Item 1. Financial Statements.
TESCO CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Assets
|
(unaudited)
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
64,581
|
|
|
$
|
91,489
|
|
Accounts receivable trade, net of allowance for doubtful accounts of $8,199 and $9,134 as of September 30, 2017 and December 31, 2016, respectively
|
44,577
|
|
|
33,320
|
|
Inventories, net
|
77,569
|
|
|
76,226
|
|
Income taxes recoverable
|
2,726
|
|
|
4,906
|
|
Prepaid and other current assets
|
13,784
|
|
|
15,034
|
|
Total current assets
|
203,237
|
|
|
220,975
|
|
Property, plant and equipment, net
|
106,842
|
|
|
120,743
|
|
Intangible and other assets, net
|
2,811
|
|
|
2,561
|
|
Total assets
|
$
|
312,890
|
|
|
$
|
344,279
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
15,571
|
|
|
$
|
13,492
|
|
Deferred revenue
|
3,370
|
|
|
4,369
|
|
Income taxes payable
|
1,774
|
|
|
2,120
|
|
Accrued payroll and benefits
|
6,672
|
|
|
6,293
|
|
Accrued taxes other than income taxes
|
4,131
|
|
|
4,301
|
|
Other current liabilities
|
4,976
|
|
|
2,135
|
|
Total current liabilities
|
36,494
|
|
|
32,710
|
|
Deferred income taxes
|
326
|
|
|
406
|
|
Other liabilities
|
1,589
|
|
|
1,580
|
|
Total liabilities
|
38,409
|
|
|
34,696
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
Common shares; no par value; unlimited shares authorized; 46,756 and 46,688 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
|
268,666
|
|
|
264,940
|
|
Retained earnings (deficit)
|
(29,686
|
)
|
|
9,142
|
|
Accumulated other comprehensive income
|
35,501
|
|
|
35,501
|
|
Total shareholders’ equity
|
274,481
|
|
|
309,583
|
|
Total liabilities and shareholders’ equity
|
$
|
312,890
|
|
|
$
|
344,279
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
Products
|
$
|
14,798
|
|
|
$
|
10,236
|
|
|
$
|
45,033
|
|
|
$
|
35,680
|
|
Services
|
25,716
|
|
|
20,179
|
|
|
72,368
|
|
|
63,774
|
|
Total revenue
|
40,514
|
|
|
30,415
|
|
|
117,401
|
|
|
99,454
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of sales and services
|
|
|
|
|
|
|
|
Products
|
13,471
|
|
|
16,965
|
|
|
43,440
|
|
|
47,068
|
|
Services
|
30,567
|
|
|
27,363
|
|
|
87,928
|
|
|
87,783
|
|
|
44,038
|
|
|
44,328
|
|
|
131,368
|
|
|
134,851
|
|
Selling, general and administrative
|
8,391
|
|
|
6,725
|
|
|
20,745
|
|
|
20,691
|
|
Long-lived asset impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
35,514
|
|
Research and engineering
|
788
|
|
|
1,248
|
|
|
2,401
|
|
|
4,258
|
|
Total operating expenses
|
53,217
|
|
|
52,301
|
|
|
154,514
|
|
|
195,314
|
|
Operating loss
|
(12,703
|
)
|
|
(21,886
|
)
|
|
(37,113
|
)
|
|
(95,860
|
)
|
Other expense (income)
|
|
|
|
|
|
|
|
Interest expense
|
165
|
|
|
196
|
|
|
287
|
|
|
850
|
|
Interest income
|
(37
|
)
|
|
(42
|
)
|
|
(141
|
)
|
|
(471
|
)
|
Foreign exchange loss (gain)
|
(127
|
)
|
|
352
|
|
|
186
|
|
|
1,537
|
|
Other expense (income)
|
241
|
|
|
233
|
|
|
(85
|
)
|
|
260
|
|
Total other expense
|
242
|
|
|
739
|
|
|
247
|
|
|
2,176
|
|
Loss before income taxes
|
(12,945
|
)
|
|
(22,625
|
)
|
|
(37,360
|
)
|
|
(98,036
|
)
|
Income tax provision (benefit)
|
83
|
|
|
(556
|
)
|
|
1,468
|
|
|
(257
|
)
|
Net loss
|
$
|
(13,028
|
)
|
|
$
|
(22,069
|
)
|
|
$
|
(38,828
|
)
|
|
$
|
(97,779
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.28
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(2.33
|
)
|
Diluted
|
$
|
(0.28
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(2.33
|
)
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
Basic
|
46,755
|
|
|
46,382
|
|
|
46,733
|
|
|
42,039
|
|
Diluted
|
46,755
|
|
|
46,382
|
|
|
46,733
|
|
|
42,039
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
Operating Activities
|
|
|
|
Net loss
|
$
|
(38,828
|
)
|
|
$
|
(97,779
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
Depreciation and amortization
|
17,159
|
|
|
22,516
|
|
Stock compensation expense
|
3,726
|
|
|
3,247
|
|
Bad debt expense (recovery)
|
(688
|
)
|
|
514
|
|
Deferred income taxes
|
(81
|
)
|
|
152
|
|
Amortization of financial items
|
—
|
|
|
406
|
|
Gain on sale of operating assets
|
(2,121
|
)
|
|
(616
|
)
|
Long-lived asset impairments
|
—
|
|
|
35,514
|
|
Changes in the fair value of contingent earn-out obligations
|
—
|
|
|
(74
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable trade, net
|
(9,055
|
)
|
|
24,780
|
|
Inventories, net
|
(1,344
|
)
|
|
14,919
|
|
Prepaid and other current assets
|
602
|
|
|
3,164
|
|
Accounts payable and accrued liabilities
|
1,012
|
|
|
(12,668
|
)
|
Income taxes payable
|
1,939
|
|
|
608
|
|
Other non-current assets and liabilities, net
|
595
|
|
|
(228
|
)
|
Net cash used in operating activities
|
(27,084
|
)
|
|
(5,545
|
)
|
Investing Activities
|
|
|
|
Additions to property, plant, equipment and intangibles
|
(2,911
|
)
|
|
(4,529
|
)
|
Proceeds on sale of operating assets
|
2,439
|
|
|
2,865
|
|
Other, net
|
—
|
|
|
226
|
|
Net cash used in investing activities
|
(472
|
)
|
|
(1,438
|
)
|
Financing Activities
|
|
|
|
Proceeds from stock issuance
|
—
|
|
|
47,918
|
|
Stock issuance costs
|
—
|
|
|
(364
|
)
|
Changes in restricted cash
|
648
|
|
|
(1,951
|
)
|
Net cash provided by financing activities
|
648
|
|
|
45,603
|
|
Change in cash and cash equivalents
|
(26,908
|
)
|
|
38,620
|
|
Cash and cash equivalents, beginning of period
|
91,489
|
|
|
51,507
|
|
Cash and cash equivalents, end of period
|
$
|
64,581
|
|
|
$
|
90,127
|
|
Supplemental cash flow information
|
|
|
|
Cash payments for interest
|
$
|
—
|
|
|
$
|
355
|
|
Cash payments for income taxes, net of refunds
|
(730
|
)
|
|
1,350
|
|
Property, plant and equipment accrued in accounts payable
|
398
|
|
|
2,329
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares
|
|
Common shares
|
|
Retained earnings (deficit)
|
|
Accumulated other comprehensive income
|
|
Total
|
For the nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
46,688
|
|
|
$
|
264,940
|
|
|
$
|
9,142
|
|
|
$
|
35,501
|
|
|
$
|
309,583
|
|
Net loss
|
—
|
|
|
—
|
|
|
(38,828
|
)
|
|
—
|
|
|
(38,828
|
)
|
Stock compensation related activity
|
68
|
|
|
3,726
|
|
|
—
|
|
|
—
|
|
|
3,726
|
|
Balances at September 30, 2017
