TESCO CORP - FORM 10-Q - November 7, 2016

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

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2016
o 
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

teso1q2015a01a03.jpg
Tesco Corporation
(Exact name of registrant as specified in its charter)

Alberta
76-0419312
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
11330 Clay Road
Suite 350
Houston, Texas
77041
(Address of Principal Executive Offices)
(Zip Code)
713-359-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   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   o
Accelerated Filer   x
Non-Accelerated Filer   o
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 common shares outstanding as of October 31, 2016:   46,403,938


TABLE OF CONTENTS
 
 

This report contains trademarks of Tesco Corporation and its subsidiaries, including TESCO®, Casing Drive System™, CDS™, Multiple Control Line Running System™, MCLRS™, OCSET™, MLT™, TESCO DESIGN™, Tescosity™, TescoCorpTM, TesTorkTM, ARCFitTM, TescomationTM, ARCTorkTM, ARCSlideTM, ARCGuideTM, Compact Casing Drive SystemTM, CCDSTM and WarthogTM. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

In this Report, the terms "Tesco Corporation", "TESCO", "we", "us", "our", "ours", or "the Company" refers to Tesco Corporation and all of our subsidiaries.


Caution Regarding Forward-Looking Information; Risk Factors
 
This report for the quarter ended September 30, 2016 ("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 are based on current beliefs as well as assumptions made by, and information currently available to, management 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 they were 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 forward-looking statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements.
 
These risks and uncertainties include, but are not limited to, the impact of: levels and volatility of oil and gas prices; cyclical nature of the energy industry and credit risks of our customers; fluctuations of our revenue and earnings; operating hazards inherent in our operations; changes in governmental regulations, including those related to the climate and hydraulic fracturing; consolidation or loss of our customers; the highly competitive nature of our business; technological advancements and trends in our industry, and improvements in our competitors’ products; global economic and political environment, and financial markets; terrorist attacks, natural disasters and pandemic diseases; our presence in international markets, including political or economic instability, currency restrictions and trade and economic sanctions; cybersecurity incidents; protecting and enforcing our intellectual property rights; changes in, or our failure to comply with, environmental regulations; restrictions under our credit facility that that may limit our ability to finance future operations or capital needs and could accelerate our debt payments; failure of our manufactured products and claims under our product warranties; availability of raw materials, component parts and finished products to produce our products, and our ability deliver the products we manufacture in a timely manner; retention and recruitment of a skilled workforce and key employees; and ability to identify and complete acquisitions. 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 through SEDAR at www.sedar.com.  Our U.S. public filings are available through 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, 2015 ("2015 Annual Report on Form 10-K") 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 risk factors, nor to assess the impact such risk factors might have on our business or the extent to which any factor or combination of risk 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
(in thousands)
 
 
September 30,
2016
 
December 31,
2015
Assets
(unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
90,127

 
$
51,507

Accounts receivable trade, net of allowance for doubtful accounts of $8,422 and $8,894 as of September 30, 2016 and December 31, 2015, respectively
38,882

 
64,270

Inventories, net
80,540

 
95,459

Income taxes recoverable
6,281

 
7,656

Prepaid and other current assets
16,155

 
17,594

Total current assets
231,985

 
236,486

Property, plant and equipment, net
125,556

 
177,716

Deferred income taxes
—

 
598

Intangible and other assets, net
4,542

 
6,894

Total assets
$
362,083

 
$
421,694

Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 

 
 

Accounts payable
11,808

 
14,332

Deferred revenue
3,837

 
4,382

Warranty reserves
602

 
893

Income taxes payable
1,147

 
1,430

Accrued payroll and benefits
6,464

 
12,448

Accrued taxes other than income taxes
4,541

 
4,173

Other current liabilities
2,908

 
5,255

Total current liabilities
31,307

 
42,913

Other liabilities
1,659

 
2,239

Deferred income taxes
1,141

 
1,588

Total liabilities
34,107

 
46,740

Commitments and contingencies


 


Shareholders’ equity
 

 
 

Common shares; no par value; unlimited shares authorized; 46,404 and 39,218 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
263,184

 
212,383

Retained earnings
29,291

 
127,070

Accumulated other comprehensive income
35,501

 
35,501

Total shareholders’ equity
327,976

 
374,954

Total liabilities and shareholders’ equity
$
362,083

 
$
421,694

 
 
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
 
 
 
 
 
 
 
Products
$
10,236

 
$
18,111

 
$
35,680

 
$
71,736

Services
20,179

 
43,286

 
63,774

 
155,782

 Total revenue
30,415

 
61,397

 
99,454

 
227,518

Operating expenses
 
 
 
 
 
 
 
Cost of sales and services
 
 
 
 
 
 
 
Products
16,965

 
20,784

 
47,068

 
72,073

Services
27,363

 
44,890

 
87,783

 
153,637

 
44,328

 
65,674

 
134,851

 
225,710

Selling, general and administrative
6,725

 
9,366

 
20,691

 
29,898

Long-lived asset impairments
—

 
—

 
35,514

 
—

Research and engineering
1,248

 
2,076

 
4,258

 
6,985

Total operating expenses
52,301

 
77,116

 
195,314

 
262,593

Operating loss
(21,886
)
 
(15,719
)
 
(95,860
)
 
(35,075
)
Other expense (income)
 
 
 
 
 
 
 
Interest expense
196

 
271

 
850

 
843

Interest income
(42
)
 
(56
)
 
(471
)
 
(96
)
Foreign exchange loss
352

 
1,951

 
1,537

 
6,506

Other expense (income)
233

 
118

 
260

 
(229
)
Total other expense
739

 
2,284

 
2,176

 
7,024

Loss before income taxes
(22,625
)
 
(18,003
)
 
(98,036
)
 
(42,099
)
Income tax provision (benefit)
(556
)
 
1,899

 
(257
)
 
13,545

Net loss
$
(22,069
)
 
$
(19,902
)
 
$
(97,779
)
 
$
(55,644
)
Loss per share:
 
 
 
 
 
 
 
Basic
$
(0.48
)
 
$
(0.51
)
 
$
(2.33
)
 
$
(1.43
)
Diluted
$
(0.48
)
 
$
(0.51
)
 
$
(2.33
)
 
$
(1.43
)
Dividends declared per share:
 
 
 
 
 
 
 
Basic
$
—

 
$
0.05

 
$
—

 
$
0.15

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
46,382

 
39,005

 
42,039

 
38,981

Diluted
46,382

 
39,005

 
42,039

 
38,981



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


2

TESCO CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net loss
$
(97,779
)
 
