Notes to the Consolidated Financial Statements
Note
1
— Nature of Operations and Basis of Presentation
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 major oil and natural gas service companies and "E&P" operating companies throughout the world.
Basis of presentation
These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of all consolidated subsidiaries after the elimination of all intercompany accounts and transactions. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for a fair presentation of operating results for the periods presented. All references to $ are to U.S. dollars.
Subsequent Events
We conducted our subsequent events review through the date these consolidated financial statements were filed with the U.S. Securities and Exchange Commission ("SEC").
Note
2
— Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to reserves for excess and obsolete inventory, uncollectible accounts receivable, valuation of goodwill, intangible assets and long-lived assets, determination of income taxes, contingent liabilities, self-insurance liabilities, stock-based compensation and warranty provisions. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of our assets and liabilities not readily apparent from other sources. Actual results could differ from those estimates.
Cash and cash equivalents
Cash equivalents are highly liquid, short-term investments with original maturities of less than three months, which are readily convertible to known amounts of cash. We also maintain other cash balances, primarily as collateral for outstanding letters of credit, that are considered restricted in nature, and are classified in our financial statements in other current assets. The aggregate carrying amounts of our restricted cash was
$3.5 million
and
$1.0 million
at
December 31, 2016
and
2015
, respectively.
Allowance for doubtful accounts
We establish an allowance for doubtful accounts receivable based on our historical experience and our assessment of specific outstanding accounts that are probable of loss. Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding historical balance or when we determine the balance will not be collected.
Inventories and inventory reserves
Inventories primarily consist of raw material and component parts used to support ongoing assembly operations, spare parts used in support of AMSS at our installed base, work in process, and finished goods. We have several valuation methods for our various types of inventories and consistently use the following methods for each type of inventory:
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•
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We value our work in process manufactured equipment using actual costs for raw materials, direct labor and appropriate manufacturing overhead allocations;
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•
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We value our finished manufactured equipment at the lower of cost or market using specific identification; and
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•
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We value our spare parts at the lower of cost or market using the average cost method.
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Research and engineering expenses and selling, general and administrative expenses are reported as period costs and excluded from inventory cost. We establish reserves for obsolete inventory and for inventory in excess of demand based on our usage of inventory on-hand, technical obsolescence and market conditions, as well as our expectations of future demand based on our manufacturing sales backlog, our installed base and our development of new products.
Property, plant and equipment
Property, plant and equipment are carried at cost. Maintenance and repairs are expensed as incurred. The costs of replacements, betterments and renewals that extend the useful life are capitalized. Generally, when fixed assets are sold, retired, or otherwise disposed of, the related cost and accumulated depreciation are removed from the books and the resulting gain or loss is recognized on our consolidated statement of income. However, when pipe handling products that we manufacture are used in our rental fleet and 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. Similarly, when "CDS" products that we manufacture are employed in our operations and 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.
We evaluate potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include substantial declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified, which is our operating segments. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group. The amount of an impairment charge is measured as the difference between the carrying amount and the fair value of the asset group.
During the year ended December 31, 2016 when impairment indicators were present, we reviewed our property, plant and equipment for impairment. As a result of our review, we recognized a
$34.6 million
impairment to our property, plant and equipment. See Note
5
for further discussion of our impairment analysis.
Depreciation and amortization of property, plant and equipment, including capital leases, is computed on the following basis:
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Asset Category
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Description
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Method
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Life
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Land, buildings and leaseholds
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Buildings
Leasehold improvements
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Straight-line
Straight-line
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20 years
Lease term
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Drilling equipment
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Top drive rental units
Tubular services equipment
Support equipment
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Usage
Straight-line
Straight-line
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2,600 operating days
5 – 7 years
3 – 7 years
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Manufacturing equipment
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Straight-line
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5 – 7 years
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Office equipment and other
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Computer hardware and software
IT development costs
Furniture and equipment
Vehicles
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Straight-line
Straight-line
Straight-line
Straight-line
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2 – 5 years
5 years
5 years
3 – 4 years
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Goodwill and other intangible assets
Goodwill, resulting from business combinations, is initially recorded at acquisition-date fair value. Goodwill is not amortized but is subject to an annual impairment test, which we perform as of December 31, or upon the occurrence of a triggering event. An impairment loss is recognized when the fair value of the recording unit is less than the carrying value. We perform our goodwill impairment tests at the reporting unit level using the Income Approach and Market Approach.
As a result of our annual impairment test as of December 31, 2015, we fully impaired
$32.7 million
and
$1.7 million
of goodwill assigned to our Tubular Services and Products segments, respectively. During the year ended
December 31, 2014
management concluded that goodwill was not impaired.
Intangible assets that have finite useful lives are capitalized at their acquisition-date fair value and amortized on a straight-line basis over their estimated useful lives. Our intangible assets that have finite useful lives consist primarily of customer relationships and patents. We review our intangible assets for impairment when circumstances indicate their carrying values may not be recoverable as measured by the amount their carrying values are exceeded by their fair values. Our intangible assets are evaluated for impairment as a component of the fixed asset groups discussed above. As a result of this evaluation, during the year ended December 31, 2016, we recognized an impairment to our intangible assets of
$0.9 million
. See Note
5
and Note
9
for further discussion of our impairment analysis.
Deferred income taxes
Deferred income taxes are determined using the liability method and are provided on all temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, except for deferred taxes on income considered to be permanently reinvested in certain international subsidiaries. Deferred income taxes are measured using enacted tax rates and laws expected to apply to taxable income in the years in which the temporary differences are expected to reverse. The effect of a change in tax rates applied to deferred income taxes is recognized in the period that the change is enacted. A valuation allowance is established to reduce deferred tax assets when it is more likely than not some or all of the benefit from the deferred tax asset will not be realized. Accrued interest and penalties related to unrecognized tax benefits are reflected in interest expense and other expense, respectively, on our consolidated statements of income.
Contingent liabilities
We recognize liabilities for loss contingencies, including legal costs expected to be incurred in connection with such loss contingencies, when we believe a loss is probable and the amount of the probable loss can be reasonably estimated. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Revisions to our contingent liabilities are reflected in income in the period in which facts become known or circumstances change that affect our previous judgments with respect to the likelihood or amount of the probable loss.
Warranties
We provide product warranties on new equipment sold pursuant to manufacturing contracts and recognize the anticipated cost of these warranties in cost of sales and services when sales revenue is recognized. We estimate our warranty liability based upon historical warranty claim experience and specific warranty claims. We periodically review our warranty provision and make adjustments to the provision as claim data and historical experience change.
