Attached files
file | filename |
---|---|
EX-10.1 - EX-10.1 - T-3 ENERGY SERVICES INC | h72531exv10w1.htm |
EX-32.2 - EX-32.2 - T-3 ENERGY SERVICES INC | h72531exv32w2.htm |
EX-31.2 - EX-31.2 - T-3 ENERGY SERVICES INC | h72531exv31w2.htm |
EX-32.1 - EX-32.1 - T-3 ENERGY SERVICES INC | h72531exv32w1.htm |
EX-31.1 - EX-31.1 - T-3 ENERGY SERVICES INC | h72531exv31w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period ended March 31, 2010
OR
o | 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 (State or Other Jurisdiction of Incorporation or Organization) |
76-0697390 (IRS Employer Identification No.) |
|
7135 Ardmore, Houston, Texas (Address of Principal Executive Offices) |
77054 (Zip Code) |
(Registrants telephone number, including area code): (713) 996-4110
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
At
April 28, 2010 the registrant had 13,068,704 shares of common stock outstanding.
TABLE OF CONTENTS
FORM 10-Q
Item | Page | |||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
12 | ||||
18 | ||||
19 | ||||
20 | ||||
20 |
i
T-3 ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except for share amounts)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,646 | $ | 11,747 | ||||
Accounts receivable trade, net |
32,615 | 28,450 | ||||||
Inventories |
57,574 | 53,689 | ||||||
Deferred income taxes |
3,026 | 2,485 | ||||||
Prepaids and other current assets |
5,582 | 7,311 | ||||||
Total current assets |
105,443 | 103,682 | ||||||
Property and equipment, net |
48,793 | 49,353 | ||||||
Goodwill, net |
88,954 | 88,779 | ||||||
Other intangible assets, net |
31,514 | 32,091 | ||||||
Other assets |
5,994 | 5,916 | ||||||
Total assets |
$ | 280,698 | $ | 279,821 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable trade |
$ | 17,017 | $ | 17,213 | ||||
Accrued expenses and other |
11,443 | 14,359 | ||||||
Current maturities of long-term debt |
| | ||||||
Total current liabilities |
28,460 | 31,572 | ||||||
Long-term debt, less current maturities |
| | ||||||
Other long-term liabilities |
926 | 1,144 | ||||||
Deferred income taxes |
8,345 | 8,009 | ||||||
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,
13,061,644 and 13,038,143 shares issued and outstanding at
March 31, 2010 and December 31, 2009 |
13 | 13 | ||||||
Warrants, 10,157 issued and outstanding at March 31, 2010 and
December 31, 2009 |
20 | 20 | ||||||
Additional paid-in capital |
182,629 | 181,115 | ||||||
Retained earnings |
58,181 | 56,201 | ||||||
Accumulated other comprehensive income |
2,124 | 1,747 | ||||||
Total stockholders equity |
242,967 | 239,096 | ||||||
Total liabilities and stockholders equity |
$ | 280,698 | $ | 279,821 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
T-3 ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands except per share amounts)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Products |
$ | 36,632 | $ | 53,341 | ||||
Services |
8,370 | 9,445 | ||||||
45,002 | 62,786 | |||||||
Cost of revenues: |
||||||||
Products |
24,130 | 33,181 | ||||||
Services |
5,207 | 5,579 | ||||||
29,337 | 38,760 | |||||||
Gross profit |
15,665 | 24,026 | ||||||
Selling, general and administrative expenses |
12,957 | 18,078 | ||||||
Equity in earnings of unconsolidated affiliates |
106 | 194 | ||||||
Income from operations |
2,814 | 6,142 | ||||||
Interest expense |
(167 | ) | (250 | ) | ||||
Other income, net |
62 | 25 | ||||||
Income from
operations before provision for income taxes |
2,709 | 5,917 | ||||||
Provision for income taxes |
729 | 2,097 | ||||||
Net income |
$ | 1,980 | $ | 3,820 | ||||
Earnings per common share: |
||||||||
Basic |
$ | .15 | $ | .30 | ||||
Diluted |
$ | .15 | $ | .30 | ||||
Weighted average common shares outstanding: |
||||||||
Basic |
12,915 | 12,529 | ||||||
Diluted |
13,093 | 12,605 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
T-3 ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,980 | $ | 3,820 | ||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||
Bad debt expense |
109 | 284 | ||||||
Depreciation and amortization |
2,223 | 2,036 | ||||||
Amortization of deferred loan costs |
57 | 57 | ||||||
Gain on sale of assets |
(9 | ) | (6 | ) | ||||
Write-off of property and equipment and inventory, net |
162 | 13 | ||||||
Deferred taxes |
(348 | ) | (723 | ) | ||||
Employee stock-based compensation expense |
1,109 | 2,019 | ||||||
Excess tax benefits from stock-based compensation |
(28 | ) | | |||||
Equity in earnings of unconsolidated affiliate |
(106 | ) | (194 | ) | ||||
Changes in assets and liabilities, net of effect of
acquisitions and dispositions: |
||||||||
Accounts receivable trade |
(4,229 | ) | 2,802 | |||||
Inventories |
(4,046 | ) | (1,355 | ) | ||||
Prepaids and other current assets |
1,734 | 322 | ||||||
Other assets |
(43 | ) | (124 | ) | ||||
Accounts payable trade |
(282 | ) | (6,614 | ) | ||||
Accrued expenses and other |
(3,120 | ) | 2,095 | |||||
Net cash provided by (used in) operating activities |
(4,837 | ) | 4,432 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,018 | ) | (1,546 | ) | ||||
Proceeds from sales of property and equipment |
82 | 6 | ||||||
Cash paid for acquisitions, net of cash acquired |
| (7,474 | ) | |||||
Net cash used in investing activities |
(936 | ) | (9,014 | ) | ||||
Cash flows from financing activities: |
||||||||
Net borrowings under swing line credit facility |
| 1,114 | ||||||
Borrowings on revolving credit facility |
| 17,000 | ||||||
Repayments on revolving credit facility |
| (13,000 | ) | |||||
Proceeds from exercise of stock options |
520 | | ||||||
Excess tax benefits from stock-based compensation |
28 | | ||||||
Net cash provided by financing activities |
548 | 5,114 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
124 | (18 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(5,101 | ) | 514 | |||||
Cash and cash equivalents, beginning of period |
11,747 | 838 | ||||||
Cash and cash equivalents, end of period |
$ | 6,646 | $ | 1,352 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
T-3 ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 1,980 | $ | 3,820 | ||||
Other comprehensive income (loss): |
||||||||
Foreign currency translation adjustment, net of
tax |
377 | (349 | ) | |||||
Comprehensive income |
$ | 2,357 | $ | 3,471 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
T-3
ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
T-3 Energy Services, Inc. has prepared the accompanying unaudited condensed consolidated
financial statements in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have been included. These financial
statements include the accounts of T-3 Energy Services, Inc. and its wholly owned subsidiaries
(collectively, T-3 or the Company). The Company accounts for its 50% investments in its
unconsolidated Mexico and Dubai affiliates under the equity method of accounting and has eliminated
all significant intercompany balances and transactions in consolidation. Operating results for the
three months ended March 31, 2010 may not be indicative of the results for the full year ending
December 31, 2010. The Company has made certain reclassifications to conform prior year financial
information to the current period presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2009.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash, accounts receivable, accounts payable and
accrued expenses. The carrying amounts of cash, accounts receivable, accounts payable and accrued
expenses approximate their respective fair values because of the short maturities of those
instruments.