$
(55,644
)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
22,516

 
29,146

Stock compensation expense
3,247

 
2,962

Bad debt expense
514

 
52

Deferred income taxes
152

 
8,937

Amortization of financial items
406

 
229

Loss on sale of operating assets
(616
)
 
(728
)
Long-lived asset impairments
35,514

 
—

Changes in the fair value of contingent earn-out obligations
(74
)
 
(597
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable trade, net
24,780

 
52,790

Inventories, net
14,919

 
679

Prepaid and other current assets
3,164

 
2,767

Accounts payable and accrued liabilities
(12,668
)
 
(29,313
)
Income taxes recoverable
608

 
(9,750
)
Other non-current assets and liabilities, net
(228
)
 
(1,663
)
Net cash used in operating activities
(5,545
)
 
(133
)
Investing Activities
 
 
 
Additions to property, plant and equipment
(4,529
)
 
(12,304
)
Proceeds on sale of operating assets
2,865

 
780

Other, net
226

 
1,793

Net cash used in investing activities
(1,438
)
 
(9,731
)
Financing Activities
 
 
 
Repayments of debt
—

 
(25
)
Proceeds from exercise of stock options
—

 
111

Dividend distribution
—

 
(5,849
)
Proceeds from stock issuance
47,918

 
—

Stock issuance costs
(364
)
 
—

Restricted cash used as collateral for outstanding letters of credit
(1,951
)
 
—

Net cash provided by (used in) financing activities
45,603

 
(5,763
)
Change in cash and cash equivalents
38,620

 
(15,627
)
Cash and cash equivalents, beginning of period
51,507

 
72,466

Cash and cash equivalents, end of period
$
90,127

 
$
56,839

Supplemental cash flow information
 
 
 
Cash payments for interest
$
355

 
$
396

Cash payments for income taxes, net of refunds
1,350

 
17,418

Property, plant and equipment accrued in accounts payable
2,329

 
1,920


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

3


TESCO CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands)


 
Common stock shares
 
Common shares
 
Retained earnings
 
Accumulated other comprehensive income
 
Total
 
For the nine months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Balances at December 31, 2015
39,218

 
$
212,383

 
$
127,070

 
$
35,501

 
$
374,954

Net loss
—

 
—

 
(97,779
)
 
—

 
(97,779
)
Stock issuance, net of issue costs
7,131

 
47,554

 
—

 
—

 
47,554

Stock compensation related activity
55

 
3,247

 
—

 
—

 
3,247

Balances at September 30, 2016
46,404

 
$
263,184

 
$
29,291

 
$
35,501

 
$
327,976

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Balances at December 31, 2014
38,949

 
$
208,999

 
$
268,627

 
$
35,501

 
$
513,127

Net loss
—

 
—

 
(55,644
)
 
—

 
(55,644
)
Dividends declared
—

 
—

 
(5,849
)
 
—

 
(5,849
)
Stock compensation related activity
57

 
2,615

 
—

 
—

 
2,615

Balances at September 30, 2015
39,006

 
$
211,614

 
$
207,134

 
$
35,501

 
$
454,249

 

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


4

TESCO CORPORATION
 
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1—Nature of Operations and Basis of Preparation
 
Nature of Operations

Tesco Corporation a global leader in the design, assembly, and service delivery of technology-based solutions for the upstream energy industry. The Company seeks to change the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for, and producing, oil and natural gas. Product and service offerings consist mainly of equipment sales and services to major oil and natural gas service companies and exploration and production operating companies throughout the world.

Basis of Presentation
 
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. All references to $ are to U.S. dollars.

Note 2—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 2015 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-16, Income Taxes (Topic 740). The standard improves the accounting for income tax consequences of intra-entry transfers of assets other than inventory. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The amendments in this ASU should be applied using a modified retrospective approach. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures, but the impact is not expected to be material.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The standard addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practices. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The amendments in this ASU should be applied using a retrospective approach. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures, but the impact is not expected to be material.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), which requires income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It will also allow an employer to repurchase more of an employees' shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The update will be effective January 1, 2017. Early adoption is permitted. The adoption of the standard is not expected to have a material effect on the financial position, results of operations, or disclosures in notes to consolidated financial statements of the Company.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. It will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The update will be effective January 1, 2019. Early adoption is permitted. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.


5

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update will be effective January 1, 2018. Early adoption is permitted on January 1, 2017. We have not yet completed our evaluation of the impact of the adoption of this standard. However, we will adopt the standard as of January 1, 2018.

Note 3—Inventories, net

During the three months ended September 30, 2016, we commenced certain supply chain initiatives designed to optimize the utilization of our global inventory. From these initiatives, certain component parts inventory held by our foreign locations that previously were only considered generally available for sale directly to our customers are now a potential source for any current or future manufacturing or assembly activity. Historically, this inventory was classified as finished goods as our intent with this inventory was to sell it directly to customers in its current state. As of September 30, 2016, we classify such inventory as raw material and component parts to properly reflect the nature and expected future utilization of the inventory as a result of the supply chain initiatives. At December 31, 2015, the value of the component parts inventory that was included in finished goods, now considered raw materials and component parts was $24.9 million. At September 30, 2016 and December 31, 2015, inventories, net of reserves for excess and obsolete inventories of $9.1 million and $11.8 million, respectively, by major classification were as follows (in thousands).
 
September 30,
2016
 
December 31,
2015
Raw materials and component parts
$
70,817

 
$
53,595

Work in progress
2,747

 
1,944

Finished goods
6,976

 
39,920

 
$
80,540

 
$
95,459


We evaluated our global inventory and projected sales estimates and inventory usage in light of the current operating environment and the timing of the forecasted recovery. Based on our analysis, we determined that certain inventory items had net realizable values that were less than their carrying amounts. Accordingly, we recorded an aggregate inventory charge of $3.1 million for the three months ended September 30, 2016.  Of this charge, $1.7 million and $1.4 million related to finished goods and raw materials, respectively.  