Per share information
Basic earnings (loss) per share of common stock is calculated using the weighted average number of our shares outstanding during the period. Diluted earnings (loss) per share of common stock is calculated using the treasury stock method, under which we assume proceeds obtained upon exercise of "in the money" share-based payments, granted under our compensation plan, would be used to purchase our common shares at the average market price during the period. Diluted earnings (loss) per share includes the shares used in the basic net income calculation, plus our unvested restricted shares, performance stock units and outstanding stock options, to the extent that these instruments dilute earnings (loss) per share. No adjustment to basic earnings (loss) per share is made if the result of the diluted earnings (loss) per share calculation is anti-dilutive.
Revenue recognition
We recognize revenue when the earnings process is complete, persuasive evidence of an arrangement exists, price is fixed or determinable and collectability is reasonably assured. For product sales, revenue is recognized upon delivery when title and risk of loss of the equipment is transferred to the customer, with no right of return. For revenue other than product sales, we recognize revenue as the services are rendered based upon agreed daily, hourly or job rates.
Product Sales
- We determine the transfer of title and risk of loss in accordance with contracts with our customers and the related International Commercial Terms. We generally require customers to pay a nonrefundable deposit with their purchase orders. Customer advances or deposits are deferred and recognized as revenue when we have completed all of our performance obligations related to the sale.
Pipe Handling Equipment Rentals and Tubular Services -
Revenue generated from specific time, materials, and equipment contracts is based upon agreed daily, hourly, or job rates and price and is recognized as amounts are earned in accordance with the contract terms.
Shipping and handling costs billed to customers are recognized in net revenue. Shipping and handling costs are included in cost of sales and services.
Operating leases
We have entered into non-cancelable operating lease agreements primarily involving office space. Certain of these leases contain escalating lease payments and we recognize expense on a straight-line basis, which is more representative of the time pattern in which the leased property is physically employed. In certain instances, we are also entitled to reimbursements for part or all of leasehold improvements made and record a deferred credit for such reimbursements, which is amortized over the remaining life of the lease term as a reduction in lease expense.
Research and engineering expenses
We expense research and engineering costs when incurred. Payments received from third parties, including payments for the use of equipment prototypes, during the research or development process are recognized as a reduction in research and engineering expense when the payments are received. We include in research and engineering expense, costs for buildings and properties, salaries and employee benefits, materials and equipment, administrative activities and allocations of corporate costs.
Stock-based compensation
Our stock-based compensation plan provides for the grants of stock options, restricted stock, restricted stock units, performance stock units and other stock-based awards to eligible directors, officers, employees and other persons. We measure stock-based compensation cost for awards as of grant date, based on the estimated fair value of the award. For stock option grants, we use a Black-Scholes valuation model to determine the estimated fair value. For market-based performance awards, we use a Monte Carlo simulation model to determine the estimated fair value. For restricted stock units, the fair value is the average of the high and low price of our stock as traded on the NASDAQ Stock Market on the date of grant.
For equity-classified awards, we recognize compensation expense on a graded basis over the vesting period. The graded basis of amortization accelerates the recognition of compensation expense for a three year vesting period, with generally
62%
being recognized in the first year,
27%
being recognized in the second year and
11%
being recognized in the third year. Compensation expense for our equity-classified awards is recorded as an increase to common shares. Consideration received on the exercise of stock options is recorded as an increase to common shares. For liability-classified awards, we recognize compensation expense based on the fair value of the award for the portion of the service period fulfilled at the end of each reporting period. The liability is recorded in accrued and other current liabilities on our consolidated balance sheet with the corresponding increase or decrease to compensation expense.
The tax benefit for stock-based compensation is included as a cash inflow in the Consolidated Statements of Cash Flows. We recognize a tax benefit only to the extent it reduces our income taxes payable. For purposes of determining the amount of tax attributes utilized in a given year as compared to the deduction for stock-based compensation, we apply the with-and-without approach. This approach considers deductions for stock-based compensation to be the last item of tax benefit recognized after all other deductions and utilization of prior year carryforwards.
Foreign currency translation
The U.S. dollar is the functional currency for all of our worldwide operations. Our cumulative translation adjustment of
$35.5 million
included in accumulated other comprehensive income resulted from the translation of assets and liabilities of our Canadian operations, which used the Canadian dollar as the functional currency prior to January 1, 2010. This cumulative translation adjustment will be adjusted only in the event of a full or partial disposition of our Canadian operations.
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. Early adoption is permitted. We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
(Topic 718),
which requires income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It will also allow an employer to repurchase more of an employees' shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The update will be effective January 1, 2017. Early adoption is permitted. We early adopted this standard as of December 31, 2016, effective January 1, 2016, and elected to account for forfeitures as they occur to determine the amount of compensation cost to be recognized. The impact of this change in accounting policy was
$0.1 million
and was recorded as a cumulative effect adjustment to retained earnings for the increase to stock compensation expense. We further elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. The impact of the adoption of other provisions of the update did not have a material impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which requires inventory not measured using either the last in, first out ("LIFO") or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. The new standard will be effective January 1, 2017 and will be applied prospectively. Early adoption is permitted. We early adopted this update as of October 1, 2016. There was no impact to our consolidated financial statements as of December 31, 2016 as the provisions of the update are to be applied prospectively.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
. The standard provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied using a retrospective approach. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures, but the impact is not expected to be material.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740)
. The standard improves the accounting for income tax consequences of intra-entity transfers of assets other than inventory. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The amendments in this ASU should be applied using a modified retrospective approach. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures, but the impact is not expected to be material.
In August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. The standard addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practices. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. Early adoption for annual and quarterly reports is permitted. The amendments in this ASU should be applied using a retrospective approach. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures, but the impact is not expected to be material.
Note
3
—Inventories
During the year ended
December 31, 2016
, we commenced certain supply chain initiatives designed to optimize the utilization of our global inventory. From these initiatives, certain component parts inventory held by our international locations that previously were only considered generally available for sale directly to our customers are now a potential source for any current or future manufacturing or assembly activity. Historically, this inventory was classified as finished goods as our intent with this inventory was to sell it directly to customers in its current state. As of
December 31, 2016
, we classify such inventory as raw material and component parts to properly reflect the nature and expected future utilization of the inventory as a result of the supply chain initiatives. At December 31, 2015, the value of the component parts inventory that was included in finished goods, now considered raw materials and component parts was
$24.9 million
. At
December 31, 2016
and
2015
, inventories, net of reserves for excess and obsolete inventories of
$9.1 million
and
$11.8 million
, respectively, by major classification were as follows (in thousands):
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2016
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2015
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Raw materials and component parts
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$
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66,731
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$
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53,595
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Work in progress
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3,420
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1,944
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Finished goods
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6,075
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39,920
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$
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76,226
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$
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95,459
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We evaluated the carrying value of our global inventory by estimating part-by-part inventory turnover and we projected sales estimates based on the current operating environment and the timing of forecasted economic recovery. Based on our analysis, we determined that certain inventory items had a net realizable value that was less than its carrying amount. Accordingly, we recorded an aggregate inventory charge of
$5.2 million
and
$13.5 million
for the years ended
December 31, 2016
and
2015
, respectively.
