Item 1. Financial Statements.
TESCO CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Assets
|
(unaudited)
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
53,892
|
|
|
$
|
51,507
|
|
Accounts receivable trade, net of allowance for doubtful accounts of $9,343 and $8,894 as of March 31, 2016 and December 31, 2015, respectively
|
48,532
|
|
|
64,270
|
|
Inventories, net
|
93,308
|
|
|
95,459
|
|
Income taxes recoverable
|
7,393
|
|
|
7,656
|
|
Prepaid and other current assets
|
15,277
|
|
|
17,594
|
|
Total current assets
|
218,402
|
|
|
236,486
|
|
Property, plant and equipment, net
|
136,137
|
|
|
177,716
|
|
Deferred income taxes
|
598
|
|
|
598
|
|
Intangible and other assets, net
|
5,391
|
|
|
6,894
|
|
Total assets
|
$
|
360,528
|
|
|
$
|
421,694
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable
|
13,823
|
|
|
14,332
|
|
Deferred revenue
|
5,471
|
|
|
4,382
|
|
Warranty reserves
|
561
|
|
|
893
|
|
Income taxes payable
|
1,322
|
|
|
1,430
|
|
Accrued payroll and benefits
|
9,568
|
|
|
12,448
|
|
Accrued taxes other than income taxes
|
4,289
|
|
|
4,173
|
|
Other current liabilities
|
2,445
|
|
|
5,255
|
|
Total current liabilities
|
37,479
|
|
|
42,913
|
|
Other liabilities
|
2,204
|
|
|
2,239
|
|
Deferred income taxes
|
1,588
|
|
|
1,588
|
|
Total liabilities
|
41,271
|
|
|
46,740
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
Common shares; no par value; unlimited shares authorized; 39,272 and 39,218 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
|
213,525
|
|
|
212,383
|
|
Retained earnings
|
70,231
|
|
|
127,070
|
|
Accumulated other comprehensive income
|
35,501
|
|
|
35,501
|
|
Total shareholders’ equity
|
319,257
|
|
|
374,954
|
|
Total liabilities and shareholders’ equity
|
$
|
360,528
|
|
|
$
|
421,694
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
Products
|
$
|
10,105
|
|
|
$
|
29,928
|
|
Services
|
25,348
|
|
|
61,742
|
|
|
35,453
|
|
|
91,670
|
|
Operating expenses
|
|
|
|
Cost of sales and services
|
|
|
|
Products
|
13,841
|
|
|
26,587
|
|
Services
|
33,018
|
|
|
56,708
|
|
|
46,859
|
|
|
83,295
|
|
Selling, general and administrative
|
6,264
|
|
|
11,163
|
|
Long-lived asset impairments
|
35,514
|
|
|
—
|
|
Research and engineering
|
1,573
|
|
|
2,850
|
|
Total operating expenses
|
90,210
|
|
|
97,308
|
|
Operating loss
|
(54,757
|
)
|
|
(5,638
|
)
|
Other expense (income)
|
|
|
|
Interest expense
|
463
|
|
|
255
|
|
Interest income
|
(82
|
)
|
|
(65
|
)
|
Foreign exchange loss
|
1,168
|
|
|
3,156
|
|
Other expense (income)
|
10
|
|
|
(206
|
)
|
Total other expense (income)
|
1,559
|
|
|
3,140
|
|
Loss before income taxes
|
(56,316
|
)
|
|
(8,778
|
)
|
Income tax provision (benefit)
|
523
|
|
|
(526
|
)
|
Net loss
|
$
|
(56,839
|
)
|
|
$
|
(8,252
|
)
|
Loss per share:
|
|
|
|
Basic
|
$
|
(1.45
|
)
|
|
$
|
(0.21
|
)
|
Diluted
|
$
|
(1.45
|
)
|
|
$
|
(0.21
|
)
|
Dividends declared per share:
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.05
|
|
Weighted average number of shares:
|
|
|
|
Basic
|
39,261
|
|
|
38,956
|
|
Diluted
|
39,261
|
|
|
38,956
|
|
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)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Operating Activities
|
|
|
|
Net loss
|
$
|
(56,839
|
)
|
|
$
|
(8,252
|
)
|
Adjustments to reconcile net loss to cash provided by (used for) operating activities:
|
|
|
|
Depreciation and amortization
|
7,959
|
|
|
10,100
|
|
Stock compensation expense
|
1,142
|
|
|
1,002
|
|
Bad debt expense (recovery)
|
463
|
|
|
(400
|
)
|
Deferred income taxes
|
—
|
|
|
(3,196
|
)
|
Amortization of financial items
|
248
|
|
|
76
|
|
Gain (loss) on sale of operating assets
|
(298
|
)
|
|
1
|
|
Long-lived asset impairments
|
35,514
|
|
|
—
|
|
Changes in the fair value of contingent earn-out obligations
|
(74
|
)
|
|
(197
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable trade, net
|
15,325
|
|
|
26,202
|
|
Inventories, net
|
2,150
|
|
|
(5,501
|
)
|
Prepaid and other current assets
|
2,267
|
|
|
(1,044
|
)
|
Accounts payable and accrued liabilities
|
(5,864
|
)
|
|
(14,235
|
)
|
Income taxes recoverable
|
155
|
|
|
(1,426
|
)
|
Other noncurrent assets and liabilities, net
|
(32
|
)
|
|
(756
|
)
|
Net cash provided by operating activities
|
2,116
|
|
|
2,374
|
|
Investing Activities
|
|
|
|
Additions to property, plant and equipment
|
(838
|
)
|
|
(7,347
|
)
|
Proceeds on sale of operating assets
|
1,057
|
|
|
—
|
|
Other, net
|
50
|
|
|
1,749
|
|
Net cash provided by (used in) investing activities
|
269
|
|
|
(5,598
|
)
|
Financing Activities
|
|
|
|
Repayments of debt
|
—
|
|
|
(18
|
)
|
Proceeds from exercise of stock options
|
—
|
|
|
79
|
|
Net cash provided by financing activities
|
—
|
|
|
61
|
|
Change in cash and cash equivalents
|
2,385
|
|
|
(3,163
|
)
|
Cash and cash equivalents, beginning of period
|
51,507
|
|
|
72,466
|
|
Cash and cash equivalents, end of period
|
$
|
53,892
|
|
|
$
|
69,303
|
|
Supplemental cash flow information
|
|
|
|
Cash payments for interest
|
$
|
118
|
|
|
$
|
116
|
|
Cash payments for income taxes, net of refunds
|
485
|
|
|
4,633
|
|
Property, plant and equipment accrued in accounts payable
|
611
|
|
|
1,688
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares
|
|
Common shares
|
|
Retained earnings
|
|
Accumulated other comprehensive income
|
|
Total
|
For the three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2016
|
39,218
|
|
|
$
|
212,383
|
|
|
$
|
127,070
|
|
|
$
|
35,501
|
|
|
$
|
374,954
|
|
Net loss
|
—
|
|
|
—
|
|
|
(56,839
|
)
|
|
—
|
|
|
(56,839
|
)
|
Stock compensation related activity
|
54
|
|
|
1,142
|
|
|
—
|
|
|
—
|
|
|
1,142
|
|
Balances at March 31, 2016
|
39,272
|
|
|
$
|
213,525
|
|
|
$
|
70,231
|
|
|
$
|
35,501
|
|
|
$
|
319,257
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2015
|
38,949
|
|
|
$
|
208,999
|
|
|
$
|
268,627
|
|
|
$
|
35,501
|
|
|
$
|
513,127
|
|
Net loss
|
—
|
|
|
—
|
|
|
(8,252
|
)
|
|
—
|
|
|
(8,252
|
)
|
Dividends declared
|
—
|
|
|
—
|
|
|
(1,948
|
)
|
|
—
|
|
|
(1,948
|
)
|
Stock compensation related activity
|
15
|
|
|
1,095
|
|
|
—
|
|
|
—
|
|
|
1,095
|
|
Balances at March 31, 2015
|
38,964
|
|
|
$
|
210,094
|
|
|
$
|
258,427
|
|
|
$
|
35,501
|
|
|
$
|
504,022
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1
—Nature of Operations and Basis of Preparation
Nature of Operations
We are a global leader in the design, manufacture and service delivery of technology-based solutions for the upstream energy industry. We seek to change the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for, and producing, oil and natural gas. Our product and service offerings consist mainly of equipment sales and services to drilling contractors and oil and natural gas operating companies throughout the world.
