Item 1. Financial Statements.
TESCO CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Assets
|
(unaudited)
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
97,469
|
|
|
$
|
51,507
|
|
|
Accounts receivable trade, net of allowance for doubtful accounts of $9,023 and $8,894 as of June 30, 2016 and December 31, 2015, respectively
|
39,282
|
|
|
64,270
|
|
|
Inventories, net
|
88,721
|
|
|
95,459
|
|
|
Income taxes recoverable
|
6,068
|
|
|
7,656
|
|
|
Prepaid and other current assets
|
13,341
|
|
|
17,594
|
|
|
Total current assets
|
244,881
|
|
|
236,486
|
|
|
Property, plant and equipment, net
|
129,899
|
|
|
177,716
|
|
|
Deferred income taxes
|
186
|
|
|
598
|
|
|
Intangible and other assets, net
|
4,829
|
|
|
6,894
|
|
|
Total assets
|
$
|
379,795
|
|
|
$
|
421,694
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
10,617
|
|
|
14,332
|
|
|
Deferred revenue
|
3,202
|
|
|
4,382
|
|
|
Warranty reserves
|
465
|
|
|
893
|
|
|
Income taxes payable
|
760
|
|
|
1,430
|
|
|
Accrued payroll and benefits
|
6,287
|
|
|
12,448
|
|
|
Accrued taxes other than income taxes
|
4,214
|
|
|
4,173
|
|
|
Other current liabilities
|
3,212
|
|
|
5,255
|
|
|
Total current liabilities
|
28,757
|
|
|
42,913
|
|
|
Other liabilities
|
2,140
|
|
|
2,239
|
|
|
Deferred income taxes
|
902
|
|
|
1,588
|
|
|
Total liabilities
|
31,799
|
|
|
46,740
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
Common shares; no par value; unlimited shares authorized; 46,273 and 39,218 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively
|
261,135
|
|
|
212,383
|
|
|
Retained earnings
|
51,360
|
|
|
127,070
|
|
|
Accumulated other comprehensive income
|
35,501
|
|
|
35,501
|
|
|
Total shareholders’ equity
|
347,996
|
|
|
374,954
|
|
|
Total liabilities and shareholders’ equity
|
$
|
379,795
|
|
|
$
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Products
|
$
|
15,339
|
|
|
$
|
23,698
|
|
|
$
|
25,444
|
|
|
$
|
53,625
|
|
|
Services
|
18,247
|
|
|
50,753
|
|
|
43,595
|
|
|
112,496
|
|
|
|
33,586
|
|
|
74,451
|
|
|
69,039
|
|
|
166,121
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of sales and services
|
|
|
|
|
|
|
|
|
Products
|
16,202
|
|
|
24,702
|
|
|
30,103
|
|
|
51,289
|
|
|
Services
|
27,462
|
|
|
52,039
|
|
|
60,420
|
|
|
108,747
|
|
|
|
43,664
|
|
|
76,741
|
|
|
90,523
|
|
|
160,036
|
|
|
Selling, general and administrative
|
7,702
|
|
|
9,369
|
|
|
13,966
|
|
|
20,532
|
|
|
Long-lived asset impairments
|
—
|
|
|
—
|
|
|
35,514
|
|
|
—
|
|
|
Research and engineering
|
1,437
|
|
|
2,059
|
|
|
3,010
|
|
|
4,909
|
|
|
Total operating expenses
|
52,803
|
|
|
88,169
|
|
|
143,013
|
|
|
185,477
|
|
|
Operating loss
|
(19,217
|
)
|
|
(13,718
|
)
|
|
(73,974
|
)
|
|
(19,356
|
)
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
Interest expense
|
191
|
|
|
354
|
|
|
654
|
|
|
572
|
|
|
Interest income
|
(347
|
)
|
|
(12
|
)
|
|
(429
|
)
|
|
(40
|
)
|
|
Foreign exchange loss
|
17
|
|
|
1,399
|
|
|
1,185
|
|
|
4,555
|
|
|
Other expense (income)
|
17
|
|
|
(141
|
)
|
|
27
|
|
|
(347
|
)
|
|
Total other expense (income)
|
(122
|
)
|
|
1,600
|
|
|
1,437
|
|
|
4,740
|
|
|
Loss before income taxes
|
(19,095
|
)
|
|
(15,318
|
)
|
|
(75,411
|
)
|
|
(24,096
|
)
|
|
Income tax provision (benefit)
|
(224
|
)
|
|
12,172
|
|
|
299
|
|
|
11,646
|
|
|
Net loss
|
$
|
(18,871
|
)
|
|
$
|
(27,490
|
)
|
|
$
|
(75,710
|
)
|
|
$
|
(35,742
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.47
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(0.92
|
)
|
|
Diluted
|
$
|
(0.47
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(0.92
|
)
|
|
Dividends declared per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Basic
|
40,426
|
|
|
38,981
|
|
|
39,844
|
|
|
38,969
|
|
|
Diluted
|
40,426
|
|
|
38,981
|
|
|
39,844
|
|
|
38,969
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
Operating Activities
|
|
|
|
|
Net loss
|
$
|
(75,710
|
)
|
|
$
|
(35,742
|
)
|
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
15,174
|
|
|
19,732
|
|
|
Stock compensation expense
|
2,076
|
|
|
2,142
|
|
|
Bad debt expense
|
566
|
|
|
139
|
|
|
Deferred income taxes
|
(273
|
)
|
|
7,088
|
|
|
Amortization of financial items
|
284
|
|
|
152
|
|
|
Gain (loss) on sale of operating assets
|
(414
|
)
|
|
(689
|
)
|
|
Long-lived asset impairments
|
35,514
|
|
|
—
|
|
|
Changes in the fair value of contingent earn-out obligations
|
(74
|
)
|
|
(364
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable trade, net
|
24,647
|
|
|
40,829
|
|
|
Inventories, net
|
6,738
|
|
|
(3,293
|
)
|
|
Prepaid and other current assets
|
4,255
|
|
|
2,942
|
|
|
Accounts payable and accrued liabilities
|
(14,753
|
)
|
|
(26,507
|
)
|
|
Income taxes recoverable
|
885
|
|
|
(7,761
|
)
|
|
Other noncurrent assets and liabilities, net
|
(197
|
)
|
|
3,017
|
|
|
Net cash provided by (used in) operating activities
|
(1,282
|
)
|
|
1,685
|
|
|
Investing Activities
|
|
|
|
|
Additions to property, plant and equipment
|
(1,977
|
)
|
|
(10,213
|
)
|
|
Proceeds on sale of operating assets
|
2,546
|
|
|
687
|
|
|
Other, net
|
(1
|
)
|
|
1,860
|
|
|
Net cash provided by (used in) investing activities
|
568
|
|
|
(7,666
|
)
|
|
Financing Activities
|
|
|
|
|
Repayments of debt
|
—
|
|
|
(25
|
)
|
|
Proceeds from exercise of stock options
|
—
|
|
|
111
|
|
|
Dividend distribution
|
—
|
|
|
(3,898
|
)
|
|
Proceeds from stock issuance