Note 4—Prepaid and other current assets

At September 30, 2016 and December 31, 2015, prepaid and other current assets consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Prepaid taxes other than income taxes
$
2,589

 
$
4,048

Deposits
4,093

 
4,295

Prepaid insurance
833

 
1,144

Other prepaid expenses
4,355

 
3,220

Restricted cash
2,721

 
996

Deferred job costs
819

 
1,786

Non-trade receivables
745

 
2,105

 
$
16,155

 
$
17,594

 


6


Note 5—Property, Plant and Equipment

At September 30, 2016 and December 31, 2015, property, plant and equipment by major classification were as follows (in thousands):
 
September 30,
2016
 
December 31,
2015
Land, buildings and leaseholds
$
27,503

 
$
27,890

Drilling equipment
265,833

 
362,556

Manufacturing equipment
13,163

 
16,303

Office equipment and other
29,924

 
33,056

Capital work in progress
2,978

 
575

 
339,401

 
440,380

Less: Accumulated depreciation
(213,845
)
 
(262,664
)
 
$
125,556

 
$
177,716


Depreciation and amortization expense for the three and nine months ended September 30, 2016 and 2015 are included on our unaudited condensed consolidated statements of income as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Cost of sales and services
$
7,186

 
$
8,890

 
$
21,879

 
$
27,510

Selling, general and administrative expense 
156

 
524

 
637

 
1,636

 
$
7,342

 
$
9,414

 
$
22,516

 
$
29,146


Sale of Operating Assets

When pipe handling products that we manufacture are used in our rental fleet and 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 within product sales of our Products segment. When CDS products that we manufacture are used in our rental fleet and 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 within CDS, parts and accessories of our Tubular Services segment. During the nine months ended September 30, 2016 and 2015, six and one used top drives were sold from our rental fleet, which had an aggregate net book value $1.4 million and $0.2 million, respectively. No used top drives were sold during the three months ended September 30, 2016 and 2015.

Asset Impairment

We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include substantial declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified, which is our operating segments. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group. The amount of an impairment charge is measured as the difference between the carrying amount and the fair value of the asset group.

Since late 2014, oil prices have declined significantly resulting in an industry downturn, affecting both drilling and production services. Consequently, we saw an overall decline in the number of new wells drilled and the average rig count throughout 2015, which impacted the demand for our products and services. We continued to see further declines during the first three months of 2016, which resulted in significantly lower cash flow projections. Accordingly, we performed an impairment evaluation on our long-lived assets as per the guidance of ASC Topic 360, Property, Plant and Equipment. Consequently, during the three months ended March 31, 2016, we recognized $0.9 million of impairment related to intangibles and $34.6 million to reduce the carrying

7

values of our fixed assets to estimated fair value in our Products operating segment. The value of assets in our Tubular Services operating segment are deemed to be recoverable, and no impairment resulted.

We measured the fair value of the asset group by applying a combination of the market approach and the cost approach at February 29, 2016. To estimate the fair value in-exchange of the property, plant and equipment, we utilized the market approach and relied upon a combination of third party market comparable, recent market sales, review of salvage values from published guides and management estimates. To estimate the fair value in-exchange for the two large manufacturing plants located in Houston and Calgary, we relied upon the improved sales comparison approach / discussions with brokers to estimate the market value. For the remaining 3 minor owned locations, the indirect cost approach was utilized. Our estimates of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our Products operating segment, such as future oil prices, amount of drilling activity, and projected demand for our services.

The following tables present the impairments recognized during the three months ended March 31, 2016 and the nine months ended September 30, 2016, by our major categories of property, plant and equipment and by our major categories of intangible assets (in thousands):

Property, plant and equipment
 
Land, building and leaseholds
$
903

Drilling equipment
31,682

Manufacturing equipment
1,497

Office equipment and other
510

 
$
34,592


Intangible assets
 
Customer relationships
$
184

Product designs
617

Other
120

 
$
921


Note 6—Warranties

Changes in our warranty reserves during the nine months ended September 30, 2016 were as follows (in thousands):
 
September 30, 2016
Balance as of January 1, 2016
$
893

Provisions
951

Expirations
(491
)
Claims
(751
)
Balance as of September 30, 2016
$
602



8

Note 7—Earnings per Share and Shareholders' Equity

Weighted Average Shares

The following table reconciles basic and diluted weighted average shares (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Basic weighted average number of shares outstanding 
46,382

 
39,005

 
42,039

 
38,981

Dilutive effect of stock-based compensation
—

 
—

 
—

 
—

Diluted weighted average number of shares outstanding
46,382

 
39,005

 
42,039

 
38,981

Anti-dilutive options excluded from calculation due to exercise prices
—

 
—

 
—

 
—


Shares were excluded from the calculation of the diluted weighted average number of shares outstanding as the Company was in a net loss position for the three and nine months ended September 30, 2016 and September 30, 2015. The inclusion of the shares would be anti-dilutive. For the three and nine months ended September 30, 2016, there were approximately 426,000 and 408,000 shares excluded, respectively. For the three and nine months ended September 30, 2015, there were approximately 218,000 and 239,000 shares excluded, respectively.

Common Stock Issued

In June 2016, the Company completed a secondary public equity offering of 7.0 million common shares that generated proceeds of $46.7 million, net of underwriting discounts, commissions, issuance costs and expenses. In July 2016, our underwriter partially exercised its over-allotment option to purchase an additional 130,752 common shares that generated nearly $1 million in additional proceeds. The unexercised options expired on July 8, 2016.


Note 8—Income Taxes
 
TESCO is an Alberta, Canada corporation. We conduct business and are taxed on profits earned in certain jurisdictions around the world. Income taxes have been provided for 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 nine months ended September 30, 2016 and 2015 was as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Current tax provision (benefit)
$
(981
)
 
$
50

 
$
(409
)
 
$
4,608

Deferred tax provision
425

 
1,849

 
152

 
8,937

Income tax provision (benefit)
$
(556
)
 
$
1,899

 
$
(257
)
 
$
13,545

 
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was a 2% benefit and 0% for the three and nine months ended September 30, 2016, respectively, compared to a (11)% and (32)% expense for the same periods in 2015. The current income tax benefit for the three and nine months ended September 30, 2016 was primarily due to refunds in certain tax jurisdictions.

We record a valuation allowance to reduce the carrying value of deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including the implementation of feasible and prudent tax planning strategies, past operating results, the existence of cumulative losses in the most recent years, and forecast of future taxable income which inherently requires significant assumptions and judgment.


9


Note 9—Long-Term Debt and Credit Facility

We entered into our Second Amended and Restated Credit Agreement on April 27, 2012 (the "Credit Facility"), to provide a revolving line of credit of $125 million, including up to $20 million of swing line loans (collectively, the "Revolver"). In February 2016, we reduced the aggregate commitments under the Credit Facility by $65 million to $60 million. See Part II, Item 8, “Financial Statements and Supplementary Data, Note 9” in our 2015 Annual Report on Form 10-K.

On August 9, 2016, we terminated the Credit Facility in order to eliminate certain fees and expenses associated with maintaining an undrawn credit facility and wrote off the remaining unamortized balance of debt issuance cost of $0.1 million related to the facility. Letters of credit that had been outstanding within the Revolver prior to its termination have now been collateralized by cash on deposit. At September 30, 2016, we maintain $2.0 million on deposit as collateral for outstanding letters of credit. This deposit is classified as restricted cash within prepaid and other assets on the balance sheet at September 30, 2016.


