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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE
CLASS B WARRANT
CLASS C WARRANT
CLASS D WARRANT
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates was
$9,979,314 at June 30, 2003. As of March 30, 2004, there were 10,581,986 shares
of common stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION
14A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 2004
ANNUAL MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF
THIS REPORT ON FORM 10-K.
TABLE OF CONTENTS
FORM 10-K
Item Page
- ---- ----
PART I
1. Business......................................................................... 1
2. Properties....................................................................... 9
3. Legal Proceedings................................................................ 9
4. Submission of Matters to a Vote of Security Holders.............................. 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............ 10
6. Selected Financial Data.......................................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 13
7A. Quantitative and Qualitative Disclosures About Market Risk....................... 26
8. Financial Statements and Supplementary Data...................................... 26
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................ 26
9A. Controls and Procedures.......................................................... 26
PART III
10. Directors and Executive Officers of the Registrant............................... 27
11. Executive Compensation........................................................... 27
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................. 27
13. Certain Relationships and Related Transactions................................... 27
14. Principal Accountant Fees and Services........................................... 27
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 28
i
Unless otherwise indicated, all references to "we," "us," "our," "our
company" or "T-3" include T-3 Energy Services, Inc. and all of its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We manufacture, remanufacture and distribute oilfield products and
services to the upstream and downstream oil and gas industry primarily in the
Gulf Coast region. Our customers include companies engaged in exploration,
production, completion, transportation and processing of oil and gas, and
drilling and well servicing contractors. Our operations are organized into three
business segments: (1) the Pressure Control segment, (2) the Products segment,
and (3) the Distribution segment.
We were formerly a Texas corporation named Industrial Holdings, Inc.
("IHI"). On December 17, 2001, T-3 Energy Services, Inc., a private Delaware
corporation ("former T-3"), merged into IHI, with IHI surviving the merger. In
connection with the merger, the combined company was reincorporated in Delaware
under the name "T-3 Energy Services, Inc." and implemented a one-for-ten reverse
stock split of its common stock.
The merger was treated for accounting purposes as a purchase of IHI by
former T-3 (a reverse acquisition) in a purchase business transaction. The
purchase method of accounting requires that we carry forward former T-3's net
assets at their historical book values and reflect IHI's net assets at their
estimated fair market values, with the fair market value of the purchase
consideration in excess of the fair market value of IHI's identifiable net
assets treated as goodwill. The historical financial data presented in this
Annual Report on Form 10-K includes the historical financial condition and
operating results of former T-3 prior to its merger with IHI. For the year 2001,
the historical financial data also includes the two weeks of operations of the
combined company from December 17, 2001 to December 31, 2001.
We were incorporated in Delaware in November 2001 in connection with
the merger into IHI and the subsequent re-incorporation in Delaware. The
Company's principal executive offices are located at 13111 Northwest Freeway,
Suite 500, Houston, Texas 77040, and its telephone number is (713) 996-4110.
RECENT DEVELOPMENTS
In mid year 2003, we hired a new management team and began to evaluate
our various existing businesses and products to determine T-3's future strategic
direction, and to improve return on stockholder investment and position T-3 for
future growth.
In the fourth quarter of 2003, our new management team completed its
evaluation of each of the business segment's product lines and service revenues
for expected performance in the forthcoming years and formulated a new business
strategy and operating plan. Management based its expectations for T-3's future
performance on current market conditions and on each of the business segment's
potential to maximize the value of the overall business by either expansion or
growth of product lines and services, internally and through acquisitions, and
in both the domestic and international markets. In December 2003, the Board of
Directors approved management's business strategy and 2004 annual operating
plan.
As part of the approved strategy and operating plan, we committed to a
formal plan to sell certain non-core assets within our Products segment.
Accordingly, these assets were reported as discontinued operations and we
recorded a loss of $11.3 million, net of tax, at December 31, 2003 based upon a
pending sales contract. The sale of these assets was consummated in February
2004 for an aggregate purchase price of approximately $7.4 million, subject to
post-closing adjustments. In connection with the disposition, we reevaluated our
expectations for the earnings, growth and contribution of the Products segment
for 2004 and concluded that the segment would still generate revenues and
earnings and contribute positively to T-3's consolidated results of operations
and cash flows but at a much reduced level. This determination was based on the
continued softness in the Gulf of Mexico
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upstream and downstream oil and gas industry as well as lower revenues generated
from larger fabricated equipment and component revenues. In addition, we expect
lower revenues from the electrical motor and generator repair and storage
business. As a result, we recorded an impairment charge of $16.2 million on
goodwill attributable to our Products segment.
BUSINESS STRATEGY
Our business strategy is to maximize stockholder value by building a
diversified oilfield services company founded on products and services that
enhance our customers' operations. We have adopted the strategies described
below:
- integrate our existing operations through appropriate
financial controls and personnel, management information
systems and facilities consolidations;
- focus on excellence in engineering and designing of our
products for our customers;
- enter niche markets for products and services that allow us an
opportunity to perform more effectively and efficiently than
major energy services companies;
- acquire products and services that complement each other and
our existing products and services in the manufacturing,
aftermarket and service arenas;
- expand higher margin aftermarket services by promoting rapid
response to customer needs;
- maintain our focus on the Gulf of Mexico and high pressure gas
markets;
- emphasize inter-company coordination through bundled products
and services, combined sales efforts and inter-company
purchases;
- take advantage of our volume purchasing power;
- expand into international markets through agency agreements or
acquisitions; and
- complete strategic add-on acquisitions.
Currently, we have 20 locations throughout the Gulf Coast region and in
other select oil and gas regions in Texas and Louisiana.
OPERATIONS
PRODUCTS AND SERVICES
Pressure Control. Through our Pressure Control segment, we manufacture,
remanufacture and repair high pressure, severe service products including
valves, chokes, actuators, blow out preventers, manifolds and wellhead
equipment. Pressure Control products and services are sold primarily in the Gulf
Coast region to major and independent oil and gas companies engaged in
exploration, production, completion and transportation of oil and gas, and to
drilling and well servicing contractors. Valves, chokes, actuators and other
pressure control products are used to start, stop and monitor the flow of
liquids and gases and to protect equipment and personnel from excessive or
sudden changes in pressure. Drilling machinery, including drawworks, mud pumps,
rotary tables, blowout preventers and pipe handling equipment, are major
mechanical and pressure control components of drilling and well servicing rigs.
These components are essential to the pumping of fluids, the hoisting,
supporting and rotating of the drill string and the controlling of sudden
changes in well pressure that may cause the well to ignite.
2
Products. Our Products segment remanufactures and repairs pumps,
electric motors and generators, fabricates equipment and components for use in
the exploration and production of oil and gas, provides specialty machining for
the repair and remanufacture of natural gas and diesel engines, and applies
specialty machining and custom coatings to customers' products used primarily in
the oil and gas industry. The Products segment's products and services are sold
primarily to customers in the upstream and downstream oil and gas industry,
located in the Gulf Coast region and North America, as well as to a large Texas
municipality. Pumps are used to move various types of fluids from one point to
the next and are sold based on the fluid type and characteristics, volume to be
pumped and the pressure at which the fluid is to be pumped. Electric motors are
used in numerous applications to provide power to equipment in petrochemical
plants and refineries, offshore production platforms and drilling and well
servicing rigs. Generators are used on offshore platforms on drilling rigs to
generate the electric power necessary for operations. Custom coating value added
services are used by some of our customers, often in conjunction with the other
products and services we provide. In the fourth quarter of 2003, we committed to
a formal plan to sell certain non-core assets that manufacture specialty bolts
and fasteners. These assets qualified as businesses and were thus accounted for
as discontinued operations (see Note 2 to our consolidated financial statements
for additional information).
Distribution. Our Distribution segment is engaged in the specialty
distribution of pipes, valves, stud bolts, gaskets and other ancillary products
primarily to the upstream and downstream oil and gas industry, offshore
fabrication companies and shipyards. Our distribution activities are carried out
through our network of five primary distribution centers along the Louisiana and
Texas Gulf Coast. The products stocked at each location vary depending upon
local customer needs.
For further information on segment reporting, see Note 13 to our
consolidated financial statements.
CUSTOMERS AND MARKETS
The Pressure Control segment sells its products and services to
companies engaged in the exploration, production and pipeline transportation of
oil and gas; companies in the petrochemical, chemical and petroleum refining
industries; and onshore and offshore contract drilling and well servicing
companies.
Within the Products segment, pumps, electric motors and generators,
fabrication, and specialty machining and coating services are sold to customers
in the upstream and downstream oil and gas industry located in the Gulf Coast
region and North America, as well as to a large Texas municipality.
The Distribution segment's customers are primarily companies in the
upstream and downstream oil and gas industry, offshore fabrication companies and
shipyards.
No single customer within any of our segments accounted for greater
than 10% of total revenues within such segment during 2003.
MARKETING
We market our products primarily through a direct sales force of 71
persons. We believe that our proximity to customers is a key to maintaining and
increasing revenues. A majority of our sales are on a purchase order basis at
fixed prices on normal 30-day trade terms. Large orders may be filled on a
contract basis, depending on the circumstances. International sales are
typically made with agent or representative arrangements, and significant sales
are secured by letters of credit.
SUPPLIERS AND RAW MATERIALS
In each of our segments, new and used inventory and related equipment
and parts are acquired from suppliers, including individual brokers, other
remanufacturing companies and original equipment manufacturers. No single
supplier of products is significant to the operations of our segments, and we
have not experienced and do not expect a shortage of products that we sell.
3
INSURANCE
We currently carry a variety of insurance for our operations. We are
partially self-insured for certain claims in amounts we believe to be customary
and reasonable.
Although we believe we currently maintain insurance coverage adequate
for the risks involved, there is always a risk our insurance may not be
sufficient to cover any particular loss or that our insurance may not cover all
losses. For example, while we maintain product liability insurance, this type of
insurance is limited in coverage, and it is possible an adverse claim could
arise in excess of our coverage. Finally, insurance rates have in the past been
subject to wide fluctuation. During 2003, our cost of insurance and self-insured
retention levels increased. Changes in coverage, insurance markets and our
industry may result in further increases in our cost and higher deductibles and
retentions.
COMPETITION
In each of our segments, many of the markets in which we compete are
highly fragmented, and our competitors in these niche markets range from
relatively small, privately held businesses to large integrated companies.
Competition is based on several competitive factors, including reputation,
manufacturing capabilities, availability of plant capacity, price, performance
and dependability. Although we do not typically maintain supply or service
contracts with our customers, a significant portion of our sales represents
repeat business from our customers. We compete with a large number of companies,
none of which are dominant in our markets, many of which possess greater
financial resources or offer certain products and services we do not offer.
BACKLOG
Our backlog is shown in the table below:
December 31,
-----------------------
2003 2002
---- ----
(in thousands)
Pressure Control $ 8,385 $ 8,088
Products 372 721
Distribution 762 1,338
------- -------
Total $ 9,519 $10,147
======= =======
The above backlog information consisted of written orders or
commitments believed to be firm contracts for products and services. These
contracts are occasionally varied or modified by mutual consent and in some
instances may be cancelable by the customer on short notice without substantial
penalty. As a result, our backlog as of any particular date may not be
indicative of our actual operating results for any future period. Management
believes that substantially all of the orders and commitments included in
backlog at December 31, 2003 will be completed within the next 12 months.
ENVIRONMENTAL REGULATIONS
We are subject to numerous federal, state and local laws and
regulations relating to the storage, handling, emission and discharge of
materials into the environment, including the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA"), the Clean Water Act, the
Clean Air Act and the Resource Conservation and Recovery Act. Each of these
statutes allows the imposition of substantial civil and criminal penalties, as
well as permit revocation, for violations of the requirements. In addition,
environmental laws could impose liability for costs associated with
investigating and remediating contamination at our facilities or at third-party
facilities at which we have arranged for the disposal or treatment of hazardous
materials and/or wastes.
Our environmental remediation and compliance costs have not been
material during any of the periods presented. We have been identified as a
potentially responsible party (PRP) with respect to one site designated for
4
cleanup under CERCLA and similar state laws. Our involvement at this site is
believed to have been minimal. Because it is early in the process, no
determination of our actual liability can be made at this time. As such, we have
not currently accrued for any future remediation costs. However, based upon our
involvement with this site, we do not expect that our share of remediation costs
will have a material impact on our financial position, results of operations or
cash flows.
In July 2001, we discovered preliminary information concerning deep
soil contamination at one of our leased facilities. This preliminary information
is limited, and the contamination source has not yet been identified. We have
informed the landlord of the existence of the contamination and have requested
that they remediate the property as required by the lease. We expect that the
landlord will comply with its obligations under the lease to investigate the
environmental condition and take any action required under applicable laws. We
do not believe that we have contributed to or are responsible for remediation of
the site.
We believe that we are in compliance in all material respects with
applicable environmental laws and are in full compliance with all obligations to
investigate or remediate contamination that could reasonably be expected to
result in material liability. However, it is possible that unanticipated factual
developments could cause us to make environmental expenditures that are
significantly different from those we currently expect. In addition,
environmental laws continue to be amended and revised and may impose stricter
obligations in the future. We cannot predict the effect such future
requirements, if enacted, would have on us, although we believe that such
regulations would be enacted over time and would affect the industry as a whole.
EMPLOYEES
As of December 31, 2003, we had a total of 778 employees, 206 of whom
are salaried and 572 of whom are paid on an hourly basis. The entire work force
is employed within the United States. We consider our relations with our
employees to be good. None of our employees are covered by a collective
bargaining agreement.
AVAILABLE INFORMATION
Access to our filings of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 with the United States Securities and Exchange Commission
(SEC) may be obtained through the Investor Relations section of our website
(http://www.t3energyservices.com). Our website provides a hyperlink to a third
party SEC filings website where these reports may be viewed and printed at no
cost as soon as reasonably practicable after we have electronically filed such
material with the SEC. The contents of our website are not, and shall not be
deemed to be, incorporated into this report.
FORWARD-LOOKING INFORMATION
Certain information in this Annual Report on Form 10-K, including the
information we incorporate by reference, 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 our forward-looking
statements by the words "expects," "projects," "believes," "anticipates,"
"intends," "plans," "budgets," "predicts," "estimates" and similar expressions.
We have based the forward-looking statements relating to our operations
on our current expectations, and estimates and projections about us and about
the industry in which we operate in general. We caution you that these
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that we cannot predict. In addition, we have based
many of these forward-looking statements on assumptions about future events that
may prove to be inaccurate. Our actual outcomes and results may differ
materially from what we have expressed or forecasted in the forward-looking
statements. Except as required by law, we undertake no obligation to update any
of the forward-looking statements in this Form 10-K after the date of this Form
10-K.
5
RISK FACTORS
BECAUSE WE DEPEND ON THE OIL AND GAS INDUSTRY, A DECLINE IN OIL AND GAS PRICES
OR A DECREASE IN INDUSTRY ACTIVITY MAY NEGATIVELY IMPACT OUR PROFITS.
We are, 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:
- the level of production from known reserves;
- weather conditions;
- the actions of the Organization of Petroleum Exporting Countries;
- political instability in the Middle East and elsewhere;
- the level of oil and gas inventories;
- the cost of producing oil and gas;
- the level of drilling activity;
- worldwide economic activity; and
- governmental regulation.
If there is a significant reduction in the demand for drilling
services, cash flows of drilling contractors or production companies or drilling
or well servicing rig utilization rates, then demand for our products will
decline.
THE OILFIELD SERVICE INDUSTRY IN WHICH WE OPERATE 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 we operate is highly
competitive. Many of our competitors have greater financial and other resources
than we do. Each of our 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. Our success will be
affected by our ability to lower our cost structure. Our forward-looking
statements assume we will be successful in reducing our cost structure and
adapting to the changing environment.
AVAILABILITY OF A SKILLED WORKFORCE COULD AFFECT OUR PROJECTED RESULTS.
The workforce and labor supply in the oilfield service industry is
aging and diminishing such that there is an increasing shortage of available
skilled labor. Our forward-looking statements assume we will be able to maintain
a skilled workforce.
OUR LONG-TERM GROWTH DEPENDS UPON TECHNOLOGICAL INNOVATION AND
COMMERCIALIZATION.
Our ability to deliver our long-term growth strategy depends in part on
the commercialization of new technology. A central aspect of our growth strategy
is to innovate our products and services, to obtain technologically advanced
products through internal research and development and/or acquisitions, and to
expand internationally. The key to our success will be our ability to
commercialize the technology that we have acquired and demonstrate the enhanced
value our technology brings to our customers' operations. Our forward-looking
statements have assumed successful commercialization of, and above-average
growth from, these new products and services.
6
THE CYCLICAL NATURE OF OR A PROLONGED DOWNTURN IN OUR INDUSTRY COULD AFFECT THE
CARRYING VALUE OF OUR GOODWILL.
During 2003, we had goodwill impairments related to continuing and
discontinued operations totaling $26.4 million. As of December 31, 2003, we had
approximately $69.0 million of goodwill after the aforementioned impairments.
Our estimates of the value of our goodwill could be reduced in the future as a
result of various factors, some of which are beyond our control. Any reduction
in the value of our businesses may result in further impairment charges and
therefore adversely affect our results.
UNINSURED JUDGMENTS OR A RISE IN INSURANCE PREMIUMS COULD ADVERSELY IMPACT OUR
RESULTS.
Although we maintain insurance to cover potential claims and losses, we
could become subject to a judgment for which we are not adequately insured.
Additionally, the terrorist attacks that occurred in the U.S., as well as other
factors, have generally increased the cost of insurance for companies, including
ours. Significant increases in the cost of our insurance and more restrictive
coverages may adversely impact our results of operations.