Goodwill and Other Long-Lived Assets
The Company tests for the impairment of goodwill on at least an annual basis and for the
impairment of other long-lived assets upon the occurrence of a triggering event.
The Company has assessed the current market conditions and has concluded, at the present time,
that no triggering events requiring an impairment analysis of goodwill or long-lived assets have
occurred in 2010. The Company will continue to monitor for events or conditions that could change
this assessment.
New Accounting Pronouncements
On January 1, 2009, the Company adopted prospectively a new framework for measuring fair value
for non-financial assets and liabilities for which companies do not measure fair value on a
recurring basis. The application of the new principles to the Companys non-financial assets and
liabilities primarily relate to assets acquired and liabilities assumed in business combinations
and asset impairments, including goodwill and long-lived assets occurring subsequent to the
effective date. The initial application of the new principles did not have a material impact on
the Companys consolidated financial position, results of operations and cash flows, nor does the
Company expect the impact in future periods to be material.
On January 1, 2009, the Company adopted a new accounting principle on accounting for business
combinations. Due to the adoption of these new principles,
approximately $125,000 of transaction costs were expensed during the first quarter of 2009 that, prior to the issuance of these new
principles, would have been capitalized. The effect of this adoption for periods beyond the first
quarter of 2009 will be dependent upon acquisitions at that time and therefore is not currently
estimable.
In May 2009, new accounting principles were issued that establish general standards of
accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. These new principles became effective
for interim and annual periods ending after June 15, 2009 and set forth the period after the
balance sheet date during which management of the Company should evaluate
5
events or transactions that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which the Company should recognize events or transactions
occurring after the balance sheet date in its financial statements and the disclosures that the
Company should make about events or transactions that occurred after the balance sheet date. The
Company adopted these new principles on June 30, 2009. The adoption of these new principles did
not have any impact on the Companys consolidated financial position, results of operations and
cash flows.
In October 2009, an update was issued to existing guidance on revenue recognition for
arrangements with multiple deliverables. This update will allow companies to allocate
consideration received for qualified separate deliverables using estimated selling price for both
delivered and undelivered items when vendor-specific objective evidence or third-party evidence is
unavailable. Additional disclosures discussing the nature of multiple element arrangements, the
types of deliverables under the arrangements, the general timing of their delivery, and significant
factors and estimates used to determine estimated selling prices are required. The Company will
adopt this update for new revenue arrangements entered into or materially modified beginning
January 1, 2011. The Company does not expect the provisions of this update to have a material
impact on the Companys consolidated financial position, results of operations and cash flows.
2. BUSINESS COMBINATIONS AND DISPOSITIONS
Business Combinations
On March 4, 2009, the Company purchased the assets of the surface wellhead business of Azura
Energy Systems Surface, Inc. (Azura) for $8.1 million in cash (subject to a customary working
capital adjustment) plus the assumption of accounts payable and other liabilities. During the
third quarter of 2009, the Company finalized the working capital adjustment and subsequently
adjusted the purchase price to $7.4 million. This business, which has been consolidated with the
Companys current wellhead business, provides additional geographic locations in key markets such
as the Marcellus and Barnett Shales. The Company funded the purchase of these assets from its
working capital and the use of borrowings under its senior credit facility.
On May 29, 2008, the Company exercised its option to purchase certain fixed assets and
inventory of HP&T Products, Inc. (HP&T) in India at their estimated fair value of $0.4 million.
During the first quarter of 2009, the Company made a further payment of $0.1 million based on the
final fair market valuation of the fixed assets and inventory. The Company funded the purchase of
these assets from the Companys working capital and the use of borrowings under its senior credit
facility.
These acquisitions were accounted for using the purchase method of accounting. Results of
operations for the above acquisitions are included in the accompanying condensed consolidated
financial statements since the dates of acquisition. The Company allocated the purchase prices to
the net assets acquired based upon their estimated fair market values at the dates of acquisition.
The Company considers the balances included in the consolidated balance sheets at December 31, 2009
and March 31, 2010 related to the HP&T acquisition to be final. The Company based the balances
included in the consolidated balance sheets at December 31, 2009 related to the Azura acquisition
on preliminary information and, at March 31, 2010, the Company considers these balances to be
final. These acquisitions are not material to the Companys condensed consolidated financial
statements, and therefore the Company does not present a preliminary purchase price allocation and
pro forma information.
