UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period ended June 30, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from
to
Commission File Number: 000-19580
T-3 ENERGY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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76-0697390
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(State or Other Jurisdiction
of Incorporation or Organization)
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(IRS Employer
Identification No.)
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7135 Ardmore, Houston, Texas
(Address of Principal Executive Offices)
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77054
(Zip Code)
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(Registrants telephone number, including area code):
(713) 996-4110
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check
mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a
smaller reporting company.
See the definitions of large accelerated
filer, accelerated filer
and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
At August 1, 2008, the registrant had 12,530,791 shares of common stock outstanding.
TABLE OF CONTENTS
FORM 10-Q
i
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except for share amounts)
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|
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June 30,
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December 31,
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2008
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2007
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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6,755
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$
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9,522
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Accounts receivable trade, net
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49,329
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44,180
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Inventories
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52,856
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47,457
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|
Deferred income taxes
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4,169
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|
|
3,354
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Prepaids and other current assets
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5,134
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|
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5,824
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|
|
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Total current assets
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118,243
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110,337
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Property and equipment, net
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43,411
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40,073
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Goodwill, net
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112,732
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112,249
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Other intangible assets, net
|
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|
34,783
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35,065
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Other assets
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3,152
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2,838
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Total assets
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$
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312,321
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$
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300,562
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|
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable trade
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$
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24,888
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$
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20,974
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Accrued expenses and other
|
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20,267
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15,156
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Current maturities of long-term debt
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74
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74
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Total current liabilities
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45,229
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36,204
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Long-term debt, less current maturities
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39,006
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61,423
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Other long-term liabilities
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1,283
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|
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1,101
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|
Deferred income taxes
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12,281
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11,186
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $.001 par value, 25,000,000 shares
authorized, no shares issued or outstanding
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Common stock, $.001 par value, 50,000,000 shares authorized,
12,520,791 and 12,320,341 shares issued and
outstanding at June 30, 2008 and December 31, 2007,
respectively
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13
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12
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Warrants, 10,157 and 13,138 issued and outstanding at June 30,
2008 and December 31, 2007, respectively
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20
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|
26
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|
Additional paid-in capital
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167,777
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|
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160,446
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|
Retained earnings
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44,057
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|
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|
27,039
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|
Accumulated other comprehensive income
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2,655
|
|
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|
3,125
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|
|
|
|
|
|
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Total stockholders equity
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214,522
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190,648
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|
|
|
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|
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|
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Total liabilities and stockholders equity
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$
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312,321
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|
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$
|
300,562
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|
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|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands except per share amounts)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Revenues:
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Products
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$
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57,724
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|
|
$
|
41,001
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|
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$
|
115,751
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|
|
$
|
78,840
|
|
Services
|
|
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9,966
|
|
|
|
10,932
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|
|
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21,109
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|
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20,993
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,690
|
|
|
|
51,933
|
|
|
|
136,860
|
|
|
|
99,833
|
|
|
|
|
|
|
|
|
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Cost of revenues:
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|
|
|
|
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|
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Products
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35,271
|
|
|
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25,526
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70,375
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|
|
|
49,839
|
|
Services
|
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|
5,339
|
|
|
|
6,519
|
|
|
|
12,234
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|
|
|
12,755
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,610
|
|
|
|
32,045
|
|
|
|
82,609
|
|
|
|
62,594
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|
|
|
|
|
|
|
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|
|
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Gross profit
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|
27,080
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|
|
|
19,888
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|
|
|
54,251
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|
|
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37,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating expenses
|
|
|
15,781
|
|
|
|
11,953
|
|
|
|
28,530
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|
20,441
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Income from operations
|
|
|
11,299
|
|
|
|
7,935
|
|
|
|
25,721
|
|
|
|
16,798
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(601
|
)
|
|
|
(103
|
)
|
|
|
(1,493
|
)
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest income
|
|
|
24
|
|
|
|
259
|
|
|
|
63
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
367
|
|
|
|
478
|
|
|
|
507
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
provision for income taxes
|
|
|
11,089
|
|
|
|
8,569
|
|
|
|
24,798
|
|
|
|
17,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
3,573
|
|
|
|
3,256
|
|
|
|
7,769
|
|
|
|
6,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
7,516
|
|
|
|
5,313
|
|
|
|
17,029
|
|
|
|
10,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(9
|
)
|
|
|
(1,075
|
)
|
|
|
(11
|
)
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,507
|
|
|
$
|
4,238
|
|
|
$
|
17,018
|
|
|
$
|
9,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.60
|
|
|
$
|
.45
|
|
|
$
|
1.37
|
|
|
$
|
.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
|
|
|
$
|
(.09
|
)
|
|
$
|
|
|
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
.60
|
|
|
$
|
.36
|
|
|
$
|
1.37
|
|
|
$
|
.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.58
|
|
|
$
|
.44
|
|
|
$
|
1.32
|
|
|
$
|
.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
|
|
|
$
|
(.09
|
)
|
|
$
|
|
|
|
$
|
(.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
.58
|
|
|
$
|
.35
|
|
|
$
|
1.32
|
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,477
|
|
|
|
11,779
|
|
|
|
12,404
|
|
|
|
11,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,063
|
|
|
|
12,127
|
|
|
|
12,926
|
|
|
|
11,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,018
|
|
|
$
|
9,737
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
11
|
|
|
|
1,075
|
|
Bad debt expense
|
|
|
68
|
|
|
|
110
|
|
Depreciation and amortization
|
|
|
4,444
|
|
|
|
2,096
|
|
Amortization of deferred loan costs
|
|
|
117
|
|
|
|
126
|
|
Loss on sale of assets
|
|
|
|
|
|
|
9
|
|
Write-off of property and equipment, net
|
|
|
25
|
|
|
|
|
|
Deferred taxes
|
|
|
(228
|
)
|
|
|
(63
|
)
|
Employee stock-based compensation expense
|
|
|
2,505
|
|
|
|
1,989
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,688
|
)
|
|
|
(435
|
)
|
Equity in earnings of unconsolidated affiliate
|
|
|
(381
|
)
|
|
|
(310
|
)
|
Changes in assets and liabilities, net of effect of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
(4,628
|
)
|
|
|
(5,159
|
)
|
Inventories
|
|
|
(5,775
|
)
|
|
|
(9,110
|
)
|
Prepaids and other current assets
|
|
|
1,090
|
|
|
|
(70
|
)
|
Other assets
|
|
|
(90
|
)
|
|
|
(31
|
)
|
Accounts payable trade
|
|
|
4,001
|
|
|
|
2,445
|
|
Accrued expenses and other
|
|
|
6,866
|
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
23,355
|
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,626
|
)
|
|
|
(2,247
|
)
|
Proceeds from sales of property and equipment
|
|
|
|
|
|
|
25
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(2,732
|
)
|
|
|
|
|
Equity investment in unconsolidated affiliate
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,358
|
)
|
|
|
(2,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net repayments under swing line credit facility
|
|
|
(3,415
|
)
|
|
|
(85
|
)
|
Net repayments under revolving credit facility
|
|
|
(19,000
|
)
|
|
|
|
|
Payments on long-term debt
|
|
|
(93
|
)
|
|
|
|
|
Debt financing costs
|
|
|
(78
|
)
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
22,157
|
|
Proceeds from exercise of stock options
|
|
|
3,084
|
|
|
|
836
|
|
Proceeds from exercise of warrants
|
|
|
38
|
|
|
|
4,018
|
|
Excess tax benefits from stock-based compensation
|
|
|
1,688
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(17,776
|
)
|
|
|
27,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
12
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,767
|
)
|
|
|
28,442
|
|
Cash and cash equivalents, beginning of period
|
|
|
9,522
|
|
|
|
3,393
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,755
|
|
|
$
|
31,835
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
7,507
|
|
|
$
|
4,238
|
|
|
$
|
17,018
|
|
|
$
|
9,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
134
|
|
|
|
1,148
|
|
|
|
(470
|
)
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
7,641
|
|
|
$
|
5,386
|
|
|
$
|
16,548
|
|
|
$
|
10,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. These financial statements include
the accounts of T-3 Energy Services, Inc. and its subsidiaries (collectively, T-3 or the
Company). The Companys 50% investment in its Mexico joint venture is accounted for under the
equity method of accounting. All significant intercompany balances and transactions have been
eliminated in consolidation. Operating results for the three and six months ended June 30, 2008,
are not necessarily indicative of the results that may be expected for the year ended December 31,
2008. For further information, refer to the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
Certain reclassifications have been made to conform prior year financial information to the current
period presentation. Also, to conform the June 30, 2007 statement of cash flows to the December
31, 2007 presentation in the Companys Annual Report on Form 10-K for the year ended December 31,
2007, the Company has reclassified $0.6 million from cash provided by financing activities to cash
provided by operating activities.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash, accounts receivable, accounts payable,
accrued expenses and long-term debt. The carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses approximate their respective fair values because of the short
maturities of those instruments. The Companys long-term debt consists of its revolving credit
facility. The carrying value of the revolving credit facility approximates fair value because of
its variable short-term interest rates.
New Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other
accounting pronouncements that require or permit fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
for interim periods within those fiscal years. Management adopted the provisions of SFAS No. 157 on
January 1, 2008. The adoption of SFAS No. 157 did not have any impact on the Companys consolidated
financial position, results of operations and cash flows.
In December 2007, the FASB issued Statement No. 141R,
Business Combinations
(SFAS No. 141R),
which changes the requirements for an acquirers recognition and measurement of the assets acquired
and the liabilities assumed in a business combination. SFAS No. 141R is effective for annual
periods beginning after December 15, 2008 and should be applied prospectively for all business
combinations entered into after the date of adoption. Management is
currently evaluating the impact that SFAS No. 141R will have on
its consolidated financial position, results of operations and cash
flows.
2. BUSINESS COMBINATIONS AND DISPOSITIONS
Business Combinations
On May 29, 2008, the Company exercised its option to purchase certain complementary assets of
HP&T Products, Inc. in India at their estimated fair value of $0.4 million. The final fair market
valuation of the assets
5
to be purchased will be determined during the third quarter of 2008, at which time we will either
make a further nominal payment or be entitled to a return of deposited monies. The $0.4 million
deposit paid by the Company has been classified in prepaids and other current assets within the
Companys condensed consolidated balance sheet as of June 30, 2008. The deposit was funded from
the Companys working capital and the use of its senior credit facility.
On January 24, 2008, the Company completed the purchase of Pinnacle Wellhead, Inc., or
Pinnacle, for approximately $2.4 million. Pinnacle is located in Oklahoma City, Oklahoma and has
been in business for over twenty years as a service provider that assembles, tests, installs and
performs repairs on wellhead production products, primarily in Oklahoma. The Company plans to
expand the Pinnacle facility into a full service repair facility similar to its other locations.
The acquisition was funded from the Companys working capital and the use of its senior credit
facility.
On October 30, 2007, the Company completed the purchases of all of the outstanding stock of
Energy Equipment Corporation, or EEC, and HP&T Products, Inc., or HP&T, for approximately $72.3
million and $25.9 million, respectively. A portion of the EEC purchase price in the amount of $3.4
million is being held in escrow for a period of one year following the closing of the acquisition
to satisfy certain indemnifications claims that may arise. An additional portion of the EEC
purchase price in the amount of $10.3 million has been set aside by Energy Equipment Group, Inc.,
the former stockholders of EEC, in a separate account in their name for a period of 18 months from
the closing of the acquisition to satisfy certain contractual indemnification claims, if any. EEC
manufactures valves, chokes, control panels, and their associated parts for sub-sea applications,
extreme temperature, and highly corrosive environments. HP&T designs gate valves, manifolds,
chokes and other products. The acquisitions of EEC and HP&T demonstrate the Companys commitment
to developing engineered products for both surface and subsea applications. These acquisitions
evolve from the Companys growth strategy focused on improving its geographic presence and
enhancing its product mix through complementary patented product additions. The acquisitions were
funded from the Companys working capital and the use of its senior credit facility.