Note
4
––Prepaid and other current assets
At
December 31, 2016
and
2015
, prepaid and other current assets consisted of the following (in thousands):
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2016
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2015
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Prepaid taxes other than income taxes
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$
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2,036
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$
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4,048
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Prepaid insurance
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1,180
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1,144
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Other prepaid expenses
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3,118
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3,220
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Deposits
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3,063
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4,295
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Restricted cash
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3,493
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996
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Non-trade receivables
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325
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2,105
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Deferred job costs
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1,819
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1,786
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$
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15,034
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$
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17,594
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Note
5
—Property, Plant and Equipment
At
December 31, 2016
and
2015
, property, plant and equipment, by major category were as follows (in thousands):
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2016
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2015
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Land, buildings and leaseholds
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$
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27,499
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$
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27,890
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Drilling equipment
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264,388
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362,556
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Manufacturing equipment
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13,188
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16,303
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Office equipment and other
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28,452
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33,056
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Capital work in progress
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3,887
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575
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337,414
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440,380
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Less: Accumulated depreciation
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(216,671
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)
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(262,664
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)
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$
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120,743
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$
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177,716
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The net book value of used top drive and catwalk rental equipment sold included in cost of sales and services on our consolidated statements of income was
$1.8 million
,
$0.5 million
and
$2.2 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Depreciation and amortization expense is included on our consolidated statements of income as follows (in thousands):
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Year Ended December 31,
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2016
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2015
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2014
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Cost of sales and services
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$
|
28,528
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$
|
36,113
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$
|
39,376
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Selling, general & administrative expense
|
799
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|
2,022
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|
2,633
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$
|
29,327
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|
|
$
|
38,135
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|
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$
|
42,009
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Asset Impairment
Since late 2014, oil prices have declined significantly resulting in an industry downturn, affecting both drilling and production services. Consequently, we saw an overall decline in the number of new wells drilled and the average rig count throughout 2015, which impacted the demand for our products and services. We continued to see further declines during the first three months of 2016, which resulted in significantly lower cash flow projections. Accordingly, we performed an impairment evaluation on our long-lived assets as per the guidance of ASC Topic 360, Property, Plant and Equipment. Consequently, during the year ended
December 31, 2016
, we recognized
$0.9 million
of impairment related to intangibles and
$34.6 million
to reduce the carrying values of our fixed assets to estimated fair value in our Products operating segment. The value of assets in our Tubular Services operating segment are deemed to be recoverable, and no impairment resulted.
We measured the fair value of the asset group by applying a combination of the market approach and the cost approach at February 29, 2016. To estimate the fair value in-exchange of the property, plant and equipment, we utilized the market approach and relied upon a combination of third party market comparable, recent market sales, review of salvage values from published guides and management estimates. To estimate the fair value in-exchange for the two large manufacturing plants located in Houston and Calgary, we relied upon the improved sales comparison approach / discussions with brokers to estimate the market value. For the remaining 3 minor owned locations, the indirect cost approach was utilized. Our estimates of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our Products operating segment, such as future oil prices, amount of drilling activity, and projected demand for our services.
The following tables present the impairments recognized during the year ended
December 31, 2016
, by our major categories of property, plant and equipment and by our major categories of intangible assets (in thousands):
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Property, plant and equipment
|
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|
Land, building and leaseholds
|
903
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|
Drilling equipment
|
31,682
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|
|
Manufacturing equipment
|
1,497
|
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|
Office equipment and other
|
511
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|
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|
34,593
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
Customer relationships
|
$
|
184
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|
Product designs
|
617
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|
Other
|
120
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|
$
|
921
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|
Note
6
—Credit Facility
We entered into our Second Amended and Restated Credit Agreement on
April 27, 2012
(the "Credit Facility"), 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 had a term of
five years
and all outstanding borrowings on the Revolver were 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 were 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 were reduced by letters of credit issued under our Credit Facility, not to exceed
$50 million
in the aggregate. Amounts available under the swing line loans were 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.
In February 2016, we reduced the aggregate commitments under the Credit Facility by
$65 million
to
$60 million
. During the year we received waivers for the Company's failure to comply with certain financial covenants under the Credit Facility as of the fiscal quarters ending March 31, 2016 and June 30, 2016.
Finally, on August 9, 2016, we terminated the Credit Facility in order to eliminate certain fees and expenses associated with maintaining an undrawn credit facility and wrote off the remaining unamortized balance of debt issuance cost of
$0.1 million
related to the facility. Letters of credit outstanding within the Revolver prior to its termination were collateralized by cash on deposit. At
December 31, 2016
, we maintain
$1.9 million
on deposit as collateral for outstanding letters of credit, which was classified as restricted cash within prepaid and other assets on the balance sheet. At
December 31, 2016
, we maintained
$91.5 million
of cash and cash equivalents.
Note
7
—Shareholders’ Equity and Stock-Based Compensation
Weighted average shares
The following table reconciles basic and diluted weighted average shares (in thousands):
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|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Basic weighted average number of shares outstanding
|
43,151
|
|
|
39,005
|
|
|
39,912
|
|
|
Dilutive effect of stock compensation awards
|
—
|
|
|
—
|
|
|
605
|
|
|
Diluted weighted average number of shares outstanding
|
43,151
|
|
|
39,005
|
|
|
40,517
|
|
|
Anti-dilutive options excluded from calculation due to exercise prices
|
—
|
|
|
—
|
|
|
355
|
|
There were approximately
325,000
and
217,000
shares excluded from the calculation of the diluted weighted average number of shares outstanding as the Company is in a net loss position for the years ended
December 31, 2016
and
2015
, respectively. 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.
Stock-based compensation
Our stock-based compensation plan provides for the grants of stock options, restricted stock units, performance share units and other stock-based awards to eligible directors, officers, employees and other persons. The maximum number of shares that may be issued under our incentive plan may not exceed
10%
of the issued and outstanding shares of our common stock. As of
December 31, 2016
,
4,668,849
shares of our common stock were authorized for grants of stock-based awards and
1,584,316
shares were available for future grants. This plan expires in May 2017.
