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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
¾¾¾¾¾¾¾
 
Form 10-Q

¾¾¾¾¾¾¾
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended June 30, 2011
 
¨
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
¾¾¾¾¾¾¾
2Q 2011_Logo
Tesco Corporation
(Exact name of registrant as specified in its charter)
¾¾¾¾¾¾¾
 
   
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)
¾¾¾¾¾¾¾
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   x     No   ¨
 

 
 

 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 

Large Accelerated Filer   ¨
Accelerated Filer   x
Non-Accelerated Filer   ¨
Smaller Reporting Company   ¨
 
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨     No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 
Number of shares of Common Stock outstanding as of July 31, 2011:   38,197,450

 
 

 
 

 
 

 


 
     
   
Page
PART I—FINANCIAL INFORMATION
     
   Item 1.
 1
   Item 2.
13
   Item 3.
21
   Item 4.
21
 
PART II—OTHER INFORMATION
     
   Item 1.
23
   Item 1A.
23
   Item 6.
23
 







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.

 
 
 

 


Caution Regarding Forward-Looking Information; Risk Factors
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Canadian and United States securities laws, including the United States Private Securities Litigation Reform Act of 1995.  From time to time, our public filings, press releases and other communications (such as conference calls and presentations) will contain forward-looking statements.  Forward-looking information is often, but not always identified by the use of words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “forecast,” “target,” “project,” “may,” “will,” “should,” “could,” “estimate,” “predict” or similar words suggesting future outcomes or language suggesting an outlook.  Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements with respect to expectations of our prospects, future 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 anticipated financial performance, business prospects, strategies and regulatory developments.  Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.  The forward-looking statements in this Quarterly Report on Form 10-Q are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
 
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved.  We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements.
 
These risks and uncertainties include, but are not limited to, the impact of changes in oil and natural gas prices and worldwide and domestic economic conditions on drilling activity and demand for and pricing of our products and services, other risks inherent in the drilling services industry (e.g. operational risks, potential delays or changes in customers’ exploration or development projects or capital expenditures, the uncertainty of estimates and projections relating to levels of rental activities, uncertainty of estimates and projections of costs and expenses, risks in conducting foreign operations, the consolidation of our customers, and intense competition in our industry), and risks associated with our intellectual property and with the performance of our technology.  These risks and uncertainties may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements.  When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
 
Copies of our Canadian public filings are available at www.tescocorp.com and on SEDAR at www.sedar.com.  Our U.S. public filings are available at www.tescocorp.com and on EDGAR at www.sec.gov.
 
Please see Part I, Item 1A—Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1A—Risk Factors of this Quarterly Report on Form 10-Q for further discussion regarding our exposure to risks.  Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such factors, nor to assess the impact such factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
 

 
 

 
 
 
PART I—FINANCIAL INFORMATION
 
Item 1.                      Financial Statements.
 
TESCO CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
 
             
   
June 30,
   
December 31,
 
   
2011
   
2010
 
             
Assets
           
Current assets
           
Cash and cash equivalents
  $ 41,330     $ 60,603  
Accounts receivable trade, net of allowance for doubtful accounts of $1,083 and $865 as of June 30, 2011 and December 31, 2010, respectively
    95,030       72,971  
Inventories, net
    86,996       59,190  
Income taxes recoverable
    4,262       2,343  
Deferred income taxes
    7,908       8,110  
Prepaid and other assets
    24,515       22,768  
                 
Total current assets
    260,041       225,985  
Property, plant and equipment, net
    183,603       182,686  
Goodwill
    29,394       29,394  
Deferred income taxes
    11,513       12,690  
Intangible and other assets, net
    4,246       4,153  
                 
Total assets
  $ 488,797     $ 454,908  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Accounts payable
  $ 37,106     $ 23,785  
Deferred revenue
    20,337       11,987  
Warranty reserves
    2,199       1,698  
Income taxes payable
    2,337       3,433  
Accrued and other current liabilities
    29,018       32,289  
                 
Total current liabilities
    90,997       73,192  
Other liabilities
    2,769       1,168  
Deferred income taxes
    3,391       4,879  
                 
Total liabilities
    97,157       79,239  
                 
Commitments and contingencies (Note 11)
   
     
 
                 
Shareholders’ equity
               
Common shares; no par value; unlimited shares authorized;   38,186 and  38,058 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    200,694       196,431  
Retained earnings
    155,445       143,737  
Accumulated comprehensive income
    35,501       35,501  
                 
Total shareholders’ equity
    391,640       375,669  
                 
Total liabilities and shareholders’ equity
  $ 488,797     $ 454,908  
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

 
1

 

 
TESCO CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share information)
 
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
                       
Products
 
$
43,917
   
$
28,794
   
$
81,110
   
$
56,881
 
Services
   
73,361
     
56,761
     
141,790
     
114,770
 
     
117,278
     
85,555
     
222,900
     
171,651
 
Operating expenses
                               
Cost of sales and services
                               
Products
   
33,486
     
20,833
     
58,545
     
42,434
 
Services
   
60,945
     
49,566
     
119,379
     
98,608
 
     
94,431
     
70,399
     
177,924
     
141,042
 
Selling, general and administrative
   
11,589
     
11,892
     
23,317
     
22,668
 
Research and engineering
   
2,403
     
1,917
     
5,288
     
3,556
 
Total operating expenses
   
108,423
     
84,208
     
206,529
     
167,266
 
Operating income
   
8,855
     
1,347
     
16,371
     
4,385
 
Other expense (income)
                               
Interest expense
   
798
     
196
     
1,084
     
251
 
Interest income
   
(2,482
)
   
(73
)
   
(2,482
)
   
(95
)
Foreign exchange loss (gain)
   
697
     
45
     
883
     
165
 
Other expense (income)
   
(559
)
   
144
     
(531
)
   
(214
)
Total other expense (income)
   
(1,546
)
   
312
     
(1,046
)
   
107
 
Income before income taxes
   
10,401
     
1,035
     
17,417
     
4,278
 
Income tax provision
   
3,012
     
334
     
5,711
     
1,372
 
Net income
 
$
7,389
   
$
701
   
$
11,706
   
$
2,906
 
                                 
Earnings per share:
                               
Basic
 
$
0.19
   
$
0.02
   
$
0.31
   
$
0.08
 
Diluted
 
$
0.19
   
$
0.02
   
$
0.30
   
$
0.08
 
Weighted average number of shares:
                           
Basic
   
38,164
     
37,792
     
38,120
     
37,776
 
Diluted
   
38,928
     
38,650
     
38,831
     
38,680
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 



TESCO CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
             
   
Six Months Ended June 30,
 
   
2011
   
2010
 
Operating Activities
           
Net income
 
$
11,706
   
$
2,906
 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
               
Depreciation and amortization
   
18,501
     
17,567
 
Stock compensation expense
   
4,139
     
3,010
 
Bad debt expense (recovery)
   
323
     
(431
)
Deferred income taxes
   
(197
)
   
(1,665
)
Amortization of deferred financing costs
   
91
     
174
 
Loss (gain) on sale of operating assets
   
(1,170
)
   
19
 
Changes in operating assets and liabilities:
               
Accounts receivable trade, net
   
(22,382
)
   
(6,782
)
Inventories
   
(27,806
)
   
6,271
 
Prepaid and other current assets
   
(332
)
   
(4,921
)
Accounts payable and accrued liabilities
   
18,697
     
4,793
 
Other noncurrent assets and liabilities, net
   
902
     
 
Income tax payable (recoverable)
   
(2,930
)
   
(1,324
)
        Other, net
   
     
(164
)
Net cash provided by (used for) operating activities
   
(458
)
   
19,453
 
                 
Investing Activities
               
Additions to property, plant and equipment
   
(19,470
)
   
(14,086
)
Proceeds on sale of operating assets
   
1,616
     
4,905
 
Change in restricted cash
   
(1,415
)
   