The acquisitions of Pinnacle, EEC and HP&T discussed above were accounted for using the
purchase method of accounting. Results of operations for the above acquisitions are included in
the accompanying condensed consolidated financial statements since the dates of acquisition. The
purchase prices were allocated to the net assets acquired based upon their estimated fair market
values at the dates of acquisition. The excess of the purchase price over the net assets acquired
was recorded as goodwill. The balances included in the condensed consolidated balance sheets at
December 31, 2007 and June 30, 2008 related to the EEC and HP&T acquisitions and, at June 30, 2008,
related to the Pinnacle acquisition are based on preliminary information and are subject to change
when final asset valuations are obtained and the potential for liabilities has been evaluated. No
material changes to the EEC and HP&T preliminary allocations were made during 2008 and the Company
does not anticipate any material changes to the allocations going forward. The Company did
allocate $1.5 million of the Pinnacle purchase price to other intangible assets during the three
months ended June 30, 2008. The Pinnacle acquisition is not material to the Companys condensed
consolidated financial statements, and therefore a preliminary purchase price allocation and pro
forma information is not presented.
The following schedule summarizes investing activities related to the Companys Pinnacle
acquisition and the deposit on HP&T India assets which is presented in the condensed consolidated
statements of cash flows for the six months ended June 30, 2008 (dollars in thousands):
|
|
|
|
|
Fair value of tangible and intangible assets,
net of cash acquired
|
|
$
|
2,801
|
|
Goodwill recorded
|
|
|
758
|
|
Total liabilities assumed
|
|
|
(827
|
)
|
Common stock issued
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
$
|
2,732
|
|
|
|
|
|
The following presents the consolidated financial information for the Company on a pro forma
basis assuming the acquisition of EEC had occurred as of January 1, 2007. The historical financial
information has been adjusted to give effect to pro forma items that are directly attributable to
the EEC acquisition and expected to have a continuing impact on the consolidated results. These
items include adjustments to record the
6
incremental amortization and depreciation expense related to the increase in fair value of the
acquired assets and
interest expense related to the borrowing under the Companys senior credit facility.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2007
|
|
June 30, 2007
|
|
|
(In thousands, except
|
|
(In thousands, except
|
|
|
per share amounts)
|
|
per share amounts)
|
Revenues
|
|
$
|
68,306
|
|
|
$
|
133,373
|
|
Income from
continuing
operations
|
|
$
|
6,514
|
|
|
$
|
13,966
|
|
Basic Earnings per
share from
continuing
operations
|
|
$
|
0.55
|
|
|
$
|
1.24
|
|
Diluted Earnings
per share from
continuing
operations
|
|
$
|
0.54
|
|
|
$
|
1.21
|
|
Dispositions
During 2004 and 2005, the Company sold substantially all of the assets of its products and
distribution segments, respectively. The assets of the products and distribution segments sold
constituted businesses and thus their results of operations were reported as discontinued
operations. The Companys loss before income taxes from discontinued operations for the three and
six months ended June 30, 2008 was not significant. The Companys loss before income taxes from
discontinued operations for the three and six months ended June 30, 2007 was $1.7 million, and
resulted from a jury verdict during the three months ended June 30, 2007 against one of the
Companys discontinued businesses. See Note 7 for further discussion.
3. INVENTORIES
Inventories consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
6,895
|
|
|
$
|
7,640
|
|
Work in process
|
|
|
15,868
|
|
|
|
16,319
|
|
Finished goods and component parts
|
|
|
30,093
|
|
|
|
23,498
|
|
|
|
|
|
|
|
|
|
|
$
|
52,856
|
|
|
$
|
47,457
|
|
|
|
|
|
|
|
|
4. DEBT
The Companys senior credit facility provides for a $180 million revolving line of credit,
maturing October 26, 2012 that can be increased by up to $70 million (not to exceed a total
commitment of $250 million) with the approval of the senior lenders. The senior credit facility
consists of a U.S. revolving credit facility that includes a swing line subfacility and a letter of
credit subfacility up to $25 million and $50 million, respectively. The Companys senior credit
facility also provides for a separate Canadian revolving credit facility, which includes a swing
line subfacility of up to U.S. $5 million and a letter of credit subfacility of up to U.S. $5
million. The revolving credit facility matures on the same date as the senior credit facility, and
is subject to the same covenants and restrictions. As of June 30, 2008, the Company had $39.0
million borrowed under its senior credit facility and there were no outstanding borrowings under
the Canadian revolving credit facility. See Note 7 to the Companys consolidated financial
statements included in the Companys Annual Report on Form 10-K for the year ended December 31,
2007 for additional information related to the Companys debt.
5. EARNINGS (LOSS) PER SHARE
Basic net income per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per common share is the
same as basic but includes dilutive stock options, restricted stock and warrants using the treasury
stock method. The following
7
tables reconcile the numerators and denominators of the basic and diluted per common share
computations for net income for the three and six months ended June 30, 2008 and 2007, as follows
(in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
7,516
|
|
|
$
|
5,313
|
|
Loss from discontinued operations
|
|
|
(9
|
)
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,507
|
|
|
$
|
4,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
basic
|
|
|
12,477
|
|
|
|
11,779
|
|
Shares for dilutive stock options, restricted
stock and warrants
|
|
|
586
|
|
|
|
348
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
diluted
|
|
|
13,063
|
|
|
|
12,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.60
|
|
|
$
|
.45
|
|
Discontinued operations
|
|
|
|
|
|
|
(.09
|
)
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
.60
|
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.58
|
|
|
$
|
.44
|
|
Discontinued operations
|
|
|
|
|
|
|
(.09
|
)
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
.58
|
|
|
$
|
.35
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2008 and 2007, there were 3,000 and 9,850 options,
respectively, that were not included in the computation of diluted earnings per share because their
inclusion would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
17,029
|
|
|
$
|
10,812
|
|
Loss from discontinued operations
|
|
|
(11
|
)
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,018
|
|
|
$
|
9,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
basic
|
|
|
12,404
|
|
|
|
11,235
|
|
Shares for dilutive stock options, restricted
stock and warrants
|
|
|
522
|
|
|
|
323
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
diluted
|
|
|
12,926
|
|
|
|
11,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.37
|
|
|
$
|
.96
|
|
Discontinued operations
|
|
|
|
|
|
|
(.09
|
)
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.37
|
|
|
$
|
.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.32
|
|
|
$
|
.94
|
|
Discontinued operations
|
|
|
|
|
|
|
(.10
|
)
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.32
|
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2008 and 2007, there were 3,000 and 9,850 options,
respectively, that were not included in the computation of diluted earnings per share because their
inclusion would have been anti-dilutive.
8
6. SEGMENT INFORMATION
The Companys determination of reportable segments considers the strategic operating units
under which the Company sells various types of products and services to various customers.
Financial information for purchase transactions is included in the segment disclosures only for
periods subsequent to the dates of acquisition.
Management evaluates the operating results of its pressure control reporting segment based
upon its three product lines: pressure and flow control, wellhead and pipeline. The Companys
operating segments of pressure and flow control, wellhead and pipeline have been aggregated into
one reporting segment, pressure control, as the operating segments have the following
commonalities: economic characteristics, nature of the products and services, type or class of
customer, and methods used to distribute their products and provide services. The pressure control
segment manufactures, remanufactures and repairs high pressure, severe service products including
valves, chokes, actuators, blowout preventers, manifolds and wellhead equipment; manufactures
accumulators and rubber goods; and applies custom coating to customers products used primarily in
the oil and gas industry.
The accounting policies of the segment are the same as those of the Company. The Company
evaluates performance based on income from operations excluding certain corporate costs not
allocated to the segment. Substantially all revenues are from domestic sources and Canada and all
assets are held in the United States and Canada.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Pressure
|
|
|
|
|
|
|
Control
|
|
Corporate
|
|
Consolidated
|
Three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
67,690
|
|
|
$
|
|
|
|
$
|
67,690
|
|
Depreciation and amortization
|
|
|
1,918
|
|
|
|
341
|
|
|
|
2,259
|
|
Income (loss) from operations
|
|
|
18,363
|
|
|
|
(7,064
|
)
|
|
|
11,299
|
|
Capital expenditures
|
|
|
2,035
|
|
|
|
213
|
|
|
|
2,248
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
51,933
|
|
|
$
|
|
|
|
$
|
51,933
|
|
Depreciation and amortization
|
|
|
744
|
|
|
|
331
|
|
|
|
1,075
|
|
Income (loss) from operations
|
|
|
13,210
|
|
|
|
(5,275
|
)
|
|
|
7,935
|
|
Capital expenditures
|
|
|
1,253
|
|
|
|
320
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Pressure
|
|
|
|
|
|
|
Control
|
|
Corporate
|
|
Consolidated
|
Six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
136,860
|
|
|
$
|
|
|
|
$
|
136,860
|
|
Depreciation and amortization
|
|
|
3,778
|
|
|
|
666
|
|
|
|
4,444
|
|
Income (loss) from operations
|
|
|
36,855
|
|
|
|
(11,134
|
)
|
|
|
25,721
|
|
Capital expenditures
|
|
|
5,105
|
|
|
|
521
|
|
|
|
5,626
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
99,833
|
|
|
$
|
|
|
|
$
|
99,833
|
|
Depreciation and amortization
|
|
|
1,447
|
|
|
|
649
|
|
|
|
2,096
|
|
Income (loss) from operations
|
|
|
24,770
|
|
|
|
(7,972
|
)
|
|
|
16,798
|
|
Capital expenditures
|
|
|
1,859
|
|
|
|
388
|
|
|
|
2,247
|
|
7. COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, involved in various legal actions arising in the ordinary
course of business.
In December 2001, a lawsuit was filed against the Company in the 14
th
Judicial
District Court of Calcasieu
9
Parish, Louisiana. The lawsuit alleges that certain equipment purchased from and installed by a
wholly owned subsidiary of the Company was defective in assembly and installation. The plaintiffs
have alleged certain damages in excess of $10 million related to repairs and activities associated
with the product failure, loss of production and damage to the reservoir. The Company has tendered
the defense of this claim under its comprehensive general liability insurance policy and its
umbrella policy. Management does not believe that the outcome of such legal action involving the
Company will have a material adverse effect on the Companys financial position, results of
operations, or cash flows.
In June 2003, a lawsuit was filed against the Company in the 61
st
Judicial District
of Harris County, Texas. The lawsuit alleges that certain equipment purchased from and installed
by a wholly-owned subsidiary of the Company was defective. The plaintiffs initially alleged repair
and replacement damages of $0.3 million. In 2005, the plaintiffs alleged production damages in the
range of $3 to $5 million. During February 2008, the Companys insurance carrier settled this
lawsuit with the plaintiffs for $0.2 million.
In July 2003, a lawsuit was filed against the Company in the U.S. District Court, Eastern
District of Louisiana. The lawsuit alleges that a wholly owned subsidiary of the Company, the
assets and liabilities of which were sold in 2004, failed to deliver the proper bolts and/or sold
defective bolts to the plaintiffs contractor to be used in connection with a drilling and
production platform in the Gulf of Mexico. The plaintiffs claimed that the bolts failed and they
had to replace all bolts at a cost of approximately $3 million. The complaint named the
plaintiffs contractor and seven of its suppliers and subcontractors (including the Companys
subsidiary) as the defendants and alleged negligence on the part of all defendants. The lawsuit
was called to trial during June 2007 and resulted in a jury finding of negligence against the
Company and three other defendants. The jury awarded the plaintiffs damages in the amount of $2.9
million, of which the Company estimates its share to be $1.0 million. The Company accrued
approximately $1.1 million, net of tax, for its share of the damages and attorney fees, court costs
and interest, as a loss from discontinued operations during the second quarter of 2007.
The Companys environmental remediation and compliance costs have not been material during any
of the periods presented. T-3 has been identified as a potentially responsible party with respect
to the Lake Calumet Cluster site near Chicago, Illinois, which has been designated for cleanup
under CERCLA and Illinois state law. The Companys involvement at this site is believed to have
been minimal. While no agency-approved final allocation of the Companys liability has been made
with respect to the Lake Calumet Cluster site, based upon the Companys involvement with this site,
management does not expect that its ultimate share of remediation costs will have a material impact
on its financial position, results of operations or cash flows.
