UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 30, 2012
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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76-0419312
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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3993 West Sam Houston Parkway North
Suite 100
Houston, Texas
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77043-1221
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(Address of Principal Executive Offices)
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(Zip Code)
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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
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Accelerated Filer
x
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Non-Accelerated Filer
o
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Smaller Reporting Company
¨
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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, 2012
:
38,674,083
TABLE OF CONTENTS
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Page
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PART I—FINANCIAL INFORMATION
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II—OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 6.
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Below is a list of defined terms that are used throughout this document:
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TESCO CASING DRILLING®
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= CASING DRILLING
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TESCO’s Casing Drive System
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= CDS™ or CDS
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TESCO’s Multiple Control Line Running System
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= MCLRS™ or MCLRS
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A list of our trademarks and the countries in which they are registered is presented below:
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Trademark
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Country of Registration
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TESCO
®
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United States, Canada
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TESCO CASING DRILLING
®
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United States
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CASING DRILLING
®
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Canada
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CASING DRILLING™
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United States
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Casing Drive System™
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United States, Canada
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CDS™
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United States, Canada
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Multiple Control Line Running System™
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United States, Canada
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MCLRS™
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United States, Canada
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When we refer to “TESCO”, “we”, “us”, “our”, “ours”, or “the Company”, we are describing Tesco Corporation and our subsidiaries.
Caution Regarding Forward-Looking Information; Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Canadian and United States securities laws, including the United States Private Securities Litigation Reform Act of 1995. From time to time, our public filings, press releases, and other communications (such as conference calls and presentations) will contain forward-looking statements. Forward-looking information is often, but not always, identified by the use of words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “forecast,” “target,” “project,” “may,” “will,” “should,” “could,” “estimate,” “predict,” or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements with respect to expectations of our prospects, future revenue, earnings, activities, and technical results.
Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information currently available to, us concerning anticipated financial performance, business prospects, strategies, and regulatory developments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. The forward-looking statements in this Quarterly Report on Form 10-Q are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these 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 on drilling activity and demand for and pricing of our products and services; other risks inherent in the drilling services industry (e.g. operational risks, potential delays or changes in customers’ exploration or development projects or capital expenditures, the uncertainty of estimates and projections relating to levels of rental activities, uncertainty of estimates and projections of costs and expenses, risks in conducting foreign operations, the consolidation of our customers, and intense competition in our industry); and risks associated with our intellectual property and with the performance of our technology. These risks and uncertainties may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Copies of our Canadian public filings are available at
www.tescocorp.com
and on SEDAR at
www.sedar.com
. Our U.S. public filings are available at
www.tescocorp.com
and on EDGAR at
www.sec.gov
.
Please see Part I, Item 1A—"Risk Factors" of our Annual Report on Form 10-K for the year ended
December 31, 2011
(“
2011
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 factors, nor to assess the impact such factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
TESCO CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
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June 30,
2012
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December 31,
2011
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Assets
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Current assets
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Cash and cash equivalents
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$
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32,587
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$
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23,069
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Accounts receivable trade, net of allowance for doubtful accounts of $2,602 and $2,491 as of June 30, 2012 and December 31, 2011, respectively
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115,585
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117,711
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Inventories, net
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114,737
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111,769
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Income taxes recoverable
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4,333
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3,020
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Deferred income taxes
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6,653
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4,909
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Prepaid and other assets
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36,076
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33,326
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Total current assets
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309,971
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293,804
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Property, plant and equipment, net
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202,619
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203,068
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Goodwill
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32,732
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32,732
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Deferred income taxes
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9,665
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12,416
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Intangible and other assets, net
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7,048
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7,195
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Total assets
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$
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562,035
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$
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549,215
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Liabilities and Shareholders’ Equity
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Current liabilities
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Current portion of long term debt
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$
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794
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$
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2,793
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Accounts payable
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43,950
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57,443
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Deferred revenue
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21,774
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25,924
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Warranty reserves
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7,376
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3,103
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Income taxes payable
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2,013
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2,336
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Accrued and other current liabilities
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30,502
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34,069
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Total current liabilities
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106,409
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125,668
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Long term debt
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305
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3,832
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Other liabilities
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2,546
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2,434
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Deferred income taxes
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9,548
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4,474
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Total liabilities
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118,808
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136,408
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Commitments and contingencies (Note 11)
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Shareholders’ equity
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Common shares; no par value; unlimited shares authorized; 38,673 and 38,569 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
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209,468
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206,573
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Retained earnings
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198,258
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170,733
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Accumulated comprehensive income
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35,501
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35,501
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Total shareholders’ equity
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443,227
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412,807
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Total liabilities and shareholders’ equity
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$
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562,035
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$
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549,215
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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)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2012
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2011
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2012
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2011
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Revenue
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Products
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$
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56,711
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$
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43,917
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$
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125,652
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$
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81,110
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Services
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79,962
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73,361
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163,442
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141,790
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136,673
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117,278
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289,094
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222,900
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Operating expenses
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Cost of sales and services
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Products
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41,444
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33,486
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93,754
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58,545
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Services
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67,590
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60,945
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135,075
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119,379
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109,034
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94,431
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228,829
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177,924
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Selling, general and administrative
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12,890
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11,589
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23,953
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23,317
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Gain on sale of CASING DRILLING
TM
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(13,289
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)
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—
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(13,289
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)
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—
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Research and engineering
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3,414
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2,403
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5,956
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5,288
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Total operating expenses
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112,049
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108,423
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245,449
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206,529
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Operating income
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24,624
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8,855
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43,645
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16,371
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Other expense (income)
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Interest expense
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949
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798
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591
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1,084
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Interest income
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(27
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)
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(2,482
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)
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(58
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)
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(2,482
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)
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Foreign exchange loss
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2,943
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697
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3,223
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883
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Other expense (income)
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743
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(559
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)
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(589
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)
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(531
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)
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Total other expense
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4,608
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(1,546
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)
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3,167
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(1,046
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)
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Income before income taxes
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20,016
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10,401
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40,478
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17,417
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Income tax provision
|
6,910
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3,012
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12,953
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5,711
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Net income
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$
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13,106
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$
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7,389
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$
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27,525
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$
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11,706
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Earnings per share:
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Basic
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$
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0.34
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$
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0.19
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$
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0.71
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$
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0.31
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Diluted
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$
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0.34
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$
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0.19
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$
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0.70
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$
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0.30
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Weighted average number of shares:
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Basic
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38,639
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38,164
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38,611
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38,120
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Diluted
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39,081
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38,928
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39,069
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38,831
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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,
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2012
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2011
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Operating Activities
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Net income
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$
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27,525
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$
|
11,706
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Adjustments to reconcile net income to net cash provided by (used for) operating activities:
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Depreciation and amortization
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20,585
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18,501
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Stock compensation expense
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1,749
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4,139
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Bad debt expense
|
840
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|
323
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Deferred income taxes
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6,081
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(197
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)
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Amortization of financial items
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118
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|
91
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Gain on sale of operating assets
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(19,546
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)
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(1,170
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)
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Changes in operating assets and liabilities:
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Accounts receivable trade, net
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(7,021
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)
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(22,382
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)
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Inventories
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(13,485
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)
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(27,806
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)
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Prepaid and other current assets
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3,292
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(332
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)
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Accounts payable and accrued liabilities
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(15,415
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)
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18,697
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Income taxes recoverable
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(1,521
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)
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(2,930
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)
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Other noncurrent assets and liabilities, net
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(744
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)
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|
902
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Net cash provided by (used for) operating activities
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2,458
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(458
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)
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Investing Activities
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Additions to property, plant and equipment
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(35,022
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)
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(19,470
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)
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Proceeds on sale of operating assets
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8,853
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1,616
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Proceeds on sale of CASING DRILLING
TM
, net of transaction costs
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38,045
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—
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Other, net
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(43
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)
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(1,415
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)
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Net cash provided by (used for) investing activities
|
11,833
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(19,269
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)
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Financing Activities
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Issuances of debt
|
35,400
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Repayments of debt
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(40,926
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)
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—
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Proceeds from exercise of stock options
|
753
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|
|
539
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Other, net
|
—
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(85
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)
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Net cash provided by (used for) financing activities
|
(4,773
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)
|
|
454
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|
Change in cash and cash equivalents
|
9,518
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(19,273
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)
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Net cash and cash equivalents, beginning of period
|
23,069
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|
60,603
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Net cash and cash equivalents, end of period
|
$
|
32,587
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$
|
41,330
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Supplemental cash flow information
|
|
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|
Cash payments for interest
|
$
|
199
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|
$
|
119
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|
Cash payments for income taxes
|
8,563
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|
8,833
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Cash received for income tax refunds
|
631
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|
|
459
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|
Property, plant and equipment accrued in accounts payable
|
1,004
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|
|
1,275
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|
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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|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
Common stock shares
|
|
Common shares
|
|
Retained earnings
|
|
Accumulated comprehensive income
|
|
Total
|
For the six months ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2012
|
38,569
|
|
|
$
|
206,573
|
|
|
$
|
170,733
|
|
|
$
|
35,501
|
|
|
$
|
412,807
|
|
Net income
|
—
|
|
|
—
|
|
|
27,525
|
|
|
—
|
|
|
27,525
|
|
Stock compensation related activity
|
104
|
|
|
2,895
|
|
|
—
|
|
|
—
|
|
|
2,895
|
|
Balances at June 30, 2012
|
38,673
|
|
|
$
|
209,468
|
|
|
$
|
198,258
|
|
|
$
|
35,501
|
|
|
$
|
443,227
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2011
|
38,058
|
|
|
$
|
196,431
|
|
|
$
|
143,737
|
|
|
$
|
35,501
|
|
|
$
|
375,669
|
|
Net income
|
—
|
|
|
—
|
|
|
11,706
|
|
|
—
|
|
|
11,706
|
|
Stock compensation related activity
|
128
|
|
|
4,263
|
|
|
—
|
|
|
—
|
|
|
4,263
|
|
Balances at June 30, 2011
|
38,186
|
|
|
$
|
200,694
|
|
|
$
|
155,443
|
|
|
$
|
35,501
|
|
|
$
|
391,638
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1—Nature of Operations and Basis of Preparation
Nature of Operations
We are a global leader in the design, manufacture, and service delivery of technology-based solutions for the upstream energy industry. We seek to change the way wells are drilled by delivering safer and more efficient solutions that add real value by reducing the costs of drilling for, and producing, oil and natural gas. Our product and service offerings consist mainly of equipment sales and services to drilling contractors and oil and natural gas operating companies throughout the world.