 
Other, net
   
     
36
 
Net cash used for investing activities
   
(19,269
)
   
(9,145
)
                 
Financing Activities
               
Repayments of debt
   
     
(8,600
)
Proceeds from exercise of stock options
   
539
     
120
 
Excess tax benefit associated with equity compensation
   
(85
)
   
(214
)
Net cash provided by (used for) financing activities
   
454
     
(8,694
)
                 
Change in cash and cash equivalents
   
(19,273
)
   
1,614
 
Net cash and cash equivalents, beginning of period
   
60,603
     
39,930
 
Net cash and cash equivalents, end of period
 
$
41,330
   
$
41,544
 
                 
Supplemental cash flow information
               
Cash payments for interest
 
$
119
   
 $
88
 
Cash payments for income taxes
   
8,833
     
5,657
 
Cash received for income tax refunds
   
459
     
1,075
 
Property, plant and equipment accrued in accounts payable
   
1,275
     
 
 

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



 
TESCO CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity and
Comprehensive Income
(in thousands)


   
Common stock shares
   
Common shares
   
Retained earnings
   
Accumulated comprehensive income
   
Total
 
 
For the six months ended June 30, 2011
                             
Balances at January 1, 2011
    38,058     $ 196,431     $ 143,737     $ 35,501     $ 375,669  
Components of comprehensive income
                                       
Net income
                11,706             11,706  
Total comprehensive income
                                    11,706  
Issuance and exercises under stock plans
    128       4,263                   4,263  
Balances at June 30, 2011
    38,186     $ 200,694     $ 155,443     $ 35,501     $ 391,638  
                                         
                                         
For the six months ended June 30, 2010
                                       
Balances at January 1, 2010
    37,750     $ 189,966     $ 136,692     $ 35,501     $ 362,159  
Components of comprehensive income
                                       
Net income
                2,906             2,906  
Total comprehensive income
                                    2,906  
Issuance and exercises under stock plans
    75       3,437                   3,437  
Balances at June 30, 2010
    37,825     $ 193,403     $ 139,598     $ 35,501     $ 368,502  
                                         
 

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



TESCO CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1—Nature of Operations and Basis of Preparation
 
Nature of Operations

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.

Basis of Presentation
 
We prepared this Quarterly Report on Form 10-Q pursuant to instructions for quarterly reporting required to be filed with the Securities and Exchange Commission (“SEC”).  Because this is an interim period filing presented using a condensed format, it does not include all information and footnotes normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  You should read this report along with our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Annual Report on Form 10-K”), which contains a summary of our significant accounting policies and other disclosures.  The condensed consolidated financial statements as of June 30, 2011 and for the quarter and six months ended June 30, 2011 and 2010 are unaudited.  We derived the unaudited condensed consolidated balance sheet as of December 31, 2010 from the audited consolidated balance sheet filed in our 2010 Annual Report on Form 10-K.  In our opinion, we have made adjustments, all of which were normal recurring adjustments unless otherwise disclosed herein, that we believe are necessary for a fair statement of the balance sheets, results of operations and cash flows, as applicable.
 
These unaudited condensed consolidated financial statements include the accounts of all consolidated subsidiaries after the elimination of all significant intercompany accounts and transactions.
 
Reclassifications
 
Our unaudited condensed consolidated financial statements for prior periods include reclassifications that are made to conform to the current year presentation.  In our unaudited condensed consolidated statement of operations for the six months ended June 30, 2010, we reclassified royalty income of $0.3 million from other expense (income) to products revenue as it has become a more significant part of our business.  Additionally, we combined common shares and contributed surplus in our unaudited condensed consolidated balance sheet as of December 31, 2010 as our common shares have no par value and our board of directors has not assigned a discretionary par value to the common shares.  These reclassifications did not impact our reported net income, stockholders’ equity, or cash flows from operating activities.

Subsequent Events

We conducted our subsequent events review through the date these unaudited condensed consolidated financial statements were filed with the SEC.

Note 2 – Revisions to Previously Issued Financial Statements

Colombian net-worth tax

The Colombian government enacted a one-time, net-worth tax for all Colombian entities, effective January 1, 2011, to be payable in eight semi-annual installments from 2011 to 2014.  Due to the effect of this new tax reform act, we should have recorded a liability in the first quarter 2011.  Based on our Colombian operations’ net equity, measured on a Colombian tax basis as of January 1, 2011, our total net-worth tax obligation is approximately $0.7 million, which is not deductible for tax purposes.  Our first semi-annual payment was made in May 2011.

The out of period adjustment is not material from a quantitative or qualitative perspective to the financial statements; therefore, the three months ended March 31, 2011 has not been restated. The financial statements for the six months ended June 30, 2011 properly reflect the Colombian tax obligation. The following table summarizes the effect of recording the revision on the unaudited condensed consolidated statement of income for the quarter ended March 31, 2011 (in thousands):

 


   
Three Months Ended March, 31 2011
 
   
As previously reported
   
Adjustments
   
As revised
 
Revenue
                       
Products
 
$
37,193
   
$
   
$
37,193
 
Services
   
68,429
     
     
68,429
 
                         
     
105,622
     
     
105,622
 
Operating expenses
                       
Cost of sales and services
                       
Products
   
25,059
     
     
25,059
 
Services
   
57,741
     
693
     
58,434
 
                         
     
82,800
     
693
     
83,493
 
Selling, general and administrative
   
11,728
     
     
11,728
 
Research and engineering
   
2,885
     
     
2,885
 
                         
Total operating expenses
   
97,413
     
693
     
98,106
 
                         
Operating income
   
8,209
     
(693
)
   
7,516
 
                         
Other expense
                       
Interest expense
   
286
     
     
286
 
Interest income
   
     
     
 
Foreign exchange losses
   
186
     
     
186
 
Other expense
   
28
     
     
28
 
                         
Total other expense
   
500
     
     
500
 
                         
Income before income taxes
   
7,709
     
(693
)
   
7,016
 
Income tax provision (benefit)
   
2,699
             
2,699
 
                         
Net income
 
$
5,010
   
$
(693
)
 
$
4,317
 
                         
                         
Earnings per share:
                       
Basic
 
$
0.13
   
$
(0.02
)
 
$
0.11
 
Diluted
 
$
0.13
   
$
(0.02
)
 
$
0.11
 
Weighted average number of shares:
                       
Basic
   
38,076
     
     
38,076
 
Diluted
   
38,753
     
     
38,753
 


Presentation of top drive sale

Our unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2010 has been revised to reflect $1.5 million of proceeds received for the sale of two used top drives from investing activities to operating activities as they were sold to a third party and were not from our top drive rental fleet.  The out of period adjustment is not material from a quantitative or qualitative perspective to the financial statements; therefore, the unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2010 has not been restated.

Note 3—Summary of Significant Accounting Policies

Significant Accounting Policies

There have been no material changes to our accounting policies, as described in the notes to our audited consolidated financial statements included in our 2010 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income, requiring entities to present items of net income and other comprehensive income either in on continuous statement – referred to as the statement of comprehensive income – or in two separate, but consecutive, statements of net income and other comprehensive income. As we elect to not early adopt, the new requirement will be effective for us for the year ended December 31, 2011.
 