The Company had no acquisitions for the three months ended March 31, 2010. The following
schedule summarizes investing activities related to the Companys acquisitions presented in the
condensed consolidated statements of cash flows for the three months ended March 31, 2009 (dollars
in thousands):
Fair value of tangible and intangible assets,
net of cash acquired |
$ | 8,865 | ||
Goodwill recorded |
| |||
Total liabilities assumed |
(1,391 | ) | ||
Common stock issued |
| |||
Cash paid for acquisitions, net of cash acquired
|
$ | 7,474 | ||
6
3. INVENTORIES
Inventories consist of the following (dollars in thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 5,370 | $ | 5,304 | ||||
Work in process |
12,693 | 11,891 | ||||||
Finished goods and component parts |
39,511 | 36,494 | ||||||
$ | 57,574 | $ | 53,689 | |||||
4. DEBT
The Companys senior credit facility provides for a $180 million revolving line of credit,
maturing October 26, 2012, that can be increased by up to $70 million (not to exceed a total
commitment of $250 million) with the approval of the senior lenders. The senior credit facility
consists of a U.S. revolving credit facility that includes a swing line subfacility and a letter of
credit subfacility up to $25 million and $50 million. The Companys senior credit facility also
provides for a separate Canadian revolving credit facility, which includes a swing line subfacility
of up to U.S. $5 million and a letter of credit subfacility of up to U.S. $5 million. The
revolving credit facility matures on the same date as the senior credit facility, and is subject to
the same covenants and restrictions. As of March 31, 2010, the Company had no outstanding
borrowings under its senior credit facility and Canadian revolving credit facility. However, at
March 31, 2010, the Company used the senior credit facility for letters of credit of approximately
$0.1 million that mature at various dates through 2010. The senior credit facility provides, among
other covenants and restrictions, that the Company comply with the following financial covenants: a
minimum interest coverage ratio of 3.0 to 1.0, a maximum leverage ratio of 3.0 to 1.0 and a
limitation on capital expenditures of no more than 75% of current year EBITDA (as defined under the
senior credit facility). As of March 31, 2010, the Company was in compliance with the covenants
under the senior credit facility, with an interest coverage ratio of 71.3 to 1.0, a leverage ratio
of 0.0 to 1.0, and year-to-date capital expenditures of $1.0 million, which represents 16% of
current year EBITDA.
As of March 31, 2010, the Companys availability under its senior credit facility was $107.2
million. The Companys availability in future periods is limited to the lesser of (a) three times
the Companys EBITDA on a trailing-twelve-months basis, which totals $107.3 million at March 31,
2010, less the Companys outstanding borrowings, standby letters of credits and other debt (as each
of these terms are defined under the Companys senior credit facility) and (b) the amount of
additional borrowings that would result in interest payments on all of the Companys debt that
exceed one third of the Companys EBITDA on a trailing-twelve-months basis. See Note 7 to the
Companys consolidated financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009 for additional information related to the Companys long-term
debt.
5. EARNINGS PER SHARE
The Company computes basic net income per common share 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 the computation also includes dilutive stock options, restricted stock
and warrants using the treasury stock method. The following tables reconcile the numerators and
denominators of the basic and diluted per common share computations for net income for the three
months ended March 31, 2010 and 2009, as follows (in thousands except per share data):
7
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Numerator: |
||||||||
Net income |
$ | 1,980 | $ | 3,820 | ||||
Denominator: |
||||||||
Weighted average common shares outstanding basic |
12,915 | 12,529 | ||||||
Shares for dilutive stock options, restricted stock and warrants |
178 | 76 | ||||||
Weighted average common shares outstanding diluted |
13,093 | 12,605 | ||||||
Basic earnings per common share |
$ | .15 | $ | .30 | ||||
Diluted earnings per common share |
$ | .15 | $ | .30 | ||||
For the three months ended March 31, 2010 and 2009, there were 528,239 and 1,126,508 options
that were not included in the computation of diluted earnings per share because their inclusion
would have been anti-dilutive. For the three months ended March 31, 2009, there were 10,157
warrants that were not included in the computation of diluted earnings per share because their
inclusion would have been anti-dilutive.
6. SEGMENT INFORMATION
The Companys 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 pressure control segment manufactures, remanufactures and repairs high pressure, severe
service products including valves, chokes, actuators, blowout preventers, accumulators, rubber
goods, manifolds and wellhead equipment.
The accounting policies of the segment are the same as those of the Company. The Company
evaluates performance based on income from operations excluding certain corporate costs not
allocated to the segment. Substantially all revenues are from domestic sources and Canada, and the
Company holds all assets in the United States, Canada and India.
(dollars in thousands) | ||||||||||||
Pressure | ||||||||||||
Three months ended March 31: | Control | Corporate | Consolidated | |||||||||
2010 |
||||||||||||
Revenues |
$ | 45,002 | $ | | $ | 45,002 | ||||||
Depreciation and amortization |
1,987 | 236 | 2,223 | |||||||||
Income (loss) from operations |
6,661 | (3,847 | ) | 2,814 | ||||||||
Capital expenditures |
903 | 115 | 1,018 | |||||||||
2009 |
||||||||||||
Revenues |
$ | 62,786 | $ | | $ | 62,786 | ||||||
Depreciation and amortization |
1,827 | 209 | 2,036 | |||||||||
Income (loss) from operations |
15,045 | (8,903 | ) | 6,142 | ||||||||
Capital expenditures |
1,338 | 208 | 1,546 |
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the ordinary course of business.
The Companys environmental remediation and compliance costs have not been material during any
of the periods presented. As part of the sale of a business in 2001, the Company agreed to
indemnify the buyers for certain environmental cleanup and monitoring activities associated with a
former manufacturing site. The Company and the buyers have engaged a licensed engineering firm to
conduct a post-closure corrective action subsurface investigation on the property and Phase II and
III investigations. During 2009, the Company recorded approximately $380,000 for incurred and
estimated future Phase III investigation costs to determine the location, nature and extent of any
contamination and potential future remediation costs based on the preliminary results of the Phase
III investigation. The Company has not incurred any additional costs related to the Phase III
investigation during the three months ended March 31, 2010. The Company anticipates the
environmental monitoring activities, for which the Company bears partial liability, to continue at
least through the year 2024. While no agency-approved final remediation plan has been made of the
Companys liability for remediation costs with respect to the site, management does not expect that
its ultimate remediation costs will have a material impact on its financial position, results of
operations or cash flows.
