Attached files
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EXCEL - IDEA: XBRL DOCUMENT - TESCO CORP | Financial_Report.xls |
EX-31.2 - CFO CERTIFICATION - TESCO CORP | exh312cfocert201410-qq3.htm |
EX-31.1 - CEO CERTIFICATION - TESCO CORP | exh311ceocert201410-qq3.htm |
EX-32 - SEC 906 CERTIFICATION - TESCO CORP | exh32sec906cert201410-qq3.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2014
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: 001-34090
Tesco Corporation
(Exact name of registrant as specified in its charter)
Alberta | 76-0419312 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
3993 West Sam Houston Parkway North Suite 100 Houston, Texas | 77043-1221 |
(Address of Principal Executive Offices) | (Zip Code) |
713-359-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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 x No ¨
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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o | Smaller Reporting Company ¨ |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of October 31, 2014: 39,642,325
TABLE OF CONTENTS
Page | ||
PART I—FINANCIAL INFORMATION | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II—OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 2. | Use of Proceeds | |
Item 6. |
Below is a list of defined terms that are used throughout this document:
TESCO’s Casing Drive System | = CDS™ or CDS | |
TESCO’s Multiple Control Line Running System | = MCLRS™ or MCLRS |
A list of our trademarks and the countries in which they are registered is presented below:
Trademark | Country of Registration | |
TESCO® | United States, Canada | |
Casing Drive System™ | United States, Canada | |
CDS™ | United States, Canada | |
Multiple Control Line Running System™ | United States, Canada | |
MCLRS™ | United States, Canada |
When we refer to “TESCO”, “we”, “us”, “our”, “ours”, or “the Company”, we are describing Tesco Corporation and our subsidiaries.
Caution Regarding Forward-Looking Information; Risk Factors
This report for the quarter ended September 30, 2014 ("Quarterly Report on Form 10-Q") contains forward-looking statements within the meaning of Canadian and United States securities laws, including the United States Private Securities Litigation Reform Act of 1995. From time to time, our public filings, press releases, and other communications (such as conference calls and presentations) will contain forward-looking statements. Forward-looking information is often, but not always, identified by the use of words such as “anticipate,” “believe,” “expect,” “plan,” “intend,” “forecast,” “target,” “project,” “may,” “will,” “should,” “could,” “estimate,” “predict,” or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements with respect to expectations of our prospects, future revenue, earnings, activities, and technical results.
Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information currently available to, management concerning anticipated financial performance, business prospects, strategies, and regulatory developments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. The forward-looking statements in this Quarterly Report on Form 10-Q are made as of the date they were issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these forward-looking statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates, and intentions expressed in such forward-looking statements.
These risks and uncertainties include, but are not limited to, the impact of: changes in oil and natural gas prices; worldwide and domestic economic conditions and political instability on drilling activity and demand for and pricing of our products and services; other risks inherent in the drilling services industry (e.g. operational risks, potential delays or changes in customers’ exploration or development projects or capital expenditures, the uncertainty of estimates and projections relating to levels of rental activities, uncertainty of estimates and projections of costs and expenses, risks in conducting foreign operations, the consolidation of our customers, and intense competition in our industry); and risks associated with our intellectual property and with the performance of our technology. These risks and uncertainties may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Copies of our Canadian public filings are available through SEDAR at www.sedar.com. Our U.S. public filings are available through www.tescocorp.com and on EDGAR at www.sec.gov.
Please see Part I, Item 1A—"Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Annual Report on Form 10-K”) and Part II, Item 1A—"Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the impact such risk factors might have on our business or the extent to which any factor or combination of risk factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
TESCO CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
September 30, 2014 | December 31, 2013 | ||||||
Assets | (unaudited) | ||||||
Current assets | |||||||
Cash and cash equivalents | $ | 87,667 | $ | 97,277 | |||
Accounts receivable trade, net of allowance for doubtful accounts of $3,031 and $3,006 as of September 30, 2014 and December 31, 2013, respectively | 127,714 | 142,584 | |||||
Inventories, net | 117,114 | 97,363 | |||||
Income taxes recoverable | 9,446 | 7,343 | |||||
Deferred income taxes | 6,132 | 6,483 | |||||
Prepaid and other current assets | 26,085 | 30,388 | |||||
Total current assets | 374,158 | 381,438 | |||||
Property, plant, and equipment, net | 203,751 | 204,908 | |||||
Goodwill | 34,401 | 32,732 | |||||
Deferred income taxes | 9,200 | 11,823 | |||||
Intangible and other assets, net | 6,214 | 6,778 | |||||
Total assets | $ | 627,724 | $ | 637,679 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities | |||||||
Current portion of long term debt | $ | 51 | $ | 385 | |||
Accounts payable | 37,214 | 45,566 | |||||
Deferred revenue | 15,158 | 21,289 | |||||
Warranty reserves | 2,290 | 2,393 | |||||
Income taxes payable | 3,665 | 5,863 | |||||
Accrued and other current liabilities | 26,343 | 35,489 | |||||
Total current liabilities | 84,721 | 110,985 | |||||
Long term debt | 15 | 27 | |||||
Other liabilities | 1,147 | 199 | |||||
Deferred income taxes | 9,737 | 9,494 | |||||
Total liabilities | 95,620 | 120,705 | |||||
Commitments and contingencies (Note 12) | — | — | |||||
Shareholders’ equity | |||||||
Common shares; no par value; unlimited shares authorized; 39,642 and 39,680 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively | 220,570 | 224,666 | |||||
Retained earnings | 276,033 | 256,807 | |||||
Accumulated other comprehensive income | 35,501 | 35,501 | |||||
Total shareholders’ equity | 532,104 | 516,974 | |||||
Total liabilities and shareholders’ equity | $ | 627,724 | $ | 637,679 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
TESCO CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share information)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | |||||||||||||||
Products | $ | 64,295 | $ | 49,089 | $ | 172,272 | $ | 146,042 | |||||||
Services | 77,651 | 83,159 | 236,178 | 242,270 | |||||||||||
141,946 | 132,248 | 408,450 | 388,312 | ||||||||||||
Operating expenses | |||||||||||||||
Cost of sales and services | |||||||||||||||
Products | 48,712 | 36,774 | 131,011 | 111,623 | |||||||||||
Services | 63,735 | 65,787 | 188,057 | 191,880 | |||||||||||
112,447 | 102,561 | 319,068 | 303,503 | ||||||||||||
Selling, general and administrative | 10,668 | 9,708 | 37,946 | 36,209 | |||||||||||
(Gain) loss on sale of Casing Drilling | — | 31 | — | (1,434 | ) | ||||||||||
Research and engineering | 1,853 | 2,136 | 6,819 | 6,657 | |||||||||||
Total operating expenses | 124,968 | 114,436 | 363,833 | 344,935 | |||||||||||
Operating income | 16,978 | 17,812 | 44,617 | 43,377 | |||||||||||
Other expense (income) | |||||||||||||||
Interest expense | 219 | 121 | 1,137 | 57 | |||||||||||
Interest income | (25 | ) | (29 | ) | (110 | ) | (83 | ) | |||||||
Foreign exchange (gain) loss | 3,074 | 471 | 5,438 | 2,535 | |||||||||||
Other expense (income) | 100 | 71 | 107 | (1,721 | ) | ||||||||||
Total other expense (income) | 3,368 | 634 | 6,572 | 788 | |||||||||||
Income before income taxes | 13,610 | 17,178 | 38,045 | 42,589 | |||||||||||
Income tax provision | 6,124 | 5,498 | 14,802 | 11,842 | |||||||||||
Net income | $ | 7,486 | $ | 11,680 | $ | 23,243 | $ | 30,747 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.19 | $ | 0.30 | $ | 0.58 | $ | 0.79 | |||||||
Diluted | $ | 0.18 | $ | 0.29 | $ | 0.57 | $ | 0.78 | |||||||
Dividends per share: | |||||||||||||||
Basic | $ | 0.05 | $ | — | $ | 0.10 | $ | — | |||||||
Weighted average number of shares: | |||||||||||||||
Basic | 40,017 | 39,076 | 39,981 | 38,999 | |||||||||||
Diluted | 40,594 | 39,841 | 40,629 | 39,574 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
TESCO CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
Operating Activities | |||||||
Net income | $ | 23,243 | $ | 30,747 | |||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||||||
Depreciation and amortization | 30,498 | 30,649 | |||||
Stock compensation expense | 3,992 | 4,660 | |||||
Bad debt expense | 3,475 | (438 | ) | ||||
Deferred income taxes | 1,736 | 521 | |||||
Amortization of financial items | 228 | 229 | |||||
Gain on sale of operating assets | (1,595 | ) | (7,431 | ) | |||
Changes in the fair value of contingent earn-out obligations | (13 | ) | — | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable trade, net | 11,395 | (1,146 | ) | ||||
Inventories, net | (17,742 | ) | 9,259 | ||||
Prepaid and other current assets | 4,235 | 3,917 | |||||
Accounts payable and accrued liabilities | (23,774 | ) | (7,821 | ) | |||
Income taxes recoverable | (4,344 | ) | (8,468 | ) | |||
Other noncurrent assets and liabilities, net | 5,720 | (2,147 | ) | ||||
Net cash provided by operating activities | 37,054 | 52,531 | |||||
Investing Activities | |||||||
Additions to property, plant and equipment | (32,964 | ) | (25,265 | ) | |||
