Attached files

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EX-10.6 - FINAL SETTLEMENT AND LICENSE AGREEMENT - TESCO CORPtesco106.htm
EX-10.15 - EMPLOYMENT AGREEMENT WITH DIETMAR NEIDHARDT - TESCO CORPtesco1015.htm
EX-21 - SUBSIDIARIES OF TESCO CORPORATION - TESCO CORPtesco21.htm
EX-23 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - TESCO CORPtesco23.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - TESCO CORPtesco311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - TESCO CORPtesco312.htm
EX-10.20 - INTERNATIONAL LETTER OF ASSIGNMENT WITH JAMES LANK - TESCO CORPtesco1020.htm
EX-10.25 - 1ST AMNDMT TO EMPLOYMENT AGREEMENT WITH FERNANDO ASSING - TESCO CORPtesco1025.htm
EX-10.23 - 2ND AMNDMT TO EMPLOYMENT AGREEMENT WITH JEFFREY FOSTER - TESCO CORPtesco1023.htm
EX-10.26 - AMNDMT TO EMPLOYMENT AGREEMENT WITH JAMES LANK - TESCO CORPtesco1026.htm
EX-10.33 - SHORT TERM INCENTIVE PLAN 2011 - TESCO CORPtesco1033.htm
EX-10.22 - 2ND AMNDMT TO EMPLOYMENT AGREEMENT WITH ROBERT KAYL - TESCO CORPtesco1022.htm
EX-10.24 - 1ST AMNDMT TO EMPLOYMENT AGREEMENT WITH DEAN FERRIS - TESCO CORPtesco1024.htm
EX-10.21 - 2ND AMNDMT TO EMPLOYMENT AGREEMENT WITH JULIO QUINTANA - TESCO CORPtesco1021.htm
EX-32 - SECTIN 906 CERTIFICATIONS OF CEO AND CFO - TESCO CORPtesco32.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 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 Logo
 
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)
 
Securities to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Shares, without par value
 
Nasdaq Stock Market
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨    No   þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
   
Large accelerated filer  ¨
Accelerated filer  þ
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
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  þ
 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant at the close of business on June 30, 2010 was $255,597,430 based upon the last sales price reported for such date on the NASDAQ Stock Market.  For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the registrant as of June 30, 2010 have been excluded as such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

Number of shares of Common Stock outstanding as of February 28, 2011: 38,062,756
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report on Form  10-K.


 
 

 
 
 



 
 
 
 



           
     
Page
 
 
PART I
     
Item 1.
 
1
 
Item 1A.
 
7
 
Item 1B.
 
14
 
Item 2.
 
15
 
Item 3.
 
15
 
Item 4.
 
15
 
         
 
PART II
     
Item 5.
 
16
 
Item 6.
 
18
 
Item 7.
 
20
 
Item 7A.
 
31
 
Item 8.
 
32
 
Item 9.
 
32
 
Item 9A.
 
32
 
Item 9B.
 
33
 
         
 
PART III
     
Item 10.
 
34
 
Item 11.
 
34
 
Item 12.
 
34
 
Item 13.
 
34
 
Item 14.
 
34
 
         
 
PART IV
     
Item 15.
 
35
 


 
Below is a list of defined terms that are used throughout this document:

TESCO CASING DRILLING®
 
= CASING DRILLING
TESCO’s Casing Drive System
 
= CDS™ or CDS
TESCO’s Multiple Control Line Running System
 
= MCLRS™ or MCLRS

 
A list of our trademarks and the countries in which they are registered is presented below:

Trademark
 
Country of Registration
TESCO®
 
United States, Canada
TESCO CASING DRILLING®
 
United States
CASING DRILLING®
 
Canada
CASING DRILLING™
 
United States
Casing Drive System™
 
United States, Canada
CDS™
 
United States, Canada
Multiple Control Line Running System™
 
United States, Canada
MCLRS™
 
United States, Canada
 
 
When we refer to “TESCO”, “we”, “us”, “our”, “ours”, or “the Company”, we are describing Tesco Corporation and our subsidiaries.
 
 
 
PART I
 
Item 1.  Business.

 
Business and Strategy

We are 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 wells are drilled by delivering safer and more efficient solutions that add real value by reducing the costs of drilling for and producing oil and natural gas.  Our product and service offerings consist mainly of equipment sales and services to drilling contractors and oil and natural gas operating companies throughout the world.

We were created on December 1, 1993 through the amalgamation of Shelter Oil and Gas Ltd., Coexco Petroleum Inc., Forewest Industries Ltd. and Tesco Corporation.  The amalgamated corporation continued under the name Tesco Corporation, which is organized under the laws of Alberta, Canada.

Our four business segments are:

·  
Top Drives - top drive sales, top drive rentals and after-market sales and services;
·  
Tubular Services – proprietary and conventional tubular services;
·  
CASING DRILLING – proprietary CASING DRILLING technology; and
·  
Research and Engineering – internal research and development activities related to our proprietary tubular services, CASING DRILLING technology and top drive model development.

For a further discussion of our business segments, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8, Financial Statements and Supplementary Data, Note 15 included in this Report on Form 10-K.

Top Drive segment

Our Top Drive segment sells equipment and provides services to drilling contractors and oil and natural gas operating companies throughout the world.  We provide top drive rental services on a day-rate basis for land and offshore drilling rigs, and we provide after-market sales and service for our customers.

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.  Our top drives offer portability and flexibility, permitting drilling companies to conduct top drive drilling for all or any portion of a well.  We offer for sale a range of portable and permanently installed top drive products that includes both hydraulically and electrically powered machines capable of delivering 400 to 1,350 horsepower, with a rated lifting capacity of 150 to 750 tons.  With each top drive we sell, we offer the services of top drive technicians who provide customers with training, installation and support services.
 
We offer six distinct model series of top drive systems, using hydraulic, permanent magnet alternating current (“AC”) and induction AC technology.  We believe that we are industry leaders in the development and provision of permanent magnet technology in both portable and permanently installed top drive systems.  This technology provides very high power density, allowing for high performance and low weight.  We use AC induction technology and late generation power electronics in our smaller horsepower systems, such as our EMI machines, allowing the end user to specify its preferred power electronics and motor combination and permitting us to select components from a larger vendor base.  EMI top drive units are available with 150 and 250 ton load path configurations.  We also developed our EXI system in response to market demands for a high performance compact electric top drive system, commonly required on modern fast moving rigs frequently used in pad drilling operations. The EXI system has a load path rating of 350 tons and generates 600 horsepower at the quill.  The HXI is a new generation of our current hydraulic HMI system, incorporating a full suite of operational features and providing a significant gain in performance at the quill.  The HXI machine has a load path rating of 250 tons and has a 700 horsepower self-contained diesel driven hydraulic power unit.
 
In addition to our top drive sales, we rent top drives on a day-rate basis for land and offshore drilling rigs.  Our rental fleet offers a range of systems that can be installed in practically any mast configuration, including workover rigs.  Our fleet is composed principally of hydraulically powered top drive systems, with power ratings of 475 to 1,350 horsepower and load path ratings of 150 to 750 tons, each equipped with its own independent diesel engine driven hydraulic power unit.  This unique combination permits a high level of portability and installation flexibility.
 

 
Our top drive rental fleet, which was comprised of 125 units at December 31, 2010, is deployed strategically around the world to be available to customers on a timely basis.  Our fleet is highly transportable and we mobilize the top drive units to meet customer requests.   In order of size by region from highest to lowest, we currently have rental units in Latin America, the United States and Canada, Russia, Asia-Pacific, the Middle East and Europe.  In response to the economic downturn and operating conditions during 2009, we redeployed over 10% of our U.S. fleet to international locations during 2009, including the Middle East, Latin America, Russia and Asia.  In 2010, we continued to mobilize top drives to the areas with higher demand and mobilized seven top drives into Russia.

We also provide after-market sales and services to our installed customer base around the globe.  We maintain regional stocks of high-demand parts in order to expedite top quality, original replacement parts for top drive systems.  Our service offerings include the commissioning of all new units and recertification of working units including top drives, power units and various other top drive product and component repairs.  Our field-experienced personnel are responsible for the rig up and installation of all units – both rentals and customer-owned units.  Our personnel also provide onsite training and top drive supervision.  In addition, technicians are available to perform work under ongoing maintenance contracts.

Markets and Competition

Demand for our top drive products and rental services depends primarily upon capital spending of drilling contractors and oil and natural gas companies and the level of drilling activity.  Our customers for top drive sales and after-market sales and service primarily consist of drilling contractors, rig builders and equipment brokers.  Occasionally, we may also sell top drives and provide after-market sales and services to major and independent oil and natural gas companies and national oil companies who wish to own and manage their own top drive systems.  Our customers for our rental fleet include drilling contractors, major and independent oil and natural gas companies and national oil companies.

We estimate that approximately 60% of land drilling rigs are currently equipped with top drive systems, including the former Soviet Union and China, where few rigs operate with top drives today.  By contrast, we estimate that approximately 95% of offshore rigs are equipped with top drives.  We were the first top drive manufacturer to provide portable top drives for land drilling rigs.  We believe that significant further land-based market potential exists for our top drive drilling system technology, including both portable and permanently installed applications.  Further, where many top drive systems approach the end of their useful lives and are inefficient or may not have legacy parts available, we believe that a market for replacement systems will be created.  This represents an important opportunity for us.

Our primary competitors in the sale of top drive systems are National Oilwell Varco, Inc. (“NOV”) and Canrig Drilling Technology Ltd., a subsidiary of Nabors Industries Ltd.  We believe we have the second largest customer installed base and are the number two global provider of top drives, following NOV.  Of the three major top drive system providers, we are the only company that maintains a sizeable fleet of assets solely for the purposes of rental.  Competition in the sale of top drive systems takes place primarily on the basis of the features and capacities of the equipment, the quality of the services and technical support offered, delivery lead time and price.

Backlog

We believe that top drive sales backlog is a leading indicator of how our business will be affected by changes in the global macro-economic environment.  We consider a product sale order as backlog when the customer has signed a purchase contract, submitted the purchase order and, if required by the purchase agreement, paid a non-refundable deposit.  Revenue from services is recognized as the services are rendered, based upon agreed daily, hourly or job rates.  Accordingly, we have no backlog for services.

Our top drive sales backlog at December 31, 2010 was 25 units with a total potential revenue value of $33.0 million, compared to 11 units with a total potential revenue value of $16.1 million at December 31, 2009, which reflected a lower order rate as a result of the weakened economic and industry conditions in 2009.  Although sales activity has improved in 2010 compared to 2009, our customers have maintained their focus on lowering project costs, and our backlog has not yet returned to pre-recession levels, as evidenced by our backlog of 65 units with a total potential revenue value of $56.9 million at December 31, 2008.  Revenues are not recognized until our earnings process is complete, the product has been delivered, collectability is reasonably assured and when title and risk of loss of the equipment is transferred to the customer.
 
 
 
We have the ability to expand or downsize our top drive manufacturing capacity to meet current and expected customer demand.  In response to declining demand for our top drives due to industry and operating conditions caused by the recession, we downsized our manufacturing operations substantially during 2009.  We maintained a core team, which continues to deliver top drives each month with a current manufacturing capacity of six to eight top drive units per month, depending on system complexity.  Current capacity is lower than peak production levels in 2008 of 12 to 16 units per month, which demonstrates the flexibility of our manufacturing operations.  We believe that our top drive business needs to maintain manufacturing inventory of one to two quarters of production.  This limits our exposure in the event that the sales market softens and allows us to effectively manage our supply chain and workforce, yet allows us to be responsive to our client base.

