UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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
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77054
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrants telephone number, including area code:
(713) 996-4110
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, par value $.001 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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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
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes
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No
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The aggregate market value of common stock held by non-affiliates was approximately
$985,039,000 at June 30, 2008. As of February 23, 2009, there were 12,547,458 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants proxy statement to be furnished to stockholders in connection
with its 2009 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14
of this annual report on form 10-K for the year ending December 31, 2008 (this Annual Report).
TABLE OF CONTENTS
FORM 10-K
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Unless otherwise indicated, all references to we, us, our, our company or T-3
include T-3 Energy Services, Inc. and its consolidated subsidiaries.
PART I
Item 1.
Business
Our Company
T-3 Energy Services, Inc. (Company, we or us) designs, manufactures, repairs and
services 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 both
onshore and offshore applications throughout the world. Our customer base consists of other
oilfield service companies, major and independent oil and gas companies, national energy companies
and pipeline companies.
We are a publicly traded Delaware corporation with principal executive offices located at 7135
Ardmore, Houston, Texas 77054. Our common stock is traded on The
NASDAQ Global Select Market under the
symbol TTES.
As of March 2, 2009, we had 22 manufacturing facilities, 21 of which were strategically
located throughout North America and one of which was located in India. We focus on providing our
customers rapid response times for value adding products and services. We believe that our
original equipment products have gained market acceptance, resulting in greater sales to customers
that use our products in both domestic and international operations.
We have three product lines: pressure and flow control, wellhead and pipeline, which generated
73%, 15% and 12% of our total revenue, respectively, for the year ended December 31, 2008. We offer
original equipment products and aftermarket parts and services for each product line. Aftermarket
parts and services include all remanufactured products and parts, repair and field services.
Original equipment products generated 80% and aftermarket parts and services generated 20% of our
total revenues, respectively, for the year ended December 31, 2008. For additional information
about our results of operations, please read our audited financial statements beginning on page F-1
of this report and incorporated into Item 8. Financial Statements and Supplementary Data.
Pressure and Flow Control
. We design, manufacture and provide aftermarket parts and services
for pressure and flow control products used in the drilling, completion, production and workover of
onshore, offshore and subsea applications. Our pressure and flow control products include:
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blow-out preventers, or BOPs;
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BOP control systems;
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elastomer products;
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production, drilling and well service chokes;
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manifolds; and
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high pressure gate valves.
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Wellhead.
We design, manufacture and provide aftermarket parts and services for wellhead
equipment used for onshore oil and gas production. Our wellhead products include wellheads,
production chokes and production valves. Wellhead products are sold to oil and gas producers and
are used during both the drilling and completion phases of an oil or gas well as well as during the
productive life of a well.
Pipeline
. We design, manufacture and provide aftermarket parts and services for a wide
variety of valves primarily for onshore pipeline applications. Our pipeline products include a wide
variety of valves for pipeline applications, including low pressure gate, ball, control and check
valves. Our pipeline valves and related products are used in field or gathering systems and in
interstate pipeline transmission systems.
Our Industry
The oilfield services industry in which we operate has historically experienced significant
volatility and can fluctuate significantly in a short period of time. Demand for our products and
services depends on the levels of spending and capital expenditures by our customers, which depends
on the levels and complexity of drilling and
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completion activity in the oil and gas industry.
Demand for our pipeline products and services is driven by maintenance, repair and construction
activities for pipeline, gathering and transmission systems. These activity levels depend on
factors including customers cash flow and ability to raise capital on attractive terms, current
prices of oil and gas and customers expectations of oil and gas prices in the future.
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 Managements Discussions and Analysis of Financial Condition and Results of
OperationsOutlook for more information regarding these industry factors and events.
Our Strategy
Our strategy is to continue to position ourselves to capitalize on what we believe to be a
long-term trend towards increased domestic and international drilling and completion activity in
the oil and gas industry while maintaining sufficient flexibility and liquidity to operate and
opportunistically improve our business throughout the business cycle, including the inevitable
temporary but potentially significant declines in activity. We believe this increased activity over
the long-term will result in additional demand for our products and services. We intend to:
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Continue new product development;
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Expand our geographic areas of operation with a focus on select international
opportunities;
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Build scale in our primary product lines; and
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Focus on execution and performance.
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Our Products and Services
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 used in onshore, offshore and subsea applications. These products include the following:
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BOPs
. A BOP is a large pressure control device located at the top of a well.