 
Note 4—Details of Certain Accounts

At June 30, 2011 and December 31, 2010, prepaid and other current assets consisted of the following (in thousands):

   
June 30,
2011
   
December 31,
2010
 
Prepaid taxes other than income
  $ 3,794     $ 9,601  
Deposits
    9,848       3,055  
Prepaid insurance
    1,978       3,791  
Other prepaid expenses
    4,286       3,219  
Restricted cash
    2,916       1,502  
Deferred job costs
    1,086       229  
Non-trade receivables
    607       1,371  
    $ 24,515     $ 22,768  
 
At June 30, 2011 and December 31, 2010, accrued liabilities consisted of the following (in thousands):

   
June 30,
2011
   
December 31,
2010
 
Accrued payroll and benefits
  $ 13,021     $ 15,926  
Accrual for foreign withholding tax claim
    5,125       5,022  
Accrued taxes other than income taxes
    6,856       9,488  
Other current liabilities
    4,016       1,853  
    $ 29,018     $ 32,289  
                 

Note 5—Inventories

At June 30, 2011 and December 31, 2010, inventories, net of reserves of $6.0 million for excess and obsolete inventories, by major classification were as follows (in thousands):

   
June 30,
2011
   
December 31,
2010
 
Raw materials
  $ 56,305     $ 33,227  
Work in progress
    2,030       1,837  
Finished goods
    28,661       24,126  
    $ 86,996     $ 59,190  
                 

     Finished goods inventory included $1.6 million and $3.4 million at June 30, 2011 and December 31, 2010, respectively, for completed top drive systems that were pending delivery to customers.

Note 6—Property, plant and equipment

At June 30, 2011 and December 31, 2010, property, plant and equipment, at cost, by major category were as follows (in thousands):

   
June 30,
2011
   
December 31,
2010
 
Land, buildings and leaseholds
  $ 21,486     $ 20,896  
Drilling equipment
    280,786       273,996  
Manufacturing equipment
    6,277       6,112  
Office equipment and other
    25,258       22,818  
Capital work in progress
    12,281       11,630  
      346,088       335,452  
Less: Accumulated depreciation
    (162,485 )     (152,766 )
    $ 183,603     $ 182,686  
                 

The net book value of used top drive rental equipment sold included in cost of sales and services on our unaudited condensed consolidated statements of income was $0.6 million and $0.8 million for the three and six months ended June 30, 2011, respectively. One used top drive was sold from our rental fleet during the three and six months ended June 30, 2011.

 
 
 
Depreciation and amortization expense for the three and six months ended June 30, 2011 and 2010 are included on our unaudited condensed consolidated statements of income as follows (in thousands):
 
                         
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Cost of sales and services
 
$
8,755
   
$
8,545
   
$
17,606
   
$
17,073
 
Selling, general and administrative expense 
   
473
     
236
     
877
     
481
 
Research and engineering
   
6
     
7
     
18
     
13
 
   
$
9,234
   
$
8,788
   
$
18,501
   
$
17,567
 

Sale of Operating Assets

     When top drive units from our rental fleet are sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services.  Proceeds from the sale of used top drives are included in proceeds from the sale of operating assets and the difference between revenue and the cost of sales and services is included in gain on sale of operating assets in the accompanying unaudited condensed consolidated statement of cash flows.

 Note 7—Warranties

Changes in our warranty accrual for the six months ended June 30, 2011 were as follows (in thousands):

   
Six Months Ended
June 30, 2011
 
Balance, January 1, 2011
  $ 1,698  
Charged to expense, net
    642  
Deductions
    (278 )
Balance, June 30, 2011
  $ 2,062  
         

Note 8—Earnings per Share

Weighted average shares

The following table reconciles basic and diluted weighted average shares (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic weighted average number of shares outstanding 
   
38,164
     
37,792
     
38,120
     
37,776
 
Dilutive effect of stock-based compensation
   
764
     
858
     
711
     
904
 
Diluted weighted average number of shares outstanding
   
38,928
     
38,650
     
38,831
     
38,680
 
Anti-dilutive options excluded from calculation due to exercise prices
   
608
     
1,223
     
735
     
1,221
 

Note 9—Income Taxes
 
Tesco Corporation is an Alberta, Canada corporation.  We conduct business and are taxable on profits earned in a number of jurisdictions around the world.  Income taxes have been recorded based on the laws and rates in effect in the countries in which operations are conducted or in which we are considered a resident for income tax purposes.
 
 
 
 
Our income tax provision (benefit) for the three and six months ended June 30, 2011 and 2010 was as follows (in thousands):

                         
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Current tax provision
 
$
3,706
   
$
1,904
   
$
5,908
   
$
3,037
 
Deferred tax provision (benefit)
   
(694
)
   
(1,570
)
   
(197
)
   
(1,665
)
Income tax provision
 
$
3,012
   
$
334
   
$
5,711
   
$
1,372
 
 
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was 29.0% and 32.8% for the three and six months ended June 30, 2011 compared to 32.3% and 32.1% for the same periods in 2010.  The 3.3% decrease and 0.7% increase in our effective tax rate for the three and six months ended June 30, 2011, respectively, as compared to the same periods in 2010 is due to the fluctuating mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world.
 
As of June 30, 2011 and December 31, 2010, we had an accrual for uncertain tax positions of $1.2 million.  This liability is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets as we anticipate that these uncertainties will not be resolved within the next 12 months.  The resolution of these uncertainties should not have a material impact on our effective tax rate.
 
Certain state and foreign tax filings remain open to examination.  We believe that any assessment on these filings will not have a material impact on our financial position, results of operations or cash flows.  We believe that appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.  However, audit outcomes and the timing of audit settlements are subject to significant uncertainty.  Therefore, additional provisions on tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

Note 10—Mexico Tax and Interest Refund

We have been previously advised by the Mexican tax authorities that they believe significant expenses incurred by our Mexican operations from 1996 through 2002 are not deductible for Mexican tax purposes.  Between 2002 and 2008, formal reassessments disallowing these deductions were issued for each of these years, all of which we appealed to the Mexican court system.  We have obtained final court rulings deciding all years in dispute in our favor, except for 1996 as discussed below, and 2001 and 2002, both of which are currently before the Mexican Tax Court.  The outcome of such appeals is uncertain.  We continue to believe that the basis for these reassessments was incorrect, and that the ultimate resolution of those outstanding matters that remain will likely not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In May 2002, we paid a deposit of $3.3 million to the Mexican tax authorities in order to appeal the reassessment for 1996.  In 2007, we requested and received a refund of approximately $3.7 million (the original deposit amount of $3.3 million plus $0.4 million in interest).  With the return of the $3.3 million deposit, the Mexican tax authorities issued a resolution indicating that we were owed an additional $3.4 million in interest and inflation adjustments but this amount had been retained by the tax authorities to satisfy a second reassessment for 1996.  We believed the second reassessment was invalid, and appealed it to the Mexican Tax Court.  In 2009, the Mexican Tax Court issued a decision accepting our arguments in part, which was subject to further appeal.

In May 2011, we received a refund of approximately $3.8 million (the remaining $3.4 million noted above, plus $0.4 million of additional interest and inflation adjustments).  We have included $2.4 million in interest income, $0.6 million in other income, partially offset by $0.4 million of related interest expense.  The remaining $1.2 million is included in other liabilities pending the ultimate resolution of this issue.

Note 11—Commitments and Contingencies
 
Legal Contingencies
 
We are subject to legal proceedings brought against us in the normal course of business.  We recognize liabilities for contingencies when we have an exposure that, when fully analyzed, indicates it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated.  Where the most likely outcome of a contingency can be reasonably estimated, we accrue a liability for that amount.  Where the most likely outcome cannot be estimated, a range of potential losses is established and if no one amount in that range is more likely than any other, the low end of the range is accrued.

 
 
 
The estimates below represent management’s best estimates of outstanding legal contingencies based on consultation with internal and external legal counsel.  There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.

In December 2009, we received an administrative subpoena from the Department of the Treasury, Office of Foreign Assets Control (OFAC) regarding a 2006 shipment of oilfield equipment that was made from our Canadian manufacturing facility to Sudan.  We reviewed this matter and have provided a timely response to the subpoena.  Our internal investigation revealed that in 2006 and 2007, a total of four top drive units were shipped to Sudan from our Canadian manufacturing facility.  Technicians were also dispatched from one of our regional offices outside of the United States to install the top drive units.  The total revenue from these activities with respect to the periods involved were approximately 0.5% and 0.7% of total revenue in 2006 and 2007.  Our policy is not to conduct any business in or sell any products to Sudan and we have implemented strengthened controls and procedures designed to ensure compliance with this policy.  We disclosed the results of our internal investigation to, and are fully cooperating with, OFAC.  An agreement tolling any applicable statute of limitations governing this investigation expired in January 2011 without a request for an extension. This matter is still open. To date, we have responded timely to OFAC’s requests and received no further questions.  Until such time as we receive substantive OFAC follow up on the matter, the effect on our consolidated financial position, results of operations or cash flows is not reasonably estimable.  Accordingly, we have not accrued a reserve for this matter as of June 30, 2011.
 
