Item 1. Financial Statements.
TESCO CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
Assets
|
(unaudited)
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
83,143
|
|
|
$
|
91,489
|
|
|
Accounts receivable trade, net of allowance for doubtful accounts of $8,923 and $9,134 as of March 31, 2017 and December 31, 2016, respectively
|
39,694
|
|
|
33,320
|
|
|
Inventories, net
|
73,592
|
|
|
76,226
|
|
|
Income taxes recoverable
|
5,060
|
|
|
4,906
|
|
|
Prepaid and other current assets
|
12,575
|
|
|
15,034
|
|
|
Total current assets
|
214,064
|
|
|
220,975
|
|
|
Property, plant and equipment, net
|
115,429
|
|
|
120,743
|
|
|
Intangible and other assets, net
|
2,415
|
|
|
2,561
|
|
|
Total assets
|
$
|
331,908
|
|
|
$
|
344,279
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
$
|
12,923
|
|
|
$
|
13,492
|
|
|
Deferred revenue
|
3,657
|
|
|
4,369
|
|
|
Income taxes payable
|
3,091
|
|
|
2,120
|
|
|
Accrued payroll and benefits
|
6,768
|
|
|
6,293
|
|
|
Accrued taxes other than income taxes
|
3,443
|
|
|
4,301
|
|
|
Other current liabilities
|
3,015
|
|
|
2,135
|
|
|
Total current liabilities
|
32,897
|
|
|
32,710
|
|
|
Deferred income taxes
|
371
|
|
|
406
|
|
|
Other liabilities
|
1,504
|
|
|
1,580
|
|
|
Total liabilities
|
34,772
|
|
|
34,696
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
Common shares; no par value; unlimited shares authorized; 46,722 and 46,688 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
|
266,187
|
|
|
264,940
|
|
|
Retained earnings (deficit)
|
(4,552
|
)
|
|
9,142
|
|
|
Accumulated other comprehensive income
|
35,501
|
|
|
35,501
|
|
|
Total shareholders’ equity
|
297,136
|
|
|
309,583
|
|
|
Total liabilities and shareholders’ equity
|
$
|
331,908
|
|
|
$
|
344,279
|
|
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,
|
|
|
2017
|
|
2016
|
|
Revenue
|
|
|
|
|
Products
|
$
|
15,180
|
|
|
$
|
10,105
|
|
|
Services
|
21,565
|
|
|
25,348
|
|
|
Total revenue
|
36,745
|
|
|
35,453
|
|
|
Operating expenses
|
|
|
|
|
Cost of sales and services
|
|
|
|
|
Products
|
15,202
|
|
|
13,841
|
|
|
Services
|
27,283
|
|
|
33,018
|
|
|
|
42,485
|
|
|
46,859
|
|
|
Selling, general and administrative
|
6,336
|
|
|
6,264
|
|
|
Long-lived asset impairments
|
—
|
|
|
35,514
|
|
|
Research and engineering
|
809
|
|
|
1,573
|
|
|
Total operating expenses
|
49,630
|
|
|
90,210
|
|
|
Operating loss
|
(12,885
|
)
|
|
(54,757
|
)
|
|
Other expense (income)
|
|
|
|
|
Interest expense
|
78
|
|
|
463
|
|
|
Interest income
|
(44
|
)
|
|
(82
|
)
|
|
Foreign exchange loss (gain)
|
(148
|
)
|
|
1,168
|
|
|
Other expense (income)
|
(123
|
)
|
|
10
|
|
|
Total other expense (income)
|
(237
|
)
|
|
1,559
|
|
|
Loss before income taxes
|
(12,648
|
)
|
|
(56,316
|
)
|
|
Income tax provision
|
1,046
|
|
|
523
|
|
|
Net loss
|
$
|
(13,694
|
)
|
|
$
|
(56,839
|
)
|
|
Loss per share:
|
|
|
|
|
Basic
|
$
|
(0.29
|
)
|
|
$
|
(1.45
|
)
|
|
Diluted
|
$
|
(0.29
|
)
|
|
$
|
(1.45
|
)
|
|
Weighted average number of shares:
|
|
|
|
|
Basic
|
46,705
|
|
|
39,261
|
|
|
Diluted
|
46,705
|
|
|
39,261
|
|
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,
|
|
|
2017
|
|
2016
|
|
Operating Activities
|
|
|
|
|
Net loss
|
$
|
(13,694
|
)
|
|
$
|
(56,839
|
)
|
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
6,001
|
|
|
7,959
|
|
|
Stock compensation expense
|