Basis of Presentation
We prepared this Quarterly Report on Form 10-Q pursuant to instructions for quarterly reports required to be filed with the Securities and Exchange Commission ("SEC"). Because this is an interim period filing presented using a condensed format, it does not include all information and footnotes normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). You should read this report along with our Annual Report on Form 10-K for the year ended
December 31, 2015
, which contains a summary of our significant accounting policies and other disclosures. The condensed consolidated financial statements as of
March 31, 2016
and for the three months ended
March 31, 2016
and
2015
are unaudited. We derived the condensed consolidated balance sheet as of
December 31, 2015
from the audited consolidated balance sheet filed in our
2015
Annual Report on Form 10-K. The results of operations and cash flows for the three months ended
March 31, 2016
and
2015
are not necessarily indicative of the operating results and cash flows to be achieved for the full year. 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 intercompany accounts and transactions. All references to $ are to U.S. dollars.
Fair Value of Financial Instruments
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
•
Level 1 — quoted prices in active markets for identical assets and liabilities;
•
Level 2 — observable market based inputs or unobservable inputs that are corroborated by market data; and
|
|
•
|
Level 3 — significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall for assets and liabilities measured on a recurring basis as of
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Total
|
|
Quoted Prices In Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Cash and cash equivalents
|
$
|
53,892
|
|
|
$
|
53,892
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contingent earn-out obligations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash and cash equivalents approximated their fair value due to the short-term nature of the accounts.
The valuation of our contingent earn-out obligations is determined using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-out obligations are measured at fair value for each reporting period and changes in estimates of fair value are recognized in earnings.
The discount rate used to calculate the contingent earn-out obligation is calculated by weighting our after-tax required returns on debt and equity by their respective percentages of total capital plus a certain premium. The return required by each class of investor reflects the rate of return investors would expect to earn on other investments of equivalent risk. We determined it would be appropriate to continue to use a discount rate equal to our weighted average cost of capital of
9%
plus a
5%
premium due to current market conditions for a total discount rate of
14%
. The contingent earn-out obligation expires in May 2016.
The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use significant unobservable inputs (Level 3) (in thousands).
|
|
|
|
|
Balance at beginning of year
|
$
|
74
|
|
Issuances
|
—
|
|
Settlements
|
—
|
|
Adjustments to fair value
|
(74
|
)
|
Balance at March 31, 2016
|
$
|
—
|
|
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the
three
months ended
March 31, 2016
, we recognized impairments on certain assets required to be measured at fair value on a nonrecurring basis (see further discussion in "
Note 5
").
Note 2
—Summary of Significant Accounting Policies
Significant Accounting Policies
There have been no material changes to our accounting policies as described in the notes to our audited consolidated financial statements included in our
2015
Annual Report on Form 10-K.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Compensation - Stock Compensation
(Topic 718),
which requires income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It will also allow an employer to repurchase more of an employees' shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The update will be effective January 1, 2017. Early adoption is permitted. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.
In February 2016, FASB issued ASU 2016-02,
Leases (Topic 842),
which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. It will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The update will be effective January 1, 2019. Early adoption is permitted. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which requires inventory not measured using either the last in, first out ("LIFO") or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. The update will be effective January 1, 2017 and will be applied prospectively. Early adoption is permitted. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which clarifies the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update will be effective January 1, 2018. Early adoption permitted is on January 1, 2017. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern
, which requires us to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. The update is effective January 1, 2017 and for interim and annual periods thereafter. We do not expect that our adoption will have a material effect on the disclosures contained in our notes to condensed consolidated financial statements.
Note 3
—Details of Certain Accounts
At
March 31, 2016
and
December 31, 2015
, prepaid and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Prepaid taxes other than income taxes
|
$
|
3,631
|
|
|
$
|
4,048
|
|
Deposits
|
3,742
|
|
|
4,295
|
|
Prepaid insurance
|
693
|
|
|
1,144
|
|
Other prepaid expenses
|
3,035
|
|
|
3,220
|
|
Restricted cash
|
946
|
|
|
996
|
|
Deferred job costs
|
927
|
|
|
1,786
|
|
Non-trade receivables
|
2,303
|
|
|
2,105
|
|
|
$
|
15,277
|
|
|
$
|
17,594
|
|
Note 4
—Inventories
At
March 31, 2016
and
December 31, 2015
, inventories, net of reserves for excess and obsolete inventories of
$11.9 million
and
$11.8 million
, respectively, by major classification were as follows (in thousands). Finished goods inventories include completed units assembled and ready for sale and spare parts inventory outside of our assembly process that are ready for sale to third-party customers.
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Raw materials
|
$
|
54,337
|
|
|
$
|
53,595
|
|
Work in progress
|
1,529
|
|
|
1,944
|
|
Finished goods
|
37,442
|
|
|
39,920
|
|
|
$
|
93,308
|
|
|
$
|
95,459
|
|
Note 5
—Property, Plant and Equipment
At
March 31, 2016
and
December 31, 2015
, property, plant and equipment by major classification were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Land, buildings and leaseholds
|
$
|
27,313
|
|
|
$
|
27,890
|
|
Drilling equipment
|
268,443
|
|
|
362,556
|
|
Manufacturing equipment
|
10,598
|
|
|
16,303
|
|
Office equipment and other
|
28,970
|
|
|
33,056
|
|
Capital work in progress
|
1,143
|
|
|
575
|
|
|
336,467
|
|
|
440,380
|
|
Less: Accumulated depreciation
|
(200,330
|
)
|
|
(262,664
|
)
|
|
$
|
136,137
|
|
|
$
|
177,716
|
|
Depreciation and amortization expense for the
three
months ended
March 31, 2016
and
2015
are included on our unaudited condensed consolidated statements of income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Cost of sales and services
|
$
|
7,666
|
|
|
$
|
9,518
|
|
Selling, general and administrative expense
|
293
|
|
|
582
|
|
|
$
|
7,959
|
|
|
$
|
10,100
|
|
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 within product sales of our Products segment. During the
three
months ended
March 31, 2016
,
3
used top drives were sold from our rental fleet, which had an aggregate net book value of
$0.2 million
, which is included in cost of sales and services.
No
used top drives were sold during the three months ended March 31, 2015.