In December 2007, Weatherford International, Inc. and Weatherford/Lamb Inc. (“Weatherford”) filed suit against us in the U.S. District Court for the Eastern District of Texas, Marshall Division (the “Marshall Suit”), alleging that various of our technologies infringe 11 different patents held by Weatherford.  Weatherford sought monetary damages and an injunction against further infringement.  Our technologies referred to in the claim included the CDS, the CASING DRILLING system and method, a float valve, and the locking mechanism for the controls of the tubular handling system.  We filed a general denial seeking a judicial determination that we did not infringe the patents in question and/or that the patents are invalid.

In August 2008, we filed suit against several competitors in the U.S. District Court for the Southern District of Texas – Houston Division, including Weatherford (the “Houston Suit”).  The Houston Suit claims infringement of two of our patents related to our CDS.  On October 26, 2010, we entered into a settlement with Weatherford (the “Settlement”) dismissing both the Marshall Suit and the Houston Suit (as it relates to Weatherford) with prejudice.  Among other provisions, the Settlement contains the following terms:

·  
Non-exclusive irrevocable worldwide and royalty free cross licenses with respect to all the patents asserted by Weatherford in the Marshall Case and by us in the Houston Case, as well as certain other U.S. and foreign equivalents and counterparts; and

·  
Weatherford has agreed to purchase for five years 67% of its worldwide top drive requirements from us, as long as we can meet production requirements, and to designate us as a preferred provider of after-market sales and service for top drives.  The prices we charge Weatherford will be equal to or lower than the prices we charge to any other customer of similar volume of purchases and/or services.

We entered into a Final Settlement and License Agreement (the "Settlement Agreement") with Weatherford on January 11, 2011, effective as of October 26, 2010.  As an additional condition of the Settlement Agreement, neither we nor Weatherford will pursue any cause of action that might adversely affect the validity or enforceability of each other's patents as listed in the exhibits to the Settlement Agreement, including any causes of action that may arise from the requests for review we filed with the U.S. Patent and Trademark Office in November 2008.

On November 11, 2010 we won a jury verdict against National Oilwell Varco, L.P. ("NOV"), Frank's Casing Crew and Rental Tools, Inc. ("Frank's") and Offshore Energy Services, Inc. ("OES") for infringing our U.S. Patent Nos. 7,140,443 and 7,377,324.  In that verdict, the jury found that NOV's accused product, the CRT 350, infringes all valid patent claims in the asserted patents, and that NOV contributory infringed all valid patent claims in the asserted patents.  The jury also found that Frank's accused products; the SuperTAWG, the FA-1 and the CRT 350, and OES's accused products, the CRT 350, infringe all valid patent claims in the asserted patents.  Damages were stipulated by the parties and the verdict is subject to entry of judgment and appeal.   On April 12, 2011, the Court ordered additional, limited discovery to be conducted before any further rulings will be issued.

In July 2006, we received a claim for withholding tax, penalties and interest related to payments over the periods from 2000 to 2004 in a foreign jurisdiction.  We disagree with this claim and are currently litigating this matter.  In February 2011, we received a favorable decision from a lower level court regarding payments made during 2000, which is subject to appeal.  During 2006, we accrued an estimated pre-tax exposure of $3.8 million and continue to accrue interest for this matter for a total accrual of $5.1 million as of June 30, 2011.

 
 
 
During the second quarter, we signed a definitive agreement to acquire 100% of the issued and outstanding stock of a private tubular services company in the Middle East.  The closing of the transaction is waiting on local regulatory approval.  We expect the transaction to close during the third quarter.   The purchase price for the company is approximately $17.0 million, exclusive of assumed debt of approximately $8.0 million.  

Other Contingencies
 
We are contingently liable under letters of credit and similar instruments that we enter into in connection with the importation of equipment to foreign countries and to secure our performance on certain contracts.  At June 30, 2011 and December 31, 2010, our total exposure under outstanding letters of credit was $9.2 million and $7.2 million.
 
Note 12—Segment Information
 
Business Segments
 
Our four business segments are: Top Drive, Tubular Services, CASING DRILLING and Research and Engineering. Our Top Drive segment is comprised of top drive sales, top drive rentals and after-market sales and service.  Our Tubular Services segment includes both our proprietary and conventional tubular services.  Our CASING DRILLING segment consists of our proprietary CASING DRILLING technology.  Our Research and Engineering segment is comprised of our internal research and development activities related to our proprietary tubular services and CASING DRILLING technology and top drive model development.

We measure the results of our business segments using, among other measures, each segment’s operating income, which includes certain corporate overhead allocations.  Overhead costs include field administration and operations support.  At a business segment level, we incur costs directly and indirectly associated with revenue.  Direct costs include expenditures specifically incurred for the generation of revenue, such as personnel costs on location or transportation, maintenance and repair, and depreciation of our revenue-generating equipment.

Certain sales and marketing activities, financing activities and corporate general and administrative expenses as well as other (income) expense and income taxes are not allocated to our business segments.

Goodwill is allocated to the business segment to which it specifically relates.  Our goodwill has been allocated to the Tubular Services segment.  We do not track or measure property, plant and equipment by business segment and, as such, this information is not presented.
 
Significant financial information relating to our business segments is presented below (in thousands):

   
Three Months Ended June 30, 2011
 
   
Top
Drive
   
Tubular
Services
   
CASING
DRILLING
   
Research &
Engineering
   
Corporate and
Other
   
Total
 
Revenue
  $ 78,568     $ 34,783     $ 3,927     $
    $
    $ 117,278  
Depreciation and amortization
    2,712       4,423       1,168       6       925       9,234  
Operating income (loss)
    21,657       2,496       (3,724 )     (2,403 )     (9,171     8,855  
Other expense (income)
                                            (1,546 )
Income before income taxes
                                          $ 10,401  
                                                 

   
Three Months Ended June 30, 2010
 
   
Top
Drive
   
Tubular
Services
   
CASING
DRILLING
   
Research &
Engineering
   
Corporate and
Other
   
Total
 
Revenue
  $ 53,488     $ 29,258     $ 2,809     $
    $
    $ 85,555  
Depreciation and amortization
    2,525       4,441       1,083       7       732       8,788  
Operating income (loss)
    13,040       1,666       (2,799 )     (1,917     (8,643     1,347  
Other expense (income)
                                            312  
Income before income taxes
                                          $ 1,035  
 
 

 
   
Six Months Ended June 30, 2011
 
   
Top
Drive
   
Tubular
Services
   
CASING
DRILLING
   
Research &
Engineering
   
Corporate and
Other
   
Total
 
Revenue
  $ 149,017     $ 67,071     $ 6,812     $
    $
    $ 222,900  
Depreciation and amortization
    5,338       8,998       2,315       18       1,832       18,501  
Operating income (loss)
    42,816       4,109       (6,837 )     (5,289 )     (18,428     16,371  
Other expense (income)
                                            (1,046
Income before income taxes
                                          $ 17,417  
                                                 
 
   
Six Months Ended June 30, 2010
 
   
Top
Drive
   
Tubular
Services
   
CASING
DRILLING
   
Research &
Engineering
   
Corporate and
Other
   
Total
 
Revenue
  $ 105,574     $ 60,555     $ 5,522     $
    $
    $ 171,651  
Depreciation and amortization
    4,916       9,049       2,112       13       1,477       17,567  
Operating income (loss)
    25,397       5,182       (5,563 )     (3,556 )     (17,075     4,385  
Other expense (income)
                                            107  
Income before income taxes
                                          $ 4,278  
                                                 