UNINSURED CLAIMS AND LITIGATION COULD ADVERSELY IMPACT OUR RESULTS.
In the ordinary course of business, we become the subject of various
claims and litigation. We maintain insurance to cover many of our potential
losses and we are subject to various self-retentions and deductibles with
respect to our insurance. Although we are subject to various ongoing items of
litigation, we do not believe any of the items of litigation we are currently
subject to will result in any material uninsured losses to us. However, it is
possible an unexpected judgment could be rendered against us in cases in which
we could be uninsured and beyond the amounts we currently have reserved or
anticipate incurring.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
Our business exposes us to possible claims for personal injury or death
resulting from the use of our products. We carry comprehensive insurance,
subject to deductibles, at levels we believe are sufficient to cover existing
and future claims. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain
adequate insurance coverage at rates we believe are reasonable.
OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our business is affected by governmental regulations relating to our
industry segments in general, as well as environmental and safety regulations
that have specific application to our business. While we are not aware of any
proposed or pending legislation, future legislation may have an adverse effect
on our business, financial condition, results of operations or prospects.
We are 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. We
have 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, we and other predecessor operators have generated and
disposed of wastes that are or may be considered hazardous. Accordingly,
although we have undertaken considerable efforts to comply with applicable laws,
it is possible that environmental requirements or facts not currently known to
us will require unanticipated efforts and expenditures that cannot be currently
quantified.
7
THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
OFFICERS OR EMPLOYEES OF FIRST RESERVE CORPORATION. THE RESOLUTION OF THESE
CONFLICTS OF INTEREST MAY NOT BE IN OUR OR OUR STOCKHOLDERS' BEST INTERESTS.
Three of our directors, Mark E. Baldwin, Joseph R. Edwards and Ben A.
Guill, are also current officers or employees of First Reserve Corporation,
which controls the general partner of First Reserve Fund VIII, L.P., a
beneficial owner of more than 85% of our common stock. This may create conflicts
of interest because these directors have responsibilities to First Reserve Fund
VIII and its owners. Their duties as officers or employees of First Reserve
Corporation may conflict with their duties as directors of our company regarding
business dealings between First Reserve Corporation and us and other matters.
The resolution of these conflicts may not always be in our or our stockholders'
best interests.
WE RENOUNCED ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND FIRST RESERVE
FUND VIII AND ITS DIRECTOR DESIGNEES ON OUR BOARD OF DIRECTORS GENERALLY HAVE NO
OBLIGATION TO OFFER US THOSE OPPORTUNITIES.
First Reserve Fund VIII has investments in other oilfield service
companies that compete with us, and First Reserve Corporation and its
affiliates, other than T-3, may invest in other such companies in the future. We
refer to First Reserve Corporation, its other affiliates and its portfolio
companies as the First Reserve group. Our certificate of incorporation provides
that, so long as First Reserve Corporation and its affiliates continue to own at
least 20% of our common stock, we renounce any interest in specified business
opportunities. Our 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 a
director of our company:
- no member of the First Reserve group or any of those
individuals will have any obligation to communicate or offer
the opportunity to us; and
- such entity or individual may pursue the opportunity as that
entity or individual sees fit,
unless:
- 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
- the opportunity was identified solely through the disclosure
of information by or on behalf of T-3.
These provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock. As
a result of these charter provisions, our 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.
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ITEM 2. PROPERTIES
We operate 20 facilities, all located in the Gulf Coast region, which
range in size from 7,200 square feet to approximately 120,000 square feet of
manufacturing, distribution and related space, or an aggregate of approximately
592,800 square feet, including corporate headquarters. Of this total, 483,300
square feet of manufacturing and related space is located in leased premises
under leases expiring at various dates through 2011. We believe our facilities
are suitable for their present and intended purposes and are adequate for our
current level of operations.
We maintain our principal executive offices at 13111 Northwest Freeway,
Suite 500, Houston, Texas 77040. This property consists of conventional office
space and is, in our opinion, adequate to meet our needs for the foreseeable
future.
The following chart lists our facilities by segment:
SEGMENT NUMBER OF FACILITIES SQUARE FOOTAGE
------- -------------------- --------------
Pressure Control........................... 12 279,800
Products................................... 2 182,500
Distribution............................... 5 123,300
Other...................................... 1 7,200
ITEM 3. LEGAL PROCEEDINGS
We are 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, we believe the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on our consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders in the
fourth quarter of 2003.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on The Nasdaq National Market under the symbol
"TTES." The following table sets forth the high and low closing sales prices of
our common stock:
PRICE RANGE
---------------------
HIGH LOW
-------- -------
2002
First Quarter.................................. $ 10.24 $ 7.50
Second Quarter................................. $ 9.70 $ 8.27
Third Quarter.................................. $ 8.60 $ 5.13
Fourth Quarter................................. $ 7.61 $ 6.40
2003
First Quarter.................................. $ 7.45 $ 6.22
Second Quarter................................. $ 7.20 $ 5.75
Third Quarter.................................. $ 6.80 $ 5.64
Fourth Quarter................................. $ 6.30 $ 4.95
On March 26, 2004, the last reported sales price of our common stock,
as quoted by The Nasdaq National Market, was $6.89 per share. On March 26, 2004,
there were approximately 146 record holders of our common stock, not including
the number of persons or entities who hold stock in nominee or street name
through various brokerage firms and banks.
DIVIDEND POLICY
We have never paid dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings to support our operations and growth. Any payment of cash
dividends in the future will be dependent on the amount of funds legally
available, our earnings, financial condition, capital requirements and other
factors that the board of directors may deem relevant. Additionally, certain of
our debt agreements restrict the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
This item is presented in three tables for the historical reporting
requirements of T-3. T-3 began operations in the first half of 2000 by acquiring
and merging two predecessor companies with different fiscal year ends. Selected
historical data for T-3, Cor-Val, Inc. and Preferred Industries, Inc. are
presented separately below.
The following selected consolidated financial data for each of the four
years in the period ended December 31, 2003 has been derived from our audited
consolidated financial statements. The following information should be read in
conjunction with our consolidated financial statements and the related notes
thereto and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Annual Report on Form
10-K.
10
T-3
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001 2000
--------- -------- --------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
OPERATING DATA:
Revenues....................................................... $ 125,584 $123,604 $ 90,162 $ 25,683
Income (loss) from operations (1).............................. (9,042) 9,477 10,126 3,784
Income (loss) from continuing operations (1),(2),(3),(4)....... (16,950) 4,050 1,922 335
Income (loss) from discontinued operations, net of tax (5)..... (11,329) 520 --- ---
--------- -------- --------- --------
Net income (loss).............................................. $ (28,279) $ 4,570 $ 1,922 $ 335
========= ======== ========= ========
Basic earnings (loss) per common share:
Continuing operations..................................... $ (1.60) $ 0.39 $ 0.85 $ 0.26
Discontinued operations................................... (1.07) 0.05 --- ---
--------- -------- --------- --------
Net income per common share............................... $ (2.67) $ 0.44 $ 0.85 $ 0.26
========= ======== ========= ========
Diluted earnings (loss) per common share: (6)
Continuing operations..................................... $ (1.60) $ 0.39 $ 0.76 $ 0.26
Discontinued operations................................... (1.07) 0.05 --- ---
--------- -------- --------- --------
Net income per common share............................... $ (2.67) $ 0.44 $ 0.76 $ 0.26
========= ======== ========= ========
Weighted average common shares outstanding:
Basic..................................................... 10,582 10,346 2,271 1,302
Diluted (6)............................................... 10,582 10,347 3,715 1,302
DECEMBER 31,
-----------------------------------------------
2003 2002 2001 2000
--------- -------- --------- --------
BALANCE SHEET DATA:
Total assets................................................... 145,537 186,599 199,728 66,819
Long-term debt, less current maturities........................ 14,263 26,441 43,897 36,083
(1) In 2003, we recorded a $16.2 million charge to continuing operations for the impairment of goodwill
related to the Products segment.
(2) In 2003, we wrote-off a $3.5 million note receivable from Beaird Industries, Inc., an entity
controlled by former directors Don Carlin and Robert Cone.
(3) In 2003, we recorded a $0.3 million charge to other expense for repairs to a leased facility damaged
by flooding.
(4) In 2001, we recorded a charge of $0.8 million related to the write-off of unamortized deferred loan
costs.
(5) In the fourth quarter of 2003, we committed to dispose of certain non-core assets within our Products
segment. Accordingly, the results of operations attributable to those assets are reported as
discontinued operations.
(6) For 2003, 2002, 2001 and 2000, there were 577,979, 480,575, 282,829 and 120,588 options, respectively,
and 517,862, 3,489,079, 3,489,079 and no warrants, respectively, that were not included in the
computation of diluted earnings per share because their inclusion would have been anti-dilutive. In
2000, there were 185,180 weighted average shares of common stock related to our convertible
subordinated debt that were not included because to do so would have been anti-dilutive.
11
Selected Historical Financial Data of Cor-Val, Inc.
The following selected unaudited historical financial data as of and
for the year ended March 31, 1999 and eleven months ended February 29, 2000 has
been derived from the audited consolidated financial statements as of and for
the year ended March 31, 1999 and for the eleven months ended February 29, 2000.
Cor-Val has been identified as a predecessor to T-3 for financial reporting
purposes.
COR-VAL, INC.
ELEVEN MONTHS
ENDED YEAR ENDED
FEBRUARY 29, 2000(1) MARCH 31, 1999
-------------------- --------------
(IN THOUSANDS)
OPERATING DATA:
Sales............................ $ 10,842 $ 10,310
Income from operations........... 1,616 1,362
Net income....................... $ 1,618 $ 797
========= =========
AS OF MARCH 31, 1999
--------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets............................................ 4,041
Long-term debt (2)...................................... 94
(1) In July 1999, Cor-Val purchased all of the equity securities of Cor-Val
Services, Inc. in exchange for common stock.
(2) Excludes deferred income taxes and other long-term liabilities.
Selected Historical Financial Data of Preferred Industries, Inc.
The following selected unaudited historical financial data as of and
for the year ended December 31, 1999 and the four months ended April 30, 2000
has been derived from the audited financial statements of Preferred Industries
as of and for the years ended December 31, 1999, and for the four months ended
April 30, 2000. Preferred Industries has been identified as a predecessor to T-3
for financial reporting purposes.
PREFERRED INDUSTRIES, INC.
FOUR MONTHS ENDED YEAR ENDED
APRIL 30, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN THOUSANDS)
OPERATING DATA:
Sales............................ $ 3,808 $ 12,925
Income (loss) from operations.... 641 (25)
Net income (loss)................ $ 352 $ (131)
======= ========
AS OF
DECEMBER 31, 1999
-----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets..................... 6,923
Long-term debt (1)............... 1,843
(1) Excludes deferred income taxes and other long-term liabilities.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion of our historical results of operations and
financial condition should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
T-3 was incorporated in October 1999. During the year 2000, we acquired
five operating companies in transactions accounted for using the purchase method
of accounting. On February 29, 2000, we acquired Cor-Val for approximately $21.4
million in cash, plus liabilities assumed and the issuance of 54,508 shares of
our common stock. On April 30, 2000, we acquired Preferred Industries for
approximately $18.8 million in cash, plus liabilities assumed and the issuance
of 18,169 shares of our common stock. On April 30, 2000, we acquired O&M
Equipment, Inc. for approximately $1.4 million in cash, plus liabilities assumed
and a maximum earnout of $1.0 million based on the performance of O&M through
2002 ($0.3 million was earned in 2002, $0.6 million was earned in 2001, and $0.1
million was earned in 2000). Additionally, we acquired Control Products of
Louisiana, Inc. and Coastal Electric Motors, Inc. in September 2000 and December
2000, respectively, for total consideration of approximately $10.3 million in
cash, plus liabilities assumed. The results of operations of these companies
have been included in our operating results from the dates of acquisition.
On May 7, 2001, simultaneous with the signing of the merger agreement
with IHI, we acquired A&B Bolt, Inc., a subsidiary of IHI, for $15.3 million in
cash including expenses in a transaction accounted for using the purchase method
of accounting. The results of operations of A&B Bolt have been included in our
operating results from the date of acquisition.
On December 17, 2001, T-3 Energy Services, Inc., a private Delaware
corporation ("former T-3"), merged into IHI, a Texas corporation, with IHI
surviving the merger. In connection with the merger, the combined company was
reincorporated in Delaware under the name "T-3 Energy Services, Inc." and
implemented a one-for-ten reverse stock split of its common stock.
The merger was treated for accounting purposes as a purchase of IHI by
former T-3 (a reverse acquisition) in a purchase business transaction. The
purchase method of accounting requires that we carry forward former T-3's net
assets at their historical book values and reflect IHI's net assets at their
estimated fair market values, with the fair market value of the purchase
consideration in excess of the fair market value of IHI's identifiable net
assets treated as goodwill. The historical financial data presented in this
Annual Report on Form 10-K includes the historical financial condition and
operating results of T-3 prior to its merger with IHI. For the year 2001, the
historical financial data also includes the two weeks of operations of the
combined company from December 17, 2001 to December 31, 2001.
As part of the merger with IHI, we acquired a non-energy subsidiary.
Because the subsidiary's operations were outside our strategic focus, at the
time of the merger, we identified this operation as one to be sold. The sale was
completed in July 2002.
On December 18, 2001, our shares of common stock began trading on The
Nasdaq National Market under the new symbol "TTES." Immediately after the
merger, First Reserve Fund VIII, L.P. ("First Reserve") owned approximately 77%
of our common shares, and collectively all of the former T-3 stockholders
(including First Reserve) owned approximately 79% of our common shares, with the
remaining 21% of our common shares being held by the stockholders of IHI
immediately prior to the merger.
Before the closing and as part of the merger, (1) IHI divested of
substantially all of its non-energy-related subsidiaries, (2) SJMB, L.P.
converted $3.6 million of its IHI debt into shares of IHI common stock, (3)
First Reserve converted $25.3 million of its former T-3 debt into shares of
former T-3 common stock, and (4) First Reserve purchased an additional $46.8
million in shares of former T-3 common stock. In addition, the combined company
completed a refinancing of its senior debt simultaneously with the closing of
the merger. Under the terms of the merger, all but two of IHI's then existing
directors and all of its officers resigned their positions with the
13
combined company, and the management of former T-3 and six of former T-3's
director designees assumed the management and director duties for the combined
company.
In mid year 2003, we hired a new management team and began to evaluate
our various existing businesses and products to determine T-3's future strategic
direction, and to improve return on stockholder investment and position T-3 for
future growth.
During the fourth quarter of 2003, we committed to a formal plan to
sell certain non-core assets within our Products segment. The sale of these
assets was consummated in February 2004. The assets sold comprised substantially
all of the assets of LSS - Lone Star - Houston Inc., Bolt Manufacturing Co.,
Inc. (d/b/a Walker Bolt Manufacturing Company) and WHIR Acquisition, Inc. (d/b/a
Ameritech Manufacturing), (collectively, "the Businesses"). The Businesses
primarily manufacture and distribute a broad line of standard and metric
fasteners, in addition to manufacturing specialty fasteners and parts in small
quantities for the commercial and aerospace industries as well as the military.
Pursuant to the asset sale agreement, the buyer purchased all of the
assets of the Businesses for a purchase price of $7.4 million, subject to a
working capital adjustment after closing. We received $7.4 million in cash on
February 23, 2004, which was immediately used to pay down our Wells Fargo term
loan (see Note 6 to the consolidated financial statements). In addition, we
received two promissory notes in the amount of $0.2 million and $0.1 million,
respectively. We did not record these two notes as their ultimate collection is
contingent upon the occurrence of certain specified events which management
believes are not probable of occurring.
At December 31, 2003, these assets constituted a business and thus were
held for sale. Accordingly, their results of operations were reported as
discontinued operations. Goodwill was allocated based on the relative fair
values of the portion of the reporting unit being disposed and the portion of
the reporting unit remaining. For the year ended December 31, 2003, we recorded
a loss of $11.3 million, net of tax, based upon a pending sales contract.
Included in this loss was a goodwill impairment charge of $10.2 million and a
long-lived asset impairment of $2.3 million. The assets sold were acquired as
part of the IHI merger that occurred on December 17, 2001. The results of
operations and cash flows for 2001 for these assets were not material to our
2001 consolidated financial statements.
In the fourth quarter of 2003, our new management team completed its
evaluation of each of the business segment's product lines and service revenues
for expected performance in the forthcoming years and formulated a new business
strategy and operating plan. Management based its expectations for T-3's future
performance on current market conditions and on each of the business segment's
potential to maximize the value of the overall business by either expansion or
growth of product lines and services, internally and through acquisitions, and
in both the domestic and international markets.
We reevaluated our expectations for the earnings, growth and
contribution of the Products segment for 2004 and concluded that the segment
would still generate revenues and earnings and contribute positively to T-3's
consolidated results of operations and cash flows but at a much reduced level.
This determination was based on the continued softness in the Gulf of Mexico
upstream and downstream oil and gas industry as well as lower revenues generated
from larger fabricated equipment and component revenues. In addition, we expect
lower revenues from the electrical motor and generator repair and storage
business. As a result, we recorded an impairment charge of $16.2 million on
goodwill attributable to our Products segment.