At June 30, 2008, the Company had no significant letters of credit outstanding.
8. STOCKHOLDERS EQUITY
On April 23, 2007, the Company closed an underwritten offering among the Company, First
Reserve Fund VIII (at the time the Companys largest stockholder) and Bear, Stearns & Co. Inc.,
Simmons & Company International, and Pritchard Capital Partners, LLC (the Underwriters), pursuant
to which the Company sold 1,000,059 shares of its common stock for net proceeds of approximately
$22.2 million, and First Reserve Fund VIII sold 4,879,316 shares of common stock pursuant to an
effective shelf registration statement on Form S-3, as amended and supplemented by the prospectus
supplement dated April 17, 2007. Of the shares sold by First Reserve Fund VIII, 313,943 had been
acquired through First Reserve Fund VIIIs exercise of warrants to purchase the Companys common
stock for $12.80 per share. As a result, the Company received proceeds of approximately $4.0
million through the exercise by First Reserve Fund VIII of these warrants.
The sale of the Companys common stock by First Reserve Fund VIII in November 2006 coupled
with its sale of common stock in the offering described above constituted a change of control
pursuant to the terms of the Companys then existing employment agreement with Gus D. Halas, the
Companys Chairman, President and Chief Executive Officer. As a result, Mr. Halas was
contractually entitled to a change of control payment from the Company of $1.6 million, which is
two times the average of his salary and bonus over the past two years, and the immediate vesting of
66,667 unvested stock options with an exercise price of $12.31 and 75,000 unvested shares of
restricted stock held by Mr. Halas. In the second quarter of 2007, the Company incurred a
compensation charge of approximately $1.9 million, net of tax, or $0.16 per diluted share for the
three months ended June 30, 2007, related
10
to the payment to Mr. Halas of the $1.6 million change of control payment and the immediate vesting
of previously unvested stock options and restricted stock held by him pursuant to the terms of his
then existing employment agreement.
Common Stock
The Company issued 200,450 shares of common stock during the six months ended June 30, 2008
primarily as a result of 188,789 stock options exercised by employees under the Companys 2002
Stock Incentive Plan. The increase is also a result of 2,981 shares issued as a result of the
exercise of warrants and the granting of 8,680 shares of restricted stock to certain members of the
Companys Board of Directors.
Warrants
During the six months ended June 30, 2008, a total of 2,981 warrants were exercised. At June
30, 2008, warrants to acquire 10,157 shares of common stock at $12.80 per share remain outstanding.
Additional Paid-In Capital
During the six months ended June 30, 2008, additional paid-in capital increased as a result of
the compensation cost recorded under SFAS 123R, stock options exercised by employees under the
Companys 2002 Stock Incentive Plan (as discussed above), and the excess tax benefits from the
stock options exercised.
9. STOCK-BASED COMPENSATION
The T-3 Energy Services, Inc. 2002 Stock Incentive Plan, as amended (the Plan), provides
officers, employees and non-employee directors equity-based incentive awards, including stock
options and restricted stock. The Plan will remain in effect for 10 years, unless terminated
earlier. As of June 30, 2008, the Company had 1,378,959 shares reserved for issuance in connection
with the Plan.
Stock Option Awards
Stock options under the Companys Plan generally expire 10 years from the grant date and vest
over three to four years from the grant date. The Company uses the Black-Scholes option pricing
model to estimate the fair value of stock options granted to employees on the date of grant. The
estimated fair value of the options is amortized to expense on a straight-line basis over the
vesting period. The Company has recorded an estimate for forfeitures of awards of stock options.
This estimate will be adjusted as actual forfeitures differ from the estimate. The fair value of
each stock option is estimated on the grant date using the Black-Scholes option pricing model using
the assumptions noted in the following table. Expected volatility is estimated based on historical
volatility of the Companys stock and expected volatilities of comparable companies. The expected
term is based on historical employee exercises of options during 2007 and 2006 and external data
from similar companies that grant awards with similar terms since prior to 2006 the Company did not
have any historical employee exercises of options. The risk-free interest rate is based upon the
U.S. Treasury yield curve in effect at the time of grant. The Company does not expect to pay any
dividends on its common stock. Assumptions used for stock options granted during 2008 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2008
|
|
2007
|
Expected volatility
|
|
|
50.00
|
%
|
|
|
40.00
|
%
|
Risk-free interest rate
|
|
|
2.26
|
%
|
|
|
4.68
|
%
|
Expected term (in years)
|
|
|
4.7
|
|
|
|
5
|
|
The Company granted 396,500 and 417,850 options during the six months ended June 30, 2008 and
2007, respectively. The weighted average grant date fair value of options granted during the six
months ended June 30, 2008 and 2007 was $18.92 and $9.04, respectively. The Company recognized
$2,082,000 and $1,174,000 of employee stock-based compensation expense related to stock options
during the six months ended June 30, 2008 and 2007, respectively. As further discussed above in
Note 8, the stock-based compensation expense related to
11
stock options for the six months ended June 30, 2007 includes a charge of $317,000 related to the
immediate vesting of 66,667 unvested stock options held by Gus D. Halas, the Companys President,
Chief Executive Officer and Chairman of the Board, pursuant to the terms of his then existing
employment agreement.
Restricted Stock Awards
On January 2, 2008, the Company granted a total of 8,680 shares of restricted stock to certain
members of its Board of Directors. The fair value of these restricted shares was determined based
on the closing price of the Companys stock on the grant date. These shares will vest on May 29,
2009.
On December 21, 2007, the Company granted a total of 2,438 shares of restricted stock to
certain members of its Board of Directors. The fair value of these restricted shares was
determined based on the closing price of the Companys stock on the grant date. These shares
vested on May 29, 2008.
On September 14, 2007, the Company and Gus D. Halas entered into an Employment Agreement that
provides for a Restricted Stock Award Agreement (the Stock Agreement) that grants 10,000 shares
of the Companys restricted common stock. Pursuant to the Stock Agreement, these shares will vest
on September 14, 2008, provided that Mr. Halas remains employed with the Company through this
vesting date. The Employment Agreement also provides for two additional restricted stock awards of
10,000 shares each to be granted on September 14, 2008 and September 14, 2009. The additional
restricted stock awards shall vest on the first anniversary of their respective grant dates,
provided that Mr. Halas remains employed with the Company through these vesting dates. The fair
value of all 30,000 shares of restricted stock was determined based on the closing price of the
Companys stock on September 14, 2007.
On April 27, 2006, the Company and Gus D. Halas entered into two Restricted Stock Award
Agreements (the Stock Agreements). The Stock Agreements each grant Mr. Halas 50,000 shares of
the Companys restricted common stock, or a total of 100,000 shares, effective January 12, 2006.
The first 50,000 shares were to vest on January 11, 2008, provided that Mr. Halas remained employed
with the Company through this vesting date. The fair value of these restricted shares was
determined based on the closing price of the Companys stock on the grant date, April 27, 2006. Of
the remaining 50,000 shares, 25,000 vested on January 12, 2007 since the Companys common stock
price increased at least 25% from the closing price of the common stock on January 12, 2006, and
25,000 were to vest on January 11, 2008 if the Companys common stock price had increased at least
25% from the closing price of the common stock on January 12, 2007, and Mr. Halas remained employed
with the Company through the applicable vesting date. The fair value of these restricted shares
with market conditions was determined using a Monte Carlo simulation model. As described further
in Note 12 of the Companys Annual Report on Form 10-K for the year ended December 31, 2007, the
sale of the Companys common stock by First Reserve Fund VIII, L.P. in November 2006 coupled with
its sale of common stock in the offering in April 2007 constituted a change of control pursuant
to the terms of the Companys then existing employment agreement with Mr. Halas. This change of
control resulted in the immediate vesting of the remaining 75,000 unvested shares of restricted
stock during April 2007.
The Company recognized $423,000 and $815,000 of employee stock-based compensation expense
related to restricted stock awards during the six months ended June 30, 2008 and 2007,
respectively.
10. INCOME TAXES
The Companys effective tax rate was 32.2% for the three months ended June 30, 2008 compared
to 38.0% for the three months ended June 30, 2007. The lower tax rate in 2008 is primarily
attributable to the utilization of research and development, or R&D, tax credits during the three
months ended June 30, 2008. In June 2008, the company filed amended tax returns for the years 2006
and 2005, which resulted in an income tax expense reduction of $0.3 million. The 2007 effective
tax rate was impacted by certain compensation expenses being non-deductible under Section 162(m).
The Companys effective tax rate was 31.3% for the six months ended June 30, 2008 compared to
37.5% for the six months ended June 30, 2007. The lower tax rate in 2008 is primarily attributable
to the Companys utilization, during 2008, of R&D tax credits and extraterritorial income exclusion
tax deductions available for
12
years prior to December 31, 2007. In March and June 2008, the Company filed amended tax returns
for the years 2006, 2005 and 2004, which resulted in an income tax expense reduction of $1.1
million. The 2007 effective tax rate was impacted by certain compensation expenses being
non-deductible under Section 162(m).
11. SUBSEQUENT EVENTS
Strategic Alternatives Costs
The
Company incurred, through
July 28, 2008, approximately $3.8 million of costs related
to the pursuit of strategic alternatives for the Company, of which $2.5 million was incurred
during the three months ended June 30, 2008. These costs incurred prior to June 30, 2008 have been
classified as operating expenses within the Companys condensed consolidated statements of
operations for the three and six months ending June 30, 2008.
Joint Venture in Dubai
On July 7, 2008, the Company entered into a joint venture arrangement, to be effective
September 1, 2008, or such earlier date as agreed to by the parties, with Aswan International
Engineering Company LLC, or Aswan, who is a member of the Al Shirawi Group of Companies. Aswan is
located in Dubai and provides manufacturing, repair and remanufacturing of oilfield products for
customers operating in the Middle East. The joint venture, which will be named T-3 Energy
Services Aswan Middle East LLC (the Middle East Joint Venture), will be operated and controlled
by both parties in equal percentages. Under the terms of the agreement, the Company will provide
the Middle East Joint Venture with a license and technical assistance to repair, manufacture,
remanufacture and service equipment for customers in the United Arab Emirates, Kuwait, Qatar,
Bahrain, Oman, Yemen, Algeria, Egypt, Pakistan and Iraq. Aswan will provide the Middle East Joint
Venture with manufacturing space pursuant to a sublease agreement along with its competence and
experience in Dubai with respect to agency support and operations support. On the effective date
of the joint venture arrangement, the Company and Aswan will enter into a contribution agreement
whereby the Company and Aswan will each contribute certain equipment and operations capital to the
Middle East Joint Venture.
Once effective, this joint venture arrangement will replace a Know-How License and Technical
Services Agreement the Company entered into with Aswan on March 3, 2008, which currently provides
Aswan with technical know-how in order to repair, manufacture and remanufacture the Companys
licensed products in the United Arab Emirates, or UAE, along with the ability to re-supply the
Companys licensed products to the combined customer base located throughout the Middle East.