Stock options
We grant options to our employees at an exercise price that may not be less than the market price on the date of grant. Stock options granted under our incentive plan have historically vested equally over a
three
year period and expired no later than
seven years
from the date of grant. The following is a summary of our stock option transactions for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Underlying Options
|
|
Weighted-
Average
Exercise
Price Per Share
|
|
Weighted-
Average
Contractual Term
|
|
Aggregate Intrinsic Value
|
|
U.S. dollar denominated options
|
|
|
|
|
(in years)
|
|
(in thousands)
|
|
Outstanding at December 31, 2015
|
989,872
|
|
|
$
|
12.22
|
|
|
4.30
|
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Forfeited
|
(36,636
|
)
|
|
$
|
11.87
|
|
|
|
|
|
|
Expired
|
(67,398
|
)
|
|
$
|
12.45
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
885,838
|
|
|
$
|
12.33
|
|
|
4.25
|
|
$
|
—
|
|
|
Vested at December 31, 2016 or expected to vest in the future
|
885,838
|
|
|
$
|
12.33
|
|
|
3.31
|
|
$
|
—
|
|
|
Exercisable at December 31, 2016
|
668,137
|
|
|
$
|
13.13
|
|
|
3.62
|
|
$
|
—
|
|
During
2016
,
2015
and
2014
, we recognized
$0.6 million
,
$0.7 million
and
$1.7 million
, respectively, of pretax compensation expense for stock options, including forfeiture credits. We did not record any income tax benefits in
2016
and
2015
. In
2014
, we recorded
$0.6 million
of income tax benefits. Total compensation cost related to unvested option awards not yet recognized at
December 31, 2016
was approximately
$0.3 million
, which is expected to be recognized over a weighted average period of
1.3
years. Options exercised during the year ended
December 31, 2015
generated cash proceeds of
$0.4 million
and did not have an intrinsic value or an associated income tax benefit. Options exercised during the year ended
December 31, 2014
had a total intrinsic value of
$4.8 million
and generated
$6.5 million
of cash proceeds and
$1.7 million
of associated income tax benefit.
Fair Value Assumptions
The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes option-pricing model based on several assumptions. These assumptions are based on management's best estimate at the time of grant. We did not grant any options during the year ended
December 31, 2016
. For the years ended December 31,
2015
and
2014
, the weighted average grant date fair value per share of options granted was
$2.46
and
$4.83
per share, respectively.
Listed below is the weighted average of each assumption based on grants for the years ended December 31,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Weighted average risk-free interest rate
|
|
1.6%
|
|
1.5%
|
|
Expected dividend yield
|
|
2.45%
|
|
1.4%
|
|
Expected life (years)
|
|
4.5
|
|
4.5
|
|
Weighted average expected volatility
|
|
44%
|
|
47%
|
|
Weighted average expected forfeiture rate
|
|
3%
|
|
2%
|
We estimate expected volatility based on our historical stock price volatility over the expected term. We estimate the expected term of our option awards based on the vesting period and average remaining contractual term, known as the "simplified method", as we do not have sufficient historical data for estimating our expected term due to significant changes in the make-up of our employees receiving stock-based compensation awards.
Restricted Stock Units
We grant restricted stock units under our incentive plan, which generally vest equally in three annual installments from the date of grant and entitle the grantee to receive the value of
one
share of our common stock for each vested restricted stock unit. A summary of our restricted stock transactions for the year ended
December 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Weighted-Average
Grant Date Fair Value per Share
|
|
Unvested at December 31, 2015
|
811,880
|
|
|
$
|
9.80
|
|
|
Granted
|
733,100
|
|
|
$
|
7.03
|
|
|
Vested
|
(291,178
|
)
|
|
$
|
10.73
|
|
|
Forfeited
|
(96,241
|
)
|
|
$
|
9.84
|
|
|
Unvested at December 31, 2016
|
1,157,561
|
|
|
$
|
7.80
|
|
During
2016
,
2015
and
2014
, we recognized
$3.9 million
,
$2.9 million
and
$2.5 million
of pretax compensation expense, including forfeiture credits, respectively, on restricted stock units. We did not record income tax benefits for the years ended
December 31, 2016
and
2015
. In
2014
, we recorded
$0.8 million
of income tax benefits. Total compensation cost related to unvested restricted stock units not yet recognized at
December 31, 2016
was approximately
$6.5 million
, which is expected to be recognized over a weighted average period of
1.7
years. The grant date fair value of our restricted stock granted during
2016
,
2015
and
2014
was
$5.2 million
,
$4.7 million
and
$4.4 million
, respectively.
Performance Stock Units
Performance stock units granted in November
2016
and December
2015
are linked to
three
year performance periods from January 1, 2017 through December 31, 2019 and January 1, 2016 through December 31, 2018, respectively. Each award is then subject to a short, time-based vesting period to permit adequate time to calculate performance. The award is based on a market condition comparing annual performance of our stock price to the stock price of a group of our peers. The performance stock unit performance objective multiplier could range from
zero
(when threshold performance is not met) to a maximum of
two
times the initial award.
For performance stock units granted in December 2014, the performance period runs for
three years
beginning on the January 1, 2015 until December 31, 2017. It is then followed by a short, time-based vesting period to permit adequate time to calculate performance. We had two types of performance stock units; the first type was a performance condition based upon the
three
year cumulative earnings per share achieved by the Company ("EPS") as measured against sliding targets that vary based on the revenue achieved over that same period and the second was based upon a performance condition based upon the
three
year average return on capital employed ("ROCE") as measured against targets that vary based on the revenue achieved over that same period. The performance stock unit performance objective multiplier could range from
zero
to a maximum of
two
times the initial award for each type of performance stock unit.
A summary of our performance stock units for the year ended
December 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Performance Stock Units
|
|
Weighted-
Average
Fair Value at Reported Date
|
|
Unvested at December 31, 2015
|
398,900
|
|
|
$
|
12.54
|
|
|
Granted
|
209,930
|
|
|
$
|
9.83
|
|
|
Vested
|
(25,532
|
)
|
|
$
|
18.13
|
|
|
Forfeited
|
(62,898
|
)
|
|
$
|
14.87
|
|
|
Unvested at December 31, 2016
|
520,400
|
|
|
$
|
10.86
|
|
During
2016
,
2015
and
2014
, we recognized
$0.6 million
,
$(0.1) million
and
$0.5 million
, respectively, of pretax compensation expense (benefit), including forfeiture credits, on performance stock units. We did not record income tax benefits for the years ended
December 31, 2016
and
2015
. In
2014
, we recorded
$0.4 million
of income tax benefits. Total compensation cost related to unvested performance stock units not yet recognized at
December 31, 2016
was approximately
$3.0 million
, which is expected to be recognized over a weighted average period of
2.1 years
. The grant date fair value of our performance stock units granted during
2016
,
2015
and
2014
was
$2.0 million
,
$1.7 million
and
$2.9 million
, respectively.