|
46,756
|
|
|
$
|
268,666
|
|
|
$
|
(29,686
|
)
|
|
$
|
35,501
|
|
|
$
|
274,481
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2015
|
39,218
|
|
|
$
|
212,383
|
|
|
$
|
127,070
|
|
|
$
|
35,501
|
|
|
$
|
374,954
|
|
Net loss
|
—
|
|
|
—
|
|
|
(97,779
|
)
|
|
—
|
|
|
(97,779
|
)
|
Stock issuance, net of issue costs
|
7,131
|
|
|
47,554
|
|
|
—
|
|
|
—
|
|
|
47,554
|
|
Stock compensation related activity
|
55
|
|
|
3,247
|
|
|
—
|
|
|
—
|
|
|
3,247
|
|
Balances at September 30, 2016
|
46,404
|
|
|
$
|
263,184
|
|
|
$
|
29,291
|
|
|
$
|
35,501
|
|
|
$
|
327,976
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TESCO CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1
—Nature of Operations and Basis of Preparation
Nature of Operations
Tesco Corporation is a global leader in the design, assembly, and service delivery of technology-based solutions for the upstream energy industry. The Company seeks to improve the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for, and producing, oil and natural gas. Product and service offerings consist mainly of equipment sales and services to oilfield service companies ("OFS") and exploration and production ("E&P") operating companies throughout the world.
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the interim periods presented. Adjustments consist of normal and recurring accruals. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required for annual financial statements presented in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
. All references to $ are to U.S. dollars.
Note 2
—Combination of TESCO with Nabors Industries Ltd.
On August 13, 2017, the Company entered into an Arrangement Agreement (the “Arrangement Agreement”) with Nabors Industries Ltd, a Bermuda exempted company (“Nabors”), and Nabors Maple Acquisition Ltd. (“Nabors Maple”), a corporation organized under the laws of Alberta, Canada, pursuant to which Nabors Maple will acquire all of the issued and outstanding common shares of the Company (the “Tesco Common Shares”) pursuant to a statutory plan of arrangement under section 193 of the Business Corporations Act (Alberta) (the “Arrangement”).
Subject to the terms and conditions of the Arrangement Agreement, at the effective time of the Arrangement, each outstanding Tesco Common Share, other than Tesco Common Shares with respect to which dissent rights have been properly exercised and not withdrawn, will be exchanged for
0.68
of a common share of Nabors (“Nabors Shares”) (the “Share Consideration”). Each dissenting Tesco Common Share will be transferred to Nabors Maple in accordance with, and for the consideration contemplated in, the Arrangement Agreement.
Pursuant to the Arrangement, at the effective time of the Arrangement: (i) all outstanding, unexpired Company options to purchase Tesco Common Shares under any Company stock incentive plan (“Company Option”) will be accelerated, cancelled, and exchanged for the right to receive an amount in cash per share, less tax withholdings, equal to (a) the excess of the Market Value per share over the option’s exercise price, multiplied by (b) the aggregate number of Tesco Common Shares subject to such Company Option immediately prior to the effective time, and each Company Option with an exercise price per share that is equal to or greater than the Market Value will be cancelled for no consideration; (ii) all outstanding Company restricted stock units (including performance-based restricted stock units) (“RSUs”) will vest and be cancelled in exchange for the right to receive an amount in cash, less tax withholding, equal to (a) the Market Value per share, multiplied by (b) the aggregate number of Tesco Common Shares underlying the Company RSUs immediately prior to the effective time. Market Value means
0.68
multiplied by the closing price of one common share of Nabors on the New York Stock Exchange (“NYSE”) on the last trading day prior to the effective date of the Arrangement.
The closing of the Arrangement is subject to satisfaction of certain conditions, including, among others, approval of the Arrangement by the Company’s security holders; approval of the interim and final order by the Court of Queen’s Bench of Alberta, and receipt of any regulatory or stock exchange approvals, including approval of the NYSE. The Arrangement Agreement contains certain customary termination rights for both the Company and Nabors. In addition, upon termination of the Arrangement Agreement under specified circumstances, including in order to enter into a binding written agreement related to a superior proposal, the Company will be required to pay a cash termination fee of
$8 million
. As of September 30, 2017, the combination had not closed.
Note 3
—Summary of Significant Accounting Policies
Significant Accounting Policies
There have been no material changes to our accounting policies as described in the notes to our audited consolidated financial statements included in our
2016
Annual Report on Form 10-K.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which clarifies the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update will be effective January 1, 2018. Early adoption is permitted on January 1, 2017. We will adopt the standard as of January 1, 2018. The standard provides for adoption retrospectively for each period presented (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial adoption (modified retrospective). We plan to apply the modified retrospective approach.
We have the necessary resources dedicated to carry out the evaluation and adoption of the new standard and are currently reviewing the Company’s existing contracts under the principles of the new standard and identifying the modifications needed to our current revenue recognition accounting policy, business processes and system requirements. We anticipate the adoption of the new standard may require us to make significant changes to our business processes, and we are currently evaluating the overall impact this guidance will have on the consolidated financial statements and related disclosures of the Company.