New Chief Financial Officer
On July 1, 2008, the Company and James M. Mitchell, the Companys Senior Vice President and
Chief Financial Officer, entered into an Employment Agreement (the Agreement). The Agreement has
a two year term commencing on July 1, 2008. The Agreement provides for an annual base salary and
an annual bonus based on the achievement of performance goals to be established annually by the
Compensation Committee of the Companys Board of Directors. The annual bonus payable, if any,
shall be pro-rated from July 1, 2008 for the 2008 fiscal year. In addition, on July 1, 2008 the
Company granted Mr. Mitchell 10,000 shares of the Companys restricted common stock pursuant to a
Restricted Stock Award Agreement. The restricted stock award will vest in one-third increments
over three years on the first anniversary of its grant date, provided that Mr. Mitchell remains
employed with the Company through these vesting dates. The Agreement contains standard
confidentiality covenants with respect to the Companys trade secrets and non-competition and
non-solicitation covenants until the later of the first anniversary of the date of termination or
resignation or such time as Mr. Mitchell no longer receives any payments under the Agreement. If
Mr. Mitchell is terminated for any reason other than due to death, disability or cause (as defined
in the Agreement), the Company is required to pay Mr. Mitchell an amount equal to two times his
annual base pay and a single bonus payment, equal to the average annual bonus pay for the prior two
fiscal years of employment, and all restricted stock grants will be fully vested. If Mr. Mitchell
has not been employed by the Company for two full fiscal years prior to his termination of
employment, the bonus payment shall be equal to fifty percent (50%) of the bonus paid, if any, for
the prior fiscal year ending immediately prior to his termination of employment.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The following discussion and analysis of our historical results of operations and financial
condition for the three and six months ended June 30, 2008 and 2007 should be read in conjunction
with the condensed consolidated financial statements and related notes included elsewhere in this
Form 10-Q and our financial statements and related managements discussion and analysis of
financial condition and results of operations included in our Annual Report on Form 10-K for the
year ended December 31, 2007.
We operate under one reporting segment, pressure control. Our pressure control business has
three product lines: pressure and flow control, wellhead and pipeline, which generated 72%, 15% and
13% of our total revenues, respectively, for the three months ended June 30, 2008, and 73%, 14% and
13% of our total revenues, respectively, for the six months ended June 30, 2008. We offer
original equipment products, which we define as products that we design or manufacture, and
aftermarket parts and services for each product line. Aftermarket parts and services include all
remanufactured products and parts, repair and field services. Original equipment products
generated 79% and 80% and aftermarket parts and services generated 21% and 20% of our total
revenues for the three and six months ended June 30, 2008, respectively.
Recent Developments
Strategic Alternatives Costs
We incurred,
through July 28, 2008, approximately $3.8 million of costs related to the
pursuit of strategic alternatives, of which $2.5 million was incurred during the three months ended
June 30, 2008. These costs incurred prior to June 30, 2008 have been classified as operating
expenses within our condensed consolidated statements of operations for the three and six months
ending June 30, 2008.
Joint Venture in Dubai
On July 7, 2008, we entered into a joint venture arrangement, to be effective September 1,
2008, or such earlier date as agreed to by the parties, with Aswan International Engineering
Company LLC, or Aswan, who is a member of the Al Shirawi Group of Companies. Aswan is located in
Dubai and provides manufacturing, repair and remanufacturing of oilfield products for customers
operating in the Middle East. The joint venture, which will be named T-3 Energy Services Aswan
Middle East LLC (the Middle East Joint Venture), will be operated and controlled by both parties
in equal percentages. Under the terms of the agreement, we will provide the Middle East Joint
Venture with a license and technical assistance to repair, manufacture, remanufacture and service
equipment for customers in the United Arab Emirates, Kuwait, Qatar, Bahrain, Oman, Yemen, Algeria,
Egypt, Pakistan and Iraq. Aswan will provide the Middle East Joint Venture with manufacturing
space pursuant to a sublease agreement along with its competence and experience in Dubai with
respect to agency support and operations support. On the effective date of the joint venture
arrangement, T-3 Energy and Aswan will enter into a contribution agreement whereby T-3 Energy and
Aswan will each contribute certain equipment and operations capital to the Middle East Joint
Venture.
Once effective, this joint venture arrangement will replace a Know-How License and Technical
Services Agreement we entered into with Aswan on March 3, 2008, which currently provides Aswan with
technical know-how in order to repair, manufacture and remanufacture our licensed products in the
United Arab Emirates, or UAE, along with the ability to re-supply our licensed products to the
combined customer base located throughout the Middle East.
New Chief Financial Officer
On July 1, 2008, we entered into an Employment Agreement (the Agreement) with James M.
Mitchell, the Companys Senior Vice President and Chief Financial Officer. The Agreement has a two
year term commencing
14
on July 1, 2008. The Agreement provides for an annual base salary and an annual bonus based on the
achievement of performance goals to be established annually by the Compensation Committee of our
Board of Directors. The annual bonus payable, if any, shall be pro-rated from July 1, 2008 for the
2008 fiscal year. In addition, on July 1, 2008 we granted Mr. Mitchell 10,000 shares of our
restricted common stock pursuant to a Restricted Stock Award Agreement. The restricted stock award
will vest in one-third increments over three years on the first anniversary of its grant date,
provided that Mr. Mitchell remains employed with us through these vesting dates. The Agreement
contains standard confidentiality covenants with respect to our trade secrets and non-competition
and non-solicitation covenants until the later of the first anniversary of the date of termination
or resignation or such time as Mr. Mitchell no longer receives any payments under the Agreement.
If Mr. Mitchell is terminated for any reason other than due to death, disability or cause (as
defined in the Agreement), we are required to pay Mr. Mitchell an amount equal to two times his
annual base pay and a single bonus payment, equal to the average annual bonus pay for the prior two
fiscal years of employment, and all restricted stock grants will be fully vested. If Mr. Mitchell
has not been employed by us for two full fiscal years prior to his termination of employment, the
bonus payment shall be equal to fifty percent (50%) of the bonus paid, if any, for the prior fiscal
year ending immediately prior to his termination of employment.
Purchase of India Assets
On May 29, 2008, we exercised the option to purchase certain complementary assets of the India
manufacturing operations of HP&T Products, Inc., or HP&T, by making a deposit of $0.4 million that
is an estimate of the fair market valuation of the assets. The final fair market valuation of the
assets to be purchased will be determined during the third quarter of 2008, at which time we will
either make a further nominal payment or be entitled to a return of deposited monies. This option
was granted with the purchase of HP&T on October 29, 2007, and allowed us 270 days in which to
exercise this option. We intend to utilize these assets in the formation of a subsidiary in India
and expect the formation of this subsidiary to be completed during the second half of 2008.
Strategy
Our strategy is to better position ourselves to capitalize on increased domestic and
international drilling activity in the oil and gas industry. We believe this increased activity
will result in additional demand for our products and services. We intend to:
|
|
|
Expand our manufacturing capacity through facility expansions and improvements
.
We have
expanded our manufacturing capacity to increase the volume and number of products we
manufacture, with an emphasis on our pressure and flow control product line. This organic
expansion effort has included increasing our BOP manufacturing capacity from ten to
twenty-five units per month by upgrading and expanding our machining capabilities at our
existing facilities and expansion into Grand Junction, Colorado and Conway, Arkansas during
2007. During 2008, we will continue to expand capacity by:
|
|
|
|
completing the expansion of our BOP repair capacity from 7 stacks per month to 11
stacks per month;
|
|
|
|
|
creating an India-based manufacturing subsidiary during the second half of 2008;
|
|
|
|
|
opening additional facilities for our wellhead product line; and
|
|
|
|
|
opening additional facilities for our pipeline product line.
|
|
|
|
Continue new product development
.
Since April 2003, we have introduced 115 new
products, and we will continue to focus on new product development across all of our
product lines, with a continued focus on pressure and flow control products and more
recently on wellhead products. In particular, during 2007 we added a subsea line of
products to our traditional surface drilling products by introducing our T-3 Diamond Series
Model 6012 Subsea Double Ram BOP fitted with subsea compact tandem booster bonnets and
casing shear bonnets. In addition, during 2007 we received commitments
|
15
|
|
|
for our new stainless steel dual block wellhead system incorporating our new Diamond Series
production gate valve technology, our new under-balanced drilling deployment valve wellhead
system, and a conventional wellhead system that also incorporates our new Diamond Series
production gate valves.
|
|
|
|
|
Expand our geographic areas of operation
.
We intend to expand our geographic areas of
operation, with particular focus on field services for our wellhead and pipeline product
lines. We are expanding our wellhead and pipeline repair and remanufacturing services by
establishing facilities in areas we believe will have high drilling activity, such as the
Barnett Shale in North Texas, the Cotton Valley trend in the East Texas Basin, the
Fayetteville Shale in the Arkoma Basin, the Marcellus Shale in the Appalachian region and
the Rocky Mountain region. For example, in January 2008 we expanded into the Oklahoma
region by acquiring Pinnacle Wellhead, Inc., or Pinnacle. During 2007, we continued our
expansion into the Rocky Mountain region by opening a facility in Grand Junction, Colorado
and we established a presence in the Arkoma Basin by opening a facility in Conway,
Arkansas.
|
|
|
|
|
Pursue strategic acquisitions and alliances
.
Our acquisition strategy will focus on
broadening our markets and existing product offerings. As noted above, in July 2008, we
entered into a joint venture arrangement, to be effective September 1, 2008 or such earlier
date as agreed to by the parties, with Aswan in the Middle East to repair, manufacture,
remanufacture and service equipment for customers in the UAE, Kuwait, Qatar, Bahrain, Oman,
Yemen, Algeria, Egypt, Pakistan and Iraq. In January 2008, we acquired Pinnacle, located
in Oklahoma City, Oklahoma to expand our wellhead products and services into a
strategically identified market that already has existing operations, work force and
customer relationships. In October 2007, we acquired Energy Equipment Corporation, or EEC,
and HP&T, both of which are located in Houston, Texas, to enhance our ability to continue
to develop and introduce innovative and industry-leading technologies within our pressure
and flow control product line. We will continue to seek similar strategic acquisition and
alliance opportunities in the future.
|
How We Generate Our Revenue
We design, manufacture, repair and service products used in the drilling and completion of new
oil and gas wells, the workover of existing wells, and the production and transportation of oil and
gas. Our products are used in onshore, offshore and subsea applications. Our customer base, which
operates in active oil and gas basins throughout the world, consists of leading drilling
contractors, exploration and production companies and pipeline companies.
We have three product lines: pressure and flow control, wellhead and pipeline. Within each of
those product lines, we sell original equipment products and also provide aftermarket parts and
services. Original equipment products are those we manufacture or have manufactured for us by
others who use our product designs. Aftermarket products and services include all remanufactured
products and parts and repair and field services.
Demand for our pressure and flow control and wellhead products and services is driven by
exploration and development activity levels, which in turn are directly related to current and
anticipated oil and gas prices. Demand for our pipeline products and services is driven by
maintenance, repair and construction activities for pipeline, gathering and transmission systems.
We typically bid for original equipment product sales and repair work. Field service work is
offered at a fixed rate plus expenses.
How We Evaluate Our Operations
Our management uses the following financial and operational measurements to analyze the
performance of our business:
|
|
|
revenue and facility output;
|
|
|
|
|
material and labor expenses as a percentage of revenue;
|
16
|
|
|
selling, general and administrative expenses as a percentage of revenue;
|
|
|
|
|
EBITDA;
|
|
|
|
|
Return on capital employed;
|
|
|
|
|
financial and operational models; and
|
|
|
|
|
other measures of performance.
|
Revenue and Facility Output.
We monitor our revenue and facility output and analyze trends to
determine the relative performance of each of our facilities. Our analysis enables us to more
efficiently operate our facilities and determine if we need to refine our processes and procedures
at any one location to improve operational efficiency.
Material and Labor Expenses as a Percentage of Revenue.
Material and labor expenses are
composed primarily of cost of materials, labor costs and the indirect costs associated with our
products and services. Our material costs primarily include the cost of inventory consumed in the
manufacturing and remanufacturing of our products and in providing repair services. We attempt
where possible to pass increases in our material costs on to our customers. However, due to the
timing of our marketing and bidding cycles, there generally is a delay of several weeks or months
from the time that we incur an actual price increase until the time that we can pass on that
increase to our customers.
Our labor costs consist primarily of wages at our facilities. As a result of increased
activity in the oil and gas industry, there have been recent shortages of qualified personnel. We
may have to raise wage rates to attract workers to expand our current work force.
Selling, General and Administrative Expenses as a Percentage of Revenue.
Our selling, general
and administrative, or SG&A, expenses include administrative and marketing costs, the costs of
employee compensation and related benefits, office and lease expenses, insurance costs and
professional fees, as well as other costs and expenses not directly related to our operations. Our
management continually evaluates the level of our SG&A expenses in relation to our revenue because
these expenses have a direct impact on our profitability.