8
The Company has been identified as a potentially responsible party with respect to the Lake
Calumet Cluster site near Chicago, Illinois, which has been designated for cleanup under CERCLA and
Illinois state law. Management believes that the Companys involvement at this site was minimal.
While no agency-approved final allocation has been made of the Companys liability with respect to
the Lake Calumet Cluster site, management does not expect that its ultimate share of remediation
costs will have a material impact on its financial position, results of operations or cash flows.
In July 2003, a lawsuit was filed against the Company in the U.S. District Court, Eastern
District of Louisiana as Chevron, U.S.A. v. Aker Maritime, Inc. The lawsuit alleged that a wholly
owned subsidiary of the Company, the assets and liabilities of which were sold in 2004, failed to
deliver the proper bolts and/or sold defective bolts to the plaintiffs contractor to be used in
connection with a drilling and production platform in the Gulf of Mexico. The plaintiff claimed
that the bolts failed and were replaced at a cost of approximately $3.0 million. The complaint
named the plaintiffs contractor and seven of its suppliers and subcontractors (including the
Companys subsidiary) as the defendants and alleged negligence on the part of all defendants. The
lawsuit was called to trial during June 2007 and resulted in a jury finding of negligence against
the Company and three other defendants. The jury awarded the plaintiffs damages in the amount of
$2.9 million, of which the Company estimates its share to be $1.0 million. The Company appealed this decision,
and on April 27, 2010 the Court of Appeals issued an opinion that affirmed the judgment for damages but reversed the judgment awarding attorney fees to Chevron.
The decision of the Court of Appeals is subject to appeal by the parties. The Company has
accrued approximately $1.1 million, net of tax, for its share of the
damages and attorney fees, court costs and interest, as a loss from discontinued operations in the
consolidated statement of operations during the year ended December 31, 2007.
At March 31, 2010, the Company had $0.1 million of letters of credit outstanding.
8. STOCKHOLDERS EQUITY
Common Stock
The Company issued 23,501 shares of common stock during the three months ended March 31, 2010
in connection with the exercise of 26,001 stock options by option holders under the Companys 2002
Stock Incentive Plan, less the forfeiture of 2,500 shares of restricted stock granted in 2009.
Warrants
No warrants were exercised during the three months ended March 31, 2010. At March 31, 2010,
warrants to acquire 10,157 shares of common stock at $12.80 per share remain outstanding. Each of
these warrants expire on December 17, 2011.
Additional Paid-In Capital
During the three months ended March 31, 2010, additional paid-in capital increased as a result
of the employee stock-based compensation cost recorded, stock options exercised by employees under
the Companys 2002 Stock Incentive Plan (as discussed above), and the excess tax benefits from the
stock options exercised and vesting of restricted stock. Partially offsetting these increases to
additional paid-in capital is a decrease principally related to the reversal of deferred tax assets
related to stock options that expired unexercised.
9. STOCK-BASED COMPENSATION
The T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended (the Plan) provides
officers, employees and non-employee directors equity-based incentive awards, including stock
options and restricted stock. The Plan provides for the issuance of up to 2,623,000 shares of
common stock thereunder, and will remain in effect until December 31, 2011, unless terminated
earlier. Stock options granted reduce the number of available shares under the Plan on a one share
for one share basis, whereas restricted stock reduce the number of available shares under the Plan
on a 1.22 shares for one share basis. As of March 31, 2010, the Company had 425,998 equivalent
shares available for issuance as stock options or 349,179 equivalent shares available for issuance
as restricted stock in connection with the Plan. Outstanding stock options and unvested restricted
stock awards under the Plan as of March 31, 2010 were 1,008,598 options and 122,200 shares.
9
Stock Option Awards
Stock options under the Companys Plan generally expire 10 years from the grant date and vest
over three years from the grant date. The Company amortizes to selling, general and administrative
expense, on a straight-line basis over the vesting period, the fair value of the options. The
Company has recorded an estimate for forfeitures of awards of stock options. The Company will
adjust this estimate as actual forfeitures differ from the estimate. The Company estimates the
fair value of each stock option on the grant date using the Black-Scholes option-pricing model,
using assumptions made for the expected volatility, expected term and the risk-free interest rate.
The Company estimates the expected volatility based on historical and implied volatilities of the
Companys stock and historical and implied volatilities of comparable companies. The Company bases
the expected term on historical employee exercises of options. The Company bases the risk-free
interest rate upon the U.S. Treasury yield curve in effect at the time of grant. The Company does
not expect to pay any dividends on its common stock. There were no stock options granted for the
three months ended March 31, 2010 or 2009.
The Company recognized employee stock-based compensation expense related to stock options of
$873,000 and $1,890,000 during the three months ended March 31, 2010 and 2009. As further
discussed in Note 11 of the Companys Quarterly Report on Form 10-Q for the period ended March 31,
2009, the stock-based compensation expense related to stock options for the three months ended
March 31, 2009 includes a charge of $651,000 related to the immediate vesting of 50,000 unvested
stock options held by the Companys former President, Chief Executive Officer and Chairman of the
Board, pursuant to the terms of his separation agreement.
On June 4, 2009, the Company converted phantom stock options awarded to Steven W. Krablin,
representing the value of the right to acquire 100,000 shares of the Companys stock, to 100,000
stock options granted pursuant to the Plan. The Company originally awarded these phantom stock
options on March 23, 2009, in connection with Mr. Krablins appointment as President, Chief
Executive Officer and Chairman of the Board, and they had a strike price of $14.85, which was equal
to the fair market value of the Companys common stock on March 23, 2009. The terms and conditions
of the stock options are unchanged from the terms and conditions of the phantom stock options. On
March 23, 2010, 50,000 of these stock options vested, and the remaining 50,000 stock options will
vest on March 23, 2011, conditioned on Mr. Krablins continued employment with the Company. For
further discussion of Mr. Krablins appointment, please refer to Note 16 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2009.
Restricted Stock Awards
On June 4, 2009, the Company converted a phantom 10,000 share restricted stock grant to Mr.
Krablin to a grant of 10,000 shares of restricted stock granted pursuant to the Plan. The Company
originally awarded this phantom restricted stock grant on March 23, 2009, in connection with Mr.