Basis of Presentation
We prepared this Quarterly Report on Form 10-Q pursuant to instructions for quarterly reporting required to be filed with the Securities and Exchange Commission (“SEC”). Because this is an interim period filing presented using a condensed format, it does not include all information and footnotes normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). You should read this report along with our Annual Report on Form 10-K for the year ended
December 31, 2011
, which contains a summary of our significant accounting policies and other disclosures. The condensed consolidated financial statements as of
June 30, 2012
and for the quarters and
six months
ended
June 30, 2012
and
2011
are unaudited. We derived the unaudited condensed consolidated balance sheet as of
December 31, 2011
from the audited consolidated balance sheet filed in our
2011
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.
Fair Value of Financial Instruments
At
June 30, 2012
, the carrying amount of cash and cash equivalents, accounts receivable trade, restricted cash, non-trade receivables, accounts payable, and accrued liabilities approximated their fair value due to their short maturities. At
June 30, 2012
, the carrying amount of our long term debt approximated its fair value. The fair value of our long term debt is determined using observable inputs and is based on current market interest rates for debt issued with similar maturities by companies with risk profiles similar to ours (Level 2).
Subsequent Events
We conducted our subsequent events review through the date on which these unaudited condensed consolidated financial statements were filed with the SEC.
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
2011
Annual Report on Form 10-K.
Recent Accounting Pronouncements
Each reporting period we consider all newly issued but not yet adopted accounting and reporting guidance applicable to our operations and the preparation of our consolidated financial statements. We do not believe that any issued accounting and reporting guidance not yet adopted by us will have a material impact on our unaudited condensed consolidated financial statements.
Note 3—Sale of CASING DRILLING™
On
June 4, 2012
, the Company completed the sale of substantially all of the assets of the CASING DRILLING™ segment to Schlumberger Oilfield Holdings Ltd. and Schlumberger Technology Corporation (together, the "Schlumberger Group") for a total cash consideration of approximately
$45.0 million
, pending a working capital purchase price adjustment expected to occur in September 2012. In June 2012, the Company recognized a total pre-tax gain of approximately
$13.3 million
, net of transaction costs. The table below sets forth the details contributing to the gain on sale (in thousands):
|
|
|
|
|
Total cash consideration
|
$
|
45,000
|
|
Fixed assets, net
|
(11,932
|
)
|
Inventories, net
|
(10,517
|
)
|
Accounts receivable, net
|
(8,307
|
)
|
Transaction costs
|
(955
|
)
|
Gain on sale of CASING DRILLING™
|
$
|
13,289
|
|
At
June 30, 2012
, the Company had received
$39.0 million
of cash, with the remaining balance of
$6.0 million
to be released from escrow when certain terms and conditions are satisfied by the Company.
Note 4—Details of Certain Accounts
At
June 30, 2012
and
December 31, 2011
, prepaid and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
Prepaid taxes other than income
|
$
|
6,439
|
|
|
$
|
9,968
|
|
Deposits
|
8,567
|
|
|
7,995
|
|
Prepaid insurance
|
2,417
|
|
|
5,136
|
|
Other prepaid expenses
|
4,893
|
|
|
4,247
|
|
Restricted cash
|
8,652
|
|
|
2,609
|
|
Deferred job costs
|
3,196
|
|
|
2,251
|
|
Non-trade receivables
|
1,912
|
|
|
1,120
|
|
|
$
|
36,076
|
|
|
$
|
33,326
|
|
At
June 30, 2012
and
December 31, 2011
, accrued and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
Accrued payroll and benefits
|
$
|
16,197
|
|
|
$
|
15,545
|
|
Accrual for foreign withholding tax claim
|
2,782
|
|
|
5,125
|
|
Accrued taxes other than income taxes
|
6,097
|
|
|
9,809
|
|
Other current liabilities
|
5,426
|
|
|
3,590
|
|
|
$
|
30,502
|
|
|
$
|
34,069
|
|
Note 5—Inventories
At
June 30, 2012
and
December 31, 2011
, inventories, net of reserves for excess and obsolete inventories of
$1.3 million
and
$4.4 million
, respectively, by major classification were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
Raw materials
|
$
|
73,269
|
|
|
$
|
75,399
|
|
Work in progress
|
7,146
|
|
|
6,892
|
|
Finished goods
|
34,322
|
|
|
29,478
|
|
|
$
|
114,737
|
|
|
$
|
111,769
|
|
Note 6—Property, plant and equipment
At
June 30, 2012
and
December 31, 2011
, property, plant, and equipment, at cost, by major category were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
Land, buildings and leaseholds
|
$
|
27,386
|
|
|
$
|
24,588
|
|
Drilling equipment
|
292,237
|
|
|
312,344
|
|
Manufacturing equipment
|
8,651
|
|
|
6,910
|
|
Office equipment and other
|
29,567
|
|
|
27,621
|
|
Capital work in progress
|
17,723
|
|
|
10,814
|
|
|
375,564
|
|
|
382,277
|
|
Less: Accumulated depreciation
|
(172,945
|
)
|
|
(179,209
|
)
|
|
$
|
202,619
|
|
|
$
|
203,068
|
|
The net book value of used top drive rental equipment sold included in cost of sales and services on our unaudited condensed consolidated statements of income was
$0.2 million
and
$1.9 million
, respectively, for the
three and six
months ended
June 30, 2012
.
One
and
five
used top drives were sold from our rental fleet during the
three and six
months ended
June 30, 2012
, respectively.
Depreciation and amortization expense for the
three and six
months ended
June 30, 2012
and
2011
are included on our unaudited condensed consolidated statements of income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Cost of sales and services
|
$
|
9,308
|
|
|
$
|
8,761
|
|
|
$
|
19,572
|
|
|
$
|
17,624
|
|
Selling, general and administrative expense
|
497
|
|
|
473
|
|
|
1,013
|
|
|
877
|
|
|
$
|
9,805
|
|
|
$
|
9,234
|
|
|
$
|
20,585
|
|
|
$
|
18,501
|
|
Sale of Operating Assets
When top drive units from our rental fleet are sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services. Proceeds from the sale of used top drives are included in proceeds from the sale of operating assets and the difference between revenue and the cost of sales and services is included in gain on sale of operating assets in the accompanying unaudited condensed consolidated statement of cash flows.