Cash paid for acquisitions, net of cash acquired | (5,000 | ) | — | ||||
Proceeds on sale of operating assets | 4,060 | 8,223 | |||||
Proceeds on sale of Casing Drilling, net of transaction costs | — | 6,050 | |||||
Other, net | 70 | 545 | |||||
Net cash used for investing activities | (33,834 | ) | (10,447 | ) | |||
Financing Activities | |||||||
Issuances of debt | — | 9,566 | |||||
Repayments of debt | (346 | ) | (9,114 | ) | |||
Proceeds from exercise of stock options | 6,405 | 658 | |||||
Dividend distribution | (4,017 | ) | — | ||||
Share repurchase program | (14,872 | ) | — | ||||
Net cash provided by (used for) financing activities | (12,830 | ) | 1,110 | ||||
Change in cash and cash equivalents | (9,610 | ) | 43,194 | ||||
Net cash and cash equivalents, beginning of period | 97,277 | 22,014 | |||||
Net cash and cash equivalents, end of period | $ | 87,667 | $ | 65,208 | |||
Supplemental cash flow information | |||||||
Cash payments for interest | $ | 345 | $ | 430 | |||
Cash payments for income taxes | 17,719 | 20,575 | |||||
Cash received for income tax refunds | 216 | 1,131 | |||||
Property, plant and equipment accrued in accounts payable | 9 | 872 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
TESCO CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands)
Common stock shares | Common shares | Retained earnings | Accumulated other comprehensive income | Total | ||||||||||||||
For the nine months ended September 30, 2014 | ||||||||||||||||||
Balances at January 1, 2014 | 39,680 | $ | 224,666 | $ | 256,807 | $ | 35,501 | $ | 516,974 | |||||||||
Net income | — | — | 23,243 | — | 23,243 | |||||||||||||
Dividend distribution | — | — | (4,017 | ) | — | (4,017 | ) | |||||||||||
Share repurchase | (717 | ) | (14,872 | ) | — | — | (14,872 | ) | ||||||||||
Stock compensation related activity | 679 | 10,776 | — | — | 10,776 | |||||||||||||
Balances at September 30, 2014 | 39,642 | $ | 220,570 | $ | 276,033 | $ | 35,501 | $ | 532,104 | |||||||||
For the nine months ended September 30, 2013 | ||||||||||||||||||
Balances at January 1, 2013 | 38,928 | $ | 213,460 | $ | 220,547 | $ | 35,501 | $ | 469,508 | |||||||||
Net income | — | — | 30,747 | — | 30,747 | |||||||||||||
Stock compensation related activity | 178 | 4,844 | — | — | 4,844 | |||||||||||||
Balances at September 30, 2013 | 39,106 | $ | 218,304 | $ | 251,294 | $ | 35,501 | $ | 505,099 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
TESCO CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1—Nature of Operations and Basis of Preparation
Nature of Operations
We are a global leader in the design, manufacture, and service delivery of technology-based solutions for the upstream energy industry. We seek to change the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for, and producing, oil and natural gas. Our product and service offerings consist mainly of equipment sales and services to drilling contractors and oil and natural gas operating companies throughout the world.
Basis of Presentation
We prepared this Quarterly Report on Form 10-Q pursuant to instructions for quarterly reports required to be filed with the Securities and Exchange Commission (“SEC”). Because this is an interim period filing presented using a condensed format, it does not include all information and footnotes normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). You should read this report along with our Annual Report on Form 10-K for the year ended December 31, 2013, which contains a summary of our significant accounting policies and other disclosures. The condensed consolidated financial statements as of September 30, 2014 and for the quarters and nine months ended September 30, 2014 and 2013 are unaudited. We derived the unaudited condensed consolidated balance sheet as of December 31, 2013 from the audited consolidated balance sheet filed in our 2013 Annual Report on Form 10-K. In our opinion, we have made adjustments, all of which were normal recurring adjustments unless otherwise disclosed herein, that we believe are necessary for a fair statement of the balance sheets, results of operations, and cash flows, as applicable.
These unaudited condensed consolidated financial statements include the accounts of all consolidated subsidiaries after the elimination of all significant intercompany accounts and transactions. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Fair Value of Financial Instruments
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
•Level 1 — quoted prices in active markets for identical assets and liabilities;
•Level 2 — observable market based inputs or unobservable inputs that are corroborated by market data
• | Level 3 — significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The following table summarizes the fair values and levels within the fair value hierarchy in which the fair value measurements fall for assets and liabilities measured on a recurring basis as of September 30, 2014 (in thousands):
Fair Value Measurements at Reporting Date Using | |||||||||||||||
Total | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Cash and cash equivalents | 87,667 | $ | 87,667 | $ | — | $ | — | ||||||||
Contingent earn-out obligations | $ | 1,369 | $ | — | $ | — | $ | 1,369 |
Cash and cash equivalents approximated their fair value due to the short-term nature of the accounts.
The valuation of our contingent earn-out obligations (see further discussion in "Note 4") is determined using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows
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and a discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use significant unobservable inputs (Level 3) (in thousands).
Balance at beginning of year | $ | — | |
Issuances | 1,382 | ||
Settlements | — | ||
Adjustments to fair value | (13 | ) | |
Balance at September 30, 2014 | $ | 1,369 |
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. We did not recognize any impairments, in the current quarter, on those assets required to be measured at fair value on a nonrecurring basis.
Note 2—Summary of Significant Accounting Policies
Significant Accounting Policies
There have been no material changes to our accounting policies as described in the notes to our audited consolidated financial statements included in our 2013 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 provides a single, contract-based revenue recognition model to help improve financial reporting by providing clearer guidance on when an entity should recognize revenue, and by reducing the number of standards to which entities have to refer. The amendment supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The updated accounting guidance will become effective for the Company’s annual and interim reporting periods beginning January 1, 2017. We are accessing the impact of the adoption of this accounting pronouncement on our condensed consolidated financial statements.
Note 3—Sale of Casing Drilling
On June 4, 2012, the Company completed the sale of substantially all of the assets of the Casing Drilling segment to Schlumberger Oilfield Holdings Ltd. and Schlumberger Technology Corporation (together, the "Schlumberger Group") for a total cash consideration of approximately $46.6 million, including a working capital purchase price adjustment. During the three months ended March 31, 2013, the Company recognized a pre-tax gain of approximately $1.5 million primarily from the working capital purchase price adjustment, in addition to the $12.4 million pre-tax gain recognized in 2012. The total pre-tax gain from the sale was $13.8 million, net of transaction costs.
Note 4—Business Combinations
On May 7, 2014, we purchased substantially all of the operating assets of Tech Field Services, LLC (“TFS”) for total consideration of approximately $6.4 million, including $5.0 million of cash and $1.4 million of contingent earn-out obligations. TFS, established in 2006 in Magnolia, Texas, provides parts, maintenance, and repairs for multiple top drive manufacturers, including TESCO top drive units. In addition to its core AMSS business, TFS offers hydraulic top drive rental units to customers. The acquired assets included four top drive rental units, parts inventory, and various administrative assets. We allocated approximately $4.7 million of the purchase price to property, plant and equipment and intangible assets and approximately $1.7 million to goodwill.
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Note 5—Details of Certain Accounts
At September 30, 2014 and December 31, 2013, prepaid and other current assets consisted of the following (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Prepaid taxes other than income taxes | $ | 4,510 | $ | 6,763 | |||
Deposits | 5,862 | 3,910 | |||||
Prepaid insurance | 2,549 | 5,311 | |||||
Other prepaid expenses | 5,352 | 2,564 | |||||
Restricted cash | 2,638 | 2,708 | |||||
Deferred job costs | 4,031 | 2,284 | |||||
Non-trade receivables | 1,143 | 6,848 | |||||
$ | 26,085 | $ | 30,388 |
At September 30, 2014 and December 31, 2013, accrued and other current liabilities consisted of the following (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Accrued payroll and benefits | $ | 15,838 | $ | 19,317 | |||
Accrued taxes other than income taxes | 7,360 | 7,331 | |||||
Other current liabilities | 3,145 | 8,841 | |||||
$ | 26,343 | $ | 35,489 |
Note 6—Inventories
At September 30, 2014 and December 31, 2013, inventories, net of reserves for excess and obsolete inventories of $2.4 million and $2.1 million, respectively, by major classification were as follows (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Raw materials (1) | $ | 79,536 | $ | 51,742 | |||
Work in progress | 9,590 | 1,280 | |||||
Finished goods (1) | 27,988 | 44,341 | |||||
$ | 117,114 | $ | 97,363 |
(1) In the first quarter of 2014, our Houston headquarters for North America became our base for global business unit supply chain sourcing. As such, we reclassified approximately $9.1 million of inventory from "Finished goods" to "Raw materials" during the first quarter of 2014.