Tubular Services segment

Our Tubular Services segment includes a suite of proprietary offerings, as well as conventional casing and tubing running services.  Casing is steel pipe that is installed in oil, natural gas or geothermal wells to maintain the structural and pressure integrity of the well bore, isolate water bearing surface sands, prevent communication between subsurface strata, and provide structural support of the wellhead and other casing and tubing strings in the well.  Most operators and drilling contractors install casing using service companies, like ours, who use specialized equipment and personnel trained for this purpose. Wells can have from two to ten casing strings installed of various sizes.  These jobs encompass wells from vertical holes to high angle extended reach wells and include both onshore and offshore applications.

Our proprietary service offerings use certain components of our CASING DRILLING technology, in particular the patented Casing Drive System (“CDS”), to provide a safer and more automated method for running casing and, if required, reaming the casing into the hole.  The CDS is a tool which facilitates running and reaming casing into a well bore on any rig equipped with a top drive.  This tool offers improved safety and efficiency over traditional methods by eliminating operations that are associated with high risk of personal injury.  It also increases the likelihood that the casing can be run to casing point on the first attempt, offers the ability to simultaneously rotate and reciprocate the casing string as required while circulating drilling fluid, and requires fewer people on the rig for casing running operations than traditional methods.

We also offer installation service of deep water smart well completion equipment using our Multiple Control Line Running System (“MCLRS”) proprietary and patented technology.  We believe this technology substantially improves the quality of the installation of high-end well completions by eliminating damage and splices to control and injection lines.  We also believe this technology improves the speed and safety of the completion process by splitting the work area between personnel making up the tubing and personnel installing completion equipment.

Our conventional service offerings provide 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.

Markets and Competition

Our Tubular Services customers primarily consist of oil and natural gas operating companies, including major and independent companies, national oil companies and, on occasion, other service companies that have contractual obligations to provide tubular running and handling services.  Demand for our tubular services strongly depends upon capital spending of oil and natural gas companies and the level of drilling activity.

The conventional tubular services market consists generally of several large, global operators and a large number of small and medium-sized operators that typically operate in limited geographic areas where the market is highly fragmented. The largest global competitors in this market are Weatherford International, Ltd. (“Weatherford International”), Franks International, Inc. and Baker Hughes Incorporated.  Competition in the conventional tubular services market takes place primarily on the basis of the quality of the services offered, the quality and utility of the equipment provided, the proximity of the service provider and equipment to the work site and price.

We are aware of competitive technology similar to our CDS tool.  We believe that we continue to be the market leader in this technology. Other companies offering similar technology and services include NOV, Weatherford International and Franks International, Inc.  Our CDS system is easily and quickly installed on any top drive system and we offer skilled and trained personnel at the field level who have specialized knowledge of top drive drilling system operations.
 

 
CASING DRILLING segment

Our CASING DRILLING process uses oilfield casing in place of drill pipe to simultaneously drill and case the well, reducing both drilling time and the chance of unscheduled drilling events.  CASING DRILLING technology minimizes the use of conventional drill pipe and drill collars and enables the operators to eliminate pipe trips and case the interval while drilling.  This avoids well bore exposure during tripping and mitigates associated risks such as borehole collapse, lost circulation problems and stuck tools or pipe.

The CASING DRILLING retrievable bottomhole assembly, which is comprised of the drill bit and other downhole tools, such as drilling motors, rotary steerable drilling systems, measurement–while–drilling and logging–while–drilling equipment, is lowered via wireline, drill pipe or a tubing string inside the casing and latched to the bottom joint of casing, retaining the ability to maintain the circulation of drilling fluid at all times.  Tools are recovered in a similar fashion, by use of wireline, or alternatively drill pipe or a tubing string.  Since the casing remains on bottom in the well at all times, wellbore integrity is preserved, and the risk of a well control incident is reduced.  Because the well is cased as it is drilled, the potential for unintentional sidetracking is significantly lessened. The risk of tool loss in the hole is also decreased.

Markets and Competition

Our CASING DRILLING customers primarily consist of oil and natural gas operating companies, including major and independent companies, national oil companies and, on occasion, other service companies that have contractual obligations to provide tubular running and handling services.  Demand for our CASING DRILLING services strongly depends upon capital spending of oil and natural gas companies and the level of drilling activity.

We are not currently aware of any commercially or technically viable direct competition for our proprietary CASING DRILLING retrievable process, services or products, although several of our competitors are known to have developed prototypes that are similar, and in some cases have deployed them in a field environment.  We continue to be the only company offering customers a broad range of tool sizes and the possibility of using casing to drill directional wells combined with specialized equipment that can be readily retrieved when drilling is complete.

We believe that the primary competition to our CASING DRILLING process is the traditional drill pipe drilling process and, to a lesser extent, other methods for casing while drilling that do not involve a retrievable bottom hole assembly.  Such alternative methods of casing while drilling offer limited applications because of the cutting structure, and they cannot be combined with directional tools which facilitate the drilling of directional (i.e. non-vertical) wells.  While we offer such alternative (i.e. non-retrievable) methods in addition to our proprietary CASING DRILLING process, we believe that Weatherford International has the largest share of the non-retrievable portion of the market.

Research and Engineering segment

As a technology driven company, we continue to invest significantly in research and development activities, primarily related to our proprietary technologies in tubular services, CASING DRILLING and top drive model development.  We hold rights, through patents and patent license agreements, to patented and/or patent pending technologies for certain innovations that we believe will have application to our core businesses.   We pursue patent protection in appropriate jurisdictions where we believe our innovations could have significant potential application to our core businesses.  We hold patents and patent applications in the United States, Canada, Europe, Norway and various other countries.  Our patent portfolio currently includes 155 issued patents, comprised of 70 U.S. and 85 foreign patents, and 121 pending patent applications, comprised of 31 U.S. and 90 foreign patent applications.  We generally retain all intellectual property rights to our technology through non-disclosure and technology ownership agreements with our employees, suppliers, consultants and other third parties with whom we do business.
 
The overall design of our portable top drive assembly is protected by patents that will continue in force for several more years. Various specific aspects of the design of the top drive and related equipment are also patented, including the torque track system that improves operational handling by absorbing the torque generated by our top drives.  Our CASING DRILLING method and retrievable apparatus are protected by patents that will continue in force for several more years.  In addition, we have patents that protect the combination of the retrievable drill bit assembly with a rotary steerable tool.  Our CDS is protected by patents on some of the gripping tools and on the “link tilt” system, which is a method used to handle casing.  We hold numerous patents related to the installation and utilization of certain accessories for casing for purposes of casing rotation. Various other related methods and tools are patent protected as well.
 
 
 
We have been party to patent infringement claims and we may not be able to protect or enforce our intellectual property rights.  For further discussion, see Part I, Item 1A, Risk Factors and Part II, Item 8, Financial Statements and Supplementary Data, Note 11 included in this Report on Form 10-K.

Our research and development costs were $9.1 million, $7.4 million and $11.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.  We will continue to invest in the development, commercialization and enhancements of our proprietary technologies.

Financial information about geographic areas

Our Top Drive and CASING DRILLING businesses are distributed globally while our Tubular Services business is more concentrated in the North American markets.  We do not track or measure property, plant and equipment by business segment and, as such, this information is not presented.  The following table presents our revenue by segment and geographic areas for the years ended December 31, 2010, 2009 and 2008 (in thousands):


   
Top Drive Segment
 
   
United States and Canada
   
International
   
Total
 
   
Revenue
   
%
   
Revenue
   
%
   
Revenue
 
                               
   2010(1)
  $ 137,826       57%     $ 106,107       43%     $ 243,933  
2009
    107,348       48%       117,505       52%       224,853  
2008
    187,882       55%       153,550       45%       341,432  
                                         
   
Tubular Services Segment
 
   
United States and Canada
   
International
   
Total
 
   
Revenue
   
%
   
Revenue
   
%
   
Revenue
 
                                         
2010
  $ 84,656       69%     $ 37,228       31%     $ 121,884  
2009
    78,428       66%       39,871       34%       118,299  
2008
    129,449       78%       37,013       22%       166,463  
                                         
   
CASING DRILLING Segment
 
   
United Stated and Canada
   
International
   
Total
 
   
Revenue
   
%
   
Revenue
   
%
   
Revenue
 
                                         
2010
  $ 6,822       53%     $ 6,026       47%     $ 12,848  
2009
    6,508       48%       7,188       52%       13,696  
2008
    15,715       58%       11,332       42%       27,047  

 
 (1)   Effective January 1, 2010, we changed the contracts for new top drive sales to generally sell the units directly from our manufacturing facility in Canada.  This change increased the amount of top drive revenue recorded in Canada in 2010, compared to 2009 and 2008 presented above.
 
 
Procurement of Materials and Supplies

For a discussion of the procurement of materials and supplies, see Part II, Item 8, Financial Statements and Supplementary Data, Note 15 included in this Report on Form 10-K.

Seasonality
 
Our business is subject to seasonal cycles, associated with winter-only, summer-only, dry-season or regulatory-based access to drilling locations.  The most significant of these occur in Canada and Russia, where traditionally the first and fourth calendar quarters of each year are the busiest as the contractor fleet can access drilling locations that are only accessible when frozen.  As of December 31, 2010, approximately 19% of our top drive rental fleet operated in Canada and Russia.
 
 
 
In certain Asia Pacific and South American regions, we are subject to decline in activities due to seasonal rains.  Further, seasonal variations in the demand for hydrocarbons and accessibility of certain drilling locations in North America can affect our business, as our activity follows the active drilling rig count reasonably closely.  We actively manage our highly mobile rental fleet around the world to minimize the impact of geographically specific seasonality.

Customers
 
Our accounts receivable are principally with major international and national oil and natural gas service and exploration and production companies and are subject to normal industry credit risks.  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, including the effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems, which may impact our ability to collect those accounts receivable.  We monitor customers who are at risk for non-payment and, if warranted by the set of circumstances, will lower available credit extended to those customers or establish alternative arrangements, including increased deposit requirements or payment schedules.

No single customer accounted for 10% or more of our consolidated revenue in any of the three years ended December 31, 2010, 2009 and 2008.

Employees

As of December 31, 2010, the total number of our employees worldwide was 1,397. We believe that our relationship with our employees is good.  We work to maintain a high level of employee satisfaction and we believe our employee compensation systems are competitive.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, are available free of charge on our internet website at www.tescocorp.com.  These reports are posted on our website as soon as reasonably practicable after such reports are electronically filed in the United States (“U.S.”) with the U.S. Securities and Exchange Commission (“SEC”) and in Canada on the System for Electronic Document Analysis and Retrieval (“SEDAR”).  Our code of conduct policy is also posted on our website.  In addition to our internet website, copies of our U.S. public filings are available at www.sec.gov and copies of our Canadian public filings are available at www.sedar.com.
 
 
 
Item 1A.  Risk Factors.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This Report on Form 10-K 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 Report on Form 10-K include, but are not limited to, statements with respect to expectations of our prospects, future revenue, 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 our 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 Report on Form 10-K 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, changes in the global economy and credit markets, 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), risks, including litigation risks, associated with our intellectual property and risks associated with the performance of our technology and other risks set forth in Part I, Item 1A, Risk Factors included in this Report on Form 10-K.  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. The forward-looking statements in this document are provided for the limited purpose of enabling current and potential investors to evaluate an investment in us. Readers are cautioned that such statements may not be appropriate, and should not be used, for other purposes.