|
47,040
|
|
|
—
|
|
|
Stock issuance costs
|
(364
|
)
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
46,676
|
|
|
(3,812
|
)
|
|
Change in cash and cash equivalents
|
45,962
|
|
|
(9,793
|
)
|
|
Cash and cash equivalents, beginning of period
|
51,507
|
|
|
72,466
|
|
|
Cash and cash equivalents, end of period
|
$
|
97,469
|
|
|
$
|
62,673
|
|
|
Supplemental cash flow information
|
|
|
|
|
Cash payments for interest
|
$
|
225
|
|
|
$
|
280
|
|
|
Cash payments for income taxes, net of refunds
|
862
|
|
|
12,791
|
|
|
Property, plant and equipment accrued in accounts payable
|
1,339
|
|
|
2,628
|
|
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 six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2016
|
39,218
|
|
|
$
|
212,383
|
|
|
$
|
127,070
|
|
|
$
|
35,501
|
|
|
$
|
374,954
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
(75,710
|
)
|
|
—
|
|
|
(75,710
|
)
|
|
Stock issuance, net of issue costs
|
7,000
|
|
|
46,676
|
|
|
—
|
|
|
—
|
|
|
46,676
|
|
|
Stock compensation related activity
|
55
|
|
|
2,076
|
|
|
—
|
|
|
—
|
|
|
2,076
|
|
|
Balances at June 30, 2016
|
46,273
|
|
|
$
|
261,135
|
|
|
$
|
51,360
|
|
|
$
|
35,501
|
|
|
$
|
347,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2015
|
38,949
|
|
|
$
|
208,999
|
|
|
$
|
268,627
|
|
|
$
|
35,501
|
|
|
$
|
513,127
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
(35,742
|
)
|
|
—
|
|
|
(35,742
|
)
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
(3,897
|
)
|
|
—
|
|
|
(3,897
|
)
|
|
Stock compensation related activity
|
56
|
|
|
1,959
|
|
|
—
|
|
|
—
|
|
|
1,959
|
|
|
Balances at June 30, 2015
|
39,005
|
|
|
$
|
210,958
|
|
|
$
|
228,988
|
|
|
$
|
35,501
|
|
|
$
|
475,447
|
|
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
Tesco Corporation a global leader in the design, assembly, and service delivery of technology-based solutions for the upstream energy industry. The Company seeks to change the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for, and producing, oil and natural gas. Product and service offerings consist mainly of equipment sales and services to major oil and natural gas service companies and exploration and production operating companies throughout the world.
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
. All references to $ are to U.S. dollars.
Note 2
—Summary of Significant Accounting Policies
Significant Accounting Policies
There have been no material changes to our accounting policies as described in the notes to our audited consolidated financial statements included in our
2015
Annual Report on Form 10-K.
Recent Accounting Pronouncements
In 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. The adoption of the standard is not expected to have a material effect on the financial position, results of operations, or disclosures in notes to consolidated financial statements of the Company.
Note 3
—Inventories, net
At
June 30, 2016
and
December 31, 2015
, inventories, net of reserves for excess and obsolete inventories of
$8.0 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 facility that are ready for sale to third-party customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Raw materials
|
$
|
50,453
|
|
|
$
|
53,595
|
|
|
Work in progress
|
2,290
|
|
|
1,944
|
|
|
Finished goods
|
35,978
|
|
|
39,920
|
|
|
|
$
|
88,721
|
|
|
$
|
95,459
|
|
Note 4
—Prepaid and other current assets
At
June 30, 2016
and
December 31, 2015
, prepaid and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Prepaid taxes other than income taxes
|
$
|
2,698
|
|
|
$
|
4,048
|
|
|
Deposits
|
3,285
|
|
|
4,295
|
|
|
Prepaid insurance
|
611
|
|
|
1,144
|
|
|
Other prepaid expenses
|
3,882
|
|
|
3,220
|
|
|
Restricted cash
|
997
|
|
|
996
|
|
|
Deferred job costs
|
755
|
|
|
1,786
|
|
|
Non-trade receivables
|
1,113
|
|
|
2,105
|
|
|
|
$
|
13,341
|
|
|
$
|
17,594
|
|
Note 5
—Property, Plant and Equipment
At
June 30, 2016
and
December 31, 2015
, property, plant and equipment by major classification were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Land, buildings and leaseholds
|
$
|
25,450
|
|
|
$
|
27,890
|
|
|
Drilling equipment
|
268,464
|
|
|
362,556
|
|
|
Manufacturing equipment
|
13,061
|
|
|
16,303
|
|
|
Office equipment and other
|
30,490
|
|
|
33,056
|
|
|
Capital work in progress
|
1,880
|
|
|
575
|
|
|
|
339,345
|
|
|
440,380
|
|
|
Less: Accumulated depreciation
|
(209,446
|
)
|
|
(262,664
|
)
|
|
|
$
|
129,899
|
|
|
$
|
177,716
|
|
Depreciation and amortization expense for the
three and six
months ended
June 30, 2016
and
2015
are included on our unaudited condensed consolidated statements of income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Cost of sales and services
|
$
|
7,027
|
|
|
$
|
9,102
|
|
|
$
|
14,693
|
|
|
$
|
18,620
|
|
|
Selling, general and administrative expense
|
188
|
|
|
531
|
|
|
481
|
|
|
1,112
|
|
|
|
$
|
7,215
|
|
|
$
|
9,633
|
|
|
$
|
15,174
|
|
|
$
|
19,732
|
|
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 and six
months ended
June 30, 2016
,
3
and
6
used top drives, respectively, were sold from our rental fleet, which had an aggregate net book value of
$1.2 million
and
$1.4 million
, respectively. During the
three and six
months ended
June 30, 2015
,
one
used top drive was sold from our rental fleet, which had an aggregate net book value of
$0.2 million
.
