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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 000-19580
T-3 ENERGY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0697390
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
13111 NORTHWEST FREEWAY, SUITE 500, HOUSTON, TEXAS 77040
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code): (713) 996-4110
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No[X]
At May 15, 2003, the registrant had 10,581,669 shares of common stock
outstanding.
TABLE OF CONTENTS
FORM 10-Q
PART I
Item Page
- ---- ----
1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002........................................................................ 1
Consolidated Statements of Operations for the Three Months Ended
March 31, 2003 and 2002.................................................................. 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002.................................................................. 3
Notes to Consolidated Financial Statements................................................. 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 7
3. Quantitative and Qualitative Disclosures about Market Risk...................................... 14
4. Controls and Procedures......................................................................... 15
PART II
1. Legal Proceedings............................................................................... 16
2. Changes in Securities and Use of Proceeds ...................................................... 16
3. Defaults Upon Senior Securities................................................................. 16
4. Submission of Matters to a Vote of Security Holders............................................. 16
5. Other Information .............................................................................. 16
6. Exhibits and Reports on Form 8-K ............................................................... 16
i
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 280 $ 857
Accounts receivable - trade, net.................................... 21,869 22,519
Inventories, net.................................................... 18,513 18,430
Notes receivable, current portion................................... 2,440 696
Deferred income taxes............................................... 3,199 2,595
Prepaids and other current assets................................... 4,580 5,262
---------- ----------
Total current assets........................................... 50,881 50,359
Property and equipment, net......................................... 29,612 29,927
Notes receivable, less current portion.............................. 1,681 5,053
Goodwill, net....................................................... 96,634 96,986
Other intangible assets, net........................................ 3,395 3,663
Other assets........................................................ 523 611
---------- ----------
Total assets........................................................ $ 182,726 $ 186,599
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade............................................ $ 10,771 $ 14,433
Accrued expenses and other.......................................... 7,847 7,781
Current maturities of long-term debt................................ 3,472 3,463
---------- ----------
Total current liabilities...................................... 22,090 25,677
Long-term debt, less current maturities............................. 26,423 26,441
Other long-term liabilities......................................... 1,092 1,108
Deferred income taxes............................................... 2,827 2,764
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 25,000,000 shares
authorized, no shares issued or outstanding................. --- ---
Common stock, $.001 par value, 50,000,000 shares authorized,
10,581,669 shares issued and outstanding at March 31, 2003
and December 31, 2002 ...................................... 11 11
Warrants, 517,862 and 3,489,079 issued and outstanding at
March 31, 2003 and December 31, 2002, respectively ........ 853 938
Additional paid-in capital..................................... 122,923 122,833
Retained earnings.............................................. 6,507 6,827
---------- ----------
Total stockholders' equity.................................. 130,294 130,609
---------- ----------
Total liabilities and stockholders' equity.......................... $ 182,726 $ 186,599
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
1
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Revenues:
Products........................................................... $ 26,585 $ 27,946
Services........................................................... 9,294 8,464
------------ ------------
35,879 36,410
Cost of revenues:
Products........................................................... 19,753 20,609
Services........................................................... 6,543 5,230
------------ ------------
26,296 25,839
Gross profit........................................................... 9,583 10,571
Selling, general and administrative expenses........................... 7,561 7,569
------------ ------------
Income from operations................................................. 2,022 3,002
Interest expense....................................................... 774 980
Interest income........................................................ 56 180
Write-down of acquired note receivable................................. 1,703 ---
Other income, net...................................................... (11) (11)
------------ ------------
Income (loss) before provision for income taxes........................ (388) 2,213
Provision (benefit) for income taxes................................... (68) 906
------------ ------------
Net income (loss)...................................................... $ (320) $ 1,307
============ ============
Earnings (loss) per common share:
Basic.............................................................. $ (.03) $ .14
============ ============
Diluted............................................................ $ (.03) $ .14
============ ============
Weighted average common shares outstanding:
Basic.............................................................. 10,582 9,626
============ ============
Diluted............................................................ 10,582 9,626
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss).......................................................... $ (320) $ 1,307
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense...................................................... 80 ---
Depreciation and amortization......................................... 1,021 953
Amortization of deferred loan costs................................... 222 212
Write-down of acquired note receivable................................ 1,703 ---
Deferred taxes........................................................ (541) 85
Amortization of stock compensation.................................... 5 7
Changes in assets and liabilities:
Accounts receivable - trade......................................... 570 3,609
Inventories, net.................................................... (83) (119)
Prepaids and other current assets................................... 878 (467)
Notes receivable.................................................... 54 24
Other assets........................................................ 89 (380)
Accounts payable - trade............................................ (3,662) (5,375)
Accrued expenses and other.......................................... 75 (532)
---------- ----------
Net cash provided by (used in) operating activities........................ 91 (676)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment..................................... (571) (949)
Proceeds from sales of property and equipment........................... 24 28
---------- ----------
Net cash used in investing activities...................................... (547) (921)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt........................................... 859 370
Net repayments under revolving credit facility......................... --- (11,000)
Payments on long-term debt............................................. (868) (1,594)
Debt financing costs................................................... (112) (4)
Proceeds from sales of common stock.................................... --- 10,000
---------- ----------
Net cash used in financing activities...................................... (121) (2,228)
---------- ----------
Net decrease in cash and cash equivalents.................................. (577) (3,825)
Cash and cash equivalents, beginning of year............................... 857 5,395
---------- ----------
Cash and cash equivalents, end of period................................... $ 280 $ 1,570
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have been included.