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Note 7—Property, Plant and Equipment
At September 30, 2014 and December 31, 2013, property, plant, and equipment, at cost, by major classification were as follows (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Land, buildings, and leaseholds | $ | 26,050 | $ | 27,048 | |||
Drilling equipment | 363,243 | 331,901 | |||||
Manufacturing equipment | 12,116 | 11,340 | |||||
Office equipment and other | 30,987 | 30,590 | |||||
Capital work in progress | 10,842 | 16,681 | |||||
443,238 | 417,560 | ||||||
Less: Accumulated depreciation | (239,487 | ) | (212,652 | ) | |||
$ | 203,751 | $ | 204,908 |
Depreciation and amortization expense for the three and nine months ended September 30, 2014 and 2013 are included on our unaudited condensed consolidated statements of income as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Cost of sales and services | $ | 9,778 | $ | 9,748 | $ | 28,450 | $ | 28,691 | |||||||
Selling, general and administrative expense | 631 | 672 | 2,048 | 1,958 | |||||||||||
$ | 10,409 | $ | 10,420 | $ | 30,498 | $ | 30,649 |
Sale of Operating Assets
When top drive units from our rental fleet are sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services. Proceeds from the sale of used top drives are included in proceeds from the sale of operating assets and the difference between revenue and the cost of sales and services is included in gain on sale of operating assets in the accompanying unaudited condensed consolidated statement of cash flows. During the three and nine months ended September 30, 2014, one and four used top drives were sold from our rental fleet, respectively. The net book value of these top drives, $0.7 million and $2.2 million, respectively, was included in cost of sales and services on our unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2014. During the three and nine months ended September 30, 2013, five and ten used top drives were sold from our rental fleet, respectively, and the net book value of these top drives was $2.0 million and $2.6 million, respectively.
Note 8—Warranties
Changes in our warranty reserves during the nine months ended September 30, 2014 were as follows (in thousands):
September 30, 2014 | |||
Balance as of January 1, 2014 | $ | 2,393 | |
Charged to expense, net | 699 | ||
Deductions | $ | (802 | ) |
Balance as of September 30, 2014 | $ | 2,290 |
8
Note 9—Earnings per Share
Weighted Average Shares
The following table reconciles basic and diluted weighted average shares (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Basic weighted average number of shares outstanding | 40,017 | 39,076 | 39,981 | 38,999 | |||||||
Dilutive effect of stock-based compensation | 577 | 765 | 648 | 575 | |||||||
Diluted weighted average number of shares outstanding | 40,594 | 39,841 | 40,629 | 39,574 | |||||||
Anti-dilutive options excluded from calculation due to exercise prices | 203 | 311 | 370 | 1,043 |
Note 10—Income Taxes
Tesco Corporation is an Alberta, Canada corporation. We conduct business and are taxed on profits earned in a number of jurisdictions around the world. Income taxes have been recorded based on the laws and rates in effect in the countries in which operations are conducted or in which we are considered a resident for income tax purposes.
Our income tax provision for the three and nine months ended September 30, 2014 and 2013 was as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Current tax provision | $ | 3,557 | $ | 4,952 | $ | 13,066 | $ | 11,321 | |||||||
Deferred tax provision | 2,567 | 546 | 1,736 | 521 | |||||||||||
Income tax provision | $ | 6,124 | $ | 5,498 | $ | 14,802 | $ | 11,842 |
Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, was 45% and 39% for the three and nine months ended September 30, 2014, respectively, compared to 32% and 28% for the same periods in 2013, respectively. The increase of 13 and 11 percentage points for the three and nine months ended September 30, 2014, as compared to the same periods in 2013, is primarily due to the fluctuating mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world, the nondeductible nature of foreign exchange losses, and $1.4 million of favorable tax settlements in foreign jurisdictions in the nine months ended September 30, 2013, compared to $0.4 million of unfavorable tax settlements in foreign jurisdictions in the nine months ended September 30, 2014.
At December 31, 2013, we had an accrual for uncertain tax positions of $0.2 million. There has been no material change to this accrual during the three and nine months ended September 30, 2014. The accrual for uncertain tax positions is included in Accrued and other current liabilities or Other liabilities in our consolidated balance sheet based on whether we anticipate the uncertainties to be resolved within the next 12 months. At September 30, 2014, the entire $0.2 million is included in "Other liabilities" in our consolidated balance sheet. The resolution of these uncertainties is not expected to have a material impact on our effective tax rate.
Certain state and foreign tax filings remain open to examination. We believe that any assessment on these filings would not have a material impact on our financial position, results of operations, or cash flows. We believe that appropriate provisions for all outstanding issues have been made for all jurisdictions and open years. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Therefore, additional provisions on tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. We are currently under audit by the Internal Revenue Service in the United States for the years ended December 31, 2011 and 2012.
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Note 11—Long Term Debt
At September 30, 2014 and December 31, 2013, long term debt consisted of the following (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Capital leases | 51 | 97 | |||||
Other notes payable | 15 | 315 | |||||
Current portion of long term debt | (51 | ) | (385 | ) | |||
Non-current portion of long term debt | $ | 15 | $ | 27 |
As part of our acquisition of Premiere Casing Services - Egypt S.A.E ("Premiere") in 2011, we assumed $7.4 million of outstanding debt on the acquisition date of October 16, 2011. During 2013, we paid off substantially all of the outstanding balances related to Premiere's capital leases and all of the balances related to the notes payable. At September 30, 2014 the outstanding balance of Premiere's capital leases was $0.1 million.
We entered into a credit agreement on April 27, 2012, to provide a revolving line of credit of $125 million, including up to $20 million of swing line loans (collectively, the “Revolver”). The credit facility has a term of five years and all outstanding borrowings on the Revolver are due and payable on April 27, 2017. The credit facility bears interest at a margin above LIBOR, federal funds rate, or the prime rate for U.S. dollar loans as determined by JPMorgan Chase Bank, N.A. in New York. We are required to pay a commitment fee on available, but unused, amounts of the credit facility of 0.375-0.500 percent per annum and a letter of credit fee of 1.00-2.00 percent per annum on outstanding face amounts of letters of credit issued under the credit facility. Amounts available under the Revolver are reduced by letters of credit issued under our credit facility, not to exceed $50 million in aggregate. Amounts available under the swing line loans may also be reduced by letters of credit or by means of a credit to a general deposit account of the applicable borrower. The availability of future borrowings may also be limited in order to maintain certain financial ratios required under the covenants. The credit facility contains covenants that we consider usual and customary for an agreement of this type, including a leverage ratio, a minimum net worth, limitations on allowable amounts for the disposal of obsolete assets and annual capital expenditures, and a fixed charge coverage ratio. The credit facility prohibits incurring any additional indebtedness outside the existing credit facility in excess of $50 million and contains other restrictions, which are standard to the industry. All of our direct and indirect material subsidiaries in the United States, Canada, Argentina, Mexico, and Indonesia as well as one of our Cyprus subsidiaries are guarantors of any borrowings under the credit facility.
Under the Revolver at September 30, 2014, we had no outstanding borrowings, $3.5 million in letters of credit outstanding, and $121.5 million in available borrowing capacity. We were in compliance with our bank covenants at September 30, 2014.
Note 12—Commitments and Contingencies
Legal contingencies
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of these proceedings involves a claim for damages exceeding ten percent of our current assets on a consolidated basis. The estimates below represent our best estimates based on consultation with internal and external legal counsel. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.
VARCO Litigation: Varco I/P, Inc. (“Varco”) filed suit against us in April 2005 in the U.S. District Court for the Western District of Louisiana, alleging that our CDS infringes certain of Varco’s U.S. patents. Varco seeks monetary damages and an injunction against further infringement. We filed a countersuit against Varco in June 2005 in the U.S. District Court for the Southern District of Texas, Houston Division seeking invalidation of the Varco patents in question. In July 2006, the Louisiana case was transferred to the federal district court in Houston, and as a result, the issues raised by Varco have been consolidated into a single proceeding in which we are the plaintiff. We also filed a request with the U.S. Patent and Trademark Office (“USPTO”) for reexamination of the patents on which Varco’s claim of infringement is based. The USPTO accepted the Varco patents for reexamination, and the district court stayed the patent litigation pending the outcome of the USPTO reexamination. In May 2009, the USPTO issued a final action rejecting all of the Varco patent claims that we had contested. The rejections were maintained by the USPTO on appeal and there are no further options for appeal by Varco. We have begun the process to have the case dismissed by the U.S. District Court. At this time, the expectation is for the case to be dismissed with no liability for Tesco.