In February 2016, FASB issued ASU 2016-02,
Leases (Topic 842)
, which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. It will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The update will be effective January 1, 2019. Although early adoption is permitted, we will adopt the standard effective January 1, 2019.
Lessees and lessors are required to adopt Topic 842 using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. We have the necessary resources dedicated to the evaluation and adoption of the new standard, and we are currently assessing the impact the standard may have on business processes, systems, and consolidated financial statements and related disclosures of the Company.
Note 4
—Inventories, net
At
September 30, 2017
and
December 31, 2016
, inventories, net of reserves for excess and obsolete inventories of
$1.6 million
and
$9.1 million
, respectively, by major classification were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Raw materials and component parts
|
$
|
68,437
|
|
|
$
|
66,731
|
|
Work in progress
|
3,473
|
|
|
3,420
|
|
Finished goods
|
5,659
|
|
|
6,075
|
|
|
$
|
77,569
|
|
|
$
|
76,226
|
|
The decrease in the reserves is due to the application of
$5.2 million
reserves directly to specific inventory items and
$2.3 million
of disposals.
Note 5
—Prepaid and Other Current Assets
At
September 30, 2017
and
December 31, 2016
, prepaid and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Prepaid taxes other than income
|
$
|
2,125
|
|
|
$
|
2,036
|
|
Prepaid insurance
|
1,237
|
|
|
1,180
|
|
Other prepaid expenses
|
2,987
|
|
|
3,118
|
|
Deposits
|
3,895
|
|
|
3,063
|
|
Restricted cash
|
2,845
|
|
|
3,493
|
|
Non-trade receivables
|
226
|
|
|
325
|
|
Deferred job costs
|
469
|
|
|
1,819
|
|
|
$
|
13,784
|
|
|
$
|
15,034
|
|
Note 6
—Property, Plant and Equipment
At
September 30, 2017
and
December 31, 2016
, property, plant and equipment by major classification were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Land, buildings and leaseholds
|
$
|
27,020
|
|
|
$
|
27,499
|
|
Drilling equipment
|
263,084
|
|
|
264,388
|
|
Manufacturing equipment
|
13,412
|
|
|
13,188
|
|
Office equipment and other
|
28,155
|
|
|
28,452
|
|
Capital work in progress
|
1,426
|
|
|
3,887
|
|
|
333,097
|
|
|
337,414
|
|
Less: Accumulated depreciation
|
(226,255
|
)
|
|
(216,671
|
)
|
|
$
|
106,842
|
|
|
$
|
120,743
|
|
For the nine months ended September 30, 2017
and the year ended
December 31, 2016
,
$3.1 million
and
$1.6 million
, respectively, were capitalized into fixed assets from inventory, and the related cash expenditures were reflected through operating cash flow.
Depreciation and amortization expense for the
three and nine
months ended
September 30, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of sales and services
|
$
|
5,247
|
|
|
$
|
7,186
|
|
|
$
|
16,858
|
|
|
$
|
21,879
|
|
Selling, general and administrative expense
|
87
|
|
|
156
|
|
|
301
|
|
|
637
|
|
|
$
|
5,334
|
|
|
$
|
7,342
|
|
|
$
|
17,159
|
|
|
$
|
22,516
|
|
During the second quarter of 2017, we reevaluated the remaining useful life of our CDS
TM
assets in the Tubular Services segment and determined these assets had a remaining life of
7
years. This change was effective June 1, 2017, and has been accounted for prospectively.
Sale of Operating Assets
When pipe handling products that we manufacture are used in our rental fleet and subsequently sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services within product sales of our Products segment. When CDS
TM
and other tubular services products that we manufacture or purchase are used in our operations and subsequently sold, the sales proceeds are included in revenue and the net book value of the equipment sold is included in cost of sales and services within CDS, parts and accessories of our Tubular Services segment. During the
three and nine
months ended
September 30, 2017
zero
and
four
used top drives were sold from our rental fleet. During the
three and nine
months ended
September 30, 2016
,
zero
and
six
used top drives were sold from our rental fleet.
Note 7
—Warranties
Changes in our warranty reserves during the
nine months ended
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
Balance as of December 31, 2016
|
$
|
474
|
|
Provisions
|
127
|
|
Expirations
|
(156
|
)
|
Claims
|
(141
|
)
|
Balance as of September 30, 2017
|
$
|
304
|
|
Note 8
—Earnings per Share and Shareholders' Equity
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,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic weighted average number of shares outstanding
|
46,755
|
|
|
46,382
|
|
|
46,733
|
|
|
42,039
|
|
Dilutive effect of stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average number of shares outstanding
|
46,755
|
|
|
46,382
|
|
|
46,733
|
|
|
42,039
|
|
Anti-dilutive options excluded from calculation due to exercise prices
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
There were approximately
558,000
and
474,000
shares excluded from the calculation of the diluted weighted average number of shares outstanding as the Company was in a net loss position for the
three and nine
months ended
September 30, 2017
. There were approximately
426,000
and
408,000
shares excluded from the calculation of the diluted weighted average number of shares outstanding as the Company was in a net loss position for the
three and nine
months ended
September 30, 2016
. The inclusion of the shares would be anti-dilutive.
Common Stock Issued
In June 2016, the Company completed a secondary public equity offering of
7.1 million
common shares that generated proceeds of
$47.6 million
, net of underwriting discounts, commissions, issuance costs and expenses. In July 2016, our underwriter partially exercised its over-allotment option to purchase an additional
130,752
common shares that generated nearly
$1 million
in additional proceeds. The unexercised options expired on July 8, 2016.
Note 9
—Income Taxes
We are an Alberta, Canada corporation. We conduct business and are taxed on profits earned in certain jurisdictions around the world. Income taxes have been provided for based on the laws and rates in effect in the countries in which operations are conducted or in which we are considered a resident for income tax purposes.
Our income tax provision for the
three and nine
months ended
September 30, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Current tax provision (benefit)
|
$
|
83
|
|
|
$
|
(981
|
)
|
|
$
|
1,549
|
|
|
$
|
(409
|
)
|
Deferred tax provision (benefit)
|
—
|
|
|
425
|
|
|
(81
|
)
|
|
152
|
|
Income tax provision (benefit)
|
$
|
83
|
|
|
$
|
(556
|
)
|
|
$
|
1,468
|
|
|
$
|
(257
|
)
|
Our effective tax rate, which is income tax expense as a percentage of loss before income taxes, was a
1%
expense
and a
4%
expense
for the
three and nine
months ended
September 30, 2017
, respectively, compared to a
2%
benefit
and
0%
for the same periods in
2016
. The current income tax
expense
for the
three and nine
months ended
September 30, 2017
was due to certain tax jurisdictions where we remain profitable.