Note 7—Warranties
Changes in our warranty accrual for the
six
months ended
June 30, 2012
were as follows (in thousands):
|
|
|
|
|
|
June 30, 2012
|
Balance as of January 1, 2012
|
$
|
3,103
|
|
Charged to expense, net
|
5,299
|
|
Deductions
|
(1,026
|
)
|
Balance as of June 30, 2012
|
$
|
7,376
|
|
During the
six
months ended
June 30, 2012
, we recorded warranty expenses of
$4.4 million
specifically associated with the gear box housing issue for our new ESI model. In March 2012, our quality control processes found casting anomalies in the gearbox housing of our new ESI top drive model and subsequently determined that the casting of the gearbox housing did not meet TESCO's standards. We have completed the inspection for
12
units out of the first
18
ESI units produced. Based on the results of the completed inspections, we have increased the specific warranty provision by
$0.5 million
during the second quarter of 2012, in addition to
$3.9 million
of specific warranty provision recorded during the first quarter of 2012.
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,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Basic weighted average number of shares outstanding
|
38,639
|
|
|
38,164
|
|
|
38,611
|
|
|
38,120
|
|
Dilutive effect of stock-based compensation
|
442
|
|
|
764
|
|
|
458
|
|
|
711
|
|
Diluted weighted average number of shares outstanding
|
39,081
|
|
|
38,928
|
|
|
39,069
|
|
|
38,831
|
|
Anti-dilutive options excluded from calculation due to exercise prices
|
1,320
|
|
|
608
|
|
|
1,052
|
|
|
735
|
|
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, 2012
and
2011
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Current tax provision
|
$
|
3,488
|
|
|
$
|
3,706
|
|
|
$
|
6,872
|
|
|
$
|
5,908
|
|
Deferred tax provision (benefit)
|
3,422
|
|
|
(694
|
)
|
|
6,081
|
|
|
(197
|
)
|
Income tax provision
|
$
|
6,910
|
|
|
$
|
3,012
|
|
|
$
|
12,953
|
|
|
$
|
5,711
|
|
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was
35%
and
32%
for the
three and six
months ended
June 30, 2012
, respectively, compared to
29%
and
33%
for the same periods in
2011
, respectively. The
6%
increase
and
1%
decrease
in our effective tax rate for
three and six
months ended
June 30, 2012
as compared to the same periods in
2011
is due to the fluctuating mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world.
At
December 31, 2011
, we had an accrual for uncertain tax positions of
$1.3 million
. During the first quarter of 2012, we reversed
$0.1 million
due to legal settlements occurring during the period, leaving a balance of
$1.2 million
at
June 30, 2012
. The
accrual for uncertain tax positions is included in other liabilities in our consolidated balance sheet as we anticipate that these uncertainties will not be resolved within the next 12 months. The resolution of these uncertainties should not have a material impact on our effective tax rate.
Certain state and foreign tax filings remain open to examination. We believe that any assessment on these filings will not have a material impact on our financial position, results of operations, or cash flows. We believe that appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Therefore, additional provisions on tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
Note 10—Long term debt
Long term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
December 31, 2011
|
Capital leases
|
329
|
|
|
5,567
|
|
Other notes payable
|
770
|
|
|
1,058
|
|
Current portion of long term debt
|
(794
|
)
|
|
(2,793
|
)
|
Non-current portion of long term debt
|
$
|
305
|
|
|
$
|
3,832
|
|
As part of our acquisition of Premiere Casing Services - Egypt S.A.E ("Premiere") in 2011, we assumed
$7.4 million
of outstanding debt at the acquisition date of
October 16, 2011
. At
December 31, 2011
the balance of this debt was
$5.6 million
related to capital leases and
$1.1 million
related to notes payable. These balances represented all of our outstanding debt at
December 31, 2011
. During the
six
months ended
June 30, 2012
we paid off a significant amount of the outstanding balances related to Premiere's capital leases. At
June 30, 2012
the outstanding balance of Premiere's capital leases was
$0.3 million
.
At
June 30, 2012
, we had a credit agreement which was entered into 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
5 years
and all outstanding borrowings on the Revolver are due and payable on
April 29, 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, and 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
, paying cash dividends to shareholders, and contains other restrictions, which are standard to the industry. All of our direct and indirect material subsidiaries in the United States and Canada are guarantors of any borrowings under the credit facility.
Under the Revolver at
June 30, 2012
, we had
no
outstanding borrowings,
$4.5 million
in letters of credit outstanding and
$120.5 million
in available borrowing capacity. We were in compliance with our bank covenants at
June 30, 2012
.
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 Company has historically provided information regarding certain legal proceedings that do not meet the definition of a material pending legal proceeding as such term is defined in Item 103 of Regulation S-K. The Company will continue to provide information regarding such legal proceedings. However, the Company will only provide information regarding any new legal proceedings in which it or its subsidiaries are involved if the Company assesses that such a proceeding is a material pending legal proceeding. The estimates 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.
Varco I/P, Inc. (“Varco”) filed suit against us in
April 2005
in the U.S. District Court for the Western District of Louisiana, alleging that our CDS infringes certain of Varco’s U.S. patents. Varco seeks monetary damages and an injunction against further infringement. We filed a countersuit against Varco in
June 2005
in the U.S. District Court for the Southern District of Texas, Houston Division seeking invalidation of the Varco patents in question. In
July 2006
, the Louisiana case was transferred to the federal district court in Houston, and as a result, the issues raised by Varco have been consolidated into a single proceeding in which we are the plaintiff. We also filed a request with the U.S. Patent and Trademark Office (“USPTO”) for reexamination of the patents on which Varco’s claim of infringement is based. The USPTO accepted the Varco patents for reexamination, and the district court stayed the patent litigation pending the outcome of the USPTO reexamination. In
May 2009
, the USPTO issued a final action rejecting all of the Varco patent claims that we had contested. Varco has appealed this decision with the USPTO and that reexamination appeal is pending. The outcome and amount of any future financial impacts from this litigation are not determinable at this time.
In
December 2009
, we received an administrative subpoena from the Department of the Treasury, Office of Foreign Assets Control (OFAC) regarding a past shipment of oilfield equipment made from our Canadian manufacturing facility in 2006 to Sudan. We reviewed this matter and have provided a timely response to the subpoena. Our internal investigation revealed that in 2006 and 2007, a total of
four
top drive units were shipped to Sudan from our Canadian manufacturing facility. Technicians were also dispatched from
one
of our regional offices outside of the United States to install the top drive units. The total revenue from these activities with respect to the periods involved was approximately
0.5%
and
0.7%
of total revenue in 2006 and 2007, respectively. Our policy is not to conduct any business in or sell any products to Sudan and we have implemented strengthened controls and procedures designed to ensure compliance with this policy. We disclosed the results of our internal investigation to, and are fully cooperating with, OFAC. We continue to evaluate the potential outcome of this matter. The effect on our consolidated financial position, results of operations or cash flows is not reasonably determinable at this time. Accordingly, we have not accrued a reserve for this matter as of
June 30, 2012
.
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 that various of our technologies infringe
11
different patents held by Weatherford. Weatherford sought monetary damages and an injunction against further infringement. Our technologies referred to in the claim included the CDS, the CASING DRILLING system and method, a float valve, and the locking mechanism for the controls of the tubular handling system. We filed a general denial seeking a judicial determination that we did not infringe the patents in question and/or that the patents are invalid.
In
August 2008
, we filed suit against several competitors in the U.S. District Court for the Southern District of Texas – Houston Division, including Weatherford (the “Houston Suit”). The Houston Suit claims infringement of
two
of our patents related to our CDS. On
October 26, 2010
, we entered into a settlement with Weatherford (the “Settlement”) dismissing both the Marshall Suit and the Houston Suit (as it relates to Weatherford) with prejudice. Among other provisions, the Settlement contains the following terms:
|
|
•
|
Non-exclusive irrevocable worldwide and royalty free cross licenses with respect to all the patents asserted by Weatherford in the Marshall Case and by us in the Houston Case, as well as certain other U.S. and foreign equivalents and counterparts; and
|
|
|
•
|
Weatherford has agreed to purchase for
five years
67%
of its worldwide top drive requirements from us, as long as we can meet production requirements, and to designate us as a preferred provider of after-market sales and service for top drives. The prices we charge Weatherford will be equal to or lower than the prices we charge to any other
|
customer of similar volume of purchases and/or services.