Geographic Areas
 
We attribute revenue to geographic regions based on the location of the customer.  Generally, for service activities, this will be the region in which the service activity occurs.  For equipment sales, this will be the region in which the sale transaction is complete and title transfers.  Our revenue by geographic area for the three and six months ended June 30, 2011 and 2010 was as follows (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
United States
  $ 39,514     $ 38,977     $ 81,882     $ 80,996  
South America
    15,470       9,626       31,619       16,510  
Canada
    14,733       8,436       26,442       15,444  
Russia
    14,648       6,865       24,442       9,860  
Asia Pacific
    13,966       7,134       24,031       17,678  
Mexico
    10,053       8,574       17,763       18,080  
Europe, Africa and Middle East
    8,894       5,943       16,721       12,955  
Total
  $ 117,278     $ 85,555     $ 222,900     $ 171,523  

Our physical location of our net property, plant and equipment by geographic area as of June 30, 2011 and 2010 was as follows (in thousands):

   
June 30,
2011
   
December 31,
2010
 
United States
  $ 59,090     $ 60,706  
Mexico
    29,707       29,582  
Asia Pacific
    21,840       22,137  
Russia
    21,755       21,583  
South America
    20,121       19,131  
Europe, Africa and Middle East
    16,114       16,083  
Canada
    14,976       13,464  
Total
  $ 183,603     $ 182,686  
                 




Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report.  This discussion contains forward-looking statements.  Please see “Caution Regarding Forward-Looking Information; Risk Factors” above and “Risk Factors” in Part II, Item IA below and in our 2010 Annual Report on Form 10-K, for a discussion of the uncertainties, risks and assumptions associated with these statements.
 
Overview and Outlook

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.

Business Environment

In 2010 and into 2011, oil and natural gas drilling activity increased significantly, from the downturn in prior years.  International rig count increased from 2010 levels and continues to improve in 2011.  One of the key indicators of our business is the number of active drilling rigs.  Below is a table that shows average rig count by region for the three and six months ended June 30, 2011 and 2010.
 
   
Three Months Average Rig Count(1)
       
Six Months Average Rig Count(1)
     
   
June, 30
   
June 30,
 
Increase (Decrease)
 
June 30,
 
June 30,
 
Increase (Decrease)
   
2011
   
2010
 
2010 to 2011
 
2011
 
2010
 
2010 to 2011
                                         
U.S.
   
1,830
     
1,508
     
322
     
21%
 
1,773
   
1,463
     
310
 
21%
Canada
   
188
     
166
     
22
     
13%
 
387
   
300
     
87
 
29%
Latin America(2)
   
417
     
394
     
23
     
6%
 
413
   
381
     
32
 
8%
Asia Pacific(3)
   
251
     
267
     
(16
)
   
(6%)
 
262
   
262
     
––
 
––
Middle East
   
291
     
256
     
35
     
14%
 
287
   
258
     
29
 
11%
Europe(4)
   
112
     
96
     
16
     
17%
 
115
   
92
     
23
 
25%
Africa
   
76
     
81
     
(5
)
   
(6%)
 
79
   
82
     
(3
)
(4%)
Worldwide
   
3,165
     
2,768
     
397
     
14%
 
3,316
   
2,838
     
478
 
17%
                                                     
(1)  Source:     Baker Hughes Incorporated worldwide rig count; averages are monthly.
(2)  Includes Mexico
(3)  Includes China
(4)  Includes Russia

Summary of Second Quarter and Six Months Ended June 30, 2011 and Operational Performance

During the second quarter of 2011, our Top Drive segment had a significant increase in the number of top drive units sold and rental days compared to the same period in 2010.  Our Tubular Services segment operating income has improved in the second quarter of 2011 as compared to the first quarter of 2011 and the second quarter of 2010. This segment is recovering from lower activity in the Gulf of Mexico as the industry recovers from the drilling moratorium imposed in 2010 and extreme winter weather conditions that slowed North America operations in the first quarter of 2011. Our proprietary tubular services offering continues to gain market acceptance and we remain committed to growing this segment as we believe that every rig with a top drive will eventually convert to running casing with an automated system, such as our CDS system.  We also invested in new and enhanced product and service offerings in our Research and Engineering segment.  We believe that our financial condition has improved significantly over the past year, as demonstrated by the following:
 
 

 
·  
Increased revenue from $85.6 million in the second quarter of 2010 to $117.3 million in the second quarter of 2011 and from $171.7 million to $222.9 million for the six months ended 2010 and 2011, respectively;
·  
Increased operating income from $1.3 million in the second quarter of 2010 to $8.9 million in the second quarter of 2011 and from $4.4 million to $16.4 million for the six months ended 2010 and 2011, respectively;
·  
Growth in our top drive backlog from 22 units with potential revenue value of $28.4 million at June 30, 2010 to 67 units with potential revenue value of $75.1 million at June 30, 2011;
·  
We remained debt-free as all cash requirements were funded from cash provided by operating activities; and
·  
Although operating activities provided less cash and cash equivalents to fund operating activities during the second quarter of 2011 as compared to the same period in 2010, we built inventory in order to meet anticipated customer demand.

 Outlook for 2011

The current outlook for the global economy varies widely, but we believe that most indicators point towards a continued improvement in 2011 in the oil and natural gas industry. 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, 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 (including Mexico)
    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 uncertain; however, in each of our revenue generating segments, we anticipate moderately improved activity in 2011, as follows:

·  
Top Drive - Based upon existing drilling and bidding levels, current economic forecasts and the size of our product sale backlog, we expect our top drive order rate and rental activity to continue to moderately increase in 2011.   We consider a product sale as backlog when the customer has signed a purchase contract, submitted the purchase order and, if required by the purchase agreement, has 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 outstanding new unit sales backlog was 67 units at June 30, 2011, compared to 43 units at March 31, 2011 and 25 units at December 31, 2010.   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 that 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 running business to continue to grow moderately in 2011 and our conventional casing running activities to show slight improvement as the market recovers.  We will continue to expand our proprietary casing service offerings, particularly in the major unconventional shale regions in North America and selected international locations. Furthermore, we expect drilling activity in the Gulf of Mexico to gradually increase in 2011, which should increase demand for our MCLRS proprietary services.

·  
CASING DRILLING – We expect improvement in our CASING DRILLING revenue and operating results in 2011 based on signed contracts and current bidding activity.




Operating Results

Below is a summary of our operating results for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):

   
Three Months Ended June 30,
   
Increase/Decrease
 
Six Months Ended June 30,
   
Increase/Decrease
   
2011
   
2010
 
2010 to 2011
 
2011
   
2010
   
2010 to 2011
(in thousands, except percentages)
                                 
Segment revenue
                                     
Top Drive
 
$
78,568
 
$
53,488
   
$
25,080
 
47%
 
$
149,017
   
$
105,574
   
$
43,443
 
41%
Tubular Services
   
34,783
   
29,258
     
5,525
 
19%
   
67,071
     
60,555
     
6,516
 
11%
CASING DRILLING
   
3,927
   
2,809
     
1,118
 
40%
   
6,812
     
5,522
     
1,290
 
23%
Consolidated revenue
 
$
117,278
 
$
85,555
   
$
31,723
 
37%
 
$
222,900
   
$
171,651
   
$
51,249
 
30%
                                                   
Segment operating income (loss)
                                           
Top Drive
 
$
21,657
 
$
13,040
   
$
8,617
 
66%
 
$
42,816
   
$
25,397
   
$
17,419
 
69%
Tubular Services
   
2,496
   
1,666
     
830
 
50%
   
4,109
     
5,182
     
(1,073
)
(21%)
CASING DRILLING
   
(3,724
)
 