Risks associated with the global economy

The current global economic and political environment may negatively impact industry fundamentals, and the related decrease in demand for drilling rigs could cause a downturn in the oil and natural gas industry. Such a condition could have a material adverse impact on our business.  

An extended deterioration in the global economic environment may impact fundamentals that are critical to our industry, such as the global demand for, and consumption of, oil and natural gas. Reduced demand for oil and natural gas generally results in lower oil and natural gas prices and prolonged weakness in the economy could impact the economics of planned drilling projects, resulting in curtailment, reduction, delay or postponement for an indeterminate period of time. Furthermore, an extended deterioration in the political environment in countries where we operate or that produce significant supply of the world’s demand for oil may also impact fundamentals that are critical to our industry, such as the global supply of oil and natural gas. Constraints in the global supply of oil caused by political turmoil in any of the large oil-producing countries of the world could significantly increase oil and natural gas prices while the removal of such constraints could significantly decrease oil and natural gas prices for an indeterminate period of time.  Such volatility in oil and natural gas prices could negatively impact the world economy and our industry.  Any long-term reduction in oil and natural gas prices will reduce oil and natural gas drilling and production activity and result in a corresponding decline in the demand for our products and services, which could adversely affect the demand for sales, rentals or services of our top drive units and for our Tubular Services and CASING DRILLING businesses. These reductions could adversely affect the future net realizability of assets, including inventory, fixed assets, goodwill and other intangible assets.
 
 
We are exposed to risks associated with the financial markets.
 
While we intend to finance our operations with existing cash, cash flow from operations and borrowing under our existing credit facility, we may require additional financing to support our growth. If any of the significant lenders, insurance companies or other financial institutions are unable to perform their obligations under our credit agreements, insurance policies or other contracts, and we are unable to find suitable replacements on acceptable terms as a result of recent credit disruptions or otherwise, our results of operations, liquidity and cash flows could be adversely affected.

Many of our customers access the credit markets to finance their oil and natural gas drilling and production activity. The possible inability of these parties to obtain financing on acceptable terms, due to the recent credit disruptions or otherwise, could impair their ability to perform under their agreements with us and lead to various negative effects on us, including business disruption, decreased revenue and increases in bad debt write-offs. A sustained decline in the financial stability of these parties could have an adverse impact on our business and results of operations.

The occurrence or threat of terrorist attacks could materially impact our business.

The occurrence or threat of future terrorist attacks could adversely affect the economies of the United States and other developed countries. A lower level of economic activity could result in a decline in energy consumption, which could cause a decrease in spending by oil and natural gas companies for exploration and development.  In addition, these risks could trigger increased volatility in prices for crude oil and natural gas which could also adversely affect spending by oil and natural gas companies.  A decrease in spending for any reason could adversely affect the markets for our products and thereby adversely affect our revenue and margins and limit our future growth prospects. Moreover, these risks could cause increased instability in the financial and insurance markets and adversely affect our ability to access capital and to obtain insurance coverage that we consider adequate or are required to obtain by our contracts with third parties.

We face risks related to natural disasters and 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 the occurrence of natural disasters such as earthquakes; floods or hurricanes; or an epidemic or outbreak of diseases, including the H1N1 virus, 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 occurrence or outbreak which could also significantly disrupt our operations and decrease our ability to provide services to our customers.
 
Risks associated with the oil and natural gas industry

Our offshore oil and natural gas operations have been, and could be further, adversely impacted by the Deepwater Horizon drilling rig accident and resulting oil spill; changes in and compliance with restrictions or regulations on offshore drilling in the US Gulf of Mexico and in other areas around the world may adversely affect our business and operating results.
 
On April 20, 2010, a fire and explosion occurred onboard the semisubmersible drilling rig Deepwater Horizon, owned by Transocean Ltd. and under contract to a subsidiary of BP plc. As a result of the incident and related oil spill, the Secretary of the US Department of the Interior directed the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEMRE”) to issue a suspension, until November 30, 2010, of drilling activities for specified drilling configurations and technologies. Although this moratorium was lifted on October 12, 2010, we cannot predict with certainty when drilling operations will fully resume in the US Gulf of Mexico. The BOEMRE has also issued new guidelines and regulations regarding safety, environmental matters, drilling equipment and decommissioning applicable to drilling in the US Gulf of Mexico, and may take other additional steps that could increase the costs of exploration and production, reduce the area of operations and result in permitting delays.
 
 
 
At this time, we cannot predict with any certainty what further impact, if any, the Deepwater Horizon incident may have on the regulation of offshore oil and natural gas exploration and development activity, or on the cost or availability of insurance coverage to cover the risks of such operations. Ongoing effects of and delays from the lifted suspension of drilling activity in the US Gulf of Mexico, or the enactment of new or stricter regulations in the United States and other countries where we operate, could have a material adverse effect on our financial condition, results of operations or cash flows.

We could be subject to substantial liability claims, which would adversely affect our financial condition, results of operations and cash flows.
 
Certain equipment and processes are used by us and other companies in the oil and natural gas industry during the delivery of oilfield services in hostile environments, such as exploration, development and production applications. An accident or a failure of a product or process could cause personal injury, loss of life, damage to property, equipment or the environment, and suspension of operations. Our insurance may not protect us against liability for some kinds of events, including events involving pollution, or against losses resulting from business interruption. Moreover, in the future we may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Substantial claims made under our policies could cause our premiums to increase. Any future damages caused by our products that are not covered by insurance, or are in excess of policy limits or are subject to substantial deductibles, could adversely affect our financial condition, results of operations and cash flows.

We face risks due to the cyclical nature of the energy industry and the corresponding credit risk of our customers.

Changing political, economic or military circumstances throughout the energy producing regions of the world can impact the market price of oil and natural gas for extended periods of time. As most of our accounts receivable are with customers involved in the oil and natural gas industry, any significant change in such circumstances could result in financial exposure in relation to affected customers.

Fluctuations in the demand for and prices of oil and natural gas would negatively impact our business.

Fluctuations in the demand for and prices of oil and natural gas impact the level of drilling activity by our customers and potential customers. The prices are primarily determined by supply, demand, government regulations relating to oil and natural gas production and processing, and international political events, none of which can be accurately predicted. In times of declining activity, not only is there less opportunity for us to sell our products and services but there is increased competitive pressure that tends to reduce our prices and, therefore, our margins.

Possible legislation and regulations related to global warming and climate change could have an adverse effect on our operations and the demand for oil and natural gas.

Foreign, federal, and state authorities and agencies are currently evaluating and promulgating climate-related legislation and regulations that are focused on restricting greenhouse gas (“GHG”) emissions. In the United States, the Environmental Protection Agency (“EPA”) is taking steps to require monitoring and reporting of GHG emissions and to regulate GHGs as pollutants under the Clean Air Act (“CAA”). The EPA’s “Mandatory Reporting of Greenhouse Gases” rule established a comprehensive scheme of regulations that require monitoring and reporting of GHG emissions that began in 2010. Furthermore, the EPA recently proposed additional GHG reporting rules specifically for the oil and natural gas industry. The EPA has also published a final rule, the “Endangerment Finding,” which concluded that GHGs in the atmosphere endanger public health and welfare, and that emissions of GHGs from mobile sources cause or contribute to the GHG pollution. Following issuance of the Endangerment Finding, the EPA promulgated final motor vehicle GHG emission standards on April 1, 2010. The EPA has asserted that the final motor vehicle GHG emission standards will trigger construction and operating permit requirements for stationary sources. In addition, climate change legislation is pending in the United States Congress. These developments may curtail production and demand for fossil fuels such as oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for our services, which may in turn adversely affect future results of operations. Additionally, federal and/or state legislation to reduce the effects of GHG may potentially have a direct or indirect adverse effect on our operations, including the possible imposition on us and/or our customers of additional operational costs due to carbon emissions generated by oil and gas related activities.  Finally, our business could be negatively affected by climate change related physical changes or changes in weather patterns, which could result in damages to or loss of our physical assets, impacts to our ability to conduct operations and/or disruption of our customers’ operations.
 
 
 
Our revenue and earnings are subject to fluctuations period over period and are difficult to forecast.
 
Our revenue and earnings may vary significantly from quarter to quarter depending upon:
 
·  
the level of drilling activity worldwide, as well as the particular geographic focus of the activity;

·  
the variability of customer orders, which are particularly unpredictable in international markets;

·  
the levels of inventories of our products held by end-users and distributors;

·  
the mix of our products sold or leased and the margins on those products;

·  
new products offered and sold or leased by us or our competitors;

·  
weather conditions or other natural disasters that can affect our operations or our customers’ operations;

·  
changes in oil and natural gas prices and currency exchange rates, which in some cases affect the costs and prices for our products;

·  
the level of capital equipment project orders, which may vary with the level of new rig construction and refurbishment activity in the industry;

·  
changes in drilling and exploration plans which can be particularly volatile in international markets;

·  
the variability of customer orders or a reduction in customer orders, which may leave us with excess or obsolete inventories;

·  
the ability of our vendors to timely supply necessary component parts used for the manufacturing of our products; and

·  
the ability to manufacture and timely deliver customer orders, particularly in the top drive segment due to the increasing size and complexity of our models.

In addition, our fixed costs cause our margins to decrease when demand is low and service capacity is underutilized.

Any significant consolidation or loss of end-user customers could have a negative impact on our business.

Exploration and production company operators and drilling contractors have undergone substantial consolidation in recent years. Additional consolidation is probable. In addition, many oil and natural gas properties could be transferred over time to different potential customers.

Consolidation of drilling contractors results in fewer end-users for our products and could result in the combined contractor standardizing its equipment preferences in favor of a competitor’s products.

Merger activity among both major and independent oil and natural gas companies also affects exploration, development and production activity, as these consolidated companies attempt to increase efficiency and reduce costs. Generally, only the more promising exploration and development projects from each merged entity are likely to be pursued, which may result in overall lower post-merger exploration and development budgets. Moreover, some end-users prefer not to use relatively new products or premium products in their drilling operations.

We operate in an intensively competitive industry and if we fail to compete effectively our business will suffer.

Our competitors may attempt to increase their market share by reducing prices or our customers may adopt competing technologies. The drilling industry is driven primarily by cost minimization. Our strategy is aimed at reducing drilling costs through the application of new technologies. Our competitors, many of whom have a more diverse product line and access to greater amounts of capital than we do, have the ability to compete against the cost savings generated by our technology by reducing prices and by introducing competing technologies. Our competitors may also have the ability to offer bundles of products and services to customers that we do not offer. We have limited resources to sustain prolonged price competition and maintain the level of investment required to continue the commercialization and development of our new technologies.
 
 
 
To compete in our industry, we must continue to develop new technologies and products.

The markets for our products and services are characterized by continual technological developments and we have identified our products as providing technological advantages over other competitive products. As a result, substantial improvements in the scope and quality of product function and performance can occur over a short period of time. If we are not able to develop commercially competitive products in a timely manner in response to changes in technology, our business may be adversely affected. Our future ability to develop new products depends on our ability to:

·  
design and commercially produce products that meet the needs of our customers,

·  
successfully market new products, and

·  
obtain and maintain patent protection.

We may encounter resource constraints, technical barriers, or other difficulties that would delay introduction of new products and services in the future. Our competitors may introduce new products or obtain patents before we do and achieve a competitive advantage. Additionally, the time and expense invested in product development may not result in commercial applications.

For example, from time to time, we have incurred significant losses in the development of new technologies which were not successful for various commercial or technical reasons. If we are unable to successfully implement technological or research and engineering type activities, our growth prospects may be reduced and our future revenue may be materially and adversely affected. Moreover, we may experience operating losses after new products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.  