Asset Impairment
We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include substantial declines in revenue rates, utilization rates, oil and natural gas market prices and
industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified, which is our operating segments. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group. The amount of an impairment charge is measured as the difference between the carrying amount and the fair value of the asset group.
Since late 2014, oil prices have declined significantly resulting in 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 the first three months of 2016, which resulted in significantly lower cash flow projections. Accordingly, we performed an impairment evaluation on our long-lived assets as per the guidance of ASC Topic 360, Property, Plant and Equipment. Consequently during the three months ended
March 31, 2016
, we recognized
$0.9 million
of impairment related to intangibles and
$34.6 million
to reduce the carrying 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
six
months ended
June 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Balance as of January 1, 2016
|
$
|
893
|
|
|
Provisions
|
521
|
|
|
Expirations
|
(373
|
)
|
|
Claims
|
(576
|
)
|
|
Balance as of June 30, 2016
|
$
|
465
|
|
Note 7
—Earnings per Share and Shareholders' Equity
Weighted Average Shares
The following table reconciles basic and diluted weighted average shares (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Basic weighted average number of shares outstanding
|
40,426
|
|
|
38,981
|
|
|
39,844
|
|
|
38,969
|
|
|
Dilutive effect of stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Diluted weighted average number of shares outstanding
|
40,426
|
|
|
38,981
|
|
|
39,844
|
|
|
38,969
|
|
|
Anti-dilutive options excluded from calculation due to exercise prices
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares were excluded from the calculation of the diluted weighted average number of shares outstanding as the Company was in a net loss position for the
three and six
months ended
June 30, 2016
and
June 30, 2015
. The inclusion of the shares would be anti-dilutive. For the
three and six
months ended
June 30, 2016
, there were approximately
322,000
and
346,000
shares excluded, respectively. For the
three and six
months ended
June 30, 2015
, there were approximately
295,000
and
247,000
shares excluded, respectively.
Common Stock Issued
During the three months ended June 2016 the Company completed a secondary public equity offering of
7.0 million
common shares that generated proceeds of
$46.7 million
, net of underwriting discounts, commissions, issuance costs and expenses. Subsequent to the balance sheet date, our underwriter partially exercised its over-allotment option to purchase an additional
130,752
common shares that generated nearly
$1 million
in additional proceeds. The unexercised options expired on July 8, 2016.
Note 8
—Income Taxes
TESCO is an Alberta, Canada corporation. We conduct business and are taxed on profits earned in certain jurisdictions around the world. Income taxes have been provided for based on the laws and rates in effect in the countries in which operations are conducted or in which we are considered a resident for income tax purposes.
Our income tax provision (benefit) for the
three and six
months ended
June 30, 2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Current tax provision
|
$
|
49
|
|
|
$
|
1,888
|
|
|
$
|
572
|
|
|
$
|
4,558
|
|
|
Deferred tax provision (benefit)
|
(273
|
)
|
|
10,284
|
|
|
(273
|
)
|
|
7,088
|
|
|
Income tax provision (benefit)
|
$
|
(224
|
)
|
|
$
|
12,172
|
|
|
$
|
299
|
|
|
$
|
11,646
|
|
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was a
1%
benefit
and
0%
for the
three and six
months ended
June 30, 2016
, respectively, compared to a
(79)%
and
(48)%
expense
for the same periods in
2015
. The current income tax expense for the
three and six
months ended
June 30, 2016
was due to certain tax jurisdictions where we remain profitable.
We record a valuation allowance to reduce the carrying value of deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including the implementation of feasible and prudent tax planning strategies, past operating results, the existence of cumulative losses in the most recent years, and forecast of future taxable income which inherently requires significant assumptions and judgment.
Note 9
—Long-Term Debt and Credit Facility
We entered into our Second Amended and Restated Credit Agreement on
April 27, 2012
(the "Credit Facility"), to provide a revolving line of credit of
$125 million
, including up to
$20 million
of swing line loans (collectively, the "Revolver"). During the six months ended June 30, 2016, we reduced the aggregate commitments under the Credit Facility by
$65 million
to
$60 million
. See Part II, Item 8, “Financial Statements and Supplementary Data, Note 9” in our 2015 Annual Report on Form 10-K.
At
June 30, 2016
and
December 31, 2015
, we had
no
outstanding borrowings under the Revolver and
$1.9 million
and
$1.3 million
in letters of credit outstanding within our Credit Facility, respectively.
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 and through 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, contemporaneously with the filing of this Report.
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
June 30, 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
June 30, 2016
, the Company had a leverage ratio of
(0.07)
, a consolidated net worth of
$348.0 million
, an interest coverage ratio of
(16.4)
and capital expenditures of
$7.0 million
. Under the Waiver (as amended on May 6, 2016), the lenders waived failures 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 June 30, 2016.