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Weatherford Litigation: Weatherford International, Inc. and Weatherford/Lamb Inc. (together, “Weatherford”) filed suit against us in the U.S. District Court for the Eastern District of Texas, Marshall Division in December 2007 (the “Marshall Suit”), alleging that various of our technologies infringe 11 different patents held by Weatherford.
In August 2008, we filed suit against several competitors in the U.S. District Court for the Southern District of Texas – Houston Division, including Weatherford, National Oilwell Varco, L.P., Offshore Energy Services, Inc., and Frank's Casing Crew & Rental Tools, Inc. (the “Houston Suit”). The Houston Suit claims infringement of two of our patents related to our CDS. We entered into a Final Settlement and License Agreement (the “Settlement Agreement”) with Weatherford on January 11, 2011, effective as of October 26, 2010. Among other provisions, the Settlement contains the following terms:
• | Non-exclusive irrevocable worldwide and royalty free cross licenses with respect to all the patents asserted by Weatherford in the Marshall Suit and by us in the Houston Suit, as well as certain other U.S. and foreign equivalents and counterparts; |
• | Weatherford has agreed to purchase for five years 67% of its worldwide top drive requirements from us, as long as we can meet production requirements, and to designate us as a preferred provider of after-market sales and service for top drives. The prices we charge Weatherford will be equal to or lower than the prices we charge to any other customer of similar volume of purchases and/or services; and |
• | Neither we nor Weatherford will pursue any cause of action that might adversely affect the validity or enforceability of each other's patents as listed in the exhibits to the Settlement Agreement. |
After the settlement with Weatherford the Houston Suit continued against competitors National Oilwell Varco, L.P., Offshore Energy Services, Inc., and Frank’s Casing Crew & Rental Tools, Inc. with lengthy and extensive proceedings in the District Court. On August 25, 2014, the District Court dismissed our suit with prejudice in favor of the competitors based upon the court's inherent power to sanction. The District Court's opinion stated, “The Court will entertain motions for attorney’s fees based on this ruling.” On October 1, 2014, we filed an appeal of the dismissal of the patent suit. The competitors’ motions for attorney’s fees were filed on or before October 24, 2014. Due to the uncertainties involved, management is unable to predict the outcome of the hearing on attorneys' fees may have on the Company. Accordingly, the Company has not accrued any amounts for the litigation at September 30, 2014.
New Mexico State Law and Collective Misclassification Action: The Company is currently participating in an arbitration, based on the Company’s dispute resolution process, with ten current and former employees (the “Employees”) who had or are working in New Mexico. The Employees claim that they are owed unpaid overtime wages including liquidated damages under the Federal Labor Standards Act and the applicable state laws of New Mexico. The arbitrators who will hear the case have not yet been set. Once the arbitrators are approved, a scheduling order will be issued and discovery will begin. The Company cannot reasonably estimate the possible cost or range of cost that may result from this arbitration. Accordingly, we have not accrued a reserve for this matter as of November 2, 2014.
Other Contingencies
We are contingently liable under letters of credit and similar instruments that we enter into in connection with the importation of equipment to foreign countries and to secure our performance on certain contracts. At September 30, 2014 and December 31, 2013, our total exposure under outstanding letters of credit was $7.3 million and $6.5 million, respectively.
Note 13—Segment Information
Business Segments
Prior to the sale of the Casing Drilling business during the second quarter of 2012, our four business segments were: Top Drive, Tubular Services, Casing Drilling, and Research and Engineering. On June 4, 2012, the Company completed the sale of substantially all of the assets of the Casing Drilling segment, which consisted of the proprietary Casing Drilling technology. Our Top Drive segment is comprised of top drive sales, top drive rental services, and after-market sales and service. Our Tubular Services segment includes both our proprietary and conventional tubular services. Our Research and Engineering segment is comprised of our internal research and development activities related to our proprietary tubular services and top drive model development, as well as the Casing Drilling technology prior to the sale.
We measure the results of our business segments using, among other measures, each segment’s operating income, which includes certain corporate overhead allocations. Overhead costs include field administration and operations support. At a business segment level, we incur costs directly and indirectly associated with revenue. Direct costs include expenditures specifically
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incurred for the generation of revenue, such as personnel costs on location or transportation, maintenance and repair, and depreciation of our revenue-generating equipment.
Certain sales and marketing activities, financing activities, corporate general and administrative expenses, other (income) expense, and income taxes are not allocated to our business segments.
Goodwill is allocated to the business segment to which it specifically relates. Substantially all of our goodwill has been allocated to the Tubular Services segment, with a portion to the Top Drive segment for after-market sales and services.
Significant financial information relating to our business segments is presented below (in thousands):
Three Months Ended September 30, 2014 | |||||||||||||||||||||||
Top Drive | Tubular Services | Casing Drilling | Research & Engineering | Corporate and Other | Total | ||||||||||||||||||
Revenue | $ | 87,696 | $ | 54,219 | $ | 31 | $ | — | $ | — | $ | 141,946 | |||||||||||
Depreciation and amortization | 2,984 | 6,286 | — | 16 | 1,123 | 10,409 | |||||||||||||||||
Operating income (loss) | 18,897 | 9,258 | (307 | ) | (1,853 | ) | (9,017 | ) | 16,978 | ||||||||||||||
Other expense | 3,368 | ||||||||||||||||||||||
Income before income taxes | $ | 13,610 |
Three Months Ended September 30, 2013 | |||||||||||||||||||||||
Top Drive | Tubular Services | Casing Drilling | Research & Engineering | Corporate and Other | Total | ||||||||||||||||||
Revenue | $ | 78,067 | $ | 54,181 | $ | — | $ | — | $ | — | $ | 132,248 | |||||||||||
Depreciation and amortization | 3,078 | 6,198 | — | 18 | 1,126 | 10,420 | |||||||||||||||||
Operating income (loss) | 19,437 | 9,597 | (32 | ) | (2,136 | ) | (9,054 | ) | 17,812 | ||||||||||||||
Other expense (income) | 634 | ||||||||||||||||||||||
Income before income taxes | $ | 17,178 |
Nine Months Ended September 30, 2014 | |||||||||||||||||||||||
Top Drive | Tubular Services | Casing Drilling | Research & Engineering | Corporate and Other | Total | ||||||||||||||||||
Revenue | $ | 238,668 | $ | 169,719 | $ | 63 | $ | — | $ | — | $ | 408,450 | |||||||||||
Depreciation and amortization | 8,126 | 18,867 | 1 | 49 | 3,455 | 30,498 | |||||||||||||||||
Operating income (loss) | 49,010 | 30,987 | (633 | ) | (6,819 | ) | (27,928 | ) | 44,617 | ||||||||||||||
Other expense | 6,572 | ||||||||||||||||||||||
Income before income taxes | $ | 38,045 |
Nine Months Ended September 30, 2013 | |||||||||||||||||||||||
Top Drive | Tubular Services | Casing Drilling | Research & Engineering | Corporate and Other | Total | ||||||||||||||||||
Revenue | $ | 229,677 | $ | 158,011 | $ | 624 | $ | — | $ | — | $ | 388,312 | |||||||||||
Depreciation and amortization | 8,838 | 18,413 | — | 66 | 3,332 | 30,649 | |||||||||||||||||
Operating income (loss) | 51,662 | 28,365 | 2,019 | (6,657 | ) | (32,012 | ) | 43,377 | |||||||||||||||
Other expense | 788 | ||||||||||||||||||||||
Income before income taxes | $ | 42,589 |
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Geographic Areas
We attribute revenue to geographic regions based on the location of the customer. Generally, for service activities, this will be the region in which the service activity occurs. For equipment sales, this will be the geographical region in which the product is initially employed. Our revenue by geographic area for the three and nine months ended September 30, 2014 and 2013 was as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Canada | $ | 12,578 | $ | 13,533 | $ | 40,873 | $ | 33,532 | |||||||
United States | 51,840 | 38,105 | 141,163 | 116,973 | |||||||||||
South America | 20,163 | 19,439 | 66,166 | 55,150 | |||||||||||
Mexico | 10,861 | 13,935 | 27,120 | 40,918 | |||||||||||
Asia Pacific | 13,303 | 13,030 | 38,390 | 38,271 | |||||||||||
Europe, Africa, and Middle East | 12,101 | 11,755 | 44,182 | 35,762 | |||||||||||
Russia | 21,100 | 22,451 | 50,556 | 67,706 | |||||||||||
Total | $ | 141,946 | $ | 132,248 | $ | 408,450 | $ | 388,312 |
The physical location of our net property, plant, and equipment by geographic area as of September 30, 2014 and December 31, 2013 was as follows (in thousands):
Top Drive | Tubular Services | Overhead, Corporate, and Other | September 30, 2014 | ||||||||||||
United States | $ | 16,845 | $ | 32,874 | $ | 10,480 | $ | 60,199 | |||||||
Mexico | 27,141 | 4,655 | 375 | 32,171 | |||||||||||
Europe, Africa, and Middle East | 7,462 | 21,051 | 3,302 | 31,815 | |||||||||||
Asia Pacific | 7,161 | 20,091 | 609 | 27,861 | |||||||||||
Russia | 15,723 | 1,767 | 20 | 17,510 | |||||||||||
South America | 10,461 | 10,040 | 1,129 | 21,630 | |||||||||||
Canada | 2,375 | 4,449 | 5,741 | 12,565 | |||||||||||
Total | $ | 87,168 | $ | 94,927 | $ | 21,656 | $ | 203,751 |
Top Drive | Tubular Services | Overhead, Corporate, and Other | December 31, 2013 | ||||||||||||
United States | $ | 18,103 | $ | 17,779 | $ | 14,885 | $ | 50,767 | |||||||
Mexico | 33,113 | 2,659 | 185 | 35,957 | |||||||||||
Europe, Africa, and Middle East | 6,284 | 23,820 | 6,705 | 36,809 | |||||||||||
Asia Pacific | 7,835 | 19,145 | 1,852 | 28,832 | |||||||||||
Russia | 16,995 | 550 | 156 | 17,701 | |||||||||||
South America | 11,584 | 7,995 | 1,042 | 20,621 | |||||||||||
Canada | 10,015 | 2,305 | 1,901 | 14,221 | |||||||||||
Total | $ | 103,929 | $ | 74,253 | $ | 26,726 | $ | 204,908 |
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Major customers and credit risk
Our accounts receivable are principally with major international and national oil and natural gas service and exploration and production companies and are subject to normal industry credit risks. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition, and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. Many of our customers are located in international areas that are inherently subject to risks of economic, political, and civil instabilities, which may impact our ability to collect those accounts receivable. The main factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency, and management’s estimate of ability to collect outstanding receivables based on the number of days outstanding and risks of economic, political, and civil instabilities. Bad debt expense is included in selling, general, and administrative expense in our consolidated statements of income.