Note 10—Commitments and Contingencies
 
Legal contingencies

In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of the proceedings involves a claim for damages exceeding ten percent of our current assets on a consolidated basis. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.

Other Contingencies
 
We are contingently liable under letters of credit and similar instruments that we enter into in connection with the importation of equipment into foreign countries and to secure our performance on certain contracts. As of September 30, 2016 and December 31, 2015, our total exposure under outstanding letters of credit was $2.7 million, which was secured by restricted cash on deposit, and $5.4 million, respectively.

At September 30, 2016, accounts receivable included approximately $1.6 million from a customer in Mexico for the period of May 2013 through July 2014 that are unbilled due to a contractual rate dispute.

Note 11—Segment Information

Business Segments

Significant financial information relating to our business segments is presented below (in thousands):
 
Three Months Ended September 30, 2016
 
Products
 
Tubular
Services
 
Research &
Engineering
 
Corporate &
Other
 
Total
Revenue
$
16,957

 
$
13,458

 
$
—

 
$
—

 
$
30,415

Depreciation and amortization
1,395

 
5,356

 
—

 
591

 
7,342

Operating loss
(7,437
)
 
(7,986
)
 
(1,248
)
 
(5,215
)
 
(21,886
)
Other expense
 

 
 

 
 

 
 

 
739

Loss before income taxes
 

 
 

 
 

 
 

 
$
(22,625
)

 
Three Months Ended September 30, 2015
 
Products
 
Tubular
Services
 
Research &
Engineering
 
Corporate &
Other
 
Total
Revenue
$
28,833

 
$
32,564

 
$
—

 
$
—

 
$
61,397

Depreciation and amortization
1,988

 
6,321

 
3

 
1,102

 
9,414

Operating loss
(3,908
)
 
(3,542
)
 
(2,076
)
 
(6,193
)
 
(15,719
)
Other expense
 

 
 

 
 

 
 

 
2,284

Loss before income taxes
 

 
 

 
 

 
 

 
$
(18,003
)

10


 
Nine Months Ended September 30, 2016
 
Products
 
Tubular
Services
 
Research &
Engineering
 
Corporate &
Other
 
Total
Revenue
$
54,122

 
$
45,332

 
$
—

 
$
—

 
$
99,454

Depreciation and amortization
3,862

 
16,676

 
2

 
1,976

 
22,516

Operating loss
(49,329
)
 
(23,335
)
 
(4,258
)
 
(18,938
)
 
(95,860
)
Other expense
 

 
 

 
 

 
 

 
2,176

Loss before income taxes
 

 
 

 
 

 
 

 
$
(98,036
)

 
Nine Months Ended September 30, 2015
 
Products
 
Tubular
Services
 
Research &
Engineering
 
Corporate &
Other
 
Total
Revenue
$
120,184

 
$
107,334

 
$
—

 
$
—

 
$
227,518

Depreciation and amortization
6,697

 
19,122

 
9

 
3,318

 
29,146

Operating loss
(2,172
)
 
(4,334
)
 
(6,985
)
 
(21,584
)
 
(35,075
)
Other expense
 

 
 

 
 

 
 

 
7,024

Loss before income taxes
 

 
 

 
 

 
 

 
$
(42,099
)

Other Charges

In response to the continued downturn in the energy market and its corresponding impact on our business outlook, we continued certain cost rationalization efforts that were initiated during 2015. Consequently, we recorded a charge in continuing operations related to headcount reductions and office closures. The following table presents these charges and the related income statement classification to which the charges are included for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
 
 
Severance
 
Facility Closures
 
Severance
 
Facility Closures
 
Income Statement Classification
Products
$
75

 
$
—

 
$
1,487

 
$
25

 
Cost of sales and services - Products
Tubular Services
193

 
15

 
1,715

 
737

 
Cost of sales and services - Services
Corporate & Other
—

 
—

 
90

 
131

 
Selling, general and administrative
 
$
268

 
$
15

 
$
3,292

 
$
893

 
 

 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
 
 
Severance
 
Facility Closures
 
Severance
 
Facility Closures
 
Income Statement Classification
Products
$
727

 
$
—

 
$
3,954

 
$
—

 
Cost of sales and services - Products
Tubular Services
524

 
—

 
2,496

 
—

 
Cost of sales and services - Services
Corporate & Other
428

 
—

 
800

 
—

 
Selling, general and administrative
 
$
1,679

 
$
—

 
$
7,250

 
$
—

 
 


11

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 geographical region in which the product is initially deployed. Our revenue by geographic area for the three and nine months ended September 30, 2016 and 2015 was as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
United States
$
9,035

 
$
17,655

 
$
33,969

 
$
62,726

Europe, Africa and Middle East
9,542

 
10,122

 
25,914

 
38,225

Asia Pacific
1,536

 
7,880

 
7,493

 
28,442

Russia
3,883

 
1,695

 
11,509

 
9,128

Latin America
5,631

 
21,397

 
17,246

 
71,016

Canada
788

 
2,648

 
3,323

 
17,981

 
$
30,415

 
$
61,397

 
$
99,454

 
$
227,518


The physical location of our net property, plant and equipment by geographic area as of September 30, 2016 and December 31, 2015 was as follows (in thousands):
 
September 30, 2016
 
Products
 
Tubular Services
 
Overhead, Corporate & Other
 
Total
United States
$
7,214

 
$
31,963

 
$
9,897

 
$
49,074

Europe, Africa and Middle East
5,645

 
11,056

 
2,332

 
19,033

Asia Pacific
3,477

 
10,433

 
522

 
14,432

Russia
11,085

 
828

 
6

 
11,919

Latin America
18,996

 
5,376

 
228

 
24,600

Canada
324

 
1,341

 
4,833

 
6,498

 
$
46,741

 
$
60,997

 
$
17,818

 
$
125,556


 
December 31, 2015
 
Products
 
Tubular Services
 
Overhead, Corporate & Other
 
Total
United States
$
19,198

 
$
32,479

 
$
10,434

 
$
62,111

Europe, Africa and Middle East
8,645

 
16,262

 
2,841

 
27,748

Asia Pacific
6,368

 
14,444

 
863

 
21,675

Russia
15,975

 
280

 
8

 
16,263

Latin America
30,265

 
9,388

 
988

 
40,641

Canada
1,498

 
2,341

 
5,439

 
9,278

 
$
81,949

 
$
75,194

 
$
20,573

 
$
177,716



12

Major customers and credit risk

Accounts receivable are subject to normal industry credit risks and are principally derived from major oil and natural gas service companies and exploration and production companies. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. Many of our customers are located in regions that are inherently subject to risks of economic, political and civil instabilities, which may impact our ability to collect. The main factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency and management’s estimate of ability to collect outstanding receivables based on the number of days outstanding and risks of economic, political and civil instabilities. Bad debt expense is included in selling, general and administrative expense in our consolidated statements of income.

