the Canadian tax law change and the tax impact of the
immaterial errors, the Company recorded an additional income tax
benefit of $0.2 million and $2.9 million for the three and nine months
ended September 30, 2009, respectively, with a corresponding adjustment to
Income Taxes Payable, Deferred Income Taxes and Accumulated Comprehensive
Income. In addition, the Company recorded certain reclassification
adjustments with no impact to income.
|
The
following tables summarize the effects of the corrected misstatements on the
condensed consolidated financial statements as of December 31, 2008 and for the
three and nine months ended September 30, 2008 (in thousands):
Balance
Sheet
as
of
December
31, 2008
|
|||||||||||||
December
31, 2008
as
previously reported
|
Adjustments
|
December
31, 2008
as
revised
|
|||||||||||
Inventories,
net
|
$ | 96,013 | $ | (821 | ) |
(d)
|
$ | 95,192 | |||||
Deferred
Income Taxes – Current Asset
|
10,996 | (80 | ) | (c,d) | 10,916 | ||||||||
Property,
Plant and Equipment, net
|
208,968 | 56 |
(d)
|
209,024 | |||||||||
Deferred
Income Taxes – Noncurrent Asset
|
9,066 | 1,373 |
(d)
|
10,439 | |||||||||
Income
Taxes Payable
|
8,297 | (244 | ) |
(c)
|
8,053 | ||||||||
Accrued
and Other Current Liabilities
|
25,711 | 928 | (a,b,d) | 26,639 | |||||||||
Contributed
Surplus
|
15,708 | (806 | ) |
(d)
|
14,902 | ||||||||
Retained
Earnings
|
142,752 | (795 | ) |
(d)
|
141,957 | ||||||||
Accumulated
Comprehensive Income
|
22,186 | 1,445 |
(d)
|
23,631 |
Statement
of Income
for
the Three Months Ended
September
30, 2008
|
|||||||||||||
September
30,
2008
as
previously reported
|
Adjustments
|
September 30,
2008
as
revised
|
|||||||||||
Cost
of Sales and Services
|
$ | 99,510 | $ | (260 | ) |
(a)
|
$ | 99,250 | |||||
Selling,
General and Administrative
|
12,550 | 822 |
(b)
|
13,372 | |||||||||
Income Before Income Taxes | 24,024 | (562 | ) | 23,462 | |||||||||
Income
Tax Provision
|
6,443 | (150 | ) |
(c)
|
6,293 | ||||||||
Net
Income
|
17,581 | (412 | ) | 17,169 | |||||||||
Earnings per share: | |||||||||||||
Basic | $ | 0.47 | $ | (0.01 | ) | $ | 0.46 | ||||||
Diluted | $ | 0.46 | $ | (0.01 | ) | $ | 0.45 |
Statement
of Income
for
the Nine Months Ended
September
30, 2008
|
|||||||||||||
September
30,
2008
as
previously reported
|
Adjustments
|
September 30,
2008
as
revised
|
|||||||||||
Cost
of Sales and Services
|
$ | 291,713 | $ | 63 |
(a)
|
$ | 291,776 | ||||||
Selling,
General and Administrative
|
36,875 | 991 |
(b)
|
37,866 | |||||||||
Income Before Income Taxes | 54,877 | (1,053 | ) | 53,824 | |||||||||
Income
Tax Provision
|
13,939 | (281 | ) |
(c)
|
13,658 | ||||||||
Net
Income
|
40,938 | (772 | ) | 40,166 | |||||||||
Earnings per share | |||||||||||||
Basic | $ | 1.10 | $ | (0.02 | ) | $ | 1.08 | ||||||
Diluted | $ | 1.08 | $ | (0.02 | ) | $ | 1.06 |
The
restatement and the revision of the immaterial errors had no impact on cash
provided by operating activities, cash used in investing activities or cash used
in financing activities for the nine months ended September 30,
2008.
(a)
|
The
Company did not properly accrue certain costs for the three and nine
months ended September 30, 2008 related to compensation. As a result of
these errors, Cost of Sales and Services was misstated. The Company
recorded a decrease of $0.3 million and an increase of $0.1 million for
the three and nine months ended September 30, 2008, respectively, with
corresponding adjustments to Accrued and Other Current Liabilities to
correct this misstatement.
|
(b)
|
The
Company under accrued certain costs for the three and nine months ended
September 30, 2008 related to compensation. As a result of this error,
Selling, General & Administrative expenses were misstated. The Company
recorded an increase to expense of $0.8 million and $1.0 million for the
three and nine months ended September 30, 2008, respectively, with
corresponding adjustments to Accrued and Other Current Liabilities to
correct this misstatement.
|
(c)
|
This
adjustment reflects the tax effect of the pre-tax errors noted above, with
corresponding adjustments to Income Taxes Payable and Deferred Income
Taxes.
|
(d)
|
Adjustments
to the Balance Sheet as of December 31, 2008 include the cumulative impact
of adjustments recorded for periods prior to January 1, 2008 and
adjustments recorded for each of the quarterly periods in the year ended
December 31, 2008. See the company’s Annual Report on Form 10-K
to be filed for the year ended December 31, 2009 for additional
information.
|
Note
3—Long Term Debt
Long term
debt consists of the following (in thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Secured
Revolver, maturity date of June 5, 2012, 1.50% and 1.99% interest rate at
September 30,
2009 and December 31, 2008, respectively
|
$ | 31,400 | $ | 39,400 | ||||
Secured
Term Loan, maturity date of October 31, 2009, 1.50% and 4.44% interest
rate at
September 30,
2009 and December 31, 2008, respectively
|
2,525 | 10,018 | ||||||
Other
|
— | 153 | ||||||
Total Debt
|
33,925 | 49,571 | ||||||
Less—Current Portion
of Long Term Debt
|
(2,525 | ) | (10,171 | ) | ||||
Non-Current Portion
of Long Term Debt
|
$ | 31,400 | $ | 39,400 |
Amounts
outstanding under the Secured Term Loan issued under the Company’s credit
agreement require quarterly payments on the principal amount
outstanding.
On June
5, 2007, the Company and its existing lenders entered into an amended and
restated credit agreement (the “Amended Credit Agreement”) to provide up to $100
million in revolving loans including up to $15 million of swingline loans
(collectively, the “Revolver”) and a term loan which had a balance of $25.0
million as of June 5, 2007 with required quarterly payments through October
31, 2009. The Amended Credit Agreement has a term of five years and all
outstanding borrowings on the Revolver will be due and payable on June 5, 2012.
In December 2007, the Company entered into the first amendment to the Amended
and restated Credit agreement to increase the Revolver to provide up to $145
million. In March 2008, it entered into a second amendment to the Amended Credit
Agreement in order to increase the limit on permitted capital expenditures
during the quarters ending March 31, June 30 and September 30, 2008 from 70% to
85% of consolidated EBITDA (as defined in the Amended Credit Agreement). Amounts
available under the Revolver are reduced by letters of credit issued under the
Amended Credit Agreement not to exceed $20 million in the aggregate of all
undrawn amounts and amounts that have yet to be disbursed under all existing
letters of credit. The availability of future borrowings may be limited in order
to maintain certain financial ratios required under the covenants. Amounts
available under the swingline loans may also be reduced by letters of credit or
by means of a credit to a general deposit account of the applicable
borrower.
Note
4—Shareholders’ Equity and Stock-Based Compensation
Common
Stock
The
following summarizes the activity in the Company’s common shares during the nine
months ended September 30, 2009 and for the year ended December 31, 2008 (dollar
amounts in thousands):
Nine
Months Ended
September
30, 2009
|
Year
Ended
December 31,
2008
|
|||||||||||||||
No.
of shares
|
Amount
|
No.
of shares
|
Amount
|
|||||||||||||
Balance—beginning
of period
|
37,513,861 | $ | 171,384 | 36,844,763 | $ | 154,332 | ||||||||||
Issued
on exercise of options
|
43,000 | 542 | 626,535 | 15,698 | ||||||||||||
Issuance
from settlement of restricted stock
|
84,586 | 2,285 | 31,159 | 1,129 | ||||||||||||
Other
issuance of common stock
|
17,539 | 134 | 11,404 | 225 | ||||||||||||
Balance—end
of period
|
37,658,986 | $ | 174,345 | 37,513,861 | $ | 171,384 |
Stock-Based
Compensation
Under the
terms of the Company’s stock option plan, as amended, 3,765,899 shares of common
stock were authorized as of September 30, 2009 for the grant of stock and stock
options to eligible directors, officers, employees and other persons. At
September 30, 2009, the Company had approximately 1,584,170 shares available for
future grants.
In May
2007, the Company amended and restated its incentive plan, now called the
Amended and Restated Tesco Corporation 2005 Incentive Plan (the “Restated
Plan”). Prior to May 2007, the Company granted stock options denominated only in
Canadian dollars. Under the Restated Plan, stock options and other stock based
awards may be denominated in Canadian dollars or U.S. dollars, at the Company’s
discretion.
Canadian
dollar-denominated stock option awards issued to non-Canadian employees qualify
for liability classification due to the Company’s voluntary delisting from the
TSX effective June 30, 2008. Accordingly, the fair value of these awards is
included in Accrued and Other Current Liabilities in the accompanying Condensed
Consolidated Balance Sheet. At September 30, 2009 and December 31, 2008, the
fair value of these awards was approximately $0.8 million. No payments were made
for stock-based awards classified as liabilities during the three and nine
months ended September 30, 2009.
With all
shares of common stock being traded on the NASDAQ, the Company plans to
denominate all future grants of equity-based awards in U.S. dollars. Options
granted by the Company have historically vested ratably over a
three year period and expired no later than seven years from the date of grant,
although the Board of Directors may choose different parameters in the future.
The exercise price of stock options under the plan may not be less than the fair
value on the date of the grant, as defined in the Restated Plan.
Stock
Options
The
following summarizes option activity for the options issued in Canadian dollars
during the nine months ended September 30, 2009 and 2008:
Nine
Months Ended
September
30, 2009
|
Nine
Months Ended
September
30, 2008
|
|||||||||||||||
No.
of options
|
Weighted-average
exercise
price
|
No.
of options
|
Weighted-Average
Exercise
price
|
|||||||||||||
Outstanding—beginning
of period
|
831,954 | C$ | 20.69 | 1,593,962 | C$ | 18.62 | ||||||||||
Granted
|
— | C$ | — | 46,300 | C$ | 24.44 | ||||||||||
Exercised
|
(20,000 | ) | C$ | 9.89 | (626,535 | ) | C$ | 14.87 | ||||||||
Cancelled
|
(121,759 | ) | C$ | 20.25 | (174,033 | ) | C$ | 23.41 | ||||||||
Outstanding—end
of period
|
690,195 | C$ | 21.08 | 839,694 | C$ | 20.75 | ||||||||||
Exercisable—end
of period
|
595,397 | C$ | 20.58 | 525,919 | C$ | 18.43 |
The following
summarizes option activity for the options issued in U.S. dollars during the
nine months ended September 30, 2009 and 2008:
Nine
Months Ended
September
30, 2009
|
Nine
Months Ended
September
30, 2008
|
|||||||||||||||
No.
of options
|
Weighted-Average
Exercise
price
|
No.
of options
|
Weighted-Average
Exercise
price
|
|||||||||||||
Outstanding—beginning
of period
|
647,100 | $ | 13.15 | — | $ | — | ||||||||||
Granted
|
45,000 | $ | 8.60 | 195,800 | $ | 28.54 | ||||||||||
Exercised
|
(23,000 | ) | $ | 7.51 | — | $ | — | |||||||||
Cancelled
|
(82,067 | ) | $ | 11.29 | (26,900 | ) | $ | 25.65 | ||||||||
Outstanding—end
of period
|
587,033 | $ | 13.28 | 168,900 | $ | 29.00 | ||||||||||
Exercisable—end
of period
|
51,521 | $ | 29.41 | — | $ | — |
The assumptions used in the Black-Scholes option pricing model during the nine months ended September 30, 2009 and 2008 were:
U.S.
Dollar Options
Nine
Months Ended
September
30,
|
Canadian
Dollar Options
Nine
Months Ended
September
30,
|
|||||||||||||||
Assumptions
|
2009
|
2008
|
2009
(Note
A)
|
2008
|
||||||||||||
Weighted
average risk-free interest rate
|
2.20 | % | 3.01 | % | 2.32 | % | 3.50 | % | ||||||||
Expected
dividend
|
$ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||
Expected
option life (years)
|
4.5 | 4.5 | 1.8 | 4.5 | ||||||||||||
Weighted
average expected volatility
|
66 | % | 50 | % | 79 | % | 51 | % | ||||||||
Weighted
average expected forfeiture rate
|
8 | % | 9 | % | 11 | % | 17 | % |
Note A:
|
Assumptions
used in the Black-Scholes pricing model during the nine months ended
September 30, 2009 for Canadian dollar options were used for revaluing
liability-classified stock option awards to fair
value.
|
Restricted
Stock
Beginning
in 2007, the Company began granting two different types of stock-based awards:
Restricted Stock Units (“RSU”s), which vest equally in three annual installments
from date of grant and entitle the grantee to receive the value of one share of
TESCO common stock upon vesting, and Performance Stock Units (“PSU”s), which
vest in full after three years and include a performance measure. PSU awards
entitle the grantee to receive the value of one share of TESCO common stock for
each PSU, subject to adjustments based on the performance measure. The PSU
performance objective multiplier can range from zero when threshold performance
is not met to a maximum of 2.5 times the initial award. Both RSUs and PSUs may
be settled by delivery of shares or the payment of cash based on the market
value of a TESCO share at the time of settlement at the discretion of the
Company.