We record a valuation allowance to reduce the carrying value of deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including the implementation of feasible and prudent tax planning strategies, past operating results, the existence of cumulative losses in the most recent years, and forecast of future taxable income which inherently requires significant assumptions and judgment.
Note 10
—Commitments and Contingencies
Legal Contingencies
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of the proceedings involves a claim for damages exceeding
ten percent
of our current assets on a consolidated basis. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.
On September 28, 2017, a shareholder of the Company filed a lawsuit in the U.S. District Court for the Southern District of Texas against TESCO and its directors. Two other shareholders of the Company filed putative class action lawsuits in the U.S. District Court for the Southern District of Texas against the Company and its directors on September 29, 2017 and October 10, 2017, respectively. The lawsuits assert claims under Section 14(a) and Section 20 of the Securities Exchange Act and allege that the Company has made materially incomplete and misleading disclosures regarding the proposed arrangement between the Company, Nabors and Nabors Maple. At the current time, the Company believes the chance that it incurs a material loss related to the litigation is remote, so it has not made any accrual related to the litigation.
Other Contingencies
We are contingently liable under letters of credit and similar instruments that we enter in connection with the importation of equipment into international countries and to secure our performance on certain contracts. As of
September 30, 2017
and
December 31, 2016
, our total exposure under outstanding letters of credit was
$2.0 million
and
$2.7 million
, respectively. Of this amount,
$2.0 million
and
$2.5 million
were secured by restricted cash on deposit at
September 30, 2017
and
December 31, 2016
, respectively.
Note 11
—Segment Information
Business Segments
Significant financial information relating to our business segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
Revenue
|
$
|
18,515
|
|
|
$
|
21,999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,514
|
|
Depreciation and amortization
|
960
|
|
|
3,931
|
|
|
—
|
|
|
443
|
|
|
5,334
|
|
Operating loss
|
(2,171
|
)
|
|
(2,305
|
)
|
|
(788
|
)
|
|
(7,439
|
)
|
|
(12,703
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
Revenue
|
$
|
16,957
|
|
|
$
|
13,458
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,415
|
|
Depreciation and amortization
|
1,395
|
|
|
5,356
|
|
|
—
|
|
|
591
|
|
|
7,342
|
|
Operating loss
|
(7,437
|
)
|
|
(7,986
|
)
|
|
(1,248
|
)
|
|
(5,215
|
)
|
|
(21,886
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
739
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(22,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
Revenue
|
$
|
58,089
|
|
|
$
|
59,312
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117,401
|
|
Depreciation and amortization
|
2,644
|
|
|
13,058
|
|
|
—
|
|
|
1,457
|
|
|
17,159
|
|
Operating loss
|
(3,453
|
)
|
|
(12,533
|
)
|
|
(2,401
|
)
|
|
(18,726
|
)
|
|
(37,113
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
247
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(37,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Products
|
|
Tubular
Services
|
|
Research &
Engineering
|
|
Corporate &
Other
|
|
Total
|
Revenue
|
$
|
54,122
|
|
|
$
|
45,332
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99,454
|
|
Depreciation and amortization
|
3,862
|
|
|
16,676
|
|
|
2
|
|
|
1,976
|
|
|
22,516
|
|
Operating loss
|
(49,329
|
)
|
|
(23,335
|
)
|
|
(4,258
|
)
|
|
(18,938
|
)
|
|
(95,860
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
2,176
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(98,036
|
)
|
Other Charges
As a result of the uncertain prospects for the oilfield services and equipment sector and the impact on our business outlook, we continued certain cost rationalization efforts that were implemented in 2015 through
2017
. Consequently, we recorded charges in continuing operations related to headcount reductions and office closures. The following table presents these charges and the related income statement classification to which the charges are included for the
three and nine
months ended
September 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
Severance
|
|
Facility Closures
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
Products
|
$
|
159
|
|
|
$
|
303
|
|
|
$
|
349
|
|
|
$
|
374
|
|
|
Cost of sales and services - Products
|
Tubular Services
|
454
|
|
|
305
|
|
|
707
|
|
|
478
|
|
|
Cost of sales and services - Services
|
Corporate & Other
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
—
|
|
|
Selling, general and administrative
|
|
$
|
613
|
|
|
$
|
608
|
|
|
$
|
1,019
|
|
|
$
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
Severance
|
|
Facility Closures
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
Products
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
1,487
|
|
|
$
|
25
|
|
|
Cost of sales and services - Products
|
Tubular Services
|
193
|
|
|
15
|
|
|
1,715
|
|
|
737
|
|
|
Cost of sales and services - Services
|
Corporate & Other
|
—
|
|
|
—
|
|
|
90
|
|
|
131
|
|
|
Selling, general and administrative
|
|
$
|
268
|
|
|
$
|
15
|
|
|
$
|
3,292
|
|
|
$
|
893
|
|
|
|
Geographic Areas
We attribute revenue to geographic regions based on the location of the customer. Generally, for service activities, this will be the region in which the service activity occurs. For equipment sales, this will be the geographical region in which the product is initially deployed. Our revenue by geographic area for the
three and nine
months ended
September 30, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
$
|
15,364
|
|
|
$
|
9,035
|
|
|
$
|
44,822
|
|
|
$
|
33,969
|
|
Europe, Africa and Middle East
|
8,341
|
|
|
9,542
|
|
|
22,204
|
|
|
25,914
|
|
Asia Pacific
|
3,390
|
|
|
1,536
|
|
|
6,697
|
|
|
7,493
|
|
Russia
|
6,881
|
|
|
3,883
|
|
|
24,359
|
|
|
11,509
|
|
Latin America
|
5,070
|
|
|
5,631
|
|
|
13,323
|
|
|
17,246
|
|
Canada
|
1,468
|
|
|
788
|
|
|
5,996
|
|
|
3,323
|
|
|
$
|
40,514
|
|
|
$
|
30,415
|
|
|
$
|
117,401
|
|
|
$
|
99,454
|
|
The location of our net property, plant and equipment by geographic area as of
September 30, 2017
and
December 31, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
Total
|
United States
|
$
|
5,790
|
|
|
$
|
27,915
|
|
|
$
|
7,739
|
|
|
$
|
41,444
|
|
Europe, Africa and Middle East
|
6,145
|
|
|
9,636
|
|
|
2,245
|
|
|
18,026
|
|
Asia Pacific
|
3,906
|
|
|
6,012
|
|
|