Management's business strategy is to continue to expand and grow our
product lines and services in both existing and strategically acquired domestic
and international operations. This will be accomplished by acquiring products
and services that complement each other in the manufacturing, aftermarket and
service arenas. In addition, to increase the volume of our products growth, we
plan to improve and expand on our international agency agreements. To promote
quality and excellence to our customers, we have increased our engineering group
to improve and expand on our existing product lines in addition to any future
products we may develop or acquire. We plan to expand our higher margin after
market services by promoting rapid response to customer needs and promote
intercompany coordination through combined sales efforts. Finally, we continue
to improve our existing operations through the integration and consolidation of
our facilities.
14
HISTORICAL TRENDS AND OUTLOOK
The following table sets forth certain statistics that are reflective
of recent historical market conditions:
WTI Henry Hub United States Gulf of Mexico
Year Ended: Oil (1) Gas (2) Rig Count (3) Rig Count (4)
----------- ------- ------- ------------- -------------
December 31, 2001.......... $ 25.97 $ 4.12 1,115 148
December 31, 2002.......... $ 26.02 $ 3.28 831 109
December 31, 2003.......... $ 31.12 $ 5.50 1,032 104
(1) Source: Average price per barrel for the year calculated by T-3 using
daily data published by the United States Department of Energy on its
website, www.eia.doe.gov.
(2) Source: Average price per MM/BTU for the year calculated by T-3 using
daily data published on www.oilnergy.com.
(3) Source: Average United States Rig Count for the year calculated by T-3
using weekly data published by Baker Hughes Incorporated.
(4) Source: Average Gulf of Mexico Rig Count for the year calculated by T-3
using weekly data published by Baker Hughes Incorporated.
Demand for our products and services is cyclical and dependent upon
activity in the oil and gas industry and the profitability, cash flow and
willingness of oil and gas companies and drilling contractors to spend capital
on the exploration, development and production of oil and gas reserves in the
Gulf of Mexico and the United States Gulf Coast regions where our products and
services are primarily sold. The level of exploration and production, our
primary driver, especially in the Gulf of Mexico, is highly sensitive to current
and projected oil and natural gas prices, which have historically been
characterized by significant volatility. 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
United States drilling rig count remained stable throughout the second half of
2002, before increasing steadily throughout 2003. However, the average Gulf of
Mexico rig count for 2003 was below the average rig count for 2002 and had
declined slightly from higher average levels in late 2002.
The level of revenue improvement for us in the future will continue to
be heavily dependent upon the timing and strength of the recovery in the Gulf of
Mexico market and our gains in market share outside the Gulf of Mexico. The
speed and extent of any recovery in these markets is difficult to predict in
light of continued economic uncertainty. As illustrated in the table above, the
market price of oil and gas alone is not an indicator of a recovery in these
markets. Many external factors, including world economic and political
conditions, quotas established by OPEC (Organization of Petroleum Exporting
Countries) and weather conditions, will influence the recovery and continued
strength of the industry. Based on our assessment of external factors and our
current levels of inquiry and quotation, we believe that continuing price and
general economic uncertainty will cause near-term activity levels to remain flat
for the first half of 2004.
15
RESULTS OF OPERATIONS
The following table sets forth certain operating statement data for
each of our segments for each of the years presented (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
--------- --------- --------
Revenues:
Pressure Control............... $ 75,214 $ 70,177 $ 52,120
Products....................... 11,249 16,179 7,435
Distribution................... 39,121 37,248 30,607
--------- --------- --------
125,584 123,604 90,162
--------- --------- --------
Cost of revenues:
Pressure Control............... 52,045 45,713 33,434
Products....................... 9,990 14,076 5,709
Distribution................... 28,672 26,850 22,041
--------- --------- --------
90,707 86,639 61,184
--------- --------- --------
Gross profit:
Pressure Control............... 23,169 24,464 18,686
Products....................... 1,259 2,103 1,726
Distribution................... 10,449 10,398 8,566
--------- --------- --------
34,877 36,965 28,978
--------- --------- --------
Operating expenses:
Pressure Control............... 11,094 11,397 9,689
Products....................... 17,873 2,155 1,624
Distribution................... 8,546 8,278 6,130
Corporate...................... 6,406 5,658 1,409
--------- --------- --------
43,919 27,488 18,852
--------- --------- --------
Income (loss) from operations:
Pressure Control............... 12,075 13,067 8,997
Products....................... (16,614) (52) 102
Distribution................... 1,903 2,120 2,436
Corporate...................... (6,406) (5,658) (1,409)
--------- --------- --------
$ (9,042) $ 9,477 $ 10,126
========= ========= ========
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Revenues. On a consolidated basis, revenues increased $2.0 million, or
2%, in 2003 compared to 2002. This increase was attributable to an improved
United States onshore rig count, increased market penetration for our pressure
control products and services, and increased revenues in the Distribution
segment resulting from several large customer projects. These increases were
negatively impacted by continued softness in the Gulf of Mexico drilling rig
activity, continued pricing pressure for our products and services and 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.
Revenues for the Pressure Control segment increased $5.0 million, or
7%, in 2003 compared to 2002. The increase in revenues was primarily
attributable to revenue increases associated with the increased United States
onshore rig count and a slight increase in market share for our pressure control
products and services. These revenues were negatively impacted by the continued
softness in Gulf of Mexico drilling rig activity and continued pricing pressure
for our products and services.
16
Revenues for the Products segment decreased $4.9 million, or 30%, in
2003 compared to 2002. This decrease was primarily attributable to continued
pricing pressure for our products and services and 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.
Revenues for the Distribution segment increased $1.9 million, or 5%, in
2003 compared to 2002 due to several large customer projects. These large
customer projects offset a slight decline in the volume of orders that typically
comprise the revenue base due to the continued softness in activity in the Gulf
of Mexico and continued pricing pressure for our products and services.
Additionally, adverse weather in the Gulf of Mexico in late September 2002
contributed to lower revenues in 2002.
Cost of Revenues. On a consolidated basis, cost of revenues increased
$4.1 million, or 5%, in 2003 compared to 2002. Gross profit as a percentage of
revenues was 28% in 2003 compared to 30% 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 and increased insurance and self-insured
medical costs.
Cost of revenues for the Pressure Control segment increased $6.3
million, or 14%, 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 31% in 2003 compared to 35% in 2002. The decrease in gross profit
margin was due to pricing pressure for our products and services, increased
insurance and self-insured medical costs, a shift in product mix to lower margin
items and the temporarily higher than normal manufacturing costs of one of our
new manufactured pressure control products. We anticipate that the costs of
manufacturing this new product will decrease in future periods and benefit our
operations.
Cost of revenues for the Products segment decreased $4.1 million, or
29%, in 2003 compared to 2002. Gross profit as a percentage of revenues was 11%
in 2003 compared to 13% in 2002. Gross profit margin decreased primarily as a
result of pricing pressure for our products and services, increased insurance
and self-insured medical costs, and a change in the revenue mix of products and
services sold, with a greater percentage of 2003 revenues consisting of lower
margin products revenues when compared to higher margin service revenues in the
prior period.
Cost of revenues for the Distribution segment increased $1.8 million,
or 7%, 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 28%
in 2002. Gross profit margin decreased primarily because of pricing pressure for
our products, startup costs associated with the sale and distribution of a new
valve automation product line and initial costs associated with new distribution
facilities located in Houston and Beaumont, Texas. We anticipate that the new
product line and locations will benefit our operations in future periods.
Operating Expenses. On a consolidated basis, operating expenses
increased $16.4 million, or 60%, in 2003 compared to 2002. As a percentage of
revenues, operating expenses were 35% in 2003 compared to 22% in 2002. The
increase was primarily attributable to a goodwill impairment of $16.2 million.
Operating expenses for the Pressure Control segment decreased $0.3
million, or 3%, in 2003 compared to 2002. As a percentage of revenues, operating
expenses decreased from 16% in 2002 to 15% in 2003, primarily due to cost
reduction strategies.
Operating expenses for the Products segment increased $15.7 million in
2003 compared to 2002, primarily due to a goodwill impairment charge of $16.2
million offset by cost reduction strategies (see further discussions of the
impairment charge in "Critical Accounting Policies"). As a percentage of
revenues and exclusive of the goodwill impairment charge, operating expenses
increased from 13% in 2002 to 15% in 2003 primarily because fixed operating
expenses did not decrease proportionally with the corresponding revenues
decrease.
Operating expenses for the Distribution segment increased $0.3 million,
or 3%, in 2003 compared to 2002. As a percentage of revenues, operating expenses
remained at 22% in both 2003 and 2002.
Operating expenses for the Corporate operations increased $0.7 million,
or 13%, in 2003 compared to 2002. This was primarily attributable to an increase
in costs associated with relocation and compensation expenses for new
17
management, the recognition of severance payments to former management, the
integration of the former IHI operating units into T-3, and professional fees.
Interest Expense. On a consolidated basis, interest expense decreased
to $3.1 million in 2003 from $3.5 million in 2002, primarily as a result of
lower debt levels and interest rates throughout 2003.
Interest Income. Interest income was generated from seller notes
receivable that arose in conjunction with the sale by IHI of several business
units prior to the merger with T-3. Interest income decreased in 2003 due to the
write-off of the note receivable from Beaird Industries, Inc.
Write-off of Acquired Note Receivable. In 2003, we wrote-off a $3.5
million note receivable that was acquired in conjunction with the disposal by
IHI of Beaird Industries, Inc. prior to the completion of IHI's merger with T-3.
During 2003, we were informed by the payor of the note of its inability to make
payments and that its ongoing refinancing efforts to date had been unsuccessful.
Prior to 2003, we had received interest payments in accordance with the
specified terms of the note.
Other (Income) Expense, net. Other (Income) Expense, net consists
primarily of a $0.3 million charge related to a casualty loss at one of our
operating facilities, which was damaged by water from a broken high-pressure
fire suppressant system coupling in August 2003. We are pursuing recovery of
these costs from third parties and/or insurance.
Income Taxes. Income tax expense for 2003 was $1.1 million as compared
to $2.7 million in 2002. The effective tax rate was positive in 2003 as the loss
from continuing operations is attributable to the write-off of non-deductible
goodwill. In 2002, the effective tax rate was 40% and was caused by the effect
of non-deductible expenses and state income taxes, net of the Federal benefit
provided.
Income (loss) from continuing operations. On a consolidated basis, loss
from continuing operations was $17.0 million in 2003 compared with income from
continuing operations of $4.1 million in 2002 as a result of the foregoing
factors.
Discontinued operations. During the fourth quarter of 2003, we
committed to a formal plan to sell certain non-core assets within our Products
segment. The sale of these assets was consummated in February 2004. These assets
were held for sale and accordingly, their results of operations were reported in
discontinued operations. Goodwill was allocated based on the relative fair
values of the portion of the reporting unit being disposed and the portion of
the reporting unit remaining. For the year ended December 31, 2003, we recorded
a loss of $11.3 million, net of tax, based upon a pending sales contract.
Included in this loss was a goodwill impairment charge of $10.2 million and a
long-lived asset impairment of $2.3 million. The assets sold were acquired as
part of the IHI merger that occurred on December 17, 2001. The results of their
operations and cash flows were not material to our 2001 consolidated financial
statements.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Revenues. On a consolidated basis, revenues increased $33.4 million, or
37%, in 2002 compared to 2001. Revenues increased across all segments as a
result of the merger with IHI in December 2001 and the acquisition of A&B Bolt
in May 2001. However, as a result of lower Gulf of Mexico drilling rig activity
and continued general economic uncertainty, on a pro forma basis as if the
merger with IHI, the acquisition of A&B Bolt, and the sale of a
non-energy-related subsidiary had occurred as of January 1, 2001, revenues
decreased $31.8 million for the year ended December 31, 2002, compared to the
year ended December 31, 2001.
Revenues for the Pressure Control segment increased $18.1 million, or
35%, in 2002 compared to 2001. The revenues increase in 2002 over 2001 was
primarily attributable to the inclusion of a full year's revenues in the 2002
period from the IHI merger. However, on a pro forma basis as if the merger with
IHI had occurred as of January 1, 2001, revenues for this segment decreased $9.8
million due to lower levels of Gulf of Mexico drilling rig activity and general
economic uncertainty, partially offset by increased international revenues.
18
Revenues for the Products segment increased $8.7 million, or 118%, in
2002 compared to 2001. This revenues increase was primarily attributable to the
inclusion of a full year's revenues in the 2002 period from the IHI merger.
However, on a pro forma basis as if the merger with IHI had occurred as of
January 1, 2001, revenues for this segment decreased $14.7 million due to lower
levels of Gulf of Mexico drilling rig activity and general economic uncertainty.
Revenues for the Distribution segment increased $6.6 million, or 22%,
in 2002 compared to 2001. The revenues increase in 2002 over 2001 was primarily
attributable to the inclusion of a full year's revenues in the 2002 period. The
Distribution segment was formed in 2001 with the acquisition of A&B Bolt in May
2001. However, on a pro forma basis as if the acquisition of A&B Bolt and the
sale of a non energy-related subsidiary had occurred as of January 1, 2001,
revenues for this segment decreased $7.2 million due to lower levels of Gulf of
Mexico drilling rig activity and general economic uncertainty.
Cost of Revenues. On a consolidated basis, cost of revenues increased
$25.5 million, or 42%, in 2002 compared to 2001 primarily as a result of the
merger with IHI in December 2001. Gross profit margin was 30% in 2002 compared
to 32% in 2001. Gross profit margin was lower on a consolidated basis in 2002
compared to 2001 primarily because of a change in the mix of revenues.
Cost of revenues for the Pressure Control segment increased $12.3
million, or 37%, in 2002 compared to 2001, primarily as a result of the increase
in revenues described above. Gross profit margin was 35% in 2002 compared to 36%
in 2001. This slight decrease was attributable to fixed costs that did not
decrease proportionally with pro forma revenues, partially offset by improved
margins because of increased operational efficiencies.
Cost of revenues for the Products segment increased $8.4 million, or
147%, in 2002 compared to 2001, primarily as a result of the increase in
revenues as a result of the merger with IHI in December 2001. Gross profit
margin decreased from 23% in 2001 to 13% in 2002. Gross profit margin decreased
primarily as a result of a change in the mix of products and services revenues
within the segment, in addition to fixed costs that did not decrease
proportionally with the decrease in pro forma revenues.
Cost of revenues for the Distribution segment increased $4.8 million,
or 22%, in 2002 compared to 2001, primarily as a result of the increase in
revenues. Gross profit margin was 28% in 2002 and 2001.
Operating Expenses. On a consolidated basis, operating expenses
increased $8.6 million, or 46%, in 2002 compared to 2001, primarily as a result
of the merger with IHI, the acquisition of A&B Bolt in 2001 and the costs
associated with being a publicly traded company. The increase was net of a
decrease in the amortization of goodwill of $1.6 million. Operating expenses as
a percentage of revenues were 22% and 21% for 2002 and 2001, respectively.
Operating expenses for the Pressure Control segment increased $1.7
million, or 18%, in 2002 compared to 2001 as a result of the increase in
revenues and the merger with IHI in December 2001. The increase was net of a
decrease in the amortization of goodwill of $1.4 million. As a percentage of
revenues, operating expenses decreased from 19% in 2001 to 16% in 2002, due to
the higher revenues resulting from the IHI merger absorbing a larger portion of
these fixed expenses.
Operating expenses for the Products segment increased $0.5 million, or
33%, in 2002 as compared to 2001, primarily as a result of the merger with IHI
in December 2001. The increase was net of a decrease in the amortization of
goodwill of $0.1 million. As a percentage of revenues, operating expenses
decreased from 22% in 2001 to 13% in 2002, due to the higher revenues resulting
from the IHI merger absorbing a larger portion of these fixed expenses.
Operating expenses for the Distribution segment increased $2.1 million,
or 35%, in 2002 as compared to 2001, primarily as a result of the inclusion of a
full year's operations for A&B Bolt in 2002. The increase was net of a decrease
in the amortization of goodwill of $0.1 million. As a percentage of revenues,
operating expenses increased from 20% in 2001 to 22% in 2002, primarily because
fixed operating expenses did not decrease proportionally with the decrease in
revenues.
19
Operating expenses for the Corporate operations increased $4.3 million,
or 302%, in 2002 compared to 2001. This increase was primarily attributable to
the merger with IHI in December 2001 and the addition of corporate staff,
including human resource, environmental, safety and information systems
personnel, and related expenses resulting from T-3's growth and the costs
associated with being a publicly traded company.
Interest Expense. On a consolidated basis, interest expense decreased
to $3.5 million in 2002 from $4.9 million in 2001, primarily as a result of
lower debt levels and interest rates throughout 2002.
Interest Income. Interest income in 2002 was generated from seller
notes receivable that arose in conjunction with the disposal by IHI of several
business units prior to the completion of the merger. Interest income in 2001
was not material.
Other (Income) Expense, net. As a result of the merger and the
subsequent refinancing of our indebtedness in December 2001, we recorded other
expense of $0.8 million for the write-off of unamortized deferred loan costs.
Income Taxes. Income tax expense for 2002 was $2.7 million as compared
to $2.6 million in 2001. The effective tax rate for 2002 was 40% compared to 57%
in 2001. For both years, the tax rate in excess of statutory rates was primarily
attributable to nondeductible expenses and state income taxes, net of the
Federal benefit provided. The decrease in the effective rate in 2002 is
attributable to the impact of nondeductible goodwill no longer being amortized
due to the adoption of Statement of Financial Accounting Standards No. 142 and
lower state income taxes.
Income (loss) from continuing operations. On a consolidated basis,
income from continuing operations was $4.1 million in 2002 compared with $1.9
million in 2001 as a result of the foregoing factors.