The
following summarizes restricted stock activity during the nine months ended
September 30, 2009:
U.S.
Dollars
|
Canadian
Dollars
|
|||||||||||||||
Shares
|
Weighted-
Average
grant
date
fair
value
|
Shares
|
Weighted-
Average
Grant
date
fair
value
|
|||||||||||||
Outstanding—beginning
of period
|
625,200 | $ | 12.22 | 119,407 | C$ | 33.10 | ||||||||||
Granted
|
22,500 | $ | 8.64 | — | C$ | — | ||||||||||
Vested
|
(45,309 | ) | $ | 23.09 | (39,277 | ) | C$ | 32.99 | ||||||||
Cancelled
|
(83,335 | ) | $ | 11.46 | (9,535 | ) | C$ | 33.57 | ||||||||
Outstanding—end
of period
|
519,056 | $ | 11.23 | 70,595 | C$ | 33.10 | ||||||||||
The
following summarizes restricted stock activity during the nine months ended
September 30, 2008:
U.S.
Dollars
|
Canadian
Dollars
|
|||||||||||||||
Shares
|
Weighted-
Average
grant
date
fair
value
|
Shares
|
Weighted-
Average
Grant
date
fair
value
|
|||||||||||||
Outstanding—beginning
of period
|
–– | $ | –– | 141,100 | C$ | 36.15 | ||||||||||
Granted
|
156,400 | $ | 27.22 | 35,600 | C$ | 24.67 | ||||||||||
Vested
|
–– | $ | –– | (31,159 | ) | C$ | 36.22 | |||||||||
Cancelled
|
(19,100 | ) | $ | 25.12 | (25,200 | ) | C$ | 34.30 | ||||||||
Outstanding—end
of period
|
137,300 | $ | 27.51 | 120,341 | C$ | 33.13 |
The weighted
average expected forfeiture rate is 14% for RSUs and 5% for PSUs.
Note
5—Comprehensive Income
Comprehensive
income includes unrealized gains and losses of the Company which have been
recognized during the period as a separate component of Shareholders’ Equity.
The Company’s total comprehensive income for the three and nine months ended
September 30, 2009 and 2008 were as follows (in thousands):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net Income
|
$
|
395
|
|
$
|
17,169
|
$
|
3,711
|
$
|
40,166
|
|||||||
Foreign
currency translation adjustment, net of income taxes
|
5,427
|
(2,260
|
)
|
10,275
|
(4,049
|
)
|
||||||||||
Total
Comprehensive Income
|
$
|
5,822
|
$
|
14,909
|
$
|
13,986
|
$
|
36,117
|
Note
6—Income Taxes
Tesco
Corporation is an Alberta (Canada) corporation. The Company and its subsidiaries
conduct business and are taxable on profits earned in a number of jurisdictions
around the world. Income taxes have been provided based on the laws and rates in
effect in the countries in which operations are conducted or in which TESCO or
its subsidiaries are considered resident for income tax purposes.
The
Company’s income tax provision for the three and nine month periods ended
September 30, 2009 and 2008 consisted of the following (in
thousands):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Current
|
$ | (10,777 | ) | $ | 5,353 | $ | (10,735 | ) | $ | 12,292 | ||||||
Deferred
|
12,106 | 940 | 3,950 | 1,366 | ||||||||||||
Income
tax provision
|
$ | 1,329 | $ | 6,293 | $ | (6,785 | ) | $ | 13,658 |
The
Company’s effective tax rate for the three and nine months ended September 30,
2009 was 77% and 221% respectively, compared to 27% and 25%, respectively, for
the same periods in 2008. The effective tax rate for the three months ended
September 30, 2009 reflects a $1.1 million charge related to tax provision to
return adjustments as a result of filing an amended 2008 tax return in Canada
and the Company's 2008 U.S. income tax returns. The effective tax rate for the
nine months ended September 30, 2009 reflects the recognition of a $4.5 million
tax benefit associated with a Canadian tax law change that occurred during the
first quarter of 2009, a $0.4 million tax benefit for research and development
credits generated during 2009 and cumulative net tax benefits of $2.5 million
related to earnings or losses generated in jurisdictions with statutory tax
rates higher or lower than the Canadian federal and provincial statutory tax
rates. The effective tax rate for the nine months ended September 30, 2009 also
includes a $0.4 million charge related to an audit assessment received in a
foreign jurisdiction, a $0.5 million charge related to provision to return
adjustments as a result of filing the Company’s U.S. income tax returns in
September 2009 and $0.5 million of tax expense associated with a reduction in
deferred tax assets attributable to a change in the period in which we expect to
utilize such assets.
As of
September 30, 2009 and December 31, 2008, the Company had an accrual for
uncertain tax positions of $1.1 million and $1.2 million, respectively. This
liability is offset by the Company’s net income tax receivables and is included
in Income Taxes Payable in the accompanying Condensed Consolidated Balance
Sheets as the Company anticipates that these uncertainties will be resolved in
the next twelve months. The resolution of these uncertainties should not have a
material impact on the Company’s effective tax rate.
TESCO and
its subsidiaries are subject to Canada federal and provincial income tax and
have concluded substantially all Canada federal and provincial tax matters for
tax years through 2001. TESCO and its subsidiaries are also subject to U.S.
federal and state income tax and have concluded substantially all U.S. federal
income tax matters for tax years through 2005. One U.S. subsidiary has been
audited through the tax year ended October 31, 2005. During the nine months
ended September 30, 2009, an audit of the Company’s consolidated tax return for
the year 2006 was concluded with no impact to the Company’s financial position,
results of operations or cash flows.
TESCO has
been advised by the Mexican tax authorities that they believe significant
expenses incurred by the Company’s Mexican operations from 1996 through 2002 are
not deductible for Mexican tax purposes. Between 2002 and 2008, formal
reassessments disallowing these deductions were issued for each of these years,
all of which the Company appealed to the Mexican court system. TESCO has
obtained final court rulings deciding all years in dispute in the Company’s
favor, except for 1996 (discussed below), and 2001 and 2002, both of which are
currently before the Mexican Tax Court. The outcome of such appeals is
uncertain. However, TESCO recorded an accrual of $0.3 million during 2008 for
the Company’s anticipated exposure on these issues ($0.2 million related to
interest and penalties was included in Other Income and $0.1 million was
included in Income Tax Expense). TESCO continues to believe that the basis for
these reassessments was incorrect, and that the ultimate resolution of those
outstanding matters that remain will likely not have a material adverse effect
on the Company’s financial position, results of operations or cash
flows.
In May
2002, TESCO paid a deposit of $3.3 million with the Mexican tax authorities in
order to appeal the reassessment for 1996. In 2007 the Company requested and
received a refund of approximately $3.7 million (the original deposit amount of
$3.3 million plus $0.4 million in interest). Therefore, in the third quarter of
2007 the Company reversed an accrual for taxes, interest and penalties ($1.4
million related to interest and penalties was included in Other Income and $0.7
million benefit in Income Tax Expense). With the return of the $3.3 million
deposit, the Mexican tax authorities issued a resolution indicating that TESCO
was owed an additional $3.4 million in interest but this amount had been
retained by the tax authorities to satisfy a second reassessment for 1996. The
Company believes the second reassessment is invalid, and has appealed it to the
Mexican Tax Court. In January 2009, the Tax Court issued a decision accepting
the Company’s arguments in part, which is now final, and may entitle the Company
to request an additional refund. Due to uncertainty regarding the ultimate
outcome, TESCO has not recognized the additional interest in dispute as an
asset.
In
addition to the material jurisdictions above, other state and foreign tax
filings remain open to examination. TESCO believes that any assessment
on these filings will not have a material impact to the Company’s financial
position, results of operations or cash flows. TESCO believes that appropriate
provisions for all outstanding issues have been made for all jurisdictions and
all open years. However, audit outcomes and the timing of audit settlements are
subject to significant uncertainty. Therefore, additional provisions on
tax-related matters could be recorded in the future as revised estimates are
made or the underlying matters are settled or otherwise resolved.
Note
7—Commitments and Contingencies
Legal
Contingencies
The
Company, in the normal course of its business, is subject to legal proceedings
brought against it and its subsidiaries. The estimates below represent
management’s best estimates based on consultation with internal and external
legal counsel. There can be no assurance as to the eventual outcome or the
amount of loss the Company may suffer as a result of these
proceedings.
The
amount of loss the Company may suffer as a result of these proceedings is not
generally reasonably estimable until settlement is reached or judgment obtained.
Management does not believe that any such proceedings currently underway against
the Company, either individually or in the aggregate, will have a material
adverse effect on the Company’s consolidated financial position, results of
operations or cash flows.
Varco
I/P, Inc. (“Varco”) filed suit against TESCO in April 2005 in the U.S. District
Court for the Western District of Louisiana, alleging that our CDS infringes
certain of Varco’s U.S. patents. Varco seeks monetary damages and an injunction
against further infringement. The Company filed a countersuit against Varco in
June 2005 in the U.S. District Court for the Southern District of Texas, Houston
Division seeking invalidation of the Varco patents in question. In July 2006,
the Louisiana case was transferred to the federal district court in Houston, and
as a result, the issues raised by Varco have been consolidated into a single
proceeding in which we are the plaintiff. The Company also filed a request with
the U.S. Patent and Trademark Office (“USPTO”) for reexamination of the patents
on which Varco’s claim of infringement is based. The USPTO accepted the Varco
patents for reexamination, and the district court stayed the patent litigation
pending the outcome of the USPTO reexamination. In May 2009, the USPTO issued a
final action rejecting all of the Varco patent claims that TESCO had contested.
Varco has appealed this decision with the USPTO. The outcome and amount of any
future financial impacts from this litigation are not determinable at this
time.
Frank’s
International, Inc. and Frank’s Casing Crew and Rental Tools, Inc. (“Franks”)
filed suit against TESCO in the U.S. District Court for the Eastern District of
Texas, Marshall Division, on January 10, 2007, alleging that its Casing
Drive System infringes two patents held by Franks. TESCO filed a response
denying the Franks allegation and asserting the invalidity of its patents. In
May 2008, Franks withdrew its claims with respect to one of the patents, and, in
July 2008, TESCO filed a request with the USPTO for reexamination of the other
patent. In September 2008, the USPTO ordered a reexamination of that patent.
During the nine months ended September 30, 2009, TESCO, Franks, and a third
party from whom TESCO had a license agreed on terms of a settlement, pursuant to
which TESCO paid $1.8 million to Franks and $0.4 million to the third party.
Under the terms of the settlement, TESCO received from the third party a release
of any royalty obligation under the license and received from Franks a
fully-paid, perpetual, world-wide nonexclusive license under the two patents at
issue. Franks requested the court to dismiss its lawsuit with prejudice. TESCO
accrued and paid this $2.2 million settlement during the nine months ended
September 30, 2009.
Weatherford
International, Inc. and Weatherford/Lamb Inc. (“Weatherford”) filed suit against
TESCO in the U.S. District Court for the Eastern District of Texas, Marshall
Division, on December 5, 2007, alleging that various TESCO technologies
infringe 10 different patents held by Weatherford. Weatherford seeks monetary
damages and an injunction against further infringement. The TESCO technologies
referred to in the claim include the CDS, the CASING DRILLING system and method,
a float valve, and the locking mechanism for the controls of the tubular
handling system. The Company has filed a general denial seeking a judicial
determination that it does not infringe the patents in question and/or that the
patents are invalid. In November 2008, the Company filed requests with the
USPTO, seeking invalidation of substantially all of the Weatherford patent
claims in the suit. The trial is set for May 2011. The outcome and amount of any
future financial impacts from this litigation are not determinable at this
time.
In July
2006, the Company received a claim for withholding tax, penalties and interest
related to payments over the periods from 2000 to 2004 in a foreign
jurisdiction. The Company disagrees with this claim and is currently litigating
this matter. However, at June 30, 2006 the Company accrued its estimated pre-tax
exposure on this matter at $3.8 million, with $2.6 million of expense included
in Other (income) expense and $1.2 million included in Interest expense. During
2008 and the nine months ended September 30, 2009, the Company accrued an
additional $0.2 million and $0.2 million, respectively, of interest expense
related to this claim.
In August
2008, the Company received a claim in Mexico for $1.1 million in fines and
penalties related to the exportation of certain temporarily imported equipment
that remained in Mexico beyond the authorized time limit for its return. The
Company disagrees with this claim and is currently litigating the matter. Due to
considerable uncertainty regarding the ultimate outcome of this matter, the
Company has not provided an accrual for this contingency.