These financial statements include the accounts of T-3 Energy Services, Inc.,
and subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. Operating results for the three months ended
March 31, 2003, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No.
123, Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. As permitted under SFAS No. 123, the
Company uses the intrinsic value method of accounting established by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to
account for its stock-based compensation programs. Accordingly, no compensation
expense is recognized when the exercise price of an employee stock option is
equal to the common share market price on the grant date. The following
illustrates the pro forma effect on net income (loss) and earnings (loss) per
share if the Company had applied the fair value recognition provisions of SFAS
No 123:
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Net income (loss), as reported.......................... $ (320) $ 1,307
Total stock-based employee compensation expense
determined under fair value method for all awards
net of related tax effects......................... (80) (65)
--------- ---------
Net income (loss), as adjusted.......................... $ (400) $ 1,242
Basic EPS:
As reported........................................... $ (0.03) $ 0.14
As adjusted........................................... $ (0.04) $ 0.13
Diluted EPS:
As reported........................................... $ (0.03) $ 0.14
As adjusted........................................... $ (0.04) $ 0.13
For the purpose of estimating the fair value disclosures above, the fair
value of each stock option has been estimated on the grant date with a
Black-Scholes option pricing model. The following assumptions for 2003 and 2002
were computed on a weighted average basis: risk-free interest rate of 3.76% and
4.92%, expected volatility of 43.60% and 34.50%, expected life of 4 years for
each period and no expected dividends. The effects of applying SFAS No. 123 may
not be indicative of future amounts since additional future awards are
anticipated and the estimation of values involves subjective assumptions which
may vary materially as a result of actual events.
4
Write-down of Acquired Note Receivable
Prior to the merger of the Company and Industrial Holdings, Inc. (IHI), IHI
sold a subsidiary, Beaird Industries Inc., to an entity controlled by Don Carlin
and Robert Cone, and IHI received a $3.5 million promissory note from the former
subsidiary as the purchase price. Mr. Carlin is a former director, and Mr. Cone
is a former executive officer and director of the Company. During the first
quarter of 2003, the Company was informed by the payor of the note of its
inability to make timely interest payments and to continue as a going concern
unless it restructures its debt obligations. The Company is negotiating revised
terms with the payor in an effort to maximize the value and collection of this
note. During the first quarter of 2003, the Company reserved approximately 50%
of the note, because management believes that the note's net realizable value is
approximately $1.7 million.
2. INVENTORIES
Inventories consist of the following (dollars in thousands):
MARCH 31, DECEMBER 31,
2003 2002
------------ -----------
Raw materials................................... $ 3,816 $ 4,115
Work in process................................. 3,401 3,357
Finished goods and component parts.............. 11,296 10,958
------------ ------------
$ 18,513 $ 18,430
============ ============
3. NEWLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 requires
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse the risks and rewards
of ownership among their owners and other parties involved. The provisions of
FIN No. 46 are applicable immediately to all variable interest entities created
after January 31, 2003 and variable interest entities in which an enterprise
obtains an interest in after that date, and for variable interest entities
created before this date, the provisions are effective July 1, 2003. The Company
adopted this standard in 2003 and there has been no impact on its financial
disclosures, financial condition and results of operations.
4. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share is the same as basic but
includes dilutive stock options and warrants using the treasury stock method.