Risks associated with our business

We have been party to patent infringement claims and we may not be able to protect or enforce our intellectual property rights.

In two separate actions, we were sued by VARCO I/P, Inc. and Weatherford International, who have alleged that our CDS tool and other equipment and processes violate certain of their patents. See Part II, Item 8, Financial Statements and Supplementary Data, Note 11 included in this Report on Form 10-K.  We settled our lawsuit with Weatherford International, and we believe the suit with VARCO I/P, Inc. is without merit. We intend to continue to defend ourselves vigorously. In the event that we are not successful in defending ourselves in this matter, it may have a material adverse effect on our Tubular Services and CASING DRILLING segments and, therefore, on our business. In addition, in the future we may be subject to other infringement claims and if any of our products were found to be infringing, our consolidated financial results may be adversely affected.

Some of our products and the processes used to produce them have been granted U.S. and international patent protection, or have patent applications pending. Nevertheless, patents may not be granted from our applications and, if patents are issued, the claims allowed may not be sufficient to protect our technology. Recent changes in U.S. patent law may have the effect of making certain of our patents more likely to be the subject of claims for invalidation.

Our competitors may be able to independently develop technology that is similar to ours without infringing on our patents. This is especially true internationally where the protection of intellectual property rights may not be as effective. In addition, obtaining and maintaining intellectual property protection internationally may be significantly more expensive than doing so domestically. We may have to spend substantial time and money defending our patents. After our patents expire, our competitors will not be legally constrained from marketing products substantially similar to ours.

We are subject to legal proceedings and may, in the future, be subject to additional legal proceedings.

We are currently involved in legal proceedings described in Part II, Item 8, Financial Statements and Supplementary Data, Note 11 including in this Report on Form 10-K.   From time to time, we may become subject to additional legal proceedings which may include contract, tort, intellectual property, tax, regulatory compliance and other claims.
 
 
 
We are also subject to complaints or allegations from former, current or prospective employees from time to time, alleging violations of employment-related laws. Lawsuits or claims could result in decisions against us which could have a material adverse effect on our financial condition, results of operations or cash flows.

Our products and services are used in hazardous conditions, and we are subject to risks relating to potential liability claims.

Most of our products are used in hazardous drilling and production applications where an accident or a failure of a product can have catastrophic consequences. For example, the unexpected failure of a top drive to rotate a drill string during drilling operations could result in the loss of control over a well, leading to blowout and the discharge of pollutants into the environment. Damages arising from an occurrence at a location where our products are used have in the past and may in the future result in the assertion of potentially large claims against us.

While we attempt to limit our exposure to such risks through contracts with our customers, these measures may not protect us against liability for certain kinds of events, including blowouts, cratering, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment, damage or loss from inclement weather or natural disasters, and losses resulting from business interruption. Our insurance coverage generally provides that we assume a portion of the risk in the form of a self-insured retention, and may not be adequate in risk coverage or policy limits to cover all losses or liabilities that we may incur. The occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet its indemnification or insurance obligations, could result in substantial losses. Moreover, we may not be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any significant claims made under our policies will likely cause our premiums to increase. Any future damages caused by our products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, could reduce our earnings and cash available for operations.

Environmental compliance and remediation costs and the costs of environmental liabilities could exceed our estimates.

The energy industry is affected by changes in public policy, federal, state and local laws and regulations. The adoption of laws and regulations curtailing exploration and development drilling for oil and natural gas for economic, environmental and other policy reasons may adversely affect our operations due to our customers having limited drilling and other opportunities in the oil and natural gas exploration and production industry. The operations of our customers, as well as our properties, are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges, waste management and workplace safety.

Our credit facility contains restrictions that may limit our ability to finance future operations or capital needs and could accelerate debt payments.

Our credit facility contains restrictive covenants which limit the amount of borrowings available by the maintenance of certain financial ratios.  Decreases in our financial performance could prohibit us from borrowing amounts under our credit facility, force us to make repayments of outstanding debt in order to remain in compliance with these restrictive covenants, or accelerate our debt payments and other financing obligations and those of our subsidiaries. Additionally, our credit agreements are collateralized by equity interests in our subsidiaries.  A breach of the covenants under these agreements could permit the lenders to exercise their rights to foreclose on these collateral interests.   If this were to occur, we might not be able to repay such debt and other financing obligations. 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 discussed elsewhere in this report.

For further discussion of our credit facility, see Part II, Item 8, Financial Statements and Supplementary Data, Note 7 included in this Report on Form 10-K.

We have a revolving credit facility that is not contracted at market rates.

Our credit facility contains provisions for interest rates on borrowings and commitment fees that were established prior to the credit crisis of 2008 and 2009.  If we needed to replace our credit facility in today’s bank loan market, for any reason, including an event of default on our part, we may be unable to negotiate lending terms at the same or substantially similar rates, or for the same borrowing capacity, that we currently hold. Any change in the terms of our fees or borrowing capacity could adversely affect our liquidity and results of operations.
 
 
 
At this time it is difficult to forecast the future state of the bank loan market. As a result of the uncertain state of various financial institutions and the credit markets generally, we may be unable to maintain our current borrowing capacity in the event of bank or banks failure to fund any commitments under the current credit facility, and we may not be able to refinance our bank facility in the same amount and on the same terms as we currently hold, which could negatively impact our liquidity and results of operations.
 
We provide warranties on our products and if our products fail to operate properly our business will suffer.

We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our products are often deployed in harsh environments including subsea applications. The failure of these products to operate properly or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have experienced quality problems with raw material vendors, which required us to recall and replace certain equipment and components. We have also received warranty claims and we expect to continue to receive them in the future. Such claims may exceed the reserve we have set aside for them. To the extent that we incur substantial warranty claims in any period because of quality issues with our products, our reputation, ability to obtain future business and earnings could be materially and adversely affected.

Our foreign operations and investments involve special risks.

We sell products and provide services in parts of the world where the political and legal systems are very different from those in the United States and Canada. In places like Russia, Latin America, the Middle East and Asia/Pacific, we may have difficulty or extra expense in navigating the local bureaucracies and legal systems. We may face challenges in enforcing contracts in local courts or be at a disadvantage when we have a dispute with a customer that is an agency of the state. We may be at a disadvantage to competitors that are not subject to the same international trade and business practice restrictions that U.S. and Canadian laws impose on us.

While diversification is desirable, it can expose us to risks related to cultural, political and economic factors of foreign jurisdictions which are beyond our control. As a general rule, we have elected not to carry political risk insurance against these risks. Such risks include the following:

·  
loss of revenue, property and equipment as a result of hazards such as wars or insurrection;

·  
the effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems;

·  
changes or interpretations in laws, regulations and policies of foreign governments, including those associated with changes in the governing parties, nationalization, and expropriation; and

·  
protracted delays in securing government consents, permits, licenses, or other regulatory approvals necessary to conduct our operations

·  
protracted delays in the collection of accounts receivable due to economic, political and civil instabilities.

Our profitability is driven to a large extent by our ability to deliver the products we manufacture in a timely manner.

Disruptions to our production schedule may adversely impact our ability to meet delivery commitments. If we fail to deliver products according to contract terms, we may suffer financial penalties and a diminution of our commercial reputation and future product orders.

We rely on the availability of raw materials, component parts and finished products to produce our products.

We buy raw materials, components and precision machining or sub-assembly services from many different vendors located in Canada, the United States, Europe, South East Asia and the Middle East. The price and lead times for some products have fluctuated along with the general changes of steel prices around the world. We also source a substantial
 
 
 
amount of electrical components, including permanent magnet motors and drives as well as a substantial amount of hydraulic components, including hydraulic motors, from suppliers located in the U.S. and abroad.  The inability of suppliers to meet performance, quality specifications and delivery schedules could cause delays in manufacturing and make it difficult or impossible for us to meet outstanding orders or accept new orders for the manufacture of the affected equipment.

The design of some of our equipment is based on components provided by specific sole source manufacturers.

Some of our products have been designed around components which are only available from one source of supply. In some cases, a manufacturer has developed or modified the design of a component at our request, and consequently we are the only purchaser of such items. If the manufacturer of such an item should go out of business or cease or refuse to manufacture the component in question, or raise the price of such components unduly, we may have to identify alternative components and redesign portions of our equipment. This could cause delays in manufacturing and make it difficult or impossible for us to meet outstanding orders or accept new orders for the manufacture of the affected equipment.

Our business requires the retention and recruitment of a skilled workforce and key employees, and the loss of such employees could result in the failure to implement our business plans.

As a technology based company, we depend upon skilled engineering and other professionals in order to engage in product innovation and ensure the effective implementation of our innovative technology, especially CASING DRILLING. We compete for these professionals, not only with other companies in the same industry, but with oil and natural gas service companies generally and other industries. In periods of high energy and industrial manufacturing activity, demand for the skills and expertise of these professionals increases, which can make the hiring and retention of these individuals more difficult and expensive. Failure to recruit and retain such individuals may result in our inability to maintain a competitive advantage over other companies and loss of customer satisfaction.   The loss or incapacity of certain key employees for any reason, including our President and Chief Executive Officer, Julio M. Quintana, could have a negative impact on our ability to implement our business plan due to the specialized knowledge these individuals possess.

Our business relies on the skills and availability of trained and experienced trades and technicians to provide efficient and necessary services to us and our customers. Hiring and retaining such individuals are critical to the success of our business plan. Retention of staff and the prevention of injury to staff are essential in order to provide a high level of service.

We have identified a material weakness in our internal controls.

Our management has concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2010.  As a result, this Form 10-K includes an adverse opinion from PricewaterhouseCoopers LLP, our independent registered public accounting firm, on our internal control over financial reporting. A description of the material weakness in our internal controls over financial reporting is included in Part II, Item 9A, Controls and Procedures in this Report on Form 10-K.

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.

The control deficiency resulted in the identification of several immaterial errors in the income tax provision and related deferred tax balances which impacted the prior period financial statements.  Although these errors did not result in the restatement of our consolidated financial statements, this control deficiency could result in a material misstatement of certain tax accounts and disclosures that would not be prevented or detected on a timely basis. Additionally, ineffective internal control over financial reporting could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading of our securities.


Item 1B.  Unresolved Staff Comments.

None.
 

 
Item 2.  Properties.
 
The following table details our principal facilities, including (i) all properties which we own, and (ii) those leased properties which serve as corporate or regional headquarters.
 
Location
 
Approximate Square Footage (Buildings)
 
Owned or Leased
 
Description
             
Houston, Texas
 
26,500
 
Leased
 
Corporate headquarters.
             
Houston, Texas
 
67,800
 
Owned
 
Headquarters for North American operations in Top Drive, Tubular Services and CASING DRILLING segments, and our U.S. regional operations base which also provides equipment repair and maintenance for U.S. and certain overseas operations.
             
Kilgore, Texas
 
21,900
 
Owned
 
Regional operations base for the Tubular Services segment in east Texas and northern Louisiana.
             
Lafayette, Louisiana
 
43,300
 
Owned
 
Regional operations base for the Tubular Services segment in southern Louisiana and the Gulf of Mexico.
             
Calgary, Alberta, Canada
 
85,000
 
Owned
 
Manufacturing of top drives and other equipment.
             
Mexico City, Mexico
 
1,615
 
Leased
 
Regional headquarters for Latin America, including Mexico.
             
Aberdeen, Scotland
 
22,700
 
Leased
 
Regional headquarters for Europe and West Africa.
             