During drilling operations, a series of BOPs are installed to provide pressure control.
When activated, BOPs seal the well and prevent fluids and gases from escaping, protecting
the safety of the crew and maintaining the integrity of the rig and wellbore.
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BOP control systems
. Our BOP control systems are actuators that are used to
remotely open and close BOPs utilizing hydraulic pressure.
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Manifolds and control valves
. Manifolds are arrangements of piping and valves used
to control, distribute and monitor fluid flow. Control valves, which can be manually,
hydraulically or electrically actuated, are valves used to control flow in a wide variety
of oilfield and industrial applications. Our manifolds and control valves are used in oil
and gas production, drilling and well servicing applications.
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Chokes
. A choke is a valve used to control fluid flow rates or reduce system
pressure. Chokes are used in oil and gas production, drilling and well servicing
applications and are often susceptible to erosion from exposure to abrasive and corrosive
fluids. Chokes are available for both fixed and adjustable modes of operation.
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Custom coatings
. Our protective coatings consist of thin liquid or powder material
that once applied over a structure prevents corrosion, wear and leakage problems. Our
protective coatings are applied to a wide variety of oilfield and industrial products.
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Elastomer products
. Elastomer products, which are constructed of molded rubber and
metal, are the sealing elements in BOPs and wellhead equipment. Elastomer products
require frequent replacement to ensure proper BOP functioning.
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Wellhead products
. Our wellhead equipment includes wellheads, production chokes
and production valves used for onshore oil and gas production. Wellhead equipment is
installed directly on top of a completed well to ensure the safe and efficient flow of
oil or gas from the wellbore to downstream separation and pipeline equipment. Wellhead
equipment generally consists of a complex series of flanges, fittings and valves.
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Pipeline products
. Our pipeline products include a wide variety of valves for
pipeline applications, including gate, ball, control and check valves. Pipeline valves
and related products are used in gathering systems (pipelines connecting individual
wellheads to a larger pipeline system) and interstate pipelines (pipelines used to
deliver oil, gas and refined products over long distances).
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Aftermarket parts and services
. Equipment used in the oil and gas industry
operates in harsh conditions and frequently requires new parts, ongoing refurbishment and
repair services. Our aftermarket parts and services are focused on repair and
remanufacture of BOPs, valves and other products and the installation and repair of
wellhead and pipeline products. We provide aftermarket services for our products as well
as other brands, including BOPs sold by many of our major competitors.
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Our pressure and flow control product line primarily consists of BOPs, BOP control systems,
elastomer products, chokes, manifolds and control valves and custom coatings and accounted for
approximately 73% of our 2008 revenue. Our wellhead and pipeline product line offerings accounted
for 15% and 12% of our 2008 revenue, respectively, while our aftermarket parts and services
revenues were spread throughout these different product lines and were reflected in the above
percentages. Our original equipment products generated approximately 80% and aftermarket parts and
services generated approximately 20% of our total 2008 revenue.
Customers and Markets
Our products are used in onshore, offshore and subsea applications and are marketed throughout
the world. Our customer base consists of other oilfield service companies, major and independent
oil and gas companies, national energy companies and pipeline companies. No single customer
accounted for greater than 10% of our total revenues during 2008, 2007 or 2006.
Financial Information About Geographic Areas
Substantially all revenues are from domestic sources, including multi-national companies
domiciled in the United States, and Canada and all assets are held in the United States, Canada and
India. Our products are ultimately deployed to substantially all oil-and-gas producing regions of
the world, including, in addition to the United States and Canada, South America, Mexico, the
Middle East, Africa, Europe and Russia. See footnote 14 to the consolidated financial statements
included in this report for further discussion of our geographic segments.
Marketing
We market our products through a direct sales force, which consisted of 60 persons at December
31, 2008. We believe that our proximity to customers is a key to maintaining and expanding our
business. Almost all of our sales are on a purchase order basis at fixed prices on normal 30-day
trade terms. Large orders may be filled on negotiated terms appropriate to the order. International
sales frequently are made with agent or representative arrangements, and significant sales are
secured by letters of credit. Although we do not typically maintain supply or service contracts
with our customers, a significant portion of our sales represents repeat business.