The following table reconciles the numerators and denominators of the basic
and diluted per common share computations for net income (loss) for the three
months ended March 31, 2003 and 2002, as follows (in thousands except per share
data):
5
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Numerator:
Net income (loss)............................................ $ (320) $ 1,307
========= =========
Denominator:
Weighted average common shares outstanding-- basic........... 10,582 9,626
Shares for dilutive stock options............................ -- --
--------- ---------
Weighted average common shares outstanding and
Assumed conversions-- diluted.............................. 10,582 9,626
========= =========
Basic earnings (loss) per common share ......................... $ (.03) $ .14
Diluted earnings (loss) per common share ....................... $ (.03) $ .14
For the three months ended March 31, 2003, there were 620,213 options and
517,862 warrants that were not included in the computation of diluted earnings
per share because their inclusion would have been anti-dilutive. For the three
months ended March 31, 2002, there were 562,350 options and 3,489,079 warrants
that were not included in the computation of diluted earnings per share because
their inclusion would have been anti-dilutive. The Company's Class B, C and D
warrants totaling 2,971,217 warrants expired on January 14, 2003.
5. REPORTABLE SEGMENTS:
The Company's determination of reportable segments considers the strategic
operating units under which the Company sells various types of products and
services to various customers.
The accounting policies of the segments are the same as those of the
Company. The Company evaluates performance based on income from operations
excluding certain corporate costs not allocated to the segments. Inter-segment
revenues are not material. Substantially all revenues are from domestic sources
and all assets are held in the United States. Segment information for the three
months ended March 31, 2003 and 2002 is as follows:
(DOLLARS IN THOUSANDS)
PRESSURE
CONTROL PRODUCTS DISTRIBUTION CORPORATE CONSOLIDATED
THREE MONTHS ENDED MARCH 31:
2003
Revenues ............................ $ 17,105 $ 9,008 $ 9,766 $ --- $ 35,879
Depreciation and amortization........ 546 221 86 168 1,021
Income (loss) from operations........ 2,799 120 531 (1,428) 2,022
Capital expenditures................. 133 178 74 186 571
2002
Revenues ............................ $ 16,464 $ 10,422 $ 9,524 $ --- $ 36,410
Depreciation and amortization........ 556 225 90 82 953
Income (loss) from operations........ 3,009 477 635 (1,119) 3,002
Capital expenditures................. 201 302 9 437 949
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion of the Company's historical results of operations
and financial condition for the three months ended March 31, 2003 and 2002
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this Form 10-Q and our financial statements
and related management's discussion and analysis of financial condition and
results of operations for the year ended December 31, 2002 included in our
Annual Report on Form 10-K.
The Company operates in three segments. The Pressure Control segment
manufactures, remanufactures and repairs high pressure, severe service products,
including valves, chokes, actuators, blowout preventers, manifolds and wellhead
equipment. The Products segment manufactures and repairs pumps, electric motors
and generators, manufactures specialty bolts and fasteners, fabricates equipment
and components for use in the exploration and production of oil and gas and
provides specialty machining for the repair and remanufacture of natural gas and
diesel engines. The Distribution segment engages in the specialty distribution
of pipes, valves, stud bolts, gaskets and other ancillary products. The
Company's products and services are sold primarily to customers in the upstream
and downstream oil and gas industry located in the Texas and Louisiana Gulf
Coast region.
Demand for the Company's products and services is cyclical and is dependent
upon activity in the oil and gas industry, especially in the Gulf of Mexico and
the United States regions where our products and services are primarily sold.
Over the last several years, the United States drilling rig count has fluctuated
due to world economic and political trends that influence the supply and demand
for energy, the price of oil and natural gas and the level of exploration and
drilling for those commodities. The level of exploration and production is
dependent on current and projected oil and natural gas prices. In the second
half of 2001 and continuing through the first quarter of 2002, natural gas
prices declined and the United States and worldwide rig counts decreased while
oil prices were volatile throughout that same time period. Natural gas prices
began to rise somewhat late in the second quarter of 2002 and remained
relatively stable throughout the remainder of 2002, before increasing
substantially in the first quarter of 2003. In addition, the United States
drilling rig count stabilized in the second quarter of 2002, increased slightly,
and then remained stable throughout the remainder of 2002, before increasing in
the first quarter of 2003. However, the Gulf of Mexico rig count for the first
quarter of 2003 was slightly below the rig count for the same period 2002.
Management believes that continuing price and general economic uncertainty will
impact near-term activity levels in the second quarter of 2003, with the
potential for improvement in mid to late 2003.