1,247
|
|
|
1,142
|
|
|
Bad debt expense (recovery)
|
(120
|
)
|
|
463
|
|
|
Deferred income taxes
|
(35
|
)
|
|
—
|
|
|
Amortization of financial items
|
—
|
|
|
248
|
|
|
Gain on sale of operating assets
|
(710
|
)
|
|
(298
|
)
|
|
Long-lived asset impairments
|
—
|
|
|
35,514
|
|
|
Changes in the fair value of contingent earn-out obligations
|
—
|
|
|
(74
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable trade, net
|
(6,042
|
)
|
|
15,325
|
|
|
Inventories, net
|
2,634
|
|
|
2,150
|
|
|
Prepaid and other current assets
|
1,660
|
|
|
2,267
|
|
|
Accounts payable and accrued liabilities
|
(893
|
)
|
|
(5,864
|
)
|
|
Income taxes payable
|
784
|
|
|
155
|
|
|
Other non-current assets and liabilities, net
|
335
|
|
|
(32
|
)
|
|
Net cash provided by (used in) operating activities
|
(8,833
|
)
|
|
2,116
|
|
|
Investing Activities
|
|
|
|
|
Additions to property, plant and equipment
|
(725
|
)
|
|
(838
|
)
|
|
Proceeds on sale of operating assets
|
413
|
|
|
1,057
|
|
|
Other, net
|
—
|
|
|
50
|
|
|
Net cash provided by (used in) investing activities
|
(312
|
)
|
|
269
|
|
|
Financing Activities
|
|
|
|
|
Changes in restricted cash
|
799
|
|
|
—
|
|
|
Net cash provided by financing activities
|
799
|
|
|
—
|
|
|
Change in cash and cash equivalents
|
(8,346
|
)
|
|
2,385
|
|
|
Cash and cash equivalents, beginning of period
|
91,489
|
|
|
51,507
|
|
|
Cash and cash equivalents, end of period
|
$
|
83,143
|
|
|
$
|
53,892
|
|
|
Supplemental cash flow information
|
|
|
|
|
Cash payments for interest
|
$
|
—
|
|
|
$
|
118
|
|
|
Cash payments for income taxes, net of refunds
|
182
|
|
|
485
|
|
|
Property, plant and equipment accrued in accounts payable
|
1,289
|
|
|
611
|
|
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 (deficit)
|
|
Accumulated other comprehensive income
|
|
Total
|
|
For the three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
46,688
|
|
|
$
|
264,940
|
|
|
$
|
9,142
|
|
|
$
|
35,501
|
|
|
$
|
309,583
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
(13,694
|
)
|
|
—
|
|
|
(13,694
|
)
|
|
Stock compensation related activity
|
34
|
|
|
1,247
|
|
|
—
|
|
|
—
|
|
|
1,247
|
|
|
Balances at March 31, 2017
|
46,722
|
|
|
$
|
266,187
|
|
|
$
|
(4,552
|
)
|
|
$
|
35,501
|
|
|
$
|
297,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2015
|
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
|
|
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 is a global leader in the design, assembly, and service delivery of technology-based solutions for the upstream energy industry. The Company seeks to improve 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 ("E&P") 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, 2016
. 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
2016
Annual Report on Form 10-K.
Recent Accounting Pronouncements
In May 2014 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which clarifies the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update will be effective January 1, 2018. Early adoption is permitted on January 1, 2017. We will adopt the standard as of January 1, 2018. The standard provides for adoption retrospectively for each period presented (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial adoption (modified retrospective). We plan to apply the modified retrospective approach.