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Suppliers and Raw Materials
In each of our product lines, new and used inventory and related equipment and parts are
acquired from suppliers, including individual brokers, remanufacturing companies and original
equipment manufacturers. We believe that the loss of any single supplier would not be significant
to our business. We have not experienced a shortage of products that we sell or incorporate into
our manufactured products. The prices we pay for our raw materials may be affected by, among other
things:
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energy, steel and other commodity prices;
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tariffs and duties on imported materials; and
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foreign currency exchange rates.
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We have generally been successful in our effort to mitigate the financial impact of higher raw
materials costs on our operations by adjusting prices on the products we sell. However, 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.
Insurance
We currently carry a variety of insurance for our operations. We are partially self-insured
for certain claims in amounts we believe to be customary and reasonable. Although we believe we
currently maintain insurance coverage adequate for the risks involved, there is a risk our
insurance may not be sufficient to cover any particular loss or that our insurance may not cover
all losses. Please read Item 1A. Risk FactorsWe may be faced with product liability claims and
"Uninsured or underinsured claims or litigation or an increase in our insurance premiums could
adversely impact our results.
Competition
Our products are sold in highly competitive markets. We compete in all areas of our
operations with a number of other companies that have financial and other resources comparable to
or greater than us. Our primary competitors, who are dominant in our business, are Cameron
International Corporation, National Oilwell Varco, Inc., GE Oil & Gas Group (including Vetco Gray
and Hydril) and FMC Technologies. We also have numerous smaller competitors. We believe the
principal competitive factors are product acceptance, reputation, timely delivery of products and
services, price, manufacturing capabilities, patents, performance and dependability. We believe
several factors give us a strong competitive position relative to our competitors. Most
significant are our rapid response times to our customers original equipment product manufacturing
and aftermarket demands and the market acceptance of our original equipment products with most of
the leading drilling contractors.
Backlog
As of December 31, 2008 and 2007, we had a backlog of $76.1 million and $64.8 million,
respectively, consisting of written orders or commitments believed to be firm contracts for our
pressure and flow control and pipeline products and services. These contracts are occasionally
varied or modified by mutual consent and in some instances may be cancelable by the customer on
short notice without substantial penalty. As a result, our backlog as of any particular date may
not be indicative of our actual operating results for any future period. We believe that
approximately 80% of all of the orders and commitments included in backlog at December 31, 2008
will be completed by June 30, 2009, with the remaining 20% being completed by December 31, 2009.
Patents and Trademarks
Our business has historically relied upon technical know-how and experience rather than
patented technology. However, we own, or have a license to use, a number of patents covering a
variety of products. Through our acquisition of HP&T, we acquired patents, which expire at various
dates between 2021 and 2023, related to valve
and gate technology and actuators that we consider to be essential to the continued growth of
our business. See footnote 5 to the consolidated financial statements included in this report for
further discussion of our patents and trademarks.
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We also rely on trade secret protection for our confidential and proprietary information. We
routinely enter into confidentiality agreements with our employees, partners and suppliers. There
can be no assurance, however, that others will not independently obtain similar information or
otherwise gain access to our trade secrets.
Environmental and Other Regulations
We operate facilities in the U.S. and abroad that are subject to stringent federal, state,
provincial and local laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. These laws and regulations can affect our
operations in many ways, such as:
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requiring the acquisition of permits to conduct regulated activities;
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restricting the manner in which we can release materials into the environment;
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requiring capital expenditures to maintain compliance with laws; and
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imposing substantial liabilities on us for pollution resulting from our operations.
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Failure to comply with these laws and regulations 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 activities.
The trend in environmental regulation has been to place more restrictions and limitations on
activities that may affect the environment, and thus, any changes in environmental laws and
regulations that result in more stringent and costly waste handling, storage, transport, disposal
or remediation requirements could have a material adverse effect on our business. In the event of
future increases in costs, we may be unable to pass on those increases to our customers. While we
believe that we are in substantial compliance with existing environmental laws and regulations and
that continued compliance with current requirements would not have a material adverse effect on us,
there is no assurance that this trend will continue in the future.
