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EX-32 - SECTION 906 CERTIFICATIONS OF CEO AND CFO - TESCO CORPtesco32.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - TESCO CORPtesco311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - TESCO CORPtesco312.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 

 
Form 10-Q
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2010
 
¨
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 April 30, 2010: 37,783,430

 
 
 


 


 
     
   
Page
PART I—FINANCIAL INFORMATION
     
Item 1.
1
     
Item 2.
12
     
Item 3.
19
     
Item 4.
19
 
PART II—OTHER INFORMATION
     
Item 1.
21
     
Item 1A.
21
     
Item 2.
21
     
Item 3.
21
     
Item 4.
21
     
Item 5.
21
     
Item 6.
22
 


 
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, 2009 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
 
FINANCIAL STATEMENTS (UNAUDITED).
 
TESCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
             
   
March 31,
2010
   
December 31,
2009
 
ASSETS
           
CURRENT ASSETS
           
    Cash and Cash Equivalents
 
$
36,627
   
$
39,930
 
    Accounts Receivable Trade, net
   
64,553
     
53,970
 
    Income Taxes Receivable
   
12,162
     
10,945
 
    Inventories, net
   
71,541
     
74,339
 
    Deferred Income Taxes
   
13,395
     
13,836
 
    Prepaid and Other Current Assets
   
21,694
     
18,680
 
       Total Current Assets
   
219,972
     
211,700
 
Property, Plant and Equipment, net
   
175,904
     
183,025
 
Goodwill
   
29,394
     
29,394
 
Deferred Income Taxes
   
13,417
     
12,986
 
Intangible and Other Assets, net
   
5,097
     
5,450
 
TOTAL ASSETS
 
$
443,784
   
$
442,555
 
LIABILITIES & SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
    Accounts Payable
 
 $
19,658
   
$
15,992
 
    Deferred Revenues
   
17,340
     
14,007
 
    Accrued and Other Current Liabilities
   
27,911
     
29,326
 
       Total Current Liabilities
   
64,909
     
59,325
 
Long Term Debt
   
––
     
8,600
 
Deferred Income Taxes
   
12,359
     
12,471
 
       Total Liabilities
   
77,268
     
80,396
 
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
               
Common Shares
   
175,796
     
175,087
 
Contributed Surplus
   
16,322
     
14,879
 
Retained Earnings
   
138,897
     
136,692
 
Accumulated Comprehensive Income
   
35,501
     
35,501
 
       Total Shareholders’ Equity
   
366,516
     
362,159
 
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
 
$
443,784
   
$
442,555
 

 
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
March 31,
 
   
2010
   
2009
 
REVENUE 
           
    Products
 
$
27,959
   
$
49,125
 
    Services
   
58,009
     
61,059
 
     
85,968
     
110,184
 
OPERATING EXPENSES
               
    Cost of Sales and Services
               
       Products
   
21,601
     
35,887
 
       Services
   
49,042
     
53,294
 
     
70,643
     
89,181
 
    Selling, General and Administrative
   
10,776
     
13,884
 
    Research and Engineering
   
1,639
     
2,588
 
       Total Operating Expenses
   
83,058
     
105,653
 
OPERATING INCOME
   
2,910
     
4,531
 
OTHER (INCOME) EXPENSE
               
    Interest expense
   
55
     
497
 
    Interest income
   
(22
)
   
(19
)
    Foreign exchange losses (gains)
   
120
     
(161
)
    Other income
   
(486
)
   
(48
)
       Total Other (Income) Expense
   
(333
)
   
269
 
INCOME BEFORE INCOME TAXES
   
3,243
     
4,262
 
INCOME TAX PROVISION (BENEFIT)
   
1,038
     
(3,248
)
NET INCOME
 
$
2,205
   
$
7,510
 
Earnings per share:
               
    Basic
 
$
0.06
   
$
0.20
 
    Diluted
 
$
0.06
   
$
0.20
 
Weighted average number of shares:
               
    Basic
   
37,759,417
     
37,516,582
 
    Diluted
   
38,709,654
     
38,347,352
 
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



TESCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
             
   
Three Months Ended
March 31,
 
   
2010
   
2009
 
OPERATING ACTIVITIES
           
Net Income
 
$
2,205
   
$
7,510
 
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
   
8,779
     
9,301
 
Stock compensation expense
   
1,524
     
1,572
 
Bad debt (recovery) expense
   
(562
)
   
657
 
Deferred income taxes
   
(102
)
   
(5,379
)
Amortization of financial items
   
87
     
174
 
Loss on sale of operating assets
   
79
     
764
 
Changes in components of working capital
               
(Increase) decrease in accounts receivable trade
   
(10,021
)
   
18,725
 
Decrease (increase) in inventories
   
3,481
     
(11,578
)
Increase in prepaid and other current assets
   
(3,014
)
   