EBITDA.
We define EBITDA as income (loss) from continuing operations before interest expense,
net of interest income, provision for income taxes and depreciation and amortization expense. Our
management uses EBITDA:
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as a measure of operating performance that assists us in comparing our performance
on a consistent basis because it removes the impact of our capital structure and asset
base from our operating results;
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as a measure for budgeting and for evaluating actual results against our budgets;
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to assess compliance with financial ratios and covenants included in our senior
credit facility;
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in communications with lenders concerning our financial performance; and
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to evaluate the viability of potential acquisitions and overall rates of return.
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Return on Capital Employed.
We define Return on Capital Employed as income from operations
divided by Capital Employed (defined as total stockholders equity plus debt less cash). Our
management uses this criterion to measure our ability to achieve the income results targeted by our
Annual Business Plan while also managing our capital employed. Our Compensation Committee also
uses this metric as a performance criteria in determining annual incentive bonus awards for our
executive officers. This measure points to the efficiency of our earnings.
Financial and Operational Models.
We couple our evaluation of financial data with performance
data that tracks financial losses due to safety incidents, product warranty and quality control;
customer satisfaction; employee productivity; and management system compliance. We collect the
information in a proprietary
17
statistical tracking program that automatically compiles and statistically analyzes real-time
trends. This information helps us ensure that each of our facilities improves with respect to
customer and market demands.
Loss Management
.
We incur operational losses from employee injuries, product warranty claims
and quality control costs. We track both incident rates and costs. We also track quality control
and warranty expenses through specialized software. All direct expenses incurred due to warranty,
quality control and safety incidents are statistically analyzed as a percentage of sales.
Customer Satisfaction.
We monitor our customers level of satisfaction regarding our
delivery, product quality, and service through customer surveys and other data collection methods.
We statistically compile all information collected from the customer satisfaction assessments to
track annual performance. All customer complaints are processed through a corrective action
program.
Employee Productivity
.
We provide each of our facilities with a benchmark under which its
employees are evaluated through a collection of practical examinations, written examinations,
presentations and in-house training videos. As the collected information is evaluated, we identify
deficiencies and take corrective actions.
Management System Compliance
.
We currently use four management programs designed to
consistently manage all aspects of our operations at each facility, while providing useful tools to
limit operational liabilities and improve profitability. These programs incorporate various
performance standards that are useful in the evaluation of operational performance in the pursuit
of continual improvement. We evaluate compliance with the standards set forth in those programs
several times a year through a combination of customer audits, third party audits and internal
audits. We then evaluate each facilitys compliance with the standards, analyze all deficiencies
identified and take corrective actions. We use corrective actions at each facility to implement
preventative action at the remaining facilities.
How We Manage Our Operations
Our management team uses a variety of tools to monitor and manage our operations, including:
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safety and environmental management systems;
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quality management systems;
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statistical tracking systems; and
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inventory turnover rates.
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Safety and Environmental Management Systems.
Our Safety Management System, or SMS, monitors
our training program as it relates to OSHA compliance. Through a collection of regulatory audits
and internal audits, we can evaluate each facilitys compliance with regulatory requirements and
take corrective actions necessary to ensure compliance.
We also use our SMS to ensure that we conduct employee training on a regular basis. We manage
several employee qualification programs from our SMS to ensure that our employees perform their
duties as safely as possible. We evaluate all employees individually with respect to their safety
performance, and we incorporate these evaluations into all annual employee reviews.
Similar to the SMS, our Environmental Management System monitors compliance with environmental
laws. We continually evaluate each of our facilities against collected data to identify possible
deficiencies.
Quality Management Systems.
We manage all manufacturing processes, employee certification
programs, and inspection activities through our certified Quality Management System, or QMS. Our
electronic QMS is based on several different industrial standards and is coupled with performance
models to ensure continual monitoring and improvement. To date our QMS has been certified by the
National Board of Boiler and Pressure Vessel Inspectors (NBIC), the American Petroleum Institute
(API), and QMI Management Systems ISO 9001 Registrars. As such, we maintain a quality management system ISO 9001 2000 license, a
NBIC VR license for repair of pressure relief valves, and several API licenses including API 6A,
6D, 16A, 16C,
18
16D, & 17D. Each facility has a quality management team that is charged with assuring that
day-to-day operations are conducted consistently and within the protocols outlined with the
corporate QMS. To ensure that all QMS elements are operating as designed and to provide an
additional level of support at each facility, we have assigned a Quality Manager at each facility
who monitors individual facility performance and helps manage critical operations.
Statistical Tracking Systems.
We have developed a statistical tracking program that assists in
the real time compilation of data from each facility and then automatically assesses the data
through various data analysis tools. We provide facility managers and operational executives with
summary reports, providing information about their performance and how it compares to industrial
and internal benchmarks.
Inventory Turnover Rates
.
The cost of our material inventory represents a significant portion
of our cost of revenue from our product lines. As a result, maintaining an optimum level of
inventory at each of our facilities is an important factor in managing our operations. We
continually monitor the inventory turnover rates for each of our product lines and adjust the
frequency of inventory orders as appropriate to maintain the optimum level of inventory based on
activity level for each product line.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make certain estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Our estimation process generally relates to potential bad debts, obsolete and slow moving
inventory, and the valuation of long-lived and intangible assets. Our estimates are based on
historical experience and on our future expectations that we believe to be reasonable under the
circumstances. The combination of these factors results in the amounts shown as carrying values of
assets and liabilities in the financial statements and accompanying notes. Actual results could
differ from our current estimates and those differences may be material.
These estimates may change as events occur, as additional information is obtained and as our
operating environment changes. There have been no material changes or developments in our
evaluation of the accounting estimates and the underlying assumptions or methodologies that we
believe to be Critical Accounting Policies and Estimates from those as disclosed in our Annual
Report on Form 10-K for the year ending December 31, 2007.
New Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other
accounting pronouncements that require or permit fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
for interim periods within those fiscal years. We adopted the provisions of SFAS No. 157 on January
1, 2008. The adoption of SFAS No. 157 did not have any impact on our consolidated financial
position, results of operations and cash flows.
In December 2007, the FASB issued Statement No. 141R,
Business Combinations
(SFAS No. 141R),
which changes the requirements for an acquirers recognition and measurement of the assets acquired
and the liabilities assumed in a business combination. SFAS No. 141R is effective for annual
periods beginning after December 15, 2008 and should be applied prospectively for all business
combinations entered into after the date of adoption. We are
currently evaluating the impact that SFAS No. 141R will have on
our consolidated financial position, results of operations and cash
flows.
Outlook
Changes in the current and expected future prices of oil and gas influence the level of energy
industry spending. Changes in spending result in an increase or decrease in demand for our
products and services. Therefore, our results are dependant on, among other things, the level of
worldwide oil and gas drilling activity,
19
and our customers perceptions of what will happen to those levels in the future. This affects
cash flows of and capital spending by other oilfield service companies and drilling contractors and
pipeline maintenance activity. We believe that oil and gas market prices and the drilling rig
count in the United States, Canada and international markets serve as key indicators of demand for
the products we manufacture and sell and for our services. The following table sets forth oil and
gas price information and rig count data as of the end of each fiscal quarter for the past two
years:
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WTI
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Henry Hub
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United States
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Canada
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International
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Quarter Ended:
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Oil
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Gas
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Rig Count
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Rig Count
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Rig Count
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June 30, 2006
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$
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70.41
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$
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6.65
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1,632
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282
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913
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September 30, 2006
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$
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70.42
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$
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6.17
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1,719
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494
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941
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December 31, 2006
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$
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59.98
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$
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7.24
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1,719
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440
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952
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March 31, 2007
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$
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58.08
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$
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7.17
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1,733
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532
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982
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June 30, 2007
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$
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64.97
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$
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7.66
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1,757
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139
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1,002
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September 30, 2007
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$
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75.46
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$
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6.25
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1,788
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348
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1,020
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December 31, 2007
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$
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90.68
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$
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7.40
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1,790
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356
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1,017
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March 31, 2008
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$
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97.94
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$
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8.72
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1,770
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507
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1,046
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June 30, 2008
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$
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126.35
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$
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11.47
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1,868
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199
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1,084
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Source: West Texas Intermediate Crude Average Spot Price for the Quarter indicated: Department of
Energy, Energy Information Administration (
www.eia.doe.gov
); NYMEX Henry Hub Natural Gas Average
Spot Price for the Quarter indicated: (www.oilnergy.com); Average rig count for the Quarter
indicated: Baker Hughes, Inc. (
www.bakerhughes.com
).
We believe our outlook for the remainder of 2008 is favorable, as overall activity in the
markets in which we operate is expected to remain high and our backlog, especially for our pressure
and flow control product line, continues to remain constant. Assuming commodity prices remain at
or near current levels or increase, we expect that our original equipment products sales to be
higher than our 2007 levels due to our product acceptance by the industry, new product
introductions (such as our subsea BOP and new wellhead systems), significant capital and
geographical expansions and continued rapid response time to customers. We also expect that the
continued high levels of drilling activity in the United States and the increased demand for our
products to be shipped internationally will result in consistent levels of backlog. However, we
believe that backlog volumes may fluctuate due to growing international sales. International
orders tend to be more complex due to several factors including financing, legal arrangements,
agent structures, engineering demands and delivery logistics. We also cannot be certain that
commodity prices will remain at high levels and our results will also be dependent on the pace and
level of activities in the markets that we serve. Please read Item 1A. Risk FactorsOur business
depends on spending by the oil and gas industry, and this spending and our business may be
adversely affected by industry conditions that are beyond our control and A decline in or
substantial volatility of oil and gas prices could adversely affect the demand and prices for our
products and services.
During the second half of 2008, we expect that our recent acquisitions of Pinnacle, EEC and
HP&T, as well as our increased manufacturing capacity gained through our facility expansions, will
have a positive effect on our revenues. Additionally, we plan to continue to increase our
manufacturing capacity through facility expansions and operational improvements, selected
geographical expansions and the continued introduction of new products being developed by our
engineering group, which has more than doubled in size since mid 2005. We believe that our
expansion efforts will allow us to continue to improve our response time to customer demands and
enable us to continue to build market share.
20
Results of Operations
Three Months ended June 30, 2008 Compared with Three Months ended June 30, 2007
Revenues.
Revenues increased $15.8 million, or 30.3%, in the three months ended June 30, 2008
compared to the three months ended June 30, 2007. Our revenues
increased primarily due to the acquisition and integration of recent
transactions. These transactions include EEC, which was completed in
October 2007, and Pinnacle, which was completed in
January 2008. Revenues also increased due to the continued
demand for our pressure and flow control and pipeline original
equipment products and services. This increase
was partially offset by decreased sales for our wellhead product line and continued weakness
in our Canadian pressure and flow control operations. We believe that our T-3 branded pressure and
flow control and pipeline products have gained market acceptance, resulting in greater bookings and
sales to customers that use our products in both their domestic and international operations. For
example, backlog for our pressure and flow control and pipeline product lines has increased
approximately 30.6% from $61.8 million at June 30, 2007 to $80.7 million at June 30, 2008. Also,
as a percentage of revenues, our original equipment product revenues accounted for approximately
79% of total revenues during the three months ended June 30, 2008, as compared to 74% of total
revenues during the same period in 2007.
Cost of Revenues.
Cost of revenues increased $8.6 million, or 26.7%, in the three months ended
June 30, 2008 compared to the three months ended June 30, 2007, primarily as a result of the
increase in revenues described above. Gross profit as a percentage of revenues was 40.0% in the
three months ended June 30, 2008 compared to 38.3% in the three months ended June 30, 2007. Gross
profit margin was higher in 2008 primarily due to increased sales of higher margin products and
services and operational efficiencies.
Operating Expenses.
Operating expenses increased $3.8 million, or 32.0%, in the three months
ended June 30, 2008 compared to the three months ended June 30, 2007. The acquisitions of EEC,
HP&T and Pinnacle accounted for $1.8 million, or 48.1%, of this total operating expense increase.