On August 9, 2016, we terminated the Credit Facility in order to eliminate certain fees and expenses associated with maintaining an undrawn credit facility. Further, as of August 9, 2016, we maintain
$1.9 million
on deposit as collateral for the letters of credit outstanding.
Note 10
—Commitments and Contingencies
Legal contingencies
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of the proceedings involves a claim for damages exceeding
ten percent
of our current assets on a consolidated basis. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.
Other Contingencies
We are contingently liable under letters of credit and similar instruments that we enter into in connection with the importation of equipment into foreign countries and to secure our performance on certain contracts. As of
June 30, 2016
and
December 31, 2015
, our total exposure under outstanding letters of credit was
$3.0 million
and
$5.4 million
, respectively.
At
June 30, 2016
, accounts receivable included approximately
$1.6 million
from a customer in Mexico for the period of May 2013 through July 2014 that are unbilled due to a contractual rate dispute.
Note 11
—Segment Information
Business Segments
Significant financial information relating to our business segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
|
Revenue
|
$
|
20,591
|
|
|
$
|
12,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,586
|
|
|
Depreciation and amortization
|
1,115
|
|
|
5,497
|
|
|
—
|
|
|
603
|
|
|
7,215
|
|
|
Operating loss
|
(2,656
|
)
|
|
(9,331
|
)
|
|
(1,437
|
)
|
|
(5,793
|
)
|
|
(19,217
|
)
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(19,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
|
Revenue
|
$
|
41,430
|
|
|
$
|
33,021
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
74,451
|
|
|
Depreciation and amortization
|
2,155
|
|
|
6,389
|
|
|
3
|
|
|
1,086
|
|
|
9,633
|
|
|
Operating loss
|
(2,816
|
)
|
|
(2,810
|
)
|
|
(2,059
|
)
|
|
(6,033
|
)
|
|
(13,718
|
)
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(15,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
|
Revenue
|
$
|
37,165
|
|
|
$
|
31,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,039
|
|
|
Depreciation and amortization
|
2,467
|
|
|
11,320
|
|
|
2
|
|
|
1,385
|
|
|
15,174
|
|
|
Operating loss
|
(41,893
|
)
|
|
(15,348
|
)
|
|
(3,010
|
)
|
|
(13,723
|
)
|
|
(73,974
|
)
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(75,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
|
Revenue
|
$
|
91,351
|
|
|
$
|
74,770
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
166,121
|
|
|
Depreciation and amortization
|
4,708
|
|
|
12,801
|
|
|
6
|
|
|
2,217
|
|
|
19,732
|
|
|
Operating income (loss)
|
1,737
|
|
|
(792
|
)
|
|
(4,910
|
)
|
|
(15,391
|
)
|
|
(19,356
|
)
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
4,740
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24,096
|
)
|
Other Charges
In response to the continued downturn in the energy market and its corresponding impact on our business outlook, we continued certain cost rationalization efforts that were initiated during 2015. Consequently, we recorded a charge in continuing operations related to headcount reductions and office closures. The following table presents these charges and the related income statement classification to which the charges are included for the
three and six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
Severance
|
|
Facility Closures
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
|
Products
|
$
|
741
|
|
|
$
|
25
|
|
|
$
|
1,412
|
|
|
$
|
25
|
|
|
Cost of sales and services - Products
|
|
Tubular Services
|
738
|
|
|
106
|
|
|
1,522
|
|
|
722
|
|
|
Cost of sales and services - Services
|
|
Corporate & Other
|
90
|
|
|
6
|
|
|
90
|
|
|
131
|
|
|
Selling, general and administrative
|
|
|
$
|
1,569
|
|
|
$
|
137
|
|
|
$
|
3,024
|
|
|
$
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
Six Months Ended June 30, 2015
|
|
|
|
|
Severance
|
|
Facility Closures
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
|
Products
|
$
|
1,818
|
|
|
$
|
—
|
|
|
$
|
3,227
|
|
|
$
|
—
|
|
|
Cost of sales and services - Products
|
|
Tubular Services
|
1,074
|
|
|
—
|
|
|
1,972
|
|
|
—
|
|
|
Cost of sales and services - Services
|
|
Corporate & Other
|
90
|
|
|
—
|
|
|
372
|
|
|
—
|
|
|
Selling, general and administrative
|
|
|
$
|
2,982
|
|
|
$
|
—
|
|
|
$
|
5,571
|
|
|
$
|
—
|
|
|
|
Geographic Areas
We attribute revenue to geographic regions based on the location of the customer. Generally, for service activities, this will be the region in which the service activity occurs. For equipment sales, this will be the geographical region in which the product is initially deployed. Our revenue by geographic area for the
three and six
months ended
June 30, 2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
United States
|
$
|
10,652
|
|
|
$
|
18,836
|
|
|
$
|
24,934
|
|
|
$
|
45,069
|
|
|
Europe, Africa and Middle East
|
10,319
|
|
|
14,588
|
|
|
16,372
|
|
|
28,103
|
|
|
Asia Pacific
|
2,975
|
|
|
8,661
|
|
|
5,957
|
|
|
20,562
|
|
|
Russia
|
3,448
|
|
|
3,104
|
|
|
7,626
|
|
|
7,434
|
|
|
Latin America
|
4,739
|
|
|
24,164
|
|
|
11,615
|
|
|
49,620
|
|
|
Canada
|
1,453
|
|
|
5,098
|
|
|
2,535
|
|
|
15,333
|
|
|
|
$
|
33,586
|
|
|
$
|
74,451
|
|
|
$
|
69,039
|
|
|
$
|
166,121
|
|
The physical location of our net property, plant and equipment by geographic area as of
June 30, 2016
and
December 31, 2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
Total
|
|
United States
|
$
|
10,982
|
|
|
$
|
27,548
|
|
|
$
|
9,532
|
|
|
$
|
48,062
|
|
|
Europe, Africa and Middle East
|
5,561
|
|
|
13,062
|
|
|
2,327
|
|
|
20,950
|
|
|
Asia Pacific
|
3,517
|
|
|
11,506
|
|
|
568
|
|
|
15,591
|
|
|
Russia
|
11,352
|
|
|
840
|
|
|
7
|
|
|
12,199
|
|
|