7
RESULTS OF OPERATIONS
The following table sets forth certain operating statement data for each of
the Company's segments for each of the periods presented (in thousands):
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Revenues:
Pressure Control................................................ $ 17,105 $ 16,464
Products........................................................ 9,008 10,422
Distribution.................................................... 9,766 9,524
---------- ----------
35,879 36,410
---------- ----------
Cost of revenues:
Pressure Control................................................ 11,688 10,649
Products........................................................ 7,474 8,393
Distribution.................................................... 7,134 6,797
---------- ----------
26,296 25,839
---------- ----------
Gross profit:
Pressure Control................................................ 5,417 5,815
Products........................................................ 1,534 2,029
Distribution.................................................... 2,632 2,727
---------- ----------
9,583 10,571
---------- ----------
Selling, general and administrative expenses:
Pressure Control................................................ 2,618 2,806
Products........................................................ 1,414 1,552
Distribution.................................................... 2,101 2,092
Corporate....................................................... 1,428 1,119
---------- ----------
7,561 7,569
---------- ----------
Income (loss) from operations:
Pressure Control................................................ 2,799 3,009
Products........................................................ 120 477
Distribution.................................................... 531 635
Corporate....................................................... (1,428) (1,119)
---------- ----------
$ 2,022 $ 3,002
========== ==========
Three Months ended March 31, 2003 Compared with Three Months ended March 31,
2002
Revenues. On a consolidated basis, revenues decreased $0.5 million, or 1%,
in 2003 compared to 2002. Although drilling activity and oil and natural gas
prices increased from period to period, the continued softness in the Gulf of
Mexico rig count was a major cause of the decline in revenues; however, this
decrease was partially offset by increased revenues resulting from an improved
United States onshore rig count and increased market penetration for our
pressure control products and services.
Revenues for the Pressure Control segment increased $0.6 million, or 4%, in
2003 compared to 2002. The increase in revenues was primarily attributable to an
increase in market share for our pressure control products and services and
slight revenue increases associated with the higher United States onshore rig
count. These revenues were partially offset by the continued softness in Gulf of
Mexico drilling rig activity.
Revenues for the Products segment decreased $1.4 million, or 14%, in 2003
compared to 2002. This decrease was primarily attributable to lower revenues
from artificial lift systems and larger fabricated equipment and components for
use in the exploration and production of oil and gas, especially in the Gulf of
Mexico.
8
Revenues for the Distribution segment increased $0.2 million, or 3%, in
2003 compared to 2002 due to certain large customer projects.
Cost of Revenues. On a consolidated basis, cost of revenues increased $0.5
million, or 2%, in 2003 compared to 2002. Gross profit as a percentage of
revenues was 27% in 2003 compared to 29% in 2002. Gross profit margin was lower
on a consolidated basis in 2003 compared to 2002 because of continued pricing
pressure for our products and services, particularly those sold in the Gulf of
Mexico.
Cost of revenues for the Pressure Control segment increased $1.0 million,
or 10%, in 2003 compared to 2002. The increase is primarily a result of the
increase in revenues described above. Gross profit as a percentage of revenues
was 32% in 2003 compared to 35% in 2002. The decrease in gross margin was due to
pricing pressure for our products and services, and the temporarily higher than
normal manufacturing costs of one of our new manufactured pressure control
products. We anticipate that this new product will benefit our operations in
future periods.
Cost of revenues for the Products segment decreased $0.9 million, or 11%,
in 2003 compared to 2002. Gross profit as a percentage of revenues was 17% in
2003 compared to 19% in 2002. Gross profit margin decreased primarily as a
result of pricing pressure for our products and services and a temporary
increase in costs associated with delivery requirements for certain fastener
products to some of our customers.
Cost of revenues for the Distribution segment increased $0.3 million, or
5%, in 2003 compared to 2002, primarily due to the increase in revenues in 2003.
Gross profit as a percentage of revenues was 27% in 2003 compared to 29% in
2002. Gross profit margin decreased primarily because of pricing pressure for
our products, temporary startup costs associated with the sale and distribution
of a new valve automation product line and temporary initial costs associated
with a new distribution facility located in Houston, Texas. We anticipate that
this new product line and location will benefit our operations in future
periods.
Selling, General and Administrative Expenses. On a consolidated basis,
selling, general and administrative expenses remained relatively constant in
2003 when compared to 2002. As a percentage of revenues, selling, general and
administrative expenses remained comparable at 21% in both 2003 and 2002.
Selling, general and administrative expenses for the Pressure Control
segment decreased $0.2 million, or 7%, in 2003 compared to 2002. Selling,
general and administrative expenses as a percentage of revenues were 15% and 17%
for 2003 and 2002, respectively, primarily due to cost reduction strategies.
Selling, general and administrative expenses for the Products segment
decreased $0.1 million, or 9%, in 2003 compared to 2002. As a percentage of
revenues, selling, general and administrative expenses increased from 15% in
2002 to 16% in 2003, primarily because as revenues decreased, fixed selling,
general and administrative expenses did not decrease proportionally.