Operating expenses for the three months ended June 30, 2008 included $2.5 million of costs related
to the pursuit of strategic alternatives. Operating expenses for the three months ended June 30,
2007 included a $2.5 million compensation charge related to the payment to Mr. Halas of the $1.6
million change of control payment and the immediate vesting of previously unvested stock options
and restricted stock held by Mr. Halas pursuant to the terms of his then existing employment
agreement. Operating expenses, excluding the strategic alternatives costs in 2008 and the
compensation charge in 2007, as a percentage of revenues were 19.7% and 18.2% in the three months
ended June 30, 2008 and 2007, respectively. The increase in operating expenses as a percentage of
revenues, excluding the strategic alternatives costs and compensation charge, as compared to the
three months ended June 30, 2007 is primarily due to increased other intangible assets amortization
costs incurred as a result of the October 2007 acquisitions of EEC and HP&T, as well as increased
employee stock-based compensation expense, health insurance and legal costs.
Interest Expense.
Interest expense for the three months ended June 30, 2008 was $0.6 million
compared to $0.1 million in the three months ended June 30, 2007. The increase was attributable to
higher debt levels during 2008, primarily incurred in conjunction with our 2007 acquisitions of EEC
and HP&T and our 2008 acquisition of Pinnacle.
Income Taxes.
Income tax expense for the three months ended June 30, 2008 was $3.6 million as
compared to $3.3 million in the three months ended June 30, 2007. The increase was primarily due
to an increase in income before taxes. Our effective tax rate was 32.2% in the three months ended
June 30, 2008 compared to 38.0% in the three months ended June 30, 2007. The lower tax rate in
2008 is primarily attributable to the utilization of research and development, or R&D, tax credits
during the three months ended June 30, 2008. In June 2008, we filed amended tax returns for the
years 2006 and 2005, which resulted in an income tax expense reduction of $0.3 million. The 2007
effective tax rate was impacted by certain compensation expenses being non-deductible under Section
162(m).
Income from Continuing Operations.
Income from continuing operations was $7.5 million in the
three months ended June 30, 2008 compared with $5.3 million in the three months ended June 30, 2007
as a result of
the foregoing factors.
21
Discontinued Operations
.
During 2004 and 2005, we sold substantially all of the assets of our
products and distribution segments, respectively. These assets constituted businesses and thus
their results of operations are reported as discontinued operations for all periods presented.
Loss from discontinued operations, net of tax for the three months ended June 30, 2008, was not
significant. Loss from discontinued operations, net of tax for the three months ended June 30,
2007 was $1.1 million as a result of a jury verdict against one of the Companys discontinued
businesses. See further discussion in Note 7 to our condensed consolidated financial statements.
Six Months ended June 30, 2008 Compared with Six Months ended June 30, 2007
Revenues.
Revenues increased $37.0 million, or 37.1%, in the six months ended June 30, 2008
compared to the six months ended June 30, 2007. Our revenues
increased primarily due to the acquisition and integration of recent
transactions. These transactions include EEC, which was completed in
October 2007, and Pinnacle, which was completed in
January 2008. Revenues also increased due to increased customer orders at higher prices attributable to improved demand for our products and
services resulting from higher levels of construction of new drilling rigs and refurbishment of
existing drilling rigs that require the type of equipment we
manufacture, increased customer orders for our pipeline and wellhead
product lines due to geographic expansion and an increase in the
number of original equipment products we manufacture and the increase in our
manufacturing capacity through other facility expansions and improvements. We believe that our T-3 branded pressure and flow control and pipeline products have
gained market acceptance, resulting in greater bookings and sales to customers that use our
products in both their domestic and international operations. For example, backlog for our
pressure and flow control and pipeline product lines has increased approximately 30.6% from $61.8
million at June 30, 2007 to $80.7 million at June 30, 2008. T-3 original equipment product
revenues (excluding EEC and Pinnacle revenues) increased approximately 6.6% in the six months ended
June 30, 2008 as compared to the six months ended June 30, 2007. In addition, our original
equipment product revenues accounted for approximately 80% of total revenues during the six months
ended June 30, 2008, as compared to 74% of total revenues during the same period in 2007. These
revenue increases are partially offset by weaker activity for our Canadian operations.
Cost of Revenues.
Cost of revenues increased $20.0 million, or 32.0%, in the six months ended
June 30, 2008 compared to the six months ended June 30, 2007, primarily as a result of the increase
in revenues described above. Gross profit as a percentage of revenues was 39.6% in the six months
ended June 30, 2008 compared to 37.3% in the six months ended June 30, 2007. Gross profit margin
was higher in 2008 primarily due to increased sales of higher margin products and services and
operational efficiencies.
Operating Expenses.
Operating expenses increased $8.1 million, or 39.6%, in the six months
ended June 30, 2008 compared to the six months ended June 30, 2007. The acquisitions of EEC, HP&T
and Pinnacle accounted for $3.9 million, or 48.3%, of this total operating expense increase.
Operating expenses for the six months ended June 30, 2008 included $2.5 million of costs incurred
related to the pursuit of strategic alternatives. Operating expenses for the six months ended June
30, 2007 included a $2.5 million compensation charge related to the payment to Mr. Halas of the
$1.6 million change of control payment and the immediate vesting of previously unvested stock
options and restricted stock held by Mr. Halas pursuant to the terms of his then existing
employment agreement. Operating expenses, excluding the strategic alternatives costs in 2008 and
the compensation charge in 2007, as a percentage of revenues were 19.0% and 18.0% in the six months
ended June 30, 2008 and 2007, respectively. The increase in operating expenses as a percentage of
revenues, excluding the strategic alternatives costs and compensation charge, as compared to the
six months ended June 30, 2007, is primarily due to increased other intangible assets amortization
costs incurred as a result of the October 2007 acquisitions of EEC and HP&T, as well as increased
employee stock-based compensation expense and health insurance costs.
Interest Expense.
Interest expense for the six months ended June 30, 2008 was $1.5 million
compared to $0.3 million in the six months ended June 30, 2007. The increase was attributable to
higher debt levels during 2008, primarily incurred in conjunction with our 2007 acquisitions of EEC
and HP&T and our 2008 acquisition of Pinnacle.
22
Income Taxes.
Income tax expense for the six months ended June 30, 2008 was $7.8 million as
compared to $6.5 million in the six months ended June 30, 2007. The increase was primarily due to
an increase in income before taxes. Our effective tax rate was 31.3% in the six months ended June
30, 2008 compared to 37.5% in the six months ended June 30, 2007. The lower tax rate in 2008 is
primarily attributable to our utilization of R&D tax credits as well as extraterritorial income
exclusion tax deductions available for years prior to December 31, 2007 during the 2008 period. In
March and June 2008, we filed amended tax returns for the years 2006, 2005 and 2004, which resulted
in an income tax expense reduction of $1.1 million. The 2007 effective tax rate was impacted by
certain compensation expenses being non-deductible under Section 162(m).
Income from Continuing Operations.
Income from continuing operations was $17.0 million in the
six months ended June 30, 2008 compared with $10.8 million in the six months ended June 30, 2007 as
a result of the foregoing factors.
Discontinued Operations
.
During 2004 and 2005, we sold substantially all of the assets of our
products and distribution segments, respectively. These assets constituted businesses and thus
their results of operations are reported as discontinued operations for all periods presented.
Loss from discontinued operations, net of tax for the six months ended June 30, 2008, was not
significant. Loss from discontinued operations, net of tax for the six months ended June 30, 2007
was $1.1 million as a result of a jury verdict during the second quarter of 2007 against one of the
Companys discontinued businesses. See further discussion in Note 7 to our condensed consolidated
financial statements.
Liquidity and Capital Resources
At June 30, 2008, we had working capital of $73.0 million, current maturities of long-term
debt of $74,000, long-term debt (net of current maturities) of $39.0 million and stockholders
equity of $214.5 million. Historically, our principal liquidity requirements and uses of cash have
been for debt service, capital expenditures, working capital and acquisition financing, and our
principal sources of liquidity and cash have been from cash flows from operations, borrowings under
our senior credit facility and issuances of equity securities. We have historically financed
acquisitions through bank borrowings, sales of equity, debt from sellers and cash flows from
operations.
Net Cash Provided by Operating Activities.
Net cash provided by operating activities was $23.4
million for the six months ended June 30, 2008 compared to $3.4 million for the six months ended
June 30, 2007. The increase in net cash provided by operating activities was primarily
attributable to increased profit and improved accounts receivable collections and inventory turns,
as well as increased customer prepayments for our products, as compared to the first six months of
2007.
Net Cash Used In Investing Activities.
Principal uses of cash are for capital expenditures and
acquisitions. For the six months ended June 30, 2008 and 2007, we made capital expenditures of
approximately $5.6 million and $2.2 million, respectively. Cash consideration paid for business
acquisitions was $2.7 million in the six months ended June 30, 2008 (see Note 2 to our condensed
consolidated financial statements). There were no acquisitions in the six months ended June 30,
2007.
Net Cash Provided by (Used in) Financing Activities.
Sources of cash from financing activities
primarily include proceeds from issuances of common stock, proceeds from the exercise of warrants
and stock options, and borrowings under our senior credit facility. Principal uses of cash include
payments on our senior credit facility. Financing activities used net cash of ($17.8) million for
the six months ended June 30, 2008 as compared to net cash of $27.4 million provided in the six
months ended June 30, 2007. We made net repayments under our swing line credit facility of $3.4
million and $85,000 during the six months ended June 30, 2008 and 2007, respectively. We repaid
$19.0 million on our revolving credit facility and $93,000 on long-term debt during the six months
ended June 30, 2008. We received net proceeds of $22.2 million from the common stock issued and
$4.0 million from the warrants exercised in connection with the April 2007 offering (see Note 12 of
the Companys consolidated financial statements included in its Annual Report on Form 10-K for the
year ended December 31, 2007) during the six months ended June 30, 2007. We had proceeds from the
exercise of
23
stock options of $3.1 million and $0.8 million during the six months ended June 30, 2008 and 2007,
respectively. We had excess tax benefits from stock-based compensation of $1.7 million and $0.4
million during the six months ended June 30, 2008 and 2007, respectively.
Principal Debt Instruments.
As of June 30, 2008, we had an aggregate of $39.0 million borrowed
under our senior credit facility. As of June 30, 2008, availability under our senior credit
facility was $140.5 million.
Our senior credit facility provides for a $180 million revolving line of credit, maturing
October 26, 2012, that we can increase by up to $70 million (not to exceed a total commitment of
$250 million) with the approval of the senior lenders. As of June 30, 2008, we had $39.0 million
borrowed under our senior credit facility. The senior credit facility consists of a U.S. revolving
credit facility that includes a swing line subfacility and letter of credit subfacility up to $25
million and $50 million, respectively. We expect to use the proceeds from any advances made
pursuant to the senior credit facility for working capital purposes, for capital expenditures, to
fund acquisitions and for general corporate purposes. The applicable interest rate of the senior
credit facility is governed by our leverage ratio and ranges from the Base Rate (as defined in the
senior credit facility) to the Base Rate plus 1.25% or LIBOR plus 1.00% to LIBOR plus 2.25%. We
have the option to choose between Base Rate and LIBOR when borrowing under the revolver portion of
our senior credit facility, whereas any borrowings under the swing line portion of our senior
credit facility are made using prime. At June 30, 2008, the swing line portion of our senior
credit facility bore interest at 5.0%, with interest payable quarterly, and the revolver portion of
our credit facility bore interest at 3.5%, with interest payable monthly. The effective interest
rate of our senior credit facility, including amortization of deferred loan costs, was 6.6% during
the first six months of 2008. The effective interest rate, excluding amortization of deferred loan
costs, was 5.9% during the first six months of 2008. We are required to prepay the senior credit
facility under certain circumstances with the net cash proceeds of certain asset sales, insurance
proceeds and equity issuances subject to certain conditions. The senior credit facility also
limits our ability to secure additional forms of debt, with the exception of secured debt
(including capital leases) with a principal amount not exceeding 10% of our consolidated net worth
at any time. The senior credit facility provides, among other covenants and restrictions, that we
comply with the following financial covenants: a minimum interest coverage ratio, a maximum
leverage ratio and a limitation on capital expenditures. As of June 30, 2008, we were in
compliance with the covenants under the senior credit facility. The senior credit facility is
collateralized by substantially all of our assets.