Asset Impairment
We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include significant declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified, which is our operating segments. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group. The amount of an impairment charge is measured as the difference between the carrying amount and the fair value of the asset group.
Since late 2014, oil prices have declined significantly resulting in a downturn in our industry, affecting both drilling and production services. Consequently, we saw an overall decline in the number of new wells drilled and the average rig count throughout 2015, which impacted the demand for our products and services. We continued to see further declines during 2016, which resulted in significantly lower cash projections. Accordingly, we performed an impairment evaluation on our long-lived assets as per the guidance of ASC Topic 360, Property, Plant and Equipment. Consequently during the three months ended March 31, 2016, we recognized
$0.9 million
of impairment related to intangibles and
$34.6 million
to reduce the carrying values of our fixed assets to estimated fair value in our Products operating segment. The value of assets in our Tubular Services operating segment are deemed to be recoverable, and no impairment resulted.
We measured the fair value of the asset group by applying a combination of the market approach and the cost approach at February 29, 2016. To estimate the fair value in-exchange of the property, plant and equipment, we utilized the market approach and relied upon a combination of third party market comparable, recent market sales, review of salvage values from published guides and management estimates. To estimate the fair value in-exchange for the two large manufacturing plants located in Houston and Calgary, we relied upon the improved sales comparison approach / discussions with brokers to estimate the market value. For the remaining 3 minor owned locations, the indirect cost approach was utilized. Our estimates of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our Products operating segment, such as future oil prices, amount of drilling activity, and projected demand for our services.
The following tables present the impairments recognized by our major categories of property, plant and equipment and by our major categories of intangible assets (in thousands):
|
|
|
|
|
Property, plant and equipment
|
|
Land, building and leaseholds
|
$
|
903
|
|
Drilling equipment
|
31,682
|
|
Manufacturing equipment
|
1,497
|
|
Office equipment and other
|
510
|
|
|
$
|
34,592
|
|
|
|
|
|
|
Intangible assets
|
|
Customer relationships
|
$
|
184
|
|
Product designs
|
617
|
|
Other
|
120
|
|
|
$
|
921
|
|
Note 6
—Warranties
Changes in our warranty reserves during the
three
months ended
March 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
March 31, 2016
|
Balance as of January 1, 2016
|
$
|
893
|
|
Provisions
|
335
|
|
Expirations
|
(425
|
)
|
Claims
|
(242
|
)
|
Balance as of March 31, 2016
|
$
|
561
|
|
Note 7
—Earnings per Share
Weighted Average Shares
The following table reconciles basic and diluted weighted average shares (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Basic weighted average number of shares outstanding
|
39,261
|
|
|
38,956
|
|
Dilutive effect of stock-based compensation
|
—
|
|
|
—
|
|
Diluted weighted average number of shares outstanding
|
39,261
|
|
|
38,956
|
|
Anti-dilutive options excluded from calculation due to exercise prices
|
—
|
|
|
—
|
|
There were approximately
116,000
and
194,000
shares excluded from the calculation of the diluted weighted average number of shares outstanding as the Company was in a net loss position for the
three
months ended
March 31, 2016
and
March 31, 2015
, respectively. The inclusion of the shares would be anti-dilutive.
Note 8
—Income Taxes
TESCO is an Alberta, Canada corporation. We conduct business and are taxed on profits earned in certain jurisdictions around the world. Income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted or in which we are considered a resident for income tax purposes.
Our income tax provision (benefit) for the
three
months ended
March 31, 2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Current tax provision
|
$
|
523
|
|
|
$
|
2,670
|
|
Deferred tax benefit
|
—
|
|
|
(3,196
|
)
|
Income tax provision (benefit)
|
$
|
523
|
|
|
$
|
(526
|
)
|
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was a
1%
expense
for the
three
months ended
March 31, 2016
, compared to a
6%
benefit
for the same period in
2015
. The current income tax expense for the
three
months ended
March 31, 2016
was due to certain tax jurisdictions where we remain profitable.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including the implementation of feasible and prudent tax planning strategies, our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income which inherently requires significant assumptions and judgment.
Note 9
—Long-Term Debt and Credit Facility
We did not have any outstanding debt as of
March 31, 2016
and
December 31, 2015
, respectively.
We entered into our Second Amended and Restated Credit Agreement on
April 27, 2012
(the "Credit Facility'), to provide a revolving line of credit of
$125 million
, including up to
$20 million
of swing line loans (collectively, the "Revolver"). The credit facility has a term of
five years
and all outstanding borrowings on the Revolver are due and payable on
April 27, 2017
. The credit facility bears interest at a margin above LIBOR, federal funds rate, or the prime rate for U.S. dollar loans as determined by JPMorgan Chase Bank, N.A. in New York. We are required to pay a commitment fee on available, but unused, amounts of the credit facility of
0.375
-
0.500 percent
per annum and a letter of credit fee of
1.00
-
2.00 percent
per annum on outstanding face amounts of letters of credit issued under the credit facility. Amounts available under the Revolver are reduced by letters of credit issued under our credit facility, not to exceed
$50 million
in aggregate. Amounts available under the swing line loans may also be reduced by letters of credit or by means of a credit to a general deposit account of the applicable borrower. The availability of future borrowings may also be limited in order to maintain certain financial ratios required under the covenants. The credit facility contains covenants that we consider usual and customary for an agreement of this type, including a leverage ratio, a minimum net worth, limitations on allowable amounts for the disposal of obsolete assets and annual capital expenditures and a fixed charge coverage ratio. The credit facility prohibits incurring any additional indebtedness outside the existing credit facility in excess of
$50 million
and contains other restrictions, which are standard to the industry. All of our direct and indirect material subsidiaries in the United States, Canada, Argentina, Mexico and Indonesia as well as one of our Cyprus subsidiaries are guarantors of any borrowings under the credit facility.
At
March 31, 2016
, we had
no
outstanding borrowings under the Revolver and
$4.4 million
in letters of credit outstanding within our Credit Facility.
On February 29, 2016, we received a waiver under the Credit Facility ("this Waiver") for the Company's failure to comply with certain financial covenants under the Credit Facility as of the end of the fiscal quarter ending December 31, 2015. This Waiver was effective from February 29, 2016 through and including the date on which we deliver, to our lenders, our financial statements and compliance certificate, both with respect to the fiscal quarter ending March 31, 2016. On May 6, 2016, the waiver was extended to the date on which we deliver, to our lenders, our financial statements and compliance certificate, both with respect to the fiscal quarter ending June 30, 2016.
Under the Credit Facility, the Company is required to, among other things, (i) not permit the leverage ratio to be greater than
3.00
to 1.0 at any time, (ii) maintain a consolidated net worth of not less than
$394.2 million
as of the end of the fiscal quarter ending March 31, 2016, (iii) not permit the interest coverage ratio to be less than
3.00
to 1.0 as of the end of any fiscal quarter, and (iv) if the leverage ratio is greater than
2.0
to 1.0 as of the end of any fiscal quarter, not permit the consolidated capital expenditures to be greater than the sum of consolidated EBITDA calculated for the most-recently completed four fiscal quarters plus net cash proceeds from asset sales for the most-recently completed four fiscal quarters. As of the end of the fiscal quarter ending March 31, 2016, the Company had a leverage ratio of
(0.24)
, a consolidated net worth of
$319.3 million
, an interest coverage ratio of
(9.9)
and capital expenditures of
$0.8 million
. Under the Waiver (as amended on May 6, 2016), the lenders waived any failure of the Company to maintain the requisite leverage ratio, consolidated net worth, interest coverage ratio and consolidated capital expenditures covenants under the Credit Facility as of the end of the fiscal quarter ending March 31, 2016.