(4,902
)
Increase (decrease) in accounts payable
   
3,666
     
(5,607
)
Increase (decrease) increase in accrued and other current liabilities
   
2,435
     
(481
)
Decrease in income taxes payable
   
(1,217
)
   
(1,238
)
Other, net
   
––
     
9
 
Net cash provided by operating activities
   
7,340
     
9,527
 
INVESTING ACTIVITIES
               
Additions to property, plant and equipment
   
(2,540
)
   
(5,216
)
Proceeds on sale of operating assets
   
390
     
55
 
Other, net
   
(5
)
   
(32
)
Net cash used in investing activities
   
(2,155
)
   
(5,193
)
FINANCING ACTIVITIES
               
Issuances of debt
   
––
     
10,000
 
Repayments of debt
   
(8,600
)
   
(12,648
)
Proceeds from exercise of stock options
   
112
     
52
 
Net cash used in financing activities
   
(8,488
)
   
(2,596
)
Effect of foreign exchange losses on cash balances
   
––
     
(67
)
Net (Decrease) Increase in Cash and Cash Equivalents
   
(3,303
)
   
1,671
 
Net Cash and Cash Equivalents, beginning of period
   
39,930
     
20,619
 
Net Cash and Cash Equivalents, end of period
 
$
36,627
   
$
22,290
 
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 



TESCO CORPORATION
 
Notes to Condensed Consolidated Financial Statements
 
Note 1—Preparation of Interim Financial Statements and 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. TESCO seeks 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. TESCO’s 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.
 
These interim condensed consolidated financial statements are unaudited and have been prepared pursuant to instructions for quarterly reporting required to be filed with the Securities and Exchange Commission (“SEC”) and do not include all information and footnotes normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles.  
 
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and are consistent in all material respects with those applied in the Company’s annual report on Form 10-K for the year ended December 31, 2009.  The preparation of these financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements and the related disclosures.  Actual results may differ from the Company’s estimates. Management has reflected all adjustments (which were normal recurring adjustments unless otherwise disclosed herein) that it believes are necessary for a fair presentation of the condensed consolidated balance sheets, results of operations and cash flows, as applicable.  The Company’s balance sheet as of December 31, 2009 included herein has been derived from the audited balance sheet as of December 31, 2009 included in TESCO’s 2009 Annual Report on Form 10-K.  These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K, which contains a summary of the Company’s significant accounting policies and other disclosures. Interim results should not be taken as indicative of the results that may be expected for the year ending December 31, 2010. 
 
Significant Accounting Policies
 
The information below provides an update to the significant accounting policies and accounting pronouncements issued but not yet adopted and discussed in TESCO’s 2009 Annual Report on Form 10-K.
 
Foreign Currency Translation
 
The U.S. dollar is the functional currency for all of the Company’s worldwide operations. Effective January 1, 2010, and resulting from an analysis of operational changes and U.S. Dollar cash flows, the Company changed the functional currency for its Canadian operations from the Canadian Dollar to the U.S. Dollar.
 
Prior to January 1, 2010, assets and liabilities of the Company’s Canadian operations, which were denominated in foreign currencies, were 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.  Effective January 1, 2010, the cumulative translation adjustments remained as a component of Accumulated Other Comprehensive Income and no additional adjustments were made as a result of the change in functional currency as discussed above.  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.
 

 
 
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. At March 31, 2010 and December 31, 2009, inventories, net of reserves for excess and obsolete inventories, by major classification were as follows (in thousands):
             
   
March 31,
2010
   
December 31,
2009
 
Raw materials
 
$
43,872
   
$
34,056
 
Work in progress
   
2,328
     
2,328
 
Finished goods
   
25,341
     
37,955
 
   
$
71,541
   
$
74,339
 
 
Warranty Accrual
 
The following is a reconciliation of changes in the Company’s warranty accrual for the three months ended March 31, 2010 (in thousands):
   
Three Months Ended
March 31, 2010
 
Balance—beginning of period
 
$
2,251
 
Charged to expense, net
   
32
 
Deductions
   
(234
)
Balance—end of period
 
$
2,049
 

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 March 31, 2010 and December 31, 2009, the allowance for doubtful accounts on Trade Accounts Receivable was $1.3 million and $1.5 million, respectively.
 
Fair Value Measurement
 
During the year ended December 31, 2009, the Company made the decision to sell certain operating assets within the next 12 months. These fixed assets had a carrying amount of $3.9 million, and were written down to their estimated realizable value of $0.3 million during the year ended December 31, 2009. The Company disposed of a portion of these assets during the current period, and as of March 31, 2010, the remaining estimated realizable value was $0.2 million. The estimated realizable fair value was derived from observable market prices in the form of quotations received from independent third parties. The following table presents the Company’s assets carried at fair value and the basis for determining their fair values (in thousands):
                               
   
As of
March 31,
2010
   
Quoted Prices in Active Markets
for Identical
Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
   
Total
Losses
 
Assets held for sale
 
$
229
   
$
   
$
229
     
   
$
3,559
 
 
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 Company had no outstanding borrowings under its credit facility at March 31, 2010.
 


