UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2015
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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
Tesco Corporation
(Exact name of registrant as specified in its charter)
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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.
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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 shares of Common Stock outstanding as of July 31, 2015: 39,005,070
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION |
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II—OTHER INFORMATION |
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Item 1. | | |
Item 1A. | | |
Item 6. | | |
Below is a list of defined terms that are used throughout this document:
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TESCO’s Casing Drive System | | = CDS™ or CDS |
TESCO’s Multiple Control Line Running System | | = MCLRS™ or MCLRS |
We own various trademarks that are important to our business. Depending upon the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained. A list of our trademarks and the countries in which they are registered is presented below:
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| | |
Trademark | | Country of Registration |
TESCO® | | United States, Canada |
Casing Drive System™ | | United States, Canada |
CDS™ | | United States, Canada |
Multiple Control Line Running System™ | | United States, Canada |
MCLRS™ | | United States, Canada |
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 June 30, 2015 ("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, 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: changes in oil and natural gas prices; worldwide and domestic economic conditions and political instability 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 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, 2014 ("2014 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)
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| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Assets | (unaudited) | | |
Current assets | | | |
Cash and cash equivalents | $ | 62,673 |
| | $ | 72,466 |
|
Accounts receivable trade, net of allowance for doubtful accounts of $6,109 and $5,814 as of June 30, 2015 and December 31, 2014, respectively | 87,602 |
| | 128,663 |
|
Inventories, net | 117,975 |
| | 114,682 |
|
Income taxes recoverable | 8,085 |
| | 9,140 |
|
Deferred income taxes | 5,808 |
| | 8,864 |
|
Prepaid and other current assets | 22,071 |
| | 26,874 |
|
Total current assets | 304,214 |
| | 360,689 |
|
Property, plant, and equipment, net | 189,307 |
| | 202,505 |
|
Goodwill | 34,401 |
| | 34,401 |
|
Deferred income taxes | 4,245 |
| | 13,971 |
|
Intangible and other assets, net | 7,927 |
| | 7,700 |
|
Total assets | $ | 540,094 |
| | $ | 619,266 |
|
Liabilities and Shareholders’ Equity | |
| | |
|
Current liabilities | |
| | |
|
Current portion of long term debt | $ | — |
| | $ | 25 |
|
Accounts payable | 21,956 |
| | 36,053 |
|
Deferred revenue | 5,799 |
| | 16,566 |
|
Warranty reserves | 2,996 |
| | 3,370 |
|
Income taxes payable | 954 |
| | 8,907 |
|
Accrued and other current liabilities | 24,209 |
| | 26,781 |
|
Total current liabilities | 55,914 |
| | 91,702 |
|
Long term debt | — |
| | — |
|
Other liabilities | 1,445 |
| | 2,144 |
|
Deferred income taxes | 7,288 |
| | 12,293 |
|
Total liabilities | 64,647 |
| | 106,139 |
|
Commitments and contingencies (Note 11) | — |
| | — |
|
Shareholders’ equity | |
| | |
|
Common shares; no par value; unlimited shares authorized; 39,005 and 38,949 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively | 210,958 |
| | 208,999 |
|
Retained earnings | 228,988 |
| | 268,627 |
|
Accumulated other comprehensive income | 35,501 |
| | 35,501 |
|
Total shareholders’ equity | 475,447 |
| | 513,127 |
|
Total liabilities and shareholders’ equity | $ | 540,094 |
| | $ | 619,266 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share information)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenue | | | | | | | |
Products | $ | 23,698 |
| | $ | 65,147 |
| | $ | 53,625 |
| | $ | 107,977 |
|
Services | 50,753 |
| | 79,959 |
| | 112,496 |
| | 158,527 |
|
| 74,451 |
| | 145,106 |
| | 166,121 |
| | 266,504 |
|
Operating expenses | | | | | | | |
Cost of sales and services | | | | | | | |
Products | 24,702 |
| | 47,597 |
| | 51,289 |
| | 82,291 |
|
Services | 52,039 |
| | 62,858 |
| | 108,747 |
| | 124,057 |
|
| 76,741 |
| | 110,455 |
| | 160,036 |
| | 206,348 |
|
Selling, general and administrative | 9,369 |
| | 13,336 |
| | 20,532 |
| | 27,270 |
|
Research and engineering | 2,059 |
| | 2,500 |
| | 4,909 |
| | 4,966 |
|
Total operating expenses | 88,169 |
| | 126,291 |
| | 185,477 |
| | 238,584 |
|
Operating income (loss) | (13,718 | ) | | 18,815 |
| | (19,356 | ) | | 27,920 |
|
Other expense (income) | | | | | | | |
Interest expense | 354 |
| | 229 |
| | 572 |
| | 636 |
|
Interest income | (12 | ) | | (23 | ) | | (40 | ) | | (84 | ) |
Foreign exchange loss (gain) | 1,399 |
| | (1,130 | ) | | 4,555 |
| | 2,209 |
|
Other expense (income) | (141 | ) | | 1 |
| | (347 | ) | | 7 |
|
Total Other expense (income) | 1,600 |
| | (923 | ) | | 4,740 |
| | 2,768 |
|
Income (loss) before income taxes | (15,318 | ) | | 19,738 |
| | (24,096 | ) | | 25,152 |
|
Income tax provision | 12,172 |
| | 7,009 |
| | 11,646 |
| | 9,124 |
|
Net income (loss) | $ | (27,490 | ) | | $ | 12,729 |
| | $ | (35,742 | ) | | $ | 16,028 |
|
Earnings (loss) per share: | | | | | | | |
Basic | $ | (0.71 | ) | | $ | 0.32 |
| | $ | (0.92 | ) | | $ | 0.40 |
|
Diluted | $ | (0.71 | ) | | $ | 0.31 |
| | $ | (0.92 | ) | | $ | 0.39 |
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Dividends declared per share: | | | | | | | |
Basic | $ | 0.05 |
| | $ | 0.05 |
| | $ | 0.10 |
| | $ | 0.05 |
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Weighted average number of shares: | | | | | | | |
Basic | 38,981 |
| | 40,175 |
| | 38,969 |
| | 39,963 |
|
Diluted | 38,981 |
| | 40,798 |
| | 38,969 |
| | 40,648 |
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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)
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| | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
Operating Activities | | | |
Net income (loss) | $ | (35,742 | ) | | $ | 16,028 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | | | |
Depreciation and amortization | 19,732 |
| | 20,089 |
|
Stock compensation expense | 2,142 |
| | 2,789 |
|
Bad debt expense | 139 |
| | 3,517 |
|
Deferred income taxes | 7,088 |
| | (831 | ) |
Amortization of financial items | 152 |
| | 76 |
|
Gain on sale of operating assets | (689 | ) | | (1,721 | ) |
Changes in the fair value of contingent earn-out obligations | (364 | ) | | — |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable trade, net | 40,829 |
| | 6,167 |
|
Inventories, net | (3,293 | ) | | (14,777 | ) |
Prepaid and other current assets | 2,942 |
| | 3,183 |
|
Accounts payable and accrued liabilities | (26,507 | ) | | (12,586 | ) |
Income taxes recoverable | (7,761 | ) | | (2,932 | ) |
Other noncurrent assets and liabilities, net | 3,017 |
| | 1,144 |
|
Net cash provided by operating activities | 1,685 |
| | 20,146 |
|
Investing Activities | | | |
Additions to property, plant and equipment | (10,213 | ) | | (19,250 | ) |
Cash paid for acquisitions, net of cash acquired | — |
| | (5,000 | ) |
Proceeds on sale of operating assets | 687 |
| | 3,344 |
|
Other, net | 1,860 |
| | (237 | ) |
Net cash used for investing activities | (7,666 | ) | | (21,143 | ) |
Financing Activities | | | |
Repayments of debt | (25 | ) | | (337 | ) |
Proceeds from exercise of stock options | 111 |
| | 6,025 |
|
Dividend distribution | (3,898 | ) | | (2,011 | ) |
Net cash provided by (used for) financing activities | (3,812 | ) | | 3,677 |
|
Change in cash and cash equivalents | (9,793 | ) | | 2,680 |
|
Net cash and cash equivalents, beginning of period | 72,466 |
| | 97,277 |
|
Net cash and cash equivalents, end of period | $ | 62,673 |
| | $ | 99,957 |
|
Supplemental cash flow information | | | |
Cash payments for interest | $ | 280 |
| | $ | 230 |
|
Cash payments for income taxes, net of refunds | 12,791 |
| | 12,693 |
|
Property, plant and equipment accrued in accounts payable | 2,628 |
| | 282 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands)
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| | | | | | | | | | | | | | | | | | |
| Common stock shares | | Common shares | | Retained earnings | | Accumulated other comprehensive income | | Total |
For the six months ended June 30, 2015 | | | | | | | | | |