On August 21, 2014, our CEO announced his retirement and resignation from Tesco, effective January 1, 2015. Under the terms of the related retirement agreement, upon retirement all unexercised and unexpired stock options granted prior to December 31, 2013 became vested
100%
. Consequently, the vesting date of the unexercised options was accelerated to January 1, 2015 and accordingly, the remaining unamortized expense of
$0.3 million
was recognized over the final service period. In addition, all unvested restricted stock units and performance stock units were cancelled, which resulted in reversal of previously recognized expense of
$0.8 million
at December 31, 2014. In addition, transition and retirement cash bonuses of
$2.3 million
were paid under this agreement.
Note
8
—Income Taxes
We are 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 provided 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 (loss) before income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Canada
|
$
|
(26,018
|
)
|
|
$
|
(39,121
|
)
|
|
$
|
9,696
|
|
|
United States
|
(39,811
|
)
|
|
(60,645
|
)
|
|
3,504
|
|
|
Other international
|
(52,184
|
)
|
|
(18,644
|
)
|
|
25,244
|
|
|
Income (loss) before taxes
|
$
|
(118,013
|
)
|
|
$
|
(118,410
|
)
|
|
$
|
38,444
|
|
Our income tax provision consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Canada
|
$
|
(883
|
)
|
|
$
|
(1,809
|
)
|
|
$
|
1,153
|
|
|
United States
|
118
|
|
|
(375
|
)
|
|
(849
|
)
|
|
Other international
|
882
|
|
|
7,351
|
|
|
20,183
|
|
|
Total current
|
117
|
|
|
5,167
|
|
|
20,487
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Canada
|
598
|
|
|
10,841
|
|
|
(691
|
)
|
|
United States
|
—
|
|
|
(8,526
|
)
|
|
2,660
|
|
|
Other international
|
(800
|
)
|
|
7,862
|
|
|
(5,448
|
)
|
|
Total deferred
|
(202
|
)
|
|
10,177
|
|
|
(3,479
|
)
|
|
Income tax provision
|
$
|
(85
|
)
|
|
$
|
15,344
|
|
|
$
|
17,008
|
|
Since we are taxable in a number of jurisdictions around the world, our effective tax rate, which is income tax expense as a percentage of pretax earnings, fluctuates from year to year based on the level of profits earned in these jurisdictions and the tax rates applicable to such profits.
The combined Canadian federal and Alberta provincial income tax rate was
26.4%
for
2016
and
2015
and
25%
for
2014
.
A reconciliation of the statutory rate and the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Tax expense (benefit) at statutory tax rate
|
(26.4
|
)%
|
|
(26.4
|
)%
|
|
25.0
|
%
|
|
Effect of:
|
|
|
|
|
|
|
Tax rates applied to earnings not attributed to Canada
|
1.6
|
|
|
(2.6
|
)
|
|
13.7
|
|
|
U.S. state taxes
|
0.1
|
|
|
0.1
|
|
|
1.3
|
|
|
Non-deductible expenses
|
1.9
|
|
|
3.8
|
|
|
3.3
|
|
|
Foreign exchange adjustments
|
0.4
|
|
|
2.2
|
|
|
0.2
|
|
|
Change in valuation allowance
|
22.1
|
|
|
34.7
|
|
|
2.4
|
|
|
Research and development tax credits
|
(0.1
|
)
|
|
(0.7
|
)
|
|
(3.1
|
)
|
|
Change in uncertain tax positions and tax audit assessments
|
(0.3
|
)
|
|
(0.1
|
)
|
|
1.0
|
|
|
Other
|
0.6
|
|
|
2.0
|
|
|
0.4
|
|
|
Tax expense (benefit) at effective tax rate
|
(0.1
|
)%
|
|
13.0
|
%
|
|
44.2
|
%
|
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of an asset or liability and its basis as reported on our consolidated financial statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in the jurisdictions in which we have operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Loss carryforwards
|
$
|
37,910
|
|
|
$
|
26,766
|
|
|
Accrued liabilities and reserves
|
7,885
|
|
|
9,612
|
|
|
Tax credit carryforwards
|
3,937
|
|
|
3,526
|
|
|
Property, plant and equipment
|
18,572
|
|
|
14,005
|
|
|
Stock compensation
|
2,096
|
|
|
1,756
|
|
|
Intangibles
|
3,887
|
|
|
4,432
|
|
|
Deferred tax assets
|
74,287
|
|
|
60,097
|
|
|
Less: Valuation allowance
|
(66,143
|
)
|
|
(47,063
|
)
|
|
Total deferred tax assets
|
$
|
8,144
|
|
|
$
|
13,034
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property, plant and equipment
|
(8,147
|
)
|
|
(13,309
|
)
|
|
Intangible assets
|
(193
|
)
|
|
(306
|
)
|
|
Other
|
(210
|
)
|
|
(409
|
)
|
|
Total deferred tax liabilities
|
$
|
(8,550
|
)
|
|
$
|
(14,024
|
)
|
|
Net deferred tax assets (liabilities)
|
$
|
(406
|
)
|
|
$
|
(990
|
)
|
For the year ended
December 31, 2016
, we generated net operating losses in Canada, U.S. and other international jurisdictions. In Canada, we are able to carry a portion of these losses back to previous years to offset prior year income and generate tax refunds of
$0.9 million
. The remainder of the net operating losses are carried forward. As of
December 31, 2016
, we had
$120.0 million
of gross net operating loss carryforwards in Canada and the U.S. These carryforwards will start expiring in 2035. We also had another
$25.8 million
of gross net operating loss carryforwards in other international jurisdictions that have a carryforward life between 5 years to non-expiring. As of
December 31, 2016
, we had
$3.9 million
of various tax credit carryforwards in Canada and the U.S. We have recorded a valuation allowance on the net deferred tax assets, since it is more likely than not that future income necessary to utilize these carryforwards will not be realized.
No provision is made for taxes that may be payable on the repatriation of accumulated earnings in international subsidiaries of
$93.5 million
on the basis that these earnings will continue to be used to finance the activities of these subsidiaries. It is not practicable to determine the amount of unrecognized deferred income taxes associated with these unremitted earnings.