Selling, general and administrative expenses for the Distribution segment
remained relatively constant in 2003 compared to 2002. As a percentage of
revenues, selling, general and administrative expenses remained comparable at
22% in both 2003 and 2002.
Selling, general and administrative expenses for the Corporate operations
increased $0.3 million, or 28%, in 2003 compared to 2002. This was primarily
attributable to an increase in costs associated with our information technology
network and the integration of the former IHI operating units into T-3.
Interest Income. Interest income was generated from seller notes receivable
that arose in conjunction with the sale by Industrial Holdings, Inc. of several
business units in 2001.
Write-down of Acquired Note Receivable. In the first quarter of 2003, the
Company wrote down a note receivable to its estimated net realizable value. The
note was acquired in conjunction with the disposal by Industrial Holdings, Inc.
of Beaird Industries, Inc. prior to the completion of its merger with T-3.
During the first quarter of 2003, the Company was informed by the payor of the
note of its inability to make timely interest payments and to continue as a
going concern unless it restructures its debt obligations. The Company is
9
negotiating terms with the payor in an effort to maximize the value and
collection of this note. A reserve of approximately 50% of the note was recorded
because we currently believe that the note's net realizable value is
approximately $1.7 million.
Income Taxes. Income tax (benefit) expense for 2003 was ($0.07) million as
compared to $0.9 million in 2002. The effective tax benefit rate was 18% in 2003
compared to an effective tax rate of 41% in 2002. The tax benefit in 2003 was
offset by the provision for state taxes and non-deductible expenses that
significantly reduced the tax benefit. Included within the net tax benefit of
($0.07) million in 2003 was a ($0.5) million deferred tax benefit arising from
the write-down of a note receivable, which is not deductible until realized.
Net Income (Loss). On a consolidated basis, net income (loss) was ($0.3)
million in 2003 compared with $1.3 million in 2002 as a result of the foregoing
factors.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had working capital of $28.8 million,
current maturities of long-term debt of $3.5 million, long-term debt of $26.4
million and stockholders' equity of $130.3 million. Historically, our principal
liquidity requirements and uses of cash have been for debt service, capital
expenditures, working capital and acquisition financing, and its principal
sources of liquidity and cash have been from cash flows from operations,
borrowings under long-term debt arrangements and issuances of equity securities.
The Company has historically financed acquisitions through bank borrowings,
sales of equity and convertible notes (primarily to First Reserve) and
internally generated funds.
Net Cash Provided by (Used in) Operating Activities. For the three months
ended March 31, 2003, net cash provided by operating activities was $0.09
million compared to $0.7 million used by operating activities in the same period
in 2002. Cash provided by operations increased in 2003 as compared to 2002
because of an increase in positive adjustments to net income for non-cash
expenses, primarily the write-down of a note receivable, and a net increase in
cash provided by working capital accounts, primarily due to a reduction in
prepaid expenses and other current assets.
Net Cash Used in Investing Activities. Principal uses of cash are for
capital expenditures and acquisitions. Investing activities used cash of $0.5
million in the three months ended March 31, 2003 compared to $0.9 million in the
same period in 2002. For the three months ended March 31, 2003 and 2002, the
Company made capital expenditures of approximately $0.6 million and $0.9
million, respectively.
Net Cash Used in Financing Activities. Sources of cash from financing
activities include borrowings under credit facilities and sales of equity
securities. Financing activities used net cash of $0.1 million in the three
months ended March 31, 2003 compared to $2.2 million in the same period in 2002.
During 2003, the Company had borrowings of $0.9 million under its long term debt
credit facilities compared to $0.4 million during 2002. During 2003, the Company
had principal payments of $0.9 million on its long-term debt, exclusive of its
revolving credit facility, compared to $1.6 million in 2002. During 2003, the
Company had no net borrowings or repayments on its revolving credit facility
compared to net repayments of $11.0 million in 2002. During 2002, the Company
had proceeds of $10.0 million from the sale of equity securities to its largest
shareholder, First Reserve Fund VIII. These proceeds were used to reduce debt.
10
Principal Debt Instruments. As of March 31, 2003, the Company had an
aggregate of $29.9 million borrowed under its principal bank credit facility and
debt instruments entered into or assumed in connection with acquisitions, as
well as other bank financings. As of March 31, 2003, the Company had $19.9
million in borrowing capacity under its revolving credit facility; however, as a
result of restrictions imposed by the funded debt-to-EBITDA ratio covenant, the
Company's availability was limited to $9.4 million.