Balances at January 1, 2015 | 38,949 |
| | $ | 208,999 |
| | $ | 268,627 |
| | $ | 35,501 |
| | $ | 513,127 |
|
Net loss | — |
| | — |
| | (35,742 | ) | | — |
| | (35,742 | ) |
Dividends declared | — |
| | — |
| | (3,897 | ) | | — |
| | (3,897 | ) |
Stock compensation related activity | 56 |
| | 1,959 |
| | — |
| | — |
| | 1,959 |
|
Balances at June 30, 2015 | 39,005 |
| | $ | 210,958 |
| | $ | 228,988 |
| | $ | 35,501 |
| | $ | 475,447 |
|
| | | | | | | | | |
For the six months ended June 30, 2014 | | | | | | | | | |
Balances at January 1, 2014 | 39,680 |
| | $ | 224,666 |
| | $ | 253,195 |
| | $ | 35,501 |
| | $ | 513,362 |
|
Net income | — |
| | — |
| | 16,028 |
| | — |
| | 16,028 |
|
Dividends declared | — |
| | — |
| | (2,011 | ) | | — |
| | (2,011 | ) |
Stock compensation related activity | 643 |
| | 9,194 |
| | — |
| | — |
| | 9,194 |
|
Balances at June 30, 2014 | 40,323 |
| | $ | 233,860 |
| | $ | 267,212 |
| | $ | 35,501 |
| | $ | 536,573 |
|
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 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 reports 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, 2014, which contains a summary of our significant accounting policies and other disclosures. The condensed consolidated financial statements as of June 30, 2015 and for the quarters ended June 30, 2015 and 2014 are unaudited. We derived the condensed consolidated balance sheet as of December 31, 2014 from the audited consolidated balance sheet filed in our 2014 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. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Fair Value of Financial Instruments
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
•Level 1 — quoted prices in active markets for identical assets and liabilities;
•Level 2 — observable market based inputs or unobservable inputs that are corroborated by market data; and
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• | Level 3 — significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall for assets and liabilities measured on a recurring basis as of June 30, 2015 (in thousands):
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| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Cash and cash equivalents | $ | 62,673 |
| | $ | 62,673 |
| | $ | — |
| | $ | — |
|
Contingent earn-out obligations | $ | 650 |
| | $ | — |
| | $ | — |
| | $ | 650 |
|
Cash and cash equivalents approximated their fair value due to the short-term nature of the accounts.
The valuation of our contingent earn-out obligations (see further discussion in "Note 3") is determined using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a
discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
The discount rate used to calculate the contingent earn-out obligation is calculated by weighting Tesco’s after tax required returns on debt and equity by their respective percentages of total capital plus a certain premium. The return required by each class of investor reflects the rate of return investors would expect to earn on other investments of equivalent risk. Tesco management determined it would be appropriate to use a discounted rate equal to the calculated WACC plus 5% a premium due to current market. Performing a sensitivity analysis on the discount rate for the contingent earn-out obligation, Tesco notes that the fair value would decrease approximately 6% to 7% for every 10% increase in the discount rate.
The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use significant unobservable inputs (Level 3) (in thousands).
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| | | |
Balance at beginning of year | $ | 1,014 |
|
Issuances | — |
|
Settlements | — |
|
Adjustments to fair value | (364 | ) |
Balance at June 30, 2015 | $ | 650 |
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We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. We did not recognize any impairments, in the current quarter, on those assets required to be measured at fair value on a nonrecurring basis.
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 2014 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued new guidance that requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The new standard will be effective January 1, 2017 and will be applied prospectively. Early adoption is permitted. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.
In May 2014, the FASB issued guidance to clarify 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 FASB has approved the proposal of a one-year deferral of the original effective date of this guidance and as a result it will be effective for fiscal years and interim periods beginning after December 15, 2017. The FASB's proposed update would still allow entities to apply the new guidance as of the original effective date (for fiscal years and interim periods beginning after December 15, 2016). We expect to adopt this guidance when effective, and the impact on our financial statements is not currently estimable.
Note 3—Business Combinations
On May 7, 2014, we purchased substantially all of the operating assets of Tech Field Services, LLC ("TFS") for total consideration of approximately $6.4 million, including $5.0 million of cash and $1.4 million of contingent earn-out obligations. TFS, established in 2006 in Magnolia, Texas, provides parts, maintenance, and repairs for multiple top drive manufacturers, including TESCO top drive units. In addition to its core AMSS business, TFS offers hydraulic top drive rental units to customers. The acquired assets included four top drive rental units, parts inventory, and various administrative assets. We allocated approximately $4.7 million
of the purchase price to property, plant and equipment and intangible assets and approximately $1.7 million to goodwill in the Top Drive reporting unit.
Note 4—Details of Certain Accounts
At June 30, 2015 and December 31, 2014, prepaid and other current assets consisted of the following (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Prepaid taxes other than income taxes | $ | 3,315 |
| | $ | 4,168 |
|
Deposits | 5,773 |
| | 4,293 |
|
Prepaid insurance | 1,208 |
| | 3,481 |
|
Other prepaid expenses | 5,291 |
| | 6,237 |
|
Restricted cash | 804 |
| | 2,664 |
|
Deferred job costs | 4,660 |
| | 4,528 |
|
Non-trade receivables | 1,020 |
| | 1,503 |
|
| $ | 22,071 |
| | $ | 26,874 |
|
At June 30, 2015 and December 31, 2014, accrued and other current liabilities consisted of the following (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Accrued payroll and benefits | $ | 15,499 |
| | $ | 18,202 |
|
Accrued taxes other than income taxes | 4,605 |
| | 4,194 |
|
Other current liabilities | 4,105 |
| | 4,385 |
|
| $ | 24,209 |
| | $ | 26,781 |
|
Note 5—Inventories
At June 30, 2015 and December 31, 2014, inventories, net of reserves for excess and obsolete inventories of $3.8 million and $2.7 million, respectively, by major classification were as follows (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Raw materials | $ | 82,715 |
| | $ | 76,489 |
|
Work in progress | 4,316 |
| | 2,866 |
|
Finished goods | 30,944 |
| | 35,327 |
|
| $ | 117,975 |
| | $ | 114,682 |
|
Note 6—Property, Plant and Equipment
At June 30, 2015 and December 31, 2014, property, plant, and equipment, at cost, by major classification were as follows (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Land, buildings, and leaseholds | $ | 24,596 |
| | $ | 27,488 |
|
Drilling equipment | 369,623 |
| | 359,533 |
|
Manufacturing equipment | 15,235 |
| | 14,302 |
|
Office equipment and other | 33,570 |
| | 32,836 |
|
Capital work in progress | 4,581 |
| | 9,621 |
|
| 447,605 |
| | 443,780 |
|
Less: Accumulated depreciation | (258,298 | ) | | (241,275 | ) |
| $ | 189,307 |
| | $ | 202,505 |
|
Depreciation and amortization expense for the three and six months ended June 30, 2015 and 2014 are included on our unaudited condensed consolidated statements of income as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Cost of sales and services | $ | 9,102 |
| | $ | 9,689 |
| | $ | 18,620 |
| | $ | 18,671 |
|
Selling, general and administrative expense | 531 |
| | 688 |
| | 1,112 |
| | 1,418 |
|
| $ | 9,633 |
| | $ | 10,377 |
| | $ | 19,732 |
| | $ | 20,089 |
|
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. During the three and six months ended June 30, 2015, one used top drive was sold from our rental fleet with a net book value of $0.2 million, which was included in cost of sales and services. During the three and six months ended June 30, 2014, two and three used top drives were sold from our rental fleet with a net book value of $1.4 million and $1.5 million, respectively, which was included in cost of sales and services.