The Waiver (as amended on May 6, 2016) includes the following restrictions on the Company, which will be effective from February 29, 2016 through and including the date on which we deliver, to our lenders, our financial statements and a compliance certificate, both with respect to the fiscal quarter ending June 30, 2016: (i) other than borrowings to make payments under outstanding letters of credit, the Company may not request any revolving loans under the Credit Facility, (ii) the Company may not request any swingline loans, (iii) the Company’s outstanding letters of credit shall not exceed
$10 million
, with no more than
$3 million
of such
$10 million
constituting letters of credit under the Credit Facility, (iv) the interest rate for all loans under the
Credit Facility is set at a rate equal to the Adjusted LIBO Rate plus
3.50%
per annum, (v) the unused commitment fees are set at a per annum rate of
0.625%
, (vi) the letter of credit fees are set at a per annum rate equal to
3.50%
, (vii) prohibit the Company and its subsidiaries from incurring additional indebtedness, other than indebtedness under the Credit Facility and (viii) prohibit the Company from declaring or paying any dividends, (ix) prohibit the Company and its subsidiaries from making capital expenditures in an amount greater than
$3 million
, net of all net cash proceeds received from asset sales. The amended Waiver separately, at our election, reduces the aggregate commitments under the Credit Facility by
$65 million
to
$60 million
. As a result of the reduction in our Credit Facility, we wrote off the unamortized debt issuance costs in proportion to the decrease in borrowing capacity of
$0.2 million
during the
three
months ended
March 31, 2016
.
Note 10
—Commitments and Contingencies
Legal contingencies
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of these proceedings involves a claim for damages exceeding
ten percent
of our current assets on a consolidated basis. 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.
Federal and State Unpaid Overtime Action
The Company participated in an arbitration, based on the Company’s dispute resolution process, with
38
current and former employees (the "Employees") who had worked or are working in various states. The Employees claimed that they were owed unpaid overtime wages including liquidated damages under the Federal Labor Standards Act and the applicable state laws of various states, including New Mexico and Colorado. The case was assigned to a three-judge panel of arbitrators. On October 22, 2015, an arbitration panel agreed that the case could proceed as a class action. The Company settled the matter with the Employees through a signed settlement agreement. The Company submitted a proposed dismissal order to the arbitrators and the arbitrators dismissed the Employees’ claims with prejudice on May 3, 2016. At March 31, 2016 and as of the date of this report, we maintain an estimated reserve for potential exposure.
Other Contingencies
We are contingently liable under letters of credit and similar instruments that we enter into in connection with the importation of equipment to foreign countries and to secure our performance on certain contracts. As of
March 31, 2016
and
December 31, 2015
, our total exposure under outstanding letters of credit was
$5.8 million
and
$5.4 million
, respectively.
At
March 31, 2016
, accounts receivable included approximately
$1.6 million
accounts receivable from a customer in Mexico for the period of May 2013 through July 2014 that are unbilled due to a contractual rate dispute. We are seeking collection of this amount through an official dispute resolution process with the customer. Included in selling, general and administrative cost during the three months ended March 31, 2016, is the release of
$2.0 million
of asset sale reserves within our Tubular Services operating segment that were no longer deemed probable of payment.
Note 11
—Segment Information
Business Segments
Our
four
business segments are: Products, Tubular Services, Research and Engineering and Corporate and Other. We have renamed our previously named Top Drive segment to Products, which is a name change only. This segment continues to be comprised of product sales, rental services and after-market sales and service. Our Tubular Services segment includes land and offshore services augmented by sales of products, accessories and consumables for the casing running process. Our Research and Engineering segment is comprised of our internal research and development activities related to our proprietary tubular services and top drive model development. Our Corporate and Other segment includes executive management and several global support and compliance functions.
We measure the results of our business segments using, among other measures, each segment’s operating income, which includes certain corporate overhead allocations. Overhead costs include field administration and operations support. At a business segment level, we incur costs directly and indirectly associated with revenue. Direct costs include expenditures specifically incurred for the generation of revenue, such as personnel costs on location or transportation, maintenance and repair and depreciation of our revenue-generating equipment.
Certain sales and marketing activities, financing activities, corporate general and administrative expenses, other (income) expense and income taxes are not allocated to our business segments.
Significant financial information relating to our business segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
Revenue
|
$
|
16,574
|
|
|
$
|
18,879
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,453
|
|
Depreciation and amortization
|
1,339
|
|
|
5,826
|
|
|
2
|
|
|
792
|
|
|
7,959
|
|
Operating loss
|
(39,223
|
)
|
|
(6,021
|
)
|
|
(1,573
|
)
|
|
(7,940
|
)
|
|
(54,757
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
1,559
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(56,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
Revenue
|
$
|
49,922
|
|
|
$
|
41,748
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,670
|
|
Depreciation and amortization
|
2,553
|
|
|
6,412
|
|
|
4
|
|
|
1,131
|
|
|
10,100
|
|
Operating income (loss)
|
4,552
|
|
|
2,018
|
|
|
(2,851
|
)
|
|
(9,357
|
)
|
|
(5,638
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
3,140
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,778
|
)
|
Other Charges
In response to the continued downturn in the energy market and its corresponding impact on our business outlook, we continued certain cost rationalization efforts that were initiated during 2015. Consequently, we recorded a charge in continuing operations related to headcount reductions and office closures. The following table presents these charges and the related income statement classification to which the charges are included for the three months ended March 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Three Months Ended March 31, 2015
|
|
|
|
Severance
|
|
Facility Closures
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
Products
|
$
|
671
|
|
|
$
|
—
|
|
|
$
|
1,409
|
|
|
$
|
—
|
|
|
Cost of sales and services - Products
|
Tubular Services
|
784
|
|
|
616
|
|
|
898
|
|
|
—
|
|
|
Cost of sales and services - Services
|
Corporate & Other
|
—
|
|
|
125
|
|
|
282
|
|
|
—
|
|
|
Selling, general and administrative
|
|
$
|
1,455
|
|
|
$
|
741
|
|
|
$
|
2,589
|
|
|
$
|
—
|
|
|
|
Geographic Areas
We attribute revenue to geographic regions based on the location of the customer. Generally, for service activities, this will be the region in which the service activity occurs. For equipment sales, this will be the geographical region in which the product is initially employed. Our revenue by geographic area for the
three
months ended
March 31, 2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
United States
|
$
|
14,282
|
|
|
$
|
26,233
|
|
Europe, Africa and Middle East
|
6,053
|
|
|
13,515
|
|
Asia Pacific
|
2,982
|
|
|
11,901
|
|
Russia
|
4,178
|
|
|
4,330
|
|
Latin America
|
6,876
|
|
|
25,456
|
|
Canada
|
1,082
|
|
|
10,235
|
|
|
$
|
35,453
|
|
|
$
|
91,670
|
|
The physical location of our net property, plant and equipment by geographic area as of
March 31, 2016
and
December 31, 2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