Krablins appointment with the Company. The Company determined the fair value of these restricted
shares based on the closing price of the Companys stock on June 4, 2009. On March 23, 2010, 5,000
shares of this restricted stock grant vested, and the remaining 5,000 shares will vest on March 23,
2011, conditioned on Mr. Krablins continued employment with the Company.
Additionally, on June 4, 2009, the Company granted 102,000 shares of restricted stock to
certain employees of the Company and 16,000 shares of restricted stock to non-executive members of
the Board of Directors. The Company determined the fair value of these restricted shares based on
the closing price of the Companys stock on the grant date. The shares granted to employees will
vest annually in one-third increments beginning on June 4, 2011, and the shares granted to the
Board members will vest on June 4, 2010.
The Company recognized employee stock-based compensation expense related to restricted stock
awards of $236,000 and $129,000 during the three months ended March 31, 2010 and 2009.
10. INCOME TAXES
The Companys effective tax rate was 26.9% for the three months ended March 31, 2010 compared to 35.4% for the three months ended March 31, 2009. The tax rate in 2010 was lower than the statutory rate as well as the rate in 2009 |
10
primarily due to benefits relating to tax positions taken in prior years that have been settled as
a result of the conclusion of certain examinations by the taxing authorities.
11. OTHER
Subsequent Events
The Companys management has evaluated subsequent events for events or transactions that have
occurred after March 31, 2010 through the date of the filing of this Form 10-Q.
No events or transactions have occurred during this period that the Company believes should be
recognized or disclosed in the March 31, 2010 financial statements.
11
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The following discussion and analysis of our historical results of operations and financial
condition for the three months ended March 31, 2010 and 2009 should be read in conjunction with the
condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q
and our financial statements and related Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2009.
We operate under one reporting segment, pressure control. Our pressure control business has
three product lines: pressure and flow control, wellhead and pipeline, which generated 71%, 24% and
5% of our total revenue for the three months ended March 31, 2010. We offer original equipment
products and aftermarket parts and services for each product line. Aftermarket parts and services
include all remanufactured products and parts, repair and field services. Original equipment
products generated 78% and aftermarket parts and services generated 22% of our total revenues for
the three months ended March 31, 2010.
Outlook
Our business is driven by the level and complexity of worldwide oil and natural gas drilling
and completion, which is, in turn, primarily driven by current and anticipated price levels for oil
and natural gas. We believe that oil and gas market prices and the drilling rig count in the
United States, Canada and international markets serve as key indirect indicators of demand for the
products we manufacture and sell and for the services we provide. As a general matter, changes in
our revenue levels and our backlog tend to lag changes in activity levels in the industry.
As of March 31, 2010, the average worldwide rig count increased
from its recent low in the second quarter of 2009 but remained 18% below the recent high in the
third quarter of 2008. As anticipated from this change in activity levels and given the lag time
between activity levels and our backlog-driven deliveries, our revenues have declined for the first
quarter of 2010 in comparison to the first quarter of 2009. Similarly, our backlog at March 31,
2010 was $39.7 million, which is up $5.2 million from December 31, 2009, but down $19.7 million
from March 31, 2009.
12
Over the past twelve months, international activity has been relatively stronger than in the
United States. We have been particularly successful selling to international markets, and
approximately 50% of first quarter 2010 revenues came from orders destined for use outside of the
United States, which is down slightly from 56% in the fourth quarter of 2009, which included one
unusually large international order of $9.0 million that shipped during that quarter. More
recently, the rig count in the United States has been generally increasing since the late summer of
2009 and has continued to increase into 2010. These activity improvements have already affected
our order intake, or bookings. Bookings levels have increased incrementally since the second
quarter of 2009, and we booked approximately $50.3 million in the first quarter of 2010, which is
up from $45.7 million in the fourth quarter of 2009, $43.3 million in the third quarter of 2009 and
$41.8 million in the second quarter of 2009. Looking forward at the remainder of 2010, we believe
the continued increases in rig counts experienced since the second quarter of 2009 indicate that
our bookings should continue to recover, which would eventually lead to increases in our revenues.
Results of Operations
Three Months ended March 31, 2010 Compared with Three Months ended March 31, 2009
Revenues. Revenues decreased $17.8 million, or 28.3%, in the three months ended March 31, 2010
compared to the three months ended March 31, 2009. Our pressure and flow control products revenue
decreased approximately $17.9 million, or 35.8%, from the three months ended March 31, 2009,
primarily due to decreased purchases by our customers, due to decreased demand for our pressure and
flow control products and services resulting from lower drilling activities. Our wellhead product
line revenues increased approximately $2.2 million, or 25.1%, from the three months ended March 31,
2009, primarily due to the integration of Azura, as well as success in increasing sales to
international and larger E&P customers, partially offset by decreased purchases by the smaller,
independent E&P customers resulting from their decreased drilling activities. Our pipeline
product line revenues decreased approximately $2.1 million, or 48.4%, from the three months ended
March 31, 2009, due to a decrease in bookings for larger pipeline-related projects period over
period. Across all three product lines, revenues have decreased when compared to the first quarter
of 2009 due to pricing pressure carryover from the second half of 2009 into the first quarter of
2010 for some of our product offerings.
Gross Profit. Gross profit as a percentage of revenues was 34.8% in the three months ended
March 31, 2010 compared to 38.3% in the three months ended March 31, 2009. Gross profit margin was
lower in 2010 primarily due to pricing pressure carryover from the second half of 2009 across all
three product lines, volume decreases for our pressure and flow control and pipeline product lines
and changes in product mix for our wellhead product line. Our gross profit margins for our
pressure and flow control, wellhead and pipeline product lines were 38.8%, 21.9% and 23.3% for the
three months ended March 31, 2010 compared to 39.4%, 31.7% and 31.3% for the three months ended
March 31, 2009.