We have the necessary resources dedicated to carry out the evaluation and adoption of the new standard and are currently reviewing the Company’s existing contracts under the principles of the new standard and identifying the modifications needed to our current revenue recognition accounting policy, business processes and system requirements. We anticipate the adoption of the new standard may require us to make significant changes to our business processes, and we are currently evaluating the overall impact this guidance will have on the consolidated financial statements and related disclosures of the Company.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. It will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The update will be effective January 1, 2019. Although early adoption is permitted, we will adopt the standard effective January 1, 2019.
Lessees and lessors are required to adopt Topic 842 using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. We have the necessary resources dedicated to the evaluation and adoption of the new standard, and we are currently assessing the impact the standard may have on business processes, systems, and consolidated financial statements and related disclosures of the Company.
Note 3
—Inventories
At
March 31, 2017
and
December 31, 2016
, inventories, net of reserves for excess and obsolete inventories of
$8.8 million
and
$9.1 million
, respectively, by major classification were as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
Raw materials and component parts
|
$
|
65,596
|
|
|
$
|
66,731
|
|
|
Work in progress
|
2,452
|
|
|
3,420
|
|
|
Finished goods
|
5,544
|
|
|
6,075
|
|
|
|
$
|
73,592
|
|
|
$
|
76,226
|
|
Note 4
—Prepaid and other current assets
At
March 31, 2017
and
December 31, 2016
, prepaid and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
Prepaid taxes other than income
|
$
|
2,127
|
|
|
$
|
2,036
|
|
|
Prepaid insurance
|
934
|
|
|
1,180
|
|
|
Other prepaid expenses
|
2,710
|
|
|
3,118
|
|
|
Deposits
|
2,420
|
|
|
3,063
|
|
|
Restricted cash
|
2,694
|
|
|
3,493
|
|
|
Non-trade receivables
|
139
|
|
|
325
|
|
|
Deferred job costs
|
1,551
|
|
|
1,819
|
|
|
|
$
|
12,575
|
|
|
$
|
15,034
|
|
Note 5
—Property, Plant and Equipment
At
March 31, 2017
and
December 31, 2016
, property, plant and equipment by major classification were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
Land, buildings and leaseholds
|
$
|
27,920
|
|
|
$
|
27,499
|
|
|
Drilling equipment
|
264,827
|
|
|
264,388
|
|
|
Manufacturing equipment
|
13,270
|
|
|
13,188
|
|
|
Office equipment and other
|
28,514
|
|
|
28,452
|
|
|
Capital work in progress
|
1,239
|
|
|
3,887
|
|
|
|
335,770
|
|
|
337,414
|
|
|
Less: Accumulated depreciation
|
(220,341
|
)
|
|
(216,671
|
)
|
|
|
$
|
115,429
|
|
|
$
|
120,743
|
|
Depreciation and amortization expense for the
three months ended
March 31, 2017
and
2016
are included on our unaudited condensed consolidated statements of income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Cost of sales and services
|
$
|
5,891
|
|
|
$
|
7,666
|
|
|
Selling, general and administrative expense
|
110
|
|
|
293
|
|
|
|
$
|
6,001
|
|
|
$
|
7,959
|
|
Sale of Operating Assets
When pipe handling products that we manufacture are used in our rental fleet and subsequently sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services within product sales of our Products segment. When CDS
TM
products that we manufacture are used in our rental fleet and subsequently sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services within CDS, parts and accessories of our Tubular Services segment. During the
three months ended
March 31, 2017
and
2016
,
one
and
three
used top drives were sold from our rental fleet.