A former
employee of one of TESCO’s U.S. subsidiaries filed suit in the U.S. District
Court for the Southern District of Texas—Houston Division on January 29, 2009 on
behalf of a number of similarly situated claimants, alleging the Company failed
to comply with certain wage and hour regulations under the U.S. Fair Labor
Standards Act. The lawsuit was dismissed on July 22, 2009 on the basis that
several of the plaintiffs were bound to arbitrate their claims against the
Company pursuant to the TESCO Dispute Resolution Program (“Plan”). Five
plaintiffs not covered by the Plan re-filed their lawsuit on July 30, 2009 in
the same court. No trial date has been set. The 22 plaintiffs covered under the
Plan have subsequently initiated arbitration proceeding with the American
Arbitration Association in Houston. Additional plaintiffs have subsequently
joined both proceedings. TESCO intends to vigorously defend all the allegations
asserted in both proceedings. The outcome and amount of any potential financial
impact from the litigation and arbitration proceedings are not determinable at
this time.
Other
Contingencies
The
Company is contingently liable under letters of credit and similar instruments
that it is required to provide from time to time in connection with the
importation of equipment to foreign countries and to secure its performance on
certain contracts. At September 30, 2009 and December 31, 2008, the total
exposure to the Company under outstanding letters of credit was $6.5 million and
$6.4 million, respectively.
Business
Segments
Historically,
the Company organized its activities into three business segments: Top Drives,
Casing Services and Research and Engineering. Effective December 31, 2008,
the Company determined that the CASING DRILLING segment no longer met the
criteria which allowed it to be aggregated with Tubular Services in the Casing
Services segment and therefore changed the presentation of its Tubular Services
activities and CASING DRILLING activities into two separate segments. The
financial and operating data for the three and nine months ended September 30,
2008 have been recast to be presented consistently with this structure. The
Company’s four business segments are: Top Drives, Tubular Services, CASING
DRILLING and Research and Engineering. The Top Drive business is comprised of
top drive sales, top drive rentals and after-market sales and service. The
Tubular Services business includes both our proprietary and conventional Tubular
Services. The CASING DRILLING segment consists of our proprietary CASING
DRILLING technology, and the Research and Engineering segment is comprised of
our research and development activities related to Tubular Services technology,
CASING DRILLING technology and top drive model development.
These
segments report their results of operations to the level of operating income.
Certain functions, including certain sales and marketing activities and
corporate general and administrative expenses, are provided centrally from the
corporate office. The costs of these functions, together with Other expense and
Income tax provision (benefit), are not allocated to these segments. Assets are
allocated to the Top Drive, Tubular Services, CASING DRILLING or Research and
Engineering segments to which they specifically relate. All of the Company’s
goodwill has been allocated to the Tubular Services segment. The Company’s chief
operating decision maker is not provided a measure of assets by business segment
and as such this information is not presented.
The
Company incurs costs directly and indirectly associated with its revenues at a
business unit level. Direct costs include expenditures specifically incurred for
the generation of revenue, such as personnel costs on location or
transportation, maintenance and repair, and depreciation of the Company’s
revenue-generating equipment. Overhead costs, such as field administration and
field operations support, are not directly associated with the generation of
revenue within a particular business segment.
At the
end of 2008, the Company identified sales of certain accessories that were
previously included as part of top drive after-market support activities.
However, since these accessories are directly related to its proprietary and
patented Tubular Services technology, the Company now includes them with its
proprietary information. Accordingly, the Company has reclassified prior year
revenues of approximately $0.4 million and $1.4 million for the three and nine
months ended September 30, 2008, respectively, and operating income of
approximately $0.3 million and $1.0 million for the three and nine months ended
September 30, 2008, respectively, related to these sales from top drive
after-market support to proprietary Tubular Services to conform to current year
presentation.
Significant
financial information relating to these segments is as follows (in
thousands):
Three
Months Ended September 30, 2009
|
||||||||||||||||||||||||
Top
Drive
|
Tubular
Services
|
CASING
DRILLING
|
Research
&
Engineering
|
Corporate
and
Other
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 45,192 | $ | 24,285 | $ | 3,132 | $ | — | $ | — | $ | 72,609 | ||||||||||||
Depreciation
and amortization
|
1,674 | 4,992 | 1,115 | 40 | 1,033 | 8,854 | ||||||||||||||||||
Operating
income (loss)
|
14,053 | (1,440 | ) | (3,072 | ) | (2,092 | ) | (5,074 | ) | 2,375 | ||||||||||||||
Other
expense
|
651 | |||||||||||||||||||||||
Income
before income taxes
|
$ | 1,724 |
Three
Months Ended September 30, 2008
|
||||||||||||||||||||||||
Top
Drive
|
Tubular
Services
|
CASING
DRILLING
|
Research
&
Engineering
|
Corporate
and
Other
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 90,700 | $ | 42,784 | $ | 6,537 | $ | — | $ | — | $ | 140,021 | ||||||||||||
Depreciation
and amortization
|
2,239 | 4,472 | 1,150 | 19 | 557 | 8,437 | ||||||||||||||||||
Operating
income (loss)
|
32,188 | 7,558 | (3,055 | ) | (2,560 | ) | (9,293 | ) | 24,838 | |||||||||||||||
Other
expense
|
1,376 | |||||||||||||||||||||||
Income
before income taxes
|
$ | 23,462 |
Nine
Months Ended September 30, 2009
|
||||||||||||||||||||||||
Top
Drive
|
Tubular
Services
|
CASING
DRILLING
|
Research
&
Engineering
|
Corporate
and
Other
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 171,118 | $ | 89,210 | $ | 10,892 | $ | — | $ | — | $ | 271,220 | ||||||||||||
Depreciation
and amortization
|
5,443 | 15,645 | 3,491 | 64 | 2,556 | 27,199 | ||||||||||||||||||
Operating
income (loss)
|
41,172 | (949 | ) | (9,298 | ) | (6,525 | ) | (25,296 | ) | (896 | ) | |||||||||||||
Other
expense
|
2,178 | |||||||||||||||||||||||
Loss
before income taxes
|
$ | (3,074 | ) |
Nine
Months Ended September 30, 2008
|
||||||||||||||||||||||||
Top
Drive
|
Tubular
Services
|
CASING
DRILLING
|
Research
&
Engineering
|
Corporate
and
Other
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 251,414 | $ | 123,439 | $ | 20,693 | $ | — | $ | — | $ | 395,546 | ||||||||||||
Depreciation
and amortization
|
6,136 | 13,624 | 2,953 | 84 | 1,679 | 24,476 | ||||||||||||||||||
Operating
income (loss)
|
82,174 | 17,122 | (9,184 | ) | (8,139 | ) | (24,209 | ) | 57,764 | |||||||||||||||
Other
expense
|
3,940 | |||||||||||||||||||||||
Income
before income taxes
|
$ | 53,824 |
Geographic
Areas
The Company
attributes revenues to geographic regions based on the location of the customer.
Generally, for service activities, this will be the region in which the service
activity occurs and, for equipment sales, this will be the region in which the
customer’s purchasing office is located. The Company’s revenues occurred in the
following areas of the world (in thousands):
Three
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
United
States
|
$ | 26,108 | $ | 72,636 | ||||
Europe,
Africa and Middle East
|
11,223 | 17,731 | ||||||
Asia
Pacific
|
10,256 | 12,489 | ||||||
Canada
|
7,885 | 13,640 | ||||||
Mexico
|
9,291 | 7,546 | ||||||
South
America
|
7,846 | 15,979 | ||||||
Total
|
$ | 72,609 | $ | 140,021 | ||||
Nine
Months Ended
September
30,
|
||||||||
2009 | 2008 | |||||||
United
States
|
$ | 123,718 | $ | 203,786 | ||||
Europe,
Africa and Middle East
|
39,989 | 38,502 | ||||||
Asia
Pacific
|
33,128 | 52,839 | ||||||
Canada
|
26,058 | 43,633 | ||||||
Mexico
|
25,488 | 15,765 | ||||||
South
America
|
22,839 | 41,021 | ||||||
Total
|
$ | 271,220 | $ | 395,546 | ||||
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.
|
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and related notes thereto included elsewhere in this
report. This discussion contains forward-looking statements. Please see “Caution
Regarding Forward-Looking Information; Risk Factors” above and “Risk Factors”
below and in our Annual Report on Form 10-K for the year ended December 31,
2008, for a discussion of the uncertainties, risks and assumptions associated
with these statements.
OVERVIEW
Business
TESCO is
a global leader in the design, manufacture and service delivery of technology
based solutions for the upstream energy industry. We seek to change the way
people drill wells by delivering safer and more efficient solutions that add
real value by reducing the costs of drilling for and producing oil and gas. Our
product and service offerings include proprietary technology, including TESCO
CASING DRILLING®
(“CASING DRILLING”), TESCO’s Casing Drive System™
(“CDS”) and TESCO’s Multiple Control Line Running System™
(“MCLRS”). TESCO® is a
registered trademark in Canada and the United States. TESCO CASING DRILLING® is a
registered trademark in the United States. CASING DRILLING® is a
registered trademark in Canada and CASING DRILLING™ is a
trademark in the United States. Casing Drive System™,
CDS™,
Multiple Control Line Running System™ and
MCLRS™ are
trademarks in Canada and the United States.
Our four
business segments are: Top Drives, Tubular Services, CASING DRILLING and
Research and Engineering. Prior to December 31, 2008, we organized our
activities into three business segments: Top Drives, Casing Services and
Research and Engineering. Effective December 31, 2008, we determined that CASING
DRILLING no longer met the criteria which allowed it to be aggregated with
Tubular Services within the Casing Services segment and therefore changed the
presentation of our Tubular Services activities and CASING DRILLING activities
into two separate segments. The financial and operating data for the three and
nine months ended September 30, 2008 have been recast to be presented
consistently with this structure.
Our Top
Drive segment sells equipment and provides services to drilling contractors and
oil and gas operating companies throughout the world. We primarily manufacture
top drives that are used in drilling operations to rotate the drill string while
suspended from the derrick above the rig floor. We also provide top drive rental
services on a day-rate basis for land and offshore drilling rigs, and we provide
after-market sales and support for our customers.
Our
Tubular Services business includes both proprietary and conventional services,
which are typically offered as a “call out” service on a well-by-well
basis.
Our
proprietary Tubular Service business is based on our Proprietary Casing Running
Service technology, which uses certain components of our CASING DRILLING
technology, in particular the CDS, and provides an efficient method for running
casing and, if required, reaming the casing into the hole. Additionally, our
proprietary Tubular Service business includes the installation service of deep
water smart well completion equipment using our MCLRS, a proprietary and
patented technology which improves the quality of the installation of high-end
well completions.
Our
conventional Tubular Service business provides equipment and personnel for the
installation of tubing and casing, including power tongs, pick-up/lay-down
units, torque monitoring services, connection testing services and power swivels
for new well construction and in work-over and re-entry operations.
Our
CASING DRILLING business is based on our proprietary CASING DRILLING technology,
which uses patented equipment and processes to allow an oil or gas well to be
drilled using standard well casing pipe. In contrast, conventional or straight
practice rotary drilling requires the use of specialized drill pipe and
drillstring components. The demonstrated benefits of using well casing to drill
the well compared with conventional drilling include a reduction in the risk of
unscheduled downhole events that typically result in non-productive time and
additional cost and operational risk to the drilling contractor and well
operator.
RESTATEMENT
As
discussed in Note 2 to the condensed consolidated financial statements included
in Item 1, “Financial Statements (Unaudited),” above, we have restated the
condensed consolidated financial statements for the quarterly period ended
September 30, 2009. Additionally, we have revised our financial results for the
quarterly period ended September 30, 2008 and the condensed consolidated balance
sheet as of December 31, 2008 to reflect the impact of certain immaterial
adjustments. Changes in this management discussion and analysis have been made
to reflect the corresponding impact of the restatement and the immaterial
adjustments.