Depreciation and Amortization
 
Depreciation and amortization expense is included in the Condensed Consolidated Statements of Income as follows (in thousands):

   
Three Months Ended
March 31,
 
   
2010
   
2009
 
Cost of sales and services
 
$
8,528
   
$
8,998
 
Selling, general and administrative expense 
   
245
     
291
 
Research and engineering
   
6
     
12
 
   
$
8,779
   
$
9,301
 
 
Severance Costs
 
During the three months ended March 31, 2009, the Company eliminated approximately 220 employee positions due to a review of its personnel structure and recorded termination benefits of $1.3 million associated with the reduction. These severance costs are recorded in Cost of Sales and Services ($0.6 million), Research and Engineering expense ($0.1 million) and Selling, General and Administrative expense ($0.6 million) 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
March 31, 2009
 
Top Drive
 
$
382
 
Tubular Services
   
183
 
Casing Drilling
   
––
 
Research and Engineering
   
142
 
Corporate and Other
   
624
 
Total Severance Costs
 
$
1,331
 

The Company incurred no significant severance costs during the three months ended March 31, 2010.

Stock-Based Compensation
 
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 March 31, 2010 and December 31, 2009, the fair value of these awards was approximately $1.2 and $1.8 million, respectively.
 
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
March 31,
 
   
2010
   
2009
 
Cost of Sales and Services
 
$
219
   
$
271
 
Selling, General and Administrative Expense
   
1,245
     
1,202
 
Research and Engineering
   
60
     
99
 
   
$
1,524
   
$
1,572
 
 
 
 
 
 
Per Share Information
 
Per share information is computed using the weighted average number of common shares outstanding during the year. Diluted per share information is calculated, including the dilutive effect of stock options which are determined using the treasury stock method. The treasury stock method assumes that the proceeds that would be obtained upon exercise of “in the money” options would be used to purchase common shares at the average market price during the period. No adjustment to diluted earnings per share is made if the result of this calculation is anti-dilutive.
 
The following table reconciles basic and diluted weighted average shares (in thousands):
               
     
Three Months Ended
March 31,
 
     
2010
   
2009
 
Basic weighted average number of shares outstanding 
     
37,759
     
37,517
 
Dilutive effect of stock compensation awards
     
951
     
830
 
Diluted weighted average number of shares outstanding
     
38,710
     
38,347
 
Weighted average anti-dilutive options excluded from calculation due to exercise prices
     
680
     
952
 
 
Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“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. The Company adopted these provisions on January 1, 2010 and the adoption did not 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 guidance, many types of transferred financial assets that would have been derecognized previously are no longer eligible for derecognition. This guidance requires enhanced disclosures about the risks to which a transferor continues to be exposed due to its continuing involvement in transferred financial assets. This guidance also clarifies and improves certain provisions in previously issued guidance that have resulted in inconsistencies in the application of the principles on which that guidance 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. The Company adopted these provisions on January 1, 2010 and the adoption did not have a material impact on the consolidated financial statements.
 
 
 
Note 2—Shareholders’ Equity and Stock-Based Compensation
 
Common Stock
 
The following summarizes the activity in the Company’s common shares during the three months ended March 31, 2010 (dollar amounts in thousands):
             
   
Three Months Ended
March 31, 2010
 
   
No. of shares
   
Amount
 
Balance—beginning of period
   
37,749,606
   
$
175,087
 
Issued on exercise of options
   
4,032
     
44
 
Issuance from settlement of restricted stock
   
25,574
     
625
 
Other issuance of common stock
   
3,037
     
40
 
Balance—end of period
   
37,782,249
   
$
175,796
 

Stock-Based Compensation
 
Under the terms of the Company’s stock option plan, as amended, 3,778,225 shares of common stock were authorized as of March 31, 2010 for the grant of stock incentive awards to eligible directors, officers, employees and other persons. At March 31, 2010, the Company had approximately 927,380 shares available for future grants.

The Company grants stock-based awards in the form of 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. RSUs 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 three months ended March 31, 2010:
                       
   
U.S. Dollars
   
Canadian Dollars
   
Shares
   
Weighted-
average
grant date
fair value
   
Shares
   
Weighted-
average
grant date
fair value
Outstanding—beginning of period
   
807,923
   
$
11.08
     
42,828
   
C$
30.93
Granted
   
   
$
     
   
C$
Vested
   
(16,948
)
 
$
24.06
     
(8,626
)
 
C$
24.84
Cancelled
   
(3,934
)
 
$
13.08
     
(234
)
 
C$
36.63
Outstanding—end of period
   
787,041
   
$
10.79
     
33,968
   
C$
32.44

The weighted average expected forfeiture rate is 14% for RSUs.
 