Our senior credit facility also provides for a separate Canadian revolving credit facility,
which includes a swing line subfacility of up to U.S. $5.0 million and a letter of credit
subfacility of up to U.S. $5.0 million. The revolving credit facility matures on the same date as
the senior credit facility, and is subject to the same covenants and restrictions. The applicable
interest rate is governed by our leverage ratio and also ranges from the Base Rate to the Base Rate
plus 1.25% or LIBOR plus 1.00% to LIBOR plus 2.25%. T-3 Oilco Energy Services Partnership, our
Canadian subsidiary, may use the proceeds from any advances made pursuant to the revolving credit
facility for general corporate and working capital purposes in the ordinary course of business or
to fund Canadian acquisitions. The revolving credit facility is guaranteed by us and all of our
material subsidiaries, and is collateralized by a first lien on substantially all of the assets of
T-3 Oilco Energy Services Partnership. As of June 30, 2008, there was no outstanding balance on
our Canadian revolving credit facility.
We believe that cash generated from operations and amounts available under our senior credit
facility will be sufficient to fund existing operations, working capital needs, capital expenditure
requirements, including the planned expansion of our manufacturing capacity, continued new product
development and expansion of our geographic areas of operation, and financing obligations.
We intend to make strategic acquisitions but the timing, size or success of any strategic
acquisition and the related potential capital commitments cannot be predicted. We expect to fund
future acquisitions primarily with cash flow from operations and borrowings, including the
unborrowed portion of our senior credit facility or new debt issuances, but we may also issue
additional equity either directly or in connection with an acquisition. There can be no assurance
that acquisition funds may be available at terms acceptable to us.
24
Contractual Obligations.
A summary of our outstanding contractual obligations and other
commercial commitments at June 30, 2008 is as follows (in thousands):
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Payments Due by Period
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Less than 1
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After 5
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Contractual Obligations
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Total
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Year
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2-3 Years
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4-5 Years
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Years
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Long-term debt
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$
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39,080
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$
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74
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$
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6
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$
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39,000
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$
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Letters of credit
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540
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540
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Operating leases
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4,948
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2,110
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2,408
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424
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6
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Total contractual obligations
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$
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44,568
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$
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2,724
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$
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2,414
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$
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39,424
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$
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6
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As of June 30, 2008, our FIN 48 unrecognized tax benefits totaled $0.9 million. These
unrecognized tax benefits have been excluded from the above table because we cannot reliably
estimate the period of cash settlement with respective taxing authorities. In addition, we have
excluded $0.5 million of post-closing purchase price adjustments related to the acquisitions of EEC
and HP&T from the above table. We expect these amounts will be paid during 2008.
Off-Balance Sheet Arrangements.
We had no off-balance sheet arrangements as of June 30, 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the value of financial
instruments as a result of movements in interest rates, foreign currency exchange rates and
commodity prices.
We are exposed to some market risk due to the floating interest rate under our senior credit
facility and our Canadian revolving credit facility. As of June 30, 2008, our senior credit
facility, whose interest rate floats with the Base Rate (as defined in the senior credit facility)
or LIBOR, had a principal balance of $39.0 million. A 1.0% increase in interest rates could result
in a $390,000 increase in annual interest expense based on the June 30, 2008 outstanding principal
balance. As of June 30, 2008, our Canadian revolving credit facility did not have an outstanding
principal balance, and therefore, we did not have any exposure to rising interest rates.
We are also exposed to some market risk due to the foreign currency exchange rates related to
our Canadian operations. We conduct our Canadian business in the local currency, and thus the
effects of foreign currency fluctuations are largely mitigated because the local expenses of such
foreign operations are also denominated in the same currency. Assets and liabilities are
translated using the exchange rate in effect at the balance sheet date, resulting in translation
adjustments that are reflected as accumulated other comprehensive income in the stockholders
equity section on our condensed consolidated balance sheet. Less than 2.5% of our net assets are
impacted by changes in foreign currency in relation to the U.S. dollar. We recorded a ($0.5)
million adjustment to our equity account for the six months ended June 30, 2008 to reflect the net
impact of the change in the foreign currency exchange rate.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that material
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, or Exchange Act, is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission, or SEC, and that any material information
relating to us is recorded, processed, summarized and reported to our management including our
Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, as appropriate to allow
timely decisions regarding required disclosures. In designing and evaluating our disclosure
controls and procedures, our management recognizes that controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving desired control
objectives. In reaching a reasonable level of assurance, our management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
25
As required by Rule 13a-15(b) of the Exchange Act, our management carried out an evaluation,
with the participation of our principal executive officer (our CEO) and our principal financial
officer (our CFO), of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of
the period covered by this report. Based on those evaluations, our CEO and CFO have concluded that
our disclosure controls and procedures are effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the
quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART II
Cautionary Note Regarding Forward-Looking Statements
Certain information contained or incorporated by reference in this Quarterly Report on Form
10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934.
All statements, other than statements of historical fact included in this report, including,
but not limited to, those under Our Results of Operation and Liquidity and Capital
Resources are forward-looking statements. Statements included in this report that are not
historical facts, but that address activities, events or developments that we expect or anticipate
will or may occur in the future, including things such as references to future goals or intentions
or other such references are forward-looking statements. These statements can be identified by the
use of forward-looking terminology including may, expects, projects, believes,
anticipates, intends, plans, budgets, predicts, estimates and similar expressions.
These statements include statements related to plans for growth of our business, future capital
expenditures and competitive strengths and goals. We make these statements based on our past
experience, current expectations and projections about us and the industries in which we operate in
general, and our perception of historical trends, current conditions and expected future
developments as well as other considerations we believe are appropriate under the circumstances.
Whether actual results and developments in the future will conform to our expectations is subject
to numerous risks and uncertainties, many of which are beyond our control. Therefore, actual
outcomes and results could materially differ from what is expressed, implied or forecast in these
statements.
Cautionary statements identifying important factors that could cause actual results to differ
materially from our expectations are set forth in this report When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary statements set forth in
our Annual Report on Form 10-K for the year ended December 31, 2007 in Item 1A Risk Factors and
in Managements Discussion and Analysis of Financial Condition and Results of Operations set
forth in this report. All forward-looking statements included in this report and all subsequent
written or oral forward-looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. The forward-looking
statements speak only as of the date made, other than as required by law, and we undertake no
obligation to publicly update or revise any forward-looking statements, other than as required by
law, whether as a result of new information, future events or otherwise.
26
Item 1. Legal Proceedings
Although we may, from time to time, be involved in litigation and claims arising out of our
operations in the normal course of business, we are not currently a party to any legal proceedings
that are material to us. Please see Note 7 Commitments and Contingencies to the unaudited
condensed consolidated financial statements included in this report.
Item 1A. Risk Factors
An investment in our securities involves a high degree of risk. You should carefully consider
the risk factors described below, together with the other information included in our Annual Report
on
Form 10-K
for the year ended December 31, 2007, before you decide to invest in our securities.
These risks are the material risks of which we are currently aware; however, they may not be the
only risks that we may face. Additional risks and uncertainties not currently known to us or that
we currently view as immaterial may also impair our business. If any of these risks develop into
actual events, it could materially and adversely affect our business, financial condition, results
of operations and cash flows, the trading price of your shares could decline and you may lose all
or part of your investment.
Risks Related to Our Business
If we are unable to successfully manage our growth and implement our business plan, our results of
operations will be adversely affected.
We have experienced significant revenue growth over the past 12 months. To maintain our
advantage of delivering original equipment products and providing aftermarket services more rapidly
than our competitors, we plan to further expand our operations by adding new facilities, upgrading
existing facilities and increasing manufacturing and repair capacity. We believe our future success
depends in part on our ability to manage this expansion. The following factors could present
difficulties for us:
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inability to integrate operations between existing and new or expanded facilities;
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lack of a sufficient number of qualified technical and operating personnel;
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shortage of operating equipment and raw materials necessary to operate our expanded
business; and
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inability to manage the increased costs associated with our expansion.
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Our business depends on spending by the oil and gas industry, and this spending and our business
may be adversely affected by industry conditions that are beyond our control.
We depend on our customers willingness to make operating and capital expenditures to explore
for, develop and produce oil and gas. Industry conditions are influenced by numerous factors over
which we have no control, such as:
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the level of drilling activity;
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the level of oil and gas production;
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the demand for oil and gas related products;
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domestic and worldwide economic conditions;
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political instability in the Middle East and other oil producing regions;
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the actions of the Organization of Petroleum Exporting Countries;
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the price of foreign imports of oil and gas, including liquefied natural gas;
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27
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natural disasters or weather conditions, such as hurricanes;
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technological advances affecting energy consumption;
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the level of oil and gas inventories;
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the cost of producing oil and gas;
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the price and availability of alternative fuels;
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merger and divestiture activity among oil and gas producers; and
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governmental regulation.
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The volatility of the oil and gas industry and the consequent impact on drilling activity
could reduce the level of drilling and workover activity by some of our customers. Any such
reduction could cause a decline in the demand for our products and services.
A decline in or substantial volatility of oil and gas prices could adversely affect the demand and
prices for our products and services.
The demand for our products and services is substantially influenced by current and
anticipated oil and gas prices and the related level of drilling activity and general production
spending in the areas in which we have operations. Volatility or weakness in oil and gas prices (or
the perception that oil and gas prices will decrease) affects the spending patterns of our
customers and may result in the drilling of fewer new wells or lower production spending for
existing wells. This, in turn, could result in lower demand and prices for our products and
services.
Historical prices for oil and gas have been volatile and are expected to continue to be
volatile. For example, since 1999 through August 1, 2008, oil prices have ranged from as low as
$11.37 per barrel to as high as $145.31 per barrel and natural gas prices have ranged from as low
as $1.65 per million British thermal units, or MMBtu, to as high as $19.38 per MMBtu. This
volatility has in the past and may in the future adversely affect our business. A prolonged low
level of activity in the oil and gas industry will adversely affect the demand for our products and
services.
Our inability to deliver our backlog on time could affect our future sales and profitability and
our relationships with our customers.
At June 30, 2008, our backlog was approximately $80.7 million. The ability to meet customer
delivery schedules for this backlog is dependent on a number of factors including, but not limited
to, access to the raw materials required for production, an adequately trained and capable
workforce, project engineering expertise for certain large projects, sufficient manufacturing plant
capacity and appropriate planning and scheduling of manufacturing resources. Our failure to
deliver in accordance with customer expectations may result in damage to existing customer
relationships and result in the loss of future business. Failure to deliver backlog in accordance
with expectations could negatively impact our financial performance and thus cause adverse changes
in the market price of our outstanding common stock. In addition, the cancellation by our
customers of existing backlog orders, as a result of an economic downturn or otherwise, could
adversely affect our business.
We rely on a few key employees whose absence or loss could disrupt our operations or be adverse to
our business.
Many key responsibilities within our business have been assigned to a small number of
employees. The loss of their services, particularly the loss of our Chairman, President and Chief
Executive Officer, Gus D. Halas, and the managers of our wellhead and pipeline product lines, Alvin
Dueitt and Jimmy Ray, respectively, could be adverse to our business. Although we have employment
and non-competition agreements with Mr. Halas and some of our other key employees, as a practical
matter, those agreements will not assure the retention of our employees, and we may not be able to
enforce all of the provisions in any employment or non-competition
28
agreement. In addition, we do not maintain key person life insurance policies on any of our
employees. As a result, we are not insured against any losses resulting from the death or
disability of our key employees.
Our industry has recently experienced shortages in the availability of qualified personnel. Any
difficulty we experience replacing or adding qualified personnel could adversely affect our
business.
Our operations require the services of employees having technical training and experience in
our business. As a result, our operations depend on the continuing availability of such personnel.