March 31,
2016
|
United States
|
$
|
8,421
|
|
|
$
|
31,848
|
|
|
$
|
9,589
|
|
|
$
|
49,858
|
|
Europe, Africa and Middle East
|
5,023
|
|
|
14,139
|
|
|
2,799
|
|
|
21,961
|
|
Asia Pacific
|
3,258
|
|
|
13,083
|
|
|
774
|
|
|
17,115
|
|
Russia
|
11,530
|
|
|
258
|
|
|
7
|
|
|
11,795
|
|
Latin America
|
18,236
|
|
|
8,718
|
|
|
810
|
|
|
27,764
|
|
Canada
|
212
|
|
|
2,143
|
|
|
5,289
|
|
|
7,644
|
|
|
$
|
46,680
|
|
|
$
|
70,189
|
|
|
$
|
19,268
|
|
|
$
|
136,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
December 31,
2015
|
United States
|
$
|
19,198
|
|
|
$
|
32,479
|
|
|
$
|
10,434
|
|
|
$
|
62,111
|
|
Europe, Africa and Middle East
|
8,645
|
|
|
16,262
|
|
|
2,841
|
|
|
27,748
|
|
Asia Pacific
|
6,368
|
|
|
14,444
|
|
|
863
|
|
|
21,675
|
|
Russia
|
15,975
|
|
|
280
|
|
|
8
|
|
|
16,263
|
|
Latin America
|
30,265
|
|
|
9,388
|
|
|
988
|
|
|
40,641
|
|
Canada
|
1,498
|
|
|
2,341
|
|
|
5,439
|
|
|
9,278
|
|
|
$
|
81,949
|
|
|
$
|
75,194
|
|
|
$
|
20,573
|
|
|
$
|
177,716
|
|
Major customers and credit risk
Our accounts receivable are principally with major oil and natural gas service, exploration and production companies and are subject to normal industry credit risks. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. Many of our customers are located in regions that are inherently subject to risks of economic, political and civil instabilities, which may impact our ability to collect. The main factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency and management’s estimate of ability to collect outstanding receivables based on the number of days outstanding and risks of economic, political and civil instabilities. Bad debt expense is included in selling, general and administrative expense in our consolidated statements of income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Please see "Caution Regarding Forward-Looking Information; Risk Factors" above and "Risk Factors" in Part II, Item 1A below and in our
2015
Annual Report on Form 10-K, for a discussion of the uncertainties, risks and assumptions associated with these statements.
Overview and Outlook
We are a global technology leader and provider of highly engineered solutions for drilling, servicing and completion of wells with facilities in North America, Europe, Russia, Latin America, Middle East and Asia Pacific. Our operations consist of top drive sales and rentals, after-market sales and services, tubular services, including related products and accessories sales and pipe handling equipment sales.
Our revenues and operating results are directly related to the level of worldwide oil and gas drilling and production activities and the profitability and cash flows of exploration and production companies and drilling contractors, which are affected by current and anticipated oil and gas prices. Oil and gas prices have been and are likely to continue to be volatile.
Unless indicated otherwise, results of operations data are presented in accordance with accounting principles generally accepted in the United States ("GAAP").
Our Segments
Our
four
business segments are:
|
|
•
|
Products (previously named Top Drive)
– product sales, rentals and after-market sales and services;
|
|
|
•
|
Tubular Services
– land and offshore tubular services augmented by sales of products, accessories and consumables for the casing running process;
|
|
|
•
|
Research and Engineering
– internal research and development activities related to our proprietary tubular services and top drive model development; and
|
|
|
•
|
Corporate and Other
– including executive management and several global support and compliance functions
|
Business Environment
Our revenues are dependent on the number of worldwide oil and gas wells drilled, the price of crude oil and natural gas, capital spending by exploration and production companies and drilling contractors, the level of worldwide oil and gas reserves inventory, civil unrest and conflicts in oil producing countries, and oil sanctions and global economics, among other things. The profitability of exploration and production companies and drilling contractors is affected by the current and anticipated prices of crude oil. Profitability is a key factor in their willingness to invest in new exploration and production activities which is reflected in rig and well counts.
Our business is dependent on both the rig count and well count. Rig count is an important business barometer for the drilling industry and its suppliers. When drilling rigs are active they consume products and services produced by the oil services industry. Rig count trends are governed by the exploration and development spending by exploration and production companies, which in turn is influenced by current and future price expectations for oil and gas. Therefore, the count may reflect the relative strength and stability of energy prices and overall market activity. However, these counts should not be solely relied on as an indicator of the economic condition of our industry, as other specific and pervasive conditions may exist that affect overall energy prices and market activity. Well count is another important business barometer for our industry. It is important to look at rig count in conjunction with the well count.
Below is a table that shows the average rig count by region for the
three
months ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Average Rig Count
(1)
|
|
Increase / (Decrease)
|
|
March 31,
|
|
|
2016
|
|
2015
|
|
2015 to 2016
|
United States
|
555
|
|
|
1,380
|
|
|
(825
|
)
|
(60
|
)%
|
Canada
|
164
|
|
|
309
|
|
|
(145
|
)
|
(47
|
)%
|
Latin America (includes Mexico)
|
233
|
|
|
352
|
|
|
(119
|
)
|
(34
|
)%
|
Middle East (excludes Iran, Iraq, Syria and Sudan)
|
403
|
|
|
412
|
|
|
(9
|
)
|
(2
|
)%
|
Asia Pacific (excludes China onshore)
|
186
|
|
|
235
|
|
|
(49
|
)
|
(21
|
)%
|
Europe (excludes Russia)
|
104
|
|
|
132
|
|
|
(28
|
)
|
(21
|
)%
|
Africa
|
91
|
|
|
130
|
|
|
(39
|
)
|
(30
|
)%
|
Worldwide
|
1,736
|
|
|
2,950
|
|
|
(1,214
|
)
|
(41
|
)%
|
Outlook
The effect and duration of oil and gas price downturns continues to be unpredictable. We began to see a decline in crude oil prices after the average West Texas Intermediate ("WTI") and Brent reached highs of $107.95 and $115.19, respectively, in June 2014. The declines continued throughout the remainder of 2014 and 2015, with WTI and Brent at $36.36 and $36.61, respectively, at the end of 2015. The spot prices of WTI and Brent at
March 31, 2016
remained consistent with the end of 2015 at $36.94 and $36.75, respectively. The current outlook for commodity prices is that they will remain relatively unchanged for the remainder of 2016 with only modest increase for 2017.
(2)
The price of crude oil directly affects exploration and production companies' profitability and, more importantly, their willingness to drill new wells. Consequently, we saw an overall decline in the number of new wells drilled and the average rig count throughout 2015 and we continue to see further declines in 2016. We believe the market outlook for our services will remain challenging for an indeterminate period as additional activity declines and further pricing pressure is expected. A long-term continued slowdown in drilling operations would adversely affect our business and results of operations. Though monitoring the commodity prices will be an indicator of movement in the market, the impact on the number of wells drilled and associated drilling rigs is the primary indicator of our ability to achieve desired results.
Our response to the market conditions has resulted in aggressive cost cutting and global reorganization to right-size the company.
During the three months ended
March 31, 2016
, we reduced our global workforce by an additional 13%, as compared to December 31, 2015, resulting in a charge of
$1.5 million
, and we also recognized other charges related to facility closures of
$0.7 million
. During the year ended December 31, 2015, we reduced our global workforce by 30% and recognized a related aggregate charge of $10.9 million. We expect our ongoing development of technological solutions to further diminish our reliance on people. Accordingly, we do not expect to employ workforce levels similar to those of the past when market conditions rebound.