Note 6
—Warranties
Changes in our warranty reserves during the
three months ended
March 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Balance as of December 31, 2016
|
$
|
474
|
|
|
Provisions
|
53
|
|
|
Expirations
|
(55
|
)
|
|
Claims
|
(45
|
)
|
|
Balance as of March 31, 2017
|
$
|
427
|
|
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
March 31,
|
|
|
2017
|
|
2016
|
|
Basic weighted average number of shares outstanding
|
46,705
|
|
|
39,261
|
|
|
Dilutive effect of stock-based compensation
|
—
|
|
|
—
|
|
|
Diluted weighted average number of shares outstanding
|
46,705
|
|
|
39,261
|
|
|
Anti-dilutive options excluded from calculation due to exercise prices
|
—
|
|
|
—
|
|
There were approximately
458,000
and
116,000
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, 2017
and
March 31, 2016
. The inclusion of the shares would be anti-dilutive.
Note 8
—Income Taxes
We are 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 for the
three months ended
March 31, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Current tax provision
|
$
|
1,081
|
|
|
$
|
523
|
|
|
Deferred tax provision
|
(35
|
)
|
|
—
|
|
|
Income tax provision
|
$
|
1,046
|
|
|
$
|
523
|
|
Our effective tax rate, which is income tax expense as a percentage of pretax earnings, was an
8%
expense
for the
three months ended
March 31, 2017
compared to a
1%
expense
for the same period in
2016
. The current income tax
expense
for the
three months ended
March 31, 2017
was primarily 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
—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 in connection with the importation of equipment into international countries and to secure our performance on certain contracts. As of
March 31, 2017
and
December 31, 2016
, our total exposure under outstanding letters of credit was
$2.7 million
. Of this amount,
$2.0 million
and
$2.5 million
were secured by restricted cash on deposit at
March 31, 2017
and
December 31, 2016
, respectively.
Note 10
—Segment Information
Business Segments
Significant financial information relating to our business segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
|
Revenue
|
$
|
20,088
|
|
|
$
|
16,657
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,745
|
|
|
Depreciation and amortization
|
816
|
|
|
4,670
|
|
|
—
|
|
|
515
|
|
|
6,001
|
|
|
Operating loss
|
(884
|
)
|
|
(5,698
|
)
|
|
(809
|
)
|
|
(5,494
|
)
|
|
(12,885
|
)
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Other Charges
As a result of the uncertain prospects for the oilfield services and equipment sector and the 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, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
Severance
|
|
Facility Closures
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
|
Products
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
671
|
|
|
$
|
—
|
|
|
Cost of sales and services - Products
|
|
Tubular Services
|
261
|
|
|
74
|
|
|
784
|
|
|
616
|
|
|
Cost of sales and services - Services
|
|
Corporate & Other
|
31
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
Selling, general and administrative
|
|
|
$
|
403
|
|
|
$
|
74
|
|
|
$
|
1,455
|
|
|
$
|
741
|
|
|
|
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 months ended
March 31, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
United States
|
$
|
13,502
|
|
|
$
|
14,282
|
|
|
Europe, Africa and Middle East
|
6,062
|
|
|
6,053
|
|
|
Asia Pacific
|
1,283
|
|
|
2,982
|
|
|
Russia
|
10,689
|
|
|
4,178
|
|
|
Latin America (includes Mexico)
|
3,703
|
|
|
6,876
|
|
|
Canada
|
1,506
|
|
|
1,082
|
|
|
|
$
|
36,745
|
|
|
$
|
35,453
|
|
The physical location of our net property, plant and equipment by geographic area as of
March 31, 2017
and
December 31, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
Total
|
|
United States
|
$
|
6,791
|
|
|
$
|
30,165
|
|
|
$
|
6,291
|
|
|
$
|
43,247
|
|
|
Europe, Africa and Middle East
|
6,150
|
|
|
9,673
|
|
|
2,276
|
|
|
18,099
|
|
|
Asia Pacific
|
3,378
|
|
|
8,505
|
|
|
438
|
|
|
12,321
|
|
|
Russia
|
10,506
|
|
|
1,711
|
|
|
5
|
|
|
12,222
|
|
|
Latin America (includes Mexico)
|
19,019
|
|
|
1,560
|
|
|
682
|
|
|
21,261
|
|
|
Canada
|
740
|
|
|
804
|
|
|
6,735
|
|
|
8,279
|
|
|
|
$
|
46,584
|
|
|
$
|
52,418
|
|
|
$
|
16,427
|
|
|
$
|
115,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
Total
|
|
United States
|
$
|
6,959
|
|
|
$
|
32,227
|
|
|
$
|
9,232
|
|
|
$
|
48,418
|
|
|