(2,799
)
   
(925
)
(33%)
   
(6,837
)
   
(5,563
)
   
(1,274
)
(23%)
Research & engineering
   
(2,403
)
 
(1,917
)
   
(486
)
(25%)
   
(5,289
)
   
(3,556
)
   
(1,733
)
(49%)
Corporate and other
   
(9,171
)
 
(8,643
)
   
(528
)
(6%)
   
(18,428
)
   
(17,075
)
   
(1,353
)
(8%)
Consolidated operating income
   
8,855
   
1,347
     
7,508
 
557%
   
16,371
     
4,385
     
11,986
 
273%
Other expense (income)
   
(1,546
)
 
312
     
(1,858
)
(596%)
   
(1,046
)
   
107
     
(1,153
)
(1078%)
Income tax provision
   
3,012
   
334
     
2,678
 
802%
   
5,711
     
1,372
     
4,339
 
316%
Net income
 
$
7,389
 
$
701
   
$
6,688
 
954%
 
$
11,706
   
$
2,906
   
$
8,800
 
303%
 
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 operating results and metrics for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
   
Three Months Ended June 30,
   
Increase/Decrease
 
Six Months Ended June 30,
   
Increase/Decrease
   
2011
   
2010
     2010 to 2011  
2011
   
2010
      2010 to 2011
                                         
Top Drive revenue
                                       
Sales
 
$
30,953
   
$
17,864
   
$
13,089
 
73%
 
$
55,915
   
$
34,940
   
$
20,975
 
60%
Rental services
   
34,652
     
24,822
     
9,830
 
40%
   
67,908
     
48,949
     
18,959
 
39%
After-market sales and services
   
12,963
     
10,802
     
2,161
 
20%
   
25,194
     
21,685
     
3,509
 
16%
   
$
78,568
   
$
53,488
   
$
25,080
 
47%
 
$
149,017
   
$
105,574
   
$
43,443
 
41%
                                                     
Top Drive operating income
 
$
21,657
   
$
13,040
   
$
8,617
 
66%
 
$
42,816
   
$
25,397
   
$
17,419
 
69%
                                                     
Number of top drive sales:
                                                   
New
   
21
     
10
     
11
 
110%
   
38
     
22
     
16
 
73%
Used or consignment
   
3
     
3
     
 
   
4
     
5
     
(1
)
(20%)
     
24
     
13
     
11
 
85%
   
42
     
27
     
15
 
56%
End of period number of top drives in rental fleet:
   
128
     
122
     
6
 
5%
   
128
     
122
     
6
 
5%
Rental operating days(a)
   
7,039
     
5,524
     
1,515
 
27%
   
13,909
     
10,897
     
3,012
 
28%
Average daily operating rate
 
$
4,923
   
$
4,493
   
$
430
 
10%
 
$
4,882
   
 $
4,492
   
$
390
 
9%

 (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 increase in revenue for the three and six months ended June 30, 2011 compared to the same period in 2010 is due to an increase in the number of units sold during the respective periods.  The average active rig count increased for the first and second quarters of 2011 by 21% and 14%, respectively, from the same period in 2010 as the oil and natural gas drilling activity continues its recovery from the past two years.  Additionally, top drive sales have increased due to new rig build activity necessary to meet global drilling demand.

The 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 or consignment units was $1.9 million and $3.2 million during the three months ended June 30, 2011 and 2010 and $2.6 million and $4.6 million for the six months ended June 30, 2011 and 2010, respectively.

Top Drive rental services revenue — The increase in revenue for the three and six months ended June 30, 2011 compared to the same periods in 2010 is due to improved operating days, utilization rates and a slightly larger rental fleet during the respective periods.   The average active rig count increased for the first and second quarters of 2011 by 21% and 14%, respectively, from the same period in 2010 as the oil and natural gas drilling activity continues its recovery from the past two years.

Top Drive after-market sales and services revenue — Revenue for the three and six months ended June 30, 2011 have improved when compared to the same periods in 2010 as we recover lost business experienced in 2009 and 2010 due to the industry downturn and as a result of a larger installed base of top drives.

Top Drive operating income — The increase in Top Drive operating income for the three and six months ended June 30, 2011 as compared to the same periods in 2010 is due to higher revenue for Top Drive sales, rental services, and after-market sales and services discussed above as well as improved margins as the oil and natural gas drilling activity continues to recover from the severe downturn of 2009.

Tubular Services Segment

Our Tubular Services business segment includes both proprietary and conventional casing running 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 operating results and metrics for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages and number of jobs):
 
   
Three Months Ended June 30,
   
Increase/Decrease
 
Six Months Ended   June 30,
   
 Increase/Decrease
   
2011
   
2010
   
2010 to 2011
 
2011
   
2010
   
2010 to 2011
                                         
Tubular Services revenue
                                           
Proprietary
 
$
29,230
   
$
24,910
   
$
4,320
     
17%
 
$
53,758
   
$
50,698
   
$
3,060
     
6%
Conventional
   
5,553
     
4,348
     
1,205
     
28%
   
13,313
     
9,857
     
3,456
     
35%
   
$
34,783
   
$
29,258
   
$
5,525
     
19%
 
$
67,071
   
$
60,555
   
$
6,516
     
11%
                                                             
Tubular Services operating income
 
$
2,496
   
$
1,666
   
$
830
     
50%
 
$
4,109
   
$
5,182
   
$
(1,073
)
   
(21%)
                                                             
Number of proprietary jobs
   
914
     
783
     
131
     
17%
   
1,734
     
1,580
     
154
     
10%
                                                             
 
The increase in Tubular Services revenue for the three and six months ended June 30, 2011 compared to the same periods in 2010 is due to increased demand for tubular services from customers active in shale gas exploration and production in the United States and Canada.  A significant amount of current U.S. drilling activity is in shale formations that require directional and horizontal drilling techniques, which we believe are good applications for our proprietary service offerings. These increases were partially offset by declines in our MCLRS proprietary tubular services of $1.1 million and $3.6 million for the three and six months ended June 30, 2011 compared to the same periods in 2010 due to the Deepwater Horizon explosion, the temporary Gulf of Mexico drilling moratorium and the resulting negative impact on the deepwater drilling permitting process as described in Part II, Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations” in our 2010 Annual Report on Form 10-K.
 
 
 
 
Tubular Services operating income increased by 50% and decreased by 21% for the three months and six months ended June 30, 2011, respectively, as compared to the same periods in 2010 despite the 19% and 11% increases in segment revenue for the same periods in 2010.  The differences for the three and six months periods ended June 30, 2011 as compared to the same periods in 2010 are a result of the difference in margins between the MCLRS work lost due to the Deepwater Horizon explosion in April 2010 and temporary moratorium and the less profitable on-shore work that increased during the same period.  In addition, inclement cold weather in a large portion of the United States during the first quarter 2011 negatively impacted our Tubular Services margins. 

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 with conventional drilling include a reduction in the risk of unscheduled downhole events that typically result in non-productive time and additional cost and operational risk to the drilling contractor and well operator.  Below is a summary of our operating results for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
   
Three Months Ended June 30,
   
Increase/Decrease
 
Six Months Ended June 30,
   
Increase/Decrease
   
2011
   
2010
   
2010 to 2011
 
2011
   
2010
   
2010 to 2011
                                     
CASING DRILLING revenue
 
$
3,927
   
$
2,809
   
$
1,118
 
40%
 
$
6,812
   
$
5,522
   
$
1,290
 
23%
CASING DRILLING operating loss
 
$
(3,724
)
 
$
(2,799
)
 
$
(925
)
(33%)
 
$
(6,837
)
 
$
(5,563
)
 
$
(1,274
)
(23%)
 
 
CASING DRILLING revenue for the three and six months ended June 30, 2011 improved over the same periods in 2010 due to improved demand for our services from multi-well contracts.