Note 7—Warranties
Changes in our warranty reserves during the six months ended June 30, 2015 were as follows (in thousands):
|
| | | |
| June 30, 2015 |
Balance as of January 1, 2015 | $ | 3,370 |
|
Charged to expense, net | 1,456 |
|
Deductions | (1,830 | ) |
Balance as of June 30, 2015 | $ | 2,996 |
|
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, |
| 2015 | | 2014 | | 2015 | | 2014 |
Basic weighted average number of shares outstanding | 38,981 |
| | 40,175 |
| | 38,969 |
| | 39,963 |
|
Dilutive effect of stock-based compensation | — |
| | 623 |
| | — |
| | 685 |
|
Diluted weighted average number of shares outstanding | 38,981 |
| | 40,798 |
| | 38,969 |
| | 40,648 |
|
Anti-dilutive options excluded from calculation due to exercise prices | — |
| | 350 |
| | — |
| | 396 |
|
There were approximately 295,000 and 247,000 shares which were excluded from the calculation of the diluted weighted average number of shares outstanding as the Company is in a net loss position for the three and six months ended June 30, 2015, respectively. The inclusion of the shares would be anti-dilutive.
Note 9—Income Taxes
Tesco Corporation is an Alberta, Canada corporation. We conduct business and are taxed 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 for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Current tax provision | $ | 1,888 |
| | $ | 7,338 |
| | $ | 4,558 |
| | $ | 9,955 |
|
Deferred tax provision (benefit) | 10,284 |
| | (329 | ) | | 7,088 |
| | (831 | ) |
Income tax provision | $ | 12,172 |
| | $ | 7,009 |
| | $ | 11,646 |
| | $ | 9,124 |
|
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was (79)% and (48)% for the three and six months ended June 30, 2015, respectively, compared to 36% and 36% for the same periods in 2014. The change for the three and six months ended June 30, 2015, as compared to the same periods in 2014, is primarily due to a $15.3 million valuation allowance recorded against deferred tax assets during the three month period ended June 30, 2015.
We record a valuation allowance to reduce the carrying value of our 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, our past operating results, the existence of cumulative losses in the most recent years, and our forecast of future taxable income which inherently requires significant assumptions and judgment.
During the three months ended June 30, 2015 we decreased our accrual for uncertain tax positions by $0.5 million due to amounts that were effectively settled, of which $0.2 million decreased tax expense.
We have settled our audit by the Internal Revenue Service in the United States for the years ended December 31, 2011 and 2012 resulting in no material net tax expense adjustment.
Note 10—Long Term Debt
At June 30, 2015 and December 31, 2014, long term debt consisted of the following (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Capital leases | $ | — |
| | $ | 25 |
|
Current portion of long term debt | — |
| | (25 | ) |
Non-current portion of long term debt | $ | — |
| | $ | — |
|
As part of our acquisition of Premiere Casing Services - Egypt S.A.E ("Premiere") in 2011, we assumed $7.4 million of outstanding debt on the acquisition date of October 16, 2011. During 2014, we paid off substantially all of the outstanding balances related to Premiere's capital leases and all of the balances related to the notes payable.
We entered into a credit agreement on April 27, 2012, to provide a revolving line of credit of $125 million, including up to $20 million of swing line loans (collectively, the "Revolver"). The credit facility has a term of five years and all outstanding borrowings on the Revolver are due and payable on April 27, 2017. The credit facility bears interest at a margin above LIBOR, federal funds rate, or the prime rate for U.S. dollar loans as determined by JPMorgan Chase Bank, N.A. in New York. We are required to pay a commitment fee on available, but unused, amounts of the credit facility of 0.375-0.500 percent per annum and a letter of credit
fee of 1.00-2.00 percent per annum on outstanding face amounts of letters of credit issued under the credit facility. Amounts available under the Revolver are reduced by letters of credit issued under our credit facility, not to exceed $50 million in the aggregate. Amounts available under the swing line loans may also be reduced by letters of credit or by means of a credit to a general deposit account of the applicable borrower. The availability of future borrowings may also be limited in order to maintain certain financial ratios required under the covenants. The credit facility contains covenants that we consider usual and customary for an agreement of this type, including a leverage ratio, a minimum net worth, limitations on allowable amounts for the disposal of obsolete assets and annual capital expenditures, and a fixed charge coverage ratio. The credit facility prohibits incurring any additional indebtedness outside the existing credit facility in excess of $50 million and contains other restrictions, which are standard to the industry. All of our direct and indirect material subsidiaries in the United States, Canada, Argentina, Mexico, and Indonesia as well as one of our Cyprus subsidiaries are guarantors of any borrowings under the credit facility.
At June 30, 2015, we had no outstanding borrowings under the Revolver and $2.7 million in letters of credit outstanding within the credit facility. Per the terms of the credit facility, there was $114.6 million in available borrowing capacity based on our operating results, down slightly from our total capacity of $125 million. Sustained losses will further limit access to funds under the Revolver. We were in compliance with our bank covenants at June 30, 2015.
Note 11—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 these proceedings involves a claim for damages exceeding ten percent of our current assets on a consolidated basis. The estimates (if any) below represent our best estimates based on consultation with internal and external legal counsel. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.
Weatherford Litigation: Weatherford International, Inc. and Weatherford/Lamb Inc. (together, "Weatherford") filed suit against us in the U.S. District Court for the Eastern District of Texas, Marshall Division in December 2007 (the "Marshall Suit"), alleging infringement of certain Weatherford patents. In August 2008, we filed a patent infringement suit against Weatherford, National Oilwell Varco, L.P., Offshore Energy Services, Inc., and Frank's Casing Crew & Rental Tools, Inc. in the U.S. District Court for the Southern District of Texas - Houston Division (the "Houston Suit"). The Houston Suit claimed infringement of 2 of our patents related to our CDS. We settled the Marshall Suit and Houston Case with Weatherford on January 11, 2011. We settled the Houston Suit with the other defendants and a joint motion to dismiss was granted by the U.S. District Court in April 2015.
Federal and State Unpaid Overtime Action: The Company is currently participating in an arbitration, based on the Company’s dispute resolution process, with 29 current and former employees (the "Employees") who had worked or are working in various states. The Employees claim that they are owed unpaid overtime wages including liquidated damages under the Federal Labor Standards Act ("FLSA") and the applicable state laws of various states, including New Mexico and Colorado. The case is assigned to a three judge panel of arbitrators. The parties litigated the issue of whether or not a Rule 23 style opt-out class action is appropriate in this case and the arbitration panel has determined it is not appropriate for FLSA claims but is available for state law wage claims. At June 30, 2015, we maintain an estimated reserve for potential exposure, which we consider adequate.
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. As of June 30, 2015 and December 31, 2014, our total exposure under outstanding letters of credit was $6.8 million and $8.3 million, respectively.
At June 30, 2015, the accounts receivable balance included approximately $2.2 million of accounts receivable from a customer in Mexico for the period of May 2013 through July 2014 that are unbilled due to a contractual rate dispute. We continue to seek collection of this amount through an official dispute resolution process with the customer. These receivables have not been reserved at June 30, 2015, as we believe the probable outcome of the dispute resolution process will be favorable.
Note 12—Segment Information
Business Segments
Prior to the sale of the Casing Drilling business during the second quarter of 2012, our five business segments were: Top Drive, Tubular Services, Casing Drilling, Research and Engineering, and Corporate and Other. On June 4, 2012, we completed the sale of substantially all of the assets of the Casing Drilling segment, which consisted of the proprietary Casing Drilling™ technology. Our Top Drive segment is comprised of product sales, rental services, and after-market sales and service. Our Tubular Services segment includes land and offshore services augmented by sales of products, accessories, and consumables for the casing running process. Our Research and Engineering segment is comprised of our internal research and development activities related to our proprietary tubular services and top drive model development, as well as the Casing Drilling technology prior to the sale. Our Corporate and Other segment includes executive management and several global support and compliance functions.