Discontinued operations. During the fourth quarter of 2003, we
committed to a formal plan to sell certain non-core assets within our Products
segment. The sale of these assets was consummated in February 2004. These assets
were held for sale and accordingly, their results of operations were reported in
discontinued operations. The assets sold were acquired as part of the IHI merger
that occurred on December 17, 2001. The results of their operations and cash
flows were not material to our 2001 consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had working capital of $24.9 million, current
maturities of long-term debt of $10.1 million, long-term debt of $14.3 million
and stockholders' equity of $102.4 million. Historically, our principal
liquidity requirements and uses of cash have been for debt service, capital
expenditures, working capital and acquisition financing, and our principal
sources of liquidity and cash have been from cash flows from operations,
borrowings under long-term debt arrangements and issuances of equity securities.
We have financed acquisitions through bank borrowings, sales of equity
(primarily to First Reserve) and internally generated funds.
Net Cash Provided by Operating Activities. For 2003, net cash provided
by operating activities was $7.8 million compared to $9.2 million in 2002 and
$1.0 million in 2001. The decrease of $1.4 million for 2003 was primarily
attributable to increases in inventory, higher payments on accounts payable, and
lower collections of accounts receivable. Cash provided by operations increased
in 2002 as compared to 2001 due to the increase in net income and more efficient
management of our working capital.
Net Cash Used in Investing Activities. Principal uses of cash are for
capital expenditures and acquisitions. For 2003, 2002 and 2001, we made capital
expenditures of approximately $1.6 million, $5.2 million and $3.2 million,
respectively. Cash consideration paid for acquisitions, including the merger
with IHI, was $0.3 million and $72.4 million in 2002 and 2001, respectively (see
Note 2 to our consolidated financial statements). There were no acquisitions in
2003.
Net Cash Provided by (Used in) Financing Activities. Sources of cash
from financing activities include borrowings under our credit facilities and
sales of equity securities. Financing activities used $5.8 million and $9.3
million of net cash in 2003 and 2002, respectively, compared to providing net
cash of $78.5 million in 2001. During 2002, we had net repayments of $15.8
million under our credit facilities, compared to net borrowings of $13.3
20
million during 2001. We had proceeds from issuance of long-term debt and
convertible subordinated debt of $0.0 million, $2.5 million and $46.6 million in
2003, 2002 and 2001, respectively. We made principal payments on long-term debt
of $5.5 million, $6.0 million and $25.7 million in 2003, 2002 and 2001,
respectively.
Proceeds from sales of our common stock were $10.0 million in 2002,
arising from the March sale of 1.0 million shares of common stock at $10 per
share to our largest stockholder, First Reserve. In 2001, proceeds from sales of
our common stock were $46.9 million. In connection with the merger with IHI in
December 2001, First Reserve purchased $46.8 million in shares of common stock.
Additionally, an executive officer and a director purchased $0.1 million in
shares of common stock.
Principal Debt Instruments. As of December 31, 2003, we had an
aggregate of $24.4 million borrowed under our principal bank credit facility and
other bank financings. As of December 31, 2003, as a result of the funded
debt-to-EBITDA ratio covenant, as defined in the credit agreement, our
availability under our revolving credit facility was limited to $5.2 million.
On December 17, 2001, we entered into a senior credit facility with
Wells Fargo, N.A. and General Electric Capital Corporation maturing December 17,
2004. Concurrently, we 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 $25.0 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 our 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 December 31, 2003, the senior credit facility bore interest
at LIBOR plus 2.75%, with interest payable quarterly. We are 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 if, and for so long as, our funded debt-to-EBITDA ratio is 2.25 to 1
or greater, with 50% of excess cash flow as determined under the senior credit
agreement. In connection with the sale of certain assets of the Products segment
in February 2004 (see Note 2 to our consolidated financial statements), we used
the net proceeds to pay down the Wells Fargo term loan. The remaining balance of
the loan was concurrently paid off with other funds. The senior credit facility
provides, among other covenants and restrictions, that we 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. The senior credit facility is
collateralized by substantially all of our assets. The senior credit facility's
weighted average interest rate, including amortization of loan costs, for the
year ended December 31, 2003 was 10.44%.
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
11.02%. The subordinated term loan provides, among other restrictions, that we
maintain a minimum fixed charge coverage ratio and a maximum funded
debt-to-EBITDA ratio. Under the terms of our senior credit facility, we are not
currently permitted to make principal payments on the subordinated term loan.
The subordinated term loan is collateralized by a second lien on substantially
all of our assets.
As of December 31, 2003, we were in compliance with all but one
covenant under both the senior credit facility and the subordinated term loan.
At December 31, 2003, we had a fixed charge coverage ratio (as defined in our
debt agreements) of 0.89:1; we were required to maintain a minimum of 1.50:1.
This breach had no effect on our financial position, results of operations or
cash flows for 2003. We requested and received waivers concerning our
non-compliance from both the senior credit facility lenders (Wells Fargo, N.A.,
General Electric Capital Corporation, Comerica Bank, and Whitney National Bank)
and the subordinated term loan lender (Wells Fargo Energy Capital, Inc.)
covering the affected period.
We believe that cash generated from operations and amounts available
under our 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. We also believe any
significant increase in capital expenditures caused by any need to increase
manufacturing capacity can be funded from operations or through debt financing.
21
We intend to pursue additional acquisition candidates, but the timing,
size or success of any acquisition effort and the related potential capital
commitments cannot be predicted. We expect to fund future cash acquisitions
primarily with cash flow from operations and borrowings, including the
unborrowed portion of our 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 us.
A summary of our outstanding contractual obligations and other
commercial commitments at December 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 $ 24,356 $ 10,093 $ 13,698 $ 169 $ 396
Operating leases 4,794 1,345 1,819 1,127 503
-------- --------- --------- ------- -------
Total Contractual Obligations $ 29,150 $ 11,438 $ 15,517 $ 1,296 $ 899
======== ========= ========= ======= =======
RELATED PARTIES
We have transactions in the normal course of business with certain
related parties. Except as noted below, management believes these transactions
were made at the prevailing market rates or terms.
On September 29, 2000, we entered into a 12%, $8 million convertible
subordinated note payable to First Reserve. In May 2001, we entered into a 12%,
$15 million convertible promissory note payable to First Reserve. The proceeds
of the note were used to fund our acquisition of A&B Bolt. In December 2001, the
two convertible promissory notes and accrued interest in the aggregate amount of
$25.3 million were converted into 2.0 million shares of common stock. Interest
expense on these two notes was $2.1 million for the year ended December 31,
2001.
In 2001, we sold 0.01 million shares of common stock to an executive
officer and a director of the Company for cash proceeds of $0.1 million.
On March 27, 2002, we sold 1.0 million shares of our common stock at
$10 per share to our largest stockholder, First Reserve. The $10 per share price
was at a premium to our then recent trading history. Our common stock closed at
$9.30 per share on March 19, 2002.
General Electric Capital Corporation is a beneficial owner of 181,692
shares of our common stock (see Note 11 to our consolidated financial
statements), and provides debt financing to us. In connection with this
financing, we paid financing costs of approximately $0.1 million and incurred
interest expense of approximately $2.2 million for the year ended December 31,
2001.
Prior to the merger of T-3 and IHI, IHI sold one of its subsidiaries to
an entity controlled by Don Carlin and Robert Cone, and IHI received a $3.5
million note receivable from the former subsidiary as part of its purchase price
(see Note 4 to our consolidated financial statements). Mr. Carlin is a former
director, and Mr. Cone is a former executive officer and director of the
Company. As more fully described in Note 4 to our consolidated financial
statements, we determined in 2003 that this note receivable was uncollectible
and wrote off $3.5 million as other expense.
We lease certain buildings under noncancelable operating leases from
related parties. Lease commitments under these leases are approximately $0.1
million for 2004. Rent expense to related parties was $0.3 million, $0.9 million
and $0.3 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
22
INFLATION
Although we believe that inflation has not had any material effect on
operating results, our business may be affected by inflation in the future.
SEASONALITY
Weather and natural phenomena can temporarily affect the sale and
performance of our products and services. We believe that our business is not
subject to any significant seasonal factors, and do not anticipate significant
seasonality in the future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operation is based upon our consolidated financial statements. We prepare these
financial statements in conformity with accounting principles generally accepted
in the United States. As such, we are required to make certain estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. We base our estimates on
historical experience, available information and various other assumptions we
believe to be reasonable under the circumstances. On an on-going basis, we
evaluate our estimates; however, actual results may differ from these estimates
under different assumptions or conditions. Our significant accounting policies
are described in Note 1 to the consolidated financial statements included
elsewhere within this Annual Report on Form 10-K. The accounting policies we
believe are the most critical to our reporting of our financial condition and
results of operations and require management's most difficult, subjective or
complex judgments and estimates are described below.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the historical carrying amount, net
of write-offs and the allowance for doubtful accounts. Our receivables are
exposed to concentrations of credit risk since a majority of our business is
conducted with companies in the oil and gas, petrochemical, chemical and
petroleum refining industries in the Gulf Coast region. We continually monitor
collections and evaluate the financial strength of our customers but do not
require collateral to support our domestic customer receivables. We may require
collateral to support our international customer receivables, if any. We provide
an allowance for doubtful accounts for potential collection issues in addition
to reserves for specific accounts receivable where collection is no longer
probable. We cannot give assurances that we will continue to experience the same
credit loss rates we have in the past or that our losses will not exceed the
amount reserved.
INVENTORY
We regularly review inventory quantities on hand and record a provision
for excess and slow moving inventory to write down the recorded cost of
inventory to its fair market value. This analysis is based primarily on the
length of time the item has remained in inventory and management's consideration
of current and expected market conditions. However, a significant decrease in
demand and a further weakening of market conditions could result in further
writedowns in inventory carrying values and a charge to earnings.
LONG-LIVED ASSETS
Long-lived assets to be held and used by us are reviewed to determine
whether any events or changes in circumstances indicate the carrying amount of
the asset may not be recoverable. Long-lived assets include property, plant and
equipment and definite-lived intangibles. For long-lived assets to be held and
used, we base our evaluation on impairment indicators such as the nature of the
assets, the future economic benefit of the assets, any historical or future
profitability measurements and other external market conditions or factors that
may be present. If such impairment indicators are present or other factors exist
that indicate the carrying amount of the asset may not be recoverable, we
determine whether an impairment has occurred through the use of an undiscounted
cash flows analysis of the asset at the lowest level for which identifiable cash
flows exist. If an impairment has occurred, we recognize a loss for the
difference between the carrying amount and the estimated fair value of the
asset. The fair
23
value of the asset is measured using quoted market prices or, in the absence of
quoted market prices, is based on an estimate of discounted cash flows. Assets
are classified as held for sale when the Company has a plan for disposal of
certain assets and those assets meet the held for sale criteria of SFAS No. 144.
At December 31, 2003, we assessed the assets of continuing operations of the
Products segment. As of December 31, 2003 and 2002, no significant impairment
had occurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses and represents a
significant portion of our assets. Identifiable intangible assets acquired in
business combinations are recorded based upon fair market value at the date of
acquisition.
Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." This standard changes the accounting for goodwill and certain other
intangible assets from an amortization method to an impairment only approach.
The standard also requires a reassessment of the useful lives of identifiable
intangible assets other than goodwill and at least an annual test for impairment
of goodwill and intangibles with indefinite lives.
During 2002, we completed the transitional goodwill and indefinite life
intangibles impairment tests as well as the annual impairment tests required by
SFAS No. 142. During 2002, our calculations indicated the fair value of each
reporting unit exceeded its carrying amount and, accordingly, goodwill and
indefinite life intangibles were not impaired. Our annual tests of impairment of
goodwill and indefinite life intangibles are performed as of December 31. The
fair values of our reporting units were determined based on the reporting units'
projected discounted cash flow and publicly traded company multiples and
acquisition multiples of comparable businesses.
In mid year 2003, we hired a new management team and began to evaluate
our various existing businesses and products to determine T-3's future strategic
direction, and to improve return on stockholder investment and position T-3 for
future growth.
In the fourth quarter of 2003, our new management team completed its
evaluation of each of the business segment's product lines and service revenues
for expected performance in the forthcoming years and formulated a new business
strategy and operating plan. Management based its expectations for T-3's future
performance on current market conditions and on each of the business segment's
potential to maximize the value of the overall business by either expansion or
growth of product lines and services, internally and through acquisitions, and
in both the domestic and international markets. In December 2003, the Board of
Directors approved management's business strategy and 2004 annual operating
plan.
In connection with the disposition of certain non-core assets (see Note
2 to our consolidated financial statements), we reevaluated our expectations for
the earnings, growth and contribution of the Products segment for 2004 and
concluded that the segment would still generate revenues and earnings and
contribute positively to T-3's consolidated results of operations and cash flows
but at a much reduced level. This determination was based on the continued
softness in the Gulf of Mexico upstream and downstream oil and gas industry as
well as lower revenues generated from larger fabricated equipment and component
revenues. In addition, we expect lower revenues from the electrical motor and
generator repair and storage business.
Accordingly, at December 31, 2003, we assessed the realizability of the
Company's recorded goodwill and other intangibles in accordance with SFAS No.
142. Our analysis indicated that goodwill was impaired for the remaining
businesses within the Products Segment as their carrying value was greater than
fair value. We then performed a discounted cash flow analysis and used other
market methods to estimate the fair value of the assets and liabilities other
than goodwill and intangibles. This assessment indicated that goodwill of $16.2
million was impaired. As a result, we recorded a non-cash goodwill impairment
charge in continuing operations. We will continue to test on a consistent
measurement date unless events occur or circumstances change between annual
impairment tests that would more likely than not reduce fair value of a
reporting unit below its carrying value.
24
Management's business strategy is to continue to expand and grow its
product lines and services in both existing and strategically acquired domestic
and international operations. This will be accomplished by acquiring products
and services that complement each other in the manufacturing, aftermarket and
service arenas. In addition, to increase the volume of our products growth, we
plan to improve and expand on our international agency agreements. To promote
quality and excellence to our customers, we have increased our engineering group
to improve and expand on our existing product lines in addition to any future
products we may develop or acquire. We plan to expand our higher margin
after-market services by promoting rapid response to customer needs and promote
intercompany coordination through combined sales efforts. Finally, we continue
to improve our existing operations through the integration and consolidation of
our facilities.
INCOME TAXES
We provide for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This standard takes into account the differences
between financial statement treatment and tax treatment of certain transactions.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates is recognized as income or expense in the period that includes the
enactment date. We operate in a number of domestic tax jurisdictions under
various legal forms. Determination of taxable income in any jurisdiction
requires the interpretation of the related tax laws and regulations and the use
of estimates and assumptions regarding significant future events. Changes in tax
laws and regulations or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we
provide during any given year.
We record a valuation allowance to reduce the carrying value of our
deferred tax assets when it is more likely than not that some or all of the
deferred tax assets will expire before realization of the benefit or that future
deductibility is not probable. The ultimate realization of the deferred tax
assets depends upon the ability to generate sufficient taxable income of the
appropriate character in the future. This requires us to use estimates and make
assumptions regarding significant future events such as the taxability of
entities operating in the various taxing jurisdictions. When the likelihood of
the realization of existing deferred tax assets changes, adjustments to the
valuation allowance are charged, in the period in which the determination is
made, either to income or goodwill, depending upon when that portion of the
valuation allowance was originally created. In addition, we have identified
various domestic tax planning strategies we would implement, if necessary, to
enable the realization of our deferred tax assets.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt." As a result,
the criteria in APB No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," will now be used to classify those gains and losses. Under SFAS
145, we will be required to reclassify any gain or loss on extinguishment of
debt that was previously classified as an extraordinary item to normal
operations for all fiscal years beginning after May 15, 2002, including all
prior period presentations. We implemented SFAS 145 in 2003 and reclassified a
$777,000 loss on extinguishment of debt incurred in December 2001 from
extraordinary items to other (income) expense in our 2001 Statement of
Operations, with the corresponding tax benefit of $303,000 reclassified to
income tax expense.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 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 Interpretation
No. 46 are applicable immediately to all variable interest entities created
after January 31, 2003 and require certain disclosures for all variable interest
entities. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R")
to clarify some of the provisions of the Interpretation and to defer the
effective date of implementation for certain entities created before January 31,
2003. Under the guidance of FIN
25
46R, entities that do not have interests in structures that are commonly
referred to as special purpose entities ("SPEs") are required to apply the
provisions of the Interpretation in financial statements for periods ending
after March 14, 2004. The adoption of the provisions applicable to SPEs and all
other variable interests obtained after January 31, 2003 did not have an impact
on our consolidated financial statements. For all other interests, we are
currently evaluating the impact this Interpretation will have, but do not expect
it to have a material impact on our financial condition, results of operations
and cash flows.
Other new accounting pronouncements effective during 2003 did not have
a material effect on our consolidated financial statements (see Note 1 to our
consolidated financial statements).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
We are exposed to some market risk due to the floating interest rate
under our revolving credit facility and certain of our term debt. As of December
31, 2003, our revolving credit facility had no principal balance and our
variable long-term debt had a principal balance of $9.9 million, with interest
rates that float with prime or LIBOR. A 1.0% increase in interest rates could
result in a $0.1 million annual increase in interest expense on the existing
principal balances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in this report as set forth in the "Index to Consolidated Financial
Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management
carried out an evaluation, with the participation of our principal executive
officer (the "CEO") and our principal financial officer (the "CFO"), of the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
of the Securities and Exchange Act of 1934. Based on those evaluations, the CEO
and CFO believe:
(i) that our disclosure controls and procedures are designed to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure; and
(ii) that our disclosure controls and procedures are effective.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated herein by reference
to the material appearing in the Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements
See index to consolidated financial statements set forth on
page F-1.
b. Reports on Form 8-K
On November 19, 2003, the Company filed a current report on
Form 8-K disclosing its establishment of a process for
employees, investors and other interested parties to
communicate directly with non-management directors.
c. Exhibits
See the Exhibit Index appearing on page EX-1.