Note 3—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 months ended March 31, 2010 and 2009 were as follows (in thousands):
             
   
Three Months Ended
March 31,
 
   
2010
   
2009
 
Net (Loss) Income
 
$
2,205
   
$
7,510
 
Foreign currency translation adjustment, net of income taxes
   
     
(1,757
)
Total Comprehensive Income
 
$
2,205
   
$
5,753
 
Effective January 1, 2010, and resulting from an analysis of operational changes and U.S. Dollar cash flows, the Company changed the functional currency for its Canadian operations from the Canadian Dollar to the U.S. Dollar. Accumulated Comprehensive Income reported in the consolidated statements of stockholders’ equity before January 1, 2010 totaled $35.5 million and consisted solely of the cumulative foreign currency translation adjustment in Canada prior to changing our functional currency. The currency translation adjustment recorded up through the date of the change in functional currency will only be adjusted in the event of a full or partial disposition of our investment in Canada.
 
Note 4—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 (benefit) for the three months ended March 31, 2010 and 2009 were as follows (in thousands):
             
   
Three Months Ended
March 31,
 
   
2010
   
2009
 
Current
 
$
1,133
   
$
1,731
 
Deferred
   
(95
)
   
(4,979
)
Income tax provision (benefit)
 
$
1,038
   
$
(3,248
)

The Company’s effective tax rate for the three months ended March 31, 2010 was 32%, compared to a benefit of 76% for the same period in 2009. During the first quarter of 2009, Canadian tax law changed which allowed the Company to elect to file its Canadian tax return in U.S. dollars beginning with the tax year ended December 31, 2008. The impact of this tax change was recognized in the first quarter of 2009. The effect was a one-time tax benefit of approximately $4.5 million to increase the Company’s deferred tax assets. Excluding this one-time tax benefit, the Company’s effective tax rate for the three months ended March 31, 2009 was 29%.
 
    As of March 31, 2010 and December 31, 2009, the Company had an accrual for uncertain tax positions of $1.2 million. This liability is offset by the Company’s net income tax receivables and is included in Income Taxes Receivable 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.
 
Certain 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 5—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.
 
In 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. In November 2009, the Company received a favorable decision from a lower level court regarding payments made during 2000, which is subject to appeal.  During 2006, the Company accrued its estimated pre-tax exposure on this matter at $3.8 million.
 
 
 
In 2009, TESCO settled a lawsuit with 48 plaintiffs related to certain wage and hour regulations under the U.S. Fair Labor Standards Act. Subsequent to that settlement, another 18 employees raised similar wage claims against the Company. During the first quarter of 2010, the Company agreed to settle all of those claims for an aggregate amount of approximately $0.4 million.

    In December 2009, the Company received an administrative subpoena from the Department of the Treasury, Office of Foreign Assets Control regarding a past shipment of oilfield equipment made from its Canadian manufacturing facility in 2006 to Sudan. The Company has reviewed this matter and has provided a timely response to the subpoena. At this time, the Company does not believe the ultimate outcome of this matter will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flow.

 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 March 31, 2010 and December 31, 2009, the total exposure to the Company under outstanding letters of credit was $6.7 million and $7.1 million, respectively.

Note 6—Segment Information
 
Business Segments
 
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 (income) 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.
 
Significant financial information relating to these segments is as follows (in thousands):
                                     
   
Three Months Ended March 31, 2010
 
   
Top
Drive
   
Tubular
Services
   
CASING
DRILLING
   
Research &
Engineering
   
Corporate and
Other
   
Total
 
Revenues
 
$
52,086
   
$
31,297
   
$
2,585
   
$
   
$
   
$
85,968
 
Depreciation and amortization
   
2,391
     
4,608
     
1,029
     
6
     
745
     
8,779
 
Operating income (loss)
   
12,357
     
3,516
     
(2,892
)
   
(1,639
)
   
(8,432
)
   
2,910
 
Other income
                                           
(333
)
Income before income taxes
                                         
$
3,243
 
 
 
 
 
 
   
Three Months Ended March 31, 2009
 
   
Top
Drive
   
Tubular
Services
   
CASING
DRILLING
   
Research &
Engineering
   
Corporate and
Other
   
Total
 
Revenues
 
$
68,126
   
$
37,002
   
$
5,056
   
$
   
$
   
$
110,184
 
Depreciation and amortization
   
1,980
     
5,419
     
1,191
     
12
     
699
     
9,301
 
Operating income (loss)
   