Latin America
|
20,037
|
|
|
5,566
|
|
|
795
|
|
|
26,398
|
|
|
Canada
|
360
|
|
|
1,335
|
|
|
5,004
|
|
|
6,699
|
|
|
|
$
|
51,809
|
|
|
$
|
59,857
|
|
|
$
|
18,233
|
|
|
$
|
129,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
Total
|
|
United States
|
$
|
19,198
|
|
|
$
|
32,479
|
|
|
$
|
10,434
|
|
|
$
|
62,111
|
|
|
Europe, Africa and Middle East
|
8,645
|
|
|
16,262
|
|
|
2,841
|
|
|
27,748
|
|
|
Asia Pacific
|
6,368
|
|
|
14,444
|
|
|
863
|
|
|
21,675
|
|
|
Russia
|
15,975
|
|
|
280
|
|
|
8
|
|
|
16,263
|
|
|
Latin America
|
30,265
|
|
|
9,388
|
|
|
988
|
|
|
40,641
|
|
|
Canada
|
1,498
|
|
|
2,341
|
|
|
5,439
|
|
|
9,278
|
|
|
|
$
|
81,949
|
|
|
$
|
75,194
|
|
|
$
|
20,573
|
|
|
$
|
177,716
|
|
Major customers and credit risk
Accounts receivable are subject to normal industry credit risks and are principally derived from major oil and natural gas service companies and exploration and production companies. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. Many of our customers are located in regions that are inherently subject to risks of economic, political and civil instabilities, which may impact our ability to collect. The main factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency and management’s estimate of ability to collect outstanding receivables based on the number of days outstanding and risks of economic, political and civil instabilities. Bad debt expense is included in selling, general and administrative expense in our consolidated statements of income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Please see "Caution Regarding Forward-Looking Information; Risk Factors" above and "Risk Factors" in Part II, Item 1A below and in our
2015
Annual Report on Form 10-K, for a discussion of the uncertainties, risks and assumptions associated with these statements.
Overview and Outlook
We are a global technology leader and provider of highly engineered solutions for drilling, servicing, and completion of wells with facilities in North America, Europe, Russia, Latin America, Middle East, and Asia Pacific. Operations consist of pipe handling product sales and rentals, after-market sales and services, and tubular services, including related products and accessories sales.
Unless indicated otherwise, results of operations data are presented in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
Business Environment
Our 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 is primarily 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 drives rig count and well count and influences profitability of drilling contractors. Accordingly, rig count and well count are important business barometers for the drilling industry and its suppliers, as they may reflect the relative strength and stability of energy prices and overall market activity. When drilling rigs are active they consume products and services produced by the oil services companies like ours. However, it is important to look at rig count in conjunction with the well count. Moreover, these counts should not be solely relied on as an indicator of the economic condition of our industry, as other specific and pervasive conditions may exist that affect overall energy prices and market activity.
Below is a table that shows the average rig count by region for the
three and six
months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Average Rig Count
(1)
|
|
Six Months Average Rig Count
(1)
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
United States
|
421
|
|
|
909
|
|
|
488
|
|
|
1,145
|
|
|
Canada
|
49
|
|
|
100
|
|
|
106
|
|
|
204
|
|
|
Latin America (includes Mexico)
|
190
|
|
|
322
|
|
|
211
|
|
|
337
|
|
|
Middle East (excludes Iran, Iraq, Syria and Sudan)
|
388
|
|
|
403
|
|
|
395
|
|
|
408
|
|
|
Asia Pacific (excludes China onshore)
|
184
|
|
|
220
|
|
|
185
|
|
|
228
|
|
|
Europe (excludes Russia)
|
92
|
|
|
116
|
|
|
98
|
|
|
124
|
|
|
Africa
|
89
|
|
|
108
|
|
|
90
|
|
|
119
|
|
|
Total
|
1,413
|
|
|
2,178
|
|
|
1,573
|
|
|
2,565
|
|
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
June 30, 2016
have shown moderate increases to $48.27 and $48.05, 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 Company's response to the market conditions has resulted in aggressive cost rationalization and global reorganization to right-size the company. During the six months ended
June 30, 2016
, the global workforce was reduced by an additional 23%, as compared to December 31, 2015, resulting in a charge of
$3.0 million
. Facility closures during the same period resulted in a charge of
$0.9 million
. In addition, certain austerity measures and efforts to streamline our overhead and support structure initiated in the previous year were continued. During the year ended December 31, 2015, the global workforce was reduced by 30%, resulting in a related aggregate charge of $10.9 million. The benefits of these efforts were seen this quarter as profitability improved despite a decline in sales.
The global markets will continue to be challenging as recent rig count increases in the U.S. were offset by declines in international markets. In addition, the recent steep decline in oil prices below $40 is softening the consensus about the pace and strength of the recovery. Accordingly, cost reductions and restructuring alone will not be sufficient to return us to profitability. We need to grow our revenue run rates and improve our products and services mix to achieve a break-even EBITDA. Our focus it to take advantage of changes in the marketplace and increase our market share by accelerating the deployment of our organic initiatives, accelerating the deployment of new technologies, adapting our business models more aggressively and, possibly, the acquisition of key synergistic technologies to complement our platform.