Europe, Africa and Middle East
|
6,263
|
|
|
10,355
|
|
|
2,308
|
|
|
18,926
|
|
|
Asia Pacific
|
3,417
|
|
|
9,315
|
|
|
478
|
|
|
13,210
|
|
|
Russia
|
10,956
|
|
|
954
|
|
|
7
|
|
|
11,917
|
|
|
Latin America (includes Mexico)
|
19,579
|
|
|
2,428
|
|
|
209
|
|
|
22,216
|
|
|
Canada
|
324
|
|
|
1,020
|
|
|
4,712
|
|
|
6,056
|
|
|
|
$
|
47,498
|
|
|
$
|
56,299
|
|
|
$
|
16,946
|
|
|
$
|
120,743
|
|
Major customers and credit risk
Our accounts receivable are principally with major international and national oil and natural gas service and E&P 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 international areas that are inherently subject to risks of economic, political and civil instabilities, which may impact our ability to collect those accounts receivable. 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" above and "Risk Factors" in Part II, Item 1A below and in our
2016
Annual Report on Form 10-K, for a discussion of the uncertainties, risks and assumptions associated with these statements.
Overview and Outlook
Tesco Corporation is a global leader and provider of highly engineered technology-based solutions for drilling, servicing, and completion of wells for the upstream energy industry. The Company seeks to improve 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 operations consist of top drives and automated pipe handling equipment sales and rentals, aftermarket sales and services, and tubular services, including related products and accessories 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 E&P companies and drilling contractors, which are affected by current and anticipated oil and gas prices.
Unless indicated otherwise, results of operations data are presented in accordance with U.S. GAAP.
Our Segments
Our operating structure is the basis for our internal and external financial reporting. As of
March 31, 2017
, our operating structure included the following business segments: (i) Products – top drives and automated pipe handling equipment sales, rentals and aftermarket sales and services, (ii) Tubular Services – onshore and offshore tubular services and sales of related products and accessories, (iii) Research & Engineering – internal research and development activities related to our proprietary tubular services and products development, and (iv) Corporate and Other – including executive management and several global support and compliance functions.
Business Environment
Our revenue is heavily dependent on the level of drilling activity of E&P companies. The willingness of E&P companies to spend capital on drilling activities is primarily affected by the current and anticipated prices of crude oil and natural gas, which is driven by such factors as the level of worldwide oil and gas reserves inventory, civil unrest and conflicts in oil producing countries, oil sanctions, and global economics, among other things. When drilling rigs are active they consume products and services produced by the oilfield services companies like ours. Accordingly, rig count and well count are important business barometers for the drilling industry and its suppliers, as they may reflect the relative strength and stability of energy prices and overall market activity. However, 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 months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
Three Months Average Rig Count
(1)
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
United States
|
739
|
|
|
555
|
|
|
Canada
|
299
|
|
|
164
|
|
|
Latin America (includes Mexico)
|
180
|
|
|
233
|
|
|
Asia Pacific (excludes China onshore)
|
197
|
|
|
186
|
|
|
Middle East (excludes Iran, Iraq and Syria)
|
383
|
|
|
403
|
|
|
Africa (excludes Sudan)
|
79
|
|
|
91
|
|
|
Europe (excludes Russia)
|
100
|
|
|
104
|
|
|
Total
|
1,977
|
|
|
1,736
|
|
_________________________________
|
|
|
|
(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.
|
Outlook
After nine consecutive quarters of activity decline in our industry, the business environment showed signs of stabilization in the fourth quarter of 2016 and the first quarter of 2017. WTI and Brent crude oil prices have recently steadied around $50/bbl, but volatility could return at any time, as evidenced by recent downward commodity price movements. North American rig count continues to improve, with an approximately 35% increase since the fourth quarter 2016; however, international and offshore rig counts remain stagnant.