353
|
|
|
10,271
|
|
Russia
|
10,570
|
|
|
1,201
|
|
|
4
|
|
|
11,775
|
|
Latin America
|
17,684
|
|
|
937
|
|
|
—
|
|
|
18,621
|
|
Canada
|
1,402
|
|
|
842
|
|
|
4,461
|
|
|
6,705
|
|
|
$
|
45,497
|
|
|
$
|
46,543
|
|
|
$
|
14,802
|
|
|
$
|
106,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
Total
|
United States
|
$
|
6,959
|
|
|
$
|
32,227
|
|
|
$
|
9,232
|
|
|
$
|
48,418
|
|
Europe, Africa and Middle East
|
6,263
|
|
|
10,355
|
|
|
2,308
|
|
|
18,926
|
|
Asia Pacific
|
3,417
|
|
|
9,315
|
|
|
478
|
|
|
13,210
|
|
Russia
|
10,956
|
|
|
954
|
|
|
7
|
|
|
11,917
|
|
Latin America
|
19,579
|
|
|
2,428
|
|
|
209
|
|
|
22,216
|
|
Canada
|
324
|
|
|
1,020
|
|
|
4,712
|
|
|
6,056
|
|
|
$
|
47,498
|
|
|
$
|
56,299
|
|
|
$
|
16,946
|
|
|
$
|
120,743
|
|
Major Customers and Credit Risk
Our accounts receivable are principally with major international and OFS and E&P companies and are subject to normal industry credit risks. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon but not limited to specific situations and overall industry conditions. Many of our customers are located in international areas that are inherently subject to risks of economic, political and civil instabilities, which may impact our ability to collect those accounts receivable. The main factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency and management’s estimate of ability to collect outstanding receivables based on the number of days outstanding and risks of economic, political and civil instabilities. Bad debt expense is included in selling, general and administrative expense in our consolidated statements of income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Please see "Caution Regarding Forward-Looking Information" above and "Risk Factors" in Part II, Item 1A below and in our
2016
Annual Report on Form 10-K, for a discussion of the uncertainties, risks and assumptions associated with these statements.
Combination of TESCO with Nabors Industries Ltd.
On August 13, 2017, the Company entered into an Arrangement Agreement (the “Arrangement Agreement”) with Nabors Industries Ltd, a Bermuda exempted company (“Nabors”), and Nabors Maple Acquisition Ltd. (“Nabors Maple”), a corporation organized under the laws of Alberta, Canada, pursuant to which Nabors Maple will acquire all of the issued and outstanding common shares of the Company (the “Tesco Common Shares”) pursuant to a statutory plan of arrangement under section 193 of the Business Corporations Act (Alberta) (the “Arrangement”).
Subject to the terms and conditions of the Arrangement Agreement, at the effective time of the Arrangement, each outstanding Tesco Common Share, other than Tesco Common Shares with respect to which dissent rights have been properly exercised and not withdrawn, will be exchanged for 0.68 of a common share of Nabors (“Nabors Shares”) (the “Share Consideration”). Each dissenting Tesco Common Share will be transferred to Nabors Maple in accordance with, and for the consideration contemplated in, the Arrangement Agreement.
Pursuant to the Arrangement, at the effective time of the Arrangement: (i) all outstanding, unexpired Company options to purchase Tesco Common Shares under any Company stock incentive plan (“Company Option”) will be accelerated, cancelled, and exchanged for the right to receive an amount in cash per share, less tax withholdings, equal to (a) the excess of the Market Value per share over the option’s exercise price, multiplied by (b) the aggregate number of Tesco Common Shares subject to such Company Option immediately prior to the effective time, and each Company Option with an exercise price per share that is equal to or greater than the Market Value will be cancelled for no consideration; (ii) all outstanding Company restricted stock units (including performance-based restricted stock units) (“RSUs”) will vest and be cancelled in exchange for the right to receive an amount in cash, less tax withholding, equal to (a) the Market Value per share, multiplied by (b) the aggregate number of Tesco Common Shares underlying the Company RSUs immediately prior to the effective time. Market Value means 0.68 multiplied by the closing price of one common share of Nabors on the New York Stock Exchange (“NYSE”) on the last trading day prior to the effective date of the Arrangement.
The closing of the Arrangement is subject to satisfaction of certain conditions, including, among others, approval of the Arrangement by the Company’s security holders; approval of the interim and final order by the Court of Queen’s Bench of Alberta, and receipt of any regulatory or stock exchange approvals, including approval of the NYSE. The Arrangement Agreement contains certain customary termination rights for both the Company and Nabors, including, among other things, a termination right for either party if both parties consent in writing, if the transaction is not consummated by February 14, 2018 (subject to extension in certain events, including in the event required regulatory approvals have not been obtained) or if a court of competent jurisdiction has enjoined the Arrangement in a final and non-appealable order. In addition, upon termination of the Arrangement Agreement under specified circumstances, including in order to enter into a binding written agreement related to a superior proposal, the Company will be required to pay a cash termination fee of $8 million.
The foregoing summaries of the Arrangement Agreement and the transactions contemplated by the Arrangement Agreement, do not purport to be complete and are subject to, and qualified in their entirety by, the full text of the Arrangement Agreement, which is attached as Exhibit 2.1, to this Quarterly Report on Form 10-Q and incorporated herein by reference.
In advance of the anticipated closing of the Transaction with Nabors, the Company has continued to operate as a separate publicly traded company bound by all of the obligations, practices and requirements associated therewith. Accordingly, the common stock of TESCO has continued to trade on the NASDAQ Stock Market under the symbol “TESO”.
Overview and Outlook
Tesco Corporation is a global leader and provider of highly engineered technology-based solutions for drilling, servicing, and completion of wells for the upstream energy industry. The Company seeks to improve the way wells are drilled by delivering safer and more efficient solutions that add value by reducing the costs of drilling for, and producing, oil and natural gas. Our operations consist of top drives and automated pipe handling equipment sales and rentals, aftermarket sales and services, and tubular services, including related products and accessories sales.