Selling, General and Administrative Expenses. Selling, general and administrative
expenses decreased $5.1 million, or 28.3%, in the three months ended March 31, 2010 compared to the
three months ended March 31, 2009. Selling, general and administrative expenses for the three
months ended March 31, 2009 included $3.9 million of separation costs for our former President,
Chief Executive Officer and Chairman of the Board. Selling, general and administrative expenses,
excluding the separation costs in 2009, decreased $1.2 million during the three months ended March
31, 2010 primarily due to decreased payroll-related expense of $0.4 million, decreased employee
stock-based compensation expense of $0.3 million, decreased acquisition costs of $0.3 million and
decreased accounts receivable reserves of $0.2 million.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of unconsolidated
affiliates for the three months ended March 31, 2010 was $0.1 million compared to $0.2 million in
the three months ended March 31, 2009. The decrease was attributable to our share of the reduced
earnings of our Mexico joint venture during the three months ended March 31, 2010.
Interest Expense. Interest expense for the three months ended March 31, 2010 was $0.2 million
compared to $0.3 million in the three months ended March 31, 2009. The decrease was attributable
to lower outstanding debt levels during the three months ending March 31, 2010.
13
Income Taxes. Income tax expense for the three months ended March 31, 2010 was $0.7 million as
compared to $2.1 million in the three months ended March 31, 2009. The decrease was primarily due
to a decrease in income before taxes. Our effective tax rate was 26.9% for the three months ended
March 31, 2010 compared to 35.4% for the three months ended March 31, 2009. The tax rate in 2010
was lower than the statutory rate as well as the rate in 2009 primarily due to benefits relating to
tax positions taken in prior years that have been settled as a result of the conclusion of certain
examinations by the taxing authorities.
Net Income. Net income was $2.0 million in the three months ended March 31, 2010 compared
with $3.8 million in the three months ended March 31, 2009 as a result of the foregoing factors.
Liquidity and Capital Resources
At March 31, 2010, we had working capital of $77.0 million, net available cash of
$6.6 million, no long-term debt, availability under our senior credit facility of $107.2 million
and stockholders equity of $243.0 million. Historically, our principal liquidity requirements and
uses of cash have been for debt service, capital expenditures, working capital and acquisitions,
and our principal sources of liquidity and cash have been from cash flows from operations,
borrowings under our senior credit facility and issuances of equity securities.
Net Cash Provided by (Used in) Operating Activities. Net cash used in operating
activities was $4.8 million for the three months ended March 31, 2010 compared to net cash provided
by operating activities of $5.2 million for the three months ended March 31, 2009. The decrease in
net cash provided by operating activities was primarily attributable to decreased profit, increases
in accounts receivable and inventory and reductions in accrued expenses.
Net Cash Used in Investing Activities. Our principal uses of cash recently have been
for capital expenditures and acquisitions. For the three months ended March 31, 2010 and 2009, we
made capital expenditures of approximately $1.0 million and $1.5 million. Cash consideration paid
for business acquisitions, net of cash acquired, was $7.5 million for the three months ended March
31, 2009, with no such acquisitions in the three months ended March 31, 2010 (see Note 2 to our
condensed consolidated financial statements).
Net Cash Provided by Financing Activities. Sources of cash from financing activities
primarily include borrowings under our senior credit facility and proceeds from the exercise of
stock options. Principal uses of cash include payments on our senior credit facility. Financing
activities provided net cash of $0.5 million for the three months ended March 31, 2010 compared to
$5.1 million for the three months ended March 31, 2009. We made net borrowings under our swing
line credit facility of $1.1 million during the three months ended March 31, 2009, with no such
borrowings during the three months ended March 31, 2010. We borrowed a net $4.0 million on our
revolving credit facility during the three months ended March 31, 2009, with no such borrowings for
the three months ended March 31, 2010. We had proceeds from the exercise of stock options of $0.5
million and from the excess tax benefits from stock-based compensation of $28,000 during the three
months ended March 31, 2010, with no such proceeds or excess tax benefits during the three months
ended March 31, 2009.
Principal Debt Instruments. Our senior credit facility provides for a $180 million revolving
line of credit, maturing October 26, 2012, that can be increased by up to $70 million (not to
exceed a total commitment of $250 million) with the approval of the senior lenders. The senior
credit facility consists of a U.S. revolving credit facility that includes a swing line subfacility
and letter of credit subfacility up to $25 million and $50 million. The senior credit facility
also provides for a separate Canadian revolving credit facility, which includes a swing line
subfacility of up to U.S. $5.0 million and a letter of credit subfacility of up to U.S. $5.0
million. The revolving credit facility matures on the same date as the senior credit facility and
is subject to the same covenants and restrictions. As of March 31, 2010, we had no outstanding
borrowings under our senior credit facility or Canadian revolving credit facility. However, at
March 31, 2010, we used the senior credit facility for letters of credit of approximately $0.1
million that mature at various dates throughout 2010. As of March 31, 2010, availability under
our senior credit facility was $107.2 million.
Our availability in future periods is limited to the lesser of (a) three times our EBITDA on a
trailing-twelve-
14
months basis, which totals $107.3 million at March 31, 2010, less our outstanding borrowings,
standby letters of credits and other debt (as each of these terms are defined under our senior
credit facility) and (b) the amount of additional borrowings that would result in interest payments
on all of our debt that exceed one third of our EBITDA on a trailing-twelve-months basis. As such,
given our internal projections for 2010, we expect availability to
continue to decrease for the first half of 2010. However, given our capital expenditure budget and
internal cash-flow forecasts, we do not believe this reduction in availability under our senior
credit facility will have a material adverse impact on our financial condition.
Our leverage ratio governs the applicable interest rate of the senior credit facility and
ranges from the Base Rate (as defined in the senior credit facility) to the Base Rate plus 1.25% or
LIBOR plus 1.00% to LIBOR plus 2.25%. We have the option to choose between Base Rate and LIBOR
when borrowing under the revolver portion of our senior credit facility, whereas any borrowings
under the swing line portion of our senior credit facility are at the Base Rate plus the specified
margin. At March 31, 2010, we had no outstanding borrowings under the revolver and swing line
portions of our senior credit facility. The effective interest rate of our senior credit facility,
including amortization of deferred loan costs, was 12.8% during the first quarter of 2010. The
effective interest rate, excluding amortization of deferred loan costs, was 8.5% during the first
quarter of 2010. We are required to prepay the senior credit facility under certain circumstances
with the net cash proceeds of certain asset sales, insurance proceeds and equity issuances subject
to certain conditions. The senior credit facility also limits our ability to secure additional
forms of debt, with the exception of secured debt (including capital leases) with a principal
amount not exceeding 10% of our consolidated net worth at any time.