As of September 30, 2014, our total net investment in Venezuela was approximately $6.6 million, including net monetary assets of $2.5 million denominated in bolivar fuerte. We continue to experience delays in collecting payment on our receivables from our primary customer in Venezuela. These receivables are not disputed, and we have not historically had material write-offs relating to this customer. Due to the significant aging of these receivables, we recorded a $1.1 million reserve for these balances at September 30, 2014.
In 2013, the Venezuelan government authorized certain companies that operate in designated industry sectors to exchange a limited volume of bolivar for dollars at a bid rate established via weekly auctions under the Complementary System of Foreign Currency Acquirement (SICAD). In February 2014, the Venezuelan government announced plans to significantly expand the use of the SICAD through the introduction of a second program intended to more closely resemble a market driven exchange rate, SICAD 2. In addition, the Venezuelan government officials indicated that the official rate of 6.3 bolivar per U.S. dollar available for exchange through the Commission for the Administration of Foreign Exchange (CADIVI) will increasingly be reserved for the settlement of U.S. dollar denominated transactions related to purchases of essential goods and services. Prior to 2014, we had remeasured our bolivar denominated net monetary assets into U.S dollars for reporting purposes at the CADIVI rate, which was 6.3 bolivars per U.S. dollar. As of March 31, 2014, we assessed the SICAD 1 exchange as being the legal mechanism most readily available to us to convert our bolivar denominated net monetary assets based on the goods and services we provide in-country. Consequently, we remeasured our bolivar denominated net monetary assets at March 30, 2014 into U.S. dollars at the SICAD 1 rate of 10.8 bolivars per U.S. dollar, which resulted in a $0.4 million foreign currency loss. During the three months ended June 30, 2104, we determined that the SICAD 2 more closely resembled the true market rate of exchange, and consequently, we remeasured our bolivar denominated net monetary assets into U.S. dollar at the SICAD 2 rate of 49.9 bolivar per U.S. dollar, which resulted in a $0.7 million foreign currency loss. At September 30, 2014, the SICAD 2 rate remained substantially unchanged at 50.0 bolivar per U.S. dollar, which resulted in a negligible foreign currency loss for the three months then ended. Further devaluation of the bolivar Fuertes in 2014 may negatively impact our financial results and operations in the remainder of the year.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Please see “Caution Regarding Forward-Looking Information; Risk Factors” above and “Risk Factors” in Part II, Item 1A below and in our 2013 Annual Report on Form 10-K, for a discussion of the uncertainties, risks, and assumptions associated with these statements.
Overview and Outlook
We are a global leader in the design, manufacture, and service delivery of technology-based solutions for the upstream energy industry. We seek to change the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for and producing oil and natural gas.
Prior to the sale of the Casing Drilling business during the second quarter of 2012, our business segments were:
• | Top Drive – top drive sales, top drive rental services, and after-market sales and services; |
• | Tubular Services – proprietary and conventional tubular services; |
• | Casing Drilling – proprietary Casing Drilling technology; and |
• | Research and Engineering – internal research and development activities related to our proprietary tubular services and top drive model development, as well as the Casing Drilling technology prior to the sale. |
On June 4, 2012, we completed the sale of substantially all of the assets of our Casing Drilling segment to the Schlumberger Group. For a detailed discussion of this matter, see Part I, Item 1—"Financial Statements", Note 3—Sale of Casing Drilling in this Quarterly Report on Form 10-Q.
Business Environment
One of the key indicators of our business is the number of active drilling rigs. During the first nine months of 2014, North America experienced an improving market based on rig activity. In addition, with the increase in drilling rig efficiencies, well counts have increased. Certain countries in Latin America experienced a decline in rig activity due to various geopolitical and economic reasons. Current global macro-economic conditions make any projections difficult. Below is a table that shows average rig count by region for the three and nine months ended September 30, 2014 and 2013.
Three Months Average Rig Count(1) | Increase / (Decrease) | Nine Months Average Rig Count(1) | Increase / (Decrease) | ||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||
U.S. | 1,903 | 1,769 | 134 | 8 | % | 1,845 | 1,763 | 82 | 5 | % | |||||||||||
Canada | 385 | 349 | 36 | 10 | % | 371 | 347 | 24 | 7 | % | |||||||||||
Latin America (includes Mexico) | 406 | 407 | (1 | ) | 0 | % | 403 | 419 | (16 | ) | (4 | )% | |||||||||
Middle East (excludes Iran, Iraq and Sudan) | 411 | 373 | 38 | 10 | % | 409 | 366 | 43 | 12 | % | |||||||||||
Asia Pacific (excludes China onshore) | 256 | 241 | 15 | 6 | % | 254 | 246 | 8 | 3 | % | |||||||||||
Europe (excludes Russia) | 148 | 140 | 8 | 6 | % | 144 | 135 | 9 | 7 | % | |||||||||||
Africa | 126 | 124 | 2 | 2 | % | 134 | 122 | 12 | 10 | % | |||||||||||
Worldwide | 3,635 | 3,403 | 232 | 7 | % | 3,560 | 3,398 | 162 | 5 | % |
(1) Source: Baker Hughes Incorporated worldwide rig count; averages are monthly.
Summary of the Quarter Ended September 30, 2014 and Operational Performance
During the third quarter of 2014, our Top Drive segment had 33 top drive units sold compared to 26 units sold during the same period in 2013. Our Tubular Services segment revenue improved slightly in the third quarter of 2014 as compared to the third quarter of 2013. Our automated tubular services offering continues to gain market acceptance, and we remain committed to growing this segment as we believe that every rig with a top drive will eventually convert to running casing with an automated
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system, such as our CDS™ system. We also invested in new and enhanced product and service offerings in our Research and Engineering segment.
Outlook for 2014
The current outlook for the global economy varies widely and has become more challenging, given the recent unanticipated oil and gas price developments. We believe we will continue to face challenges while managing our currency exposure and a tighter credit policy, which has a tendency to push Product deliveries into future quarters. The sanctions concerning Russia to date have had limited impact on us, as we do not believe they apply directly to our current operations. However, as we continue to monitor developments, it is becoming clearer that such sanctions are affecting the whole business environment and slowing the activity in the country. If these current conditions persist, we expect greater initial activity volatility in the U.S. rather than internationally. Accordingly, we expect those potential conditions to have a lesser impact on our business when compared to some of our more North America-centric peers. Moreover, we believe we are well positioned to deal with some of these market challenges described, and we believe that our global operational momentum remains generally healthy. Accordingly, we expect that our fourth quarter will be an improvement over the third quarter, as we continue to focus on both the deployment of our strategy and our ability to generate cash.