Our revenues and operating results are directly related to the level of worldwide oil and gas drilling and production activities and the profitability and cash flows of E&P companies and drilling contractors, which are affected by current and anticipated oil and gas prices.
Unless indicated otherwise, results of operations data are presented in accordance with U.S. GAAP.
Our Segments
Our operating structure is the basis for our internal and external financial reporting. As of
September 30, 2017
, our operating structure included the following business segments: (i) Products – top drives and automated pipe handling equipment sales, rentals and aftermarket sales and services, (ii) Tubular Services – onshore and offshore tubular services and sales of related products and accessories, (iii) Research & Engineering – internal research and development activities related to our proprietary tubular services and products development, and (iv) Corporate and Other – including executive management and several global support and compliance functions.
Business Environment
Our revenue is heavily dependent on the level of drilling activity of E&P companies. The willingness of E&P companies to spend capital on drilling activities is primarily affected by the current and anticipated prices of crude oil and natural gas, which is driven by such factors as the level of worldwide oil and gas reserves, civil unrest and conflicts in oil producing countries, economic sanctions, and global economics, among other things. When drilling rigs are active they consume products and services produced by OFS companies like ours. Accordingly, rig count and well count are important business indicators for the drilling industry and its suppliers, as they may reflect the relative strength and stability of energy prices and overall market activity. However, these counts should not be solely relied on as an indicator of the economic condition of our industry, as other specific and pervasive conditions may exist that affect overall energy prices and market activity.
Below is a table that shows the average rig count by region for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Average Rig Count
(1)
|
|
Nine Months Average Rig Count
(1)
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
947
|
|
|
480
|
|
|
859
|
|
|
485
|
|
Canada
|
208
|
|
|
121
|
|
|
207
|
|
|
111
|
|
Latin America
|
188
|
|
|
187
|
|
|
185
|
|
|
203
|
|
Asia Pacific
|
193
|
|
|
190
|
|
|
196
|
|
|
187
|
|
Middle East
|
394
|
|
|
385
|
|
|
390
|
|
|
392
|
|
Africa
|
84
|
|
|
80
|
|
|
83
|
|
|
87
|
|
Europe
|
88
|
|
|
94
|
|
|
93
|
|
|
97
|
|
Total
|
2,102
|
|
|
1,537
|
|
|
2,013
|
|
|
1,562
|
|
_________________________________
|
|
(1)
|
Source: Baker Hughes Incorporated worldwide rig count. The Baker Hughes North American Rotary Rig Count is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. The Baker Hughes International Rotary Rig Count is a monthly census of active drilling rigs exploring for or developing oil or natural gas outside North America (U.S. and Canada). To be counted as active, a rig must be on location and be drilling or 'turning to the right'. A rig is considered active from the moment the well is "spudded" until it reaches target depth. Rigs that are in transit from one location to another, rigging up or being used in non-drilling activities such as workovers, completions or production testing, are not counted as active. The Baker Hughes International Rotary Rig Count does not include rigs drilling in Russia, the Caspian region, Iran, Sudan, Cuba, North Korea or onshore China. Iraq was excluded from the International Rotary Rig Count for the period September 1990 to May 2012. Syria is currently excluded from the International Rotary Rig Count as of February 2012 due to difficulty obtaining data as a result of continued civil unrest.
|
Outlook
In the third quarter of 2017, WTI and Brent crude oil prices were volatile, trading between mid-$40/bbl and $52/bbl. Today WTI and Brent crude oil prices have stabilized at nearly $55/bbl, but the risk of continued volatility remains high. We believe crude oil prices will remain volatile through the foreseeable future. U.S. rig count increased approximately 6% in the third quarter of 2017 as compared to the second quarter of 2017, and has recently stabilized around 910 rigs total with 889 on land as of October 27, 2017. Canadian rig count increased from the second quarter of 2017 by approximately 80% and is now at 191 rigs a of October 27, 2017, mostly due to seasonality rather than improved fundamentals. International and offshore rig counts remain stagnant.
The global outlook remains mixed. While there is market speculation that the U.S. rig count could decline in the fourth quarter of 2017 and into 2018, we remain cautiously optimistic that it will stay relatively flat, especially in a sustained $50+/bbl oil environment. So far, we have seen limited evidence of any significant activity declines on the part of our customers.
Despite the aforementioned indicators of increased stability, many industry experts continue to predict a prolonged downturn. In addition, we continue to see strong pricing pressures globally and do not anticipate any significant pricing recovery in the next few quarters. Accordingly, we have maintained many of the cost-control measures introduced at the onset of the decline, and we continue to realize benefits from our overhead and support structure optimization efforts. Although our core business is modestly recovering and the strong initiatives undertaken are contributing, we will continue to face significant challenges as the market continues to evolve. All the while, we remain highly focused on returning to a quarterly breakeven EBITDA run rate while minimizing cash usage over the next several quarters. The key drivers to this in the short term are growth in CDS land Evolution adoption and market share; acceleration of new and used CDS equipment and accessories revenues; continued gain in offshore tubular services market share in our established markets; and acceleration of all aftermarket sales and services offerings as rigs reactivate.
Results of Operations
The discussions below relating to significant line items from our consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items.
This discussion should be read in conjunction with Part I, Item 1, "Financial Statements" included in this Report.