28
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 30TH DAY OF MARCH,
2004.
T-3 ENERGY SERVICES, INC.
By: /s/ Steven J. Brading
----------------------------------
STEVEN J. BRADING (CHIEF FINANCIAL
OFFICER AND VICE PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS AND IN THE CAPACITIES INDICATED
ON THE 30TH DAY OF MARCH, 2004.
SIGNATURE TITLE
By: /s/ Gus D. Halas President, Chief Executive Officer and
------------------------- Chairman (Principal Executive Officer)
GUS D. HALAS
By: /s/ Steven J. Brading Vice President, Chief Financial Officer,
------------------------- Treasurer and Secretary (Principal
STEVEN J. BRADING Financial and Accounting Officer)
By: /s/ Mark E. Baldwin Director
-------------------------
MARK E. BALDWIN
By: /s/ Stephen A. Snider Director
-------------------------
STEPHEN A. SNIDER
By: /s/ Joseph R. Edwards Director
-------------------------
JOSEPH R. EDWARDS
By: /s/ Ben A. Guill Director
-------------------------
BEN A. GUILL
By: /s/ Steven W. Krablin Director
-------------------------
STEVEN W. KRABLIN
By: /s/ James M. Tidwell Director
-------------------------
JAMES M. TIDWELL
29
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
T-3 Energy Services, Inc., and Subsidiaries:
Report of Independent Auditors..................................................................... F-2
Report of Independent Public Accountants........................................................... F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002....................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001............................................................... F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001......................................................... F-7
Notes to Consolidated Financial Statements......................................................... F-8
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
T-3 Energy Services, Inc.:
We have audited the accompanying consolidated balance sheets of T-3
Energy Services, Inc. as of December 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the two years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of T-3 Energy Services, Inc.
as of December 31, 2001 and for the year then ended were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those consolidated financial statements in their report dated March
8, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of T-3
Energy Services, Inc., at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 to the accompanying consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.
142 (Goodwill and Other Intangible Assets) "FAS 142" in 2002.
As discussed above, the financial statements of T-3 Energy Services,
Inc. as of December 31, 2001, and for the year ended December 31, 2001, were
audited by other auditors who have ceased operations. As described in Note 1,
these financial statements have been revised to include the transitional
disclosures required by FAS 142. Our audit procedures with respect to the
disclosures in Note 1 for 2001 included (a) agreeing the previously reported net
income to the previously issued financial statements, (b) agreeing the
adjustments to reported net income representing amortization expense (net of tax
effect) recognized in 2001 related to goodwill to the Company's underlying
records obtained from management, and (c) testing the mathematical accuracy of
the reconciliation of adjusted net income to reported net income, and the
related earnings per share amounts. In our opinion, the disclosures in Note 1
for 2001 are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements taken as a
whole.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 12, 2004
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
T-3 Energy Services, Inc.:
We have audited the accompanying consolidated balance sheets of T-3
Energy Services, Inc. (a Delaware corporation), and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations, cash
flows and stockholders' equity for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
T-3 Energy Services, Inc., and subsidiaries as of December 31, 2001 and 2000,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 8, 2002
NOTE: The report of Arthur Andersen LLP presented above is a copy of a
previously issued Arthur Andersen LLP report and said report has not been
reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent
to the inclusion of its report in this Form 10-K.
F-3
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31,
-------------------------------
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 19 $ 857
Restricted cash................................................... 102 --
Accounts receivable - trade, net.................................. 20,098 20,050
Inventories....................................................... 14,155 16,121
Notes receivable, current portion................................. 1,462 696
Deferred income taxes............................................. 2,613 2,595
Current assets of discontinued operations......................... 8,202 4,826
Prepaids and other current assets................................. 4,159 5,214
---------- ----------
Total current assets......................................... 50,810 50,359
Property and equipment, net....................................... 22,950 24,636
Notes receivable, less current portion............................ 370 5,053
Goodwill, net..................................................... 68,726 85,596
Other intangible assets, net...................................... 2,228 3,663
Long-term assets of discontinued operations....................... --- 16,689
Other assets...................................................... 453 603
---------- ----------
Total assets...................................................... $ 145,537 $ 186,599
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade.......................................... $ 8,186 $ 12,705
Accrued expenses and other........................................ 6,615 7,707
Current liabilities of discontinued operations.................... 1,047 1,802
Current maturities of long-term debt.............................. 10,093 3,463
---------- ----------
Total current liabilities.................................... 25,941 25,677
Long-term debt, less current maturities........................... 14,263 26,441
Other long-term liabilities....................................... 177 1,108
Deferred income taxes............................................. 2,790 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,
10,581,986 shares issued and outstanding in 2003 and 2002 11 11
Warrants, 517,862 and 3,489,079 issued and
outstanding in 2003 and 2002.............................. 853 938
Additional paid-in capital................................... 122,954 122,833
Retained earnings (deficit).................................. (21,452) 6,827
---------- ----------
Total stockholders' equity................................ 102,366 130,609
---------- ----------
Total liabilities and stockholders' equity........................ $ 145,537 $ 186,599
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Products ............................................... $ 95,997 $ 91,380 $ 69,282
Services ............................................... 29,587 32,224 20,880
--------- --------- ---------
125,584 123,604 90,162
Cost of revenues:
Products ............................................... 70,523 64,585 47,184
Services ............................................... 20,184 22,054 14,000
--------- --------- ---------
90,707 86,639 61,184
Gross profit ................................................ 34,877 36,965 28,978
Operating expenses:
Impairment of goodwill ................................. 16,209 --- ---
Selling, general and administrative expenses ........... 27,710 27,488 18,852
--------- --------- ---------
43,919 27,488 18,852
Income (loss) from operations ............................... (9,042) 9,477 10,126
Interest expense ............................................ 3,126 3,478 4,851
Interest income ............................................. 256 676 3
Write-off of acquired note receivable ....................... 3,491 --- ---
Other (income) expense, net ................................. 427 (83) 799
--------- --------- ---------
Income (loss) from continuing operations before provision for
income taxes ........................................... (15,830) 6,758 4,479
Provision for income taxes .................................. 1,120 2,708 2,557
--------- --------- ---------
Income (loss) from continuing operations .................... (16,950) 4,050 1,922
Income (loss) from discontinued operations, net of tax ...... (11,329) 520 ---
--------- --------- ---------
Net income (loss) ........................................... $ (28,279) $ 4,570 $ 1,922
========= ========= =========
Basic earnings (loss) per common share:
Continuing operations .................................. $ (1.60) $ 0.39 $ 0.85
Discontinued operations ................................ (1.07) 0.05 ---
--------- --------- ---------
Net income (loss) per common share ..................... $ (2.67) $ 0.44 $ 0.85
========= ========= =========
Diluted earnings (loss) per common share:
Continuing operations .................................. $ (1.60) $ 0.39 $ 0.76
Discontinued operations ................................ (1.07) 0.05 ---
--------- --------- ---------
Net income (loss) per common share ..................... $ (2.67) $ 0.44 $ 0.76
========= ========= =========
Weighted average common shares outstanding:
Basic .................................................. 10,582 10,346 2,271
========= ========= =========
Diluted ................................................ 10,582 10,347 3,715
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income (loss) ..................................................... $(28,279) $ 4,570 $ 1,922
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Income) loss from discontinued operations, net of tax .......... 11,329 (520) ---
Loss on extinguishment of debt .................................. --- --- 777
Bad debt expense ................................................ 681 443 86
Depreciation and amortization ................................... 3,682 3,261 4,021
Amortization of deferred loan costs ............................. 983 850 184
Deferred taxes .................................................. 1,028 3,502 (153)
Amortization of stock compensation .............................. 36 9 31
Write-off of acquired note receivable ........................... 3,491 --- ---
Impairment of goodwill .......................................... 16,209 --- ---
Changes in assets and liabilities, net of effect of acquisitions and
dispositions:
Accounts receivable - trade, net ............................. (650) 5,584 (3,136)
Inventories .................................................. 1,944 773 (3,144)
Prepaids and other current assets ............................ 931 (1,307) (2,010)
Notes receivable ............................................. 555 271 (192)
Other assets ................................................. 151 (57) (46)
Accounts payable - trade ..................................... (4,519) (1,787) (738)
Accrued expenses and other ................................... 190 (6,427) 3,396
-------- -------- --------
Net cash provided by operating activities ............................. 7,762 9,165 998
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................ (1,604) (5,220) (3,189)
Proceeds from sales of property and equipment ...................... 302 250 295
Cash paid for acquisitions, net of cash acquired ................... --- (300) (72,364)
-------- -------- --------
Net cash used in investing activities ................................. (1,302) (5,270) (75,258)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt and convertible
subordinated debt ............................................ --- 2,473 46,615
Net borrowings (repayments) under revolving credit facility ...... --- (15,806) 13,301
Payments on long-term debt ....................................... (5,548) (5,967) (25,738)
Debt financing costs ............................................. (215) (5) (2,631)
Proceeds from sales of common stock .............................. --- 10,000 46,940
-------- -------- --------
Net cash provided by (used in) financing activities ................... (5,763) (9,305) 78,487
-------- -------- --------
Net cash provided by (used in) discontinued operations ................ (1,433) 872 ---
-------- -------- --------
Net increase in restricted cash ....................................... (102) --- ---
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................. (838) (4,538) 4,227
Cash and cash equivalents, beginning of year .......................... 857 5,395 1,168
-------- -------- --------
Cash and cash equivalents, end of year ................................ $ 19 $ 857 $ 5,395
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK WARRANTS ADDITIONAL RETAINED TOTAL
--------------- --------------- ------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------- ------ -------- -------- ---------- --------- --------
BALANCE, DECEMBER 31, 2000 .. --- $ --- 1,971 $ 2 --- $ --- $ 21,696 $ 335 $ 22,033
Sales of common stock ....... --- --- 3,669 4 --- --- 46,936 --- 46,940
Amortization of stock
compensation ............. --- --- --- --- --- --- 31 --- 31
First Reserve debt conversion --- --- 1,953 2 --- --- 25,302 --- 25,304
Merger with IHI ............. --- --- 1,989 2 3,489 938 18,860 --- 19,800
Net income .................. --- --- --- --- --- --- --- 1,922 1,922
--- ----- ------ ---- ------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 .. --- --- 9,582 10 3,489 938 112,825 2,257 116,030
Sales of common stock ....... --- --- 1,000 1 --- --- 9,999 --- 10,000
Amortization of stock
compensation ............. --- --- --- --- --- --- 9 --- 9
Net income .................. --- --- --- --- --- --- --- 4,570 4,570
--- ----- ------ ---- ------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 .. --- --- 10,582 11 3,489 938 $122,833 6,827 130,609
Expiration of warrants ...... --- --- --- --- (2,971) (85) 85 --- ---
Amortization of stock
compensation ............. --- --- --- --- --- --- 36 --- 36
Net loss .................... --- --- --- --- --- --- --- (28,279) (28,279)
--- ----- ------ ---- ------ ------- -------- -------- --------
BALANCE, DECEMBER 31, 2003 .. --- $ --- 10,582 $ 11 518 $ 853 $122,954 $(21,452) $102,366
=== ===== ====== ==== ====== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
T-3 Energy Services, Inc. ("T-3" or "the Company") was incorporated in
October 1999, but did not engage in business activities until the acquisition of
Cor-Val, Inc. on February 29, 2000. T-3 acquired Preferred Industries, Inc. on
April 30, 2000. For financial reporting purposes, T-3 was deemed the accounting
acquirer of both Cor-Val and Preferred Industries and applied the purchase
method of accounting in both acquisitions. Cor-Val and Preferred Industries have
been identified as predecessors to T-3 for financial presentation purposes.
Additionally, T-3 acquired O&M Equipment, Inc. in April 2000, Control Products
of Louisiana, Inc. in September 2000, Coastal Electric Motors, Inc. in December
2000 and A&B Bolt and Supply, Inc. in May 2001. The results of operations for
these acquisitions are included in the operating results for T-3 from their
respective dates of acquisition. On December 17, 2001, T-3 merged into IHI with
IHI surviving the merger under the name T-3 Energy Services, Inc. The merger was
treated for accounting purposes as if IHI was acquired by T-3 (a reverse
acquisition) in a purchase business transaction. The purchase method of
accounting required that the Company carry forward T-3's net assets at their
historical book values and reflect IHI's net assets at their estimated fair
values at the date of the merger. Accordingly, the 2001 historical operating
results presented herein include the historical operating results of T-3 prior
to its merger with IHI and the two weeks of operations of the combined company
from December 17, 2001 to December 31, 2001. In connection with the merger at
December 17, 2001, the Company implemented a one-for-ten reverse stock split of
its common stock and common shares underlying existing warrants and options.
Accordingly, all share amounts presented in this report have been restated to
reflect this stock split.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of T-3 Energy Services, Inc., and its wholly owned subsidiaries. All significant
intercompany accounts have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of December
31, 2003 and 2002, there were no cash equivalents. At December 31, 2003, the
Company had approximately $102,000 in restricted cash arising from insurance
proceeds held in escrow pending landlord approval of repairs to a leased
facility.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
prepaids and other current assets, accounts payable and accrued expenses and
other approximate their respective fair values because of the short maturities
of those instruments.
Long term notes receivable, including its current portion, are
estimated by discounting future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings. The carrying
amounts of these notes receivable closely approximate their fair values.
The fair value of long-term debt, including current maturities, is
estimated based upon quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturities. The
carrying amounts of these long-term debt instruments closely approximate their
fair values.
Other long-term liabilities consist primarily of deferred payments for
which cost approximates fair value.
F-8
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are stated at the historical carrying amount, net
of write-offs and the allowance for doubtful accounts. The Company's receivables
are exposed to concentrations of credit risk since its business is primarily
conducted with companies in the oil and gas, petrochemical, chemical and
petroleum refining industries in the Gulf Coast region. The Company continually
monitors collections and evaluates the financial strength of its customers but
does not require collateral to support its domestic customer receivables. The
Company may require collateral to support its international customer
receivables, if any. The Company provides an allowance for doubtful accounts for
potential collection issues in addition to reserves for specific accounts
receivable where collection is no longer probable, as presented in the table
below (dollars in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ -----------
Balance at beginning of year $ 461 $ 86 ---
Charged to expense ......... 681 443 86
Write-offs ................. (216) (68) ---
----- ----- -----
Balance at end of year ..... $ 926 $ 461 $ 86
===== ===== =====
Inventories
Inventories are stated at the lower of cost or market. Cost includes,
where applicable, manufacturing labor and overhead. The first-in, first-out
method ("FIFO") is used to determine the cost of substantially all of the
inventories in the Company's Pressure Control and Products segments. The
Distribution segment uses the specific identification method for certain valve
inventories and average cost for all other items in determining cost.
Inventories consist of the following (dollars in thousands):
DECEMBER 31, DECEMBER 31,
2003 2002
------------ -----------
Raw materials .................... $ 2,967 $ 3,584
Work in process .................. 2,325 3,030
Finished goods and component parts 8,863 9,507
------- -------
$14,155 $16,121
======= =======
The Company regularly reviews inventory quantities on hand and records
a provision for excess and slow moving inventory. During 2003, 2002 and 2001,
the Company recorded $841,000, $484,000 and $183,000, respectively, in charges
to earnings to write down the recorded cost of inventory to its estimated fair
market value.
Property and Equipment
Property and equipment is stated at cost. For property and equipment
acquired as a result of business combinations (see Note 2), cost is determined
based upon fair values as of the acquisition dates. Depreciation is computed
using the straight-line method over estimated useful lives. Expenditures for
replacements and major improvements are capitalized. Expenditures for
maintenance, repairs and minor replacements are expensed as incurred. Leasehold
improvements are amortized over the lesser of the estimated useful life or term
of the lease.
Long-lived assets to be held and used by the Company are reviewed to
determine whether any events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable. Long-lived assets include property,
plant and equipment and definite-lived intangibles. For long-lived assets to be
held and used, the Company bases its evaluation on impairment indicators such as
the nature of the assets, the future economic benefit of the assets, any
historical or future profitability measurements and other external market
conditions or factors that may be present. If such impairment indicators are
present or other factors exist that indicate the
F-9
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carrying amount of the asset may not be recoverable, the Company determines
whether an impairment has occurred through the use of an undiscounted cash flows
analysis of the asset at the lowest level for which identifiable cash flows
exist. If an impairment has occurred, the Company recognizes a loss for the
difference between the carrying amount and the estimated fair value of the
asset. The fair value of the asset is measured using quoted market prices or, in
the absence of quoted market prices, is based on an estimate of discounted cash
flows. Assets are classified as held for sale when the Company has a plan for
disposal of certain assets and those assets meet the held for sale criteria of
SFAS No. 144. At December 31, 2003, the Company assessed the assets of
continuing operations of the Products segment. As of December 31, 2003 and 2002,
no significant impairment had occurred.
Goodwill
Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses. Identifiable intangible
assets acquired in business combinations are recorded based upon fair market
value at the date of acquisition.
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." This standard changes the accounting for goodwill and
certain other intangible assets from an amortization method to an impairment
only approach. The standard also requires a reassessment of the useful lives of
identifiable intangible assets other than goodwill and at least an annual test
for impairment of goodwill and intangibles with indefinite lives.