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, corporate general and administrative expenses, 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. Substantially all of our goodwill has been allocated to the Tubular Services segment, with a portion to the Top Drive segment for after-market sales and services.
Significant financial information relating to our business segments is presented below (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| Top Drive | | Tubular Services | | Casing Drilling | | Research & Engineering | | Corporate and Other | | Total |
Revenue | $ | 41,430 |
| | $ | 33,021 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 74,451 |
|
Depreciation and amortization | 2,155 |
| | 6,389 |
| | — |
| | 3 |
| | 1,086 |
| | 9,633 |
|
Operating income (loss) | (2,816 | ) | | (2,810 | ) | | — |
| | (2,059 | ) | | (6,033 | ) | | (13,718 | ) |
Total Other expense | |
| | |
| | |
| | |
| | |
| | 1,600 |
|
Loss before income taxes | |
| | |
| | |
| | |
| | |
| | $ | (15,318 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2014 |
| Top Drive | | Tubular Services | | Casing Drilling | | Research & Engineering | | Corporate and Other | | Total |
Revenue | $ | 86,279 |
| | $ | 58,795 |
| | $ | 32 |
| | $ | — |
| | $ | — |
| | $ | 145,106 |
|
Depreciation and amortization | 2,688 |
| | 6,526 |
| | — |
| | 17 |
| | 1,146 |
| | 10,377 |
|
Operating income (loss) | 19,237 |
| | 11,288 |
| | (37 | ) | | (2,500 | ) | | (9,173 | ) | | 18,815 |
|
Other expense (income) | |
| | |
| | |
| | |
| | |
| | (923 | ) |
Income before income taxes | |
| | |
| | |
| | |
| | |
| | $ | 19,738 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| Top Drive | | Tubular Services | | Casing Drilling | | Research & Engineering | | Corporate and Other | | Total |
Revenue | $ | 91,351 |
| | $ | 74,770 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 166,121 |
|
Depreciation and amortization | 4,708 |
| | 12,801 |
| | — |
| | 6 |
| | 2,217 |
| | 19,732 |
|
Operating income (loss) | 1,737 |
| | (792 | ) | | — |
| | (4,910 | ) | | (15,391 | ) | | (19,356 | ) |
Other expense | |
| | |
| | |
| | |
| | |
| | 4,740 |
|
Income before income taxes | |
| | |
| | |
| | |
| | |
| | $ | (24,096 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2014 |
| Top Drive | | Tubular Services | | Casing Drilling | | Research & Engineering | | Corporate and Other | | Total |
Revenue | $ | 150,972 |
| | $ | 115,500 |
| | $ | 32 |
| | $ | — |
| | $ | — |
| | $ | 266,504 |
|
Depreciation and amortization | 5,143 |
| | 12,581 |
| | — |
| | 33 |
| | 2,332 |
| | 20,089 |
|
Operating income (loss) | 29,970 |
| | 22,153 |
| | (326 | ) | | (4,966 | ) | | (18,911 | ) | | 27,920 |
|
Total Other expense | |
| | |
| | |
| | |
| | |
| | 2,768 |
|
Income before income taxes | |
| | |
| | |
| | |
| | |
| | $ | 25,152 |
|
Other Charges
In response to the continued downturn in the energy industry, and its corresponding impact on our business outlook, we continued certain cost rationalization efforts, which included reductions in workforce. We recorded restructuring charges in continuing operations, primarily related to headcount reductions, of $3.0 million and $5.6 million for the three months and six months ended June 30, 2015, respectively. The following table presents these charges and the related income statement classification to which the charges are included (in thousands):
|
| | | | | | | | | |
| Three Months Ended June 30, 2015 | | Six Months Ended June 30, 2015 | | Income Statement Classification |
| | | | | (Operating expenses) |
Restructuring Costs | | | | | |
Top Drive | $ | 1,818 |
| | $ | 3,227 |
| | Cost of sales and services - Products |
Tubular Services | 1,074 |
| | 1,972 |
| | Cost of sales and services - Services |
Corporate and Other | 90 |
| | 372 |
| | Selling, general and administrative |
| $ | 2,982 |
| | $ | 5,571 |
| | |
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 employed. Our revenue by geographic area for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Canada | $ | 5,098 |
| | $ | 17,039 |
| | $ | 15,333 |
| | $ | 28,294 |
|
United States | 18,836 |
| | 51,821 |
| | 45,069 |
| | 89,323 |
|
South America (excluding Mexico) | 15,578 |
| | 24,086 |
| | 31,793 |
| | 46,003 |
|
Mexico | 8,586 |
| | 9,321 |
| | 17,827 |
| | 16,259 |
|
Asia Pacific | 8,661 |
| | 13,338 |
| | 20,562 |
| | 25,087 |
|
Europe, Africa, and Middle East | 14,588 |
| | 16,176 |
| | 28,103 |
| | 32,081 |
|
Russia | 3,104 |
| | 13,325 |
| | 7,434 |
| | 29,457 |
|
Total | $ | 74,451 |
| | $ | 145,106 |
| | $ | 166,121 |
| | $ | 266,504 |
|
The physical location of our net property, plant, and equipment by geographic area as of June 30, 2015 and December 31, 2014 was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Top Drive | | Tubular Services | | Overhead, Corporate, and Other | | June 30, 2015 |
United States | $ | 19,007 |
| | $ | 32,608 |
| | $ | 9,298 |
| | $ | 60,913 |
|
Mexico | 23,992 |
| | 2,132 |
| | 186 |
| | 26,310 |
|
Europe, Africa, and Middle East | 7,501 |
| | 20,925 |
| | 3,033 |
| | 31,459 |
|
Asia Pacific | 6,465 |
| | 17,592 |
| | 690 |
| | 24,747 |
|
Russia | 16,043 |
| | 326 |
| | 12 |
| | 16,381 |
|
South America (excluding Mexico) | 10,793 |
| | 8,021 |
| | 494 |
| | 19,308 |
|
Canada | 1,186 |
| | 3,308 |
| | 5,695 |
| | 10,189 |
|
Total | $ | 84,987 |
| | $ | 84,912 |
| | $ | 19,408 |
| | $ | 189,307 |
|
|
| | | | | | | | | | | | | | | |
| Top Drive | | Tubular Services | | Overhead, Corporate, and Other | | December 31, 2014 |
United States | $ | 17,128 |
| | $ | 35,914 |
| | $ | 10,180 |
| | $ | 63,222 |
|
Mexico | 26,925 |
| | 2,002 |
| | 387 |
| | 29,314 |
|
Europe, Africa, and Middle East | 7,738 |
| | 20,721 |
| | 3,878 |
| | 32,337 |
|
Asia Pacific | 6,773 |
| | 19,000 |
| | 590 |
| | 26,363 |
|
Russia | 16,516 |
| | 454 |
| | 8 |
| | 16,978 |
|
South America (excluding Mexico) | 10,047 |
| | 9,496 |
| | 740 |
| | 20,283 |
|
Canada | 2,904 |
| | 5,245 |
| | 5,859 |
| | 14,008 |
|
Total | $ | 88,031 |
| | $ | 92,832 |
| | $ | 21,642 |
| | $ | 202,505 |
|
Major customers and credit risk
Our accounts receivable are principally with major oil and natural gas service, exploration, and production companies and are subject to normal industry credit risks. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition, and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. Many of our customers are located in 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. Since the decline in oil prices beginning June 2014, we have seen an increasing number of companies in financial distress, and several bankruptcies. However, we believe we have adequate controls in place to mitigate credit risk.
On July 1, 2015 Bank Indonesia issued Circular No. 17/11/DKSP which mandates the use of the Indonesian Rupiah within the territory of the Republic of Indonesia. This change has had no impact on the company for the three months ended June 30, 2015. We continue to monitor the potential impact of this circular on our business in Indonesia and our functional currency election.
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 2014 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. Our operations consist of top drive sales, rentals, after-market sales and services, and our tubular sales and services.
Our revenues and operating results are directly related to the level of worldwide oil and gas drilling and production activities and the profitability and cash flow of exploration and production companies and drilling contractors, which are affected by current and anticipated oil and gas prices.