Operating results by business segments
Below is a summary of the operating results of our business segments for the
three and nine
months ended
September 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Segment revenue
|
|
|
|
|
|
|
|
Products revenue
|
|
|
|
|
|
|
|
Product sales
|
$
|
3,931
|
|
|
$
|
4,368
|
|
|
$
|
15,205
|
|
|
$
|
16,951
|
|
Rental services
|
6,625
|
|
|
7,120
|
|
|
17,571
|
|
|
19,579
|
|
Aftermarket sales and services
|
7,959
|
|
|
5,469
|
|
|
25,313
|
|
|
17,592
|
|
|
18,515
|
|
|
16,957
|
|
|
58,089
|
|
|
54,122
|
|
Tubular Services revenue
|
|
|
|
|
|
|
|
Land
|
$
|
12,047
|
|
|
$
|
7,793
|
|
|
$
|
34,636
|
|
|
$
|
26,365
|
|
Offshore
|
5,638
|
|
|
4,074
|
|
|
14,377
|
|
|
15,859
|
|
CDS, Parts & Accessories
|
4,314
|
|
|
1,591
|
|
|
10,299
|
|
|
3,108
|
|
|
21,999
|
|
|
13,458
|
|
|
59,312
|
|
|
45,332
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
40,514
|
|
|
$
|
30,415
|
|
|
$
|
117,401
|
|
|
$
|
99,454
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
|
|
|
|
|
Products
|
$
|
(2,171
|
)
|
|
$
|
(7,437
|
)
|
|
$
|
(3,453
|
)
|
|
$
|
(49,329
|
)
|
Tubular Services
|
(2,305
|
)
|
|
(7,986
|
)
|
|
(12,533
|
)
|
|
(23,335
|
)
|
Research and Engineering
|
(788
|
)
|
|
(1,248
|
)
|
|
(2,401
|
)
|
|
(4,258
|
)
|
Corporate and Other
|
(7,439
|
)
|
|
(5,215
|
)
|
|
(18,726
|
)
|
|
(18,938
|
)
|
Operating loss
|
$
|
(12,703
|
)
|
|
$
|
(21,886
|
)
|
|
$
|
(37,113
|
)
|
|
$
|
(95,860
|
)
|
Products Segment
Demand for our top drives and pipe handling products, rental services, and aftermarket sales and service depends primarily upon the level of drilling activity and capital spending of drilling contractors and E&P companies. Revenues from our Products segment are generated through top drive and automated pipe handling new and used equipment sales, rentals, and field and in-house aftermarket sales and service. Our rental fleet of top drive and pipe handling equipment is highly mobile, where we install the units on the customers' rig sites and charge a daily rate for rental operating days. Rental operating days are defined as a day that a unit in our rental fleet is under contract and operating. When we sell used equipment from our rental fleet we record revenue and cost of sales. Aftermarket sales and service consists of part sales and in-house shop and callout field services. We provide these services for top drives and automated pipe handling equipment we manufacture and for selected models of our competitors.
Q3 2017
as compared to
Q3 2016
Product sales
Revenue
decreased
by
$0.4 million
, or
10%
, for the
three months ended
September 30, 2017
as compared to
2016
. Increased revenues in Russia were offset by declines in the United States and Middle East. In the
three months ended
September 30, 2017
, we sold a total of
four
new top drives. In the same period in
2016
, we sold a total of
three
new top drives.
Rental Services
Revenues
decreased
by
$0.5 million
, or
7%
, for the
three months ended
September 30, 2017
as compared to
2016
due to decreased revenues in the United States and Russia. At
September 30, 2017
, utilization was
18%
as compared to 21% utilization at September 30, 2016. The lower utilization was due to low operating days and contracted units.
Aftermarket Sales and Services
Revenues
increased
by
$2.5 million
, or
46%
, for the
three months ended
September 30, 2017
as compared to
2016
primarily due to increased demand for parts and services in North America and Russia, which included several top drive upgrades in 2017.
Operating Loss
Products operating loss
decreased
by
$5.3 million
, or
71%
, for the
three months ended
September 30, 2017
as compared to
2016
primarily due to increased revenues and reductions in operating expenses derived from our restructuring and cost rationalization efforts. Reductions in workforce and facility closures resulted in charges of
$0.5 million
and
$0.1 million
for the
three months ended
September 30, 2017
and
2016
, respectively.
YTD
2017
as compared to YTD
2016
Product sales
Revenues
decreased
by
$1.7 million
, or
10%
, for the
nine months ended
September 30, 2017
as compared to
2016
. Increased revenues in Russia were offset by declines in the United States, Middle East and United Kingdom. In the
nine months ended
September 30, 2017
, we sold a total of
17
top drives, of which
13
were new and
four
were used and sold from our rental fleet. In the same period in
2016
, we sold a total of
15
top drives, of which
nine
were new and
six
were used and sold from our rental fleet.
Rental Services
Revenues
decreased
by
$2.0 million
, or
10%
, for the
nine months ended
September 30, 2017
as compared to
2016
. Increased revenues in Russia were offset by declines in Latin America.
Afterm
arket Sales and Services
Revenues
increased
by
$7.7 million
, or
44%
, for the
nine months ended
September 30, 2017
as compared to
2016
primarily due to increased demand for parts and services in North America and Russia, which included several top drive upgrades in 2017.
Operating Loss
Products operating loss
decreased
by
$45.9 million
, or
93%
, for the
nine months ended
September 30, 2017
as compared to
2016
primarily due to the $33.6 million impairment of long-lived assets during the three months ended March 31, 2016, increases in aftermarket sales and services revenues and reductions in operating expenses derived from our restructuring and cost rationalization efforts. Reductions in workforce and facility closures resulted in charges of
$0.7 million
and
$1.5 million
for the
nine months ended
September 30, 2017
and
2016
, respectively.
Tubular Services Segment
We generate revenues in our Tubular Services segment through a suite of proprietary service offerings and conventional casing and tubular running services for both onshore and offshore markets, typically contracted on a callout basis, and sales of our proprietary CDS and accessories. Our services include personnel and equipment, including the CDS, power tongs, pick up/lay-down units and specialty cementing heads, as well as torque monitoring and hammering services for new well construction, completion, and workover or re-entry operations.
Q3 2017
as compared to
Q3 2016
Land
Revenues
increased
by
$4.3 million
, or
55%
, for the
three months ended
September 30, 2017
as compared to
2016
due to increases in the United States and Argentina, driven by an increase in activity.
Offshore
Revenues
increased
by
$1.6 million
, or
38%
, for the
three months ended
September 30, 2017
as compared to
2016
, driven by increased activity in the United States.
CDS, Parts, & Accessories
Revenues
increased
by
$2.7 million
, for the
three months ended
September 30, 2017
as compared to
2016
due to increased CDS equipment and part sales in the United States and Middle East, driven by growing market acceptance of these tools. During the
three months ended
September 30, 2017
, CDS equipment revenues were $2.9 million, compared to $0.4 million during the same period in
2016
.
Operating Loss
Tubular Services operating loss
decreased
by
$5.7 million
, or
71%
, for the
three months ended
September 30, 2017
as compared to
2016
primarily due to increased revenues and cost reductions achieved through cost rationalization efforts undertaken. Reductions in workforce and facility closures resulted in charges of
$0.8 million
and
$0.2 million
for the
three months ended
September 30, 2017
and
2016
, respectively.
YTD
2017
as compared to YTD
2016
Land
Revenues
increased
by
$8.3 million
, or
31%
, for the
nine months ended
September 30, 2017
as compared to
2016
primarily due to the aforementioned increase in the United States and Argentina activity.