On December 17, 2001, the Company entered into a senior credit facility
with Wells Fargo, N.A. and General Electric Capital Corporation maturing
December 17, 2004. Concurrently, the Company entered into a $12.0 million
subordinated term loan with Wells Fargo Energy Capital, Inc. maturing December
17, 2005. The senior credit facility includes a revolving credit facility of the
lesser of a defined borrowing base (based upon 85% of eligible accounts
receivable and 50% of eligible inventory) or $41.5 million, a term loan of $16.5
million and an optional facility for up to an additional $30.0 million in the
form of a revolving credit commitment for future acquisitions based upon
specific criteria. The senior credit facility's term loan is payable in equal
quarterly installments of $0.8 million. The applicable interest rate of the
senior credit facility is governed by the Company's trailing-twelve-month funded
debt-to-EBITDA ratio and ranges from prime plus 1.25% or LIBOR plus 2.25% to
prime plus 2.00% or LIBOR plus 3.00%. At March 31, 2003, the senior credit
facility bore interest at LIBOR plus 2.75%, with interest payable quarterly. The
Company is required to prepay the senior credit facility under certain
circumstances with the net cash proceeds of asset sales, insurance proceeds,
equity issuances and institutional debt, and commencing April 2003, if, and for
so long as, our funded debt-to-EBITDA ratio for the previous fiscal year is 2.25
to 1 or greater, with 50% of excess cash flow as determined under the senior
credit agreement. The senior credit facility provides, among other covenants and
restrictions, that the Company comply with certain financial covenants,
including a limitation on capital expenditures, a minimum fixed charge coverage
ratio, minimum consolidated tangible net worth and a maximum funded
debt-to-EBITDA ratio. As of March 31, 2003, the Company was in compliance with
the covenants under the senior credit facility. The senior credit facility is
collateralized by substantially all of the Company's assets.
The subordinated term loan bears interest at a fixed rate of 9.50% with
interest payable quarterly. The principal balance is due in full on December 17,
2005. The effective interest rate, including amortization of loan costs, is
10.7%. The subordinated term loan provides, among other restrictions, that the
Company maintain a minimum fixed charge coverage ratio and a maximum funded
debt-to-EBITDA ratio. Under the terms of its senior credit facility, the Company
is not currently permitted to make principal payments on the subordinated term
loan. As of March 31, 2003, the Company was in compliance with the covenants
under the subordinated term loan. The subordinated term loan is collateralized
by a second lien on substantially all of the Company's assets.
Management believes that cash generated from operations and amounts
available under its senior credit facility and from other sources of debt will
be sufficient to fund existing operations, working capital needs, capital
expenditure requirements and financing obligations. Management also believes any
significant increase in capital expenditures caused by any need to increase
manufacturing capacity can be funded from operations or through debt financing.
The Company intends to pursue additional acquisition candidates, but the
timing, size or success of any acquisition effort and the related potential
capital commitments cannot be predicted. The Company expects to fund future cash
acquisitions primarily with cash flow from operations and borrowings, including
the un-borrowed portion of its senior credit facility or new debt issuances, but
may also issue additional equity either directly or in connection with an
acquisition. However, acquisition funds may not be available at terms acceptable
to the Company.
11
A summary of our outstanding contractual obligations and other commercial
commitments at March 31, 2003 is as follows (in thousands):
Payments Due by Period
----------------------
Less than 1
Contractual Obligations Total Year 1-3 Years 4-5 Years After 5 Years
----------------------- ----- ---- --------- --------- -------------
Long-term debt $ 29,895 $ 3,472 $ 25,752 $ 163 $ 508
Operating leases 5,196 1,634 2,183 1,184 195
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 35,091 $ 5,106 $ 27,935 $ 1,347 $ 703
========== ========== ========== ========== ==========
FORWARD-LOOKING INFORMATION AND RISK FACTORS
Certain information in this Annual Report on Form 10-Q includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can
identify these forward-looking statements by the words "expects," "projects,"
"believes," "anticipates," "intends," "plans," "budgets," "predicts,"
"estimates" and similar expressions.
The Company has based the forward-looking statements relating to its
operations on its current expectations, and estimates and projections about the
Company and about the industries in which it operates in general. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions. In addition, many of these forward-looking
statements are based on assumptions about future events that may prove to be
inaccurate. Actual outcomes and results may differ materially from what the
Company has expressed or forecast in the forward-looking statements.
BECAUSE THE COMPANY DEPENDS ON THE OIL AND GAS INDUSTRY, A DECLINE IN OIL AND
GAS PRICES OR A DECREASE IN INDUSTRY ACTIVITY WILL NEGATIVELY IMPACT ITS
PROFITS.