Our Segments
Prior to the sale of the Casing Drilling business during the second quarter of 2012, our five business segments were:
| |
• | Top Drive – product sales, rentals, and after-market sales and services; |
| |
• | Tubular Services – land and offshore tubular services augmented by sales of products, accessories, and consumables for the casing running process; |
| |
• | Casing Drilling – proprietary Casing Drilling technology; |
| |
• | Research and Engineering – internal research and development activities related to our proprietary tubular services and top drive model development, as well as the Casing Drilling technology prior to the sale; and |
| |
• | Corporate and Other – including executive management and several global support and compliance functions |
On June 4, 2012, we completed the sale of substantially all of the assets of our Casing Drilling segment to the Schlumberger Group.
Business Environment
Our revenues are dependent on the number of worldwide oil and gas wells drilled, the price of crude oil and natural gas, capital spending by oil field companies and drilling contractors, 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. The profitability of exploration and production companies and drilling contractors are affected by the current and anticipated prices of crude oil. Profitability is a key factor in their willingness to invest in new exploration and production activities which is reflected in rig and well counts.
Our business is dependent on both the rig count and well count. Rig count is an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil service industry.
Rig count trends are governed by the exploration and development spending by exploration and production companies, which in turn is influenced by current and future price expectations for oil and gas. Therefore, the count may reflect the relative strength and stability of energy prices and overall market activity. However, 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. Well count is another important business barometer for our industry. It is important to look at rig count in conjunction with the well count.
Below is a table that shows the average rig count by region for the three and six months ended June 30, 2015 and 2014:
|
| | | | | | | | | |
| Three Month Average Rig Count(1) | | Six Month Average Rig Count(1) |
| June 30, | | June 30, |
| 2015 | 2014 | | 2015 | 2014 |
U.S. | 909 |
| 1,852 |
| | 1,145 |
| 1,816 |
|
Canada | 100 |
| 202 |
| | 204 |
| 364 |
|
Latin America (includes Mexico) | 322 |
| 402 |
| | 337 |
| 402 |
|
Middle East (excludes Iran, Iraq and Sudan) | 403 |
| 415 |
| | 408 |
| 408 |
|
Asia Pacific (excludes China onshore) | 220 |
| 249 |
| | 228 |
| 253 |
|
Europe (excludes Russia) | 116 |
| 149 |
| | 124 |
| 142 |
|
Africa | 108 |
| 133 |
| | 119 |
| 137 |
|
Worldwide | 2,178 |
| 3,402 |
| | 2,565 |
| 3,522 |
|
Outlook
The effect and duration of oil and gas price downturns are unpredictable. Based upon the simple average of three spot prices(2); Dated Brent, West Texas Intermediate, and the Dubai Fateh in U.S. dollars per barrel, we began to see a decline in the price of crude oil after the average reached a high of $108.37 per barrel in June 2014. This decline continued throughout the year where it ended with an average price of $60.55 per barrel as of December 2014 and continued to decline going into the current year with the prices steadying around $61.30 per barrel as of June 2015.
The price of crude oil directly affects exploration and production companies' profitability and, more importantly, their willingness to drill new wells. As a result, we expect to see an overall decline in the number of new wells drilled and the average rig count during 2015. Our visibility into the second half of 2015 and beyond remains limited. Oil and gas inventories and global production rates, however, point to a flattening of the industry decline. A long-term continued slowdown in drilling operations would adversely affect our business and results of operations. Though monitoring the commodity prices will be an indicator of movement in the market, the impact on the number of wells drilled and associated drilling rigs is the primary indicator of our ability to achieve desired results.
We have reacted aggressively to market conditions through restructuring and right sizing efforts. Reductions to our global workforce of 16% resulted in a one-time charge of $5.6 million for the six months ended June 30, 2015. Our restructuring efforts will continue during the remainder of the 2015 and will include further headcount reductions, management consolidation, and developing a more efficient operating footprint. Through these efforts we should be poised to return to profitability when market conditions improve. Moreover, we believe we are well positioned and should benefit from our strong balance sheet, liquidity, access to credit, global infrastructure, broad product and service offerings, and installed base of equipment. As of June 30, 2015, we had $62.7 million in cash and equivalents, no long-term outstanding debt obligations, and immediate access to $114.6 million through our revolving credit facility. In this challenging market, we remain focused on things within our control, including cost and resource base, the effective development of our technology, and the quality and integrity of our products and services.
__________________________________
| |
(1) | Source: Baker Hughes Incorporated worldwide rig count; averages are monthly. |
The current economic conditions are challenging. However, we see them as potential opportunities in those regions in which we already maintain a presence. While we have transitioned from a primarily North American company to generating more revenue globally over the past few years, our position in many of these foreign markets still leaves significant growth opportunities in spite of the current economic conditions. We plan to expand our service offerings in those areas in which we already have facilities and capital resources. We are focusing on offering longer-term service contracts. We believe that our global infrastructure provides the capacity to offer additional after-market sales and services without incurring significant additional capital expenditures to grow these markets. We believe this provides us with a competitive advantage. We plan to use our existing facilities as a base to promote our after-market sales and services to include long-term maintenance contracts, automated rig controls, and equipment health monitoring services. These services are also compatible with our competitors' top drives. We believe that top drives are at the point in their life-cycle where we will begin to see a steady increase in the need for service, maintenance, and recertification.
Until recently, our tubular services business was primarily focused on onshore drilling. With land-based drilling consistently moving toward horizontal drilling, the value from automated casing running tools, specifically our CDS offering, has served as the foundation of our land-based expertise. Our customers have realized great benefit from the performance of our casing running tools and our approach to providing new solutions that have provided us with the opportunity to expand to offshore markets. We feel there is a significant opportunity for growth in the offshore market, including the market for our automated tubular services and equipment. Our automated services require fewer people to operate, reducing expense, and promoting safety and service quality. We plan to use our offshore expertise that we gained in Indonesia, Saudi Arabia, the United States, Mexico, and the North Sea to increase our offshore market presence globally. We are promoting our record of safety, service quality, and reliability to gain market share. In addition, offshore operations are long-term in nature and, therefore, less affected by short term swings in crude oil prices.
We plan to capitalize on growth opportunities, continue to invest in research and engineering related to our top drive and tubular services segments, and continue to better integrate our products and service offerings with our customers' needs.
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 Form 10-Q.
Operating results by business segments
Below is a summary of the operating results of our business segments for the three and six months ended June 30, 2015 and 2014 (in thousands, except percentages):
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | 2014 | | 2015 | 2014 |
Segment revenue | | | | | |
Top Drive revenue | | | | | |
Sales | $ | 13,742 |
| $ | 40,536 |
| | $ | 31,513 |
| $ | 65,860 |
|
Rental services | 17,733 |
| 26,726 |
| | 37,743 |
| 51,426 |
|
After-Market sales and services | 9,955 |
| 19,017 |
| | 22,095 |
| 33,686 |
|
| 41,430 |
| 86,279 |
| | 91,351 |
| 150,972 |
|
Tubular Services revenue | | | | | |
Land | $ | 23,471 |
| $ | 39,594 |
| | $ | 54,096 |
| $ | 79,522 |
|
Offshore | 8,716 |
| 10,030 |
| | 18,566 |
| 20,867 |
|
CDS, Parts, & Accessories | 834 |
| 9,171 |
| | 2,108 |
| 15,111 |
|
| 33,021 |
| 58,795 |
| | 74,770 |
| 115,500 |
|
| | | | | |
Casing Drilling | $ | — |
| $ | 32 |
| | $ | — |
| $ | 32 |
|
Revenue | $ | 74,451 |
| $ | 145,106 |
| | $ | 166,121 |
| $ | 266,504 |
|
| | | | | |
Segment operating income (loss) | | | | | |
Top Drive | $ | (2,816 | ) | $ | 19,237 |
| | $ | 1,737 |
| $ | 29,970 |
|
Tubular Services | (2,810 | ) | 11,288 |
| | (792 | ) | 22,153 |
|
Casing Drilling | — |
| (37 | ) | | — |
| (326 | ) |
Research & engineering | (2,059 | ) | (2,500 | ) | | (4,910 | ) | (4,966 | ) |
Corporate and other | (6,033 | ) | (9,173 | ) | | (15,391 | ) | (18,911 | ) |
Operating income (loss) | $ | (13,718 | ) | $ | 18,815 |
| | $ | (19,356 | ) | $ | 27,920 |
|
Top Drive Segment
Revenues from our top drive segment are generated through sales, rentals, and after-market sales and service. Sales of top drives consist of new and used top drives and catwalks. Our rental fleet of top drives are mobile. We install the units on the customers' drill 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 both top drives we manufacture and those of our competitors. Prior to the second quarter of 2014, we only provided after-market sales and services for our proprietary top drives.