RESULTS OF OPERATIONS
For
the Three Months Ended September 30, 2009 and 2008
Our
revenues, operating income and net income for the three months ended September
30, 2009 decreased compared to the same period in 2008, primarily due to
decreased top drive product sales, decreased top drive rental activities,
decreased Tubular Services revenues, and decreased CASING DRILLING activity,
partially offset by decreased operating expenses. Revenues, operating income and
net income for the three months ended September 30, 2009 and 2008 were as
follows:
Three Months
Ended September 30,
|
%
Change
|
|||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
%
of
Revenues
|
%
of
Revenues
|
|||||||||||||||||||
REVENUES
|
||||||||||||||||||||
Top
Drive
|
||||||||||||||||||||
-Sales
|
$ | 14,343 | $ | 45,958 | (69 | ) | ||||||||||||||
-Rental
services
|
20,005 | 27,720 | (28 | ) | ||||||||||||||||
-After-market
sales and service(1)
|
10,844 | 17,022 | (36 | ) | ||||||||||||||||
Total
Top Drive
|
45,192 | 62 | 90,700 | 65 | (50 | ) | ||||||||||||||
Tubular
Services(2)
|
||||||||||||||||||||
-Conventional
|
4,052 | 18,882 | (79 | ) | ||||||||||||||||
-Proprietary(1)
|
20,233 | 23,902 | (15 | ) | ||||||||||||||||
Total
Tubular Services
|
24,285 | 34 | 42,784 | 31 | (43 | ) | ||||||||||||||
CASING
DRILLING
|
3,132 | 4 | 6,537 | 4 | (52 | ) | ||||||||||||||
Total
Revenues
|
$ | 72,609 | 100 | $ | 140,021 | 100 | (48 | ) | ||||||||||||
OPERATING
INCOME
|
||||||||||||||||||||
Top
Drive
|
$ | 14,053 | 31 | $ | 32,188 | 35 | (56 | ) | ||||||||||||
Tubular
Services
|
(1,440 | ) | (6 | ) | 7,558 | 18 | (119 | ) | ||||||||||||
CASING
DRILLING
|
(3,072 | ) | (98 | ) | (3,055 | ) | (47 | ) | 1 | |||||||||||
Research
and Engineering
|
(2,092 | ) | n/a | (2,560 | ) | n/a | 18 | |||||||||||||
Corporate
and Other
|
(5,074 | ) | n/a | (9,293 | ) | n/a | 45 | |||||||||||||
Total
Operating Income
|
$ | 2,375 | 3 | $ | 24,838 | 18 | (90 | ) | ||||||||||||
NET
(LOSS) INCOME
|
$ | 395 | 1 | $ | 17,169 | 12 | (98 | ) | ||||||||||||
(1)
|
At
the end of 2008, we identified sales of certain accessories that were
previously included as part of our top drive after-market support
activities. However, since these accessories are directly related to our
proprietary and patented Tubular Services technology, we now include them
with our proprietary information. Accordingly, we have reclassified prior
year revenues and operating income of approximately $0.4 million and $0.3
million, respectively, related to these sales from top drive after-market
support to proprietary Tubular Services to conform to our current year
presentation.
|
(2)
|
At
the end of 2008, we commenced the presentation of our Tubular Services
business and CASING DRILLING as two separate segments. Accordingly, we
have reclassified prior year revenues of approximately $6.5 million and
prior year operating losses of approximately $3.1 million from the former
Casing Services segment to the CASING DRILLING segment to conform to the
current year presentation.
|
Revenues
for the three months ended September 30, 2009 were $72.6 million, compared to
$140.0 million in the same period in 2008, a decrease of $67.4 million, or 48%.
This decrease is due to a $45.5 million decrease in the Top Drive segment, an
$18.5 million decrease in the Tubular Services segment and a $3.4 million
decrease in the CASING DRILLING segment. Each segment is discussed in further
detail below.
Operating
Income for the three months ended September 30, 2009 was $2.4 million, compared
to $24.8 million in the three months ended September 30, 2008, a decrease of
$22.4 million, or 90%. This decrease is primarily due to lower revenues in all
of our segments, decreased margins due to ongoing pricing pressures associated
with depressed drilling activity and $0.3 million in severance costs, partially
offset by a $1.6 million gain on the sale of operating equipment, as discussed
further below.
Net Income
for the three months ended September 30, 2009 was $0.4 million, compared to
income of $17.2 million in the same period in 2008, a decrease of $16.8 million,
or 98%. This decrease is primarily due to decreased operating income as
discussed above and a $0.6 million increase in foreign exchange losses and an
increase in our effective tax rate during the current year’s period, partially
offset by a $0.6 million decrease in interest expense and a $0.8 million
increase in interest income, as discussed below.
Top
Drive Segment
Our Top
Drive segment consists of top drive sales, after-market sales and service and
top drive rental service activities.
Revenues—Revenues for the
three months ended September 30, 2009 decreased $45.5 million, or 50%, compared
to the same period in 2008, primarily driven by a $31.6 million decrease in top
drive sales, a $7.7 million decrease in top drive rental operations and a $6.2
million decrease in after-market sales and service.
Revenues
from top drive sales decreased $31.6 million to $14.3 million for the three
months ended September 30, 2009 as compared to the same period in 2008. This
decrease is primarily due to a decrease in the number of Top Drive units sold
during the current year in connection with the current downturn in the drilling
industry. We sold 13 units (10 new and 3 used) during the three
months ended September 30, 2009, compared to 38 units sold (32 new and 6 used)
during the same period in 2008. Revenues related to the sale of used top drive
units during the three months ended September 30, 2009 were $2.9 million, down
from $7.1 million during the three months ended September 30,
2008.
Revenues
from top drive rental service activities decreased $7.7 million to $20.0 million
during the three months ended September 30, 2009 as compared to the same period
in 2008, primarily due to a decrease in the number of rental operating days,
primarily in North America, during the current year’s period. Our rental fleet
worked 4,441 operating days during the three months ended September 30, 2009,
down from 6,014 operating days in the same period last year. Demand for our top
drive rental services is directly tied to active rig count; on a year-over-year
basis, we estimate that the worldwide active rig count has declined
approximately 40%. At September 30, 2009, we had 123 top drives in our rental
fleet.
Revenues
from after-market sales and service decreased $6.2 million to $10.8 million for
the three months ended September 30, 2009 as compared to the same period in
2008, primarily due to the decline in industry conditions during the current
year’s period compared to the prior year. During 2009, weakened economic
conditions resulted in a marked decrease in active rig count and drilling
activities. Accordingly, our customers have decreased their demand for
after-market parts and maintenance and repair services. This decrease in demand
has resulted in pricing pressures and thus, decreased revenues per
job.
Operating Income—Top Drive
operating income for the three months ended September 30, 2009 decreased $18.1
million to $14.1 million as compared to the same period in 2008. The decrease in
operating income during the current period is primarily due to the decrease in
the number of top drives sold during the current period, as discussed above. In
addition, operating margins were negatively impacted by pricing pressures on our
after-market sales and service businesses, as described above. This was
partially offset by a $1.6 million gain on the sale of certain ancillary Top
Drive equipment.
Outlook—We had a third-party
backlog of three top drive units as of September 30, 2009 compared to a
third-party backlog of 10 units as of June 30, 2009 and 65 units as of December
31, 2008. With this drop in backlog, we have downsized our manufacturing
operations substantially to better reflect current market conditions. We have
maintained a core team, which can continue to deliver a reasonable number of top
drives each month to meet current and expected demand. We plan to minimize our
costs for the next several quarters and improve our business processes so as to
substantially improve efficiencies as the business turns around. While we have
seen an increase in activity, particularly in the rental portion of our
business, our customers have maintained their focus on lowering project costs
and, given the continued pricing pressures, we expect to see continued margin
compression over the remainder of 2009 and throughout 2010. We will continue to
monitor our operations and cost structure in response to any further changes in
demand.
Tubular
Services Segment
Revenues—Revenues for the
three months ended September 30, 2009 decreased $18.5 million, or 43%, to $24.3
million as compared to the same period in 2008. This was primarily due to a
$14.8 million decrease in our conventional Tubular Services business and a $3.7
million decrease in our proprietary service offerings. The decrease in our
revenues is due to a significant decline in North American drilling activity
over the past 12 months. Our conventional business is primarily conducted in
North America and has been severely impacted by the decline in active rig count
discussed above. We continue to shift our customers to our
proprietary product offerings. We completed 683 jobs during the three months
ended September 30, 2009, up 38% compared to 496 jobs during the three months
ended September 30, 2008. While the number of jobs performed has
increased, revenue per job has been negatively impacted by pricing pressures
resulting from decreased drilling activity.
Operating
Income—Tubular Services’ operating income for the three months ended
September 30, 2009 decreased $9.0 million to a $1.4 million loss compared to
income of $7.6 million for the same period in 2008, primarily due to the
decrease in revenues described above.
Outlook—We expect the current
year’s operations will remain depressed in the near term due to the current
status of worldwide economies and the current excess supply of oil and
natural gas. Our customers have maintained their focus on lowering project costs
and accordingly, given the continued pricing pressures, we expect to see
continuing margin compression over the remainder of 2009 and throughout 2010. We
will continue to monitor our operations and cost structure in response to any
further changes in demand. We continue to believe that the fundamentals driving
our global business remain intact and that our financial condition will enable
us to weather the current conditions and poise us for future growth when
conditions improve.
CASING
DRILLING Segment
Revenues—Revenues for the
three months ended September 30, 2009 were $3.1 million compared to $6.5 million
in the same period last year, a decrease of $3.4 million or 52%. This decrease
was due to a continuing decline in available work in connection with current
industry operating conditions. As mentioned above, worldwide active
rig count has declined approximately 40% during the past 12 months.
Operating Income—CASING
DRILLING’s operating loss for the three months ended September 30, 2009 was $3.1
million, virtually unchanged from last year. While revenues decreased
as discussed above, operating losses were minimized by reducing headcount in
locations experiencing significant activity declines, combining under-performing
operations and streamlining internal processes.
Outlook—As mentioned above,
we expect the current year’s operations will continue to decline in the near
term due to the current status of the drilling industry. We remain confident
that our CASING DRILLING business will be a valuable part of our future
operations. Accordingly, we are focusing on maintaining our existing
infrastructure around the world while reducing headcount in locations
experiencing significant activity declines, combining under-performing
operations and streamlining internal processes.
Research
and Engineering Segment
Research
and Engineering’s operating expenses are comprised of our activities related to
the design and enhancement of our top drive models and proprietary equipment and
were $2.1 million for the three months ended September 30, 2009, a decrease of
$0.5 million from operating expenses of $2.6 million for the three months ended
September 30, 2008. This decrease is primarily due to our focus on reducing
costs during the current year’s period, partially offset by $0.1 million in
severance costs incurred during the current quarter. We will continue to invest
in the development, commercialization and enhancements of our proprietary
technologies.
Corporate
and Other Segment
Corporate
and Other Expenses primarily consist of the corporate level general and
administrative expenses and certain operating level selling and marketing
expenses. Corporate and Other’s operating expenses for the three months ended
September 30, 2009 decreased $4.2 million to $5.1 million, compared to $9.3
million for the same period in 2008. This decrease is primarily due to decreased
legal expenses and employee compensation costs during the current year’s
period. In addition, our non-cash stock compensation expense
decreased $0.7 million during the current period related to performance stock
units, which declined in value in response to the current year’s operating
levels.
Net
(Loss) Income
Net
(loss) income for the three months ended September 30, 2009 and 2008 was as
follows (in thousands):
Three
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
%
of
revenue
|
%
of
revenue
|
|||||||||||||||
Operating
Income
|
$ | 2,375 | 3 | $ | 24,838 | 18 | ||||||||||
Interest
expense
|
497 | — | 1,098 | 1 | ||||||||||||
Interest
income
|
(847 | ) | (1 | ) | (45 | ) | — | |||||||||
Foreign
exchange losses
|
1,002 | 1 | 422 | 1 | ||||||||||||
Other
(income)
|
(1 | ) | — | (99 | ) | — | ||||||||||
Income
taxes
|
1,329 | 2 | 6,293 | 4 | ||||||||||||
Net Income
|
$ | 395 | 1 | $ | 17,169 | 12 | ||||||||||
Interest
Expense—Interest expense for the three months ended September 30, 2009
decreased $0.6 million compared to the same period in 2008. During the three
months ended September 30, 2009, average daily debt balances were $42.6 million,
approximately $25.3 million lower than the same period last year. In addition,
the weighted average interest rate decreased by 277 basis points during the
current year due to market conditions, resulting in lower interest expense
during the current year period.
Interest Income—Interest
income for the three months ended September 30, 2009 increased $0.8 million
compared to the same period in 2008, primarily due to $0.8 million in interest
received on an overpayment of prior years’ U.S. federal income
taxes.
Foreign Exchange Losses
—Foreign exchange losses increased to $1.0 million during the three
months ended September 30, 2009 from $0.4 million during the same period in
2008, primarily due to the comparative weakening of the Canadian dollar versus
the U.S. dollar.
Other (Income) —Other
(income) for the three months ended September 30, 2009 was relatively flat
compared to the same period during 2008.
Income Taxes—TESCO is an
Alberta, Canada corporation. We conduct business and are taxed on profits earned
in a number of jurisdictions around the world. Our income tax expense is
provided based on the laws and rates in effect in the countries in which
operations are conducted or in which TESCO and/or its subsidiaries are
considered residents for income tax purposes. Income tax expense as a percentage
of pre-tax earnings fluctuates from year to year based on the level of profits
earned in each jurisdiction in which we operate and the tax rates applicable to
such profits. Please see Note 6 to the Condensed Consolidated Financial
Statements included in Item 1, “Financial Statements (Unaudited),” above for a
description of our Mexican tax matters.
Our
effective tax rate for the three months ended September 30, 2009 was 77%
compared to 27% for the same period in 2008. The effective tax rate for the
three months ended September 30, 2009 reflects a $1.1 million charge related to
tax provision to return adjustments as a result of filing an amended 2008 tax
return in Canada and our 2008 U.S. income tax returns.
As
discussed in Note 6 to the Condensed Consolidated Financial Statements included
in Item 1 above, our tax returns are subject to examination in each of the
jurisdictions in which we operate, and the audit outcomes and the timing of
audit settlements are subject to significant uncertainty. Therefore, additional
provisions on tax-related matters could be recorded in the future as revised
estimates are made or the underlying matters are settled or otherwise
resolved.