During 2002, the Company completed the transitional goodwill and
indefinite life intangibles impairment tests as well as the annual impairment
tests required by SFAS No. 142. During 2002, management's calculations indicated
the fair value of each reporting unit exceeded its carrying amount and,
accordingly, goodwill and indefinite life intangibles were not impaired. The
Company's annual tests of impairment of goodwill and indefinite life intangibles
are performed as of December 31. The fair values of the Company's reporting
units were determined based on the reporting units' projected discounted cash
flow and publicly traded company multiples and acquisition multiples of
comparable businesses.
In mid year 2003, the Company hired a new management team and began to
evaluate its various existing businesses and products to determine T-3's future
strategic direction, and to improve return on shareholder investment and
position T-3 for future growth.
In the fourth quarter of 2003, T-3's new management team completed its
evaluation of each of the business segment's product lines and service revenues
for expected performance in the forthcoming years and formulated a new business
strategy and operating plan. Management based its expectations for T-3's future
performance on current market conditions and on each of the business segment's
potential to maximize the value of the overall business by either expansion or
growth of product lines and services, internally and through acquisitions, and
in both the domestic and international markets. In December 2003, the Board of
Directors approved management's business strategy and 2004 annual operating
plan.
In connection with the disposition of certain non-core assets (see Note
2), management reevaluated its expectations for the earnings, growth and
contribution of the Products segment for 2004 and concluded that the segment
would still generate revenues and earnings and contribute positively to T-3's
consolidated results of operations and cash flows but at a much reduced level.
This determination was based on the continued softness in the Gulf of Mexico
upstream and downstream oil and gas industry as well as lower revenues generated
from larger fabricated equipment and component revenues. In addition, management
expects lower revenues from the electrical motor and generator repair and
storage business.
Accordingly, at December 31, 2003, T-3 assessed the realizability of
the Company's recorded goodwill and other intangibles in accordance with SFAS
No. 142. Management's analysis indicated that goodwill was impaired for the
remaining businesses within the Products Segment as their carrying value was
greater than fair
F-10
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value. The Company then performed a discounted cash flow analysis and used other
market methods to estimate the fair value of the assets and liabilities other
than goodwill and intangibles. This assessment indicated that goodwill of $16.2
million was impaired. As a result, T-3 recorded a non-cash goodwill impairment
charge in continuing operations. The Company will continue to test on a
consistent measurement date unless events occur or circumstances change between
annual impairment tests that would more likely than not reduce fair value of a
reporting unit below its carrying value.
Had the Company accounted for its goodwill and certain other intangible
assets under SFAS No. 142 for all prior periods presented, the Company's net
income and earnings per common share would have been as follows for the year
ended December 31, 2001 (dollars in thousands, except per share data):
DECEMBER 31,
2001
------------
Reported income ....................... $1,922
Amortization expense, net of tax ...... 1,608
------
Net income, as adjusted ............... $3,530
======
Earnings per common share, as adjusted:
Basic ........................... $ 1.55
======
Diluted ......................... $ 1.19
======
The changes in the carrying amount of goodwill for the year ended
December 31, 2003, are as follows (dollars in thousands):
PRESSURE
CONTROL PRODUCTS DISTRIBUTION UNALLOCATED TOTAL
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 2001............. $ 62,680 $ 18,378 $ 5,565 $ 1,247 $ 87,870
Adjustments............................ (41) (631) (355) (1,247) (2,274)
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 2002............. $ 62,639 $ 17,747 $ 5,210 $ --- $ 85,596
Adjustments............................ (589) 250 (322) --- (661)
Impairment loss recognized
in operating income............... --- (16,209) --- --- (16,209)
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 2003............. $ 62,050 $ 1,788 $ 4,888 $ --- $ 68,726
============== ============== ============== ============== ==============
During 2003, the Company reduced goodwill by $2,225,000 as a direct
result of management's conclusion that purchase accounting accruals previously
established were no longer necessary. These reductions were partially offset by
a charge to goodwill to increase the valuation allowance for deferred tax assets
to the extent the allowance had been established previously through purchase
accounting. During 2002, the Company reduced goodwill by $1,931,000 as a result
of the utilization of acquired net operating losses, reductions in net operating
loss valuation allowances and utilization of tax-deductible goodwill
amortization. In 2002, as part of its final purchase accounting adjustments,
$763,000 was reclassified to non-competes and various other adjustments were
made to reflect the final valuation of the acquired assets and liabilities.
Other Intangible Assets
Other intangible assets include deferred loan costs, non-compete
agreements, patents and other similar items, as described below (dollars in
thousands):
F-11
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, DECEMBER 31,
2003 2002
------------------ ----------------
Deferred loan costs.............................................. $ 2,937 $ 2,723
Covenants not to compete......................................... 4,015 4,038
Other intangible assets.......................................... 46 45
------------------ ----------------
6,998 6,806
Less: Accumulated amortization................................... (4,770) (3,143)
------------------ ----------------
$ 2,228 $ 3,663
================== ================
Deferred loan costs were incurred in connection with the arrangement of
the Company's credit agreement and the Wells Fargo note payable (see Note 6).
Deferred loan costs are amortized over the terms of the applicable loan
agreements, which range from three to fifteen years. Accumulated amortization
was $1,903,000 and $920,000 at December 31, 2003 and 2002, respectively.
Amortization of deferred loan costs for the years ended December 31, 2003, 2002
and 2001, which is classified as interest expense, was $983,000, $850,000 and
$184,000, respectively. The early repayment of certain T-3 indebtedness in
connection with the merger with IHI in December 2001 resulted in a loss on
extinguishment of debt of $777,000 as a result of the write-off of unamortized
deferred loan costs. This amount is included in other (income) expense in the
2001 Statement of Operations.
Covenants not to compete are amortized upon commencement of the
non-compete period over the terms of the agreements, which range from one to
five years. Accumulated amortization was $2,852,000 and $2,216,000 at December
31, 2003 and 2002, respectively. Amortization expense for covenants not to
compete was $636,000, $707,000, and $908,000 for the years ended December 31,
2003, 2002 and 2001, respectively. The following table summarizes estimated
aggregate amortization expense for each of the five succeeding fiscal years (in
thousands):
Year ending December 31 -
2004................................................................................ $ 124
2005................................................................................ 23
2006................................................................................ --
2007................................................................................ --
2008................................................................................ --
Excluded from the above amortization expense is $1.0 million of
covenants not to compete for which the amortization period has not yet begun.
Self-Insurance
The Company is self-insured up to certain levels for its group medical
coverage. The amounts in excess of the self-insured levels are fully insured, up
to a limit. Liabilities associated with these risks are estimated by considering
historical claims experience. Although management believes adequate reserves
have been provided for expected liabilities arising from the Company's
self-insured obligations, projections of future losses are inherently uncertain,
and it is reasonably possible their estimates of these liabilities will change
over the near term as circumstances develop.
Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This standard takes into account the differences
between financial statement treatment and tax treatment of certain transactions.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and
F-12
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates is recognized as income or expense in the period
that includes the enactment date. T-3 operates in a number of domestic tax
jurisdictions under various legal forms. Determination of taxable income in any
jurisdiction requires the interpretation of the related tax laws and regulations
and the use of estimates and assumptions regarding significant future events.
Changes in tax laws and regulations or the Company's level of operations or
profitability in each taxing jurisdiction could have an impact upon the amount
of income taxes that it provides during any given year.
The Company records a valuation allowance to reduce the carrying value
of its deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will expire before realization of the benefit or that
future deductibility is not probable. The ultimate realization of the deferred
tax assets depends upon the ability to generate sufficient taxable income of the
appropriate character in the future. This requires management to use estimates
and make assumptions regarding significant future events such as the taxability
of entities operating in the various taxing jurisdictions. When the likelihood
of the realization of existing deferred tax assets changes, adjustments to the
valuation allowance are charged, in the period in which the determination is
made, either to income or goodwill, depending upon when that portion of the
valuation allowance was originally created. In addition, the Company has
identified various domestic tax planning strategies it would implement, if
necessary, to enable the realization of its deferred tax assets.
Contingencies
The Company records an estimated loss from a loss contingency when
information available prior to the issuance of its financial statements
indicates that it is probable that an asset has been impaired or a liability has
been incurred at the date of the financial statements and the amount of the loss
can be reasonably estimated. Accounting for contingencies such as environmental,
legal and income tax matters requires the Company to use its judgment. While the
Company believes that its accruals for these matters are adequate, the actual
loss from a loss contingency could be significantly different than the estimated
loss, resulting in an adverse effect on the results of operations and financial
position of the Company.
Revenue Recognition
The Company's products and services are sold based upon purchase orders
or contracts with the customer that include fixed or determinable prices and
that do not include right of return or other similar provisions or other
significant post delivery obligations. The Company records revenue at the time
its manufacturing process is complete, the customer has been provided with all
proper inspection and other required documentation, title and risk of loss has
passed to the customer, collectibility is reasonably assured and the product has
been delivered. Customer advances or deposits are deferred and recognized as
revenue when the Company has completed all of its performance obligations
related to the sale. The Company also recognizes revenue as services are
performed in accordance with the related contract provisions. The amounts billed
for shipping and handling cost are included in revenue and related costs are
included in costs of sales.
Stock-Based Compensation
At December 31, 2003, the Company had stock option plans, which are
described more fully in Note 12. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. No significant stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per common share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to
stock-based employee plans (dollars in thousands, except per share data):
F-13
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002 2001
------------- ------------- -------------
Net income (loss), as reported.......................................... $ (28,279) $ 4,570 $ 1,922
Total stock-based employee compensation expense determined under fair
value method for all awards, net of related tax effects............... (517) (311) (172)
------------- ------------- -------------
Net income, as adjusted................................................. $ (28,796) $ 4,259 $ 1,750
Basic EPS:
As reported........................................................... $ (2.67) $ 0.44 $ 0.85
As adjusted........................................................... $ (2.72) $ 0.41 $ 0.77
Diluted EPS:
As reported........................................................... $ (2.67) $ 0.44 $ 0.76
As adjusted........................................................... $ (2.72) $ 0.41 $ 0.71
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, 2002 and
2001, respectively, were computed on a weighted average basis: risk-free
interest rate of 3.80%, 4.82% and 5.32%, expected volatility of 43.44%, 37.21%
and 35.93%, expected life of 4, 4 and 6 years 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.
Cash Flows
Supplemental disclosures of cash flow information is presented in the
following table (dollars in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
---- ---- ----
Non-cash investing and financing activities:
Property acquired with debt...................................... $ --- $ --- $ 915
Common stock and warrants issued in acquisitions and merger...... --- --- 19,800
Conversion of convertible subordinated debt to equity............ --- --- 25,304
Cash paid during the period for:
Interest..................................................... $ 2,131 $ 2,676 $ 2,608
Income taxes................................................. 20 2,511 1,835
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the prior-year amounts to
conform to the current-year presentation.
F-14
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Newly Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." As a result, the criteria in APB No. 30, "Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," will now be used to classify
those gains and losses. Under SFAS 145, the Company will be required to
reclassify any gain or loss on extinguishment of debt that was previously
classified as an extraordinary item to normal operations for all fiscal years
beginning after May 15, 2002, including all prior period presentations. The
Company implemented SFAS 145 in 2003 and reclassified a $777,000 loss on
extinguishment of debt incurred in December 2001 from extraordinary items to
other (income) expense in its 2001 Statement of Operations, with the
corresponding tax benefit of $303,000 reclassified to income tax expense.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"). FIN 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 Interpretation No. 46 are applicable immediately to
all variable interest entities created after January 31, 2003 and require
certain disclosures for all variable interest entities. In December 2003, the
FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the
provisions of the Interpretation and to defer the effective date of
implementation for certain entities created before January 31, 2003. Under the
guidance of FIN 46R, entities that do not have interests in structures that are
commonly referred to as special purpose entities ("SPEs") are required to apply
the provisions of the Interpretation in financial statements for periods ending
after March 14, 2004. The adoption of the provisions applicable to SPEs and all
other variable interests obtained after January 31, 2003 did not have an impact
on the Company's consolidated financial statements. For all other interests,
management is currently evaluating the impact this Interpretation will have, but
does not expect it to have a material impact on the Company's financial
condition, results of operations and cash flows.
2. BUSINESS COMBINATIONS AND DISPOSITIONS:
Business Combinations
On May 7, 2001, the Company's board of directors approved an agreement
and plan of merger with Industrial Holdings, Inc. (IHI). As a condition to the
merger agreement, T-3 purchased IHI's subsidiary, A&B Bolt and Supply, Inc., on
May 7, 2001, for a purchase price of $15.3 million in cash including expenses.
On December 17, 2001, T-3 and IHI completed the merger, with IHI being the
surviving legal entity and changing its name to T-3 Energy Services, Inc. The
merger was treated for accounting purposes as if IHI was acquired by T-3 (a
reverse acquisition). The valuation of IHI's net assets was $21.9 million and
was based upon the 2.0 million shares of IHI common stock outstanding at the
date of the merger at the approximate trading price of $9.75 at the time that
the final terms of the merger were announced plus the fair value of outstanding
warrants and options, determined with a Black-Scholes option pricing model, plus
merger costs incurred by T-3. The acquisitions of A&B Bolt and IHI have been
accounted for using the purchase method of accounting. The purchase method of
accounting requires that the Company adjust the net assets of the acquired
companies to their estimated fair values at the date of acquisition and merger.
The results of operations of A&B Bolt and IHI have been included in the
Company's operating results from the date of acquisition and merger,
respectively.
On December 30, 2002, the Company acquired certain assets of a
spray-welding business, including a covenant not to compete valued at $150,000,
for $300,000 in cash.
The following schedule summarizes investing activities related to the
Company's acquisitions and merger presented in the consolidated statements of
cash flows for the years ended December 31, 2003, 2002 and 2001 (dollars in
thousands):
F-15
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002 2001
---- ---- ----
Fair value of tangible and intangible assets,
net of cash acquired.................................... $ --- $ 300 $ 54,134
Goodwill recorded......................................... --- --- 64,865
Total liabilities assumed................................. --- --- (26,835)
Common stock issued....................................... --- --- (19,800)
--------------- --------------- ---------------
Cash paid for acquisitions, net of cash acquired.......... $ --- $ 300 $ 72,364
=============== =============== ===============
The Company's revenues and net income on an unaudited pro forma basis
for the year ended December 31, 2001, assuming the IHI merger and the
acquisition of A&B Bolt in 2001 had occurred on January 1, 2001, would be as
follows (dollars in thousands, except per share data):
2001
------------
Revenues.............................................................. $ 193,879
Net income ........................................................... 2,922
Basic earnings per share.............................................. 0.31
Diluted earnings per share............................................ 0.30
The pro forma results include adjustments to goodwill amortization,
depreciation expense, interest expense, income tax expense and operating
expenses to reflect the reduction in salaries and related benefits of owners and
officers of certain acquired companies whose positions and salaries have been
eliminated by contractual agreement and not replaced. Pro forma net income
includes $3.1 million in merger related expenses incurred by IHI that have not
been eliminated. The pro forma results presented are not necessarily indicative
of what actually would have occurred if the acquisitions had been completed as
of January 1, 2001, nor are they necessarily indicative of future consolidated
results.
Dispositions
On June 30, 2002, the Company sold the net assets of a non-energy
subsidiary acquired as part of the merger with IHI. The assets were sold for
book value, and no gain or loss was recognized on the sale.
During the fourth quarter of 2003, the Company committed to a formal
plan to sell certain non-core assets within its Products segment. The sale of
these assets was consummated in February 2004. The assets sold comprised
substantially all of the assets of LSS - Lone Star - Houston Inc., Bolt
Manufacturing Co., Inc. (d/b/a Walker Bolt Manufacturing Company) and WHIR
Acquisition, Inc. (d/b/a Ameritech Manufacturing), (collectively, "the
Businesses"). The Businesses primarily manufacture and distribute a broad line
of standard and metric fasteners, in addition to manufacturing specialty
fasteners and parts in small quantities for the commercial and aerospace
industries as well as the military.
Pursuant to the asset sale agreement, the buyer purchased all of the
assets of the Businesses for a purchase price of $7.4 million, subject to a
working capital adjustment after closing. The Company received $7.4 million in
cash on February 23, 2004, which was immediately used to pay down its Wells
Fargo term loan (see Note 6). In addition, the Company received two promissory
notes in the amount of $0.2 million and $0.1 million, respectively. The Company
did not record these two notes as their ultimate collection is contingent upon
the occurrence of certain specified events which management believes are
probable of not occurring. The asset sale agreement provides for the Company to
procure assignments or new contracts with certain existing customers, licensors
and landlords associated with the business within ninety days after the closing.
If the Company fails to procure such assignments or new contracts then the
Company shall reimburse the buyer with an amount associated to each contract
right.
F-16
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003, these assets constituted a business and thus were
held for sale. Accordingly, their results of operations were reported as
discontinued operations. Goodwill was allocated based on the relative fair
values of the portion of the reporting unit being disposed and the portion of
the reporting unit remaining. For the year ended December 31, 2003, the Company
recorded a loss of $11,329,000, net of tax, based upon a pending sales contract.
Included in this loss was a goodwill impairment charge of $10,230,000 and a
long-lived asset impairment charge of $2,254,000. The assets sold were acquired
as a part of the IHI merger that occurred on December 17, 2001. The results of
operations and cash flows relating to these assets for 2001 were not material to
the Company's 2001 consolidated financial statements.