At
December 31, 2015
, we had an accrual for uncertain tax positions of
$1.5 million
. During
2016
, we reduced our accrual by
$0.8 million
in uncertain tax positions for prior year as we effectively settled the related examinations with no payment of tax, leaving a balance of
$0.7 million
at
December 31, 2016
. Out of the
$0.7 million
,
$0.2 million
is included in a current liability, as we expect resolution within the next twelve months. The remaining
$0.5 million
is included in long term liabilities. The total amount of the
$0.7 million
unrecognized tax benefits that, if recognized, would affect the effective tax rate is
$0.7 million
.
A reconciliation of the beginning and ending accrual for uncertain tax positions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Balance, beginning of year
|
$
|
1,475
|
|
|
$
|
2,553
|
|
|
$
|
1,904
|
|
|
Decreases in tax positions for prior years
|
(451
|
)
|
|
(994
|
)
|
|
—
|
|
|
Increase in tax positions for prior years
|
—
|
|
|
—
|
|
|
556
|
|
|
Increase in tax positions for current year
|
—
|
|
|
94
|
|
|
299
|
|
|
Lapse in statute of limitations
|
(310
|
)
|
|
(178
|
)
|
|
(206
|
)
|
|
Balance, end of year
|
$
|
714
|
|
|
$
|
1,475
|
|
|
$
|
2,553
|
|
Interest related to uncertain tax positions is recognized in interest expense and penalties related to uncertain tax positions are recognized in other expense on our consolidated statements of income. At
December 31, 2016
and
2015
, we had accrued
$0.1 million
for the potential payment of interest and penalties on uncertain tax positions.
We are subject to Canadian federal and provincial income tax and have concluded substantially all Canadian federal and provincial tax matters for tax years through
2008
. We are also subject to U.S. federal and state income tax and have concluded substantially all U.S. federal income tax matters for tax years through
2012
.
In addition to the material jurisdictions above, other state and international tax filings remain open to examination. We believe that any assessment on these filings will not have a material impact on our consolidated financial position, results of operations or cash flows. We believe that appropriate provisions for all outstanding issues have been made for all jurisdictions and all 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.
Note
9
—Goodwill and Other Intangible Assets
Goodwill
A reporting unit is defined as an operating segment or one level below an operating segment (also known as a component). As such, the first step to identifying reporting units is to identify the operating segments in accordance with ASC 280,
Segment Reporting
. Consistent with prior years, we have identified
four
operating segments. These
four
operating segments are defined by the Company as Products, Tubular Services, Research and Engineering and Corporate. The Research and Engineering and Corporate segments are allocated to the Products and Tubular Services operating segments for purposes of goodwill impairment testing.
The goodwill impairment review is performed annually as of December 31 or upon the occurrence of a triggering event. At
December 31, 2015
, we utilized the Income Approach (
50%
weighted) and the Market Approach (
50%
weighted) to test for impairment. The 2015 impairment test utilized the rolling annual forecasts and our multiyear forecast for the Income Approach and certain financial information of publicly traded peer companies for the Market Approach. The Income Approach estimated fair value through the present value of future discounted cash flows and the Market Approach estimated fair value by applying industry ratios to each reporting unit. Included in the Income Approach are assumptions regarding revenue growth rates, future gross margins, future selling, general and administrative expenses and an estimated WACC. We calculated the WACC by weighting the after tax required returns on debt and equity by their respective percentages of total capital plus a current market risk factor. For the Market Approach, we identified peer companies for each reporting unit by focusing on companies which competed in either the Products or Tubular Services businesses. We used
three
common multiples for each reporting units and applied them to Tesco’s historical performance metrics in order to estimate the fair value of each reporting unit using the Market Approach.
During the year ended
December 31, 2015
, we noted declines in the market value of our stock, oil and natural gas prices and utilization. Due to these indicators, step one of our annual impairment test concluded that the fair value of each of our reporting units was less than the carrying value of its net assets. As a result, we performed the second step of the impairment test, which compares the implied fair value of the reporting unit goodwill to the carrying value of that goodwill. The step two impairment test indicated that the goodwill for our reporting units was fully impaired. Accordingly, we recognized an aggregate impairment of
$34.4 million
as of
December 31, 2015
. We did not recognize any impairment in 2014.
For the year ended
December 31, 2015
, the change in the carrying amount of goodwill was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
34,401
|
|
|
Impairments
|
|
(34,401
|
)
|
|
Balance, end of year
|
|
$
|
—
|
|
Other intangible assets
At
December 31, 2016
and
2015
, the estimated useful life, carrying amount and accumulated amortization of our intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Estimated useful life
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net intangible assets
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Customer relationships
|
7 - 10 years
|
|
$
|
6,050
|
|
|
$
|
(5,192
|
)
|
|
$
|
858
|
|
|
Patents
|
10 - 14 years
|
|
2,521
|
|
|
(2,101
|
)
|
|
420
|
|
|
Non-compete agreements
|
5 years
|
|
2,010
|
|
|
(2,010
|
)
|
|
—
|
|
|
Other
|
7 - 10 years
|
|
2,080
|
|
|
(2,080
|
)
|
|
—
|
|
|
|
|
|
$
|
12,661
|
|
|
$
|
(11,383
|
)
|
|
$
|
1,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
Estimated useful life
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net intangible assets
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Customer relationships
|
7 - 10 years
|
|
$
|
6,325
|
|
|
$
|
(4,593
|
)
|
|
$
|
1,732
|
|
|
Patents
|
10 - 14 years
|
|
2,521
|
|
|
(1,923
|
)
|
|
598
|
|
|
Non-compete agreements
|
5 years
|
|
2,010
|
|
|
(1,991
|
)
|
|
19
|
|
|
Other
|
7 - 10 years
|
|
2,938
|
|
|
(1,286
|
)
|
|
1,652
|
|
|
|
|
|
$
|
13,794
|
|
|
$
|
(9,793
|
)
|
|
$
|
4,001
|
|
During the year ended
December 31, 2016
, we recognized
0.9 million
of impairment related to intangibles in our Products operating segment. We did not recognize any impairment losses on our intangible assets during the years ended December 31,
2015
or
2014
.
See Note
5
for further discussion of our impairment analysis.
Amortization expense related to our intangible assets for the years ended
December 31, 2016
,
2015
and
2014
, was
$1.8 million
,
$1.0 million
and
$1.5 million
, respectively, and is included in cost of sales and services in our consolidated statements of income. Future estimated amortization expense related to our intangible assets for the next five years is expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Amortization Expense
|
|
2017
|
|
$
|
624
|
|
|
2018
|
|
524
|
|
|
2019
|
|
130
|
|
|
2020
|
|
—
|
|
|
2021
|
|
—
|
|
The approximate remaining weighted-average useful lives for the various asset classes are as follows: (1) Customer Relationships -
1.8
years and (2) Patents -
2.9
years.