In a recovering market, we have the capacity to be an early actor through our ability to aggressively fund capital spending and working capital as well as to accelerate technology deployments. We believe that greater integration of drilling services into the rig operations; upgrading of rigs, particularly around pipe handling and mechanization of rig-floor processes; increased focus on highly mobile, plug and play rig equipment that can move between rigs and create much greater capital efficiency; and the acceleration of remote management, real-time communication and software technologies to enhance drilling performance are emerging market trends that favor Tesco.
_________________________________
|
|
|
|
(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
|
In addition, we have begun to see a shift in the market in which participants are moving from maintaining their own equipment to 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.
Historically, 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 customer's 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 and six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Segment revenue
|
|
|
|
|
|
|
|
|
Products revenue
|
|
|
|
|
|
|
|
|
Sales
|
$
|
8,381
|
|
|
$
|
13,742
|
|
|
$
|
12,583
|
|
|
$
|
31,513
|
|
|
Rental services
|
5,887
|
|
|
17,733
|
|
|
12,459
|
|
|
37,743
|
|
|
After-Market sales and services
|
6,323
|
|
|
9,955
|
|
|
12,123
|
|
|
22,095
|
|
|
|
20,591
|
|
|
41,430
|
|
|
37,165
|
|
|
91,351
|
|
|
Tubular Services revenue
|
|
|
|
|
|
|
|
|
Land
|
$
|
7,778
|
|
|
$
|
23,471
|
|
|
$
|
18,571
|
|
|
$
|
54,096
|
|
|
Offshore
|
4,364
|
|
|
8,716
|
|
|
11,785
|
|
|
18,566
|
|
|
CDS, Parts & Accessories
|
853
|
|
|
834
|
|
|
1,518
|
|
|
2,108
|
|
|
|
12,995
|
|
|
33,021
|
|
|
31,874
|
|
|
74,770
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
33,586
|
|
|
$
|
74,451
|
|
|
$
|
69,039
|
|
|
$
|
166,121
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
Products
|
$
|
(2,656
|
)
|
|
$
|
(2,816
|
)
|
|
$
|
(41,893
|
)
|
|
$
|
1,737
|
|
|
Tubular Services
|
(9,331
|
)
|
|
(2,810
|
)
|
|
(15,348
|
)
|
|
(792
|
)
|
|
Research and Engineering
|
(1,437
|
)
|
|
(2,059
|
)
|
|
(3,010
|
)
|
|
(4,910
|
)
|
|
Corporate and Other
|
(5,793
|
)
|
|
(6,033
|
)
|
|
(13,723
|
)
|
|
(15,391
|
)
|
|
Operating loss
|
$
|
(19,217
|
)
|
|
$
|
(13,718
|
)
|
|
$
|
(73,974
|
)
|
|
$
|
(19,356
|
)
|
Products Segment
Revenues from our Products segment are generated through pipe handling product sales, rentals, and after-market sales and service. Sales of top drives consist of new and used top drives and catwalks. Our rental fleet of pipe handling products is mobile. We install the units on the customers' rig site and charge a daily rate for rental operating days. Rental operating days are defined as a day that a unit in our rental fleet is under contract and operating.
Our after-market sales and service consists of providing parts and servicing units. We provide these services for automated pipe handling equipment we manufacture and selected models of our competitors.
Q2 2016
as compared with
Q2 2015
Sales
Revenues
decreased
by
$5.4 million
, or
39%
, for the
three
months ended
June 30, 2016
as compared to
2015
primarily due to fewer top drive units sold globally as a result of decreased demand, rig count and crude oil prices. In the
three
months ended
June 30, 2016
, we sold a total of
8
top drives, of which
5
were new and
3
were from our rental fleet, as compared to the same period in
2015
, where we sold
11
top drives, of which
10
were new and
one
was from our rental fleet. We recognized revenue of $1.6 million and $0.8 million related to the sale of the used top drives from our rental fleet during the
three
months ended
June 30, 2016
and
2015
, respectively.
Rental Services
Revenues
decreased
by
$11.8 million
, or
67%
, for the
three
months ended
June 30, 2016
as compared to
2015
primarily due to the depressed market demand within the industry, which led to a 50% decrease in our utilization. At
June 30, 2016
utilization declined to 15% due to fewer operating days and fewer contracted units. The decrease in activity in conjunction with price compression primarily impacted our revenues in Latin America.
After-
Market Sales and Services
Revenues
decreased
by
$3.6 million
, or
36%
, for the
three
months ended
June 30, 2016
as compared to
2015
primarily due to a decline in demand for parts and services in North America and Asia Pacific, accounting for 67% and 16%, respectively, of the total decline. With the continued decline in oil prices and consequential decrease in drilling activity, customers have chosen to defer non-critical services and consume their inventories rather than replenish them.
Operating Loss
Products operating loss
was flat for the
three
months ended
June 30, 2016
as compared to
2015
. Declines in revenue were offset by reductions in operating expenses derived from our aggressive restructuring and cost rationalization efforts. Reductions in workforce and offices closures resulted in charges of
$0.8 million
and
$1.8 million
for the
three
months ended
June 30, 2016
and
2015
, respectively.
YTD 2016
as compared with
YTD 2015
Sales
Revenues
decreased
by
$18.9 million
, or
60%
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to fewer top drive units sold globally as a result of decreased demand driven by reduced rig count and depressed crude oil prices. In the
six
months ended
June 30, 2016
, we sold a total of
14
top drives, of which
8
were new and
6
were from our rental fleet, as compared to the same period in
2015
, when we sold
25
top drives, of which
24
were new and
one
was from our rental fleet. We recognized revenue of $2.8 million and $0.8 million related to the sale of the used top drives from our rental fleet during the
six
months ended
June 30, 2016
and
2015
, respectively.
Rental Services
Revenues
decreased
by
$25.3 million
, or
67%
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to the depressed market demand within the industry causing a 56% decrease in utilization rates. At
June 30, 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
$10.0 million
, or
45%
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to a decline in demand for parts and services in North America, Asia Pacific and Latin America, accounting for 63%, 14% and 13%, respectively, of the total decline. With the continued decline in oil prices and consequential decrease in drilling activity, customers have chosen to defer non-critical services and consume their inventories rather than replenish them.