17,256
     
2,221
     
(1,361
)
   
(2,588
)
   
(10,997
)
   
4,531
 
Other expense
                                           
269
 
Income before income taxes
                                         
$
4,262
 

    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
March 31,
 
   
2010
   
2009
 
United States
 
$
42,019
   
$
56,538
 
Europe, Africa and Middle East
   
10,007
     
14,241
 
Asia Pacific
   
10,544
     
10,812
 
Canada
   
7,008
     
12,490
 
Mexico
   
9,506
     
8,895
 
South America
   
6,884
     
7,208
 
Total
 
$
85,968
   
$
110,184
 
 



 
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, 2009, 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. Our Top Drive segment sells equipment and provides services to drilling contractors and oil and gas operating companies throughout the world. We primarily manufacture top drives that are used in drilling operations to rotate the drill string while suspended from the derrick above the rig floor. We also provide top drive rental services on a day-rate basis for land and offshore drilling rigs, and we provide after-market sales and support for our customers.
 
Our Tubular Services business includes both proprietary and conventional services, which are typically offered as a “call out” service on a well-by-well basis.
 
Our proprietary Tubular Service business is based on our Proprietary Casing Running Service technology, which uses certain components of our CASING DRILLING technology, in particular the CDS, and provides an efficient method for running casing and, if required, reaming the casing into the hole. Additionally, our proprietary Tubular Service business includes the installation service of deep water smart well completion equipment using our MCLRS, a proprietary and patented technology which improves the quality of the installation of high-end well completions.
 
Our conventional Tubular Service business provides equipment and personnel for the installation of tubing and casing, including power tongs, pick-up/lay-down units, torque monitoring services, connection testing services and power swivels for new well construction and in work-over and re-entry operations.
 
Our CASING DRILLING business is based on our proprietary CASING DRILLING technology, which uses patented equipment and processes to allow an oil or gas well to be drilled using standard well casing pipe. In contrast, conventional or straight practice rotary drilling requires the use of specialized drill pipe and drillstring components. The demonstrated benefits of using well casing to drill the well compared with conventional drilling include a reduction in the risk of unscheduled downhole events that typically result in non-productive time and additional cost and operational risk to the drilling contractor and well operator.
 


 RESULTS OF OPERATIONS
 
For the Three Months Ended March 31, 2010 and 2009
 
Our revenues, operating income and net income for the three months ended March 31, 2010 decreased compared to the same period in 2009, primarily due to decreased top drive product sales and service, decreased Tubular Services revenues, and decreased CASING DRILLING activity, partially offset by decreased operating expenses as discussed below. Revenues, operating income and net income for the three months ended March 31, 2010 and 2009 were as follows:
                               
   
Three Months Ended March 31,
   
%
Change
 
   
2010
   
2009
 
         
% of
Revenues
         
% of
Revenues
 
REVENUES
                             
Top Drive
                             
-Sales
 
$
17,076
         
$
28,736
           
(41
)
-Rental services
   
24,127
           
23,581
           
2
 
-After-market sales and service
   
10,883
           
15,809
           
(31
)
Total Top Drive
   
52,086
     
61
     
68,126
     
62
     
(24
)
Tubular Services
                                       
-Conventional
   
5,509
             
9,597
             
(43
)
-Proprietary
   
25,788
             
27,405
             
(6
)
Total Tubular Services
   
31,297
     
36
     
37,002
     
34
     
(15
)
CASING DRILLING
   
2,585
     
3
     
5,056
     
4
     
(49
)
Total Revenues
 
$
85,968
     
100
   
$
110,184
     
100
     
(22
)
                                         
OPERATING INCOME
                                       
Top Drive
 
$
12,357
     
24
   
$
17,256
     
25
     
(28
)
Tubular Services
   
3,516
     
11
     
2,221
     
6
     
58
 
CASING DRILLING
   
(2,892
)
   
(112
)
   
(1,361
)
   
(27
)
   
(112
)
Research and Engineering
   
(1,639
)
   
n/a
     
(2,588
)
   
n/a
     
(37
)
Corporate and Other
   
(8,432
)
   
n/a
     
(10,997
)
   
n/a
     
(23
)
Total Operating Income
 
$
2,910
     
3
   
$
4,531
     
4
     
(36
)
                                         
NET INCOME
 
$
2,205
     
3
   
$
7,510
     
7
     
(71
)
                                         
 
Revenues for the three months ended March 31, 2010 were $86.0 million, compared to $110.2 million in the same period in 2009, a decrease of $24.2 million, or 22%. This decrease is due to a $16.0 million decrease in the Top Drive segment, a $5.7 million decrease in the Tubular Services segment and a $2.5 million decrease in the CASING DRILLING segment. Each segment is discussed in further detail below.
 