Note
10
—Warranties
Changes in our warranty accrual for the years ended
December 31, 2016
and
2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Balance, beginning of year
|
$
|
893
|
|
|
$
|
3,370
|
|
|
Provisions
|
1,129
|
|
|
2,144
|
|
|
Expirations
|
(603
|
)
|
|
(1,099
|
)
|
|
Claims
|
(945
|
)
|
|
(3,522
|
)
|
|
Balance, end of year
|
$
|
474
|
|
|
$
|
893
|
|
In 2015, we incurred warranty expense of
$1.5 million
related to operational issues related to our catwalk units.
Note
11
—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.
Federal and State Unpaid Overtime Action
The Company participated in an arbitration, based on the Company’s dispute resolution process, with
38
current and former employees (the "Employees") who had worked or are working in various states. The Employees claim that they were owed unpaid overtime wages including liquidated damages under the Federal Labor Standards Act and the applicable state laws of various states, including New Mexico and Colorado. The case was assigned to a
three
-judge panel of arbitrators. On October 22, 2015, an arbitration panel agreed that the case could proceed as a class action. The Company settled the matter with the Employees through a signed settlement agreement. The Company submitted a proposed dismissal order to the arbitrators and the arbitrators dismissed the Employees' claims with prejudice on May 3, 2016.
Other contingencies
We are contingently liable under letters of credit and similar instruments that we enter in connection with the importation of equipment to international countries and to secure our performance on certain contracts. At
December 31, 2016
and
2015
, our total exposure under outstanding letters of credit was
$2.7 million
and
$5.4 million
, respectively.
Commitments
We have operating lease commitments expiring at various dates, principally for administrative offices, operation facilities and equipment. Rental expense for all operating leases was
$7.9 million
,
$11.3 million
and
$8.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Future minimum lease commitments under non-cancelable operating leases with initial or remaining terms of one year or more as of
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Minimum lease commitments
|
|
2017
|
|
$
|
6,289
|
|
|
2018
|
|
4,594
|
|
|
2019
|
|
3,293
|
|
|
2020
|
|
2,349
|
|
|
2021
|
|
1,818
|
|
|
Thereafter
|
|
3,620
|
|
|
Total
|
|
21,963
|
|
As of
December 31, 2016
, we had
$7.3 million
in manufacturing purchase commitments for executed purchase orders that were submitted to respective vendors.
Note
12
—Segment Information
Business segments
Our Products segment is comprised of pipe handling equipment sales and rentals and aftermarket sales and service. Our Tubular Services segment includes both our onshore and offshore tubular services. Our Research and Engineering segment is comprised of our internal research and development activities related to our automated tubular services and top drive model development, as well as the Casing Drilling technology prior to the sale. Our Corporate and Other segment consists of expense at the corporate level, which includes general and administrative costs and selling, marketing and other expenses that are not directly related to or allocated down to other segments in our internal reporting.
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 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 and other (income) expense and income taxes are not allocated to our business segments.
Significant financial information relating to these segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Products
|
|
Tubular Services
|
|
Research & Engineering
|
|
Corporate & Other
|
|
Total
|
|
Revenue
|
$
|
72,886
|
|
|
$
|
61,851
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,737
|
|
|
Depreciation and amortization
|
5,128
|
|
|
21,628
|
|
|
2
|
|
|
2,569
|
|
|
29,327
|
|
|
Operating loss
|
(54,628
|
)
|
|
(30,190
|
)
|
|
(5,750
|
)
|
|
(24,215
|
)
|
|
(114,783
|
)
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,230
|
)
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(118,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
Products
|
|
Tubular Services
|
|
Research & Engineering
|
|
Corporate & Other
|
|
Total
|
|
Revenue
|
$
|
145,708
|
|
|
$
|
134,030
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
279,738
|
|
|
Depreciation and amortization
|
8,414
|
|
|
25,435
|
|
|
11
|
|
|
4,275
|
|
|
38,135
|
|
|
Operating income (loss)
|
(18,857
|
)
|
|
(46,124
|
)
|
|
(9,198
|
)
|
|
(28,222
|
)
|
|
(102,401
|
)
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,009
|
)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(118,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
Products
|
|
Tubular Services
|
|
Casing Drilling
(a)
|
|
Research & Engineering
|
|
Corporate & Other
|
|
Total
|
|
Revenue
|
$
|
318,786
|
|
|
$
|
224,142
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
542,991
|
|
|
Depreciation and amortization
|
10,909
|
|
|
26,392
|
|
|
1
|
|
|
65
|
|
|
4,642
|
|
|
42,009
|
|
|
Operating income (loss)
|
58,628
|
|
|
35,514
|
|
|
(632
|
)
|
|
(9,574
|
)
|
|
(37,393
|
)
|
|
46,543
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,099
|
)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,444
|
|
(a)
The Casing Drilling segment was disposed of in 2012. The 2014 amounts above represent residual activity associated with the disposal of the segment.