CASING DRILLING operating loss increased for the three and six months ended June 30, 2011 compared to the same periods in 2010 despite revenue in those periods increasing due to our increased investment in personnel and other infrastructure. We believe that demand for our CASING DRILLING services will improve during 2011 based on signed contracts and current bidding activity, which necessitated the increased investment in advance of that activity.

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 expect slightly improved operating results for CASING DRILLING for the remainder of 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 were 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 June 30, 2011 our CASING DRILLING long-lived assets had a net book value of approximately $13.8 million.  We believe that our CASING DRILLING business will be profitable in the future and will become a more valuable and significant part of our operations.  Accordingly, we will continue to invest in our 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 three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
 
 
 
   
Three Months Ended June 30,
   
 
 Increase/Decrease
 
Six Months Ended June 30,
   
 
 Increase/Decrease
   
2011
   
2010
   
2010 to 2011
 
2011
   
2010
   
2010 to 2011
                                         
Research and engineering expense
 
$
2,403
   
$
1,917
   
$
486
     
25%
 
$
5,288
   
$
3,556
   
$
1,732
     
49%
                                                             
 
Research and engineering expenses increased during the three and six months ended June 30, 2011 as compared to the same periods in 2010 as we continue to invest in the development, commercialization and enhancements of our proprietary technologies. Specifically, we have increased our headcount and incurred additional costs for engineering, prototype construction and training.

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 expenses for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
   
Three Months Ended June 30,
   
 
 Increase/Decrease
 
Six Months Ended June 30,
   
 Increase/Decrease
   
2011
   
2010
   
2010 to 2011
 
2011
   
2010
   
2010 to 2011
                                     
Corporate and other expenses
 
$
9,171
   
$
8,643
   
$
528
 
6%
 
$
18,428
   
$
17,075
   
$
1,353
 
8%
Corporate and other expenses as a % of revenue
   
8%
     
10%
         
(2%)
   
8%
     
10%
         
(2%)
                                                     

The increase in corporate and other expenses is due to increased taxes other than income taxes and increased incentive stock compensation expense.  Taxes other than income taxes increased by $0.3 million and $1.2 million for the three and six months ended June 30, 2011 as compared to the same periods in 2010 due to a one-time net-worth tax assessed by the Colombian government as of January 1, 2011 of $0.7 million as well as increased property taxes in the U.S. Incentive stock compensation expense increased by $0.2 million and $1.1 million for the three and six months ended June 30, 2011, respectively as compared to the same periods in 2010 due to an increase in the amount  of restricted stock and options granted to our employees in 2010.

Other Expense (Income)

Below is a summary of our other expense (income) for the three and six months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
   
Three Months Ended June 30,
   
Increase/Decrease
 
Six Months Ended June 30,
   
 
 Increase/Decrease
   
2011
   
2010
   
2010 to 2011
 
2011
   
2010
   
2010 to 2011
                                     
Other expense (income)
                                       
Interest expense
 
$
798
   
$
196
   
$
602
 
307%
 
$
1,084
   
$
251
   
$
833
 
332%
Interest income
   
(2,482
)
   
(73
)
   
(2,409
)
(3300%)
   
(2,482
)
   
(95
)
   
(2,387
)
(2513%)
Foreign exchange losses
   
697
     
45
     
652
 
1449%
   
883
     
165
     
718
 
435%
Other expense (income)
   
(559
)
   
144
     
(703
)
nm
   
(531
)
   
(214
)
   
(317
)
nm
Total other expense (income)
 
$
(1,546
)
 
$
312
   
$
(1,858
)
(596%)
 
$
(1,046
)
 
$
107
   
$
(1,153
)
(1078%)
 
nm ––
Percentage is not meaningful
 
The significant increase in other income for the three and six months ended June 30, 2011 as compared to the same periods in 2010 is due to a refund received from the Mexican tax authorities during the second quarter of 2011 as described in Note 10.   We have included $2.4 million in interest income, $0.6 million in other income, partially offset by $0.4 million of interest expense related to this refund.
 
 
 
 
In addition, we incur interest expense for a commitment fee under our revolving credit facility – see Item 2, Liquidity and Capital Resources, included in this Quarterly Report on Form 10-Q.  We paid all outstanding amounts owed under our credit facility in the first quarter of 2010 and following such payment and have remained debt-free.

Foreign exchange losses are due to fluctuations in the valuation of the U.S. dollar compared to other currencies we transact in around the world, including the Canadian dollar, Argentinean pesos, Mexican pesos, Russian rubles, Euros, and Singapore dollars, among others.  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 the three and six months ended June 30, 2011 and 2010. 

  Income Tax Provision
 
   
Three Months Ended June 30,
   
Increase/Decrease
 
Six Months Ended June 30,
   
Increase/Decrease
   
2011
   
2010
   
2010 to 2011
 
2011
   
2010
   
2010 to 2011
                                 
Effective income tax rate
   
29.0%
     
32.3%
     
(3.3%)
     
32.8%
     
32.1%
     
0.7%
 
                                                 
 
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 a resident for income tax purposes.  Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, increased for the three and six months ended June 30, 2011 compared to the same periods in 2010 due to the fluctuating mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world.
 
 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.
 
Our net cash position at June 30, 2011 and December 31, 2010 was as follows (in thousands):

             
   
June 30,
2011
   
December 31,
2010
 
Cash
 
$
41,330
   
$
60,603
 
Long term debt
   
     
 
Net cash
 
$
41,330
   
$
60,603
 
                 

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.

We have a credit agreement which was entered into in 2007 and has since been amended several times (“credit facility”).  Our credit facility is maintained by a syndicate of seven banks, and we are not aware of any insolvency issues with respect to any of our syndicate banks.  Our credit facility originally had a term loan, which was paid in full in 2009, and a revolving line of credit of $100 million including up to $15 million of swingline loans (collectively, the “Revolver”), which was amended to increase the line of credit to $145 million in December 2007.  Our credit facility has a term of five years and all outstanding borrowings on the Revolver are due and payable on June 5, 2012.  Amounts available under the Revolver are reduced by letters of credit issued under our credit facility, not to exceed $20 million in the aggregate of all undrawn amounts and amounts that have yet to be disbursed under all existing letters of credit.  Amounts available under the swingline loans may also be reduced by letters of credit or by means of a credit to a general deposit account of the applicable borrower.
 
 
 
 
Our credit facility contains covenants that we consider usual and customary for an agreement of this type, including a leverage ratio, a minimum net worth, a quarterly capital expenditure limitation, and a fixed charge coverage ratio.  The credit facility prohibits incurring any additional indebtedness outside the existing credit facility in excess of $15 million, paying cash dividends to shareholders and contains other restrictions, which are standard to the industry. The credit facility is secured by substantially all our assets.  All of our direct and indirect material subsidiaries in the United States and Canada are guarantors of any borrowings under the credit facility.  As of June 30, 2011, our capital expenditures are limited to the lesser of $75 million or 100% of consolidated EBITDA (as defined in the credit facility) plus the net cash proceeds from asset sales for the four then most recent quarters.

The availability of future borrowings may be limited in order to maintain certain financial ratios required under the covenants. As of June 30, 2011, we had no outstanding borrowings, $9.2 million in letters of credit outstanding, and $135.8 million available under the Revolver.  We were in compliance with our bank covenants at June 30, 2011.

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 six months ended June 30, 2011 and 2010.

Operating Activities – Net cash provided by operating activities is our primary source of capital and liquidity.  Net cash used in operating activities was $0.5 million for the six months ended June 30, 2011 compared to net cash provided by operating activities of $19.5 million during the same period in 2010.  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 $33.4 million and $21.6 million of cash during the six months ended June 30, 2011 and 2010, respectively.  The net change in working capital and other balance sheet accounts used $33.9 million in the six months ended June 30, 2011 compared to providing $3.1 million during the same period in 2010, primarily due to cash outlays for inventory purchases to support increasing business activity as well as increasing accounts receivable as a result of our increased activity levels derived from the continued recovery in the economy and the oil and natural gas drilling activities in general.  Although operating activities provided less cash and cash equivalents to fund operating activities during the second quarter of 2011 as compared to the same period in 2010, we did so primarily to build inventory in order to meet anticipated customer demand.