We continued certain austerity measures and efforts to streamline our overhead and support structure initiated in the previous year. Throughout the remainder of 2016 and beyond, we will continue to monitor the impacts of our reorganization efforts to ensure that desired progress is achieved. Through these efforts we expect to return to profitability when market conditions improve or competitors leave the market. Moreover, we believe we are well positioned and should benefit from our strong balance sheet, global infrastructure, broad product and service offerings and installed base of equipment. In this challenging market, we remain focused on things within our control, including safety, our cost and resource base, the effective development of our technology and the quality and integrity of our products and services.
__________________________________
|
|
(1)
|
Source: Baker Hughes Incorporated worldwide rig count. The Baker Hughes North American Rotary Rig Count is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. The Baker Hughes International Rotary Rig Count is a monthly census of active drilling rigs exploring for or developing oil or natural gas outside North America (U.S. and Canada). To be counted as active, a rig must be on location and be drilling or 'turning to the right'. A rig is considered active from the moment the well is "spudded" until it reaches target depth. Rigs that are in transit from one location to another, rigging up or being used in non-drilling activities such as workovers, completions or production testing, are not counted as active.
|
|
|
(2)
|
Source: U.S. Energy Information Administration
|
The challenging economic conditions present potential opportunities in those regions in which we already maintain a presence. While we have transitioned from a primarily North American company to generating more revenue globally over the past few years, we believe our position in many foreign markets still leaves significant growth opportunities in spite of the current economic conditions. We believe our global infrastructure provides the capacity to offer additional after-market sales and services without incurring significant additional capital expenditures to grow these markets. We believe this provides us with a competitive advantage.
We have begun to see a shift in the market in which participants are moving from maintaining their own equipment to an increase in outsourcing this activity under long-term contracts. Moreover, we believe that in the current business environment, many top drives have suffered deferred maintenance and cannibalization, which we expect will result in a steady increase in the need for service, maintenance, and recertification as commodity prices recover and drilling activity increases. We plan to use our existing facilities as a base to promote our after-market sales and services to capture long-term maintenance contracts opportunities, which may be enhanced through our automated rig controls, equipment health monitoring services, and pipe handling automation. These services are also compatible with our competitors' top drives. We expect these factors to allow us to take advantage of our existing inventory.
Until recently, our tubular services business was primarily focused on onshore drilling. With land-based drilling consistently moving toward horizontal drilling, the value from automated casing running tools, specifically our CDS offering, has served as the foundation of our land-based expertise. Our customers have realized great benefit from the performance of our casing running tools and our approach to developing new solutions has provided us with the opportunity to expand to offshore markets. We believe that there is a significant opportunity for growth in the offshore market, including the market for our automated tubular services and equipment. Our automated services require fewer people to operate, thereby reducing expense and promoting safety and service quality. We plan to use our offshore expertise gained in Indonesia, Saudi Arabia, the United States, Mexico and the North Sea to continue to increase our offshore market share. Offshore operations are long-term in nature and, therefore, less affected by short term swings in crude oil prices. We plan to capitalize on growth opportunities, continue to invest in research and engineering related to our Products and Tubular Services segments and continue to better integrate our products and service offerings with our customers needs.
Results of Operations
The discussions below relating to significant line items from our consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items.
This discussion should be read in conjunction with Part I, Item 1, "Financial Statements" included in this Report.
Operating results by business segments
Below is a summary of the operating results of our business segments for the
three
months ended
March 31, 2016
and
2015
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Increase / (Decrease)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Segment revenue
|
|
|
|
|
|
|
|
Products revenue
|
|
|
|
|
|
|
|
Sales
|
$
|
4,202
|
|
|
$
|
17,770
|
|
|
$
|
(13,568
|
)
|
|
(76
|
)%
|
Rental services
|
6,572
|
|
|
20,012
|
|
|
(13,440
|
)
|
|
(67
|
)%
|
After-Market sales and services
|
5,800
|
|
|
12,140
|
|
|
(6,340
|
)
|
|
(52
|
)%
|
|
16,574
|
|
|
49,922
|
|
|
(33,348
|
)
|
|
(67
|
)%
|
Tubular Services revenue
|
|
|
|
|
|
|
|
Land
|
$
|
10,794
|
|
|
$
|
30,625
|
|
|
$
|
(19,831
|
)
|
|
(65
|
)%
|
Offshore
|
7,421
|
|
|
9,849
|
|
|
(2,428
|
)
|
|
(25
|
)%
|
CDS, Parts & Accessories
|
664
|
|
|
1,274
|
|
|
(610
|
)
|
|
(48
|
)%
|
|
18,879
|
|
|
41,748
|
|
|
(22,869
|
)
|
|
(55
|
)%
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
35,453
|
|
|
$
|
91,670
|
|
|
$
|
(56,217
|
)
|
|
(61
|
)%
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
Products
|
$
|
(39,223
|
)
|
|
$
|
4,552
|
|
|
$
|
(43,775
|
)
|
|
(962
|
)%
|
Tubular Services
|
(6,021
|
)
|
|
2,018
|
|
|
(8,039
|
)
|
|
(398
|
)%
|
Research and Engineering
|
(1,573
|
)
|
|
(2,851
|
)
|
|
1,278
|
|
|
(45
|
)%
|
Corporate and Other
|
(7,940
|
)
|
|
(9,357
|
)
|
|
1,417
|
|
|
(15
|
)%
|
Operating loss
|
$
|
(54,757
|
)
|
|
$
|
(5,638
|
)
|
|
$
|
(49,119
|
)
|
|
(871
|
)%
|
Products Segment
Revenues from our Products segment are generated through top drive sales, rentals, after-market sales and service and pipe handling equipment sales. Sales of top drives consist of new and used top drives and catwalks. Our rental fleet of top drives are mobile. We install the units on the customers' drill site and charge a daily rate for rental operating days. Rental operating days are defined as a day that a unit in our rental fleet is under contract and operating.
Our after-market sales and service consists of providing parts and servicing units. We provide these services for pipe handling equipment, both top drives we manufacture and selected top drive models of our competitors.
Q1 2016
as compared with
Q1 2015
Sales
Revenues
decreased
by
$13.6 million
, or
76%
, for the
three
months ended
March 31, 2016
as compared to
2015
due primarily to fewer number of top drive units sold globally as a result of decreased demand, rig count and crude oil prices. In the
three
months ended
March 31, 2016
, we sold a total of
6
top drives, of which
3
were new and
3
were used and from our rental fleet, as compared to the same period in
2015
, where we sold
14
top drives, of which
14
were new and
0
were used and from our rental fleet. We recognized revenue of $1.2 million related to the sale of
3
used top drives from our rental fleet during the
three
months ended
March 31, 2016
.
Rental Services
Revenues
decreased
by
$13.4 million
, or
67%
, for the
three
months ended
March 31, 2016
as compared to
2015
primarily due to the depressed market demand within the industry causing a 58% decrease in our utilization. At
March 31, 2016
utilization declined to 14% due to fewer operating days and fewer contracted units. The decrease in activity compounded with price compression primarily impacted our revenues in Latin America, North America and Russia.