33
For the Nine
Months Ended September 30, 2009 and 2008
Our
revenues, operating income and net income for the nine months ended September
30, 2009 decreased compared to the same period in 2008 primarily due to
decreased top drive product sales, decreased top drive rental activities,
decreased conventional Tubular Services revenues, and decreased CASING DRILLING
activity, partially offset by increased activities in proprietary Tubular
Services. Revenues, operating income and net income for the nine months ended
September 30, 2009 and 2008 were as follows:
Nine Months
Ended September 30,
|
%
Change
|
|||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||
%
of
Revenues
|
%
of
Revenues
|
|||||||||||||||||||
REVENUES
|
||||||||||||||||||||
Top
Drive
|
||||||||||||||||||||
-Sales
|
$ | 70,903 | $ | 121,037 | (41 | ) | ||||||||||||||
- Rental services
|
61,660 | 82,201 | (25 | ) | ||||||||||||||||
-
After-market sales and service(1)
|
38,555 | 48,176 | (20 | ) | ||||||||||||||||
Total
Top Drive
|
171,118 | 63 | 251,414 | 64 | (32 | ) | ||||||||||||||
Tubular
Services(2)
|
||||||||||||||||||||
-Conventional
|
18,147 | 62,582 | (71 | ) | ||||||||||||||||
-Proprietary(1)
|
71,063 | 60,857 | 17 | |||||||||||||||||
Total
Tubular Services
|
89,210 | 33 | 123,439 | 31 | (28 | ) | ||||||||||||||
CASING
DRILLING
|
10,892 | 4 | 20,693 | 5 | (47 | ) | ||||||||||||||
Total
Revenues
|
$ | 271,220 | 100 | $ | 395,546 | 100 | (31 | ) | ||||||||||||
OPERATING
(LOSS) INCOME
|
||||||||||||||||||||
Top
Drive
|
$ | 41,172 | 24 | $ | 82,174 | 33 | (50 | ) | ||||||||||||
Tubular
Services
|
(949 | ) | (1 | ) | 17,122 | 14 | (106 | ) | ||||||||||||
CASING
DRILLING
|
(9,298 | ) | (84 | ) | (9,184 | ) | (44 | ) | (1 | ) | ||||||||||
Research
and Engineering
|
(6,525 | ) | n/a | (8,139 | ) | n/a | 20 | |||||||||||||
Corporate
and Other
|
(25,296 | ) | n/a | (24,209 | ) | n/a | (5 | ) | ||||||||||||
Total
Operating (Loss) Income
|
$ | (896 | ) | –– | $ | 57,764 | 15 | (102 | ) | |||||||||||
NET
INCOME
|
$ | 3,711 | 1 | $ | 40,166 | 10 | (91 | ) | ||||||||||||
(1)
|
At
the end of 2008, we identified sales of certain accessories that were
previously included as part of our top drive after-market support
activities. However, since these accessories are directly related to our
proprietary and patented Tubular Services technology, we now include them
with our proprietary information. Accordingly, we have reclassified prior
year revenues and operating income of approximately $1.4 million and $1.0
million, respectively, related to these sales from top drive after-market
support to proprietary Tubular Services to conform to our current year
presentation.
|
(2)
|
At
the end of 2008, we commenced the presentation of our Tubular Services
business and CASING DRILLING as two separate segments. Accordingly, we
have reclassified prior year revenues of approximately $20.7 million and
prior year operating losses of approximately $9.2 million from the former
Casing Services segment to the CASING DRILLING segment to conform to the
current year presentation.
|
Revenues for
the nine months ended September 30, 2009 were $271.2 million, compared to $395.5
million in the same period in 2008, a decrease of $124.3 million, or 31%. This
decrease is due to a $80.3 million decrease in the Top Drive segment, a $34.2
million decrease in the Tubular Services segment and a $9.8 million decrease in
the CASING DRILLING segment. Each segment is discussed in further detail
below.
Operating
(Loss) Income for the nine months ended September 30, 2009 was a loss of $0.9
million, compared to income of $57.8 million in the nine months ended September
30, 2008, a decrease of $58.7 million, or 102%. This decrease is primarily due
to lower revenues in all of our segments, decreased margins due to severe
pricing pressures associated with the current economic environment, $2.2 million
in expenses for a litigation settlement, increased legal fees of $2.3 million
associated with ongoing litigation, a $1.8 million impairment of fixed assets
held for sale, $3.2 million in severance costs and $0.4 million in reserves
recorded related to a legal claim in North America, partially offset by a $2.3
million decrease in bonus accruals recorded during the current year’s period and
a $1.1 million gain recognized on the sale of operating assets.
Net Income
for the nine months ended September 30, 2009 was $3.7 million, compared to
income of $40.2 million in the same period in 2008, a decrease of $36.5 million
or 91%. This decrease is due primarily to decreased operating income as
discussed above, partially offset by a $20.4 million decrease in our provision
for income taxes and a $2.1 million decrease in interest expense, as discussed
below.
Top
Drive Segment
Our Top
Drive segment consists of top drive sales, after-market sales and service and
top drive rental service activities.
Revenues—Revenues for the
nine months ended September 30, 2009 decreased $80.3 million, or 32%, compared
to the same period in 2008, primarily driven by a $50.1 million decrease in top
drive sales, a $20.6 million decrease in top drive rental operations and a $9.6
million decrease in after-market sales and service.
Revenues
from top drive sales decreased $50.1 million to $70.9 million for the nine
months ended September 30, 2009 as compared to the same period in 2008 in
connection with the current downturn in the drilling industry. We sold 73 units
(68 new and 5 used) during the nine months ended September 30, 2009, compared to
99 units sold (81 new and 18 used) during the same period in 2008. Revenues
related to the sale of used top drive units during the nine months ended
September 30, 2009 and 2008 were $4.9 million and $19.0 million,
respectively.
Revenues
from top drive rental service activities decreased $20.6 million to $61.7
million during the nine months ended September 30, 2009 as compared to the same
period in 2008, primarily due to a decrease in the number of rental operating
days during the current year’s period, particularly in North America where
active drilling activity declined approximately 40% over the past 12
months. Our rental fleet worked 12,796 operating days during the nine
months ended September 30, 2009, down from 17,363 operating days in the same
period last year. Demand for our top drive rental services is directly tied to
active rig count; on a year-over-year basis, we estimate that the worldwide
active rig count has declined approximately 30%. At September 30, 2009, we had
123 top drive units in our rental fleet.
Revenues
from after-market sales and service decreased $9.6 million to $38.5 million for
the nine months ended September 30, 2009 as compared to the same period in 2008,
primarily due to the current year’s decline in active rig count and drilling
activities. Accordingly, our customers have decreased their demand for
after-market parts and maintenance and repair services. This decrease in demand
has resulted in pricing pressures and thus, decreased revenues per
job.
Operating
Income—Top Drive operating income for the nine months ended September 30,
2009 decreased $41.0 million to $41.2 million as compared to the same period in
2008. The decrease in operating income during the current period is primarily
due to the decrease in the number of top drives sold during the current period,
as discussed above. Top drive operating income was also unfavorably
affected by a decrease in the number of used top drive units sold during the
nine months ended September 30, 2009. We sold five used units during the current
period, compared to 18 used units last year. Used units sold are typically our
older units that operated in our rental fleet, and they have a lower basis,
resulting in higher margins from the sales compared to the sales of new units.
In addition, operating margins were negatively impacted by pricing pressures on
our after-market sales and service businesses, as described above. We also
recorded a reserve of $0.4 million during the nine months ended September 30,
2009 in connection with a legal claim in North America and severance costs of
$1.1 million. This was partially offset by a $1.6 million gain on the sale of
certain ancillary Top Drive equipment.
Tubular
Services Segment
Revenues—Revenues for the
nine months ended September 30, 2009 decreased $34.2 million, or 28%, to $89.2
million as compared to the same period in 2008. This was primarily due to a
$44.4 million decrease in our conventional Tubular Services business, partially
offset by a $10.2 million increase in our proprietary service offerings. The
decrease in our conventional revenues is due to a 40% industry decline in North
America over the past 12 months and our continued focus to shift our customers
to proprietary product offerings. Our conventional business is primarily
conducted in North America and is directly tied to the active rig count which
has declined sharply over the past 12 months. We continue to focus on
shifting our customer service to our proprietary product offerings. We completed
1,787 jobs during the nine months ended September 30, 2009, up 28% compared to
1,401 jobs during the nine months ended September 30, 2008. While the
number of jobs performed has increased, revenue per job has been negatively
impacted by pricing pressures resulting from decreased drilling
activity.
Operating Income—Tubular
Services’ operating income for the nine months ended September 30, 2009
decreased $18.0 million to a $0.9 million loss compared to income of $17.1
million for the same period in 2008, primarily due to the decrease in revenues
described above, a $1.8 million impairment of fixed assets held for sale and
$0.4 million in severance costs recorded during the current period. During the
nine months ended September 30, 2009, we recorded a pre-tax impairment loss of
approximately $1.8 million to write down fixed assets held for sale to their
estimated realizable value of $0.2 million.
CASING
DRILLING Segment
Revenues—Revenues for the
nine months ended September 30, 2009 were $10.9 million compared to $20.7
million in the same period last year, a decrease of $9.8 million or 47%. This
decrease was due to a decline in available work, particularly in Latin America
and the U.S., in connection with current industry operating
conditions.
Operating Income—CASING
DRILLING’s operating loss of $9.3 million for the nine months ended September
30, 2009 was flat compared to last year. This was primarily due to
decreased revenues as described above and a loss on the sale of operating assets
in the amount of $0.5 million, partially offset by reduced management and
overhead expenses.
Research
and Engineering Segment
Research
and Engineering’s operating expenses are comprised of our activities related to
the design and enhancement of our top drive models and proprietary
equipment. These expenses were $6.5 million for the nine months ended
September 30, 2009, a decrease of $1.6 million from operating expenses of $8.1
million for the nine months ended September 30, 2008. This decrease is primarily
due to our focus on reducing costs during the current year’s period, partially
offset by $0.4 million in severance costs and $0.2 million in relocation costs
incurred during the nine months ended September 30, 2009. We will continue to
invest in the development, commercialization and enhancements of our proprietary
technologies.
Corporate and Other
Segment
Corporate
and Other Expenses primarily consist of the corporate level general and
administrative expenses and certain operating level selling and marketing
expenses. Corporate and Other’s operating expenses for the nine months ended
September 30, 2009 increased $1.1 million to $25.3 million, compared to $24.2
million for the same period in 2008. This increase is primarily due to a $2.2
million legal settlement, a $2.3 million increase in legal expenses related to
ongoing litigation and $1.2 million in severance costs, partially offset by
decreased audit fees and other corporate expenses from the same period in 2008.
In addition, our non-cash stock compensation expense decreased $0.9 million
during the current period related to performance stock units, which declined in
value in response to the current year’s operating levels.
Net
Income
Net
income for the nine months ended September 30, 2009 and 2008 was as follows (in
thousands):
Nine
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
%
of
revenue
|
%
of
revenue
|
|||||||||||||||
Operating
(Loss) Income
|
$ | (896 | ) | –– | $ | 57,764 | 15 | |||||||||
Interest
expense
|
1,451 | 1 | 3,552 | 1 | ||||||||||||
Interest
income
|
(896 | ) | — | (306 | ) | — | ||||||||||
Foreign
exchange losses
|
1,480 | 1 | 747 | 1 | ||||||||||||
Other
(income) expense
|
143 | — | (53 | ) | — | |||||||||||
Income
taxes
|
(6,785 | ) | (3 | ) | 13,658 | 3 | ||||||||||
Net
Income
|
$ | 3,711 | 1 | $ | 40,166 | 10 | ||||||||||
Interest Expense—Interest
expense for the nine months ended September 30, 2009 decreased $2.1 million
compared to the same period in 2008. During the nine months ended September 30,
2009, average daily debt balances were $43.8 million, approximately $30.0
million lower than the same period last year. In addition, the weighted average
interest rate decreased by 312 basis points during the current year due to
market conditions, resulting in lower interest expense during the current year
period.
Interest Income—Interest
income for the nine months ended September 30, 2009 increased $0.6 million
compared to the same period in 2008, primarily due to $0.8 million in interest
received on an overpayment of prior years’ U.S. federal income
taxes.
Foreign Exchange
Losses—Foreign exchange losses increased $0.7 million compared to the
same period in 2008, primarily due to the comparative strengthening of the
Canadian dollar versus the U.S. dollar.
Other (Income) Expense— Other
expense for the nine months ended September 30, 2009 was $0.1 million compared
to other income of $0.1 million in the same period during 2008, an increase of
$0.2 million.
Income
Taxes—TESCO is an Alberta, Canada corporation. We conduct business and
are taxed on profits earned in a number of jurisdictions around the world. Our
income tax expense is provided based on the laws and rates in effect in the
countries in which operations are conducted or in which TESCO and/or its
subsidiaries are considered residents for income tax purposes. Income tax
expense as a percentage of pre-tax earnings fluctuates from year to year based
on the level of profits earned in each jurisdiction in which we operate and the
tax rates applicable to such profits. Please see Note 6 to the condensed
consolidated financial statements included in Item 1, “Financial Statements
(Unaudited),” above for a description of our Mexican tax matters.
Our
effective tax rate for the nine months ended September 30, 2009 was 221%
compared to 25% for the same period in 2008. The effective tax rate for the nine
months ended September 30, 2009 reflects the recognition of a $4.5 million tax
benefit associated with a Canadian tax law change that occurred during the first
quarter of 2009, a $0.4 million tax benefit for research and development credits
generated during 2009 and cumulative net tax benefits of $2.5 million related to
earnings or losses generated in jurisdictions with statutory tax rates higher or
lower than the Canadian federal and provincial statutory tax rates. The
effective tax rate for the nine months ended September 30, 2009 also includes a
$0.4 million charge related to an audit assessment received in a foreign
jurisdiction, a $0.5 million charge related to provision to return adjustments
as a result of filing our U.S. income tax returns in September 2009 and $0.5
million of tax expense associated with a reduction in deferred tax assets
attributable to a change in the period in which we expect to utilize such
assets.