Other Charges
In response to the continued downturn in the energy market and its corresponding impact on our business outlook, we continued certain cost rationalization efforts that were initiated during 2015. Consequently, we recorded a charge 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
|
Products
|
|
$
|
1,814
|
|
|
$
|
25
|
|
|
Cost of sales and services - Products
|
|
Tubular Services
|
|
2,009
|
|
|
1,430
|
|
|
Cost of sales and services - Services
|
|
Corporate and Other
|
|
565
|
|
|
131
|
|
|
Selling, general and administrative
|
|
|
|
$
|
4,388
|
|
|
$
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
Severance
|
|
Facility Closures
|
|
Income Statement Classification
|
|
Products
|
|
$
|
5,438
|
|
|
$
|
—
|
|
|
Cost of sales and services - Products
|
|
Tubular Services
|
|
3,932
|
|
|
—
|
|
|
Cost of sales and services - Services
|
|
Corporate and Other
|
|
1,500
|
|
|
—
|
|
|
Selling, general and administrative
|
|
|
|
$
|
10,870
|
|
|
$
|
—
|
|
|
|
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 region in which the sale transaction is completed and title transfers. Our revenue by geographic area for the past three fiscal years was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
United States
|
$
|
43,578
|
|
|
$
|
81,385
|
|
|
$
|
185,086
|
|
|
Europe, Africa and Middle East
|
29,049
|
|
|
46,462
|
|
|
58,421
|
|
|
Asia Pacific
|
9,295
|
|
|
32,909
|
|
|
55,322
|
|
|
Russia
|
14,006
|
|
|
15,049
|
|
|
57,482
|
|
|
Latin America
|
21,911
|
|
|
84,804
|
|
|
126,003
|
|
|
Canada
|
16,898
|
|
|
19,129
|
|
|
60,677
|
|
|
Total
|
$
|
134,737
|
|
|
$
|
279,738
|
|
|
$
|
542,991
|
|
Our physical location of our net property, plant and equipment by geographic area as of
December 31, 2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
December 31,
2016
|
|
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
|
|
|
Total
|
$
|
47,498
|
|
|
$
|
56,299
|
|
|
$
|
16,946
|
|
|
$
|
120,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Tubular Services
|
|
Overhead, Corporate & Other
|
|
December 31,
2015
|
|
United States
|
$
|
19,198
|
|
|
$
|
32,479
|
|
|
$
|
10,434
|
|
|
$
|
62,111
|
|
|
Europe, Africa and Middle East
|
8,645
|
|
|
16,262
|
|
|
2,841
|
|
|
27,748
|
|
|
Asia Pacific
|
6,368
|
|
|
14,444
|
|
|
863
|
|
|
21,675
|
|
|
Russia
|
15,975
|
|
|
280
|
|
|
8
|
|
|
16,263
|
|
|
Latin America
|
30,265
|
|
|
9,388
|
|
|
988
|
|
|
40,641
|
|
|
Canada
|
1,498
|
|
|
2,341
|
|
|
5,439
|
|
|
9,278
|
|
|
Total
|
$
|
81,949
|
|
|
$
|
75,194
|
|
|
$
|
20,573
|
|
|
$
|
177,716
|
|
Venezuela Charges
Since early 2014, we reviewed and monitored our operations in Venezuela given the deterioration of the political and business environment and security pointed towards ever increasing risk in the country. Furthermore, the continued devaluation of local currency coupled with delayed and/or uncollectible payments from our customers, have made our ability to collect receivables increasingly difficult. As business conditions in Venezuela continued to deteriorate in the fourth quarter of 2014, we assessed the recoverability of our long-lived assets in the country. We performed an undiscounted cash flow assessment and concluded the future undiscounted cash flows did not recover the net book value of the long-lived assets based on our current assumptions of the Venezuelan operations. As such we estimated the fair value of the long-lived assets based on the estimated market value of the asset base within Venezuela using indications of what a knowledgeable, willing buyer would pay to a knowledgeable, willing seller in the market and recorded a charge of approximately
$0.6 million
as of December 31, 2014. Given the same circumstances, we also applied the lower of cost or market principle to the value of our inventory in country and recorded an inventory charge of
$1.0 million
to properly state the inventory at net realizable value as of December 31, 2014.
As of December 31, 2014, the total aggregate charges recorded in Venezuela were
$3.2 million
of which
$1.6 million
was recorded as cost of sales and services related to impairment loss on long-lived assets and write down of the inventory to net realizable value and
$1.6 million
as selling, general and administrative costs pertaining to the increase for the allowance for doubtful accounts on outstanding receivables.
On November 9, 2015, we completed the sale of substantially all of our Venezuelan fixed assets and inventory for total cash consideration of
$2.5 million
. As of December 31, 2015, we recorded a reserve of
$1.5 million
against the outstanding sale proceeds and we recognized a net loss of
$0.5 million
. As of December 31, 2016, we have collected all remaining sale proceeds and recognized a gain of
$1.5 million
.
Major customers and credit risk
Our accounts receivable are principally with major international and national oil and natural gas service 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 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.
On November 3, 2016, the authorities in Egypt devalued the Egyptian pound by
32.3%
and announced the currency would be allowed to float. The move devalued the rate from the previous official rate of
8.8
to
13.0
to the U.S. dollar, and the floating exchange rate has declined further to
18.1
at December 31, 2016, resulting in a
$0.8 million
foreign exchange loss. At
December 31, 2016
, we maintained cash of
$1.2 million
on deposit in an Egyptian bank. Due to currency controls, intended to maintain the value of the Egyptian pound against the U.S. dollar, our ability to convert Egyptian pounds to other currencies and transfer the funds freely outside of the country was limited.
On December 17, 2015, the government of Argentina announced the end of most of its currency controls and allowed the Argentine Peso to be traded freely. Consequently, the Peso weakened
32%
against the U.S. Dollar, resulting in a
$6.1 million
foreign exchange loss for the month of December 2015. The lifting of currency controls, however, permits us more cost effective access to cash generated in Argentina.
Procurement of materials and supplies
We procure materials and components from many different vendors located throughout the world. A portion of these components are electrical in nature, including permanent magnet motors, induction motors and drives. We also purchase hydraulic components, such as motors, from certain suppliers located in the United States. In order to manufacture many of our proprietary parts, we require substantial quantities of steel. We select our component sources from, and establish supply relationships with, vendors who are prepared to develop components and systems that allow us to produce high performance, reliable and compact machines. For both our electric and hydraulic top drive systems we source key components, such as AC motors, power electronics and hydraulic systems from vendors who have developed these components for commercial, often non-oilfield applications and who have adapted them for service conditions specific to our applications. Consequently, our ability to maintain timely deliveries and to provide long term support of certain models may depend on the supply of these components and systems. We attempt to minimize risks associated with this dependency through the development of supply agreements to maintain acceptable levels of ready components.
Note
13
—Quarterly Financial Data (unaudited)
The following table presents unaudited quarterly financial data for
2016
and
2015
(in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2016 quarterly period ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Revenue
|
$
|
35,453
|
|
|
$
|
33,586
|
|
|
$
|
30,415
|
|
|
$
|
35,283
|
|
|
Operating loss
|
(54,757
|
)
|
|
(19,217
|
)
|
|
(21,886
|
)
|
|
(18,923
|
)
|
|
Net loss
|
(56,839
|
)
|
|
(18,871
|
)
|
|
(22,069
|
)
|
|
(20,149
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(1.45
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.43
|
)
|
|
Diluted
|
$
|
(1.45
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2015 quarterly period ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Revenue
|
$
|
91,670
|
|
|
$
|
74,451
|
|
|
$
|
61,397
|
|
|
$
|
52,220
|
|
|
Operating loss
|
(5,638
|
)
|
|
(13,718
|
)
|
|
(15,719
|
)
|
|
(67,326
|
)
|
|
Net loss
|
(8,252
|
)
|
|
(27,490
|
)
|
|
(19,902
|
)
|
|
(78,110
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.21
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(2.00
|
)
|
|
Diluted
|
$
|
(0.21
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(2.00
|
)
|