Operating Income for the three months ended March 31, 2010 was $2.9 million, compared to $4.5 million in the three months ended March 31, 2009, a decrease of $1.6 million, or 36%. This decrease is primarily due to lower revenues in all of our segments, as discussed further below.

Net Income for the three months ended March 31, 2010 was $2.2 million, compared to income of $7.5 million in the same period in 2009, a decrease of $5.3 million, or 71%. This decrease is primarily due to decreased operating income as discussed above and a one-time tax benefit of approximately $4.5 million recorded during the three months ended March 31, 2009 to increase the Company’s deferred tax assets as a result of a change in Canadian tax law, as discussed below.

 
 
Top Drive Segment
 
Our Top Drive segment consists of top drive sales, top drive rental service activities and after-market sales and services.
 
Revenues—Revenues for the three months ended March 31, 2010 decreased $16.0 million, or 24%, compared to the same period in 2009, primarily driven by a $11.6 million decrease in top drive sales and a $4.9 million decrease in after-market sales and service, offset by a $0.5 million increase in top drive rental operations.
 
Revenues from top drive sales decreased $11.6 million to $17.1 million for the three months ended March 31, 2010 as compared to the same period in 2009. This decrease is primarily due to the number of Top Drive units sold during 2009 resulting from the fulfillment of backlog orders from 2008 that arose prior to the downturn in the drilling industry that continues to impact our business.  We sold 14 units (12 new, 1 used and 1 consignment unit) during the three months ended March 31, 2010, compared to 32 units sold (31 new and 1 used) during the same period in 2009.  Our outstanding backlog was 65 units at December 31, 2008, compared to 11 units at December 31, 2009.  At March 31, 2010, our third-party backlog was 18 units.
 
Revenues from top drive rental service activities increased $0.5 million to $24.1 million during the three months ended March 31, 2010 as compared to the same period in 2009, primarily due to an increase in the number of rental operating days during the current year’s period. Our rental fleet worked 5,373 operating days during the three months ended March 31, 2010, up from 4,673 operating days in the same period last year. At March 31, 2010, we had 117 top drives in our rental fleet, compared to 126 units as of March 31, 2009.
 
Revenues from after-market sales and service decreased $4.9 million to $10.9 million for the three months ended March 31, 2010 as compared to the same period in 2009, primarily due to a decline in customer 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 March 31, 2010 decreased $4.9 million to $12.4 million as compared to the same period in 2009. 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.
 
Outlook— Based upon existing drilling levels and current economic forecasts, we expect our top drive order rate to moderately increase in 2010. While we have seen a recent increase in sales activity, our customers have maintained their focus on lowering project costs and, accordingly, we have adjusted our sales prices on selected product offerings.
  
Tubular Services Segment
 
Revenues—Revenues for the three months ended March 31, 2010 decreased $5.7 million, or 15%, to $31.3 million as compared to the same period in 2009. This was primarily due to a $4.1 million decrease in our conventional Tubular Services business and a $4.6 million decrease in our proprietary equipment sales, partially offset by increased proprietary services revenue. The decrease in our revenues is due to the decline in available work as the global market recovers from last year’s depressed economic conditions.  We continue to shift our customers to our proprietary product offerings. We completed 797 jobs during the three months ended March 31, 2010, up 41% compared to 562 jobs during the three months ended March 31, 2009.  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 March 31, 2010 increased $1.3 million to $3.5 million compared to income of $2.2 million for the same period in 2009, primarily due to a reduction in our fixed operating cost structure.  In response to the steep decline in industry conditions that occurred in early 2009, we took steps to reduce our operating costs and strategically aligned certain locations, particularly in North America.

Outlook—We expect our proprietary services business to grow moderately in 2010 compared to 2009 and our conventional casing activities to recover more slowly as we continue to focus our efforts on the expansion of our proprietary casing service offerings. In addition, we continue to expand our tubular services activities in selected international locations to further expand our global footprint. We continue to believe that the fundamentals driving our global business remain intact and that our financial condition will position us for future growth as drilling industry conditions improve.
 
 
 
CASING DRILLING Segment
 
Revenues—Revenues for the three months ended March 31, 2010 were $2.6 million compared to $5.1 million in the same period last year, a decrease of $2.5 million or 49%. This decrease was due to a comparatively slower recovery in available work for CASING DRILLING in connection with current industry operating conditions. 
 
Operating Income—CASING DRILLING’s operating loss for the three months ended March 31, 2010 was $2.9 million, an increase from last year of $1.4 million.  The increased loss is primarily due to the decreased revenues discussed above.
 