Recent
Quarterly Trends
Revenues
for the three months ended September 30, 2009 were $72.6 million, compared to
$88.4 million for the three months ended June 30, 2009, a decrease of $15.8
million, or 18%. This decrease is due to a $12.6 million decrease in the Top
Drive segment, a $3.6 million decrease in the Tubular Services segment,
partially offset by a $0.4 million increase in the CASING DRILLING segment. The
decrease in the Top Drive segment is primarily the result of the sale of 13
units (10 new and 3 used) during the three months ended September 30, 2009 as
compared to 28 top drive units (27 new and 1 used) during the three months ended
June 30, 2009. The decrease in Tubular Services revenues was primarily due
to a decline in proprietary equipment sales during the three months ended
September 30, 2009 compared to the three months ended June 30, 2009. The
increase in our CASING DRILLING revenues was due to a recovery in available
work, particularly in Latin America and the Asia Pacific region.
Operating
Income for the three months ended September 30, 2009 was $2.4 million, compared
to a loss of $7.8 million in the three months ended June 30, 2009, an increase
of $10.2 million. This increase is primarily due to a $4.2 million increase in
the Top Drive segment, a $0.3 million increase in operating income in the
Tubular Services segment, a $1.8 million increase in the CASING DRILLING segment
and a $4.2 million increase in the Corporate and Other segment, partially offset
by a $0.3 million decrease in losses in the Research and Engineering segment.
The increase in Top Drive operating income was primarily due to the sale of
three used units during the current quarter and a $1.6 million gain on the sale
of ancillary operating equipment, compared to the sale of one used unit during
the three months ended June 30, 2009. The increase in Tubular
Services operating income was primarily due to a $1.8 million impairment of
fixed assets held for sale incurred during the three months ended June 30, 2009.
The decrease in CASING DRILLING operating loss was primarily due to a $0.9
million improvement in bad debt expense during the three months ended September
30, 2009. The decrease in Corporate and Other’s expenses of $3.9 million was
primarily due to a $1.9 million decrease in legal fees, a $0.6 million decrease
in severance costs and a $0.7 million decrease in non-cash stock compensation
expense during the current period.
Net
Income for the three months ended September 30, 2009 was $0.4 million, compared
to a loss of $4.2 million in the three months ended June 30, 2009, an
improvement of $4.6 million. This change is due primarily to increased operating
income as discussed above and $0.8 million in interest income recorded during
the three months ended September 30, 2009, partially offset by an increase in
our effective tax rate from 54% for the three months ended June 30, 2009 to 77%
for the three months ended September 30, 2009. The effective tax rate for the
three months ended September 30, 2009 reflects the recognition of a $0.6 million
charge related to provision to return adjustments as a result of filing an
amended 2008 Canadian income tax return and a $0.5 million charge related to
provision to return adjustments as a result of filing our 2008 U.S. income tax
returns.
LIQUIDITY
AND CAPITAL RESOURCES
Our Net
Cash (Debt) position at September 30, 2009 and December 31, 2008 was as
follows (in thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Cash
|
$ | 45,761 | $ | 20,619 | ||||
Current
portion of long term debt
|
(2,525 | ) | (10,171 | ) | ||||
Long
term debt
|
(31,400 | ) | (39,400 | ) | ||||
Net
Cash (Debt)
|
$ | 11,836 | $ | (28,952 | ) | |||
The
conversion from a Net Debt position to a Net Cash position during the nine
months ended September 30, 2009 was primarily the result of collecting accounts
receivable that were outstanding as of December 31, 2008, partially offset
by using cash collected to fund our operations. We have reported Net Cash (Debt)
because we regularly review Net Cash (Debt) as a measure of our performance.
However, the measure presented in this document may not always be comparable to
similarly titled measures reported by other companies due to differences in the
components of the measurement.
On
June 5, 2007, we and our existing lenders entered into an amended and
restated credit agreement (the “Amended Credit Agreement”) to provide up to $100
million in revolving loans including up to $15 million of swingline loans
(collectively, the “Revolver”) and a term loan which had a balance of $25.0
million as of June 5, 2007 with required quarterly payments through
October 31, 2009. The Amended Credit Agreement has a term of five years and
all outstanding borrowings on the Revolver will be due and payable on
June 5, 2012. In December 2007, we entered into the first amendment to the
Amended and Restated Credit agreement to increase the Revolver to provide up to
$145 million. In March 2008, we entered into a second amendment to the Amended
Credit Agreement in order to increase the limit on permitted capital
expenditures during the quarters ending March 31, June 30 and
September 30, 2008 from 70% to 85% of consolidated EBITDA (as defined in
the Amended Credit Agreement). Amounts available under the Revolver are reduced
by letters of credit issued under the Amended Credit Agreement not to exceed $20
million in the aggregate of all undrawn amounts and amounts that have yet to be
disbursed under all existing letters of credit. Amounts available under the
swingline loans may also be reduced by letters of credit or by means of a credit
to a general deposit account of the applicable borrower. As of September 30,
2009, we had $5.6 million in letters of credit outstanding under our credit
facility and $108.0 million available under the Revolver.
The Amended
Credit Agreement contains covenants that we consider usual and customary for an
agreement of this type, including a leverage ratio, a minimum net worth, and a
fixed charge coverage ratio. Pursuant to the terms of the Amended Credit
Agreement, we are prohibited from incurring any additional indebtedness outside
the existing Credit Facility, in excess of $15 million, paying cash dividends to
shareholders and other restrictions which are standard to the industry. The
Amended Credit Agreement is secured by substantially all our assets. All of our
direct and indirect material subsidiaries in the United States and Canada are
guarantors of any borrowings under the Amended Credit Agreement. Additionally,
our capital expenditures are limited to 70% of consolidated EBITDA plus net
proceeds from asset sales. The capital expenditure limit decreases to 60% of
consolidated EBITDA plus net proceeds from asset sales for fiscal quarters
ending after June 30, 2010. The availability of future borrowings may be
limited in order to maintain certain financial ratios required under the
covenants. We were in compliance with our bank covenants at September 30,
2009.
Outstanding
borrowings under our revolving credit facility were $31.4 million and the
outstanding balance on our term loan was $2.5 million as of September 30, 2009.
Our credit facility is maintained by a syndicate of seven banks, and we are not
aware of any insolvency issues with respect to our syndicate banks.
Our
investment in working capital, excluding cash and current portion of long term
debt, decreased $5.2 million to $128.1 million at September 30, 2009 from
$133.3 million at December 31, 2008. The decrease during the nine months
ended September 30, 2009 was primarily due to a decrease in accounts receivable,
partially offset by a decrease in our accounts payable.
Following
is the calculation of working capital, excluding cash and the current portion of
long term debt, as of September 30, 2009 and December 31, 2008 (in
thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Current
assets
|
$ | 227,829 | $ | 244,164 | ||||
Current
liabilities
|
(56,510 | ) | (100,447 | ) | ||||
Working
capital
|
171,319 | 143,717 | ||||||
Less:
|
||||||||
Cash
and cash equivalents
|
(45,761 | ) | (20,619 | ) | ||||
Current
portion of long term debt
|
2,525 | 10,171 | ||||||
Working
capital, excluding cash and current portion of long term debt
|
$ | 128,083 | $ | 133,269 | ||||
During the
nine months ended September 30, 2009, cash provided by operating activities was
$49.1 million compared to cash provided by operating activities of $39.2 million
in the same period in 2008. This increase is primarily due to the changes in
working capital discussed above. We believe our operations will continue to
generate cash and these amounts, along with amounts available under our existing
credit facilities, will be sufficient to fund our working capital needs and
capital expenditures.
We are
also monitoring the creditworthiness and ability of our customers to obtain
financing in order to mitigate any adverse impact on our revenues, cash flows
and earnings.
OFF
BALANCE SHEET ARRANGEMENTS
As of
September 30, 2009 and December 31, 2008, we had no off balance sheet
arrangements.
SIGNIFICANT
ACCOUNTING POLICIES
The
preparation and presentation of our financial statements requires management to
make estimates that significantly affect the results of operations and financial
position reflected in the financial statements. In making these estimates,
management applies accounting policies and principles that it believes will
provide the most meaningful and reliable financial reporting. As described more
fully below, these estimates bear the risk of change due to the inherent
uncertainty attached to the estimate. Management considers the most significant
of these estimates and their impact to be:
Foreign Currency
Translation—The U.S. dollar is the functional currency for most of our
worldwide operations. For foreign operations where the local currency is the
functional currency, specifically our Canadian operations, assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
at end-of-period exchange rates, and the resultant translation adjustments are
reported, net of their related tax effects, as a component of accumulated other
comprehensive income in shareholders’ equity. Monetary assets and liabilities
denominated in currencies other than the functional currency are remeasured into
the functional currency prior to translation into U.S. dollars, and the
resultant exchange gains and losses are included in income in the period in
which they occur. Income and expenses are translated into U.S. dollars at the
average exchange rates in effect during the period. Our primary exposure with
respect to foreign currency exchange rate risk is the change in the U.S.
dollar/Canadian dollar exchange rate. Historically, this exchange rate has
fluctuated within approximately 20% of the U.S. dollar, and we have recognized a
corresponding foreign exchange gain or loss. We cannot accurately predict the
amount or variability of future exchange rate fluctuations. Accordingly, the
amount of gains or losses recognized in the future may vary significantly from
historically reported amounts.
Revenue Recognition—We
recognize revenues from product sales when the earnings process is complete and
collectability is reasonably assured when title and risk of loss of the
equipment is transferred to the customer, with no right of return. Revenue in
the Top Drive segment may be generated from contractual arrangements that
include multiple deliverables. Revenue from these arrangements is recognized as
each item or service is delivered based on their relative fair value and when
the delivered items or services have stand-alone value to the customer. For
revenues other than product sales, we recognize revenues as the services are
rendered based upon agreed daily, hourly or job rates.
We
provide product warranties on equipment sold pursuant to manufacturing contracts
and provide for the anticipated cost of such warranties in cost of sales when
sales revenue is recognized. The accrual of warranty costs is an estimate based
upon historical experience and upon specific warranty issues as they arise. We
periodically review our warranty provision to assess its adequacy in the light
of actual warranty costs incurred. The key factors with respect to estimating
our product warranty accrual are our assumptions regarding the quantity and
estimated cost of potential warranty exposure. Historically, our warranty
expense has fluctuated based on the identification of specifically identified
technical issues, and warranty expense does not necessarily move in concert with
sales levels. In the past, we have not recognized a material adjustment from our
original estimates of potential warranty costs. However, because the warranty
accrual is an estimate, it is reasonably possible that future warranty issues
could arise that could have a significant impact on our financial
statements.
Deferred Revenues—We
generally require customers to pay a non-refundable deposit for a portion of the
sales price for top drive units with their order. These customer deposits are
deferred until the customer takes title and risk of loss of the
product.
Accounting for
Stock-Based Compensation—We recognize compensation expense on stock-based
awards to employees, directors and others. For those awards that we intend to
settle in stock, compensation expense is based on the calculated fair value of
each stock-based award at its grant date, the estimation of which may require us
to make assumptions about the future volatility of our stock price, rates of
forfeiture, future interest rates and the timing of grantees’ decisions to
exercise their options. Certain of our stock options awarded prior to our
voluntary delisting from the Toronto Stock Exchange effective June 30, 2008 were
denominated in Canadian dollars and have been determined to be liability
classified awards. Accordingly, they are remeasured at fair value at the end of
each reporting period, which may result in volatility in future compensation
expense. The fair value of option awards is estimated using the Black-Scholes
option pricing model. Key assumptions in the Black-Scholes option pricing model,
some of which are based on subjective expectations, are subject to change. A
change in one or more of these assumptions would impact the expense associated
with future grants. These assumptions bear the risk of change as they require
significant judgment and they have inherent uncertainties that management may
not be able to control. These key assumptions include the weighted average
risk-free interest rate, the expected life of options, the volatility of our
common shares and the weighted average expected forfeiture rate. We base our
assumptions on our historical experience; however, future activity may vary
significantly from our estimates.
Allowance for Doubtful Accounts
Receivable—We perform ongoing credit evaluations of customers and grant
credit based upon past payment history, financial condition and anticipated
industry conditions. Customer payments are regularly monitored and a provision
for doubtful accounts is established based upon specific situations and overall
industry conditions. Many of our customers are located in international areas
that are inherently subject to risks of economic, political and civil
instabilities, which may impact management’s ability to collect those accounts
receivable. The main factors in determining the allowance needed for accounts
receivable are customer bankruptcies, delinquency, and management’s estimate of
ability to collect outstanding receivables based on the number of days
outstanding. We make assumptions regarding current market conditions and how
they may affect our customers’ ability to pay outstanding receivables. These
assumptions are based on the length of time that a receivable remains unpaid,
our historical experiences with the customers, the financial condition of the
individual customers and the international areas in which they operate.