Q2 2015 as compared with Q2 2014
Sales
Revenues decreased by $26.8 million, or 66%, for the three months ended June 30, 2015 as compared to the same period of 2014 primarily due to a decrease in the number of units sold globally which is driven from the decrease in demand, rig count and crude oil prices compared to the prior period. In the three months ended June 30, 2015, we sold a total of 10 new top drives, as compared to the same period in 2014, when we sold 33 new top drives. We experienced a significant decrease in the number of top drives sold in North America based on current market conditions as well as in Russia due to the devaluation of the Ruble and the uncertainty surrounding economic and political issues within the region. In addition, we had revenue of $0.8 million related to the sale of one used top drive during the three months ended June 30, 2015, while revenue related to the sale of two used top drive units was $2.3 million for the same period in 2014.
Rental Services
Revenues decreased by $9.0 million, or 34%, for the three months ended June 30, 2015 as compared to the same period in 2014, as the utilization of our rental fleet also decreased by 32% during the same period due to depressed market demand within the industry. For the three months ended June 30, 2015, utilization declined to 30% due to fewer operating days and fewer contracted units. The decrease in activity compounded with price compression primarily impacted our revenues in Latin America, North America and Russia.
After-Market Sales and Services
Revenues decreased by $9.1 million, or 48%, for the three months ended June 30, 2015 as compared to the same period in 2014. This decrease was primarily due to a decline in demand for parts and services in North America, accounting for 42% and 40% of the total decline, respectively. Further, declines in demand for part sales in Latin America and services in the Middle East contributed to a majority of the remaining decrease. With the decline in oil prices and consequential decrease in drilling activity, customers are choosing to defer non-critical services and consume their inventories rather than replenish them.
Operating Income
Top Drive operating income decreased by $22.1 million, or 115%, for the three months ended June 30, 2015 as compared to the same period of 2014, primarily due to a decline in revenues for each product offering related to current market conditions with respect to a significant drop in rig count, oil prices and overall demand for oil field services. While we restructured and implemented cost rationalization measures, they did not keep pace with the continued market decline, which was greater than expected. The significant decline in our manufacturing activities led to an under absorption of manufacturing overhead and increased bottom line cost. For the three months ended June 30, 2015 the under absorption was $3.5 million, compared with an over absorption of $0.9 million for the same period of 2014. In addition, for the three months ended June 30, 2015 we also recorded non-recurring items related to restructuring costs of $1.8 million and specific warranty reserves for new products of $1.3 million. Also, bad debt expense during the three months ended June 30, 2015 was $0.6 million compared to $1.0 million for the same period in 2014.
YTD 2015 as compared with YTD 2014
Sales
Revenues decreased by $34.3 million, or 52%, for the six months ended June 30, 2015 as compared to the same period of 2014 primarily due to a decrease in the number of units sold globally which is driven by the decrease in demand, rig count, and crude oil prices compared to the prior period. We experienced a significant decrease in the number of top drive units sold in North America based on current market conditions and in Russia due to the devaluation of the Ruble and the uncertainty surrounding economic and political issues within the region. These declines were partially offset by approximately 10% increase in top drive unit sales in Asia Pacific and the Middle East regions. In the six months ended June 30, 2015, we sold 24 new top drive units, as compared to 52 new top drive units for the same period in 2014. In addition, we recognized revenue of $0.8 million related to the sale of one used top drive unit for the six months ended June 30, 2015 as compared to revenue of $3.1 million from the sale of three used top drive units during the same period in 2014.
Rental Services
Revenues decreased by $13.7 million, or 27%, for the six months ended June 30, 2015 as compared to the same period in 2014. Utilization declined from 44% to 32% due to a decrease in market demand within the industry. The decrease in activity compounded with price compression primarily impacted our revenues in Latin America, North America and Russia.
After-Market Sales and Services
Revenues decreased by $11.6 million, or 34%, for the six months ended June 30, 2015 as compared to the same period in 2014. Decreases in part sales and after-market services in the North American market contributed to 80% of the overall decrease, while the remaining decrease was primarily driven by decreases in Latin America. With the decline in oil prices and consequential decrease in drilling activity, customers are choosing to defer non-critical services and consume their inventories rather than replenish them. Accordingly, the decrease in part sales contributed to 60% of the overall decrease worldwide.
Operating Income
Top Drive operating income decreased by $28.2 million, or 94%, for the six months ended June 30, 2015 as compared to the same period in 2014 primarily due to a decline in revenues for each product offering due to current market conditions which include a significant drop in rig count and declining oil prices and overall demand for oil field services. While we restructured and implemented cost rationalization measures, they did not keep pace with the continued market decline, which was greater than expected. The significant decline in our manufacturing activities led to an under absorption of manufacturing overhead and has increased bottom line cost. For the six months ended June 30, 2015 the under absorption was $6.3 million, compared with an over absorption of $1.5 million for the same period of 2014. In addition, for the six months ended June 30, 2015 we also recorded non-recurring items related to restructuring costs of $3.2 million and specific warranty reserves for new products of $1.3 million. Also, bad debt expense during the six months ended June 30, 2015 was $0.5 million and $1.9 million for the same period in 2014.
Tubular Services Segment
We generate revenues in our tubular services business from land and offshore services augmented by sales of products, accessories, and consumables for the casing running process. We have made certain reclassifications to the product offerings in Tubular Services for clarity regarding the markets in which we operate and consistency with our long-term strategy to become a broad-based tubular service provider. 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 includes the CDStm system, down-well consumables, and other non-consumable parts. As of June 4, 2015, following the expiration of a non-compete contract provision entered into during the sale of the Casing Drilling business to Schlumberger in 2012, this segment is able to pursue and perform work that involves drilling on an oil or gas well using standard well casing pipe.
Q2 2015 as compared with Q2 2014
Land
Revenues decreased by $16.1 million, or 41%, for the three months ended June 30, 2015 as compared to the same period in 2014, primarily due to decreased activity and demand in North America and Latin America, which contributed 68% and 19% to the overall decrease, respectively. In North America, we experienced an approximate 50% decrease in the number of jobs performed compounded by downward pricing pressures caused by the lower oil prices and rig count as compared to 2014. In Latin America, the decrease was primarily driven by lower job count.
Offshore
Revenues decreased by $1.3 million, or 13%, for the three months ended June 30, 2015 as compared to the same period in 2014, primarily due to fewer offshore jobs being performed in Asia Pacific. Offshore revenue in North America offset this variance as our mix of services performed during the quarter shifted towards higher revenue-generating deep water services as compared to 2014.
CDS, Parts, & Accessories
Revenues decreased by $8.3 million, or 91%, for the three months ended June 30, 2015 as compared to the same period in 2014, primarily due to customers postponing capital expenditures in light of the decline in oil prices and overall reduction in operating rigs. Revenue for CDS™ equipment sales was insignificant for the three months ended June 30, 2015, while we had $5.6 million of sales during the same period in 2014. The decrease in revenues related to parts and accessories is tied to the fewer number of land-based and offshore tubular services jobs during the second quarter of 2015.
Operating Income
Tubular Services operating income decreased by $14.1 million, or 125%, for the three months ended June 30, 2015 as compared to the same period in 2014, primarily due to a reduction in revenue due to lower activity and price compression. Contributors to the total decline were North America, Latin America, and Asia Pacific of 36%, 20%, and 24%, respectively. Additionally, we recorded restructuring charges of $1.1 million and received some benefit during the period from cost-cutting measures.