The related assets and liabilities included in the sale of these
businesses, as detailed below, have been reclassified as current and non-current
assets and liabilities held for sale at December 31, 2003 and 2002 as follows
(dollars in thousands):
DECEMBER 31, DECEMBER 31,
2003 2002
---------------- ----------------
Current assets of discontinued operations:
Trade accounts receivable $ 2,210 $ 2,469
Inventories 3,127 2,309
Prepaid expenses and other 121 48
Property & equipment 2,736 ---
Other assets 8 ---
---------------- ----------------
Total current assets of discontinued operations 8,202 4,826
================ ================
Long-term assets of discontinued operations:
Property & equipment --- 5,291
Goodwill --- 11,390
Other assets --- 8
---------------- ----------------
Total long-term assets of discontinued operations --- 16,689
================ ================
Current liabilities of discontinued operations:
Accounts payable 990 1,728
Accrued expenses and other 57 74
---------------- ----------------
Total current liabilities of discontinued operations 1,047 1,802
================ ================
F-17
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating results of discontinued operations are as follows (dollars in
thousands):
2003 2002
---------- --------
Revenues $ 21,940 $ 23,266
Costs of revenues 18,270 18,099
---------- --------
Gross profit 3,670 5,167
Impairment charges 12,484 ---
Operating expenses 3,949 4,368
---------- --------
Operating income (loss) (12,763) 799
Other (income) expense --- (1)
---------- --------
Income (loss) before provision for income taxes (12,763) 800
Provision (benefit) for income taxes (1,434) 280
---------- --------
Income (loss) from discontinued operations $ (11,329) $ 520
========== ========
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment and the estimated useful lives is
as follows (dollars in thousands):
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIFE 2003 2002
----------- --------------- ---------------
Land............................................... -- $ 772 $ 772
Buildings and improvements......................... 3-40 years 7,322 7,009
Machinery and equipment............................ 3-15 years 15,012 14,453
Vehicles........................................... 5-10 years 2,403 2,754
Furniture and fixtures............................. 3-10 years 679 637
Computer equipment................................. 3-7 years 3,625 3,154
Construction in progress........................... -- 219 140
--------------- ---------------
30,032 28,919
Less -- Accumulated depreciation................... (7,082) (4,283)
--------------- ---------------
Property and equipment, net..................... $ 22,950 $ 24,636
=============== ===============
Depreciation expense for the years ended December 31, 2003, 2002 and
2001, was $3,039,000, $2,564,000 and $1,440,000, respectively.
F-18
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES RECEIVABLE:
Notes receivable consist of the following (dollars in thousands):
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
8.00% subordinated promissory note receivable with an effective rate of 12%, in
the original face amount of $350,000, net of a $25,000 discount at December 31,
2003 and 2002, due in monthly installments of $7,100 through January 2007................. $ 291 $ 291
Subordinated promissory note receivable with interest at the greater of 8.00% or
LIBOR + 5.5%, with an effective rate of 12%, in the original face amount of
$1,500,000, net of a $119,000 discount, due in monthly installments of $30,400
beginning in January 2003 through November 2004 with a final payment in December
2004 of all outstanding principal and interest (the Company received interest only
payments through September 2003)........................................................ 1,329 1,381
10.00% subordinated promissory note receivable from former directors, with an
effective rate of 12%, in the original face amount of $3,500,000, net of a
$138,000 discount. Interest payments due in twelve quarterly installments
beginning April 2002 with a final payment in December 2004 of all outstanding
principal and interest. This note was written off as uncollectible in 2003................ --- 3,362
Other notes receivable, unsecured......................................................... 212 715
--------- --------
1,832 5,749
Less -- Current portion................................................................... (1,462) (696)
--------- --------
$ 370 $ 5,053
========= ========
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 that efforts to restructure its
debt obligations had so far been unsuccessful. Accordingly, the Company reserved
approximately 50% of the note, because management believed that the note's net
realizable value was approximately $1.7 million. In the fourth quarter of 2003,
the Company learned that efforts to refinance Beaird Industries Inc. had failed,
and management determined that the note was uncollectible and wrote off the
remaining balance of the note. These amounts appear in the 2003 Statement of
Operations under the caption "Write-off of acquired note receivable".
5. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (dollars in thousands):
DECEMBER 31, DECEMBER 31,
2003 2002
--------------- ---------------
Accrued payroll and related benefits....................... $ 1,473 $ 2,493
Accrued medical costs...................................... 1,918 537
Accrued taxes.............................................. 500 326
Other accrued liabilities.................................. 2,724 4,351
--------------- ---------------
$ 6,615 $ 7,707
=============== ===============
F-19
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT:
Long-term debt from financial institutions consists of the following
(dollars in thousands):
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Wells Fargo credit facility...................................... $ -- $ --
Wells Fargo swing line........................................... -- 2,079
Wells Fargo term loan............................................ 9,900 13,200
Wells Fargo Energy Capital subordinated term loan................ 12,000 12,000
Wells Fargo mortgage notes payable............................... 2,337 2,469
Equipment loans and other........................................ 119 156
----------- -----------
Total.................................................. 24,356 29,904
Less -- Current maturities of long-term debt..................... (10,093) (3,463)
----------- -----------
Long-term debt......................................... $ 14,263 $ 26,441
=========== ===========
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 $25.0 million, a term loan of $16.5
million and an optional facility for up to an additional $30.0 million in
revolving credit commitments for future acquisitions based upon specific
criteria. At December 31, 2003, as a result of the funded debt-to-EBITDA ratio
covenant, the Company's availability under the revolving credit facility was
limited to $5.2 million. 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 December 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 if, and for so long as, its funded
debt-to-EBITDA ratio is 2.25 to 1 or greater, with 50% of excess cash flow as
determined under the senior credit agreement. In connection with the sale of
certain assets of its Products segment in February 2004 (see Note 2), the
Company used the net proceeds to pay down the Wells Fargo term loan. The
remaining balance of the loan was concurrently paid off with other funds. 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. The
senior credit facility is collateralized by substantially all of the Company's
assets. The senior credit facility's weighted average interest rate, including
amortization of loan costs, for the year ended December 31, 2003 was 10.44%.
The subordinated term loan bears interest at 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 11.02%.
The subordinated term loan provides, among other covenants and restrictions,
that the Company maintain a minimum fixed charge coverage ratio and a maximum
funded debt-to-EBITDA ratio. Under the terms of the senior credit facility, the
Company is not currently permitted to make principal payments on the
subordinated term loan. The subordinated term loan is collateralized by a second
lien on substantially all of the Company's assets.
As of December 31, 2003, the Company was in compliance with all but one
covenant under both the senior credit facility and the subordinated term loan.
At December 31, 2003, the Company had a fixed charge coverage ratio (as defined
in our debt agreements) of 0.89:1; it is required to maintain a minimum of
1.50:1. This breach had no effect on the Company's financial position, results
of operations or cash flows for 2003. T-3 requested and received waivers
concerning its non-compliance from both the senior credit facility lenders
(Wells Fargo,
F-20
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N.A., General Electric Capital Corporation, Comerica Bank, and Whitney National
Bank) and the subordinated term loan lender (Wells Fargo Energy Capital, Inc.)
covering the affected period.
The Company has two notes payable with Wells Fargo Bank with combined
outstanding principal of $2,337,000 and $2,469,000 at December 31, 2003 and
2002, respectively. The notes bear interest at 9.00% and the Treasury rate plus
3.65%, respectively, and are payable in monthly installments totaling $27,000.
The notes mature in May 2005 and February 2016, respectively, and are
collateralized by certain real estate of two of the Company's subsidiaries. The
Company repaid both notes payable with cash from operations in January 2004.
The aggregate maturities of long-term debt during the five years
subsequent to December 31, 2003, are as follows (dollars in thousands):
Year ending December 31 --
2004............................... $ 10,093
2005............................... 13,584
2006............................... 113
2007............................... 82
2008............................... 87
Thereafter......................... 397
----------
$ 24,356
==========
7. EARNINGS PER SHARE:
Basic net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted net income per common share is the same as basic but assumes the
exercise of convertible subordinated debt securities and includes dilutive stock
options 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 for the years ended December 31, 2003, 2002 and
2001, as follows (in thousands except per share data):
2003 2002 2001
----------- ---------- ----------
Numerator:
Income (loss) from continuing operations..................... $ (16,950) $ 4,050 $ 1,922
Interest on convertible debt, net of tax..................... -- -- 901
--------- --------- ---------
Income (loss) from continuing operations before
interest on convertible debt............................... (16,950) 4,050 2,823
Income (loss) from discontinued operations................... (11,329) 520 --
--------- --------- -----------
Net income (loss) before interest on convertible debt........ $ (28,279) $ 4,570 $ 2,823
========= ========= =========
Denominator:
Weighted average common shares outstanding-- basic........... 10,582 10,346 2,271
Shares for convertible debt.................................. -- -- 1,435
Shares for dilutive stock options............................ -- 1 9
--------- --------- ---------
Weighted average common shares outstanding and
Assumed conversions-- diluted.............................. 10,582 10,347 3,715
========= ========= =========
Basic earnings (loss) per common share:
Continuing operations........................................ $ (1.60) $ 0.39 $ 0.85
Discontinued operations...................................... (1.07) 0.05 --
--------- --------- ---------
Net income (loss) per common share........................... $ (2.67) $ 0.44 $ 0.85
========= ========= =========
Diluted earnings (loss) per common share:
Continuing operations........................................ $ (1.60) $ 0.39 $ 0.76
Discontinued operations...................................... (1.07) 0.05 --
--------- --------- ---------
Net income (loss) per common share........................... $ (2.67) $ 0.44 $ 0.76
========= ========= =========
F-21
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For 2003, 2002 and 2001, there were 577,979, 480,575, and 282,829
options, respectively, and for 2003, 2002 and 2001, 517,862, 3,489,079 and
3,489,079 warrants, respectively, that were not included in the computation of
diluted earnings per share because their inclusion would have been
anti-dilutive.
8. INCOME TAXES:
The components of the provision for income taxes for the years ended
December 31 are as follows (dollars in thousands):
2003 2002 2001
---- ---- ----
Federal --
Current.......................................... $ 75 $ (974) $ 2,396
Deferred......................................... 1,022 3,349 (444)
State --
Current.......................................... 17 180 617
Deferred......................................... 6 153 (12)
--------- --------- ---------
Provision for income taxes from
continuing operations............................ $ 1,120 $ 2,708 $ 2,557
========= ========= =========
Provision (benefit) for income taxes from
discontinued operations.......................... $ (1,434) $ 280 $ --
========= ========= =========
A reconciliation of the actual tax rate to the statutory U.S. tax rate
for the years ended December 31 is as follows (dollars in thousands):
2003 2002 2001
---- ---- ----
Income tax expense (benefit) at the statutory rate....... $ (5,382) $ 2,298 $ 1,523
Increase resulting from -
Nondeductible goodwill and expenses................. 5,692 199 625
State income taxes, net of federal benefit.......... 15 219 399
Losses not benefited................................ 795 -- --
Other............................................... -- (8) 10
----------- ----------- -----------
$ 1,120 $ 2,708 $ 2,557
=========== =========== ===========
F-22
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred taxes as of December 31 are as follows (dollars
in thousands):
2003 2002
---- ----
Deferred income tax assets -
Net operating loss carryforwards..................... $ 6,139 7,367
Accrued expenses..................................... 1,496 1,635
Inventories.......................................... 1,550 1,553
Intangible assets.................................... 421 104
Allowance for doubtful accounts...................... 387 250
Writeoff of note receivable.......................... 1,155 ---
Other................................................ 43 70
------------ ------------
11,191 10,979
Valuation allowance....................................... (6,474) (5,686)
------------ ------------
Total deferred income tax assets................. 4,717 5,293
Deferred income tax liabilities -
Property and equipment............................... (3,874) (4,426)
Prepaid expenses..................................... (820) (842)
Other................................................ (200) (194)
------------ ------------
Total deferred income tax liabilities............ (4,894) (5,462)
------------ ------------
Net deferred income tax asset (liability)........ $ (177) $ (169)
============ ============
The Company and its subsidiaries file a consolidated federal income tax
return. At December 31, 2003, the Company had net operating loss ("NOL")
carryforwards of approximately $18.1 million for income tax purposes that expire
beginning in 2019 and are subject to annual limitations under Section 382 of the
Internal Revenue Code. In 2003, the Company increased its valuation allowance by
$795,000 to reserve Federal deferred tax assets to the extent they exceeded
Federal net deferred tax liabilities, as it was more likely than not that these
deferred tax assets will expire before realization of the benefit. In 2002, the
Company reduced its valuation allowance by $1,454,000 to recognize a Federal
deferred tax asset to the extent of Federal net deferred tax liabilities. Any
reductions in the valuation allowance attributable to the use of these NOL
carryforwards reduces goodwill only to the extent that the valuation allowance
was originally established through purchase accounting.
At December 31, 2003, the Company had $8,993,000 in goodwill, net of
accumulated amortization, that will be tax deductible in future periods.
9. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with
certain related parties. Except as noted below, management believes these
transactions were made at the prevailing market rates or terms.
On September 29, 2000, the Company entered into a 12%, $8 million
convertible subordinated note payable to First Reserve. In May 2001, the Company
entered into a 12%, $15 million convertible promissory note payable to First
Reserve. The proceeds of the note were used to fund the acquisition of A&B Bolt.
In December 2001, the two convertible promissory notes and accrued interest in
the aggregate amount of $25.3 million were converted into 1,953,244 shares of
common stock. Interest expense on these two notes was $2,056,000 for the year
ended December 31, 2001.
General Electric Capital Corporation is a beneficial owner of 181,692
shares of common stock (see Note 11), and provides debt financing to the
Company. In connection with this financing, the Company paid financing costs of
approximately $124,000 and incurred interest expense of approximately $2,205,000
for the year ended December 31, 2001.
F-23
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2001, the Company sold 12,718 shares of common stock to an executive
officer and a director of the Company for cash proceeds of $140,000.
Prior to the merger of T-3 and IHI, IHI sold one of its subsidiaries to
an entity controlled by Don Carlin and Robert Cone, and IHI received a $3.5
million note receivable from the former subsidiary as part of its purchase price
(see Note 4). Mr. Carlin is a former director, and Mr. Cone is a former
executive officer and director of the Company. As more fully described in Note
4, the Company determined in 2003 that this note receivable was uncollectible
and wrote off $3.5 million as other expense.
On March 27, 2002, the Company sold 1,000,000 shares of its common
stock at $10 per share to First Reserve. The $10 per share price was at a
premium to the Company's then recent trading history. The Company's common stock
closed at $9.30 per share on March 19, 2002.
The Company leases certain buildings under noncancelable operating
leases from current employees of the Company. Lease commitments under these
leases are approximately $109,000 for 2004. Rent expense to related parties was
$253,000, $907,000 and $269,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases certain buildings, equipment and vehicles under
noncancelable operating leases with related parties and other third parties.
Total expense related to these leases included in the accompanying statements of
operations for the years ended December 31, 2003, 2002 and 2001 were $1,907,000,
$1,878,000 and $570,000, respectively. Aggregate minimum rental commitments for
noncancelable operating leases with terms exceeding one year, net of minimum
sublease income from subleases assumed in the merger with IHI, are as follows
(dollars in thousands):
Year ending December 31 -
2004.......................................................... $ 1,345
2005.......................................................... 977
2006.......................................................... 842
2007.......................................................... 656
2008.......................................................... 471
Thereafter.................................................... 503
-----------
Total minimum lease payments.................................. $ 4,794
Less: minimum sublease income................................. (583)
-----------
Net minimum lease payments.................................... $ 4,211
===========
In connection with the purchase accounting for the merger with IHI, the
Company engaged a lease broker to determine the fair market rental rate of
leases of comparable lease space. As a result of this engagement, it was
determined that at the date of the merger, the contract rental rates associated
with two of these leases exceeded the then fair market rental rate. Accordingly,
the Company recorded a reserve based on this excess that is amortized over the
remaining lease terms of 3 to 6 years. The reserve balance was $220,000 and
$1,645,000 at December 31, 2003 and 2002, respectively.
Contingencies
The Company is, from time to time, involved in various legal actions
arising in the normal course of business. Management does not believe there are
any existing or potential legal actions involving the Company that will have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
F-24
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's environmental remediation and compliance costs have not
been material during any of the periods presented. T-3 has been identified as a
potentially responsible party (PRP) with respect to one site designated for
cleanup under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) and similar state laws. The Company's involvement at this
site is believed to have been minimal. Because it is early in the process, no
determination of the Company's actual liability can be made at this time. As
such, management has not currently accrued for any future remediation costs.
However, based upon the Company's involvement with this site, management does
not expect that its share of remediation costs will have a material impact on
its financial position, results of operations and cash flows.
In July 2001, the Company discovered preliminary information concerning
deep soil contamination at one of its leased facilities. This preliminary
information is limited, and the contamination source has not yet been
identified. The Company has informed the landlord of the existence of the
contamination and has requested that they remediate the property as required by
the lease. Management expects that the landlord will comply with its obligations
under the lease to investigate the environmental condition and take any action
required under applicable laws. Management does not believe that the Company has
contributed to or is responsible for remediation of the site.
At December 31, 2003, the Company had no letters of credit outstanding.
11. STOCKHOLDERS' EQUITY:
Authorized Shares
The Company's authorized capital stock consists of an aggregate of
75,000,000 shares. Those shares consist of 50,000,000 shares of common stock,
par value $.001 per share, and 25,000,000 shares of preferred stock, par value
$.001 per share.
Sales and Issuances of Common Stock
In April, 2001, the Company sold 12,718 shares of common stock to an
executive officer and a director of the Company for cash proceeds of $140,000.