Current global macro-economic conditions make any projections difficult and uncertain; nevertheless, in each of our revenue generating segments, we anticipate moderately improved activity for the remainder 2014, as follows:
• | Top Drive - We expect our top drive rental activity to moderately improve for the remainder of 2014. Top drive rentals activity continue to strengthen, particularly in our Latin American operations. After Market Sales and Service continues to show momentum after the recent third quarter’s record revenue. In addition, our Top Drive sales backlog was 47 units at September 30, 2014, compared to 26 units at September 30, 2013 and 32 units at December 31, 2013. As mentioned above, there is some risk of year-end delivery delays given the current market conditions and, particularly, the Russian sanctions. |
• | Tubular Services - We expect our Tubular Services business to improve in our domestic and international markets for the remainder of 2014, as we continue to expand our offerings, particularly in the major unconventional shale regions in North America, offshore in the Gulf of Mexico and select international locations. |
Operating Results
Below is a summary of our operating results for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages):
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||
Segment revenue | |||||||||||||||||||||||||
Top Drive | $ | 87,696 | $ | 78,067 | $ | 9,629 | 12% | $ | 238,668 | $ | 229,677 | $ | 8,991 | 4% | |||||||||||
Tubular Services | 54,219 | 54,181 | 38 | —% | 169,719 | 158,011 | 11,708 | 7% | |||||||||||||||||
Casing Drilling | 31 | — | 31 | —% | 63 | 624 | (561 | ) | (90)% | ||||||||||||||||
Consolidated revenue | $ | 141,946 | $ | 132,248 | $ | 9,698 | 7% | $ | 408,450 | $ | 388,312 | $ | 20,138 | 5% | |||||||||||
Segment operating income (loss) | |||||||||||||||||||||||||
Top Drive | $ | 18,897 | $ | 19,437 | $ | (540 | ) | (3)% | $ | 49,010 | $ | 51,662 | $ | (2,652 | ) | (5)% | |||||||||
Tubular Services | 9,258 | 9,597 | (339 | ) | (4)% | 30,987 | 28,365 | 2,622 | 9% | ||||||||||||||||
Casing Drilling | (307 | ) | (32 | ) | (275 | ) | 859% | (633 | ) | 2,019 | (2,652 | ) | (131)% | ||||||||||||
Research & engineering | (1,853 | ) | (2,136 | ) | 283 | 13% | (6,819 | ) | (6,657 | ) | (162 | ) | (2)% | ||||||||||||
Corporate and other | (9,017 | ) | (9,054 | ) | 37 | —% | (27,928 | ) | (32,012 | ) | 4,084 | 13% | |||||||||||||
Consolidated operating income | 16,978 | 17,812 | (834 | ) | (5)% | 44,617 | 43,377 | 1,240 | 3% | ||||||||||||||||
Other expense (income) | 3,368 | 634 | 2,734 | 431% | 6,572 | 788 | 5,784 | 734% | |||||||||||||||||
Income tax provision | 6,124 | 5,498 | 626 | 11% | 14,802 | 11,842 | 2,960 | 25% | |||||||||||||||||
Net income | $ | 7,486 | $ | 11,680 | $ | (4,194 | ) | (36)% | $ | 23,243 | $ | 30,747 | $ | (7,504 | ) | (24)% |
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Top Drive Segment
Our Top Drive business segment sells equipment and provides services to drilling contractors and oil and natural gas operating companies throughout the world. We primarily manufacture top drives that are used in drilling operations to rotate the drill string while suspended from the derrick above the rig floor. We also provide top drive rental services on a day-rate basis for land and offshore drilling rigs, and we provide after-market sales and support for our customers.
The following is a summary of our Top Drive operating results and metrics for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages, units, days, and rate):
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||
Top Drive revenue | |||||||||||||||||||||||||
Sales | $ | 41,560 | $ | 30,647 | $ | 10,913 | 36% | $ | 107,420 | $ | 92,611 | $ | 14,809 | 16% | |||||||||||
Rental services | 26,728 | 32,592 | (5,864 | ) | (18)% | 78,154 | 93,076 | (14,922 | ) | (16)% | |||||||||||||||
After-market sales and services | 19,408 | 14,828 | 4,580 | 31% | 53,094 | 43,990 | 9,104 | 21% | |||||||||||||||||
87,696 | 78,067 | 9,629 | 12% | 238,668 | $ | 229,677 | $ | 8,991 | 4% | ||||||||||||||||
Top Drive operating income | $ | 18,897 | $ | 19,437 | $ | (540 | ) | (3)% | $ | 49,010 | $ | 51,662 | $ | (2,652 | ) | (5)% | |||||||||
Number of top drive sales: | |||||||||||||||||||||||||
New | 32 | 21 | 11 | 52% | 84 | 64 | 20 | 31% | |||||||||||||||||
Used or consignment | 1 | 5 | (4 | ) | (80)% | 4 | 10 | (6 | ) | (60)% | |||||||||||||||
33 | 26 | 7 | 27% | 88 | 74 | 14 | 19% | ||||||||||||||||||
End of period number of top drives in rental fleet | 135 | 130 | 5 | 4% | 135 | 130 | 5 | 4% | |||||||||||||||||
Rental operating days(a) | 6,032 | 6,671 | (639 | ) | (10)% | 16,528 | 18,662 | (2,134 | ) | (11)% | |||||||||||||||
Average daily operating rate | $ | 4,431 | $ | 4,886 | $ | (455 | ) | (9)% | $ | 4,729 | $ | 4,987 | $ | (258 | ) | (5)% |
__________________________________
(a) Defined as a day that a unit in our rental fleet is under contract and operating; does not include stand-by days.
Top Drive operating results were largely driven by oil and natural gas drilling activity and new rig build activity. The average active rig count increased for the third quarter of 2014 and year-to-date by 7% and 5%, respectively, from the same periods in 2013 (Source: Baker Hughes Incorporated worldwide rig count).
Top Drive Sales Revenue — The increase in revenue for the three and nine months ended September 30, 2014 compared to the same periods in 2013 is due primarily to an increase in the number of units sold in North America and Asia Pacific. The selling price per unit varies significantly depending on the model, whether the unit was previously operated in our rental fleet, and whether a power unit was included in the sale. Revenue related to the sale of used top drive units is $1.0 million and $4.2 million for the three months ended September 30, 2014 and 2013, respectively, and $4.1 million and $8.5 million for the nine months ended September 30, 2014 and 2013, respectively.
Top Drive Rental Revenue — The decrease in revenue for the three and nine months ended September 30, 2014 compared to the same periods in 2013 is primarily due to the decreased operating days due to geopolitical conditions, primarily in Russia, Indonesia, Mexico, and Venezuela. Price erosion in the US from competition and contract adjustments experienced in Mexico and Argentina further negatively impacted rental revenue.
Top Drive After-Market Sales and Services Revenue — The increase in revenue for the three and nine months ended September 30, 2014 as compared to the same period in 2013 is due to increased demand in North America.
Top Drive Operating Income — The decrease in operating income for the three months ended September 30, 2014 as compared to the same period in 2013 is primarily due to the decline in activity and price for Rental, partially offset by an increase in top drives sales in North America and Asia Pacific and increased demand in North America for after-market sales and services. The decrease in operating income for the nine months ended September 30, 2014 as compared to the same period in 2013 is due to decreased rental activity in Russia, Indonesia, Mexico, and Venezuela.
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Tubular Services Segment
Our Tubular Services business segment includes both automated and conventional services, which are typically offered as a “call out” service on a well-by-well basis. Our automated service offerings, in particular the CDS™, provide a safer and more automated method for running casing and, if required, reaming the casing into the hole, as compared to traditional methods. Our conventional Tubular Service business provides equipment and personnel for the installation of tubing and casing, including power tongs, pick-up/lay-down units, torque monitoring services, and connection testing services for new well construction and in work-over and re-entry operations. The following is a summary of our Tubular Services operating results and metrics for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages and number of jobs):
Three Months Ended September 30, | Increase/ (Decrease) | Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||
Tubular Services revenue | |||||||||||||||||||||||||
Automated | $ | 43,695 | $ | 43,615 | $ | 80 | 0% | $ | 137,273 | $ | 126,905 | $ | 10,368 | 8% | |||||||||||
Conventional | 10,524 | 10,566 | (42 | ) | 0% | 32,446 | 31,106 | 1,340 | 4% | ||||||||||||||||
$ | 54,219 | $ | 54,181 | $ | 38 | 0% | $ | 169,719 | $ | 158,011 | $ | 11,708 | 7% | ||||||||||||
Tubular Services operating income | $ | 9,258 | $ | 9,597 | $ | (339 | ) | (4)% | $ | 30,987 | $ | 28,365 | $ | 2,622 | 9% | ||||||||||
Number of automated jobs | 1,045 | 1,063 | (18 | ) | (2)% | 3,128 | 2,994 | 134 | 4% |
The slight increase in Tubular Services revenue for the three and nine months ended September 30, 2014 compared to the same periods in 2013 is due to increased demand in the Latin America region for our automated offerings, while continuing to invest in our offshore business. A significant amount of current U.S. drilling activity in shale formations requires directional and horizontal drilling techniques, which we believe are good applications for our automated service offerings. In addition, increased domestic and international demand for our tubular services, both automated and conventional, resulted in new jobs at more favorable pricing terms. The Tubular Services automated revenue during the three and nine months ended September 30, 2014 also includes $3.3 million and $11.8 million, respectively, of revenue for CDS™ equipment sales, compared to $3.6 million and $9.4 million during the same periods in 2013.