Outlook—While operating rig count is beginning to recover, North American rigs are being deployed to the U.S. shale gas projects where there is currently less demand for CASING DRILLING technology.  As we move forward, we are seeing movement into oil basin projects.  We are evaluating these prospects and expect this to be a positive trend for the CASING DRILLING business. We remain confident that our CASING DRILLING business will be a valuable part of our future operations. Accordingly, we plan to maintain our existing CASING DRILLING infrastructure around the world while monitoring costs 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.  These expenses were $1.6 million for the three months ended March 31, 2010, a decrease of $1.0 million from operating expenses of $2.6 million for the three months ended March 31, 2009. This decrease is primarily due to our continued focus on reducing costs and the timing of our investments in Top Drive model development. We 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 operating expenses for the three months ended March 31, 2010 decreased $2.6 million to $8.4 million, compared to $11.0 million for the same period in 2009. This decrease is primarily due to a $2.2 legal settlement and $0.6 million in severance costs incurred during the prior year’s period.  
 
Net Income
 
Net income for the three months ended March 31, 2010 and 2009 was as follows (in thousands):
                         
   
Three Months Ended March 31,
 
   
2010
   
2009
 
         
% of
revenue
         
% of
revenue
 
Operating Income
 
$
2,910
     
3
   
$
4,531
     
4
 
Interest expense
   
55
     
     
497
     
 
Interest income
   
(22
)
   
     
(19
)
   
 
Foreign exchange losses (gains)
   
120
     
     
(161
)
   
––
 
Other income
   
(486
)
   
(1
)
   
(48
)
   
 
Income taxes
   
1,038
     
1
     
(3,248
)
   
3
 
Net Income
 
$
2,205
     
3
   
$
7,510
     
7
 
                                 
 
Interest Expense—Interest expense for the three months ended March 31, 2010 decreased $0.4 million compared to the same period in 2009. During the three months ended March 31, 2010, we paid all outstanding amounts owed under our credit facility, compared to average daily debt balances of $43.7 million during the the same period last year, resulting in lower interest expense during the current year period.
 
Interest Income—Interest income for the three months ended March 31, 2010 was relatively flat compared to the same period in 2009.
 
 
 
Foreign Exchange Losses (Gains) —Foreign exchange losses (gains) increased to a loss of $0.1 million during the three months ended March 31, 2010 from a gain of $0.2 million during the same period in 2009.  Effective January 11, 2010 the Venezuelan government devalued its currency and moved to a two-tier exchange structure. The official exchange rate moved from 2.15 to 2.60 for essential goods and to 4.30 for non-essential goods and services.  The unfavorable impact of the devaluation to our first quarter results is approximately $0.4 million with the exchange rate movement from 2.15 to 4.30. This loss is partially offset by gains resulting from fluctuations in other worldwide currencies.  Effective January 1, 2010, and resulting from an analysis of U.S. Dollar cash flows, we changed our functional currency in our Canadian operations from the Canadian Dollar to the U.S. Dollar.  As a result, we have decreased exposure to fluctuations in the Canadian dollar values compared to the U.S. dollar effective January 1, 2010.
 
Other (Income) Expense—Other (income) expense for the three months ended March 31, 2010 increased by $0.4 million compared to the same period during 2009, primarily due to a reversal of a $0.4 million penalty assessed by a taxing authority.
 
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.
 
Our effective tax rate for the three months ended March 31, 2010 was 32% compared to a benefit of 76% for the three months ended March 31, 2009.  During the first quarter of 2009, Canadian tax law changed which allows the company to elect to file its Canadian tax return in U.S. dollars beginning with the tax year ended December 31, 2008. The impact of this tax change was recognized in the first quarter of 2009. The effect was a one-time tax benefit of approximately $4.5 million to increase our deferred tax assets. Excluding this one-time tax benefit, our effective tax rate for the three months ended March 31, 2009 was 29%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our Net Cash position at March 31, 2010 and December 31, 2009 was as follows (in thousands):
             
   
March 31,
2010
   
December 31,
2009
 
Cash and cash equivalents
 
$
36,627
   
$
39,930
 
Long term debt
   
     
(8,600
)
Net Cash
 
$
36,627
   
$
31,330
 
                 
 
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 March 31, 2010, we had $5.8 million in letters of credit outstanding under our credit facility and $139.2 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 will decrease 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 March 31, 2010.
 
We had no outstanding borrowings under our revolving credit facility as of March 31, 2010. 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 cash equivalents, increased $6.0 million to $118.4 million at March 31, 2010 from $112.4 million at December 31, 2009. The increase during the three months ended March 31, 2010 was primarily due to an increase in accounts receivable, partially offset by an increase in our accounts payable.
 