Historically, our estimates have not differed materially from the ultimate
amounts recognized for bad debts. However, these allowances are based on
estimates. If actual results are not consistent with our assumptions and
judgments used, we may be exposed to additional write offs of accounts
receivable that could be material to our results of operations.
Excess and Obsolete Inventory
Provisions—Our inventory consists primarily of specialized tubular
services and casing tool parts, spare parts, work in process, and raw materials
to support our ongoing manufacturing operations and our installed base of
specialized equipment used throughout the world. Customers rely on us to stock
these specialized items to ensure that their equipment can be repaired and
serviced in a timely manner. Our estimated carrying value of inventory therefore
depends upon demand driven by oil and gas drilling activity, which depends in
turn upon oil and gas prices, the general outlook for economic growth worldwide,
available financing for our customers, political stability in major oil and gas
producing areas and the potential obsolescence of various types of equipment we
sell, among other factors. Quantities of inventory on hand are reviewed
periodically to ensure they remain active part numbers and the quantities on
hand are not excessive based on usage patterns and known changes to equipment or
processes. Our primary exposure with respect to estimating our provision for
excess and obsolete inventory is our assumption regarding the projected quantity
usage patterns. These estimates are based on historical usage and operating
forecasts and are reviewed for reasonableness on a periodic basis. Historically,
our estimates have not differed materially from the amount of inventory
ultimately expensed as excess or obsolete. However, significant or unanticipated
changes in business conditions and (or) changes in technologies could impact the
amount and timing of any additional provision for excess or obsolete inventory
that may be required.
Impairment of Intangible and Other
Long-Lived Assets and Goodwill —Long-lived assets, which include
property, plant and equipment, goodwill and intangible and other assets,
comprise a substantial portion of our assets. The carrying value of these assets
is reviewed for impairment on an annual basis or whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. This
requires us to forecast future cash flows to be derived from the utilization of
these assets based upon assumptions about future business conditions or
technological developments. Significant, unanticipated changes in circumstances
could make these assumptions invalid and require changes to the carrying value
of our long-lived assets.
Long-lived
assets, such as property, plant and equipment, and intangible assets are
reviewed for impairment when events or changes in circumstances indicate that
the carrying value of the assets contained in our financial statements may not
be recoverable. When evaluating long-lived assets and intangible assets for
potential impairment, we first compare the carrying value of the asset to the
asset’s estimated, future net cash flows (undiscounted and without interest
charges). If the estimated future cash flows are less than the carrying value of
the asset, we calculate and recognize an impairment loss. If we recognize an
impairment loss, the adjusted carrying amount of the asset will be its new cost
basis. For a depreciable long-lived asset, the new cost basis will be
depreciated over the remaining useful life of that asset. Restoration of a
previously recognized impairment loss is prohibited.
Our
impairment loss calculations require management to apply judgments in estimating
future cash flows and asset fair values, including forecasting useful lives of
the assets and selecting the discount rate that represents the risk inherent in
future cash flows. We had no impairment charges on long-lived assets during the
year ended December 31, 2008 or the nine months ended September 30, 2009. If
actual results are not consistent with our assumptions and judgments used in
estimating future cash flows and asset fair values, we may be exposed to
impairment losses that could be material to our results of
operations.
We test
consolidated goodwill for impairment using a fair value approach at the
reporting unit level and perform our goodwill impairment test annually or upon
the occurrence of a triggering event. Goodwill impairment exists when the
estimated fair value of goodwill is less than its carrying value.
For purposes
of our analysis, we estimate the fair value for the reporting unit based on
discounted cash flows (the income approach). The income approach is dependent on
a number of significant management assumptions including markets and market
share, sales volumes and prices, costs to produce, capital spending, working
capital changes, terminal value multiples and the discount rate. The discount
rate is commensurate with the risk inherent in the projected cash flows and
reflects the rate of return required by an investor in the current economic
conditions. Based on our analysis performed for the year ended December 31,
2008 and the interim analysis performed at June 30, 2009, if we were to increase
the discount rate by 200 basis points while keeping all other assumptions
constant, there would be no impairment in the reporting unit. We determined that
no triggering event occurred during the three months ended September 30, 2009,
and accordingly, did not perform an impairment analysis on its goodwill during
the current period. Inherent in our projections are key assumptions
relative to how long the current downward cycle might last. Furthermore, the
financial and credit market volatility directly impacts our fair value
measurement through our weighted-average cost of capital that we use to
determine our discount rate. During times of volatility, significant judgment
must be applied to determine whether credit changes are a short term or long
term trend. While we believe the assumptions made are reasonable and
appropriate, we will continue to monitor these, and update our impairment
analysis if the cycle downturn continues for longer than expected.
If actual
results are not consistent with our assumptions and judgments used in estimating
future cash flows and asset fair values, we may be exposed to additional
impairment losses that could be material to our results of
operations.
Income Taxes—We use the
liability method which takes into account the differences between financial
statement treatment and tax treatment of certain transactions, assets and
liabilities. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. By their nature, tax laws are often subject to interpretation. Further
complicating matters is that in those cases where a tax position is open to
interpretation, differences of opinion can result in differing conclusions as to
the amount of tax benefits to be recognized under FASB Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes.” Valuation allowances are established to reduce deferred
tax assets when it is more likely than not that some portion or all of the tax
asset will not be realized. Estimates of future taxable income and ongoing tax
planning have been considered in assessing the utilization of available tax
losses and credits. Unforeseen events and industry conditions may impact
forecasts of future taxable income which, in turn, can affect the carrying value
of the deferred tax assets and liabilities and impact our future reported
earnings. The level of evidence and documentation necessary to support a
position prior to being given recognition and measurement within the financial
statements is a matter of judgment that depends on all available evidence. A
change in our forecast of future taxable income, or changes in circumstances,
assumptions and clarification of uncertain tax regimes may require changes to
any valuation allowances associated with our deferred tax assets, which could
have a material effect on net income.
CHANGES
IN ACCOUNTING PRONOUNCEMENTS
In June
2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification™ (“Codification”) became the single source of authoritative U.S.
GAAP. The Codification did not create any new U.S. GAAP standards but
incorporated existing accounting and reporting standards into a new topical
structure with a new referencing system to identify authoritative accounting
standards, replacing the prior references to Statement of Financial Accounting
Standards (“SFAS”), Emerging Issues Task Force (“EITF”), FASB Staff Position
(“FSP”) and other publications. Authoritative standards included in
the Codification are designated by their Accounting Standards Codification
(“ASC”) topical reference, and new standards will be designated as Accounting
Standards Updates (ASU), with a year and assigned sequence
number. Beginning with this interim report for the third quarter of
2009, references to prior standards have been updated to reflect the new
referencing system.
In
October 2009, the FASB issued updated guidance that allows for more flexibility
in determining the value of separate elements in revenue arrangements with
multiple deliverables. This guidance modifies the requirements for
determining whether a deliverable can be treated as a separate unit of
accounting by removing the criteria that verifiable and objective evidence of
fair value exists for the undelivered elements. All entities must
adopt no later than the beginning of their first fiscal year beginning on or
after June 15, 2010. Upon adoption, entities may choose between the prospective
application for transactions entered into or materially modified after the date
of adoption, or the retroactive application for all revenue arrangements for all
periods presented. Disclosures will be required when changes in
either those judgments or the application of this guidance significantly affect
the timing or amount of revenue recognition. We will adopt these
provisions on January 1, 2011. We are currently evaluating the potential
impact these standards may have on the consolidated financial
statements.
In June
2009, the FASB issued new accounting guidance that clarifies the characteristics
that identify a variable interest entity (“VIE”) and changes how a reporting
entity identifies a primary beneficiary that would consolidate the VIE from a
quantitative risk and rewards calculation to a qualitative approach based on
which variable interest holder has controlling financial interest and the
ability to direct the most significant activities that impact the VIE’s economic
performance. This guidance requires the primary beneficiary assessment to
be performed on a continuous basis. It also requires additional disclosures
about an entity’s involvement with VIE, restrictions on the VIE’s assets and
liabilities that are included in the reporting entity’s consolidated balance
sheet, significant risk exposures due to the entity’s involvement with the VIE,
and how its involvement with a VIE impacts the reporting entity’s consolidated
financial statements. This update is effective for fiscal years beginning after
November 15, 2009. We will adopt these provisions on January 1, 2010 and
the adoption is not expected to have a material impact on the consolidated
financial statements.
45
In June
2009, the FASB issued new accounting guidance that enhances the information
provided to financial statement users to provide greater transparency about
transfers of financial assets and a transferor’s continuing involvement, if any,
with transferred financial assets. Under this Statement, many types of
transferred financial assets that would have been derecognized previously are no
longer eligible for derecognition. This Statement requires enhanced disclosures
about the risks to which a transferor continues to be exposed due to its
continuing involvement in transferred financial assets. This Statement also
clarifies and improves certain provisions in previously issued statements that
have resulted in inconsistencies in the application of the principles on which
that Statement is based. These updates are effective for annual reporting
periods beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. We will adopt these provisions on January 1,
2010 and the adoption is not expected to have a material impact on the
consolidated financial statements.
In May 2009,
the FASB issued new accounting guidance which establishes general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before the financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events. We adopted the new disclosure requirements in our financial
statements issued for the period ended June 30, 2009 and the adoption did not
have a material impact on the consolidated financial statements.
In April
2009, the FASB issued new guidance that requires that a registrant to disclose
the fair value of all financial instruments for interim reporting periods and in
its financial statements for annual reporting periods, whether recognized or not
recognized in the statement of financial position. We adopted the updated
guidance for the interim reporting period ended March 31, 2009 and the
adoption did not have a material impact on our consolidated financial statements
as the Statement required additional disclosures but no change in accounting
policy.
In April
2008, the FASB issued an update to existing accounting standards that amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. The intent
of the update is to improve the consistency between the useful life of a
recognized intangible asset under existing accounting standards and the period
of expected cash flows used to measure the fair value of the asset under
accounting guidance for business combinations and other applicable accounting
literature. We adopted the updated guidance on January 1, 2009 and the
adoption did not have a material impact on our consolidated financial
statements.
In March
2008, the FASB issued an update to existing accounting standards enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how: (a) an entity uses derivative
instruments; (b) derivative instruments and related hedged items are
accounted for under previously issued standards and (c) derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. We adopted the provisions of the updated
guidance on January 1, 2009 and the adoption did not have a material impact
on our consolidated financial statements.
In
December 2007, the FASB issued an update to previously issued accounting
guidance to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. Additionally, this Statement requires that
consolidated net income include the amounts attributable to both the parent and
the noncontrolling interest. We adopted the updated guidance on January 1,
2009 and the adoption did not have a material impact on our consolidated
financial statements.
In
December 2007, the FASB issued a revision to previously issued accounting
standards which significantly changes the principles and requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The update also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This guidance is effective on a prospective basis to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and
early adoption is prohibited. In February 2009, the FASB issued additional
updates which amended the provisions related to the initial recognition and
measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under the guidance. We
adopted both of the updates on a prospective basis effective January 1,
2009 and the adoption did not have a material impact on our consolidated
financial statements.
In April
2009, the FASB issued new accounting guidance that affirms that the objective of
fair value when the market for an asset is not active; clarifies and includes
additional factors for determining whether there has been a significant decrease
in market activity for an asset in an inactive market; eliminates the proposed
presumption that all transactions are distressed and requires an entity to
disclose a change in valuation technique (and the related inputs) resulting from
the application of the guidance. The updated guidance must be
applied prospectively and retrospective application is not permitted. We elected
to adopt the updated guidance in the first quarter of 2009, and the adoption did
not have a material impact on our consolidated financial
statements.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
From time
to time, we may utilize derivative financial instruments in the management of
our foreign currency and interest rate exposures. We do not use derivative
financial instruments for trading or speculative purposes and account for all
such instruments using the fair value method. Currency exchange exposures on
foreign currency denominated balances and anticipated cash flows may be managed
by foreign exchange forward contracts when it is deemed appropriate. Exposures
arising from changes in prevailing levels of interest rates relative to the
contractual rates on our debt may be managed by entering into interest rate swap
agreements when it is deemed appropriate.
As of
December 31, 2007, we had entered into a series of 25 bi-weekly foreign
currency forward contracts with notional amounts aggregating
C$43.8 million. During the three months ended March 31, 2008, we
terminated these bi-weekly foreign currency forward contracts and recognized a
loss of $0.6 million. We replaced them with 14 monthly foreign currency forward
contracts with notional amounts aggregating C$50.8 million. We subsequently
settled two of these contracts and terminated the remaining 12 contracts, and
recognized a loss of $0.2 million for the nine months ended September 30, 2008.
We were not party to any derivative financial instruments as of September 30,
2009 or December 31, 2008.
The
carrying value of cash, investments in short-term commercial paper and other
money market instruments, accounts receivable, accounts payable and accrued
liabilities approximate their fair value due to the relatively short-term period
to maturity of the instruments.
The fair
value of our long term debt depends primarily on current market interest rates
for debt issued with similar maturities by companies with risk profiles similar
to us. The fair value of our debt related to our credit facility at September
30, 2009 was approximately $29.8 million. We also have short-term debt in the
form of a term loan. The fair value of our term loan debt at September 30, 2009
was approximately $2.5 million. A one percent change in interest rates would
increase or decrease interest expense $0.3 million annually based on amounts
outstanding at September 30, 2009.