The global outlook remains mixed, and we remain cautious. Accordingly, we have maintained many of the austerity measures introduced at the onset of the decline, while we begin to realize benefits from our overhead and support structure optimization efforts. Although our core business is modestly recovering and the strong initiatives undertaken are contributing, we will continue to face significant challenges as the new market forms.
As we transition to the new market, we remain highly focused on returning to a quarterly breakeven EBITDA run rate while minimizing cash usage over the next several quarters. The key driver to this in the short term are growth in CDS land Evolution adoption and market share; acceleration of new and used CDS equipment and accessories sales; continued gain in offshore tubular services market share in our established markets; and acceleration of all AMSS offerings as rigs reactivate.
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, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Segment revenue
|
|
|
|
|
Products revenue
|
|
|
|
|
Product sales
|
$
|
5,946
|
|
|
$
|
4,202
|
|
|
Rental services
|
5,289
|
|
|
6,572
|
|
|
Aftermarket sales and services
|
8,853
|
|
|
5,800
|
|
|
|
20,088
|
|
|
16,574
|
|
|
Tubular Services revenue
|
|
|
|
|
Land
|
$
|
10,335
|
|
|
$
|
10,794
|
|
|
Offshore
|
4,219
|
|
|
7,421
|
|
|
CDS, Parts & Accessories
|
2,103
|
|
|
664
|
|
|
|
16,657
|
|
|
18,879
|
|
|
|
|
|
|
|
Revenue
|
$
|
36,745
|
|
|
$
|
35,453
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
|
|
Products
|
$
|
(884
|
)
|
|
$
|
(39,223
|
)
|
|
Tubular Services
|
(5,698
|
)
|
|
(6,021
|
)
|
|
Research and Engineering
|
(809
|
)
|
|
(1,573
|
)
|
|
Corporate and Other
|
(5,494
|
)
|
|
(7,940
|
)
|
|
Operating loss
|
$
|
(12,885
|
)
|
|
$
|
(54,757
|
)
|
Products Segment
Demand for our top drives and pipe handling products, rental services, and aftermarket sales and service depends primarily upon the level of drilling activity and capital spending of drilling contractors and E&P companies. Revenues from our Products segment are generated through top drive and automated pipe handling new and used equipment sales, rentals, and field and in-house aftermarket sales and service. Our rental fleet of top drive and pipe handling equipment is highly mobile, where we install the units on the customers' rig sites 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. When we sell proprietary used equipment from our rental fleet we record revenue and cost of sales. Aftermarket sales and service consists of part sales and in-house shop and callout field services. We provide these services for top drives and automated pipe handling equipment we manufacture and for selected models of our competitors.
Q1 2017
as compared with
Q1 2016
Product sales
Revenue
increased
by
$1.7 million
, or
42%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to increased demand resulting from increased rig count and crude oil prices. Decreased sales in the United States were more than offset by strong sales in Russia. In the
three months ended
March 31, 2017
, we sold a total of
six
top drives, of which
five
were new and
one
was used and subsequently sold from our rental fleet. In the same period in
2016
, we sold a total of
six
top drives, of which
three
were new and
three
were used and subsequently sold from our rental fleet.
Rental Services
Revenues
decreased
by
$1.3 million
, or
20%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to the depressed market demand within the industry. At
March 31, 2017
utilization was 14% due to fewer operating days and fewer contracted units. Decreased sales in Latin America were partially offset by strong sales in Russia.
Aftermarket Sales and Services
Revenues
increased
by
$3.1 million
, or
53%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to increased demand for parts and services in Russia and the United States.
Operating Loss
Products operating loss
decreased
by
$38.3 million
, or
98%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to $33.6 million in impairment of long-lived assets during the three months ended March 31, 2016. Increases in revenue and reductions in operating expenses derived from our restructuring and cost rationalization efforts generated a $4.7 million improvement. Reductions in workforce and offices closures resulted in charges of
$0.1 million
and
$0.7 million
for the
three months ended
March 31, 2017
and
2016
, respectively.