Shortages of qualified personnel are occurring in our industry. If we should suffer any material
loss of personnel to competitors, or be unable to employ additional or replacement personnel with
the requisite level of training and experience, our operations could be adversely affected. A
significant increase in the wages paid by other employers could result in a reduction in our
workforce, increases in wage rates, or both.
Shortages of raw materials may restrict our operations.
The forgings, castings and outsourced coating services necessary for us to make our products
are in high demand from our competitors and from participants in other industries. There can be no
assurance that we will be able to continue to purchase these raw materials on a timely basis or at
acceptable prices. Shortages could result in increased prices that we may be unable to pass on to
customers. In addition, during periods of shortages, delivery times may be substantially longer.
Any significant delay in our obtaining raw materials would have a corresponding delay in the
manufacturing and delivery of our products. Any such delay might jeopardize our relationships with
our customers and result in a loss of future business.
We intend to expand our business through strategic acquisitions. Our acquisition strategy
exposes us to various risks, including those relating to difficulties in identifying suitable
acquisition opportunities and integrating businesses and the potential for increased leverage or
debt service requirements.
We have pursued and intend to continue to pursue strategic acquisitions of complementary
assets and businesses, such as our recent acquisitions of Pinnacle, EEC and HP&T. Acquisitions
involve numerous risks, including:
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unanticipated costs and exposure to unforeseen liabilities;
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difficulty in integrating the operations and assets of the acquired businesses;
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potential loss of key employees and customers of the acquired company;
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potential inability to properly establish and maintain effective internal controls
over an acquired company; and
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risk of entering markets in which we have limited prior experience.
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Our failure to achieve consolidation savings, to incorporate the acquired businesses and
assets into our existing operations successfully or to minimize any unforeseen operational
difficulties could have an adverse effect on our business.
In addition, we may incur indebtedness to finance future acquisitions and also may issue
equity securities in connection with such acquisitions. Debt service requirements could represent a
burden on our results of operations and financial condition and the issuance of additional equity
securities could be dilutive to our existing stockholders.
The oilfield service industry in which we operate is highly competitive, which may result in a loss
of market share or a decrease in revenue or profit margins.
Our products and services are subject to competition from a number of similarly sized or
larger businesses. Factors that affect competition include timely delivery of products and
services, reputation, price, manufacturing
29
capabilities, availability of plant capacity, performance and dependability. Any failure to
adapt to a changing competitive environment may result in a loss of market share and a decrease in
revenue and profit margins. If we cannot maintain our rapid response times, or if our competitors
are able to reduce their response times, we may lose future business. In addition, many of our
competitors have greater financial and other resources than we do, which may allow them to address
these factors more effectively than we can or weather industry downturns more easily than we can.
If we do not develop and commercialize new competitive products, our revenue may decline.
To remain competitive in the market for pressure control products and services, we must
continue to develop and commercialize new products. If we are not able to develop commercially
competitive products in a timely manner in response to industry demands, our business and revenues
will be adversely affected. Our future ability to develop new products depends on our ability to:
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design and commercially produce products that meet the needs of our customers;
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successfully market new products; and
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protect our proprietary designs from our competitors.
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We may encounter resource constraints or technical or other difficulties that could delay
introduction of new products and services. Our competitors may introduce new products before we do
and achieve a competitive advantage.
Additionally, the time and expense invested in product development may not result in
commercial products or provide revenues. Moreover, we may experience operating losses after new
products are introduced and commercialized because of high start-up costs, unexpected manufacturing
costs or problems, or lack of demand.
The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of
our goodwill.
From 2003 through 2005, we incurred goodwill impairments related to continuing and
discontinued operations totaling $29.5 million. There were no such goodwill impairments during
2006, 2007 or the first six months of 2008. As of June 30, 2008, we had approximately $112.7
million of goodwill. Our estimates of the value of our goodwill could be reduced as a result of
various factors, some of which are beyond our control.
We may be faced with product liability claims.
Most of our products are used in hazardous drilling and production applications where an
accident or a failure of a product can cause personal injury, loss of life, damage to property,
equipment or the environment or suspension of operations. Despite our quality assurance measures,
defects may occur in our products. Any defects could give rise to liability for damages, including
consequential damages, and could impair the markets acceptance of our products. We generally
attempt to contractually disclaim responsibility for consequential damages, but our disclaimers may
not be effective. We carry product liability insurance as a part of our commercial general
liability coverage of $1 million per occurrence with a $2 million general aggregate annual limit.
Additional coverage may also be available under our umbrella policy. Our insurance may not
adequately cover our costs arising from defects in our products or otherwise.
Liability to customers under warranties may materially and adversely affect our earnings.
We provide warranties as to the proper operation and conformance to specifications of the
products we manufacture. Failure of our products to operate properly or to meet specifications may
increase our costs by requiring additional engineering resources and services, replacement of parts
and equipment or monetary reimbursement to a customer. We have in the past received warranty
claims, and we expect to continue to receive them in the future. To the extent that we incur
substantial warranty claims in any period, our reputation, our ability to obtain future business
and our earnings could be adversely affected.
30
Uninsured or underinsured claims or litigation or an increase in our insurance premiums could
adversely impact our results.
We maintain insurance to cover potential claims and losses, including claims for personal
injury or death resulting from the use of our products. We carry comprehensive insurance, including
business interruption insurance, subject to deductibles, at levels we believe are sufficient to
cover existing and future claims. It is possible an unexpected judgment could be rendered against
us in cases in which we could be uninsured or underinsured and beyond the amounts we currently have
reserved or anticipate incurring. Significant increases in the cost of insurance and more
restrictive coverage may have an adverse impact on our results of operations. In addition, we may
not be able to maintain adequate insurance coverage at rates we believe are reasonable.
Our operations are subject to stringent environmental laws and regulations that may expose us to
significant costs and liabilities.
Our operations in the U.S. and abroad are subject to stringent federal, state, provincial and
local environmental laws and regulations governing the discharge of materials into the environment
and environmental protection. These laws and regulations require us to acquire permits to conduct
regulated activities, to incur capital expenditures to limit or prevent releases of materials from
our facilities, and to respond to liabilities for pollution resulting from our operations.
Governmental authorities enforce compliance with these laws and regulations and the permits issued
under them, oftentimes requiring difficult and costly actions. Failure to comply with these laws,
regulations and permits may result in the assessment of administrative, civil and criminal
penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or
preventing some or all of our operations.
There is inherent risk of incurring significant environmental costs and liabilities in our
business due to our handling of petroleum hydrocarbons and wastes, the release of air emissions or
water discharges in connection with our operations, and historical industry operations and waste
disposal practices conducted by us or our predecessors. Joint and several strict liability may be
incurred in connection with discharges or releases of petroleum hydrocarbons and wastes on, under
or from our properties and facilities, many of which have been used for industrial purposes for a
number of years, oftentimes by third parties not under our control. Private parties who use our
products and facilities where our petroleum hydrocarbons or wastes are taken for reclamation or
disposal may also have the right to pursue legal actions to enforce compliance as well as to seek
damages for non-compliance with environmental laws and regulations and for personal injury or
property damage. In addition, changes in environmental laws and regulations occur frequently, and
any such changes that result in more stringent and costly requirements could have a material
adverse effect on our business. For example, passage of climate change legislation that restricts
emissions of certain gases, commonly referred to as greenhouse gases, in areas that we conduct
business could adversely affect our operations and demand for our products. We may not be able to
recover some or any of these costs from insurance.
We will be subject to political, economic and other uncertainties as we expand our international
operations.
We intend to continue our expansion into international markets such as Mexico, Canada, Norway,
the Middle East and India. Our international operations are subject to a number of risks inherent
in any business operating in foreign countries including, but not limited to:
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political, social and economic instability;
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currency fluctuations; and
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government regulation that is beyond our control.
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Our operations have not yet been affected to any significant extent by such conditions or
events, but as our international operations expand, the exposure to these risks will increase. To
the extent we make investments in foreign facilities or receive revenues in currencies other than
U.S. dollars, the value of our assets and our income could be adversely affected by fluctuations in
the value of local currencies.
31
Risks Related to Our Common Stock
The market price of our common stock may be volatile or may decline regardless of our operating
performance.
The market price of our common stock has experienced, and may continue to experience,
substantial volatility. During the twelve-month period ended June 30, 2008, the sale prices of our
common stock on The NASDAQ Global Market has ranged from a low of $28.29 to a high of $80.28 per
share. We expect our common stock to continue to be subject to fluctuations. Broad market and
industry factors may adversely affect the market price of our common stock, regardless of our
actual operating performance. Factors that could cause fluctuation in the stock price may include,
among other things:
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actual or anticipated variations in quarterly operating results;
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announcements of technological advances by us or our competitors;
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current events affecting the political and economic environment in the United
States;
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conditions or trends in our industry, including demand for our products and
services, technological advances and governmental regulations;
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litigation involving or affecting us;
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changes in financial estimates by us or by any securities analysts who might cover
our stock; and
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additions or departures of our key personnel.
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The realization of any of these risks and other factors beyond our control could cause the
market price of our common stock to decline significantly. In particular, the market price of our
common stock may be influenced by variations in oil and gas prices, because demand for our services
is closely related to those prices.
Our ability to issue preferred stock could adversely affect the rights of holders of our common
stock.
Our certificate of incorporation authorizes us to issue up to 25,000,000 shares of preferred
stock in one or more series on terms that may be determined at the time of issuance by our board of
directors. Accordingly, we may issue shares of any series of preferred stock that would rank senior
to the common stock as to voting or dividend rights or rights upon our liquidation, dissolution or
winding up.
Certain provisions in our charter documents have anti-takeover effects.
Certain provisions of our certificate of incorporation and bylaws may have the effect of
delaying, deferring or preventing a change in control of us. Such provisions, including those
regulating the nomination and election of directors and limiting who may call special stockholders
meetings, together with the possible issuance of our preferred stock without stockholder approval,
may make it more difficult for other persons, without the approval of our board of directors, to
make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other
takeover attempts that a stockholder might consider to be in such stockholders best interest.
Because we have no plans to pay any dividends for the foreseeable future, investors must look
solely to stock appreciation for a return on their investment in us.
We have never paid cash dividends on our common stock and do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain any future earnings to support
our operations and growth. Any payment of cash dividends in the future will be dependent on the
amount of funds legally available, our earnings, financial condition, capital requirements and
other factors that our board of directors may deem relevant. Additionally, certain of our debt
agreements restrict the payment of dividends. Accordingly, investors must rely on sales of their
common stock after price appreciation, which may never occur, as the only way to realize any future
gains on their investment. Investors seeking cash dividends should not purchase our common stock.
32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The 2008 Annual Meeting of Stockholders of the Company was held on May 29, 2008. A brief
description of the proposals and voting results follows.
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a.
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The following nominee was elected at that meeting as Class I director:
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Number of Votes
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Name of Nominee
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For
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Withheld
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Gus D. Halas
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10,449,603
|
|
|
|
1,098,089
|
|
|
b.
|
|
The result of the vote to approve the amendment and restatement of the 2002 Stock
Incentive Plan to increase the number of shares of common stock authorized for issuance
from 2,000,000 to 3,000,000 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Votes
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Votes
|
|
2,766,889
|
|
|
7,769,675
|
|
|
|
181,136
|
|
|
|
829,992
|
|
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
Exhibit Number
|
|
Identification of Exhibit
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended
|
|
|
|
32.1**
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief
Executive Officer)
|
|
|
|
32.2**
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief
Financial Officer)
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Furnished herewith.
|
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 6th day of August 2008.
|
|
|
|
|
|
T-3 ENERGY SERVICES, INC.
|
|
|
By:
|
/s/ JAMES M. MITCHELL
|
|
|
|
James M. Mitchell (Chief Financial
|
|
|
|
Officer and Senior Vice President)
|
|
|
34
INDEX TO EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Identification of Exhibit
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended
|
|
|
|
32.1**
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief
Executive Officer)
|
|
|
|
32.2**
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief
Financial Officer)
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Furnished herewith.
|
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