Our
accounts receivable are principally with oil and gas service and exploration and
production companies and are subject to normal industry credit risks. Please see
Part I, Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the
year ended December 31, 2008 for a detailed discussion of the risk factors
affecting us and Item 1A. “Risk Factors,” below for further discussion of
recent risks.
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
At the
time that our Quarterly Report on Form 10-Q for the quarter ended September 30,
2009 was filed on November 5, 2009, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2009. Subsequent to that evaluation, as a result
of the restatement described in Note 2 to the condensed consolidated financial
statements contained herein, our management, including our Chief Executive
Officer and Chief Financial Officer, concluded that our disclosure controls and
procedures were not effective as of September 30, 2009 because of the material
weakness described below. Notwithstanding the material weakness described below,
management, based upon the additional work performed during the restatement
process, has concluded that the Company’s condensed consolidated financial
statements for the periods covered by and included in this Quarterly Report on
Form 10-Q/A are fairly stated in all material respects in accordance with
generally accepted accounting principles in the United States of America for
each of the periods presented herein.
The
Company's disclosure controls and procedures are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Security Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to management of the Company, with the participation of its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Material
Weakness in Internal Control Over Financial Reporting
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis. In
connection with the restatement described in Note 2 to the condensed
consolidated financial statements, we reevaluated our internal control over
financial reporting and have identified the following material
weakness:
We did
not maintain effective control over accounting for income taxes with respect to
non-routine and atypical transactions as of September 30,
2009. Specifically, an effective control was not in place to ensure
that the accounting impacts resulting from a change in tax law were completely
and accurately recorded on a timely basis related to the adoption of a new tax
law in Canada during the first quarter of 2009. Additionally, this
control was not sufficiently designed to ensure that deferred taxes denominated
in a currency other than the functional currency were appropriately calculated
and re-measured on a timely basis. This control deficiency resulted in
misstatements of the deferred tax asset, income tax provision, foreign exchange
gains and losses and cumulative translation adjustment accounts and the related
financial statement disclosures. This control deficiency also
resulted in the restatement of the Company’s condensed consolidated financial
statements as of and for the three and nine months ended September 30,
2009. Additionally, this control deficiency could result in
misstatements of the aforementioned accounts and disclosures that would result
in a material misstatement of the consolidated financial statements that would
not be prevented or detected. Accordingly, our management has
determined that this control deficiency constitutes a material
weakness.
Changes
in Internal Control Over Financial Reporting
As
described under the paragraph entitled Material Weakness in Internal Control
Over Financial Reporting, there were changes in internal control over financial
reporting during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.
Management's
Plan for Remediation
Subsequent
to December 31, 2009, our management has taken immediate action to begin
remediating the material weakness identified by thoroughly reviewing the tax
provision process and existing controls to identify areas in need of improvement
to increase the efficiency and effectiveness of our internal controls over the
accounting for income taxes. Specifically, we plan to establish and
design controls to identify and properly account for significant changes or
events impacting the Company's tax accounts, such as significant changes to the
tax laws including the following:
·
|
In
addition to its performance on an annual basis, the Company will prepare a
tax basis balance sheet and relate reconciliation upon the occurrence of
significant changes or events impacting the Company's tax accounts, such
as significant changes in tax law, during the quarter in which such events
occur.
|
·
|
Increasing
the use of expert outside services providers to review the tax
implications of such events when determined to be
necessary.
|
·
|
Automation
through the general ledger system of the re-measurement of the Company's
Canadian and other international deferred tax accounts denominated in a
currency other than the function
currency.
|
We
believe the remediation measures described above will remediate the material
weakness identified and strengthen our internal control over financial
reporting. We are committed to continuing to improve our internal
control processes and will continue to review our financial reporting controls
and procedures. As we continue to evaluate and work to improve our
internal control over financial reporting, we may identify additional measures
to address the material weakness or determine to modify certain of the
remediation procedures described above. Our management, with the
oversight of our audit committee, will continue to take steps to remedy the
known material weakness as expeditiously as possible and enhance the overall
design and capability of our control environment.
PART
II—OTHER INFORMATION
ITEM 1.
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LEGAL PROCEEDINGS.
|
In the
normal course of our business, we are subject to legal proceedings brought by or
against us and our subsidiaries. None of these proceedings involves a claim for
damages exceeding ten percent of the current assets of TESCO and its
subsidiaries on a consolidated basis. Please see Part I, Item 3—“Legal
Proceedings” in our Annual Report on Form 10-K for the year ended
December 31, 2008 for a summary of our ongoing legal proceedings. The
estimates below represent management’s best estimates based on consultation with
internal and external legal counsel. There can be no assurance as to the
eventual outcome or the amount of loss we may suffer as a result of these
proceedings.
Varco
I/P, Inc. (“Varco”) filed suit against TESCO in April 2005 in the U.S. District
Court for the Western District of Louisiana, alleging that our CDS infringes
certain of Varco’s U.S. patents. Varco seeks monetary damages and an injunction
against further infringement. We filed a countersuit against Varco in June 2005
in the U.S. District Court for the Southern District of Texas, Houston Division
seeking invalidation of the Varco patents in question. In July 2006, the
Louisiana case was transferred to the federal district court in Houston, and as
a result, the issues raised by Varco have been consolidated into a single
proceeding in which we are the plaintiff. We also filed a request with the U.S.
Patent and Trademark Office (“USPTO”) for reexamination of the patents on which
Varco’s claim of infringement is based. The USPTO accepted the Varco patents for
reexamination, and the district court stayed the patent litigation pending the
outcome of the USPTO reexamination. In May 2009, the USPTO issued a final action
rejecting all of the Varco patent claims that TESCO had contested. Varco has
appealed this decision with the USPTO. The outcome and amount of any future
financial impacts from this litigation are not determinable at this
time.
Frank’s
International, Inc. and Frank’s Casing Crew and Rental Tools, Inc. (“Franks”)
filed suit against TESCO in the U.S. District Court for the Eastern District of
Texas, Marshall Division, on January 10, 2007, alleging that its Casing
Drive System infringes two patents held by Franks. TESCO filed a response
denying the Franks allegation and asserting the invalidity of its patents. In
May 2008, Franks withdrew its claims with respect to one of the patents, and, in
July 2008, TESCO filed a request with the USPTO for reexamination of the other
patent. In September 2008, the USPTO ordered a reexamination of that patent.
During the nine months ended September 30, 2009, TESCO, Franks, and a third
party from whom TESCO had a license agreed on terms of a settlement, pursuant to
which TESCO paid $1.8 million to Franks and $0.4 million to the third party.
Under the terms of the settlement, TESCO received from the third party a release
of any royalty obligation under the license and received from Franks a
fully-paid, perpetual, world-wide nonexclusive license under the two patents at
issue. Franks requested the court to dismiss its lawsuit with prejudice. TESCO
accrued and paid this $2.2 million settlement during the nine months ended
September 30, 2009.
In July
2006, we received a claim for withholding tax, penalties and interest related to
payments over the periods from 2000 to 2004 in a foreign jurisdiction. We
disagree with this claim and are currently litigating this matter. However, at
June 30, 2006 we accrued our estimated pre-tax exposure on this matter at
$3.8 million, with $2.6 million included in other expense and $1.2 million
included in interest expense. During 2008 and the nine months ended September
30, 2009, we accrued an additional $0.2 million and $0.1 million, respectively,
of interest expense related to this claim.
In
February 2009 we received notification of a regulatory review of our payroll
practices in one of our North American business districts. Based on information
currently available, we do not expect a material financial impact upon the
conclusion of this review.
A former
employee of one of TESCO’s U.S. subsidiaries filed suit in the U.S. District
Court for the Southern District of Texas—Houston Division on January 29,
2009 on behalf of a number of similarly situated claimants, alleging we failed
to comply with certain wage and hour regulations under the U.S. Fair Labor
Standards Act. The lawsuit was dismissed on July 22, 2009 on the basis that
several of the plaintiffs were bound to arbitrate their claims against us
pursuant to the TESCO Dispute Resolution Program (“Plan”). Five plaintiffs not
covered by the Plan re-filed their lawsuit on July 30, 2009 in the same
court. No trial date has been set. The 22 plaintiffs covered under the Plan have
subsequently initiated arbitration proceeding with the American Arbitration
Association in Houston. . Additional plaintiffs have subsequently joined both
proceedings. We intend to vigorously defend all the allegations asserted in both
proceedings. The outcome and amount of any potential financial impact from the
litigation and arbitration proceedings are not determinable at this
time.
ITEM 1A.
|
RISK FACTORS.
|
See Part
I, Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year
ended December 31, 2008 for a detailed discussion of the risk factors
affecting the Company. The information below provides updates to the previously
disclosed risk factors and should be read in conjunction with the risk factors
and information disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2008.
We
face risks related to pandemic diseases, which could materially and adversely
disrupt our operations and affect travel required for our worldwide
operations.
A portion
of our business involves the movement of people and certain parts and supplies
to or from foreign locations. Any restrictions on travel or shipments to
and from foreign locations, due to an epidemic or outbreak of diseases,
including the recent H1N1 Flu (commonly known as Swine Flu), in these locations
could significantly disrupt our operations and decrease our ability to provide
services to our customers. In addition, our local workforce could be affected by
such an outbreak which could also significantly disrupt our operations and
decrease our ability to provide services to our customers.
Restrictions
imposed by our credit agreement may limit our ability to finance future
operations or capital needs.
The
amount of borrowings available under our credit agreement is limited by the
maintenance of certain financial ratios. Decreases in our financial performance
could prohibit us from borrowing available amounts under our revolver or could
force us to make repayments of outstanding total debt in order to remain in
compliance with our credit agreements. These restrictions may negatively impact
our ability to finance future operations, implement our business strategy or
fund our capital needs. Compliance with these financial ratios may be
affected by events beyond our control, including the risks and uncertainties
described in the other risk factors and elsewhere in this report.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
|
None.
ITEM 3.
|
DEFAULTS UPON SENIOR
SECURITIES.
|
None.
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
None.
ITEM 5.
|
OTHER INFORMATION.
|
None.
ITEM 6.
|
Exhibits
Exhibit No.
|
Description
|
|
3.1*
|
Articles
of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated
by reference to Exhibit 4.1 to Tesco Corporation’s Registration Statement
on Form S-8 (File No. 333-139610) filed with the SEC on December
22, 2006)
|
|
3.2*
|
Amended
and Restated By-laws of Tesco Corporation (incorporated by reference to
Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with
the SEC on May 22, 2007)
|
|
4.1*
|
Form
of Common Share Certificate for Tesco Corporation (incorporated by
reference to Exhibit 4.3 to Tesco Corporation’s Registration
Statement on Form S-8 filed with the SEC on November 13,
2008)
|
|
4.2*
|
Shareholder
Rights Plan Agreement between Tesco Corporation and Computershare Trust
Company of Canada, as Rights Agent, Amended and Restated as of May 20,
2008 (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s
Current Report on Form 8-K filed with the SEC on May 22,
2008)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana,
President and Chief Executive Officer of Tesco
Corporation
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification, executed by Robert L. Kayl, Senior Vice
President and Chief Financial Officer of Tesco
Corporation
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President
and Chief Executive Officer of Tesco Corporation and Robert L. Kayl,
Senior Vice President and Chief Financial Officer of Tesco
Corporation
|
*
|
Incorporated
by reference to the indicated
filing
|
SIGNATURE
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TESCO
CORPORATION
|
||||
By:
|
/s/ JULIO M. QUINTANA
|
|||
Julio
M. Quintana,
President
and Chief Executive Officer
|
||||
Date:
March 5, 2010
|
||||
TESCO
CORPORATION
|
||||
By:
|
/s/ ROBERT L. KAYL
|
|||
Robert
L. Kayl,
Senior
Vice President and Chief Financial Officer
|
||||
Date:
March 5, 2010
|
INDEX
TO EXHIBITS
TO
QUARTERLY
REPORT ON FORM 10-Q/A
FOR
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
Exhibit No.
|
Description
|
|
3.1*
|
Articles
of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated
by reference to Exhibit 4.1 to Tesco Corporation’s Registration Statement
on Form S-8 (File No. 333-139610) filed with the SEC on December
22, 2006)
|
|
3.2*
|
Amended
and Restated By-laws of Tesco Corporation (incorporated by reference to
Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with
the SEC on May 22, 2007)
|
|
4.1*
|
Form
of Common Share Certificate for Tesco Corporation (incorporated by
reference to Exhibit 4.3 to Tesco Corporation’s Registration
Statement on Form S-8 filed with the SEC on November 13,
2008)
|
|
4.2*
|
Shareholder
Rights Plan Agreement between Tesco Corporation and Computershare Trust
Company of Canada, as Rights Agent, Amended and Restated as of May 20,
2008 (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s
Current Report on Form 8-K filed with the SEC on May 22,
2008)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana,
President and Chief Executive Officer of Tesco
Corporation
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification, executed by Robert L. Kayl, Senior Vice
President and Chief Financial Officer of Tesco
Corporation
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President
and Chief Executive Officer of Tesco Corporation and Robert L. Kayl,
Senior Vice President and Chief Financial Officer of Tesco
Corporation
|
*
|
Incorporated
by reference to the indicated
filing
|