Offshore
Revenues
decreased
by
$1.5 million
, or
9%
, for the
nine months ended
September 30, 2017
as compared to
2016
primarily due to a decrease in activity in Indonesia in the
nine months ended
September 30, 2017
as compared to 2016.
CDS, Parts, & Accessories
Revenues
increased
by
$7.2 million
for the
nine months ended
September 30, 2017
as compared to
2016
due to increased CDS equipment and part sales in the United States and Middle East, driven by growing market acceptance of these tools. During the
nine months ended
September 30, 2017
, CDS equipment revenues were $5.7 million, compared to $1.1 million during the same period in 2016. Demand for Tubular Services accessories sales, particularly in the United States, also increased.
Operating Loss
Tubular Services operating loss
decreased
by
$10.8 million
, or
46%
, for the
nine months ended
September 30, 2017
as compared to
2016
primarily due to increased Land and CDS, Parts & Accessories revenues and cost reductions achieved through cost rationalization efforts undertaken. Reductions in workforce and facility closures resulted in charges of
$1.2 million
and
$2.5 million
for the
nine months ended
September 30, 2017
and
2016
, respectively.
Research and Engineering Segment
We are a technology-based company deploying new technologies to increase the degree of rig automation and mechanization and to enhance our field operations. We are working aggressively to drive increased integration between the drilling rig and tubular services technology. We continue to invest in our research and engineering in order to continually develop, commercialize and enhance our proprietary products relating to our current product offerings and new technologies in development.
Q3 2017
as compared to
Q3 2016
In line with the industry downturn, operating expenses
decreased
by
$0.5 million
, or
37%
, during the
three months ended
September 30, 2017
as compared to
2016
primarily due to a decrease in spending related to targeted cost rationalization efforts.
YTD
2017
as compared to YTD
2016
In line with the industry downturn, operating expenses
decreased
by
$1.9 million
, or
44%
, during the
nine months ended
September 30, 2017
as compared to
2016
primarily due to a decrease in spending related to targeted cost rationalization efforts.
Corporate and Other Segment
Corporate and other expenses primarily consist of overhead, general and administrative expenses, and certain selling and marketing expenses.
Q3 2017
as compared to
Q3 2016
Operating expenses
increased
by
$2.2 million
, or
43%
, during the
three months ended
September 30, 2017
as compared to
2016
primarily due to $2.1 million in Nabors Transaction costs.
YTD
2017
as compared to YTD
2016
Operating expenses
decreased
by
$0.2 million
, or
1%
, during the
nine months ended
September 30, 2017
as compared to
2016
as the aforementioned Nabors Transaction costs were offset by cost saving measures implemented in
2017
and
2016
. The benefits of these cost saving measures are visible primarily in personnel costs and various discretionary spending accounts.
Other Expense (Income)
Q3 2017
as compared to
Q3 2016
Foreign Exchange Loss (Gain)
Although our functional currency is the U.S. dollar, our operations have net assets and liabilities not denominated in the functional currency which exposes us to changes in foreign currency exchange rates that impact income. Foreign exchange was a gain of
$0.1 million
and a loss of
$0.4 million
for the
three months ended
September 30, 2017
and
2016
, respectively.
Income Tax Provision (Benefit)
Income tax provision was
$0.1 million
for the
three months ended
September 30, 2017
as compared to a benefit of
$0.6 million
in the same period in
2016
. Our effective tax rates were an
expense
of
1%
and a
2%
benefit
for the
three months ended
September 30, 2017
and
2016
, respectively.
YTD
2017
as compared to YTD
2016
Foreign Exchange Loss
Foreign exchange was a loss of
$0.2 million
and
$1.5 million
for the
nine months ended
September 30, 2017
and
2016
, respectively. The change was primarily due to losses relating to exchange rate changes and reductions in net monetary assets subject to revaluation in Argentina in the
nine months ended
September 30, 2016
.
Income Tax Provision (Benefit)
Income tax provision was
$1.5 million
for the
nine months ended
September 30, 2017
due to certain tax jurisdictions where we remain profitable, as compared to a benefit of
$0.3 million
in the same period in
2016
. Our effective tax rates were an
expense
of
4%
and
0%
for the
nine months ended
September 30, 2017
and
2016
, respectively.
Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund operating, investing, and financing activities. Our primary sources of liquidity are cash flows generated from operations and available cash and cash equivalents. We had cash and cash equivalents of
$64.6 million
and
$91.5 million
at
September 30, 2017
and
December 31, 2016
, respectively.
The decline in cash of
$26.9 million
during the first nine months of 2017 was primarily driven by negative operating cash flow of
$27.1 million
. The use of cash from operations was driven by negative cash earnings of
$20.8 million
and an increase in working capital of
$6.8 million
. The increase in working capital was driven by from higher receivables related to the increase in revenue during the first nine months and longer payment terms with certain customers. During the fourth quarter of 2017, cash levels are expected to increase over the
third
quarter ending level as working capital is expected to decrease from lower inventory and higher receivables collections.
We believe our current cash balance is adequate to conduct our business for at least the next 12 months.
Off-Balance Sheet Arrangements
In addition to the lease commitments as described in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our
2016
Annual Report on Form 10-K, as of
September 30, 2017
, our off-balance sheet arrangements included letters of credit as noted below.
Letters of Credit
We are contingently liable under letters of credit and similar instruments that we enter in connection with the importation of equipment into international countries and to secure our performance on certain contracts. As of
September 30, 2017
and
December 31, 2016
, our total exposure under outstanding letters of credit was
$2.0 million
and
$2.7 million
, respectively. Of this amount,
$2.0 million
and
$2.5 million
were secured by restricted cash on deposit at
September 30, 2017
and
December 31, 2016
, respectively.
Critical Accounting Estimates and Policies
Accounting policies are described in the notes to the audited consolidated financial statements and in Part II, Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of the
2016
Annual Report on Form 10−K. The unaudited condensed consolidated financial statements were prepared in conformity with U.S. GAAP. Results of operations and financial condition, as reflected in the unaudited condensed consolidated financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of the business and customers. While these issues require judgments that may be subjective, they are generally based on a significant amount of historical data and current market data. The most critical accounting policies are those described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in the
2016
Annual Report on Form 10−K. During the
three and nine
months ended
September 30, 2017
, there have been no material changes to the types of judgments, assumptions, and estimates upon which our critical accounting estimates are based.