Following is the calculation of working capital, excluding cash and cash equivalents, as of March 31, 2010 and December 31, 2009 (in thousands):
             
   
March 31,
2010
   
December 31,
2009
 
Current assets
 
$
219,972
   
$
211,700
 
Current liabilities
   
(64,909
)
   
(59,325
)
Working capital
   
155,063
     
152,375
 
Less:
               
Cash and cash equivalents
   
(36,627
)
   
(39,930
)
Working capital, excluding cash and cash equivalents
 
$
118,436
   
$
112,445
 
                 

During the three months ended March 31, 2010, our capital expenditures were $2.5 million, compared to $5.2 million during the three months ended March 31, 2009. We project our capital expenditures for 2010 to be between $20 to $30 million. The planned increase from our 2009 capital spending levels is directly related to our forecasted rate of industry recovery from 2009 conditions, along with our 2010 strategy to judiciously apply our capital spending in certain key markets.

During the three months ended March 31, 2010, cash provided by operating activities was $7.3 million, compared to cash provided by operating activities of $9.5 million in the same period in 2009. This decrease 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 March 31, 2010 and December 31, 2009, 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 all of our worldwide operations. Effective January 1, 2010, and resulting from an analysis of operational changes and U.S. Dollar cash flows, we changed the functional currency for our Canadian operations from the Canadian Dollar to the U.S. Dollar.
 
Prior to January 1, 2010, assets and liabilities of our Canadian operations, which were denominated in foreign currencies, were 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.  Effective January 1, 2010, the cumulative translation adjustments remained as a component of Accumulated Other Comprehensive Income and no additional adjustments were made as a result of the change in functional currency as discussed above.  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.
 
CHANGES IN ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the Financial Accounting Standards Board (“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 adopted these provisions on January 1, 2010 and the adoption did not 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 guidance, many types of transferred financial assets that would have been derecognized previously are no longer eligible for derecognition. This guidance requires enhanced disclosures about the risks to which a transferor continues to be exposed due to its continuing involvement in transferred financial assets. This guidance also clarifies and improves certain provisions in previously issued guidance that have resulted in inconsistencies in the application of the principles on which that guidance 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 adopted these provisions on January 1, 2010 and the adoption did not have a material impact on the consolidated financial statements.
 



 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
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. We had no outstanding debt under our credit facility at March 31, 2010.
 
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, 2009 for a detailed discussion of the risk factors affecting us.
 
CONTROLS AND PROCEDURES.
 
Material Weakness Previously Disclosed

As discussed in our 2009 Annual Report on Form 10-K, we did not maintain effective control over accounting for income taxes with respect to non-routine and atypical transactions as of December 31, 2009.  Specifically, an effective control was not operating to ensure that accounting changes were completely and accurately recorded on a timely basis for the adoption of a new tax law in Canada during the first quarter 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 assets, the income tax provision, foreign exchange gains and losses, cumulative translation adjustments accounts and related financial disclosures.  This control deficiency also resulted in restatements of our condensed consolidated financial statements as of and for each of the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 and resulted in audit adjustments to our consolidated financial statements as of and for the year ended December 31, 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.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the SEC reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of March 31, 2010, our Chief Executive Officer and Chief Financial Officer participated with our management in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2010, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting.  Because of this material weakness, we performed additional procedures to ensure that our financial statements as of and for the quarter ended March 31, 2010 were fairly presented in all material respects in accordance with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




 
Remediation Plan

Our management continues to take action in 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 are establishing and designing controls to identify and properly account for significant changes or events impacting the Company’s tax accounts, such as significant changes to tax laws, including the following:
 
·  
In addition to its performance on an annual basis, the Company will prepare a tax basis balance sheet and related reconciliation upon the occurrence of significant changes or events impacting the Company’s tax accounts, such as significant changes in tax laws, during the quarter in which such events occur.
·  
Increasing the use of expert outside service 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 deferred tax accounts denominated in a currency other than the local functional 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
 
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, 2009 for a summary of our ongoing legal proceedings.
 
The amount of loss we 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 us, either individually or in the aggregate, will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In 2009, TESCO settled a lawsuit with 48 plaintiffs related to certain wage and hour regulations under the U.S. Fair Labor Standards Act. Subsequent to that settlement, another 18 employees raised similar wage claims against us. During the first quarter of 2010, we agreed to settle those claims for approximately $0.4 million.

RISK FACTORS.
 
See Part I, Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009 for a detailed discussion of the risk factors affecting the Company. There have been no material changes in the risk factors described in Part 1, Item 1A, “Risk Factors,” disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
 ITEM 2.            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None.
 
DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 4.             REMOVED AND RESERVED
 
OTHER INFORMATION.
 
None.




EXHIBITS.
 
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: May 7, 2010
   
 
TESCO CORPORATION
     
 
By:
/s/    ROBERT L. KAYL        
   
Robert L. Kayl,
Senior Vice President and Chief Financial Officer
   
 
Date: May 7, 2010
 




INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2010
 
     
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
 
     
31.2
 
     
32
 
 
 
 
 

*
Incorporated by reference to the indicated filing
 
 
24