Operating Loss
Products operating loss
decreased
by
$43.6 million
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to the decline in revenues for each product offering due to current market conditions as a result of continued declines in oil prices and in overall demand for oilfield services.
During the three months ended
March 31, 2016
, we identified indicators that could cause potential impairments to our long-lived assets. Due to these indicators, we conducted testing for impairment and determined that the carrying amount of our long-lived assets in our Products segment exceeded its fair value. Accordingly, we recognized an aggregate long-lived asset impairment of $33.6 million during the
six
months ended
June 30, 2016
. For further discussion, see Part 1, Item 1, "Financial Statements,
Note 5
", included in this report. Reductions in workforce and offices closures resulted in charges of
$1.4 million
and
$3.2 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Tubular Services Segment
We generate revenues in our Tubular Services segment from land and offshore services augmented by sales of products, accessories and consumables for the casing running process. Our services include personnel and equipment, including the 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
, down-well consumables and other non-consumable parts.
Q2 2016
as compared with
Q2 2015
Land
Revenues
decreased
by
$15.7 million
, or
67%
, for the
three
months ended
June 30, 2016
as compared to
2015
primarily due to decreased activity and demand in North America and Latin America of 46% and 45%, respectively. The decrease in rig count and
overall activity resulted in a reduction of jobs performed during the
three
months ended
June 30, 2016
as compared to
2015
. In addition, we experienced significant price compression within tubular services during the three months ended June 30, 2016 as compared to 2015.
Offshore
Revenue
s
decreased
by
$4.4 million
, or
50%
, for the
three
months ended
June 30, 2016
as compared to
2015
primarily due to a decrease in the number of operating rigs within the Asia Pacific region during the
second
quarter of
2016
. This decrease is partially 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 for the
three
months ended
June 30, 2016
as compared to
2015
were flat. Decreases in revenues of part and accessories sales in North America and Latin America were offset by the sale of a used CDS unit in Asia Pacific.
Operating Loss
Tubular Services operating loss
decreased
by
$6.5 million
, for the
three
months ended
June 30, 2016
as compared to
2015
primarily due to the aforementioned declines in revenue partially offset by cost reductions achieved through aggressive cost rationalization efforts undertaken. Reductions in workforce and offices closures resulted in charges of
$0.8 million
and
$1.1 million
for the
three
months ended
June 30, 2016
and
2015
, respectively.
YTD 2016
as compared with
YTD 2015
Land
Revenues
decreased
by
$35.5 million
, or
66%
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to decreased activity and demand in North America and Latin America of 45% and 44%, respectively. The decrease in rig count and overall activity resulted in a reduction of jobs being performed during the
six
months ended
June 30, 2016
as compared to
2015
. Additionally, the continued decline in oil prices and tubular services competition compressed pricing.
Offshore
Revenue
s
decreased
by
$6.8 million
, or
37%
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to a decrease in the number of operating rigs within the Asia Pacific region during the first half of
2016
. This decrease was 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
28%
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to declining part sales driven by customers postponing capital expenditures in light of the decline in market conditions. The decrease in revenues related to parts and accessories is tied to the decreased land-based and offshore tubular services jobs performed in primarily in North America and Latin America during the
six
months ended
June 30, 2016
.
Operating Loss
Tubular Services operating loss decreased by
$14.6 million
, for the
six
months ended
June 30, 2016
as compared to
2015
primarily due to the aforementioned declines in revenue partially offset by cost reductions achieved through aggressive cost rationalization efforts undertaken. Significant contributors to the total decline were Latin America and Asia Pacific of 59% and 32%, respectively. Reductions in workforce and offices closures resulted in charges of
$2.2 million
and
$2.0 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. Declines were further offset by an adjustment in the amount of past due disputed accounts payable during the three months ended March 31, 2016.
Research and Engineering Segment
We are a technology-based company deploying new technologies to increase 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.
Q2 2016
as compared with
Q2 2015
Operating expenses
decreased
by
$0.6 million
, or
30%
, during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to a decrease in spending related to targeted cost rationalization efforts.
YTD 2016
as compared with
YTD 2015
Operating expenses
decreased
by
$1.9 million
, or
39%
, during the
six
months ended
June 30, 2016
as compared to
2015
primarily due to a decrease in spending related to targeted cost rationalization efforts.
Corporate and Other Segment
Corporate and other expenses primarily consist of overhead, general and administrative expenses and certain selling and marketing expenses.
Corporate and other expenses as a percent of revenues were
17%
and
8%
for the three months ended
June 30, 2016
and
2015
, respectively.
Q2 2016
as compared with
Q2 2015
Operating expenses
decreased
by
$0.2 million
, or
4%
, during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to cost saving measures implemented in 2015 and continuing in 2016. The benefits of these cost saving measures are visible primarily in personnel costs and various discretionary spending accounts.
YTD 2016
as compared with
YTD 2015
Operating expenses
decreased
by
$1.7 million
, or
11%
, during the
six
months ended
June 30, 2016
as compared to
2015
primarily due to cost saving measures implemented in 2015 and continuing in 2016. The benefits of these cost saving measures are visible primarily in personnel costs and various discretionary spending accounts.