The senior credit facility provides, among other covenants and restrictions, that we comply
with the following financial covenants: a minimum interest coverage ratio of 3.0 to 1.0, a maximum
leverage ratio of 3.0 to 1.0 and a limitation on capital expenditures of no more than 75% of
current year EBITDA. As of March 31, 2010, we were in compliance with the covenants under the
senior credit facility, with an interest coverage ratio of 71.3 to 1.0, a leverage ratio of 0.0 to
1.0, and year-to-date capital expenditures of $1.0 million, which represents 16% of current year
EBITDA. Substantially all of our assets collateralize the senior credit facility.
We believe that cash generated from operations and amounts available under our senior credit
facility will be sufficient to fund existing operations, working capital needs, capital expenditure
requirements, continued new product development and expansion of our geographic areas of operation,
and financing obligations during 2010.
We intend to make strategic acquisitions but cannot predict the timing, size or success of any
strategic acquisition and the related potential capital commitments. We expect to fund future
acquisitions primarily with cash flow from operations and borrowings, including the unborrowed
portion of our senior credit facility or new debt issuances, but we may also issue additional
equity either directly or in connection with an acquisition. There can be no assurance that
acquisition funds will be available at terms acceptable to us.
Off-Balance Sheet Arrangements. We had no off-balance sheet arrangements as of March 31, 2010.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make certain estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Our estimation process generally relates to potential bad debts, obsolete and slow moving
inventory, and the valuation of goodwill and other long-lived assets. We base our estimates on
historical experience and on our future expectations that we believe to be reasonable under the
circumstances. The combination of these factors results in the amounts shown as carrying values of
assets and liabilities in the financial statements and accompanying notes. Actual results could
differ from our current estimates and those differences may be material.
We test for the impairment of goodwill on at least an annual basis and for the impairment of
other long-lived assets upon the occurrence of a triggering event.
We have assessed the current market conditions and have concluded, at the present
time, that no triggering events requiring an impairment analysis of goodwill or long-lived assets
have occurred in 2010. We will continue to monitor for events or conditions that could change this assessment.
15
These critical accounting estimates may change as events occur, as additional information is
obtained and as our operating environment changes. There have been no material changes or
developments in our evaluation of the accounting estimates and the underlying assumptions or
methodologies that we believe to be Critical Accounting Policies and Estimates from those as
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
New Accounting Pronouncements
On January 1, 2009, we adopted prospectively a new framework for measuring fair value for
non-financial assets and liabilities for which companies do not measure fair value on a recurring
basis. The application of the new principles to our non-financial assets and liabilities primarily
relate to assets acquired and liabilities assumed in business combinations and asset impairments,
including goodwill and long-lived assets occurring subsequent to the effective date. The initial
application of the new principles did not have a material impact on our consolidated financial
position, results of operations and cash flows, nor do we expect the impact in future periods to be
material.
On January 1, 2009, we adopted a new accounting principle on accounting for business
combinations. Due to the adoption of these new principles,
approximately $125,000 of transaction costs were expensed during the first quarter of 2009 that, prior to the issuance of these new
principles, would have been capitalized. The effect of this adoption for periods beyond the first
quarter of 2009 will be dependent upon acquisitions at that time and therefore is not currently
estimable.
In May 2009, new accounting principles were issued that establish general standards of
accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. These new principles became effective
for interim and annual periods ending after June 15, 2009 and set forth the period after the
balance sheet date during which we should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances under which we
should recognize events or transactions occurring after the balance sheet date in our financial
statements and the disclosures that we should make about events or transactions that occurred after
the balance sheet date. We adopted these new principles on June 30, 2009. The adoption of these
new principles did not have any impact on our consolidated financial position, results of
operations and cash flows.
In October 2009, an update was issued to existing guidance on revenue recognition for
arrangements with multiple deliverables. This update will allow companies to allocate
consideration received for qualified separate deliverables using estimated selling price for both
delivered and undelivered items when vendor-specific objective evidence or third-party evidence is
unavailable. Additional disclosures discussing the nature of multiple element arrangements, the
types of deliverables under the arrangements, the general timing of their delivery, and significant
factors and estimates used to determine estimated selling prices are required. We will adopt this
update for new revenue arrangements entered into or materially modified beginning January 1, 2011.
We do not expect the provisions of this update to have a material impact on our consolidated
financial position, results of operations and cash flows.
Cautionary Note Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference in this Quarterly Report, our
filings with the SEC, and our public releases, including, but not limited to, information regarding
the status and progress of our operating activities, the plans and objectives of our management,
assumptions regarding our future performance and plans, and any financial guidance provided therein
are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or
the Securities Act, and Section 21E of the Exchange Act. The words believe, may, will,
estimate, continues, anticipate, intend, budget, predict, project, expect and
similar expressions identify these forward-looking statements, although not all forward-looking
statements contain these identifying words. These forward-looking statements are made subject to
certain risks and uncertainties that could cause actual results to differ materially from those
stated. Risks and uncertainties
16
that could cause or contribute to such differences include, without limitation, those
discussed in the section entitled Risk Factors included in our Annual Report on Form 10-K for the
year ended December 31, 2009 and our subsequent SEC filings.
We largely base these forward-looking statements on our expectations and beliefs concerning
future events, which reflect estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market conditions and other factors
relating to our operations and business environment, all of which are difficult to predict and many
of which are beyond our control.
Although we believe our estimates and assumptions to be reasonable, they are inherently
uncertain and involve a number of risks and uncertainties that are beyond our control. Our
assumptions about future events may prove to be inaccurate. We caution you that the
forward-looking statements contained in this Quarterly Report are not guarantees of future
performance, and we cannot assure you that those statements will be realized or the forward-looking
events and circumstances will occur. Actual results may differ materially from those anticipated
or implied in the forward-looking statements due to the factors listed in the section entitled
Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2009 and
our subsequent SEC filings. All forward-looking statements speak only as of the date of this
report. We do not intend to publicly update or revise any forward-looking statements as a result
of new information, future events or otherwise, except as required by law. These cautionary
statements qualify all forward-looking statements attributable to us or persons acting on our
behalf.