After-
Market Sales and Services
Revenues
decreased
by
$6.3 million
, or
52%
, for the
three
months ended
March 31, 2016
as compared to
2015
primarily due to a decline in demand for parts and services in North America and Latin America, accounting for 61% and 14%, respectively, of the total decline. With the continued decline in oil prices and consequential decrease in drilling activity, customers have chosen to defer non-critical services and consume their inventories rather than replenish them.
Operating Loss
Products operating incom
e
decreased
by
$43.8 million
, or
962%
, for the
three
months ended
March 31, 2016
as compared to
2015
primarily due to a decline in revenues for each product offering due to current market conditions as a result of continued declines in oil prices and in overall demand for oilfield services.
During the
three
months ended
March 31, 2016
, we identified indicators that could cause potential impairments to our long-lived assets. Due to these indicators, we conducted testing for impairment and determined that the carrying amount of our long-lived assets in our Products segment exceeded its fair value. Accordingly, we recognized an aggregate long-lived asset impairment of $35.5 million during the
three
months ended
March 31, 2016
.
Additionally, in our continued company-wide reduction in workforce and cost rationalization efforts, we recorded non-recurring items of
$0.7 million
related to severance during the
three
months ended
March 31, 2016
.
Tubular Services Segment
We generate revenues in our Tubular Services segment from land and offshore services augmented by sales of products, accessories and consumables for the casing running process. We have made certain reclassifications to the product offerings in Tubular Services for clarity regarding the markets in which we operate and consistency with our long-term strategy to become a broad-based tubular service provider. Our services include personnel and equipment, including the CDS
TM
, power tongs, pick up/lay-down units, torque monitoring services and connection testing services for new well completion and in work-over or re entry operations. Our product sales include the CDS
TM
system, down-well consumables and other non-consumable parts.
Q1 2016
as compared with
Q1 2015
Land
Revenues
decreased
by
$19.8 million
, or
65%
, for the
three
months ended
March 31, 2016
as compared to
2015
primarily due to decreased activity and demand in North America and Latin America of 44% and 42%, respectively. The decrease in rig count and overall activity resulted in a reduction of jobs being performed during the
three
months ended
March 31, 2016
as compared to
2015
. Additionally, oil prices and tubular services competition compressed pricing.
Offshore
Revenue
s
decreased
by
$2.4 million
, or
25%
, for the
three
months ended
March 31, 2016
as compared to
2015
a decrease in the number of operating rigs within the Asia Pacific region during the first quarter of
2016
. This decrease is offset by offshore revenue in North America as our mix of services performed continue to shift towards higher revenue generating deepwater services.
CDS, Parts, & Accesso
ries
Revenues
decreased
by
$0.6 million
, or
48%
, for the
three
months ended
March 31, 2016
as compared to
2015
primarily due to customers postponing capital expenditures in light of the decline in oil prices and overall reduction in operating rigs. The decrease in revenues related to parts and accessories is tied to the decrease in land-based and offshore tubular services jobs performed in primarily in Asia Pacific, North America and Latin America during the
three
months ended
March 31, 2016
.
Operating Loss
Tubular Services operating income
decreased
by
$8.0 million
, or
398%
, for the
three
months ended
March 31, 2016
as compared to
2015
primarily a reduction in revenues of
$22.9 million
, which was a result of the continued decline in the energy market and oil prices. Contributors to the total decline were Latin America and Asia Pacific of 59% and 46%, respectively. These declines were partially offset by an adjustment in the amount of past due disputed accounts payable during the period.
In our continued company-wide reduction in workforce and cost rationalization efforts, we recorded non-recurring items of
$0.8 million
and
$0.6 million
related to severance and facility closures, respectively, during the
three
months ended
March 31, 2016
.
Research and Engineering Segment
We are a technology-based company deploying new technologies to increase the degree of rig automation and mechanization and to enhance our field operations. We are working aggressively to drive a more definitive integration between the drilling rig and tubular services technology. We continue to invest in our research and engineering in order to continually develop, commercialize and enhance our proprietary products relating to our current product offerings and new technologies in development.
Q1 2016
as compared with
Q1 2015
Operating expenses
decreased
by
$1.3 million
, or
45%
, during the
three
months ended
March 31, 2016
as compared to
2015
primarily due to a decrease in spending in connection with our efforts to reduce operating costs.
Corporate and Other Segment
Corporate and other expenses primarily consist of overhead, general and administrative expenses and certain selling and marketing expenses.
Corporate and other expenses as a percent of revenues were
22%
and
10%
for the three months ended
March 31, 2016
and
2015
, respectively.
Q1 2016
as compared with
Q1 2015
Operating expenses
decreased
by
$1.4 million
, or
15%
, during the
three
months ended
March 31, 2016
as compared to
2015
primarily due to cost saving measures implemented in 2015 and during the first quarter of 2016. The benefits of these cost saving measures are visible primarily in personnel cost and various discretionary spending accounts.
Other expense (income)
Below is a detail of expenses that are not allocated to segments for the
three
months ended
March 31, 2016
and
2015
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Increase / (Decrease)
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Interest expense
|
$
|
463
|
|
|
$
|
255
|
|
|
$
|
208
|
|
|
82
|
%
|
Interest income
|
(82
|
)
|
|
(65
|
)
|
|
(17
|
)
|
|
26
|
%
|
Foreign exchange loss
|
1,168
|
|
|
3,156
|
|
|
(1,988
|
)
|
|
(63
|
)%
|
Other expense (income)
|
10
|
|
|
(206
|
)
|
|
216
|
|
|
(105
|
)%
|
Loss before income taxes
|
(56,316
|
)
|
|
(8,778
|
)
|
|
(47,538
|
)
|
|
542
|
%
|
Income tax provision (benefit)
|
523
|
|
|
(526
|
)
|
|
1,049
|
|
|
(199
|
)%
|
Net loss
|
$
|
(56,839
|
)
|
|
$
|
(8,252
|
)
|
|
$
|
(48,587
|
)
|
|
589
|
%
|
Q1 2016
as compared with
Q1 2015
Interest Expense
Interest expense
increased
by
$0.2 million
, or
82%
, during the
three
months ended
March 31, 2016
as compared to
2015
primarily due to the write off the unamortized debt issuance costs of
$0.2 million
during the
three
months ended
March 31, 2016
related to the decrease in our Credit Facility's borrowing capacity. For further discussion, see Part 1, Item 1, "Financial Statements,
Note 9
", included in this Report.
Foreign Exchange Loss
Although our functional currency is the U.S. dollar, our operations have net assets and liabilities not denominated in the functional currency which exposes us to changes in foreign currency exchange rates that impact income. Foreign exchange losses
decreased
by
$2.0 million
, or
63%
, during the
three
months ended
March 31, 2016
as compared to
2015
primarily due to exchange losses based upon currency movements and changes in the net monetary asset bases in Argentina, Colombia and Mexico.
Other Expense (Income)
Other expense
increased
by
$0.2 million
, or
105%
, during the
three
months ended
March 31, 2016
as compared to
2015
primarily due to the fair market value adjustment recorded in
2016
for the contingent earn-out obligation related to the acquisition of assets from Tech Field Services LLC in 2014. For further discussion, see Part 1, Item 1, "Financial Statements,
Note 1
", included in this Report.
Income Tax Provision
Income tax provision
increased
by
$1.0 million
, or
199%
, for the
three
months ended
March 31, 2016
as compared to the same period in
2015
primarily due to continuing to pay current income tax in certain jurisdictions where we remain profitable. Our effective tax rates were a
1%
expense
and a
6%
benefit
for the
three
months ended
March 31, 2016
and
2015
, respectively.
Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. Our primary sources of liquidity are cash flows generated from our operations and available cash and cash equivalents. Availability under our revolving credit facility (the "Revolver") was reduced from $125 million to $60 million per the terms of the Waiver Letter we received on February 29, 2016. Despite this reduction in available borrowings, we believe that our cash on hand and cash from operations are adequate to cover our liquidity requirements for at least the next twelve months.
"Net Cash" is a non-GAAP measure reflecting cash and cash equivalents, net of debt. Management uses this non-GAAP measure to evaluate our capital structure and financial leverage. We believe Net Cash is a meaningful measure that will assist investor in understanding our results and recognizing underlying trends. Net Cash should not be considered as an alternative to, or more meaningful than, cash and equivalents as determined in accordance with GAAP or as an indicator of our operating performance or liquidity.
The following is a reconciliation of our cash and cash equivalents to Net Cash as of
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Cash
|
$
|
53,892
|
|
|
$
|
51,507
|
|
Current portion of long-term debt
|
—
|
|
|
—
|
|
Long-term debt
|
—
|
|
|
—
|
|
Net cash
|
$
|
53,892
|
|
|
$
|
51,507
|
|
The change in our Net Cash position was primarily due to changes in our working capital levels.
The following table summarizes our net cash provided by (used in) operating, investing and financing activities for the
three
months ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net cash provided by operating activities
|
$
|
2,116
|
|
|
$
|
2,374
|
|
Net cash provided by (used in) investing activities
|
269
|
|
|
(5,598
|
)
|
Net cash provided by financing activities
|
—
|
|
|
61
|
|
Increase (decrease) in cash and equivalents
|
$
|
2,385
|
|
|
$
|
(3,163
|
)
|
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
three
months ended
March 31, 2016
and
2015
. This discussion should be read in conjunction with Part I, Item 1, "Financial Statements" included in this Report.
Operating Activities
Net cash
provided
by operating activities was
$2.1 million
and
$2.4 million
for the
three
months ended
March 31, 2016
and
2015
, respectively. After adjusting for non-cash items, including a long-lived asset impairment of
$35.5 million
, the
decrease
in net cash
provided
by operating activities was due primarily to the results of our operations, cash inflows of
$15.3 million
from decreasing receivables, offset by decreasing accounts payable of
$5.9 million
.
Investing Activities
Net cash
provided
by investing activities was
$0.3 million
during the
three
months ended
March 31, 2016
compared to net cash used in investing activities of
$5.6 million
during the same period of
2015
. Capital spending during the
three
months ended
March 31, 2016
and
2015
was
$0.8 million
and
$7.3 million
, respectively. Sales of various operating assets during the
three
months ended
March 31, 2016
resulted in cash proceeds of
$1.1 million
.
Financing Activities
Net cash
used
by financing activities was
$0.0 million
and
$0.1 million
during the
three
months ended
March 31, 2016
and
2015
, respectively. During the
three
months ended March 31,
2015
we recognized
$0.1 million
in proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
As of
March 31, 2016
, we have no off-balance sheet arrangements other than the manufacturing purchase commitments and letters of credit noted below, 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
2015
Annual Report on Form 10-K.
Manufacturing Purchase Commitments
Our manufacturing purchase commitments, which represent executed purchase orders that have been submitted to our respective vendors, have
decreased
from
$8.5 million
as of
December 31, 2015
to
$7.2 million
as of
March 31, 2016
. This
decrease
of
$1.3 million
, or
15%
, is driven primarily by the receipt of orders and the cancellation of prior orders with vendors due to the decline in oil prices.
Letters of Credit
We enter into letters of credit in the ordinary course of business. The availability of current borrowings is, and future borrowings may be, limited in order to maintain certain financial ratios required by restrictive covenants in our Second Amended and Restated Credit Agreement, dated as of April 27, 2012 (the "Credit Facility"). As of
March 31, 2016
, we had outstanding letters of credit of approximately
$5.8 million
, of which
$4.4 million
is outstanding under our Credit Facility.
On February 29, 2016, we received a waiver under the Credit Facility ("this Waiver") for the Company's failure to comply with certain financial covenants under the Credit Facility as of the end of the fiscal quarter ending December 31, 2015. This Waiver was effective from February 29, 2016 through and including the date on which we deliver, to our lenders, our financial statements and compliance certificate, both with respect to the fiscal quarter ending March 31, 2016. On May 6, 2016, the waiver was extended to the date on which we deliver, to our lenders, our financial statements and compliance certificate, both with respect to the fiscal quarter ending June 30, 2016.
Under the Credit Facility, the Company is required to, among other things, (i) not permit the leverage ratio to be greater than
3.00
to 1.0 at any time, (ii) maintain a consolidated net worth of not less than
$394.2 million
as of the end of the fiscal quarter ending March 31, 2016, (iii) not permit the interest coverage ratio to be less than
3.00
to 1.0 as of the end of any fiscal quarter, and (iv) if the leverage ratio is greater than
2.0
to 1.0 as of the end of any fiscal quarter, not permit the consolidated capital expenditures to be greater than the sum of consolidated EBITDA calculated for the most-recently completed four fiscal quarters plus net cash proceeds from asset sales for the most-recently completed four fiscal quarters. As of the end of the fiscal quarter ending March 31, 2016, the Company had a leverage ratio of
(0.24)
, a consolidated net worth of
$319.3 million
, an interest coverage ratio of
(9.9)
and capital expenditures of
$(0.8) million
. Under the Waiver (as amended on May 6, 2016), the lenders waived any failure of the Company to maintain the requisite leverage ratio, consolidated net worth, interest coverage ratio and consolidated capital expenditures covenants under the Credit Facility as of the end of the fiscal quarter ending March 31, 2016.
The Waiver (as amended on May 6, 2016) includes the following restrictions on the Company, which will be effective from February 29, 2016 through and including the date on which we deliver, to our lenders, our financial statements and a compliance certificate, both with respect to the fiscal quarter ending June 30, 2016: (i) other than borrowings to make payments under outstanding letters of credit, the Company may not request any revolving loans under the Credit Facility, (ii) the Company may not request any swingline loans, (iii) the Company’s outstanding letters of credit shall not exceed
$10 million
, with no more than
$3 million
of such
$10 million
constituting letters of credit under the Credit Facility, (iv) the interest rate for all loans under the Credit Facility is set at a rate equal to the Adjusted LIBO Rate plus
3.50%
per annum, (v) the unused commitment fees are set at a per annum rate of
0.625%
, (vi) the letter of credit fees are set at a per annum rate equal to
3.50%
, (vii) prohibit the Company and its
subsidiaries from incurring additional indebtedness, other than indebtedness under the Credit Facility and (viii) prohibit the Company from declaring or paying any dividends, (ix) prohibit the Company and its subsidiaries from making capital expenditures in an amount greater than
$3 million
, net of all net cash proceeds received from asset sales. The amended Waiver separately, at our election, reduces the aggregate commitments under the Credit Facility by
$65 million
to
$60 million
. As a result of the reduction in our Credit Facility, we wrote off the unamortized debt issuance costs in proportion to the decrease in borrowing capacity of
$0.2 million
during the
three
months ended
March 31, 2016
.
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
2015
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
2015
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
2015
Annual Report on Form 10−K.