In connection with the merger with IHI in December 2001, First Reserve
converted two subordinated convertible notes including interest totaling $25.3
million into 1,953,244 shares of common stock and purchased 3,656,250 shares of
common stock for $46.8 million.
On March 27, 2002, the Company sold 1,000,000 shares of its common
stock at $10 per share to its largest stockholder, First Reserve.
Reserved Shares
At December 31, 2003, the Company had approximately 1,518,000 of
reserved shares for issuance in connection with its outstanding stock options
and warrants.
F-25
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants to acquire common stock
The following table sets forth the 517,862 outstanding warrants to
acquire 517,862 shares of common stock as of December 31, 2003:
Number of
common shares
Warrants to acquire common stock at $12.50 per share issued by IHI to
SJMB, L.P. as compensation for consulting services, currently
exercisable, expiring on June 29, 2005.......................................... 75,000
Warrants to acquire common stock at $12.50 per share issued by IHI to
SJMB, L.P. in consideration of a $2 million bank guaranty,
currently exercisable, expiring on June 13, 2005................................ 40,000
Warrants to acquire common stock at $14.00 per share issued by IHI to
its lenders in connection with the amendment of its credit agreement,
currently exercisable, expiring on June 30, 2005................................ 15,000
Warrants to acquire common stock at $12.50 per share issued by IHI to
SJMB, L.P. in connection with an acquisition,
currently exercisable, expiring on June 30, 2005................................ 30,000
Warrants to acquire common stock at $12.50 per share issued by IHI to an executive
officer as compensation for services rendered, currently exercisable,
expiring on June 13, 2005....................................................... 30,000
Warrants to acquire common stock at $12.80 per share issued by IHI to the
former T-3 stockholders in connection with the merger with IHI,
currently exercisable, expiring on December 17, 2011............................ 327,862
In connection with the merger with IHI, the Company valued the warrants
using a Black-Scholes option-pricing model.
12. EMPLOYEE BENEFIT PLANS:
Stock Option Plans
T-3 Energy Services, Inc. 2002 Stock Incentive Plan
The T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended
(the Plan), provides officers, employees and outside directors equity-based
incentives. The Plan will remain in effect for 10 years, unless terminated
earlier. Generally, options expire 10 years from the grant date and vest over
three to four years from the grant date.
In 2000, the Company issued performance-based options under the Plan to
purchase up to approximately 57,860 shares of the Company's common stock at
$11.01 per share which expired 10 years from the date of grant. In 2001, T-3
amended the options whereby the performance-based options were converted to time
based options. These converted options vest at 33-1/3% on the third, fourth and
fifth anniversaries of the date of employment. As a result of the amendment, the
Company recorded a compensation charge in 2001, 2002 and 2003. At December 31,
2003, there was approximately $14,000 in deferred compensation expense to be
recognized over the remaining vesting period of these options.
Industrial Holdings, Inc. Stock Option Plans
IHI maintained an incentive stock plan and a non-employee director plan
under which it granted incentive or non-qualified options to key employees and
non-qualified options to non-employee directors. The option price per share was
generally the fair market value on the date of the grant and the options granted
were exercisable immediately to five years after the grant date in accordance
with the vesting provisions of the individual agreement set forth at the time of
the award. All options expire ten years from the date of the grant. All options
F-26
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
vested at the time of the merger under the change of control provision provided
by the plan. As of January 1, 2002, all outstanding stock options that were
previously granted under this plan were assumed and continued under the T-3
Energy Services, Inc. 2002 Stock Incentive Plan.
The following table summarizes information about T-3 employee stock options
outstanding at December 31:
2003 2002 2001
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------ ----- ------ ----- ------ -----
Outstanding at the beginning of the year .... 471,880 $ 14.42 439,175 $ 19.68 120,589 $ 11.01
Granted...................................... 256,500 6.63 207,500 9.03 96,033 12.74
Assumed from Industrial Holdings, Inc........ -- -- -- -- 225,242 27.18
Exercised.................................... -- -- -- -- -- --
Forfeited.................................... (150,401) 12.36 (174,795) 21.23 (2,689) 11.01
-------- -------- -------- -------- ------- -------
Outstanding at end of year................... 577,979 $ 11.50 471,880 $ 14.42 439,175 $ 19.68
-------- -------- -------- -------- ------- -------
Options exercisable at end of year........... 283,918 $ 15.45 162,526 $ 22.36 276,490 $ 24.33
Weighted-average fair value of options
granted during the year at market price ... 256,500 2.57 207,500 3.23 96,033 $ 5.64
Weighted-average fair value of options
granted during the year where exercise
price is greater than market price at
grant date................................. --- -- --- -- --- --
The following table summarizes significant ranges of all outstanding
and exercisable options at December 31, 2003:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISABLE NUMBER EXERCISE
EXERCISABLE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------ ----------- ---- ----- ----------- -----
$ 6.28 100,000 9.2 $ 6.28 -- $ 6.28
$ 6.85 109,500 7.4 $ 6.85 25,000 $ 6.85
$ 7.55 50,000 8.6 $ 7.55 16,667 $ 7.55
$ 9.50 80,000 6.4 $ 9.50 40,333 $ 9.50
$ 11.01 125,808 3.6 $ 11.01 97,391 $ 11.01
$ 12.50 41,750 6.4 $ 12.50 41,750 $ 12.50
$ 12.80 18,387 8.2 $ 12.80 15,784 $ 12.80
$ 14.41 39,209 8.2 $ 14.41 33,668 $ 14.41
$ 92.50 - 105.00 10,825 3.5 $ 99.71 10,825 $ 99.77
$113.80 - 137.50 2,500 4.5 $ 137.50 2,500 $ 137.50
The Company follows APB Opinion No. 25 in accounting for stock options
issued to employees. Under APB Opinion No. 25, compensation expense is not
recorded for stock options issued to employees if the exercise price of an
option is equal to or greater than the market price of the stock on the date of
grant. SFAS No. 123, "Accounting for Stock-Based Compensation," requires that if
a company does not record compensation expense for stock options issued to
employees pursuant to APB Opinion No. 25, the Company must disclose the effects
on its results of operations as if an estimate of the value of stock-based
compensation at the date of grant had been recorded as an expense. The Company's
adjusted net income and earnings per share, assuming that the Company had
expensed the estimated fair value of options provided to its employees over the
applicable vesting period, are summarized in Note 1.
Defined Contribution Plans
The Company sponsors a defined contribution retirement plan for most
full-time and some part-time employees. The plan provides for matching
contributions up to 50% of the first 6% of covered employees'
F-27
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
salaries or wages contributed and for discretionary contributions. Contributions
to this plan totaled approximately $606,000, $597,000 and $305,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
13. 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. Financial information for purchase transactions
is included in the segment disclosures only for periods subsequent to the dates
of acquisition.
The Company's operations are organized into three business segments: (1)
the Pressure Control segment, (2) the Products segment, and (3) the Distribution
segment. The Pressure Control segment manufactures remanufactures and repairs
high pressure, severe service products including valves, chokes, actuators, blow
out preventers, manifolds and wellhead equipment. The Products segment
remanufactures and repairs pumps, electric motors and generators, fabricates
equipment and components for use in the exploration and production of oil and
gas, provides specialty machining for the repair and remanufacture of natural
gas and diesel engines and applies custom coating to customers' products used
primarily in the oil and gas industry. The Distribution segment is engaged in
the specialty distribution of pipes, valves, stud bolts, gaskets and other
ancillary products primarily to the upstream and downstream oil and gas
industry, offshore fabrication companies and shipyards. No single customer
accounted for 10% or more of consolidated revenues during the three years ended
December 31, 2003.
The accounting policies of the segments are the same as those of the
Company as described in Note 1. Intersegment revenues and transfers are
accounted for at commercial prices and are eliminated in consolidation. 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.
(DOLLARS IN THOUSANDS)
PRESSURE
CONTROL PRODUCTS DISTRIBUTION CORPORATE CONSOLIDATED
------- -------- ------------ --------- ------------
2003
Revenues ............................ $ 75,214 $ 11,249 $ 39,121 $ --- $ 125,584
Depreciation and amortization........ 2,237 408 328 709 3,682
Income (loss) from operations(1)..... 12,075 (16,614) 1,903 (6,406) (9,042)
Total assets......................... 101,825 18,441 17,652 7,619 145,537
Capital expenditures................. 661 81 86 776 1,604
2002
Revenues ............................ $ 70,177 $ 16,179 $ 37,248 $ --- $ 123,604
Depreciation and amortization........ 2,023 456 343 439 3,261
Income (loss) from operations........ 13,067 (52) 2,120 (5,658) 9,477
Total assets......................... 104,433 46,648 19,157 16,361 186,599
Capital expenditures................. 2,558 1,086 196 1,380 5,220
2001
Revenues ............................ $ 52,120 $ 7,435 $ 30,607 $ --- $ 90,162
Depreciation and amortization........ 3,153 293 371 204 4,021
Income (loss) from operations........ 8,997 102 2,436 (1,409) 10,126
Total assets......................... 107,685 50,176 23,286 18,581 199,728
Capital expenditures................. 1,775 271 280 863 3,189
(1) In 2003, we recorded a $16.2 million charge to continuing operations for the impairment of goodwill
related to the Products segment.
F-28
T-3 ENERGY SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 2003 and 2002 is as follows (in
thousands, except per share data):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2003
Revenues ................................... $ 30,208 $ 31,956 $ 31,619 $ 31,801
Gross profit ............................... 8,499 9,272 8,383 8,723
Income (loss) from operations .............. 1,964 1,917 1,367 (14,290)
Income (loss) from continuing operations ... (357) 770 42 (17,405)
Income (loss) from discontinued operations.. 37 (8) 74 (11,432)
Net income (loss) .......................... (320) 762 116 (28,837)
Basic earnings (loss) per common share:
Continuing operations .................... (.03) .07 --- (1.64)
Discontinued operations .................. --- --- .01 (1.08)
Net income (loss) ........................ (.03) .07 .01 (2.72)
Diluted earnings (loss) per common share:
Continuing operations .................... (.03) .07 --- (1.64)
Discontinued operations .................. --- --- .01 (1.08)
Net income (loss) ........................ (.03) .07 .01 (2.72)
2002
Revenues ................................... $ 30,801 $ 31,339 $ 29,786 $ 31,678
Gross profit ............................... 9,420 9,614 8,900 9,031
Income from operations ..................... 2,763 2,795 2,090 1,829
Income from continuing operations .......... 1,150 1,209 942 749
Income from discontinued operations ........ 157 193 123 47
Net income ................................. 1,307 1,402 1,065 796
Basic earnings per common share
Continuing operations .................... .12 .11 .09 .07
Discontinued operations .................. .02 .02 .01 .01
Net income ............................... .14 .13 .10 .08
Diluted earnings per common share
Continuing operations .................... .12 .11 .09 .07
Discontinued operations .................. .02 .02 .01 .01
Net income ............................... .14 .13 .10 .08
The Company's previously reported 2003 and 2002 quarterly results have been
restated to reflect discontinued operations (see Note 2). The sum of the
individual quarterly net income per common share amounts may not agree with the
year-to-date net income per common share as each quarterly computation is based
upon the weighted average number of common shares outstanding during that
period.
F-29
INDEX TO EXHIBITS
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
2.1 -- Agreement and Plan of Merger dated May 7, 2001, as amended, among Industrial
Holdings, Inc., T-3 Energy Services, Inc. and First Reserve Fund VIII,
Limited Partnership (incorporated herein by reference to Annex I to the
Definitive Proxy Statement on Schedule 14A of T-3 dated November 9, 2001).
2.2 -- Plan and Agreement of Merger dated December 17, 2001, between T-3 Energy
Services, Inc. ("the Company") and T-3 Combination Corp (incorporated herein
by referenced to Exhibit 2.2 to the Company's Current Report on Form 8-K
dated December 31, 2001).
3.1 -- Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated
herein by reference to Exhibit 3.1 to the Company's Current Report on Form
8-K dated December 31, 2001).
3.2 -- Bylaws of T-3 Energy Services, Inc. (incorporated herein by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated December 31,
2001).
4.1 -- Specimen Certificate of Common Stock, $.001 par value, of the Company
(incorporated herein by reference to Exhibit 4.1 to the Company's 2001 Annual
Report on Form 10-K).
4.2 -- Warrants to purchase 30,000 shares of the Company's Common Stock at $12.50
per share issued to SJMB, L.P. in connection with the acquisition of OF
Acquisition, L.P. (incorporated herein by reference to Exhibit 4.3 to
Industrial Holdings, Inc. Proxy Statement on Schedule 14A dated August 15,
2000).
4.3 -- Warrants to purchase 40,000 shares of the Company's Common Stock for $12.50
per share issued to SJMB, LP in consideration of a bank guaranty provided on
behalf of Industrial Holdings, Inc. (incorporated herein by reference to
Exhibit 10.3 - Exhibit A to Industrial Holdings, Inc. Proxy Statement on
Schedule 14A dated August 15, 2000).
4.4 -- Warrants to purchase 75,000 shares of the Company's Common Stock for $12.50
per share issued to SJMB, L.P. as compensation for consulting services
(incorporated herein by reference to Exhibit 4.9 to the Company's 2001 Annual
Report on Form 10-K).
4.5 -- Warrants to purchase 30,000 shares of the Company's Common Stock for $12.50
per share issued to Robert E. Cone as compensation (incorporated herein by
reference to Exhibit 4.10 to the Company's 2001 Annual Report on Form 10-K).
4.6 -- Form of warrant to purchase 325,000 shares of the Company's Common Stock at
$12.80 per share issued to former T-3 shareholders in connection with the
merger of T-3 and Industrial Holdings, Inc. (incorporated herein by reference
to Annex VII to the Definitive Proxy Statement on Schedule 14A of T-3 dated
November 9, 2001).
10.1 -- Employment Agreement of Gus D. Halas (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2003).
10.2 -- Employment Agreement of Michael T. Mino (incorporated herein by reference to
Exhibit 10.2 to the Company's 2001 Annual Report on Form 10-K).
10.3 -- Employment Agreement of Steven J. Brading (incorporated herein by reference
to Exhibit 10.3 to the Company's 2002 Annual Report on Form 10-K).
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
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10.4 -- Registration Rights Agreement dated December 17, 2001, among Industrial
Holdings, Inc. and the Stockholders thereto (incorporated herein by reference
to Exhibit 10.1 to Industrial Holdings, Inc. Report on Form 8-K dated
December 31, 2001).
10.5 -- Credit Agreement dated December 18, 2001, among T-3 Energy Services, Inc. and
Wells Fargo Bank, National Association, as Agent for the Banks (incorporated
herein by reference to Exhibit 10.2 to the Company's Report on Form 8-K dated
December 31, 2001).
10.6 -- Third Amendment to Credit Agreement between Wells Fargo Bank Texas, National
Association and the Company dated February 20, 2003. (incorporated herein by
reference to Exhibit 10.7 to the Company's 2002 Annual Report on Form 10-K).
10.7 -- Loan Agreement dated December 18, 2001, among T-3 Energy Services, Inc. and
Wells Fargo Energy Capital, Inc., as agent for the Lenders (incorporated
herein by reference to Exhibit 10.3 to the Company's Report on Form 8-K dated
December 31, 2001).
10.8 -- Asset Purchase Agreement dated October 26, 2001 among IHI, American Rivet
Company, Inc. and ARC Acquisition Corp (incorporated herein by reference to
Exhibit 10.4 to the Company's Report on Form 8-K dated December 31, 2001).
10.9 -- Stock Purchase Agreement dated November 14, 2001 between IHI and GHX
Acquisition Corp (incorporated herein by reference to Exhibit 10.5 to the
Company's Report on Form 8-K dated December 31, 2001).
10.10 -- Asset Purchase Agreement dated November 6, 2001 among IHI, Landreth Metal
Forming, Inc. and Landreth Fastener Corporation (incorporated herein by
reference to Exhibit 10.6 to the Company's Report on Form 8-K dated December
31, 2001).
10.11 -- Stock Purchase Agreement dated November 15, 2001, among IHI, Donald Carlin
and Robert E. Cone with respect to disposition of Beaird Industries, Inc.
(incorporated herein by reference to Exhibit 10.7 to the Company's Report on
Form 8-K dated December 31, 2001).
10.12 -- Stock Purchase Agreement by and between Industrial Holdings, Inc., the
shareholder of A&B Bolt & Supply, Inc., and T-3 Energy Services, Inc. dated
May 7, 2001 (incorporated herein by reference to Exhibit 2.1 to Industrial
Holdings, Inc. Report on Form 10-Q dated May 15, 2001).
10.13 -- T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended and restated
effective July 30, 2002 (incorporated herein by reference to the Company's
Form S-8 filed November 18, 2002).
10.14 Purchase and Sale of Assets Agreement among Lone Star Fasteners, LP; LSS-Lone
Star-Houston, Inc., Bolt Manufacturing Co., Inc. d/b/a Walker Bolt
Manufacturing Company and WHIR Acquisition, Inc. d/b/a Ameritech Fastener
Manufacturing and the Company (incorporated herein by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K dated March 9, 2004).
14.1* -- Senior Executive Ethics Policy
16.1 -- Letter regarding change in certifying accountants (incorporated herein by
reference to the Company's Form 8-K filed June 28, 2002).
21.1* -- Subsidiaries of the Company.
23.1* -- Consent of Ernst & Young LLP with respect to the audited consolidated
financial statements of T-3 Energy Services, Inc. and subsidiaries.
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
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31.1* -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2* -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
32.1* -- 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).
32.2* -- 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).
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* Filed herewith.