Investing Activities – Net cash used for investing activities was $19.3 million during the six months ended June 30, 2011 compared to $9.1 million during the same period of 2010.  Our capital expenditures of $19.4 million increased by $5.3 million, or 38% during the six months ended June 30, 2011 compared to same period in 2010 to meet projected demand for our products and services as a result of the continued moderate economic recovery. 

Financing Activities – Net cash provided by financing activities was $0.5 million during the six months ended June 30, 2011 compared to net cash used in financing activities of $8.7 million for the same period in 2010.  During the first quarter of 2010, we used $8.6 million of cash to repay our debt and have not borrowed any amounts under our revolving credit facility since that time. 

 We also monitor the creditworthiness and ability of our customers to obtain financing in order to mitigate any adverse impact on our revenue, cash flows and earnings.

Manufacturing Purchase Commitments

Our manufacturing purchase commitments, which represent executed purchase orders that have been submitted to the respective vendor, have risen from $36.6 million as of December 31, 2010 to $66.1 million as of June 30, 2011.  This increase of $29.5 million, or 81%, is driven by increased customer demand for our products and services, as demonstrated by our backlog increasing from 25 units as of December 31, 2010 to 67 units as of June 30, 2011.

Off-Balance Sheet Arrangements

As of June 30, 2011, we have no off-balance sheet arrangements other than the manufacturing purchase commitments and letters of credit described above, and future interest payments on the aggregate unused commitments under our revolving credit facility and lease commitments as described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2010 Annual Report on Form 10-K.
 
 
 
 
Critical Accounting Estimates and Policies
 
Our accounting policies are described in the notes to our audited consolidated financial statements included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2010 Annual Report on Form 10−K.  We prepare our unaudited condensed consolidated financial statements in conformity with U.S. GAAP.  Our results of operations and financial condition, as reflected in our unaudited condensed consolidated financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of our business and customers.  We believe that the most critical accounting policies in this regard are those described in our 2010 Annual Report on Form 10−K.  While these issues require us to make judgments that are subjective, they are generally based on a significant amount of historical data and current market data.  There have been no material changes or developments in authoritative accounting pronouncements or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be critical accounting policies and estimates as disclosed in our 2010 Annual Report on Form 10−K.
 
Quantitative and Qualitative Disclosures About Market Risk.
 
The carrying value of cash, investments in short-term commercial paper and other money market instruments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short-term period to maturity of the instruments.
 
The fair value of our long term debt depends primarily on current market interest rates for debt issued with similar maturities by companies with risk profiles similar to us.  We had no outstanding debt under our credit facility at June 30, 2011.
 
Our accounts receivable are principally with oil and natural gas service and exploration and production companies and are subject to normal industry credit risks.  Please see Part I, Item 1A—“Risk Factors” in our 2010 Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us.

There have been no material changes in the market risk factors since December 31, 2010.

Controls and Procedures.
 
Material Weakness Previously Disclosed

As discussed in our 2010 Annual Report on Form 10-K, we did not maintain effective control over accounting for income taxes with respect to non-routine and atypical transactions as of December 31, 2009.  During 2010, we noted the previously reported control deficiency surrounding our income tax provision was not isolated solely to non-routine and atypical transactions but more broadly affects the completeness and accuracy of our world-wide provision for income taxes.  Accordingly, our management concluded we did not maintain effective control over accounting for income taxes as of December 31, 2010.  Specifically, our internal control to review our local country tax returns and return to provision calculations and analysis was not operating with the level of rigor and precision necessary to ensure the accounting for our income tax provision and deferred tax balances was being completely and accurately recorded on a timely basis.  This control deficiency resulted in the identification of several immaterial errors impacting the income tax provision and deferred tax balances related to prior period financial statements.  Although these errors did not result in the restatement of our previously filed consolidated financial statements, this control deficiency could result in the misstatement of income tax accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.  Accordingly, our management has determined the previously reported control deficiency continues to exist, although it more broadly affects our income tax provision and disclosures, and therefore this control deficiency continues to constitute a material weakness as of June 30, 2011. The controls over our tax provision process occur on an annual basis and will not be tested again until year-end.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the SEC reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  As of June 30, 2011, our Chief Executive Officer and Chief Financial Officer participated with our management in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2011, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting related to income taxes.  Because of this material weakness, we performed additional procedures to ensure that our unaudited condensed consolidated financial statements as of and for the quarter ended June 30, 2011 were fairly presented in all material respects in accordance with U.S. GAAP.
 

 
 
Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Remediation Plan

We continue to take action in remediating the material weakness identified by our management by thoroughly reviewing the tax provision process and existing controls to identify areas in need of improvement and to increase the efficiency and effectiveness of our internal controls over the accounting for income taxes.  Specifically, management believes personnel additions in our tax department in 2010 and 2011 and their timely and diligent execution of existing controls related to the preparation and review of our local country tax accrual, tax returns and return to provision calculations and analysis should remediate the existing material weakness.

 We are committed to continuing to improve our internal control processes and will continue to review our financial reporting controls and procedures.  As we continue to evaluate and work to improve our internal control over financial reporting, we may identify additional measures to address the material weakness or determine to modify certain of the remediation procedures described above.  Our management, with the oversight of our audit committee, will continue to take steps to remedy the known material weakness as expeditiously as possible and enhance the overall design and capability of our control environment. 



 
PART II—OTHER INFORMATION
 
Legal Proceedings.
 
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries.  None of these proceedings involves a claim for damages exceeding ten percent of our current assets on a consolidated basis.  See Part I, Item 3—“Legal Proceedings” in our 2010 Annual Report on Form 10-K and Part I, Item 1—“Financial Statements and Supplementary Data”, Note 10 of this Quarterly Report on Form 10-Q for a summary of our ongoing legal proceedings.

Risk Factors.
 
See Part I, Item 1A—Risk Factors in our 2010 Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us.  There have been no material changes in the risk factors described in Part I, Item 1A—Risk Factors disclosed in our 2010 Annual Report on Form 10-K.
 
Exhibits.
 
The Exhibit Index set forth below is incorporated herein by reference.




SIGNATURE
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
 
TESCO CORPORATION
     
 
By:
/s/    JULIO M. QUINTANA        
   
Julio M. Quintana,
President and Chief Executive Officer
   
 
Date:   August 9, 2011
   
 
TESCO CORPORATION
     
 
By:
/s/    ROBERT L. KAYL        
   
Robert L. Kayl,
Senior Vice President and Chief Financial Officer
   
 
Date:   August 9, 2011
 



 
EXHIBIT INDEX
 
     
Exhibit No.
 
Description
3.1*
 
Articles of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated by reference to Exhibit 4.1 to Tesco Corporation’s Registration Statement on Form S-8 (File No. 333-139610) filed with the SEC on December 22, 2006)
     
3.2*
 
Amended and Restated By-laws of Tesco Corporation (incorporated by reference to Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22, 2007)
     
4.1*
 
Form of Common Share Certificate for Tesco Corporation (incorporated by reference to Exhibit 4.3 to Tesco Corporation’s Registration Statement on Form S-8 filed with the SEC on November 13, 2008)
     
4.2*
 
Amended and Restated Shareholder Rights Plan Agreement by and between Tesco Corporation and Computershare Trust Corporation of Canada, dated June 6, 2011 and effective as of May 4, 2011 (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on June 3, 2011)
     
31.1
 
Rule 13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation
     
31.2
 
Rule 13a-14(a)/15d-14(a) Certification, executed by Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation
     
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation and Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation
 
 
 
 
 
 
*
Incorporated by reference to the indicated filing

 
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