The Company is, and will continue to be, dependent upon the oil and gas
industry and the level of oil and gas exploration and production. The level of
exploration and production depends upon the prevailing view of future product
prices. Many factors affect the supply and demand for oil and gas and therefore
influence product prices, including:
o the level of production from known reserves;
o weather conditions;
o the actions of the Organization of Petroleum Exporting Countries;
o political instability in the Middle East and elsewhere;
o the level of oil and gas inventories;
o the cost of producing oil and gas;
o the level of drilling activity;
o worldwide economic activity; and
o environmental regulation.
If there is a significant reduction in demand for drilling services, in
cash flows of drilling contractors or production companies or in drilling or
well servicing rig utilization rates, then demand for the Company's products
will decline.
12
THE OILFIELD SERVICE INDUSTRY IN WHICH THE COMPANY OPERATES IS HIGHLY
COMPETITIVE, WHICH MAY RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE
OR PROFIT MARGINS.
The oilfield service industry in which the Company operates is highly
competitive. Many of its competitors have greater financial and other resources
than it does. Each of its operating units is subject to competition from a
number of similarly sized or larger businesses. Factors that affect competition
include price, quality and customer service. Strong competition may result in a
loss of market share and a decrease in revenue and profit margins.
THE COMPANY'S INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
The Company's business exposes it to possible claims for personal injury or
death resulting from the use of its products. The Company carries comprehensive
insurance, subject to deductibles, at levels it believes are sufficient to cover
existing and future claims. However, the Company could be subject to a claim or
liability that exceeds its insurance coverage. In addition, the Company may not
be able to maintain adequate insurance coverage at rates it believes are
reasonable.
THE COMPANY'S OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
The Company's business is affected by governmental regulations relating to
its industry segments in general, as well as environmental and safety
regulations that have specific application to its business. While management is
not aware of any proposed or pending legislation, future legislation may have an
adverse effect on its business, financial condition, results of operations or
prospects.
The Company is subject to various federal, state and local environmental
laws, including those governing air emissions, water discharges and the storage,
handling, disposal and remediation of petroleum and hazardous substances. The
Company has in the past and will likely in the future incur expenditures to
ensure compliance with environmental laws. Due to the possibility of
unanticipated factual or regulatory developments, the amount and timing of
future environmental expenditures could vary substantially from those currently
anticipated. Moreover, certain of our facilities have been in operation for many
years and, over that time, the Company and other predecessor operators have
generated and disposed of wastes that are or may be considered hazardous.
Accordingly, although the Company has undertaken considerable efforts to comply
with applicable laws, it is possible that environmental requirements or facts
not currently known to management will require unanticipated efforts and
expenditures that cannot be currently quantified.
FOUR OF THE COMPANY'S DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE
ALSO DIRECTORS OR OFFICERS OF FIRST RESERVE CORPORATION. THE RESOLUTION OF THESE
CONFLICTS OF INTEREST MAY NOT BE IN THE COMPANY'S OR ITS SHAREHOLDERS' BEST
INTERESTS.
Four of the Company's directors, Mark E. Baldwin, Thomas R. Denison, Joseph
R. Edwards and Ben A. Guill, are also current directors or officers of First
Reserve Corporation, which controls the general partner of First Reserve Fund
VIII, L.P. This may create conflicts of interest because these directors have
responsibilities to First Reserve Fund VIII and its owners. Their duties as
directors or officers of First Reserve Corporation may conflict with their
duties as directors of the Company regarding business dealings between First
Reserve Corporation and the Company and other matters. The resolution of these
conflicts may not always be in the Company's or its shareholders' best
interests.
THE COMPANY WILL RENOUNCE ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND
FIRST RESERVE FUND VIII AND ITS DIRECTOR DESIGNEES ON THE COMPANY'S BOARD OF
DIRECTORS GENERALLY WILL HAVE NO OBLIGATION TO OFFER THE COMPANY THOSE
OPPORTUNITIES.
First Reserve Fund VIII has investments in other oilfield service companies
that compete with the Company, and First Reserve Corporation and its affiliates,
other than T-3, may invest in other such companies in the future. The Company
refers to First Reserve Corporation, its other affiliates and its portfolio
companies as the First
13
Reserve group. The Company's certificate of incorporation provides that, so long
as First Reserve Corporation and its affiliates continue to own at least 20% of
the Company's common stock, the Company renounces any interest in specified
business opportunities. The Company's certificate of incorporation also provides
that if an opportunity in the oilfield services industry is presented to a
person who is a member of the First Reserve group, including any individual who
also serves as First Reserve Fund VIII's director designee of the Company:
o no member of the First Reserve group or any of those individuals
will have any obligation to communicate or offer the opportunity to
the Company; and
o such entity or individual may pursue the opportunity as that entity
or individual sees fit,
unless:
o it was presented to a member of the First Reserve group in that
person's capacity as a director or officer of T-3; or
o the opportunity was identified solely through the disclosure of
information by or on behalf of T-3.