Note 12—Subsequent Events

On November 3, 2016, the authorities in Egypt devalued the Egyptian pound by 32.3% and announced the currency would be allowed to float. The move devalued the rate from the previous official rate of 8.8 to 13.0 to the U.S. dollar, and the floating exchange rate has declined further. At September 30, 2016, we maintained cash of $1.9 million on deposit in an Egyptian bank. Due to currency controls, intended to maintain the value of the Egyptian pound against the U.S. dollar, our ability to convert Egyptian pounds to other currencies and transfer the funds freely outside of the country was limited. We are currently evaluating the full impact of this action on our financial statements.


13


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 Quarterly Report on Form 10-Q. This discussion contains forward-looking statements.  Please see "Caution Regarding Forward-Looking Information; Risk Factors" above and "Risk Factors" in Part II, Item 1A below and in our 2015 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 technology leader and provider of highly engineered solutions for drilling, servicing, and completion of wells with facilities in North America, Europe, Russia, Latin America, Middle East, and Asia Pacific. Operations consist of pipe handling product sales and rentals, after-market sales and services, and tubular services, including related products and accessories sales.

Unless indicated otherwise, results of operations data are presented in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").

Business Environment

Our revenue is heavily dependent on the level of drilling activity of exploration and production companies, which is performed primarily through drilling contractors. The willingness of exploration and production companies to spend capital on drilling activities is primarily affected by the current and anticipated prices of crude oil and natural gas, which is driven by such factors as the level of worldwide oil and gas reserves inventory, civil unrest and conflicts in oil producing countries, oil sanctions, and global economics, among other things. When drilling rigs are active they consume products and services produced by the oilfield services companies like ours. Accordingly, rig count and well count are important business barometers for the drilling industry and its suppliers, as they may reflect the relative strength and stability of energy prices and overall market activity. However, it is important to look at rig count in conjunction with the well count. Moreover, these counts should not be solely relied on as an indicator of the economic condition of our industry, as other specific and pervasive conditions may exist that affect overall energy prices and market activity.




14

Below is a table that shows the average rig count by region for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Average Rig Count(1)
 
Nine Months Average Rig Count(1)
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
United States
480

 
866

 
485

 
1,052

Canada
121

 
191

 
111

 
200

Latin America (includes Mexico)
187

 
318

 
203

 
331

Middle East (excludes Iran, Iraq, Syria and Sudan)
385

 
393

 
392

 
403

Asia Pacific (excludes China onshore)
190

 
217

 
187

 
224

Europe (excludes Russia)
94

 
109

 
97

 
119

Africa
80

 
95

 
87

 
111

Total
1,537

 
2,189

 
1,562

 
2,440


Outlook

The effect and duration of the oil and gas industry downturn continues to be unpredictable. We began to see a decline in crude oil prices after the average West Texas Intermediate ("WTI") and Brent crude reached highs of $107.95 and $115.19, respectively, in June 2014. The declines continued throughout the remainder of 2014 and 2015, with WTI and Brent crude at $36.36 and $36.61, respectively, at the end of 2015. The spot prices of WTI and Brent crude at September 30, 2016 have shown moderate increases to $47.72 and $48.24, respectively. The current outlook for commodity prices remains highly uncertain, but we believe evidence suggests they will remain relatively unchanged for the remainder of 2016 with only modest increase for 2017.(2) 

The Company's response to the market conditions has resulted in aggressive cost rationalization and global reorganization to right-size the company. During the nine months ended September 30, 2016, the global workforce was reduced by an additional 25%, as compared to December 31, 2015, resulting in a charge of $3.3 million. Facility closures during the same period resulted in a charge of $0.9 million. In addition, certain austerity measures and efforts to streamline our overhead and support structure initiated in the previous year continued. During the year ended December 31, 2015, the global workforce was reduced by 30%, resulting in a related aggregate charge of $10.9 million. We expect to complete almost all of our planned cost reduction and restructuring actions by year-end, but that alone will not return us to profitability. We also need to grow our revenue run rates and improve our products and services mix in order to improve profitability.

Recent higher crude oil prices and increased rig count in North America are some evidence that suggests the market bottom is forming. Despite this gradual increase, we still believe that the path to recovery will be slow and volatile as international and offshore markets will remain weak and global oilfield services pricing remains challenged and unsustainable. However, our nearly completed cost reductions and restructuring actions as well as strong liquidity position should allow us to weather the slow recovery and participate early in the recovery. Accordingly, cash generation and preservation continue to be a high priority. At the same time, we will continue to invest in initiatives that should quicken our return to profitability.

While pricing in North America remains at unsustainable levels, it is slowly driving competitor attrition. This highlights the importance of cost efficiency, differentiation, automation of services and liquidity in this market as key measures of survivability and the ability to secure market share as activity increases.


_________________________________
(1)
Source: Baker Hughes Incorporated worldwide rig count. The Baker Hughes North American Rotary Rig Count is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. The Baker Hughes International Rotary Rig Count is a monthly census of active drilling rigs exploring for or developing oil or natural gas outside North America (U.S. and Canada). To be counted as active, a rig must be on location and be drilling or 'turning to the right'. A rig is considered active from the moment the well is "spudded" until it reaches target depth. Rigs that are in transit from one location to another, rigging up or being used in non-drilling activities such as workovers, completions or production testing, are not counted as active.

(2)
Source: U.S. Energy Information Administration


15


Within our Products segment we will continue funding the development and commercialization of our suite of rig floor mechanization technologies. We completed lab testing of the Pipe Drive System ("PDS'') and expect to commercialize this project next year. In addition, land catwalk adoption is growing with increased demand coming mostly from the Middle East. As initial demand is coming from rentals, we will add a few catwalks to our rental fleet over the next few quarters with the expectation they will convert to product sales in the future. Over time we expect most rigs will operate with a catwalk to deliver pipe to the rig floor in a safe and automated manner. Therefore, we expect most of the demand in the future to convert to product sales.

In addition, we continue to expand the scope of our after-market service capabilities. That new scope includes repairing and upgrading third-party pipe-handling equipment and expanding our footprint cost-effectively by adding distributors to markets we choose not to operate in directly. Not only may these distributors be an outlet for local after-market service, they may also generate opportunities for additional new and used product sales and tubular services. In the third quarter of 2016 we added our second distributor after changing our means of distribution in a market.