YTD 2015 as compared with YTD 2014
Land
Revenues decreased by $25.4 million, or 32%, for the six months ended June 30, 2015 as compared to the same period in 2014, primarily due to decreased activity and demand in North America and Latin America, contributing 74% and 15% of the total variance, respectively. Specifically for North America, the decrease in rig count and overall activity resulted in half the number of jobs being performed during the six months ended June 30, 2015 compared to the same period in 2014. Additionally, oil prices and tubular services competition also compressed prices by 15% on average. The decrease in revenue for Latin America was primarily due to a decrease in the number of jobs performed.
Offshore
Revenues decreased by $2.3 million, or 11%, for the six months ended June 30, 2015 as compared to the same period in 2014, primarily due to a decrease in the number of offshore jobs performed in Asia Pacific. Additionally, a one-off job performed during 2014 in Europe exaggerates the unfavorable variance when compared against the same period in 2015. Offshore revenues in North America offset these variances as our mix of services performed during the quarter shifted more towards higher revenue-generating deep water services as compared to 2014.
CDS, Parts, & Accessories
Revenues decreased by $13.0 million, or 86%, for the six months ended June 30, 2015 as compared to the same period in 2014, primarily due to customers postponing capital expenditures in light of the decline in oil prices and overall reduction in operating rigs. Revenue for CDS™ equipment sales was insignificant for the six months ended June 30, 2015, while we had $8.4 million of sales during the same period in 2014. The decrease in revenues related to parts and accessories is tied to the decrease in land based and offshore tubular services jobs during the second quarter of 2015.
Operating Income
Tubular Services operating income decreased by $22.9 million, or 104%, for the six months ended June 30, 2015 as compared to the same period in 2014, primarily due to a reduction in revenues of $40.7 million for the same period. North America, Latin America and Asia Pacific contributed the majority of the decrease in operating income over the period. Additionally, we recorded restructuring charges of $2.0 million and received some benefit during the period from cost rationalization measures.
Casing Drilling Segment
On June 4, 2012, we completed the sale of substantially all of the assets of the Casing Drilling segment to the Schlumberger Group.
We previously generated revenues in our casing drilling business by selling services related to our proprietary Casing Drilling System. This system used patented equipment and processes to allow an oil or gas well to be drilled using standard well casing pipe.
YTD 2015 as compared with YTD 2014
The 2014 Casing Drilling activity was due to casing drilling part sales. Beginning in 2015, there is no Casing Drilling activity.
Research and Engineering Segment
We are a technology-based company. We are deploying new technologies to increase the degree of automation and mechanization of 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.
Q2 2015 as compared with Q2 2014
Operating expenses decreased by $0.4 million, or 18%, during the three months ended June 30, 2015, as compared to same period in 2014, due to lower spending and cost rationalization measures. Additionally, testing costs were down as we commissioned our own test rig for proprietary product enhancement.
YTD 2015 as compared with YTD 2014
Operating expenses decreased by $0.1 million, or 1%, during the six months ended June 30, 2015, as compared to the same period in 2014, due to lower spending, cost rationalization measures, and the commissioning of our test rig.
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 was 8.1% and 6.3% for the three months ended June 30, 2015 and 2014, respectively.
Q2 2015 as compared with Q2 2014
Operating expenses decreased by $3.1 million, or 34%, during the three months ended June 30, 2015, as compared to the same period in 2014, due primarily to cost rationalization measures implemented during the previous period. The benefits of these cost saving measures impacted personnel cost and various discretionary spending accounts.
YTD 2015 as compared with YTD 2014
Operating expenses decreased by $3.5 million, or 19%, during the six months ended June 30, 2015, as compared to the same period in 2014, due primarily to cost saving measures implemented in Q1 2015. The benefits of these cost saving measures are visible primarily in personnel cost and various discretionary spending accounts.
Other Expenses
Below is a detail of expenses that are not allocated to segments for the three and six months ended June 30, 2015 and 2014 (in thousands, except percentages):
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | 2014 | | 2015 | 2014 |
Interest expense | $ | 354 |
| $ | 229 |
| | $ | 572 |
| $ | 636 |
|
Interest income | (12 | ) | (23 | ) | | (40 | ) | (84 | ) |
Foreign exchange losses (gains) | 1,399 |
| (1,130 | ) | | 4,555 |
| 2,209 |
|
Other expense (income) | (141 | ) | 1 |
| | (347 | ) | 7 |
|
Income before taxes | $ | (15,318 | ) | $ | 19,738 |
| | $ | (24,096 | ) | $ | 25,152 |
|
Income tax provision (benefit) | 12,172 |
| 7,009 |
| | 11,646 |
| 9,124 |
|
Net Income (loss) | $ | (27,490 | ) | $ | 12,729 |
| | $ | (35,742 | ) | 16,028 |
|
Q2 2015 as compared with Q2 2014
Interest Expense
Interest expense increased by $0.1 million, or 55%, during the three months ended June 30, 2015 as compared to the same period in 2014, primarily due to interest expense on certain tax matters incurred related to U.S. and Argentina jurisdictions.
Foreign Exchange Losses
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 which impact income. Foreign exchange losses increased by $2.5 million, or 224%, during the three months ended June 30, 2015, as compared to the same period in 2014, primarily due to currency devaluations in Argentina, Venezuela, Mexico, Russia, and Indonesia contributing 48%, 27%, 8%, 7%, and 4%, respectively.
Other Expenses (Income)
Other Income increased by $0.1 million, during the three months ended June 30, 2015 as compared to the same period in 2014, primarily due to the favorable fair market value adjustment recorded in 2015 for the TFS acquisition contingent earn-out obligation. For further discussion of this acquisition and adjustment, see Part 1, Item 1, "Financial Statements, Note 1 and Note 3", respectively, included in this Report.
Income Tax Provision
Our income tax provision increased by $5.2 million, or 74%, for the three months ended June 30, 2015, as compared to the same period in 2014. Our effective tax rates were (79)% and 36% for the three months ended June 30, 2015 and 2014, respectively. The significant change is primarily due to a $15.3 million valuation allowance recorded during the three months ended June 30, 2015.
YTD 2015 as compared with YTD 2014
Interest Expense
Interest expense decreased during the six months ended June 30, 2015 and is consistent with the same period during 2014.
Foreign Exchange Losses
Foreign exchange losses increased by $2.3 million, or 106%, during the six months ended June 30, 2015 as compared to the same period in 2014, primarily due to exchange losses based upon currency movements and changes in the net monetary asset base in Argentina, Colombia, Mexico, and Venezuela.
Other Expenses (Income)
Other income increased by $0.4 million, during the six months ended June 30, 2015 as compared to the same period in 2014, primarily due to the favorable fair market value adjustment recorded in 2015 for the contingent earn-out obligation related to the acquisition of TFS. For further discussion of this acquisition and adjustment, see Part 1, Item 1, "Financial Statements, Note 1 and Note 3", respectively, included in this Report.
Income Tax Provision
Our income tax provision increased by $2.5 million, or 28%, for the six months ended June 30, 2015 as compared to the same period in 2014. Our effective tax rates were (48)% and 36% for the six months ended June 30, 2015 and 2014, respectively. The significant change is primarily due to a $15.3 million valuation allowance recorded during the three months ended June 30, 2015.
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 our operations, available cash and cash equivalents, and availability under our $125 million revolving credit facility. Available borrowing under the Revolver was $114.6 million at June 30, 2015. This is down from $122.3 million due to the terms of the Revolver that tie borrowing capacity to operating results. Sustained losses will further limit access to funds under the Revolver. Despite this temporary reduction in available borrowings, our financial position remains strong, with resources sufficient to execute our strategy.
Net cash is a non-GAAP measure reflecting cash and cash equivalents, net of debt. Management uses this non-GAAP measure to evaluate our capital structure and financial leverage. We believe net cash is a meaningful measure that will assist investor in understanding our results and recognizing underlying trends. Net cash should not be considered as an alternative to, or more meaningful than, cash and equivalents as determined in accordance with GAAP or as an indicator of our operating performance or liquidity.