17
ITEM 3. 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 senior credit
facility and our Canadian revolving credit facility. As of March 31, 2010, our senior credit
facility and our Canadian revolving credit facility did not have an outstanding principal balance,
and therefore, we did not have any exposure to rising interest rates.
The foreign currency exchange rates related to our Canadian and Indian operations and our
unconsolidated affiliates in Mexico and Dubai also expose us to some market risk. However, the
changes in foreign currency in relation to the United States dollar impact less than 1% of our net
assets.
The functional currency for our Indian operations and our Dubai affiliate is the United States
dollar. The functional currency for our Canadian operations and our Mexico affiliate is their
respective local currency. We maintain the accounting records for all of our international
subsidiaries in local currencies.
We translate the results of operations for foreign subsidiaries with functional currencies
other than the United States dollar using average exchange rates during the period. We translate
assets and liabilities of these foreign subsidiaries using the exchange rates in effect at the
balance sheet dates, and the resulting translation adjustments are included as Accumulated Other
Comprehensive Income, a component of stockholders equity. We recorded a $0.4 million gain
adjustment to our equity account for the three months ended March 31, 2010 to reflect the net
impact of the change in foreign currency exchange rate related to our international operations.
For our non-U.S. subsidiaries where the functional currency is the United States dollar, we
translate our inventories, property, plant and equipment and other non-monetary assets and
liabilities, together with their related elements of revenue and expense, at historical rates of
exchange. We translate monetary assets and liabilities at current exchange rates. We translate
all other revenues and expenses at average exchange rates. We recognize translation gains and
losses for these subsidiaries in our results of operations during the period incurred. We reflect
the gain or loss related to individual foreign currency transactions in results of operations when
incurred. We recorded a gain of approximately $25,000 during the three months ended March 31,
2010.
18
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that
material information required to be disclosed in our reports filed under the Securities Exchange
Act of 1934, or Exchange Act, is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission, or SEC, and that any material
information relating to us is recorded, processed, summarized and reported to our management
including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, as
appropriate to allow timely decisions regarding required disclosures. In designing and evaluating
our disclosure controls and procedures, our management recognizes that controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving desired
control objectives. In reaching a reasonable level of assurance, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by Rule 13a-15(b) of the Exchange Act, our management carried out an evaluation,
with the participation of our principal executive officer (our CEO) and our principal financial
officer (our CFO), of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of
the period covered by this report. Based on those evaluations, our CEO and CFO have concluded that
our disclosure controls and procedures are effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the
quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
19
Item 5. Other Information
Employment Agreement with James M. Mitchell
On April 28, 2010, we entered into a new employment agreement (the Agreement) with James M.
Mitchell, our Chief Financial Officer and Senior Vice President, that replaces and supersedes his
existing employment agreement. The Agreement has a term of two (2) years and provides for a base
annual salary of three hundred thousand dollars ($300,000).
The terms of the Agreement are substantially similar to his previous employment agreement,
except for:
| the Agreement does not provide for target percentages for Mr. Mitchells annual incentive award, instead leaving any such award up to the discretion of the Compensation Committee of our Board of Directors; | ||
| Mr. Mitchell will no longer receive an automobile allowance or reimbursement of country club dues; | ||
| Mr. Mitchell is no longer eligible for an additional severance payment upon his death or disability; | ||
| Mr. Mitchells severance payment for a termination not for cause will be equal to (i) the greater of his annual salary or the remaining salary payable to him under the Agreement plus (ii) the greater of his target or prior year actual annual incentive bonus; | ||
| Mr. Mitchell is now eligible for a payment following a termination not for cause or resignation with good reason following a change of control equal to (i) two times his annual base salary plus (ii) the greater of his target or prior year actual annual incentive bonus, and his unvested stock options and restricted stock will vest automatically (except for performance-based restricted stock, which shall only vest upon completion of the performance goals). |
The foregoing description of the Agreement is qualified in its entirety by reference to the
full text of the Agreement, which is attached as Exhibit 10.1 to this Quarterly Report on Form
10-Q and incorporated herein by reference.
PART II
Item 6. Exhibits
Exhibit Number | Identification of Exhibit | |||
3.1
|
| Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated December 31, 2001). | ||
3.2
|
| Certificate of Amendment to the Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2005). | ||
3.3
|
| Certificate of Amendment to the Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2006). | ||
3.4
|
| Certificate of Amendment to the Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2007). | ||
3.5
|
| Amended and Restated Bylaws of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated December 11, 2007). | ||
4.1
|
| Specimen Certificate of Common Stock, $.001 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to the Companys 2001 Annual Report on Form 10-K). | ||
10.1*+
|
Employment Agreement by and betwen James M. Mitchell and T-3 Energy Services, Inc. | |||
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). |
* | Filed herewith. | |
** | Furnished herewith. | |
+ | Management contract or compensatory plan of arrangement. |
20
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 29th day of April 2010.
T-3 ENERGY SERVICES, INC. |
||||
By: | /s/ JAMES M. MITCHELL | |||
James M. Mitchell (Chief Financial Officer and Senior Vice President) |
||||
21
INDEX TO EXHIBITS
Exhibit Number | Identification of Exhibit | |||
3.1
|
| Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated December 31, 2001). | ||
3.2
|
| Certificate of Amendment to the Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2005). | ||
3.3
|
| Certificate of Amendment to the Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2006). | ||
3.4
|
| Certificate of Amendment to the Certificate of Incorporation of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2007). | ||
3.5
|
| Amended and Restated Bylaws of T-3 Energy Services, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated December 11, 2007). | ||
4.1
|
| Specimen Certificate of Common Stock, $.001 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to the Companys 2001 Annual Report on Form 10-K). | ||
10.1*+
|
Employment Agreement by and betwen James M. Mitchell and T-3 Energy Services, Inc. | |||
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). |
* | Filed herewith. | |
** | Furnished herewith. | |
+ | Management contract or compensatory plan of arrangement. |
22