We continue to increase the installations of our first generation Automated Rig Controls ("ARC") product, which adds significant drilling performance to top drives. While customer feedback has been very positive thus far, we continue to develop further performance and drilling features that will be part of one seamless, fully-integrated performance-enhancing platform.

Within our Tubular Services segment, we will continue to convert more land market share from conventional casing running to our automated Evolution model, which requires significantly less manpower and equipment. We expect conversion rates to increase as we introduce additional cementing accessories, like our new multi-plug launch system ("MPLS"), which is currently performing field tests and is expected to be commercialize in the coming quarters. The combination of this plug launch system and our side-entry cement swivel with the CDSTM will provide significant value creation for our customers while giving us additional cost efficiencies, which we expect to disrupt the industry cost model, allow us to gain market share and improve our profitability.

Results of Operations

The discussions below relating to significant line items from our consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. This discussion should be read in conjunction with Part I, Item 1, "Financial Statements" included in this Report.

16

Operating results by business segments

Below is a summary of the operating results of our business segments for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Segment revenue
 
 
 
 
 
 
 
Products revenue
 
 
 
 
 
 
 
Sales
$
4,368

 
$
5,436

 
$
16,951

 
$
36,948

Rental services
7,120

 
13,998

 
19,579

 
51,742

After-Market sales and services
5,469

 
9,399

 
17,592

 
31,494

 
16,957

 
28,833

 
54,122

 
120,184

Tubular Services revenue
 
 
 
 
 
 
 
Land
$
7,793

 
$
20,967

 
$
26,365

 
$
75,063

Offshore
4,074

 
7,447

 
15,859

 
26,013

CDS, Parts & Accessories
1,591

 
4,150

 
3,108

 
6,258

 
13,458

 
32,564

 
45,332

 
107,334

 
 
 
 
 
 
 
 
Revenue
$
30,415

 
$
61,397

 
$
99,454

 
$
227,518

 
 
 
 
 
 
 
 
Segment operating loss
 
 
 
 
 
 
 
Products
$
(7,437
)
 
$
(3,908
)
 
$
(49,329
)
 
$
(2,172
)
Tubular Services
(7,986
)
 
(3,542
)
 
(23,335
)
 
(4,334
)
Research and Engineering
(1,248
)
 
(2,076
)
 
(4,258
)
 
(6,985
)
Corporate and Other
(5,215
)
 
(6,193
)
 
(18,938
)
 
(21,584
)
Operating loss
$
(21,886
)
 
$
(15,719
)
 
$
(95,860
)
 
$
(35,075
)

Products Segment

Revenues from our Products segment are generated through pipe handling product sales, rentals, and after-market sales and service. Sales of Products consist of new and used pipe handling products. Our rental fleet of pipe handling products is highly mobile, where we install the units on the customers' rig site and charge a daily rate for rental operating days. Rental operating days are defined as a day that a unit in our rental fleet is under contract and operating.

Our after-market sales and service consists of providing parts and servicing units. We provide these services for automated pipe handling equipment we manufacture and selected models of our competitors.

Q3 2016 as compared with Q3 2015

Sales
Revenues decreased by $1.1 million, or 20%, for the three months ended September 30, 2016 as compared to 2015 primarily due to fewer top drive units sold globally as a result of decreased demand, rig count and crude oil prices. In the three months ended September 30, 2016, we sold 3 new top drives, as compared to the same period in 2015, where we sold 5 new top drives.

Rental Services
Revenues decreased by $6.9 million, or 49%, for the three months ended September 30, 2016 as compared to 2015 primarily due to the depressed market demand within the industry, which led to a 16% decrease in our utilization. At September 30, 2016 utilization declined to 21% due to fewer operating days and fewer contracted units. The decrease in activity in conjunction with price compression primarily impacted our revenues in Latin America.




17

After-Market Sales and Services
Revenues decreased by $3.9 million, or 42%, for the three months ended September 30, 2016 as compared to 2015 primarily due to a decline in demand for parts and services in North America and Asia Pacific, accounting for 60% and 28%, respectively, of the total decline. With the continued decline in oil prices and consequential decrease in drilling activity, customers have chosen to defer non-critical services and consume their inventories rather than replenish them.

Operating Loss
Products operating loss increased by $3.5 million, or 90%, for the three months ended September 30, 2016 as compared to 2015 primarily due to an inventory charge of $3.0 million. Declines in revenue were offset by reductions in operating expenses derived from our aggressive restructuring and cost rationalization efforts. Reductions in workforce and offices closures resulted in charges of $0.1 million and $0.7 million for the three months ended September 30, 2016 and 2015, respectively.

YTD 2016 as compared with YTD 2015

Sales
Revenues decreased by $20.0 million, or 54%, for the nine months ended September 30, 2016 as compared to 2015 primarily due to fewer top drive units sold globally as a result of decreased demand driven by reduced rig count and depressed crude oil prices. In the nine months ended September 30, 2016, we sold a total of 15 top drives, of which 9 were new and 6 were from our rental fleet, as compared to the same period in 2015, when we sold 30 top drives, of which 29 were new and one was from our rental fleet. We recognized revenue of $2.8 million and $0.8 million related to the sale of the used top drives from our rental fleet during the nine months ended September 30, 2016 and 2015, respectively.

Rental Services
Revenues decreased by $32.2 million, or 62%, for the nine months ended September 30, 2016 as compared to 2015 primarily due to the depressed market demand within the industry causing a 44% decrease in utilization rates. At September 30, 2016, utilization declined to 16% due to fewer operating days and fewer contracted units. The decrease in activity compounded with price compression primarily impacted our revenues in Latin America.

After-Market Sales and Services
Revenues decreased by $13.9 million, or 44%, for the nine months ended September 30, 2016 as compared to 2015 primarily due to a decline in demand for parts and services in North America, Asia Pacific and the Middle East, accounting for 52%, 15% and 15%, respectively, of the total decline. With the continued decline in oil prices and consequential decrease in drilling activity, customers have chosen to defer non-critical services and consume their inventories rather than replenish them.

Operating Loss
Products operating loss increased by $47.2 million, for the nine months ended September 30, 2016 as compared to 2015 primarily due to the impairment charge discussed below and the decline in revenues for each product offering due to current market conditions as a result of continued declines in oil prices and in overall demand for oilfield services.

During the three months ended March 31, 2016, we identified indicators that could cause potential impairments to our long-lived assets. Due to these indicators, we conducted testing for impairment and determined that the carrying amount of our long-lived assets in our Products segment exceeded its fair value. Accordingly, we recognized an aggregate long-lived asset impairment of $33.6 million during the nine months ended September 30, 2016. For further discussion, see Part 1, Item 1, "Financial Statements, Note 5", included in this report. Reductions in workforce and offices closures resulted in charges of $1.5 million and $4.0 million for the nine months ended September 30, 2016 and 2015, respectively.