The decrease in Tubular Services operating income for the three months ended September 30, 2014 as compared to the same period in 2013 is primarily due to decreased direct profit and operating margins in 2014. The increase in operating income for the nine months ended September 30, 2014 compared to the same period in 2013 is due primarily to higher revenue discussed above and related flow through to operating income in the Latin America and Middle East regions.
Casing Drilling Segment
On June 4, 2012, we completed the sale of substantially all of the assets of our Casing Drilling segment to the Schlumberger Group. The Casing Drilling business was based on the proprietary Casing Drilling technology, which used patented equipment and processes to allow an oil or gas well to be drilled using standard well casing pipe.
Below is a summary of the operating results of the segment for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages):
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||
Casing Drilling revenue | $ | 31 | $ | — | $ | 31 | 0% | $ | 63 | $ | 624 | $ | (561 | ) | (90)% | ||||||||||
Casing Drilling operating income (loss) | $ | (307 | ) | $ | (32 | ) | $ | (275 | ) | 859% | $ | (633 | ) | $ | 2,019 | $ | (2,652 | ) | (131)% |
Casing Drilling operating income for the nine months ended September 30, 2013 is primarily attributed to a working capital adjustment gain of approximately $1.5 million from the sale. For a detailed discussion of this matter, see Part I, Item 1—"Financial Statements", Note 3—Sale of Casing Drilling in this Quarterly Report on Form 10-Q.
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Research and Engineering Segment
Our Research and Engineering segment is comprised of our internal research and development activities related to our automated product offerings. The following is a summary of our research and engineering expense for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages):
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||
Research and engineering expense | $ | 1,853 | $ | 2,136 | $ | (283 | ) | (13)% | $ | 6,819 | $ | 6,657 | $ | 162 | 2% |
Research and engineering expenses decreased during the three months ended September 30, 2014 as compared to the same period in 2013 due to decreased spending on materials and equipment utilized in product development. The increase in research and engineering expenses during the nine months ended September 30, 2014 compared to the same periods in 2013 due to increased spending on automation and compact projects. We continue to invest in the development, commercialization, and enhancements of our proprietary technologies relating to our Top Drive and Tubular Services segments.
Corporate and Other Segment
Corporate and other expenses primarily consist of the corporate level general and administrative expenses and certain selling and marketing expenses. Below is a summary of our corporate and other expenses for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages):
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | ||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||
Corporate and other expenses | $ | 9,017 | $ | 9,054 | $ | (37 | ) | 0% | $ | 27,928 | $ | 32,012 | $ | (4,084 | ) | (13)% |
Corporate and other expenses were lower during the three months ended September 30, 2014, as compared to the same period in 2013, due primarily to the loss on sale of the test well disposed of during the quarter. These expenses were lower during the nine months ended September 30, 2014, as compared to the same period in 2013, due primarily to decreased legal fees.
Other Expense (Income)
Below is a summary of our other expense (income) for the three and nine months ended September 30, 2014 and 2013 (in thousands, except percentages):
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||||
2014 | 2013 | 2013 to 2014 | 2014 | 2013 | 2013 to 2014 | ||||||||||||||||||||||
Other expense (income) | |||||||||||||||||||||||||||
Interest expense | $ | 219 | $ | 121 | $ | 98 | 81 | % | $ | 1,137 | $ | 57 | $ | 1,080 | 1,895 | % | |||||||||||
Interest income | (25 | ) | (29 | ) | 4 | 14 | % | (110 | ) | (83 | ) | (27 | ) | (33 | )% | ||||||||||||
Foreign exchange loss (gain) | 3,074 | 471 | 2,603 | 553 | % | 5,438 | 2,535 | 2,903 | 115 | % | |||||||||||||||||
Other expense (income) | 100 | 71 | 29 | 41 | % | 107 | (1,721 | ) | 1,828 | 106 | % | ||||||||||||||||
Total other expense (income) | $ | 3,368 | $ | 634 | $ | 2,734 | 431 | % | $ | 6,572 | $ | 788 | $ | 5,784 | 734 | % |
Interest expense increased in the three months ended September 30, 2014 primarily due to interest expense adjustments totaling $0.1 million in a North American jurisdiction in 2013, while the same period in 2014 had no adjustments. Interest expense increased in the nine months ended September 30, 2014 primarily due to interest adjustments totaling $0.4 million in two Latin American jurisdictions in 2014, while the same period in 2013 includes a $0.7 million credit for an interest adjustment in one Latin American jurisdiction.
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Foreign exchange losses increased during the three and nine months ended September 30, 2014 as compared to the same periods in 2013 due to fluctuations in the valuation of the U.S. dollar compared to other currencies we transact in around the world. Foreign exchange losses for the three and nine months ended September 30, 2014 were $3.1 million and $5.4 million, respectively. Foreign exchange losses for the three and nine months ended September 30, 2013 were $0.5 million and $2.5 million, respectively. The largest foreign exchange losses during the nine months ended September 30, 2014 were from the Argentine peso, the Russian ruble, and the Mexican peso in the amounts of $2.8 million, $1.3 million and $0.7 million, respectively.
Other expense increased in the three and nine months ended September 30, 2014 primarily due to our participation in an amnesty program for a tax issue in a foreign jurisdiction in March and May 2013, for which there was no participation in 2014. For the nine months ended September 30, 2013, there was a reversal of $1.8 million of other expense previously made for these issues.
Income Tax Provision
Three Months Ended September 30, | Increase / (Decrease) | Nine Months Ended September 30, | Increase / (Decrease) | ||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Effective income tax rate | 45% | 32% | 13 pts | 39% | 28% | 11 pts |
We are an Alberta, Canada corporation. We conduct business and are taxed on profits earned in a number of jurisdictions around the world. Our income tax rate is based on the laws and rates in effect in the countries in which our operations are conducted or in which we are considered a resident for income tax purposes. Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, increased for the three and nine months ended September 30, 2014 as compared to the same periods in 2013 due to the fluctuating mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world, the nondeductible nature of foreign exchange losses, and $1.4 million of favorable tax settlements in foreign jurisdictions in the nine months ended September 30, 2013, compared to $0.4 million of unfavorable tax settlements in foreign jurisdictions in the nine months ended September 30, 2014.
Liquidity and Capital Resources
We rely on our cash and access to credit to fund our operations, growth initiatives, and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents, and available borrowings under our Revolver. We use these sources of liquidity to fund our working capital requirements, capital expenditures, strategic investments and acquisitions. For 2014, we forecast capital expenditures to be between $35 million and $45 million based on expected demand for our products and services. We expect to be able to fund our activities for the remainder of 2014 with cash flows generated from our operations, and available cash and cash equivalents.
As of September 30, 2014, we had no outstanding borrowings under our Revolver, and we had availability to borrow $121.5 million under our Revolver. The availability of current borrowings is, and future borrowings may be, limited in order to maintain certain financial ratios required by restrictive covenants in our Revolver. We were in compliance with our bank covenants at September 30, 2014. For further discussion on our credit facility, see Part I, Item 1—“Financial Statements”, Note 11 of this Quarterly Report on Form 10-Q.
Our net cash position at September 30, 2014 and December 31, 2013 was as follows (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Cash | $ | 87,667 | $ | 97,277 | |||
Current portion of long term debt | (51 | ) | (385 | ) | |||
Long term debt | (15 | ) | (27 | ) | |||
Net cash | $ | 87,601 | $ | 96,865 |
We report our net cash position because we regularly review it as a measure of our performance. However, the measure presented in this Quarterly Report on Form 10-Q may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the measurement we use.
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Cash Flows
Our cash flows fluctuate with the level of spending by oil and natural gas companies for drilling activities. Certain sources and uses of cash, such as the level of discretionary capital expenditures and the issuance and repayment of debt, are within our control and are adjusted as necessary based on market conditions. The following is a discussion of our cash flows for the nine months ended September 30, 2014 and 2013.
Operating Activities – Net cash provided by operating activities is our primary source of capital and liquidity. Net cash provided by operating activities was $37.1 million for the nine months ended September 30, 2014 compared to net cash provided of $52.5 million for the same period in 2013. The decrease in net cash provided by operating activities was due primarily to cash outflows from increasing inventories and receivables, and decreasing accounts payable and accrued liabilities.
Investing Activities – Net cash used by investing activities was $33.8 million during the nine months ended September 30, 2014 compared to $10.4 million during the same period of 2013. During the nine months ended September 30, 2014 and 2013, we used $33.0 million and $25.3 million of cash, respectively, for capital expenditures, and sales of operating assets provided $4.1 million and $8.2 million of cash, respectively. During the nine months ended September 30, 2014, we did not receive cash from the sale of the Casing Drilling segment to the Schlumberger Group compared to $6.1 million that we received during the same period in 2013. Further, we purchased substantially all of the operating assets of Tech Field Services, LLC during the nine months ended September 30, 2014 for $5.0 million.