Moscow, Russia
 
3,987
 
Leased
 
Regional headquarters for the former Soviet Union.
             
Dubai, United Arab Emirates
 
3,800
 
Leased
 
Regional headquarters for the Middle East, North Africa and East Africa.
             
Republic of Singapore
 
15,500
 
Leased
 
Regional headquarters for India, China, Japan, Australia and New Zealand.
             

In addition, we lease operational facilities at locations in Texas, Colorado, Pennsylvania, Arkansas, North Dakota and Wyoming. Each of these locations supports operations in its local area, primarily for the Tubular Services segment.

Outside the U.S., we lease additional operating facilities Canada, Mexico, Venezuela, Colombia, Ecuador, Argentina, Brazil, Norway, Russia, Dubai, Indonesia, Australia and New Zealand. The majority of these facilities support the Top Drive, Tubular Services and CASING DRILLING segments.

We consider our existing equipment and facilities to be adequate to support our operations.

Item 3.  Legal Proceedings.

The information with respect to this Item 3 is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 11  included in this Report on Form 10-K.
 
Item 4.  (Removed and Reserved)
 
 
PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our outstanding shares of common stock are traded on the Nasdaq Stock Market (“NASDAQ”) under the symbol “TESO.” The following table outlines the share price trading range and volume of shares traded by quarter for 2010 and 2009.
 
   
Share Price Trading Range
 
   
High
   
Low
 
   
($ per share)
 
2010
           
1st Quarter
  $ 15.24     $ 10.85  
2nd Quarter
    13.51       9.00  
3rd Quarter
    14.47       9.64  
4th Quarter
    16.40       11.30  
                 
2009
               
1st Quarter
  $ 10.34     $ 6.25  
2nd Quarter
    11.41       7.55  
3rd Quarter
    10.28       6.38  
4th Quarter
    13.29       7.59  
 
As of February 28, 2011, there were approximately 238 holders of record of our common stock, including brokers and other nominees.

Dividend Policy

We have not declared or paid any dividends since 1993 and do not expect to declare or pay dividends in the near future. Any decision to pay dividends on our common shares will be made by our Board of Directors on the basis of our earnings, financial requirements and other relevant conditions existing at the time. Pursuant to our Amended and Restated Credit Agreement, we are currently prohibited from paying dividends to our shareholders.
 
 

Performance graph

The following performance graph and table compares the yearly percentage change in the cumulative shareholder return for the five year period commencing on December 31, 2005 and ending on December 31, 2010 on our common shares (assuming a $100 investment was made on December 31, 2005) with the total cumulative return of the S&P 500 Composite Index and the Philadelphia Oil Service Sector Index (“OSX”), assuming reinvestment of dividends.
 


Five Year Performance Graph
 
 
   
Dec. 31, 2005
   
Dec. 31, 2006
   
Dec. 31, 2007
   
Dec. 31, 2008
   
Dec. 31, 2009
   
Dec. 31, 2010
 
    Tesco Corp.
  $ 100     $ 95     $ 155     $ 39     $ 70     $ 86  
    S & P 500
  $ 100     $ 114     $ 118     $ 72     $ 66     $ 101  
   OSX
  $ 100     $ 110     $ 166     $ 67     $ 107     $ 135  

 

 
Item 6.  Selected Financial Data.

The following selected historical financial data as of  December 31, 2010 and 2009 and for each of the years ended December 31, 2010, 2009 and 2008 is derived from the audited consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data in this Report on Form 10-K.  The selected financial data as of December 31, 2008, 2007 and 2006 and for each of the years ended December 31, 2007 and 2006 are derived from audited consolidated financial statements.  The selected financial data is not necessarily indicative of results to be expected in future periods and should be read in conjunction with Part II,  Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data included in this Report on Form 10-K.
 
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Statements of income (loss) data:
   
(in millions, except share and per share amounts)
 
                                         
Revenue
                                       
Top Drive
 
$
243.9
   
$
224.8
   
$
341.4
   
$
289.1
   
$
219.2
 
Tubular Services
   
121.9
     
118.3
     
166.5
     
158.7
     
143.3
 
CASING DRILLING
   
12.9
     
13.7
     
27.0
     
14.6
     
23.7
 
     
378.7
     
356.8
     
534.9
     
462.4
     
386.2
 
                                         
Operating income (loss)
                                       
Top Drives
   
62.8
     
49.5
     
106.8
     
80.5
     
66.9
 
Tubular Services
   
8.2
     
(2.9
)
   
22.5
     
23.7
     
33.1
 
CASING DRILLING
   
(11.6
)
   
(20.6
)
   
(12.6
)
   
(14.1
)
   
(6.7
)
Research and Engineering
   
(9.1
)
   
(7.4
)
   
(11.1
)
   
(12.0
)
   
(6.0
)
Corporate and Other
   
(35.0
)
   
(33.0
)
   
(30.8
)
   
(29.9
)
   
(26.4
)
     
15.3
     
(14.4
)
   
74.8
     
48.2
     
60.9
 
Interest expense, net
   
0.6
     
0.9
     
4.2
     
3.2
     
3.2
 
Other (income) expense
   
0.9
     
2.3
     
(0.1
)
   
2.9
     
4.1
 
Income (loss) before income taxes
   
13.8
     
(17.6
)
   
70.7
     
42.1
     
53.6
 
Income tax (benefit) provision
   
6.8
     
(12.3
)
   
20.8
     
10.0
     
23.3
 
Net income (loss) before cumulative effect of accounting change
   
7.0
     
(5.3
)
   
49.9
     
32.1
     
30.3
 
Cumulative effect of accounting change, net of income taxes
   
     
     
     
     
0.2
 
Net income (loss)
 
$
7.0
   
$
(5.3
)
 
$
49.9
   
$
32.1
   
$
30.5
 
                                         
Weighted average number of common shares outstanding:
                                 
Basic
   
37,835
     
37,598
     
37,221
     
36,604
     
35,847
 
Diluted
   
38,261
     
37,598
     
37,833
     
37,404
     
36,593
 
                                         
Earnings (loss) per share:
                                       
Basic
 
$
0.19
   
$
(0.14
)
 
$
1.34
   
$
0.88
   
$
0.85
 
Diluted
 
$
0.18
   
$
(0.14
)
 
$
1.32
   
$
0.86
   
$
0.83
 
                                         
Cash dividends per common share
 
$
   
$
   
$
   
$
   
$
 
                                         

Factors Affecting Trends

·  
Our effective tax rate has fluctuated as follows:  2010: 49%, 2009: 70%, 2008:  29%; 2007:  24%, 2006:  43%.
·  
In 2010, we recorded a $1.9 million increase in income tax expense for a valuation allowance adjustment established on foreign subsidiary net operating losses.
·  
In 2009, we recorded an impairment charge of $14.4 million to reduce obsolete and slow moving inventory to its net realizable value, an impairment charge of $3.6 million to reduce fixed assets held for sale to its net realizable value, and an accrual of $3.7 million for severance and relocation costs as part of a cost restructuring.
·  
Revenue in 2006 includes $9.0 million from contract CASING DRILLING rig activities which were sold in late 2006.
 
 
 
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
     
(in millions, except share and per share amounts)
 
Balance sheet data:
                                       
Total assets
 
$
454.9
   
$
442.6
   
$
499.9
   
$
471.5
   
$
372.2
 
Debt and capital leases
   
     
8.6
     
49.6
     
80.8
     
44.5
 
Shareholders’ equity
   
375.7
     
362.2
     
351.9
     
303.6
     
241.9
 
                                         
Cash flow data:
                                       
Cash flow provided by operating activities
 
$
55.1
   
$
63.3
   
$
77.0
   
$
25.3
   
$
4.9
 
Cash flows used in from investing activities
   
(25.8
)
   
(3.8
)
   
(58.5
)
   
(64.4
)
   
(33.2
)
Cash flows provided by (used in) financing activities
   
(8.7
)
   
(40.7
)
   
(19.5
)
   
48.9
     
9.7
 
                                         
Other data:
                                       
Adjusted EBITDA (a)
 
$
56.9
   
$
42.4
   
$
114.5
   
$
79.1
   
$
85.0
 
Net cash (debt) (b)
   
60.6
     
31.3
     
(29.0
)
   
(57.7
)
   
(29.6
)
                                         
 
(a)  
We evaluate our performance based on non-GAAP measures, of which a primary performance measure is adjusted EBITDA, which consists of earnings (net income or loss) available to common shareholders, net interest expense, income taxes, non-cash stock compensation expense, non-cash impairments, depreciation and amortization and other non-cash items. This measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. The measure should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with U.S. GAAP. The amounts included in the adjusted EBITDA calculation, however, are derived from amounts included in the historical consolidated statements of income data.

We believe adjusted EBITDA is useful to an investor in evaluating our operating performance because it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as income taxes, net interest expense, depreciation and amortization, and non-cash stock compensation expense which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired; it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest) and asset base (primarily depreciation and amortization) and actions that do not affect liquidity (stock compensation expense) from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.  Adjusted EBITDA is derived from our consolidated statements of income as follows (in millions):
 
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
     
(in millions)
 
Net income (loss)
 
$
7.0
   
$
(5.3
)
 
$
49.9
   
$
32.1
   
$
30.5
 
Income tax provision (benefit)
   
6.8
     
(12.3
)
   
20.8
     
10.0
     
23.3
 
Depreciation and amortization
   
36.1
     
36.7
     
33.3
     
27.3
     
22.5
 
Net interest expense
   
0.6
     
0.9
     
4.2
     
3.2
     
3.2
 
Stock compensation expense—non-cash
   
6.4
     
4.4
     
6.3
     
6.5
     
5.7
 
Impairment of inventory and assets—non-cash
   
     
18.0
     
     
     
 
Cumulative effect of accounting change, net of income taxes
   
     
     
     
     
(0.2
)
Adjusted EBITDA
 
$
56.9
   
$
42.4
   
$
114.5
   
$
79.1
   
$
85.0
 
                                         

(b)  
Net cash (debt) represents the amount cash and cash equivalents exceeds (or is less than) total debt. Net cash (debt) is not a calculation based upon U.S. GAAP. The amounts included in the net cash (debt) calculation, however, are derived from amounts included in our historical consolidated balance sheets. In addition, net cash (debt) should not be considered as an alternative to operating cash flows or working capital as a measure of liquidity. We have reported net cash (debt) because we regularly review net cash (debt) as a measure of our liquidity. However, the net cash (debt) 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 calculation. net cash (debt) is derived from the consolidated balance sheets as follows (in millions):
 
     
Years Ended December 31,
 
     
2010
   
2009
   
2008
   
2007
   
2006
 
       
(in millions)
 
 
Cash and cash equivalents
 
$
60.6
   
$
39.9
   
$
20.6
   
$
23.1
   
$
14.9
 
 
Current portion of long term debt
   
     
     
(10.2
)
   
(10.0
)
   
(10.0
)
 
Long term debt
   
     
(8.6
)
   
(39.4
)
   
(70.8
)
   
(34.5
)
 
Net cash (debt)
 
$
60.6
   
$
31.3
   
$
(29.0
)
 
$
(57.7
)
 
$
(29.6
)
                                           
 

 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with our consolidated financial statements and the accompany footnotes included in  Part II, Item 8, Financial Statements and Supplementary Data included in this Report on Form 10-K.  MD&A includes forward-looking statements that are subject to risks and uncertainties that may result in actual results differing from the statements we make.  These risks and uncertainties are discussed further in Part I, Item 1A, Risk Factors included in this Report on Form 10-K.