Tubular Services Segment
We generate revenues in our Tubular Services segment through a suite of proprietary service offerings and conventional casing and tubing running services for both onshore and offshore markets, typically contracted on a callout basis; and sales of our proprietary CDS and accessories. Our services include personnel and equipment, including the CDS, power tongs, pick up/lay-down units, torque monitoring, specialist cementing heads and hammering services for new well construction, completion, and workover or re-entry operations.
Q1 2017
as compared with
Q1 2016
Land
Revenues
decreased
by
$0.5 million
, or
4%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to decreased activity and demand in North America.
Offshore
Revenue
s
decreased
by
$3.2 million
, or
43%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to a decrease in the number of operating rigs within the United States and Indonesia during the
first
quarter of
2017
.
CDS, Parts, & Accesso
ries
Revenues
increased
by
$1.4 million
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to increased CDS equipment and part sales due to growing market acceptance of these tools for international operations. During the
three months ended
March 31, 2017
, we had $0.4 million of sales for CDS equipment sales, compared to $0.1 million of sales during the same period in
2016
.
Operating Loss
Tubular Services operating loss
decreased
by
$0.3 million
, or
5%
, for the
three months ended
March 31, 2017
as compared to
2016
primarily due to the aforementioned declines in revenue offset by cost reductions achieved through cost rationalization efforts undertaken. Reductions in workforce and offices closures resulted in charges of
$0.3 million
and
$1.4 million
for the
three months ended
March 31, 2017
and
2016
, respectively.
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 increased 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 2017
as compared with
Q1 2016
In line with the industry downturn, operating expenses
decreased
by
$0.8 million
, or
49%
, during the
three months ended
March 31, 2017
as compared to
2016
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 decreased to
15%
from
22%
for the
three months ended
March 31, 2017
and
2016
, respectively.
Q1 2017
as compared with
Q1 2016
Operating expenses
decreased
by
$2.4 million
, or
31%
, during the
three months ended
March 31, 2017
as compared to
2016
primarily due to cost saving measures implemented in 2016 and 2015. The benefits of these cost saving measures are visible primarily in personnel cost and various austerity measures.
Other Expense (Income)
Q1 2017
as compared with
Q1 2016
Interest Expense
Interest expense
decreased
by
$0.4 million
during the
three months ended
March 31, 2017
as compared to
2016
.
Foreign Exchange Loss (Gain)
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 was a gain of
$0.1 million
and a loss of
$1.2 million
for the
three months ended
March 31, 2017
and
2016
, respectively. The change was primarily due to losses relating to exchange rate changes and reductions in net monetary assets subject to revaluation in Argentina in the
three months ended
March 31, 2016
.
Income Tax Provision
Income tax provision
increased
by
$0.5 million
for the
three months ended
March 31, 2017
as compared to the same period in
2016
. Our effective tax rates were a
8%
expense
and a
1%
expense
for the
three months ended
March 31, 2017
and
2016
, 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. We had cash and cash equivalents of
$83.1 million
and
$91.5 million
at
March 31, 2017
and
December 31, 2016
, respectively. We believe our current cash balance is adequate to conduct our business for at least the next 12 months.
Off-Balance Sheet Arrangements
In addition to the lease commitments as described in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our
2016
Annual Report on Form 10-K, as of
March 31, 2017
, our off-balance sheet arrangements included letters of credit as noted below.
Letters of Credit
We are contingently liable under letters of credit and similar instruments that we enter in connection with the importation of equipment into international countries and to secure our performance on certain contracts. As of
March 31, 2017
and
December 31, 2016
, our total exposure under outstanding letters of credit was
$2.7 million
. Of this amount,
$2.0 million
and
$2.5 million
were secured by restricted cash on deposit at
March 31, 2017
and
December 31, 2016
, respectively.
Critical Accounting Estimates and Policies
Accounting policies are described in the notes to the audited consolidated financial statements and in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of the
2016
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
2016
Annual Report on Form 10−K. During the
three months ended
March 31, 2017
, there have been no material changes to the types of judgments, assumptions, and estimates upon which our critical accounting estimates are based.