Tubular Services Segment

We generate revenues in our Tubular Services segment from land and offshore services augmented by sales of products, accessories and consumables for the casing running process. Our services include personnel and equipment, including the CDSTM, power tongs, pick up/lay-down units, torque monitoring services, and connection testing services for new well completion and in work-over or re-entry operations. Our product sales include the CDSTM, down-well consumables, and other non-consumable parts.

Q3 2016 as compared with Q3 2015

Land
Revenues decreased by $13.2 million, or 63%, for the three months ended September 30, 2016 as compared to 2015 primarily due to decreased activity and demand in Latin America and North America of 51% and 47%, respectively. The decrease in rig count and overall activity resulted in a reduction of jobs performed during the three months ended September 30, 2016 as compared

18

to 2015. In addition, we experienced significant price compression within tubular services during the three months ended September 30, 2016 as compared to 2015.

Offshore
Revenues decreased by $3.4 million, or 45%, for the three months ended September 30, 2016 as compared to 2015 primarily due to a decrease in the number of operating rigs within the Asia Pacific region during the third quarter of 2016. This decrease is partially offset by offshore revenue in North America as the mix of services we performed continued to shift towards higher revenue generating deep-water services.

CDS, Parts, & Accessories
Revenues decreased by $2.6 million, or 62%, for the three months ended September 30, 2016 as compared to 2015 primarily due to lower CDSTM equipment sales and customers postponing capital expenditures in light of the decline in oil prices and overall reduction in operating rigs. During the three months ended September 30, 2016, we had $0.4 million of sales for CDS™ equipment sales, compared to $3.3 million of sales during the same period in 2015.

Operating Loss
Tubular Services operating loss increased by $4.4 million, for the three months ended September 30, 2016 as compared to 2015 primarily due to the aforementioned declines in revenue partially offset by cost reductions achieved through aggressive cost rationalization efforts undertaken. Reductions in workforce and offices closures resulted in charges of $0.2 million and $0.5 million for the three months ended September 30, 2016 and 2015, respectively.

YTD 2016 as compared with YTD 2015

Land
Revenues decreased by $48.7 million, or 65%, for the nine months ended September 30, 2016 as compared to 2015 primarily due to decreased activity and demand in North America and Latin America of 45% and 43%, respectively. The decrease in rig count and overall activity resulted in a reduction of jobs being performed during the nine months ended September 30, 2016 as compared to 2015. Additionally, the continued decline in oil prices and tubular services competition compressed pricing.

Offshore
Revenues decreased by $10.2 million, or 39%, for the nine months ended September 30, 2016 as compared to 2015 primarily due to a decrease in the number of operating rigs within the Asia Pacific region. This decrease was partially offset by offshore revenue in North America as our mix of services performed continued to shift towards higher revenue generating deep-water services.

CDS, Parts, & Accessories
Revenues decreased by $3.2 million, or 50%, for the nine months ended September 30, 2016 as compared to 2015 primarily due to lower CDSTM equipment sales and declining part sales driven by customers postponing capital expenditures in light of the decline in market conditions. Revenue for CDS™ equipment sales was $1.1 million for the nine months ended September 30, 2016, compared to $3.3 million of sales during the same period in 2015.

Operating Loss
Tubular Services operating loss increased by $19.0 million, for the nine months ended September 30, 2016 as compared to 2015 primarily due to the aforementioned declines in revenue partially offset by cost reductions achieved through aggressive cost rationalization efforts undertaken. Reductions in workforce and offices closures resulted in charges of $2.5 million for the nine months ended September 30, 2016 and 2015, respectively. Declines were further offset by an adjustment in the amount of past due disputed accounts payable during the three months ended March 31, 2016.

Research and Engineering Segment

We are a technology-based company deploying new technologies to increase rig automation, rig mechanization, and to enhance our field operations. We are working aggressively to drive a more definitive integration between the drilling rig and tubular services technology. We continue to invest in our research and engineering in order to continually develop, commercialize, and enhance our proprietary products relating to our current product offerings and new technologies in development.


19

Q3 2016 as compared with Q3 2015

Operating expenses decreased by $0.8 million, or 40%, during the three months ended September 30, 2016 as compared to 2015 primarily due to a decrease in spending related to targeted cost rationalization efforts.

YTD 2016 as compared with YTD 2015

Operating expenses decreased by $2.7 million, or 39%, during the nine months ended September 30, 2016 as compared to 2015 primarily due to a decrease in spending related to targeted cost rationalization efforts.

Corporate and Other Segment

Corporate and other expenses primarily consist of overhead, general and administrative expenses, and certain selling and marketing expenses. Corporate and other expenses as a percent of revenues were 17% and 10% for the three months ended September 30, 2016 and 2015, respectively.

Q3 2016 as compared with Q3 2015

Operating expenses decreased by $1.0 million, or 16%, during the three months ended September 30, 2016 as compared to 2015 primarily due to cost saving measures implemented in 2015 and continuing in 2016. The benefits of these cost saving measures are visible primarily in personnel costs and various discretionary spending accounts.

YTD 2016 as compared with YTD 2015

Operating expenses decreased by $2.6 million, or 12%, during the nine months ended September 30, 2016 as compared to 2015 primarily due to cost saving measures implemented in 2015 and continuing in 2016. The benefits of these cost saving measures are visible primarily in personnel costs and various discretionary spending accounts.

Other expense (income)

Below is a detail of expenses that are not allocated to segments for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest expense
$
196

 
$
271

 
$
850

 
$
843

Interest income
(42
)
 
(56
)
 
(471
)
 
(96
)
Foreign exchange loss
352

 
1,951

 
1,537

 
6,506

Other expense (income)
233

 
118

 
260

 
(229
)
Loss before income taxes
(22,625
)
 
(18,003
)
 
(98,036
)
 
(42,099
)
Income tax provision (benefit)
(556
)
 
1,899

 
(257
)
 
13,545

Net loss
$
(22,069
)
 
$
(19,902
)
 
$
(97,779
)
 
$
(55,644
)

Q3 2016 as compared with Q3 2015

Interest Expense
Interest expense decreased by $0.1 million, or 28%, during the three months ended September 30, 2016 as compared to 2015.
 
Foreign Exchange Loss
Although our functional currency is the U.S. dollar, our operations have net assets and liabilities not denominated in the functional currency which exposes us to changes in foreign currency exchange rates that impact income. Foreign exchange losses decreased by $1.6 million, or 82%, during the three months ended September 30, 2016 as compared to 2015 primarily due to exchange rates and reductions in net monetary assets subject to revaluation in Argentina, Colombia, and Mexico.