Overview

Listed below is a general outline of our MD&A:

·  
Our business – includes a summary of our business purposes and description, a description of the current business environment, a summary of our 2010 performance and an outlook for 2011;

·  
Results of operations – includes a year-over-year analysis of the results of our business segments, our corporate activities and other income statement items;

·  
Liquidity and capital resources – includes a general discussion of our sources and uses of cash, available liquidity, our liquidity outlook for 2011, an overview of cash flow activity during 2010, and additional factors that could impact our liquidity;

·  
Critical accounting estimates – includes a discussion of accounting estimates that involve the use of significant assumptions and/or judgments in the preparation of our consolidated financial statements.

·  
Off balance sheet arrangements – includes a discussion of our (i) off balance sheet arrangements, including guarantees and letter of credit, if any, and (ii) other contractual obligations.
 
Our Business

We are 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 wells are drilled by delivering safer and more efficient solutions that add real value by reducing the costs of drilling for and producing oil and natural gas.

Our four business segments are:

·  
Top Drives - top drive sales, top drive rentals and after-market sales and services;
·  
Tubular Services – proprietary and conventional tubular services;
·  
CASING DRILLING – proprietary CASING DRILLING technology; and
·  
Research and Engineering – internal research and development activities related to our proprietary tubular services, CASING DRILLING technology and top drive model development.
 
For a detailed description of these business segments, see Part I, Item 1, Business included in this Report on Form 10-K.

Business Environment

The global economy continues to be affected by the economic crisis that started in late 2008, which led to a significant global economic downturn.  Many oil and natural gas operators significantly curtailed their drilling activity in 2009 due to lower oil and natural gas prices and tightening credit availability, which had the greatest impact on natural gas drilling across North America (excluding Mexico).  In 2010, natural gas drilling recovered significantly since 2009, particularly in the shale regions of the United States.  International rig count has also started to recover from 2009 levels.  Although we appear to be on a slow recovery, the oil and natural gas industry has not yet fully recovered from the recession.  One of the key indicators of our business is the number of active drilling rigs.  Below is a table that shows rig counts by region for the years ended December 31, 2010, 2009 and 2008.
 
 
 
 
Average Rig Count(1)
 
Increase (Decrease)
 
2010
 
2009
 
2008
 
2010 to 2009
 
2009 to 2008
U.S.
     1,541
 
     1,086
 
     1,878
 
        455
 
42%
 
       (792)
 
(42%)
Canada
        351
 
        221
 
        379
 
        130
 
59%
 
       (158)
 
(42%)
Latin America (includes Mexico)
        383
 
        356
 
        384
 
          27
 
8%
 
         (28)
 
(7%)
Asia Pacific (includes China)
        269
 
        243
 
        252
 
          26
 
11%
 
           (9)
 
(4%)
Middle East
        265
 
        252
 
        280
 
          13
 
5%
 
         (28)
 
(10%)
Africa
          83
 
          62
 
          65
 
          21
 
34%
 
           (3)
 
(5%)
Europe (includes Russia)
          93
 
          84
 
          98
 
          9
 
11%
 
         (14)
 
(14%)
Worldwide
     2,985
 
     2,304
 
     3,336
 
        681
 
30%
 
    (1,032)
 
(31%)
 __________________________________                          
(1)  Source:     Baker Hughes Incorporated worldwide rig count; averages are monthly.
       
 
In addition to decreased drilling activity caused by lower oil and natural gas prices and the tightening of credit availability, the semisubmersible drilling rig, Deepwater Horizon, sank in April 2010 in the Gulf of Mexico after an explosion and fire onboard the rig.  We provided no products or services to the Deepwater Horizon or for the drilling of this well.  The cause of the explosion, fire, and resulting oil spill is being investigated by numerous industry participants, governmental agencies and Congressional committees.  In May 2010, the United States Department of the Interior issued an order imposing a six month moratorium on all offshore deep water drilling projects.  A preliminary injunction was issued which blocked enforcement of the moratorium during June 2010, and the Department of the Interior issued a new moratorium of deep water drilling in July 2010, which was set to expire in November 2010.  This moratorium had a negative impact on our tubular services business during 2010.

In October 2010, the Department of the Interior lifted the moratorium, which introduced more comprehensive plans to deal with potential blowouts, improvements to workplace safety, and inspections and design reviews of blowout preventers by independent third parties.  We expect some permits for resumed drilling will be approved in early 2011 as operators come into full compliance with these regulations.  We do not know the extent of the impact on our future revenue or earnings from increased regulation of Gulf of Mexico offshore deep water drilling projects, but our customers’ actions, the potential movement of deep water rigs to other markets, and the possible shift of drilling activity from deep water to other types of drilling, such as more traditional land-based drilling and alternative shale gas drilling, could affect our results. For a list of possible risk factors affecting risks associated with the oil and natural gas industry, see Part I, Item 1A, Risk Factors included in this Report on Form 10-K.

Summary of 2010 and Operational Performance

During 2010, our Top Drive segment continued to provide a strong base of earnings, and our Tubular Services segment performance has improved substantially from 2009.  Our proprietary tubular services offering continues to gain market acceptance, and we remain committed to growing this segment as we believe that every top drive rig will eventually convert to running casing with an automated system, such as the CDS system we offer.  In addition, in 2010 we laid the ground work for growth and improved results in our CASING DRILLING segment in 2011. We also invested in new and enhanced product and service offerings in our Research and Engineering segment.  We are now fiscally stronger than we were a year ago, as demonstrated by:

·  
Increased revenue from $356.8 million in 2009 to $378.7 in 2010;
·  
Increased operating results from an operating loss of $14.4 million in 2009 to operating income of $15.3 million in 2010;
·  
Lower inventory levels from $74.3 million at December 31, 2009 to $59.2 at December 31, 2010;
·  
Growth in our top drive backlog from 11 units with potential revenue value of $16.1 million at December 31, 2009 to 25 units with potential revenue value of $33.0 million at December 31, 2010;
·  
Increased cash and cash equivalents from $39.9 million at December 31, 2009 to $60.6 million at December 31, 2010; and
·  
The pay-off of our credit facility in early 2010, and we did not make any revolving credit line draws during the year as all cash requirements were funded from cash provided by operating activities and the sale of used top drives.
 
 
 
Outlook for 2011
 
The current outlook for the global economy varies widely, but we believe that most indicators point towards a continued slow recovery in 2011. Below is a table that shows projected drilling activity for 2011 by region and compares these projections to the number of wells drilled during each of the years ended December 31, 2010, 2009 and 2008.  In particular, the U.S. and Canadian activity is projected to increase by 9% and international activity is projected to increase by 2% from average 2010 levels.
 
 
Wells drilled (1)
Years ended December 31,
 
2011
 
2010
 
2009
 
2008
 
(forecast)(1)
           
U.S.
50,392
 
45,617
 
37,204
 
54,749
Canada
11,163
 
10,912
 
8,010
 
18,661
Latin America
5,506
 
5,450
 
4,531
 
5,243
Europe, Africa, Middle East (including Russia)
11,867
 
11,359
 
10,519
 
11,429
Far East (including China)
23,942
 
23,802
 
23,655
 
22,490
Worldwide
102,870
 
97,140
 
83,919
 
112,572
 __________________________________
(1)  
Source: Report by World Oil magazine, February 2011.
 
Current global macro-economic conditions make any projections difficult and uncertain; however, in each of our revenue generating segments, we anticipate moderately improved activity into 2011, as follows:

·  
Top Drive - Based upon existing drilling and bidding levels and current economic forecasts, we expect our top drive order rate and rental activity to moderately increase in 2011.   Our outstanding backlog was 25 units at December 31, 2010 compared to 11 units at December 31, 2009.   Our customers have maintained their focus on lowering project costs, which continues to put downward pressure on our sales prices on selected product offerings.  However, we expect international demand for our top drive rental services will expand, following the increase experienced in North America in 2010.  As such, we intend to grow our rental fleet of top drives in 2011.

·  
Tubular Services - We expect our CDS proprietary casing business to continue to grow moderately in 2011 and our conventional casing activities to maintain at current levels or grow slightly as the market recovers.  We will 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 most major unconventional shale regions in North America and selected international locations to further expand our global foot print.  We continue to develop relationships with new and existing customers in both our Tubular Services and CASING DRILLING segments.

·  
CASING DRILLING – We expect improvement in our CASING DRILLING revenue and operating results in 2011 based on signed contracts and current bidding activity.  We plan to maintain our CASING DRILLING infrastructure around the world while optimizing headcount in locations with higher demand and streamlining internal processes. We remain confident that our CASING DRILLING business will be a valuable part of our future operations.
 
 
 
Results of operations

Below is a summary of our revenue and operating results for the years ended December 31, 2010, 2009 and 2008 (in thousands, except percentages):
                                           
 
Year Ended December 31,
   
Increase/Decrease
 
 
2010
   
2009
   
2008
   
2010 to 2009
   
2009 to 2008
 
Segment revenue
                                     
Top Drive
  $ 243,933     $ 224,853     $ 341,432     $ 19,080       8%     $ (116,579 )     (34%)  
Tubular Services
    121,884       118,299       166,463       3,585       3%       (48,164 )     (29%)  
CASING DRILLING
    12,848       13,696       27,047       (848 )     (6%)       (13,351 )     (49%)  
Consolidated revenue
  $ 378,665     $ 356,848     $ 534,942     $ 21,817       6%     $ (178,094 )     (33%)  
                                                         
Segment operating income (loss)
                                               
Top Drive
  $ 62,818     $ 49,532     $ 106,822     $ 13,286       27%     $ (57,290 )     (54%)  
Tubular Services
    8,228       (2,942 )     22,474       11,170       380%       (25,416 )     (113%)  
CASING DRILLING
    (11,594 )     (20,643 )     (12,605 )     9,049       44%       (8,038 )     (64%)  
Research and engineering
    (9,075 )     (7,431 )     (11,049 )     (1,644 )     (22%)       3,618       33%  
Corporate and other
    (35,060 )     (32,945 )     (30,795 )     (2,115 )     (6%)       (2,150 )     (7%)  
Consolidated operating income (loss)
    15,317       (14,429 )     74,847       29,746       206%       (89,276 )     (119%)  
Other expense
    1,495       3,176       4,075       (1,681 )     (53%)       (899 )     (22%)  
Income (loss) before income taxes
    13,822       (17,605 )     70,772       (31,427 )     226%       (88,377 )     (125%)  
Income tax provision (benefit)
    6,777       (12,340 )     20,849       19,117       155%       (33,189 )     (159%)  
Net income (loss)
  $ 7,045     $ (5,265 )   $ 49,923     $ 12,310       234%     $ (55,188 )     (111%)  
                                                         

Top Drive Segment

Our Top Drive business segment sells equipment and provides services to drilling contractors and oil and natural 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.  Below is a summary of our top drive operating results and metrics for the years ended December 31, 2010, 2009 and 2008 (revenue and operating income in thousands, except percentages):

                                           
   
Year Ended December 31,
   
Increase/Decrease
 
   
2010
   
2009
   
2008
   
2010 to 2009
   
2009 to 2008
 
Top Drive revenue
                                         
Sales
  $ 85,584     $ 91,398     $ 164,160     $ (5,814 )     (6%)     $ (72,762 )     (44%)  
Rental services
    109,179       83,845       111,959       25,334       30%       (28,114 )     (25%)  
After-market sales and services
    49,170       49,610       65,313       (440 )     (1%)       (15,703 )     (24%)  
    $ 243,933     $ 224,853     $ 341,432     $ 19,080       8%     $ (116,579 )     (34%)  
                                                         
Top Drive operating income
  $ 62,818     $ 49,532     $ 106,822     $ 13,286       27%     $ (57,290 )     (54%)  
                                                         
Number of top drive sales:
                                                       
New
    61       79       118       (18 )     (23%)       (39 )     (33%)  
Used
    8       11       19       (3 )     (27%)       (8     (42%)  
                                                         
End of period number of top drives in rental fleet:
    125       117       126       8       7%       (9 )     (7%)  
Rental operating days (a)
    23,972       18,218       23,171       5,754       32%       (4,953 )     (21%)  
Average daily operating rate
  $ 4,554     $ 4,602     $ 4,832       (48 )     (1%)       (230 )     (5%)  
                                                         
 (a)  Defined as a day that a unit in our rental fleet is under contract and operating; does not include stand-by days.
 