We entered into a Final Settlement and License Agreement (the "Settlement Agreement") with Weatherford on
January 11, 2011
, effective as of
October 26, 2010
. As an additional condition of the Settlement Agreement, neither we nor Weatherford will pursue any cause of action that might adversely affect the validity or enforceability of each other's patents as listed in the exhibits to the Settlement Agreement, including any causes of action that may arise from the requests for review (“patent re-examinations”) we and Weatherford filed with the USPTO. However, the patent re-examinations already initiated continue with only the respective patent owner corresponding with the USPTO. Ongoing re-examination procedures include the patents owned by us and asserted in the Houston Suit. An oral hearing with the Board of Patent Appeals and Interferences (“BPAI”) at the USPTO was scheduled for August 1, 2012. The timing of a decision from the BPAI is not known, and, if adverse to us, will be subject to appeal to the Court of Appeals for the Federal Circuit.
On
November 11, 2010
we won a jury verdict against National Oilwell Varco, L.P. ("NOV"), Frank's Casing Crew and Rental Tools, Inc. ("Frank's") and Offshore Energy Services, Inc. ("OES") for infringing our U.S. Patent Nos. 7,140,443 and 7,377,324. In that verdict, the jury found that NOV's accused product, the CRT 350, infringes all valid patent claims in the asserted patents, and that NOV contributorily infringed all valid patent claims in the asserted patents. The jury also found that Frank's accused products, the (i) SuperTAWG, (ii) FA-1, and (iii) CRT 350, and OES's accused products, the CRT 350, infringe all valid patent claims in the asserted patents. Damages were stipulated by the parties and the verdict is subject to entry of judgment and appeal.
We have been previously advised by the Mexican tax authorities that they believe significant expenses incurred by our Mexican operations from 1996 through 2002 are not deductible for Mexican tax purposes. Between 2002 and 2008, formal reassessments disallowing these deductions were issued for each of these years, all of which we appealed to the Mexican court system. We have obtained final court rulings deciding all years in dispute in our favor, except for 1996 as discussed below, and 2001 and 2002, both of which are currently before the Mexican Tax Court. The outcomes of such appeals are uncertain. We continue to believe that the basis for these reassessments was incorrect, and that the ultimate resolution of those outstanding matters will likely not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
In May 2002, we paid a deposit of
$3.3 million
to the Mexican tax authorities in order to appeal the reassessment for 1996. In 2007, we requested and received a refund of approximately
$3.7 million
(the original deposit amount of
$3.3 million
plus
$0.4 million
in interest). With the return of the
$3.3 million
deposit, the Mexican tax authorities issued a resolution indicating that we were owed an additional
$3.4 million
in interest and inflation adjustments but this amount had been retained by the tax authorities to satisfy a second reassessment for 1996. We believed the second reassessment was invalid, and appealed it to the Mexican Tax Court. In 2009, the Mexican Tax Court issued a decision accepting our arguments in part, which was subject to further appeal.
In May 2011, we received a refund of approximately
$3.8 million
(the remaining
$3.4 million
noted above, plus
$0.4 million
of additional interest and inflation adjustments) and recorded
$2.4 million
in interest income,
$0.6 million
in other income, partially offset by
$0.4 million
of related interest expense. The remaining
$1.2 million
is included in other liabilities pending the ultimate resolution of this issue.
In
August 2008
, we received a claim in Mexico for
$1.1 million
in fines and penalties related to the exportation of certain temporarily imported equipment that remained in Mexico beyond the authorized time limit for its return. We disagree with this claim and are currently litigating the matter. In December 2009, we received a decision from the Mexican Tax Court in our favor, which is subject to further appeal. The outcome of this litigation is uncertain. No accrual has been recorded for this claim.
In
July 2006
, we received a claim for withholding tax, penalties and interest related to payments over the periods from 2000 to 2004 in a foreign jurisdiction. We disagree with this claim and are currently litigating this matter. During 2006, we accrued an estimated pre-tax exposure of
$3.8 million
and continue to accrue interest for this matter. In April 2012, we received final determination for the 2000 and 2002 tax years and have reversed
$1.9 million
of the accrual (
$1.3 million
to other income and a
$0.6 million
reduction of interest expense). At
June 30, 2012
, we have
$2.8 million
accrued for the remaining years.
In October 2011, we received a
$1.0 million
tax assessment from the Norwegian tax authorities. In January 2012, we submitted to the authorities our position that no tax liability is due. Our submission was not accepted by the authorities and we are currently appealing this decision in the Norwegian legal system. We believe the assessment has no merit and no accrual has been made for this assessment.
Other Contingencies
We are contingently liable under letters of credit and similar instruments that we enter in connection with the importation of equipment to foreign countries and to secure our performance on certain contracts. At
June 30, 2012
and
December 31, 2011
, our
total exposure under outstanding letters of credit was
$7.7 million
and
$12.8 million
, respectively.
Note 12—Segment Information
Business Segments
Prior to the sale of the CASING DRILLING™ business during the second quarter of 2012, our
four
business segments were: Top Drive, Tubular Services, CASING DRILLING™, and Research and Engineering. On
June 4, 2012
, the Company 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 top drive sales, top drive rentals, and after-market sales and service. Our Tubular Services segment includes both our proprietary and conventional tubular services. Our 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.
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, and other (income) expense and income taxes are not allocated to our business segments.
Goodwill is allocated to the business segment to which it specifically relates. Our goodwill has been allocated to the Tubular Services segment. Prior to the sale of the CASING DRILLING™ business during the second quarter of 2012, we did not track or measure property, plant and equipment by business segment and, as such, this information is not presented for property, plant, and equipment balances at
December 31, 2011
.
Significant financial information relating to our business segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2012
|
|
Top
Drive
|
|
Tubular
Services
|
|
CASING
DRILLING™
|
|
Research &
Engineering
|
|
Corporate and
Other
|
|
Total
|
Revenue
|
$
|
90,138
|
|
|
$
|
41,635
|
|
|
$
|
4,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
136,673
|
|
Depreciation and amortization
|
2,795
|
|
|
5,615
|
|
|
396
|
|
|
22
|
|
|
977
|
|
|
9,805
|
|
Operating income (loss)
|
22,924
|
|
|
4,608
|
|
|
8,886
|
|
(1)
|
(3,414
|
)
|
|
(8,380
|
)
|
|
24,624
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,608
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,016
|
|
(1) Includes gain on sale of assets of
$13.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
Top
Drive
|
|
Tubular
Services
|
|
CASING
DRILLING™
|
|
Research &
Engineering
|
|
Corporate and
Other
|
|
Total
|
Revenue
|
$
|
78,568
|
|
|
$
|
34,783
|
|
|
$
|
3,927
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117,278
|
|
Depreciation and amortization
|
2,712
|
|
|
4,423
|
|
|
1,168
|
|
|
6
|
|
|
925
|
|
|
9,234
|
|
Operating income (loss)
|
21,657
|
|
|
2,496
|
|
|
(3,724
|
)
|
|
(2,403
|
)
|
|
(9,171
|
)
|
|
8,855
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,546
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
Top
Drive
|
|
Tubular
Services
|
|
CASING
DRILLING™
|
|
Research &
Engineering
|
|
Corporate and
Other
|
|
Total
|
Revenue
|
$
|
191,953
|
|
|
$
|
85,106
|
|
|
$
|
12,035
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
289,094
|
|
Depreciation and amortization
|
5,709
|
|
|
11,433
|
|
|
1,479
|
|
|
42
|
|
|
1,922
|
|
|
20,585
|
|
Operating income (loss)
|
47,818
|
|
|
9,550
|
|
|
8,032
|
|
(1)
|
(5,956
|
)
|
|
(15,799
|
)
|
|
43,645
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,167
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,478
|
|
(1) Includes gain on sale of assets of
$13.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
Top
Drive
|
|
Tubular
Services
|
|
CASING
DRILLING™
|
|
Research &
Engineering
|
|
Corporate and
Other
|
|
Total
|
Revenue
|
$
|
149,017
|
|
|
$
|
67,071
|
|
|
$
|
6,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222,900
|
|
Depreciation and amortization
|
5,338
|
|
|
8,998
|
|
|
2,315
|
|
|
18
|
|
|
1,832
|
|
|
18,501
|
|
Operating income (loss)
|
42,816
|
|
|
4,109
|
|
|
(6,837
|
)
|
|
(5,289
|
)
|
|
(18,428
|
)
|
|
16,371
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,046
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,417
|
|
Geographic Areas
We attribute revenue to geographic regions based on the location of the customer. Generally, for service activities, this will be the region in which the service activity occurs. For equipment sales, this will be the region in which the sale transaction is complete and title transfers. Our revenue by geographic area for the
three and six
months ended
June 30, 2012
and
2011
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Canada
|
44,208
|
|
|
35,550
|
|
|
100,742
|
|
|
69,289
|
|
United States
|
41,926
|
|
|
34,725
|
|
|
80,349
|
|
|
66,590
|
|
South America
|
13,688
|
|
|
13,366
|
|
|
28,769
|
|
|
25,671
|
|
Mexico
|
13,431
|
|
|
10,053
|
|
|
25,547
|
|
|
17,764
|
|
Asia Pacific
|
11,604
|
|
|
9,458
|
|
|
22,741
|
|
|
17,819
|
|
Europe, Africa and Middle East
|
7,396
|
|
|
7,629
|
|
|
15,170
|
|
|
14,314
|
|
Russia
|
4,420
|
|
|
6,497
|
|
|
15,776
|
|
|
11,453
|
|
Total
|
136,673
|
|
|
117,278
|
|
|
289,094
|
|
|
222,900
|
|
The physical location of our net property, plant and equipment by geographic area as of
June 30, 2012
and
December 31, 2011
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top Drive
|
|
Tubular Services
|
|
Overhead, Corporate and Other
|
|
June 30,
2012
|
United States
|
$
|
17,630
|
|
|
$
|
16,107
|
|
|
$
|
16,304
|
|
|
$
|
50,041
|
|
Mexico
|
36,365
|
|
|
6,776
|
|
|
593
|
|
|
43,734
|
|
South America
|
4,868
|
|
|
12,611
|
|
|
379
|
|
|
17,858
|
|
Asia Pacific
|
8,282
|
|
|
13,431
|
|
|
167
|
|
|
21,880
|
|
Russia
|
17,094
|
|
|
1,359
|
|
|
71
|
|
|
18,524
|
|
Europe, Africa and Middle East
|
1,730
|
|
|
25,539
|
|
|
6,166
|
|
|
33,435
|
|
Canada
|
13,020
|
|
|
2,928
|
|
|
1,199
|
|
|
17,147
|
|
Total
|
$
|
98,989
|
|
|
$
|
78,751
|
|
|
$
|
24,879
|
|
|
$
|
202,619
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
United States
|
|
$
|
56,758
|
|
Mexico
|
|
35,473
|
|
South America
|
|
22,943
|
|
Asia Pacific
|
|
22,414
|
|
Russia
|
|
20,236
|
|
Europe, Africa and Middle East
|
|
30,544
|
|
Canada
|
|
14,700
|
|
Total
|
|
$
|
203,068
|
|
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 IA below and in our 2011 Annual Report on Form 10-K, for a discussion of the uncertainties, risks, and assumptions associated with these statements.