Other expense (income)
Below is a detail of expenses that are not allocated to segments for the
three and six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Interest expense
|
$
|
191
|
|
|
$
|
354
|
|
|
$
|
654
|
|
|
$
|
572
|
|
|
Interest income
|
(347
|
)
|
|
(12
|
)
|
|
(429
|
)
|
|
(40
|
)
|
|
Foreign exchange loss
|
17
|
|
|
1,399
|
|
|
1,185
|
|
|
4,555
|
|
|
Other expense (income)
|
17
|
|
|
(141
|
)
|
|
27
|
|
|
(347
|
)
|
|
Loss before income taxes
|
(19,095
|
)
|
|
(15,318
|
)
|
|
(75,411
|
)
|
|
(24,096
|
)
|
|
Income tax provision (benefit)
|
(224
|
)
|
|
12,172
|
|
|
299
|
|
|
11,646
|
|
|
Net loss
|
$
|
(18,871
|
)
|
|
$
|
(27,490
|
)
|
|
$
|
(75,710
|
)
|
|
$
|
(35,742
|
)
|
Q2 2016
as compared with
Q2 2015
Interest Expense
Interest expense
decreased
by
$0.2 million
, or
46%
, during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to the decrease in debt issue costs related to the reduction of our Credit Facility's borrowing capacity.
Interest Income
Interest income
increased
by
$0.3 million
, during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to interest received on short term investment of excess cash held in Latin America.
Foreign Exchange Loss
Although our functional currency is the U.S. dollar, our operations have net assets and liabilities not denominated in the functional currency which exposes us to changes in foreign currency exchange rates that impact income. Foreign exchange losses
decreased
by
$1.4 million
, or
99%
, during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to relatively stable exchange rates and reductions in net monetary assets subject to revaluation in Argentina, Colombia, and Mexico.
Other Expense (Income)
Other expense
increased
by
$0.2 million
during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to the fair market value adjustment recorded in 2015 for the contingent earn-out obligation related to the acquisition of assets in 2014. The contingent earn-out obligation expired in May 2016.
Income Tax Provision
Income tax provision
decreased
by
$12.4 million
for the
three
months ended
June 30, 2016
as compared to the same period in
2015
primarily due to a $15.3 million valuation allowance recorded against deferred tax assets during the
three
months ended June 30, 2015. Our effective tax rates were a
1%
benefit
and a
(79)%
expense
for the
three
months ended
June 30, 2016
and
2015
, respectively.
YTD 2016
as compared with
YTD 2015
Interest Expense
Interest expense
increased
by
$0.1 million
, or
14%
, during the
six
months ended
June 30, 2016
as compared to
2015
primarily due to the write off the unamortized debt issuance costs of $0.2 million during the
six
months ended
June 30, 2016
related to the decrease in our Credit Facility's borrowing capacity.
Interest Income
Interest income
increased
by
$0.4 million
during the
three
months ended
June 30, 2016
as compared to
2015
primarily due to interest received on short term investment of excess cash held in Latin America.
Foreign Exchange Loss
Although our functional currency is the U.S. dollar, our operations have net assets and liabilities not denominated in the functional currency which exposes us to changes in foreign currency exchange rates that impact income. Foreign exchange losses
decreased
by
$3.4 million
, or
74%
, during the
six
months ended
June 30, 2016
as compared to
2015
primarily due to relatively stable exchange rates and reductions in net monetary assets subject to revaluation in Argentina, Colombia, and Mexico.
Other Expense (Income)
Other expense
increased
by
$0.4 million
during the
six
months ended
June 30, 2016
as compared to
2015
primarily due to the fair market value adjustment recorded in 2015 for the contingent earn-out obligation related to the acquisition of assets in 2014. The contingent earn-out obligation expired in May 2016.
Income Tax Provision
Income tax provision
decreased
by
$11.3 million
, or
97%
, for the
six
months ended
June 30, 2016
as compared to the same period in
2015
primarily due to a $15.3 million valuation allowance recorded against deferred tax assets during the
six
months ended June 30, 2015. Our effective tax rates were
0%
and a
(48)%
expense
for the
six
months ended
June 30, 2016
and
2015
, respectively.
Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund operating, investing, and financing activities. Our primary sources of liquidity are cash flows generated from operations and available cash and cash equivalents. For the
six
months ended
June 30, 2016
, cash and cash equivalents increased by
$46.0 million
to
$97.5 million
, primarily due to the June 2016 secondary public equity offering of
7.0 million
common shares of the Company that generated proceeds of
$46.7 million
, net of underwriting discounts, commissions, issuance costs and expenses. The offering proceeds provide Tesco optionality to address working capital and capital spending needs in a potential market recovery while also funding strategic initiatives to gain market share through technology offerings and possibly through acquisitions.
Off-Balance Sheet Arrangements
As of
June 30, 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
$6.9 million
as of
June 30, 2016
. This
decrease
of
$1.6 million
, or
19%
, is driven primarily by the receipt of orders and the cancellation of prior orders with vendors due to the decline in product demand caused by the decline in oil prices.
Letters of Credit
The Company enters into letters of credit in the ordinary course of business. The availability of current borrowings is, and future borrowings may be, limited in order to maintain certain financial ratios required by restrictive covenants in the Second Amended and Restated Credit Agreement, dated as of April 27, 2012 (the "Credit Facility"). As of
June 30, 2016
, outstanding letters of credit were approximately
$3.0 million
, of which
$1.9 million
was outstanding under the Credit Facility. On August 9, 2016, we terminated the Credit Facility in order to eliminate certain fees and expenses associated with maintaining an undrawn credit facility. Further, as of August 9, 2016, we maintain
$1.9 million
on deposit in letters of credit outstanding , see Part 1, Item 1, “Financial Statements,
Note 9
”, included in this Report.
Critical Accounting Estimates and Policies
Accounting policies are described in the notes to the audited consolidated financial statements included in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of the
2015
Annual Report on Form 10−K. The unaudited condensed consolidated financial statements were prepared in conformity with U.S. GAAP. Results of operations and financial condition, as reflected in the unaudited condensed consolidated financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of the business and customers. While these issues require judgments that may be subjective, they are generally based on a significant amount of historical data and current market data. The most critical accounting policies are those described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in the
2015
Annual Report on Form 10−K. During the
three and six
ended
June 30, 2016
, there have been no material changes to the types of judgments, assumptions and estimates upon which our critical accounting estimates are based.