 
 
Top Drive sales revenue  The decreases in revenue from 2008 to 2009 and from 2009 to 2010 were both due to decreases in the number of units sold during the respective periods.  The decrease in units sold from 2008 to 2009 was the result of the global economic downturn, which did not significantly impact our top drive sales until the middle of 2009.  The decrease in units sold from 2009 to 2010 was primarily due to strong results in the first half of 2009 being driven by the fulfillment of backlog orders that were placed in 2008, prior to the downturn in the drilling industry, compared to being in a slight economic recovery in the last half of 2010. Although sales activity has increased during the last half of 2010, it was not significant enough to compensate for the slower sales in the first half of 2010 as compared to 2009 as a whole.

Our selling price per unit varies significantly depending on the model, whether the unit was previously operated in our rental fleet and whether a power unit was included in the sale. Revenue related to the sale of used top drive units was $8.0 million, $10.4 million and $20.1 million during the 2010, 2009 and 2008, respectively.

Top Drive rental services revenue — The decrease in revenue from 2008 to 2009 was due to a decrease in rental operating days during the respective periods resulting from a 31% decline in the average worldwide rig count year-over-year.  The increase in revenue from 2009 to 2010 was due to the increase in rental operating days during the respective periods resulting from a 30% growth in the average worldwide rig count year-over-year.   Our rental fleet was reduced by 9 units in 2009 but increased by 8 units in 2010 to meet the demand of our customers for rental services.

Top Drive after-market sales and services revenue — The decrease in revenue from 2008 to 2009 was the result of a 31% decline in the average worldwide rig count year-over-year as a result of the economic crisis in late 2008.  The steep drop in rig count substantially decreased the number of operating top drives in need of repairs.  In addition, drilling contractors began performing their own maintenance on units we have historically maintained.  These factors drove negative pricing pressures and resulted in revenue in 2010 decreasing slightly from 2009 as a result of prolonged weakness during the latter part of 2009 and earlier part of 2010 with some improvement in the last half of 2010.

Top Drive operating income — The deterioration in Top Drive operating results from 2008 to 2009 was a function of revenue factors discussed above.  Additionally, we performed an analysis of our inventory parts in connection with our then current backlog and operating forecasts and recorded a charge of $5.4 million in 2009 to reflect the net realizable value of our Top Drive inventory and incurred severance costs of $1.3 million due to cost restructurings in 2009.  This was partially offset by non-recurring gains recorded in 2009, including $1.6 million for the sale of certain ancillary top drive equipment and $1.3 million for the sale of a building and property located in Canada.  The improvement in Top Drive operating results from 2009 to 2010 is a function of revenue factors discussed above as well as the non-recurring items recorded in 2009.

Tubular Services Segment

Our Tubular Services business segment 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 services of deep water smart well completion equipment using our MCLRS, a proprietary and patented technology that 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.  Below is a summary of our tubular services operating results and metrics for the years ended December 31, 2010, 2009 and 2008 (revenue and operating income in thousands, except percentages):
 
                                           
   
Year Ended December 31,
 
Increase/Decrease
       
   
2010
   
2009
 
2008
 
2010 to 2009
 
2009 to 2008
 
Tubular Services revenue
                                   
Proprietary
  $ 100,734     $ 95,440     $ 87,046     $ 5,294       6%     $ 8,394       10%  
Conventional
    21,150       22,859       79,417       (1,709 )     (7%)       (56,558 )     (71%)  
    $ 121,884     $ 118,299     $ 166,463     $ 3,585       3%     $ (48,164 )     (29%)  
                                                         
Tubular Services operating income
  $ 8,228     $ (2,942 )   $ 22,474     $ 11,170       380%     $ (25,416 )     (113%)  
                                                         
Number of proprietary jobs
    3,173       2,569       1,970       604       24%       599       30%  
 
 
 
The increase in Tubular Services proprietary revenue from 2008 to 2009 and from 2009 to 2010 was due to the corresponding increase in proprietary jobs during the respective periods, which is a reflection of increased utilization of our CDS tools, partially offset by a decline in demand for our tubular services in the North Sea region.  A significant amount of U.S. drilling activity in 2009 and 2010 was in shale formations that require directional and horizontal drilling techniques, which we believe are good applications for our proprietary service offerings.  While the number of jobs performed has increased, revenue per job have been negatively impacted by pricing pressures as a result of the downturn in the oil and natural gas industry.  In addition, in the last half of 2010 our results have been negatively affected by bidding and pricing pressure in the U.S. as the Gulf of Mexico workforce displaced by the Deepwater Horizon explosion and the resulting drilling moratorium was competing for on-shore work.  Lastly, Tubular Services revenue for 2009 included $7.6 million of revenue for CDS equipment sales to one customer while no CDS equipment sales were made during 2010.

Our Tubular Services conventional revenue decreased significantly from 2008 to 2009 due to the 31% decline in average worldwide rig count year-over-year as well as our shift in job focus from conventional to proprietary services.  The decrease in conventional revenue from 2009 to 2010 was also due to this shift in job focus from conventional to proprietary services.  During 2009 and 2010, we continue to gain market acceptance of our services that use our proprietary and patented technology.

The deterioration of Tubular Services operating results from 2008 to 2009 was primarily a function of revenue factors discussed above as well as the impairment of $1.8 million for assets held for sale and severance costs of $0.4 million due to cost restructuring in 2009.  Additionally, we performed an analysis of our inventory parts in connection with our operating activities and projected future demand for all business segments in 2009 and recorded a charge of $2.0 million in 2009 to reflect the net realizable value of our Tubular Services inventory.  The improvement in Tubular Services operating results from 2009 to 2010 was a function of revenue factors discussed above, the non-recurring impairment charges and severance accruals in 2009, and reaping the benefit of cost restructuring measures taken in 2009, partially offset by a $1.8 million decrease in operating income recorded in 2010 resulting from a customer dispute over contract term interpretations.
 
CASING DRILLING Segment

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 drill pipe and drill string components. The demonstrated benefits of using well casing to drill the well compared to conventional drilling include, among other benefits, 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.  Below is a summary of our CASING DRILLING operating results and metrics for the years ended December 31, 2010, 2009 and 2008 (in thousands, except percentages):

                                       
   
Year Ended December 31,
Increase/Decrease
   
2010
 
2009
 
2008
 
2010 to 2009
 
2009 to 2008
CASING DRILLING revenue
 
$
12,848
 
$
13,696
 
$
27,047
 
$
(848
)
(6%)
 
$
(13,351
)
(49%)
CASING DRILLING operating loss
 
$
(11,594
$
(20,643
$
(12,605
$
9,049
 
44%
 
$
(8,038
)
(64%)
                                       
 
The decrease in CASING DRILLING revenue from 2008 to 2009 and from 2009 to 2010 was due to the delay or lack of work for CASING DRILLING due to weak domestic and international demand in this sector of the oil and natural gas industry.   CASING DRILLING activity has recently improved and revenue increased in the fourth quarter of 2010.

The deterioration of CASING DRILLING operating results from 2008 to 2009 was a function of the revenue factors discussed above.  In addition, we performed an analysis of our inventory parts to determine excess or slow moving items based on our operating activities and projected future demand for all business segments in 2009 and recorded a charge of $7.0 million to reflect the net realizable value of our CASING DRILLING inventory.  Our operating results in 2009 were also negatively impacted by an impairment charge of $1.8 million for assets held for sale, a loss on sale of operating assets located in Latin America of $0.5 million, and severance costs of $0.2 million as a result of cost restructuring measures.  Our CASING DRILLING operating results improved from 2009 to 2010 as a result of reaping the benefits in 2010 of various cost reduction measures implemented in 2009 and the non-recurring expenses recorded in 2009 discussed above.
 
 
 
We routinely assess whether impairment indicators of our long-lived assets are present based on triggering events that include continued declines in the market or not achieving our internal projections in future years.    Although we have seen increased demand for CASING DRILLING in the last half of 2010 and expect improved operating results in 2011, we have experienced losses in the CASING DRILLING segment over the past few years and expect losses to continue in the near term.  We therefore conducted a test of recoverability as set forth in current accounting guidance for long-lived assets and determined that our CASING DRILLING long-lived assets are not impaired as of December 31, 2010.  Our analysis includes significant growth and profitability assumptions beginning in 2012.   If the expected market conditions do not occur at the level expected or within the timeframe projected, we may determine in the future that our CASING DRILLING long-lived assets are impaired. As of December 31, 2010 our CASING DRILLING long-lived assets had a net book value of approximately $15.9 million.  We believe that our CASING DRILLING business will be profitable in the future and become a more valuable and significant part of our operations.  Accordingly, we plan to maintain our existing CASING DRILLING infrastructure around the world while monitoring costs and streamlining internal processes.  If, in the future, we determine that an impairment of our CASING DRILLING long-lived assets has occurred, the amount of such impairment expense could be material to our results of operations, but we expect that it would not materially impact our cash flows or overall viability. 

Research and Engineering Segment

Our Research and Engineering segment is comprised of our internal research and development activities related to Tubular Services technology, CASING DRILLING technology and top drive model development.  Below is a summary of our research and engineering expense for the years ended December 31, 2010, 2009 and 2008 (in thousands, except percentages):

                                     
 
Year Ended December 31,
Increase/Decrease
 
2010
 
2009
 
2008
 
2010 to 2009
 
2009 to 2008
Research and engineering expense
$
9,075
 
$
7,431
 
$
11,049
 
$
1,644
 
22%
 
$
(3,618
)
(33%)
                                     
 
Research and engineering expenses decreased from 2008 to 2009 due to decreased product development activities on our top drive models and our focus on reducing costs during 2009 as a result of the downturn in the oil and natural gas industry.  These expenses increased from 2009 to 2010 as we observed the return of more normal operating conditions within the oil and natural gas industry following the severe downturn in 2009, and as we once again increased our investment 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 selling and marketing expenses.  Below is a summary of our corporate and other expense for the years ended December 31, 2010, 2009 and 2008 (in thousands, except percentages):

                                     
 
Year Ended December 31,
Increase/Decrease
 
2010
 
2009
 
2008
 
2010 to 2009
 
2009 to 2008
Corporate and other expenses
$
35,060
 
$
32,945
 
$
30,795
 
$
2,115
 
6%
 
$
2,150
 
7%
Corporate and other expenses as a % of revenue
 
9%
   
9%
   
6%
       
––%
       
3%
                                     
 
Corporate and other expenses were higher in 2010 than in 2009 due to increased incentive cash and stock compensation expense of $5.3 million that resulted from improved company performance, and $1.2 million of additional legal expense associated with the patent infringement lawsuit that was brought by us in the third quarter of 2008 and settled against one of our four defendants in the fourth quarter of 2010.  These increases in 2010 were partially offset by non-recurring expenses recorded in 2009, including legal settlement costs of $2.2 million and severance costs of $1.4 million due to cost restructurings.   Corporate and other expenses increased from 2008 to 2009 due to the non-recurring expenses discussed above, partially offset by reduced incentive cash and stock compensation resulting from weakened company performance in 2009 as compared to 2008.  Corporate and other expenses as a percentage of revenue stayed consistent from 2009 to 2010 and increased from 2008 to 2009 due to higher expenses and lower revenue due to the downturn in the oil and natural gas industry from 2008 to 2009.
 