Overview and Outlook
We are a global leader in the design, manufacture and service delivery of technology based solutions for the upstream energy industry. We seek to change the way wells are drilled by delivering safer and more efficient solutions that add real value by reducing the costs of drilling for and producing oil and natural gas.
Prior to the sale of the CASING DRILLING™ business during the second quarter of 2012, our business segments were:
|
|
•
|
Top Drives – top drive sales, top drive rentals, and after-market sales and services;
|
|
|
•
|
Tubular Services – proprietary and conventional tubular services;
|
|
|
•
|
CASING DRILLING™ – proprietary CASING DRILLING™ technology; and
|
|
|
•
|
Research and Engineering – internal research and development activities related to our proprietary tubular services and top drive model development, as well as the CASING DRILLING™ technology prior to the sale.
|
On June 4, 2012, the Company completed the sale of substantially all of the assets of the CASING DRILLING™ segment to the Schlumberger Group.
For a detailed discussion of this matter, see Part I, Item 1—"Financial Statements", Note 3—Sale of CASING DRILLING™ in this Quarterly Report on Form 10-Q.
Business Environment
In
2011
and during the first six months of
2012
, oil and natural gas drilling activity increased significantly from the low level of activity beginning with the severe global economic downturn in 2008. During 2011, international rig count increased from 2010 levels and has continued to improve in most geographic regions in
2012
. One of the key indicators of our business is the number of active drilling rigs. Below is a table that shows average rig count by region for the
three and six
months ended
June 30, 2012
and
2011
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Average Rig Count
(1)
|
|
Increase / (Decrease)
|
|
Six Months Average Rig Count
(1)
|
|
Increase / (Decrease)
|
|
June 30,
|
|
|
June 30,
|
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
U.S.
|
1,970
|
|
|
1,830
|
|
|
140
|
|
8
|
%
|
|
1,981
|
|
|
1,773
|
|
|
208
|
|
12
|
%
|
Canada
|
173
|
|
|
188
|
|
|
(15
|
)
|
(8
|
)%
|
|
382
|
|
|
387
|
|
|
(5
|
)
|
(1
|
)%
|
Latin America (includes Mexico)
|
438
|
|
|
417
|
|
|
21
|
|
5
|
%
|
|
435
|
|
|
413
|
|
|
22
|
|
5
|
%
|
Middle East (excludes Iran, Iraq and Sudan)
|
343
|
|
|
291
|
|
|
52
|
|
18
|
%
|
|
327
|
|
|
287
|
|
|
40
|
|
14
|
%
|
Asia Pacific (excludes China onshore)
|
241
|
|
|
251
|
|
|
(10
|
)
|
(4
|
)%
|
|
246
|
|
|
262
|
|
|
(16
|
)
|
(6
|
)%
|
Europe (excludes Russia)
|
117
|
|
|
112
|
|
|
5
|
|
4
|
%
|
|
115
|
|
|
115
|
|
|
—
|
|
—
|
%
|
Africa
|
90
|
|
|
76
|
|
|
14
|
|
18
|
%
|
|
86
|
|
|
79
|
|
|
7
|
|
9
|
%
|
Worldwide
|
3,372
|
|
|
3,165
|
|
|
207
|
|
7
|
%
|
|
3,572
|
|
|
3,316
|
|
|
256
|
|
8
|
%
|
(1) Source: Baker Hughes Incorporated worldwide rig count; averages are monthly.
Summary of the
Second
Quarter Ended
June 30, 2012
and Operational Performance
During the
second
quarter of
2012
, our Top Drive segment had a significant
increase
in the number of top drive units sold compared to the same period in
2011
. Our Tubular Services segment revenue and operating income also improved significantly in the
second
quarter of
2012
as compared to the second quarter of 2011. Our proprietary tubular services offering continues to gain market acceptance and we remain committed to growing this segment as we believe that every rig with a top drive will
eventually convert to running casing with an automated system, such as our CDS™ system. We also invested in new and enhanced product and service offerings in our Research and Engineering segment. We believe that our financial condition has improved significantly over the past year, as demonstrated by the following:
|
|
•
|
Increased
revenue from
$117.3 million
in the
second
quarter of
2011
to
$136.7 million
in the
second
quarter of
2012
;
|
|
|
•
|
Completed the sale of substantially all of the assets of the CASING DRILLING™ segment to the Schlumberger Group for a total purchase price of approximately
$45.0 million
, recognizing a total pre-tax gain of approximately
$13.3 million
, net of transaction costs;
|
|
|
•
|
Increased
operating income from
$8.9 million
in the
second
quarter of
2011
to $11.3 million (excluding a pre-tax gain of approximately
$13.3 million
, net of transaction costs, on the sale of CASING DRILLING™) in the
second
quarter of
2012
;
|
|
|
•
|
Renewed our credit agreement to provide a revolving line of credit of $125 million, including up to $20 million of swing line loans; and
|
|
|
•
|
Increased cash and cash equivalents from operating activities during the
six
months ended
June 30, 2012
as compared to the same period in
2011
.
|
Outlook for
2012
Volatility in the global economy has continued over the past few quarters as a result of European debt crisis, reduced consumer demand, slower GDP growth rates in the United States and internationally, and declining oil and natural gas prices. Furthermore, in order to address negative fiscal situations and initiate deficit reduction measures, many governments are seeking additional revenue sources, including eliminating key federal income tax incentives currently available to oil and natural gas exploration and production companies. Current global macro-economic conditions make any projections difficult and uncertain; however, any significant elimination of tax incentives could result in oil and gas operators curtailing drilling activity, which would negatively affect our business.