20


Income Tax Provision
Income tax provision decreased by $2.5 million for the three months ended September 30, 2016 as compared to the same period in 2015 primarily due to additional pre-tax losses sustained during the three months ended September 30, 2016. Our effective tax rates were a 2% benefit and a (11)% expense for the three months ended September 30, 2016 and 2015, respectively.

YTD 2016 as compared with YTD 2015

Interest Expense
Interest expense was flat during the nine months ended September 30, 2016 as compared to 2015 and included the write-off of unamortized debt issuance costs of $0.3 million during the nine months ended September 30, 2016 related to the cancellation of our Credit Facility in August 2016.

Interest Income
Interest income increased by $0.4 million during the three months ended September 30, 2016 as compared to 2015 primarily due to interest received on short term investment of excess cash held in Latin America.

Foreign Exchange Loss
Although our functional currency is the U.S. dollar, our operations have net assets and liabilities not denominated in the functional currency which exposes us to changes in foreign currency exchange rates that impact income. Foreign exchange losses decreased by $5.0 million, or 76%, during the nine months ended September 30, 2016 as compared to 2015 primarily due to exchange rates and reductions in net monetary assets subject to revaluation in Argentina, Colombia, and Mexico.

Income Tax Provision
Income tax provision decreased by $13.8 million, or 102%, for the nine months ended September 30, 2016 as compared to the same period in 2015 primarily due to a $21.7 million valuation allowance recorded against deferred tax assets during the nine months ended September 30, 2015. Our effective tax rates were 0% and a (32)% expense for the nine months ended September 30, 2016 and 2015, respectively.

Liquidity and Capital Resources

We assess liquidity in terms of our ability to generate cash to fund operating, investing, and financing activities. Our primary sources of liquidity are cash flows generated from operations and available cash and cash equivalents. For the nine months ended September 30, 2016, cash and cash equivalents increased by $38.6 million to $90.1 million, primarily due to the June 2016 secondary public equity offerings of 7.1 million common shares of the Company (including 130,752 shares issued pursuant to the underwriter's exercise of its option to purchase additional common shares of the company in July 2016) that generated aggregate proceeds of $47.6 million, net of underwriting discounts, commissions, issuance costs and expenses. The offering proceeds provide us optionality to address working capital and capital spending needs in a potential market recovery while also funding strategic initiatives to gain market share through technology offerings and possibly through acquisitions. We believe our current cash balance is more than adequate to conduct our business.

Off-Balance Sheet Arrangements

In addition to the lease commitments as described in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our 2015 Annual Report on Form 10-K, as of September 30, 2016, our off-balance sheet arrangements included manufacturing purchase commitments and letters of credit as noted below.

Manufacturing Purchase Commitments
Our manufacturing purchase commitments, which represent executed purchase orders that have been submitted to our respective vendors, have decreased from $8.5 million as of December 31, 2015 to $6.4 million as of September 30, 2016.  This decrease of $2.1 million, or 25%, is driven primarily by the receipt of orders and the cancellation of prior orders with vendors due to the decline in product demand caused by the decline in oil prices.

Letters of Credit
The Company enters into letters of credit in the ordinary course of business. As of September 30, 2016, the total outstanding letters of credit was $2.7 million, which were collateralized by cash on deposit. See Part 1, Item 1, “Financial Statements, Note 9 and Note 10", included in this Report.



21


Critical Accounting Estimates and Policies
 
Accounting policies are described in the notes to the audited consolidated financial statements included in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of the 2015 Annual Report on Form 10−K. The unaudited condensed consolidated financial statements were prepared in conformity with U.S. GAAP. Results of operations and financial condition, as reflected in the 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 the business and customers. While these issues require judgments that may be subjective, they are generally based on a significant amount of historical data and current market data. The most critical accounting policies are those described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in the 2015 Annual Report on Form 10−K.  During the three and nine ended September 30, 2016, there have been no material changes to the types of judgments, assumptions, and estimates upon which our critical accounting estimates are based.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
 
See Part I, Item 7A —"Quantitative and Qualitative Disclosures About Market Risk" in the 2015 Annual Report on Form 10‑K for a detailed discussion of the risks affecting the Company. There have been no material changes to the market risks described in Part I, Item 7A —"Quantitative and Qualitative Disclosures About Market Risk" disclosed in the 2015 Annual Report on Form 10‑K.

Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures designed and maintained to provide reasonable assurance that information required to be disclosed in the reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") are 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 the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, to allow timely decisions regarding required disclosure. As of September 30, 2016, the Chief Executive Officer, Chief Financial Officer, and Principal Accounting Officer participated with management in evaluating the effectiveness of disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). The Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer have concluded that, as of September 30, 2016, disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22

PART II—OTHER INFORMATION

Item 1.    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 1, "Financial Statements, Note 10" of this Report for a summary of certain ongoing legal proceedings. Such information is incorporated into this Part II, Item 1—"Legal Proceedings" by reference.

Item 1A. Risk Factors.

See Part I, Item 1A—"Risk Factors" in our 2015 Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us. There have been no material changes to the risk factors described in Part I, Item 1A—"Risk Factors" disclosed in our 2015 Annual Report on Form 10-K.
 
 Item 6.    Exhibits.
 
The Exhibit Index set forth below is incorporated herein by reference.

23


SIGNATURE
 
Pursuant to the requirements 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/    FERNANDO R. ASSING        
 
 
Fernando R. Assing,
President and Chief Executive Officer
(Principal Executive Officer)
Date:
November 7, 2016
 
 
 
 
 
 
 
 
By:
/s/    CHRISTOPHER L. BOONE      
 
 
Christopher L. Boone,
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date:
November 7, 2016
 
 
 
 
 
 
TESCO CORPORATION
 
 
 
 
By:
/s/    THOMAS B SLOAN JR.     
 
 
Thomas B Sloan Jr.,
Vice President and Corporate Controller
(Principal Accounting Officer)
Date:
November 7, 2016
 


24


EXHIBIT INDEX

 
 
 
Exhibit No.
 
Description
 
 
 
3.1*
 
Restated Articles of Amalgamation of Tesco Corporation, dated May 29, 2007 (incorporated by reference to Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on June 1, 2007)
 
 
 
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 dated March 5, 2014 filed with the SEC on March 11, 2014)
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) Certification, executed by Fernando R. Assing, President and Chief Executive Officer of Tesco Corporation
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a) Certification, executed by Christopher L. Boone, 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 Fernando R. Assing, President and Chief Executive Officer of Tesco Corporation and Christopher L. Boone, Senior Vice President and Chief Financial Officer of Tesco Corporation
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
__________________________________
*
Incorporated by reference


25

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