 
 
Other Expense (Income)

Below is a summary of our other expense (income) for the years ended December 31, 2010, 2009 and 2008 (in thousands, except percentages):
 
                                     
 
Year Ended December 31,
Increase/Decrease
 
2010
 
2009
 
2008
 
2010 to 2009
 
2009 to 2008
Other expense (income)
                                   
Interest expense
$
758
 
$
1,891
 
$
4,503
 
$
(1,133
)
(60%)
 
$
(2,612
)
(58%)
Interest income
 
(165
)
 
(958
)
 
(349
)
 
793
 
83%
   
(609
)
(174%)
Foreign exchange losses
 
1,043
   
1,360
   
186
   
(317
)
(23%)
   
1,174
 
631%
Other expense (income)
 
(141
)
 
883
   
(265
)
 
(1,024
)
(116%)
   
1,148
 
433%
Total other expense (income)
$
1,495
 
$
3,176
 
$
4,075
 
$
(1,681
)
(53%)
 
$
(899
)
(22%)
                                     
 
 Interest expense — Interest expense decreased from 2009 to 2010 and from 2008 to 2009 as a result of the payments made under our credit facility.  We paid our credit facility in full in January 2010 and have not drawn on our revolving line of credit since then.  Our average monthly outstanding debt balance was $0.7 million, $31.9 million and $60.5 million during 2010, 2009 and 2008, respectively.  Interest expense recorded in 2010 was primarily due to commitment fees for our revolving line of credit.

Interest income — Interest income decreased from 2009 to 2010 and increased from 2008 to 2009 primarily due to non-recurring interest income of $0.8 million received on a tax refund during 2009.
 
Foreign exchange losses — Foreign exchange losses decreased from 2009 to 2010 and increased from 2008 to 2009 due to fluctuations in the valuation of the U.S. dollar compared to other currencies we transact in around the world.   From time to time, we may use foreign currency forward contracts to manage our currency exchange exposures on foreign currency denominated balances and anticipated cash flows; however, we did not have any foreign currency forward contracts in place during 2010 and 2009.   Effective January 1, 2010, we changed our functional currency in our Canadian operations from the Canadian dollar to the U.S. dollar.

Other expense (income) — Other expense (income) reflects gains (losses) on sale of non-operating assets, penalties, and other miscellaneous expense (income).  Other expense was higher in 2009 than 2010 and 2008 due to accrued penalties of $0.7 million assessed by a taxing authority during 2009.

  Income Tax Provision (Benefit)

                                     
 
Year Ended December 31,
Increase/Decrease
 
2010
 
2009
 
2008
 
2010 to 2009
 
2009 to 2008
Effective income tax rate
 
49%
   
70%
   
29%
   
(21%)
   
41%
                                     
 
We are an Alberta, Canada corporation.  We conduct business and are taxed on profits earned in a number of jurisdictions around the world. Our income tax rate is based on the laws and rates in effect in the countries in which our operations are conducted or in which we are considered resident for income tax purposes. Our effective tax rate, which is 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 earnings.

Our effective tax rate for 2010 of 49% was higher than the 28% Canadian statutory rate primarily due to a $1.9 million valuation allowance adjustment established on foreign subsidiary net operating losses.  A valuation allowance is established to reduce deferred tax assets in those jurisdictions where it is more likely than not that sufficient future profits will not be generated to utilize existing tax losses.  Our effective tax rate for 2009 of 70% included several non-recurring adjustments, but consisted primarily of the recognition of a $4.5 million tax benefit associated with a Canadian tax law change that occurred during the first quarter of 2009.  No provision is made for taxes that may be payable on the repatriation
 
 
 
of accumulated earnings in our foreign subsidiaries on the basis that these earnings will continue to be used to finance the activities of these subsidiaries.

For a further description of income tax matters, see Part I, Risk Factors, caption ‘We have identified material weaknesses in our internal controls’, Part II, Item 8, Financial Statements and Supplementary Data, Note 9, and Part II, Item 9A, Controls and Procedures included in this Report on Form 10-K.
   
Liquidity and capital resources

We rely on our cash and access to credit to fund our operations, growth initiatives and acquisitions.  Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents and availability under our revolving credit facility.  We use these sources of liquidity to fund our working capital requirements, capital expenditures, strategic investments and acquisitions.  For 2011, we forecast capital expenditures to be between $55 million to $65 million, based on current market conditions.  We expect to be able to fund our activities for 2011 with cash flows generated from our operations, available cash and cash equivalents, and available borrowings under our revolving credit facility.

As of December 31, 2010, we had no outstanding borrowings, and we had availability to borrow $128.5 million under our revolving credit facility.  The availability of current borrowings is, and future borrowings may be, limited in order to maintain certain financial ratios required by restrictive covenants in our credit facility. We were in compliance with our bank covenants at December 31, 2010.  For further discussion on our credit facility, see Part II, Item 8, Financial Statements and Supplementary Data, Note 7 included in this Report on Form 10-K.

Our net cash position as of December 31, 2010 and 2009 was as follows (in thousands):

   
Years ended December 31,
 
   
2010
   
2009
 
Cash
  $ 60,603     $ 39,930  
Current portion of long term debt
           
Long term debt
          (8,600 )
Net cash
  $ 60,603     $ 31,330  

We report our net cash position because we regularly review it 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 we use.

Cash Flows

Our cash flows fluctuate with the level of spending by oil and natural gas companies for drilling activities.  Certain sources and uses of cash, such as the level of discretionary capital expenditures and the issuance and repayment of debt, are within our control and are adjusted as necessary based on market conditions.  The following is a discussion of our cash flows for the years ended December 31, 2010 and 2009.

Operating Activities – Net cash provided by operating activities is our primary source of capital and liquidity.  Net cash provided by operating activities was $55.1 million in 2010 compared to $63.3 million in 2009.  Net income adjusted for non-cash items, such as depreciation and amortization, stock-based compensation, gain on sale of operating assets and deferred income tax expense, provided $43.2 million and $50.1 million of cash during 2010 and 2009, respectively.  The net change in working capital and other balance sheet accounts provided $11.9 million in 2010, primarily due to income tax refunds of $19.2 million for loss carrybacks applied to previous years and a $12.5 million monetization of inventory, partially offset by current year tax payments of $13.8 million and $6.0 million of cash outlays to support increasing business activity as a result of moderate recovery in the economy and the oil and natural gas industry in general.  The net change in working capital and other balance sheet accounts provided $13.2 million in 2009, primarily due to cash inflows from collection of accounts receivable exceeding cash outflows by $7.2 million in response to decreasing business activity during 2009 as a result of the recession in the economy and the oil and natural gas industry in general, a $14.1 million monetization of inventory and $6.8 million of income tax refunds, partially offset by $14.9 million of payments for income taxes.
 
Investing Activities – Net cash used for investing activities was $25.8 million during 2010 compared to $3.8 million in 2009.  During 2009 and 2008, we used $37.1 million and $17.3 million of cash, respectively, for capital expenditures, and sales from operating assets provided $10.4 million and $13.7 million of cash, respectively.  Our capital expenditures
 
 
 
increased by $19.8 million or 114% in 2010 as compared to 2009 to meet projected demand for our products and services as a result of the moderate economic recovery in 2010 while we lowered capital expenditures in 2009 to conserve cash during the height of the economic crisis.
 
Financing Activities – Net cash used in financing activities was $8.7 million during 2010 compared to $40.7 million in 2009.  During 2010, we used $8.6 million of cash to repay our debt and had no borrowings under our revolving credit facility.  During 2009, we issued $10.0 million of debt and used $51.0 million to repay our debt under our credit facility.

Critical Accounting Estimates

Our significant accounting policies are described in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 in this Report on Form 10-K.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to select appropriate accounting estimates and to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities.  We consider our critical accounting estimates to be those that require difficult, complex or subjective judgment necessary in accounting for inherently uncertain matters and those that could significantly influence our financial results based on changes in those judgments.  Changes in facts and circumstances may result in revised estimates and actual results may differ materially from those estimates.  We believe the most critical accounting policies in this regard are those described below.

Deferred Taxes — We record deferred tax assets and liabilities to reflect 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. 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. 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.
 
Loss Contingencies  We accrue loss contingency reserves when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be reasonably estimated.  Estimates of our liabilities are based on an evaluation of potential outcomes and currently available facts.  Actual results may differ from our estimates, and our estimates can be revised in the future, either negatively or positively, depending upon actual outcomes or changes in expectations based on the facts surrounding each matter.
Revenue Recognition  We recognize revenue from product sales when the earnings process is complete, collectability is reasonably assured, and 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 revenue other than product sales, we recognize revenue 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 and services 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 the 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.
 
 
 
Allowance for Doubtful Accounts Receivable — We maintain an allowance for doubtful accounts to record accounts receivable at their net realizable value.  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 and risks of economic, political and civil instabilities. We make assumptions regarding current market conditions and how they may affect our customers’ ability to pay outstanding receivables 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 is stated at the lower of cost or market.  Our estimated market value of inventory depends upon demand driven by oil and natural gas drilling activity, which depends in turn upon oil and natural gas prices, the general outlook for economic growth worldwide, available financing for our customers, political stability in major oil and natural 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. Significant or unanticipated changes in business conditions and/or changes in technologies could impact the amount and timing of provision for excess or obsolete inventory that may be required.

Impairment of Goodwill and Long-Lived Assets —Long-lived assets, which include goodwill, property, plant and equipment, and intangible assets, comprise a substantial portion of our assets. The carrying value of goodwill is reviewed for impairment on an annual basis and the carrying value of other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

We test consolidated goodwill for impairment using a fair value approach and perform our goodwill impairment test annually as of December 31 or upon the occurrence of a triggering event. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. We estimate the fair value of goodwill 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. During times of economic volatility, significant judgment must be applied to determine our weighted-average cost of capital that we use to determine the discount rate.  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 goodwill impairment losses that could be material to our results of operations.

When evaluating long-lived assets other than goodwill (such as property, plant and equipment) 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.  This process requires management to apply judgment in estimating future cash flows and asset fair values, including forecasting useful lives of the assets held and used, estimating future operating activities, future business conditions or technological developments.   If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values or if we encounter significant, unanticipated changes in circumstances, we may be required to lower the carrying value of our long-lived assets by recording an impairment charge that could be material to our results of operations.
 
 Recent Accounting Pronouncements

See Part II, Item 8, Financial Statements and Supplementary Data, Note 2, under the heading “Recent accounting pronouncements” included in this Report on Form 10-K.
 
 
 
Off-Balance Sheet Arrangements

As of December 31, 2010, we have no off-balance sheet arrangements other than the contractual obligations and letters of credit noted below.

Contractual Obligations
 
We are party to various contractual obligations.  A portion of these obligations are reflected in our financial statements, such as long term debt, while other obligations, such as operating leases and purchase obligations, are not reflected on our balance sheet.  The following is a summary of our contractual cash obligations as of December 31, 2010 (in thousands):

   
Payments due by period
 
   
Total
   
Less than 1 year