Thus far, clear signs of weakening demand have had a limited impact on oil and natural gas market fundamentals and we continue to anticipate sustained activity levels for the remainder of
2012
in each of our revenue generating segments, as follows:
|
|
•
|
Top Drive -
Based upon existing drilling and bidding levels and the size of our product sale backlog, we expect our top drive order rate and rental activity to remain steady for the remainder of
2012
. In North America, we are experiencing some downward pressure in bidding activity. Our outstanding new unit sales backlog was
41
units at
June 30, 2012
, compared to 57 units at March 31, 2012 and
74
units at
December 31, 2011
. Our customers have maintained their focus on lowering project costs, which continues to put downward pressure on our sales prices on select product offerings.
|
|
|
•
|
Tubular Services -
We expect our CDS™ proprietary and conventional casing running business to continue to grow moderately for the remainder of
2012
. We will continue to expand our proprietary casing service offerings, particularly in the major unconventional shale regions in North America and select international locations. In addition, we expect drilling activity in the U.S. Gulf of Mexico to gradually increase throughout the second half of 2012 and 2013, which should increase demand for our MCLRS proprietary services.
|
Operating Results
Below is a summary of our operating results for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
Segment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top Drive
|
$
|
90,138
|
|
|
$
|
78,568
|
|
|
$
|
11,570
|
|
15%
|
|
191,953
|
|
|
149,017
|
|
|
42,936
|
|
29%
|
Tubular Services
|
41,635
|
|
|
34,783
|
|
|
6,852
|
|
20%
|
|
85,106
|
|
|
67,071
|
|
|
18,035
|
|
27%
|
CASING DRILLING™
|
4,900
|
|
|
3,927
|
|
|
973
|
|
25%
|
|
12,035
|
|
|
6,812
|
|
|
5,223
|
|
77%
|
Consolidated revenue
|
$
|
136,673
|
|
|
$
|
117,278
|
|
|
$
|
19,395
|
|
17%
|
|
289,094
|
|
|
222,900
|
|
|
66,194
|
|
30%
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top Drive
|
$
|
22,924
|
|
|
$
|
21,657
|
|
|
$
|
1,267
|
|
6%
|
|
47,818
|
|
|
42,816
|
|
|
5,002
|
|
12%
|
Tubular Services
|
4,608
|
|
|
2,496
|
|
|
2,112
|
|
85%
|
|
9,550
|
|
|
4,109
|
|
|
5,441
|
|
132%
|
CASING DRILLING™
|
8,886
|
|
|
(3,724
|
)
|
|
12,610
|
|
339%
|
|
8,032
|
|
|
(6,837
|
)
|
|
14,869
|
|
217%
|
Research & engineering
|
(3,414
|
)
|
|
(2,403
|
)
|
|
(1,011
|
)
|
(42)%
|
|
(5,956
|
)
|
|
(5,289
|
)
|
|
(667
|
)
|
(13)%
|
Corporate and other
|
(8,380
|
)
|
|
(9,171
|
)
|
|
791
|
|
9%
|
|
(15,799
|
)
|
|
(18,428
|
)
|
|
2,629
|
|
14%
|
Consolidated operating income
|
24,624
|
|
|
8,855
|
|
|
15,769
|
|
178%
|
|
43,645
|
|
|
16,371
|
|
|
27,274
|
|
167%
|
Other expense (income)
|
4,608
|
|
|
(1,546
|
)
|
|
6,154
|
|
398%
|
|
3,167
|
|
|
(1,046
|
)
|
|
4,213
|
|
403%
|
Income tax provision
|
6,910
|
|
|
3,012
|
|
|
3,898
|
|
129%
|
|
12,953
|
|
|
5,711
|
|
|
7,242
|
|
127%
|
Net income
|
$
|
13,106
|
|
|
$
|
7,389
|
|
|
$
|
5,717
|
|
77%
|
|
27,525
|
|
|
11,706
|
|
|
15,819
|
|
135%
|
Top Drive Segment
Our Top Drive business segment sells equipment and provides services to drilling contractors and oil and natural gas operating companies throughout the world. We primarily manufacture top drives that are used in drilling operations to rotate the drill string while suspended from the derrick above the rig floor. We also provide top drive rental services on a day-rate basis for land and offshore drilling rigs, and we provide after-market sales and support for our customers. The following is a summary of our operating results and metrics for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages, units, days, and rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
Top Drive revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
39,314
|
|
|
$
|
30,953
|
|
|
$
|
8,361
|
|
27%
|
|
$
|
89,713
|
|
|
$
|
55,915
|
|
|
$
|
33,798
|
|
60%
|
Rental services
|
33,893
|
|
|
34,652
|
|
|
(759
|
)
|
(2)%
|
|
68,540
|
|
|
67,908
|
|
|
632
|
|
1%
|
After-market sales and services
|
16,931
|
|
|
12,963
|
|
|
3,968
|
|
31%
|
|
33,701
|
|
|
25,194
|
|
|
8,507
|
|
34%
|
|
90,138
|
|
|
78,568
|
|
|
11,570
|
|
15%
|
|
$
|
191,954
|
|
|
$
|
149,017
|
|
|
$
|
42,937
|
|
29%
|
Top Drive operating income
|
$
|
22,924
|
|
|
$
|
21,657
|
|
|
$
|
1,267
|
|
6%
|
|
$
|
47,818
|
|
|
$
|
42,816
|
|
|
$
|
5,002
|
|
12%
|
Number of top drive sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
33
|
|
|
21
|
|
|
12
|
|
57%
|
|
68
|
|
|
38
|
|
|
30
|
|
79%
|
Used or consignment
|
1
|
|
|
3
|
|
|
(2
|
)
|
(67)%
|
|
5
|
|
|
4
|
|
|
1
|
|
25%
|
|
34
|
|
|
24
|
|
|
10
|
|
42%
|
|
73
|
|
|
42
|
|
|
31
|
|
74%
|
End of period number of top drives in rental fleet:
|
130
|
|
|
128
|
|
|
2
|
|
2%
|
|
130
|
|
|
128
|
|
|
2
|
|
2%
|
Rental operating days
(a)
|
6,658
|
|
|
7,039
|
|
|
(381
|
)
|
(5)%
|
|
13,645
|
|
|
13,909
|
|
|
(264
|
)
|
(2)%
|
Average daily operating rate
|
$
|
5,091
|
|
|
$
|
4,923
|
|
|
$
|
168
|
|
3%
|
|
$
|
5,023
|
|
|
$
|
4,882
|
|
|
$
|
141
|
|
3%
|
(a) Defined as a day that a unit in our rental fleet is under contract and operating; does not include stand-by days.
Top Drive operating results were largely driven by increased oil and natural gas drilling activity and new rig build activity undertaken to meet anticipated global drilling demand. The average active rig count increased for the second quarter of
2012
and year-to-date by
7%
and
8%
, respectively, from the same periods in
2011
.
In March 2012, our quality control processes found casting anomalies in the gearbox housing of our new ESI top drive model and subsequently determined that the casting of the gearbox housing did not meet TESCO's standards. We have completed the inspection for 12 units out of the first 18 ESI units produced. Based on the results of the completed inspections, we have increased the specific warranty provision by $0.5 million during the second quarter of 2012, in addition to $3.9 million of specific warranty provision recorded during the first quarter of 2012.
Top Drive sales revenue
— The
increase
in revenue for the
three and six
months ended
June 30, 2012
compared to the same period in
2011
is due to an increase in the number of new units sold.
The selling price per unit varies significantly depending on the model, whether the unit was previously operated in our rental fleet and whether a power unit was included in the sale. Revenue related to the sale of used or consignment top drive units was $1.1 million and $1.9 million for the three months ended
June 30, 2012
and
2011
, respectively, and $8.1 million and $2.6 million for the
six
months ended
June 30, 2012
and
2011
, respectively.
Top Drive rental revenue
— The decrease in revenue for the three months ended
June 30, 2012
compared to the same period in
2011
is due to a decrease in the number of operating days during the respective periods. The
increase
in revenue for the six months ended
June 30, 2012
compared to the same period in
2011
is due to improved rental daily operating rates and a larger rental fleet during the respective periods.
Top Drive after-market sales and services revenue
— Revenue for the
three and six
months ended
June 30, 2012
improved significantly compared to the same periods in
2011
as we began to recover lost business experienced in prior years due to the industry downturn and as a result of a larger installed base of top drives.
Top Drive operating income
— The increase in Top Drive operating income for the
three and six
months ended
June 30, 2012
as compared to the same period in
2011
is due to higher revenue from Top Drive sales, and after-market sales and services discussed above. This increase for the six months ended June 30, 2012, was significantly offset due to an increase in warranty expense of
$4.4 million
specifically associated with the gearbox housing issue for our new ESI model.