These provisions of the Company's certificate of incorporation may be amended
only by an affirmative vote of holders of at least 80% of its outstanding common
stock. As a result of these charter provisions, the Company's future competitive
position and growth potential could be adversely affected.
THE CONVICTION OF OUR FORMER INDEPENDENT AUDITORS, ARTHUR ANDERSEN LLP, ON
FEDERAL OBSTRUCTION OF JUSTICE CHARGES MAY ADVERSELY AFFECT ARTHUR ANDERSEN
LLP'S ABILITY TO SATISFY ANY CLAIMS ARISING FROM THE PROVISION OF AUDITING
SERVICES TO US AND MAY IMPEDE OUR ACCESS TO THE CAPITAL MARKETS.
Arthur Andersen LLP, which audited our financial statements for the years
ended December 31, 2001 and 2000, was convicted in June 2002 on federal
obstruction of justice charges. In light of the jury verdict and the underlying
events, Arthur Andersen LLP stopped practicing before the Securities and
Exchange Commission and subsequently ceased operations. The Securities and
Exchange Commission has stated that, for the time being subject to certain
conditions, it will continue accepting financial statements audited by Arthur
Andersen LLP. After reasonable efforts, we have not been able to obtain the
consent of Arthur Andersen LLP to the incorporation by reference of its audit
report dated March 8, 2002 into our registration statement Form S-8. As
permitted under Rule 437a promulgated under the Securities Act of 1933, as
amended (Securities Act), we have not filed the written consent of Arthur
Andersen LLP that would otherwise be required by the Securities Act. Because
Arthur Andersen LLP has not consented to the incorporation by reference of their
report in the registration statement, you may not be able to recover amounts
from Arthur Andersen LLP under Section 11(a) of the Securities Act for any
untrue statement of a material fact or any omission to state a material fact, if
any, contained in or omitted from our financial statements included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which
are incorporated by reference in the registration statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
The Company is exposed to some market risk due to the floating interest
rate under its revolving credit facility and certain of its term debt. As of
March 31, 2003, the revolving credit facility had no principal balance and the
variable long-term debt had a principal balance of $15.3 million, all with
interest rates that float with prime or LIBOR. A 1.0% increase in interest rates
could result in a $0.2 million annual increase in interest expense on the
existing principal balances.
14
ITEM 4. CONTROLS AND PROCEDURES
The Company's management team continues to review the Company's internal
controls and procedures and the effectiveness of those controls. Within the 90
days prior to the date of this report, the Company conducted an evaluation,
under the supervision of and with the participation of the Company's management,
including the President and Chief Executive Officer and Vice President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934. Based upon that evaluation, the President and
Chief Executive Officer and Vice President and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's disclosure
procedures subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or taken.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various claims and litigation arising in the
ordinary course of business. While there are uncertainties inherent in the
ultimate outcome of such matters and it is impossible to currently determine the
ultimate costs that may be incurred, the Company believes the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on its consolidated financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
a. Exhibits
Exhibit Number Identification of Exhibit
-------------- -------------------------
10.1 Employment Agreement of Gus D. Halas
99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002 (Chief Executive
Officer)
99.2 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002 (Chief Financial
Officer)
b. Reports on Form 8-K
None
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 15TH DAY OF MAY,
2003.
T-3 ENERGY SERVICES, INC.
By: /s/ STEVEN J. BRADING
--------------------------------------
STEVEN J. BRADING (CHIEF FINANCIAL
OFFICER AND VICE PRESIDENT)
By: /s/ MICHAEL T. MINO
--------------------------------------
MICHAEL T. MINO (CORPORATE
CONTROLLER AND VICE PRESIDENT)
17
CERTIFICATIONS
I, Gus D. Halas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of T-3 Energy
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ GUS D. HALAS
---------------------------------------
Gus D. Halas
Chief Executive Officer
May 15, 2003
18
CERTIFICATIONS
I, Steven J. Brading, certify that:
1. I have reviewed this quarterly report on Form 10-Q of T-3 Energy
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ STEVEN J. BRADING
--------------------------------
Steven J. Brading
Chief Financial Officer
May 15, 2003
19
INDEX TO EXHIBITS
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
- -------------- --------------------------
10.1* -- Employment agreement of Gus D. Halas
99.1* -- Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
99.2* -- Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
- ----------
* Filed herewith.