The following is a reconciliation of our cash and cash equivalents to net cash as of June 30, 2015 and December 31, 2014 (in thousands):
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Cash | $ | 62,673 |
| | $ | 72,466 |
|
Current portion of long term debt | — |
| | (25 | ) |
Long term debt | — |
| | — |
|
Net cash | $ | 62,673 |
| | $ | 72,441 |
|
The following table summarizes our net cash provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2015 and 2014 (in thousands):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
Cash provided by operating activities | $ | 1,685 |
| | $ | 20,146 |
|
Cash used in investing activities | (7,666 | ) | | (21,143 | ) |
Cash provided by (used in) financing activities | (3,812 | ) | | 3,677 |
|
Increase (decreases) in cash and equivalents | $ | (9,793 | ) | | $ | 2,680 |
|
Certain sources and uses of cash, such as the level of discretionary capital expenditures, the issuance and repayment of debt, and the payment of dividends 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, 2015 and 2014. This discussion should be read in conjunction with Part I, Item 1, "Financial Statements" included in this Report.
Operating Activities
Net cash provided by operating activities is our primary source of capital and liquidity. Net cash provided by operating activities was $1.7 million for the six months ended June 30, 2015 compared to net cash provided of $20.1 million for the same period in 2014. The decrease in net cash provided by operating activities was due primarily to cash inflows from decreasing receivables, and intangibles, which was offset by one time retirement and transition bonus payments to the former CEO, cash tax payments, and decreasing accounts payable.
Investing Activities
Net cash used by investing activities was $7.7 million during the six months ended June 30, 2015 compared to $21.1 million during the same period in 2014. We used cash for capital spending during the six months ended June 30, 2015 and 2014 of $10.2 million
and $19.3 million, respectively. While there were proceeds of $0.7 million from the sale of operating assets for the six months ended June 30, 2015, the amount for the same period in 2014 was $3.3 million.
Capital expenditures during the six months ended June 30, 2015 were primarily related to orders raised in 2014, yet received and paid during 2015. We expect capital spending to significantly decrease in line with current market conditions.
Financing Activities
Net cash used by financing activities was $3.8 million during the six months ended June 30, 2015 compared to $3.7 million of net cash provided for the same period in 2014. During the six months ended June 30, 2015 and 2014, we received $0.1 million and $6.0 million in proceeds from the exercise of stock options, respectively. In addition, cash dividends paid were $3.9 million and $2.0 million for the six months ended June 30, 2015 and 2014, respectively
Off-Balance Sheet Arrangements
As of June 30, 2015, we have no off-balance sheet arrangements other than the manufacturing purchase commitments and letters of credit noted below, 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 2014 Annual Report on Form 10-K.
Manufacturing Purchase Commitments
Our manufacturing purchase commitments, which represent executed purchase orders that have been submitted to our respective vendors, have decreased from $23.2 million as of December 31, 2014 to $10.2 million as of June 30, 2015. This decrease of $13.0 million, or 56%, is driven primarily by the receipt of fewer orders from customers and the cancellation of prior orders with vendors due to the declining oil prices during the last quarter of 2014 continuing through the first quarter of 2015.
Letters of Credit
We enter into letters of credit in the ordinary course of business. The availability of current borrowings is, and future borrowings may be, limited in order to maintain certain financial ratios required by restrictive covenants in our credit facility. As of June 30, 2015, we had outstanding letters of credit of approximately $6.8 million, of which $2.7 million is outstanding under our revolving credit facility with an available credit line of $114.6 million. We were in compliance with our bank covenants as of June 30, 2015. For further discussion on our credit facility, see Part I, Item 1, "Financial Statements, Note 10" included in this Report.
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 2014 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 2014 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 2014 Annual Report on Form 10−K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See Part I, Item 7A —"Quantitative and Qualitative Disclosures About Market Risk" in our 2014 Annual Report on Form 10‑K for a detailed discussion of the risks affecting us. 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 our 2014 Annual Report on Form 10‑K.
Item 4. Controls and Procedures.
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, Chief Financial Officer, and Chief Accounting Officer, to allow timely decisions regarding required disclosure. As of June 30, 2015, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer participated with management in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act).
As more fully disclosed in our Annual Report Form 10-K for the year ended December 31, 2014, we previously identified a material weakness in our internal controls over foreign currency calculations impacting unrealized foreign currency exchange adjustments, depreciation and cost of goods sold. This weakness contributed to the revision of our previously issued financial statements for 2012 and 2013. This material weakness has not been remediated at June 30, 2015.
In connection with the preparation of our financial statements for the three months ended June 30, 2015, we performed additional procedures, which included detailed calculations of foreign exchange and a high level reasonableness analysis that involved several levels of review. In addition, we continued to strengthen our internal controls over foreign currency calculations. We have standardized our process and format for the manual calculation, trained worldwide accounting personnel, and implemented formal review procedures.
Ongoing efforts to remediate the material weakness also include the development and implementation of technological solutions to eliminate manual processes. During the three months ended June 30, 2015 the development of some of the solutions have been completed and promoted to the user acceptance testing phase and are expected to be fully functional during the following period. The completion of the development of the remainder of the solutions are expected to be achieved during the coming period. While further enhancements to our system of internal controls were achieved during the period, we expect the aforementioned technological solutions to be implemented during the remainder of 2015, resulting in the full remediation of the material weakness.
Notwithstanding the existence of the material weakness and efforts to remediate the material weakness in internal control over financial reporting, we believe the Consolidated Financial Statements in this Report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting
Other than the ongoing remediation efforts described above, there have been no changes in our internal control over financial reporting during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 11" 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 2014 Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us. Except as set forth by this section, there have been no material changes to the risk factors described in Part I, Item 1A—"Risk Factors" disclosed in our 2014 Annual Report on Form 10-K.
Item 6. 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/ FERNANDO R. ASSING |
| | Fernando R. Assing, President and Chief Executive Officer (Principal Executive Officer) |
Date: | August 10, 2015 | |
| | |
| | TESCO CORPORATION |
| | |
| By: | /s/ CHRISTOPHER L. BOONE |
| | Christopher L. Boone, Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
Date: | August 10, 2015 | |
| | |
| | TESCO CORPORATION |
| | |
| By: | /s/ THOMAS B SLOAN |
| | Thomas B Sloan, Vice President and Corporate Controller (Principal Accounting Officer) |
Date: | August 10, 2015 | |
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) |
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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) |
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10* | | Form of Amendment to Employment Agreement (incorporated by reference to Exhibit 10.1 to Tesco Corporation's Current Report on Form 8-K effective April 5, 2015 filed with the SEC on April 1, 2015) |
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14* | | Tesco Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to Tesco Corporation's Current Report on Form 8-K dated May 12, 2015 and filed with the SEC on May 15, 2015) |
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31.1 | | Rule 13a-14(a)/15d-14(a) Certification, executed by Fernando R. Assing, President and Chief Executive Officer of Tesco Corporation |
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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 |
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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 |
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101.INS** | | XBRL Instance Document |
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101.SCH** | | XBRL Taxonomy Extension Schema |
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101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF** | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB** | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase |
__________________________________
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* | Incorporated by reference |
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** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 |
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+ | Management contract or compensatory plan or arrangement |
Exhibit 31.2
Certification of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher L. Boone, certify that:
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1. | I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2015 of Tesco Corporation (the "registrant"); |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financial reporting, or caused such internal reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: August 10, 2015 | /s/ Christopher L. Boone |
| Christopher L. Boone Sr. Vice President and Chief Financial Officer |
Exhibit 31.1
Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Fernando R. Assing, certify that:
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1. | I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2015 of Tesco Corporation (the "registrant"); |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financial reporting, or caused such internal reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: August 10, 2015 | /s/ Fernando R. Assing |
| Fernando R. Assing President and Chief Executive Officer |
EXHIBIT 32
Section 1350 Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Tesco Corporation (the “Corporation”), does hereby certify that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (the “Form 10-Q”) of the Corporation fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
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Date: August 10, 2015 | /s/ Fernando R. Assing |
| Fernando R. Assing President and Chief Executive Officer |
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Date: August 10, 2015 | /s/ Christopher L. Boone |
| Christopher L. Boone Sr. Vice President and Chief Financial Officer |
The foregoing certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Corporation specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.