Tubular Services Segment
Our Tubular Services business segment includes both proprietary and conventional casing running services, which are mostly offered as a “call out” service on a well-by-well basis. Our proprietary Tubular Service business is based on our Proprietary Casing Running Service technology, in particular the CDS™, and provides an efficient method for running casing and, if required, reaming the casing into the hole. In addition, our proprietary Tubular Service business includes the installation services of deep water smart well completion equipment using our MCLRS, a proprietary and patented technology that improves the quality of the installation of high-end well completions. Our conventional Tubular Service business provides equipment and personnel for the installation of tubing and casing, including power tongs, pick-up/lay-down units, torque monitoring services, connection testing services and power swivels for new well construction and in work-over and re-entry operations. Below is a summary of our operating results and metrics for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages and number of jobs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase/ (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
Tubular Services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
|
$
|
33,067
|
|
|
$
|
29,230
|
|
|
$
|
3,837
|
|
13%
|
|
$
|
65,655
|
|
|
$
|
53,758
|
|
|
$
|
11,897
|
|
22%
|
Conventional
|
8,568
|
|
|
5,553
|
|
|
3,015
|
|
54%
|
|
19,451
|
|
|
13,313
|
|
|
6,138
|
|
46%
|
|
$
|
41,635
|
|
|
$
|
34,783
|
|
|
$
|
6,852
|
|
20%
|
|
$
|
85,106
|
|
|
$
|
67,071
|
|
|
$
|
18,035
|
|
27%
|
Tubular Services operating income
|
$
|
4,608
|
|
|
$
|
2,496
|
|
|
$
|
2,112
|
|
85%
|
|
$
|
9,550
|
|
|
$
|
4,109
|
|
|
$
|
5,441
|
|
132%
|
Number of proprietary jobs
|
817
|
|
|
914
|
|
|
(97
|
)
|
(11)%
|
|
1,676
|
|
|
1,734
|
|
|
(58
|
)
|
(3)%
|
The
increase
in Tubular Services revenue for the
three and six
months ended
June 30, 2012
compared to the same periods in
2011
is due to increased demand for tubular services. A significant amount of current U.S. drilling activity is in shale formations that require directional and horizontal drilling techniques, which we believe are good applications for our proprietary service offerings. In addition, increased domestic and international demand for our tubular services, both proprietary and conventional, has resulted in new jobs at more favorable pricing terms. For the
three and six
months ended
June 30, 2012
, revenue related to our MCLRS proprietary tubular services increased $3.5 million and $4.3 million, respectively, compared to the same periods in
2011
, due to the market conditions in the first half of 2011 resulting from the Deepwater Horizon explosion, the temporary Gulf of Mexico drilling moratorium and the resulting negative impact on the deepwater drilling permitting process. Tubular Services revenue for the
three and six
months ended
June 30, 2012
included $0.5 million and $2.2 million, respectively, of revenue for CDS equipment sales while no CDS equipment sales were made during the same periods in
2011
.
The
increase
in Tubular Services operating income for the
three and six
months ended
June 30, 2012
as compared to the same periods in
2011
is due to higher revenue for our MCLRS proprietary tubular services and CDS equipment sales, which provide higher operating margins, higher revenue for proprietary and conventional jobs as discussed above, and improved margins as oil and natural gas drilling activity continues to recover from the severe downturn experienced in prior years.
CASING DRILLING™ Segment
On June 4, 2012, the Company completed the sale of substantially all of the assets of the CASING DRILLING™ segment to the Schlumberger Group. The CASING DRILLING™ business was based on the proprietary CASING DRILLING™ technology, which used patented equipment and processes to allow an oil or gas well to be drilled using standard well casing pipe.
The following is a summary of the operating results of the segment prior to the sale for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
CASING DRILLING™ revenue
|
$
|
4,900
|
|
|
$
|
3,927
|
|
|
$
|
973
|
|
25%
|
|
$
|
12,035
|
|
|
$
|
6,812
|
|
|
$
|
5,223
|
|
77%
|
CASING DRILLING™ operating income (loss)
|
$
|
8,886
|
|
|
$
|
(3,724
|
)
|
|
$
|
12,610
|
|
339%
|
|
$
|
8,032
|
|
|
$
|
(6,837
|
)
|
|
$
|
14,869
|
|
217%
|
CASING DRILLING™ revenue for the
three and six
months ended
June 30, 2012
improved significantly over the same periods in
2011
due to improved demand for our services from multi-well contracts and an increase in the number of higher-margin jobs performed.
CASING DRILLING™ operating
income
for the
three and six
months ended
June 30, 2012
includes approximately
$13.3 million
gain from the sale.
For a detailed discussion of this matter, see Part I, Item 1—"Financial Statements", Note 3—Sale of CASING DRILLING™ in this Quarterly Report on Form 10-Q.
Absent the gain, CASING DRILLING™ operating loss decreased for the
three and six
months ended
June 30, 2012
compared to the same period in
2011
due primarily to increased revenue, the focus on cost management and related job activity.
Research and Engineering Segment
Our Research and Engineering segment is comprised of our internal research and development activities related to Tubular Services technology and top drive model development, as well as the CASING DRILLING™ technology prior to the sale. Below is a summary of our research and engineering expense for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
Research and engineering expense
|
$
|
3,414
|
|
|
$
|
2,403
|
|
|
$
|
1,011
|
|
42%
|
|
$
|
5,956
|
|
|
$
|
5,288
|
|
|
$
|
668
|
|
13%
|
Research and engineering expenses increased during the
three and six
months ended
June 30, 2012
as compared to the same periods in
2011
due to increased spending on our top drive technology. We continue to invest in the development, commercialization, and enhancements of our proprietary technologies.
Corporate and Other Segment
Corporate and other expenses primarily consist of the corporate level general and administrative expenses and certain selling and marketing expenses. Below is a summary of our corporate and other expenses for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
Corporate and other expenses
|
$
|
8,380
|
|
|
$
|
9,171
|
|
|
$
|
(791
|
)
|
(9)%
|
|
$
|
15,799
|
|
|
$
|
18,428
|
|
|
$
|
(2,629
|
)
|
(14)%
|
Corporate and other expenses as a % of revenue
|
6%
|
|
8%
|
|
(2) pts
|
|
5%
|
|
8%
|
|
(3) pts
|
Corporate and other expenses decreased
$0.8 million
and
$2.6 million
during the
three and six
months ended
June 30, 2012
, respectively, as compared to the same periods in
2011
. Stock compensation decreased by $0.5 million and $2.0 million, respectively, and other compensation costs decreased by $0.5 million and $1.0 million, respectively, for the
three and six
months ended
June 30, 2012
, as compared to the same periods in
2011
.
Other Expense (Income)
The following is a summary of our other expense (income) for the
three and six
months ended
June 30, 2012
and
2011
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase/(Decrease)
|
|
2012
|
|
2011
|
|
2011 to 2012
|
|
2012
|
|
2011
|
|
2011 to 2012
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
$
|
949
|
|
|
$
|
798
|
|
|
$
|
151
|
|
19%
|
|
$
|
591
|
|
|
$
|
1,084
|
|
|
$
|
(493
|
)
|
(45)%
|
Interest income
|
(27
|
)
|
|
(2,482
|
)
|
|
2,455
|
|
99%
|
|
(58
|
)
|
|
(2,482
|
)
|
|
2,424
|
|
98%
|
Foreign exchange losses
|
2,943
|
|
|
697
|
|
|
2,246
|
|
322%
|
|
3,223
|
|
|
883
|
|
|
2,340
|
|
265%
|
Other expense (income)
|
743
|
|
|
(559
|
)
|
|
1,302
|
|
233%
|
|
(589
|
)
|
|
(531
|
)
|
|
(58
|
)
|
(11)%
|
Total other expense (income)
|
$
|
4,608
|
|
|
$
|
(1,546
|
)
|
|
$
|
6,154
|
|
398%
|
|
$
|
3,167
|
|
|
$
|
(1,046
|
)
|
|
$
|
4,213
|
|
403%
|
In April 2012, we received a favorable determination on a legacy withholding tax issue in a foreign jurisdiction. The impact of this was recognized in the first quarter of 2012, when we reversed $1.9 million of accruals previously made for this issue ($1.3 million to other income and a $0.6 million reduction of interest expense). For a detailed discussion of this matter, see Part I, Item 2—"Financial Statements", Note 11—Commitments and Contingencies in this Quarterly Report on Form 10-Q.
Foreign exchange losses increased during the
three and six
months ended
June 30, 2012
as compared to the same periods in
2011
due to fluctuations in the valuation of the U.S. dollar compared to other currencies we transact in around the world, including the Argentine peso, Mexican peso, and Russian ruble, among others.
Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Increase / (Decrease)
|
|
Six Months Ended June 30,
|
|
Increase / (Decrease)
|
|
2012
|
|
2011
|
|
|
2012
|
|
2011
|
|
Effective income tax rate
|
35%
|
|
29%
|
|
6 pts
|
|
32%
|
|
33%
|
|
(1) pts
|
We are an Alberta, Canada corporation. We conduct business and are taxed on profits earned in a number of jurisdictions around the world. Our income tax rate is based on the laws and rates in effect in the countries in which our operations are conducted or in which we are considered a resident for income tax purposes. Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, increased for the three months ended
June 30, 2012
and decreased for the six months ended
June 30, 2012
compared to the same periods in
2011
due to the fluctuating mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world.
Liquidity and Capital Resources
We rely on our cash and access to credit to fund our operations, growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents, and available borrowings under our revolving credit facility. We use these sources of liquidity to fund our working capital requirements, capital expenditures, strategic investments and acquisitions. For
2012
, we forecast capital expenditures to be between
$50 million
and
$60 million
based on increased demand for our products and services. We expect to be able to fund our activities for
2012
with cash flows generated from our operations, available cash and cash equivalents, and available borrowings under our revolving credit facility.
Our net cash position at
June 30, 2012
and
December 31, 2011
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
Cash
|
$
|
32,587
|
|
|
$
|
23,069
|
|
Current portion of long term debt
|
(794
|
)
|
|
(2,793
|
)
|
Long term debt
|
(305
|
)
|
|
(3,832
|
)
|
Net cash
|
$
|
31,488
|
|
|
$
|
16,444
|
|
We report our net cash position because we regularly review it as a measure of our performance. However, the measure presented in this Quarterly Report on Form 10-Q may not always be comparable to similarly titled measures reported by other
companies due to differences in the components of the measurement we use.
At
June 30, 2012
, we had a credit agreement which was entered into 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
5 years
and all outstanding borrowings on the Revolver are due and payable on
April 29, 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 the 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, and 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
, paying cash dividends to shareholders and contains other restrictions, which are standard to the industry. All of our direct and indirect material subsidiaries in the United States and Canada are guarantors of any borrowings under the credit facility.
Under the Revolver at
June 30, 2012
, we had
no
outstanding borrowings,
$4.5 million
in letters of credit outstanding and
$120.5 million
in available borrowing capacity. We were in compliance with our bank covenants at
June 30, 2012
.
Cash Flows
Our cash flows fluctuate with the level of spending by oil and natural gas companies for drilling activities. Certain sources and uses of cash, such as the level of discretionary capital expenditures and the issuance and repayment of debt, are within our control and are adjusted as necessary based on market conditions. The following is a discussion of our cash flows for the
six
months ended
June 30, 2012
and
2011
.
Operating Activities
– Net cash provided by operating activities is our primary source of capital and liquidity. Net cash
provided
from operating activities was
$2.5 million
for the
six
months ended
June 30, 2012
compared to
$0.5 million
used during the same period in
2011
. The
increase
in net cash
provided
for operating activities is primarily due to increased operating income, excluding the sale of CASING DRILLING™.
Investing Activities
– Net cash
provided
by investing activities was
$11.8 million
during the
six
months ended
June 30, 2012
compared to
$19.3 million
used during the same period of
2011
. On June 4, 2012, we completed the sale of substantially all of the assets of the CASING DRILLING™ segment to the Schlumberger Group, which provided
$38.0 million
of cash proceeds, net of transactions costs. During the
six
months ended
June 30, 2012
and
2011
, we used $
35.0 million
and
$19.5 million
of cash, respectively, for capital expenditures, and sales of operating assets provided
$8.9 million
and
$1.6 million
of cash, respectively. Our capital expenditures increased by $14.6 million, or 75%, during the
six
months ended
June 30, 2012
as compared to the same period of
2011
to meet projected demand for our products and services.
Financing Activities
– Net cash
used
by financing activities was
$4.8 million
during the
six
months ended
June 30, 2012
compared to
$0.5 million
provided from financing activities for the same period in
2011
. During the
six
months ended
June 30, 2012
, we borrowed
$35.4 million
from our revolving credit facility and used
$40.9 million
of cash to repay our debt.
Manufacturing Purchase Commitments
Our manufacturing purchase commitments, which represent executed purchase orders that have been submitted to the respective vendors, have decreased from
$82.7 million
as of
December 31, 2011
to
$42.3 million
as of
June 30, 2012
. This decrease of
$40.4 million
, or
49%
, is driven by a decrease in our backlog from
74
units as of
December 31, 2011
to
41
units as of
June 30, 2012
.
Off-Balance Sheet Arrangements
As of
June 30, 2012
, we have no off-balance sheet arrangements other than the manufacturing purchase commitments and letters of credit described above, and future interest payments on the aggregate unused commitments under our revolving credit facility and lease commitments as described in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our
2011
Annual Report on Form 10-K.
Critical Accounting Estimates and Policies
Our accounting policies are described in the notes to our audited consolidated financial statements included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our
2011
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
2011
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
2011
Annual Report on Form 10−K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The carrying value of cash, investments in short-term commercial paper and other money market instruments, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to the relatively short-term period to maturity of the instruments.
The fair value of our long term debt depends primarily on current market interest rates for debt issued with similar maturities by companies with risk profiles similar to us. We had no debt outstanding under our credit facility at
June 30, 2012
.
Our accounts receivable are principally with oil and natural gas service, exploration, and production companies and are subject to normal industry credit risks. In Mexico, the majority of our accounts receivable are principally from one customer. Our accounts receivable was $19.3 million in Mexico at June 30, 2012. Please see Part I, Item 1A—“Risk Factors” in our
2011
Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us.
There have been no material changes in our market risk factors since
December 31, 2011
.
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 and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of
June 30, 2012
, our Chief Executive Officer and Chief Financial 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). Our Chief Executive Officer and Chief Financial Officer have concluded that, as of
June 30, 2012
, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
June 30, 2012
, that 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 Quarterly Report on Form 10-Q for a summary of our 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 2011 Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us. There have been no material changes in the risk factors described in Part I, Item 1A—"Risk Factors" disclosed in our 2011 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.
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TESCO CORPORATION
|
|
|
|
|
|
By:
|
/s/ JULIO M. QUINTANA
|
|
|
Julio M. Quintana,
President and Chief Executive Officer
|
Date:
|
August 6, 2012
|
|
|
|
|
|
TESCO CORPORATION
|
|
|
|
|
|
By:
|
/s/ ROBERT L. KAYL
|
|
|
Robert L. Kayl,
Senior Vice President and Chief Financial Officer
|
Date:
|
August 6, 2012
|
|
EXHIBIT INDEX
|
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|
|
|
|
|
Exhibit No.
|
|
Description
|
3.1*
|
|
Articles of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated by reference to Exhibit 4.1 to Tesco Corporation's Registration Statement on Form S-8 (File No. 333-139610) filed with the SEC on December 22, 2006)
|
|
|
|
3.2*
|
|
Amended and Restated By-laws of Tesco Corporation (incorporated by reference to Exhibit 3.1 to Tesco Corporation's Current Report on Form 8-K filed with the SEC on May 22, 2007)
|
|
|
|
10.1***
|
|
Asset Purchase Agreement dated April 29, 2012 (incorporated by reference to Exhibit 10.1 to Tesco Corporation's Current Report on Form 8-K filed with the SEC on May 1, 2012)
|
|
|
|
10.2*
|
|
Second Amended and Restated Credit Agreement dated April 27, 2012 (incorporated by reference to Exhibit 10.2 to Tesco Corporation's Current Report on Form 8-K filed with the SEC on May 1, 2012)
|
|
|
|
10.3*
|
|
First Amendment to Asset Purchase Agreement dated June 4, 2012 (incorporated by reference to Exhibit 10.1 to Tesco Corporation's Current Report on Form 8-K filed with the SEC on June 8, 2012)
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification, executed by Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation
|
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation and Robert L. Kayl, Senior Vice President and Chief Financial Officer of Tesco Corporation
|
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101.INS**
|
|
XBRL Instance Document
|
|
|
|
101.SCH**
|
|
XBRL Taxonomy Extension Schema
|
|
|
|
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
|
|
|
*
|
Incorporated by reference to the indicated filing
|
|
|
**
|
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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***
|
Previously filed as Exhibit 10.1 to Tesco Corporation's Current Report on Form 8-K filed with the SEC on May 1, 2012. Filed here to correct document formatting issue of previously filed document.
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