Financing Activities – Net cash used by financing activities was $12.8 million during the nine months ended September 30, 2014 compared to $1.1 million of net cash provided for the same period in 2013.
Included in the net cash provided by financing operations were cash dividends of $0.05 per share of our common stock paid on June 2, 2014 and August 28, 2014 to shareholders of record on May 22, 2014 and August 22, 2014, respectively. Total dividend payments made during the nine months ended September 30, 2014 was $4.0 million. We expect continued growth in financial position and plans to continue dividend payments in the future.
We announced on May 6, 2014 that its Board of Directors authorized the repurchase of up to $100.0 million of our common shares over a two year period. We repurchased 716,475 shares valued at $14.9 million during the three months ended September 30, 2014.
Manufacturing Purchase Commitments
Our manufacturing purchase commitments, which represent executed purchase orders that have been submitted to our respective vendors, have decreased from $34.9 million as of December 31, 2013 to $29.6 million as of September 30, 2014. This decrease of $5.3 million, or 15%, is driven primarily by reduced lead times with many suppliers and increased inventory reserves to be used in production during the remainder of 2014.
Off-Balance Sheet Arrangements
As of September 30, 2014, we have no off-balance sheet arrangements other than the manufacturing purchase commitments and letters of credit described above, and future interest payments on the aggregate unused commitments under our revolving credit facility and lease commitments as described in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2013 Annual Report on Form 10-K.
Critical Accounting Estimates and Policies
Our accounting policies are described in the notes to our audited consolidated financial statements included in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2013 Annual Report on Form 10−K. We prepare our unaudited condensed consolidated financial statements in conformity with U.S. GAAP. Our results of operations and financial condition, as reflected in our unaudited condensed consolidated financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of our business and customers. We believe that the most critical accounting policies in this regard are those described in our 2013 Annual Report on Form 10−K. While these issues require us to make judgments that are subjective, they are generally based on a significant amount of historical data and current market data. There have been no material changes or developments in authoritative accounting pronouncements or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be critical accounting policies and estimates as disclosed in our 2013 Annual Report on Form 10−K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See Part I, Item 7A —“Quantitative and Qualitative Disclosures About Market Risk” in our 2013 Annual Report on Form 10‑K for a detailed discussion of the risks affecting us. There have been no material changes to the market risks described in Part I, Item 7A —"Quantitative and Qualitative Disclosures About Market Risk" disclosed in our 2013 Annual Report on Form 10‑K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the SEC reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of September 30, 2014, our Chief Executive Officer and Chief Financial Officer participated with management in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of these proceedings involves a claim for damages exceeding ten percent of our current assets on a consolidated basis. See Part I, Item 1—“Financial Statements”, Note 12 of this Quarterly Report on Form 10-Q for a summary of certain ongoing legal proceedings. Such information is incorporated into this Part II, Item 1—"Legal Proceedings" by reference.
Item 1A. Risk Factors.
See Part I, Item 1A—"Risk Factors" in our 2013 Annual Report on Form 10-K for a detailed discussion of the risk factors affecting us. Except as set forth by this section, there have been no material changes to the risk factors described in Part I, Item 1A—"Risk Factors" disclosed in our 2013 Annual Report on Form 10-K.
Our operations are subject to political and economic instability, risk of government action, and cybersecurity incidents that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
We are exposed to risks inherent in doing business in each of the countries in which we operate. In places like Russia, Latin America, the Middle East and Asia Pacific, we may have difficulty or extra expense in navigating the local bureaucracies and legal systems. We may face challenges in enforcing contracts in local courts or be at a disadvantage when we have a dispute with a customer that is an agency of the state. We may be at a disadvantage to competitors that are not subject to the same international trade and business practice restrictions that U.S. and Canadian laws impose on us.
While diversification is desirable, it can expose us to risks related to cultural, political, and economic factors of foreign jurisdictions which are beyond our control. As a general rule, we have elected not to carry political risk insurance against these risks. Such risks include the following:
• | loss of revenue, property, and equipment as a result of hazards such as wars, insurrection, and other instances of political and economic instability; |
• | the effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems; |
• | changes or interpretations in laws, regulations, and policies of foreign governments, including those associated with changes in the governing parties, nationalization, and expropriation; |
• | protracted delays in securing government consents, permits, licenses, or other regulatory approvals necessary to conduct our operations; and |
• | protracted delays in the collection of accounts receivable due to economic, political, and civil instabilities. |
We are subject to foreign governmental regulations in some jurisdictions in which we operate that favor or require awarding contracts to local contractors or require foreign contractors to employ citizens of or purchase supplies from a certain jurisdiction. Such regulations may adversely affect our ability to compete in that jurisdiction. Our operations in some jurisdictions may be significantly affected by union activity and general labor unrest. In Argentina and Mexico, particularly, where we have significant operations, labor organizations have substantial support and have considerable political influence. In Argentina, the demands of labor organizations have increased in recent years and seem likely to continue as a result of the general labor unrest and dissatisfaction resulting from the disparity between the cost of living and salaries in Argentina as a result of the devaluation of the Argentine Peso. There can be no assurance that our operations in Argentina or Mexico will not face labor disruptions in the future or that any such disruptions will not have a material adverse effect on our financial condition or results of operations. Further, unionization efforts have been made from time to time in other jurisdictions in which we operate with varying degrees of success. Any such unionization could increase our costs or limit the flexibility in that market.
Due to unsettled political conditions in many oil-producing countries, our operations, revenue, and profits are subject to adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls, and governmental actions. These and other risks described above could result in the loss of our personnel or assets, cause us to evacuate our personnel from certain countries, cause us to increase spending on security worldwide, disrupt financial and commercial markets, including the supply of and pricing for oil and natural gas, and generate greater political and economic instability in some of the geographic areas in which we operate. Areas where we operate that have significant risk include, but are not limited to: Argentina, Colombia, Egypt,
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Indonesia, Iraq, Mexico, Russia, and Venezuela. In addition, any possible reprisals as a consequence of military or other action, such as acts of terrorism in the United States or elsewhere, could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. The continuance of our sales to customers, and our operations, in Russia and the region are uncertain in light of recent events in Ukraine. Continued political instability, deteriorating macroeconomic conditions, the implementation of additional economic sanctions that restrict our ability to do business, and actual or threatened military action in the region could have a material adverse effect on our operations in the region and on the result of operations of our Top Drive segment.
Our operations are also subject to the risk of information technology disruptions. Cybersecurity incidents, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information, and the corruption of data. We believe that we have implemented appropriate measures to mitigate potential risks to our technology and our operations from these information technology disruptions. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.
Item 2. Use of Proceeds.
On May 2, 2014, our Board of Directors (the “Board”) authorized a common stock repurchase program (the “Program”), which permits us to repurchase up to $100,000,000 USD of our current shares outstanding. The repurchase of the common shares shall be conducted as a normal course issuer bid ("NCIB"). This Board authorization expires June 30, 2016.
During the quarter ended September 30, 2014, we repurchased our common shares in the following amounts at the following average prices:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (millions) | ||||||||||
July 1 - July 31 | 237,673 | $ | 20.66 | 237,673 | $ | 95.1 | ||||||||
August 1 - August 31 | 138,795 | $ | 20.97 | 138,795 | $ | 92.2 | ||||||||
September 1 - September 30 | 340,007 | $ | 20.74 | 340,007 | $ | 85.1 | ||||||||
716,475 | 716,475 |
Item 6. Exhibits.
The Exhibit Index set forth below is incorporated herein by reference.
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SIGNATURE
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.
TESCO CORPORATION | ||
By: | /s/ JULIO M. QUINTANA | |
Julio M. Quintana, President and Chief Executive Officer (Principal Executive Officer) | ||
Date: | November 7, 2014 | |
TESCO CORPORATION | ||
By: | /s/ CHRISTOPHER L. BOONE | |
Christopher L. Boone, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||
Date: | November 7, 2014 |
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EXHIBIT INDEX
Exhibit No. | Description | |
3.1* | Articles of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated by reference to Exhibit 4.1 to Tesco Corporation's Registration Statement on Form S-8 (File No. 333-139610) filed with the SEC on December 22, 2006) | |
3.2* | Amended and Restated By-laws of Tesco Corporation (incorporated by reference to Exhibit 3.1 to Tesco Corporation's Current Report on Form 8-K filed with the SEC on March 5, 2014) | |
14* | Tesco Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to Tesco Corporation's Current Report on Form 8-K dated August 7, 2013 and filed with the SEC on August 13, 2014) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification, executed by Christopher L. Boone, Senior Vice President and Chief Financial Officer of Tesco Corporation | |
32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation and Christopher L. Boone, Senior Vice President and Chief Financial Officer of Tesco Corporation | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
* | Incorporated by reference to the indicated filing |
** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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