In the U.S., the Comprehensive Environmental Response, Compensation and Liability Act, as
amended, or CERCLA, also known as Superfund, and comparable state laws impose liability without
regard to fault or the legality of the original conduct, on certain classes of persons considered
to be responsible for the release of a hazardous substance into the environment. Such classes of
persons may include the current or past owners or operators of sites where hazardous substances
were released, and companies that disposed or arranged for the disposal of hazardous substances
found at such sites. Under CERCLA, these responsible persons may be subject to strict and, in
certain circumstances, joint and several liability for the costs of cleaning up hazardous
substances released into the environment, for damages to natural resources, and for the costs of
certain health studies, and it is not uncommon for neighboring landowners and other third parties
to file claims for personal injury and property damage allegedly caused by the release of the
hazardous substances into the environment. We also may incur liability under the Resource
Conservation and Recovery Act, as amended, or RCRA, which imposes requirements related to the
handling and disposal of solid and hazardous wastes. We generate materials in the course of our
operations that may be regulated as hazardous substances and/or solid or hazardous wastes.
We currently own or lease, and have in the past owned or leased, properties in the U.S. that
for many years have been used as manufacturing facilities for industrial purposes. Although we used
operating and disposal practices that were standard in the industry at the time, petroleum
hydrocarbons or wastes may have been disposed of or released on or under such properties owned or
leased by us or on or under other locations where such petroleum hydrocarbons or wastes have been
taken for reclamation or disposal. In addition, some of these properties have been operated by
third parties whose treatment and disposal or release of petroleum hydrocarbons and other wastes
was not under our control. These properties and the materials disposed or released on them may be
subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove
or remediate
previously disposed wastes or property contamination, or to perform remedial activities to
prevent future contamination. While we have been identified as a potentially responsible party, or
PRP, with respect to one site identified on the CERCLA National Priorities List designated for
cleanup, we believe that our involvement at that site has been minimal, and that our liability for
this matter will not have a material adverse effect on our business. See Item 3. Legal
Proceedings and footnote 11 to the consolidated financial statements included in this report for
further discussion of this PRP matter.
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The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act, and
analogous state laws impose restrictions and controls on the discharge of pollutants into waters of
the U.S. or the states. Such discharges are prohibited, except in accord with the terms of a permit
issued by the U.S. Environmental Protection Agency, or EPA, or analogous state agencies. Spill
prevention, control and countermeasure requirements under federal law require appropriate
containment berms and similar structures to help prevent the contamination of navigable waters in
the event of a hydrocarbon tank spill, rupture or leak. In addition, the Clean Water Act and
analogous state laws require individual permits or coverage under general permits for discharges of
stormwater from certain types of facilities. These permits may require us to monitor and sample
the stormwater runoff. Discharges in violation of the Clean Water Act could result in penalties,
as well as significant remedial obligations. We believe that our U.S. facilities are in substantial
compliance with this act.
The Clean Air Act, as amended, and comparable state laws restrict the emission of air
pollutants from many sources in the U.S., including paint booths, and may require us to obtain
pre-approval for the construction or modification of certain projects or facilities expected to
produce air emissions, impose stringent air permit requirements, or use specific equipment or
technologies to control emissions. We believe that our U.S. operations are in material compliance
with the Clean Air Act.
In response to studies suggesting that emissions of certain gases, including carbon dioxide
and methane, may be contributing to warming of the Earths atmosphere, many foreign nations,
including Canada, have agreed to limit emissions of these gases, generally referred to as
greenhouse gases, pursuant to the United Nations Framework Convention on Climate Change, also
known as the Kyoto Protocol. The Kyoto Protocol requires Canada to reduce its emissions of
greenhouse gases to 6% below 1990 levels by 2012. As a result, it is possible that already
stringent air emissions regulations applicable to our operations in Canada will be replaced with
even stricter requirements prior to 2012. Although the United States is not participating in the
Kyoto Protocol, President Obama has expressed support for, and it is anticipated that the current
session of Congress will consider climate change-related legislation to restrict greenhouse gas
emissions. In addition, at least one-third of the states, either individually or through
multi-state regional initiatives, have already taken legal measures to reduce emissions of
greenhouse gases, primarily through the planned development of greenhouse gas emission inventories
and/or greenhouse gas cap and trade programs. Also, as a result of the U.S. Supreme Courts
decision on April 2, 2007 in
Massachusetts, et al. v. EPA
and certain provisions of the Clean Air
Act, the EPA may regulate carbon dioxide and other greenhouse gas emissions from mobile sources
such as cars and trucks. The Courts holding in Massachusetts that greenhouse gases fall under the
federal Clean Air Acts definition of air pollutant may also result in future regulation of
greenhouse gas emissions from stationary sources under certain Clean Air Act programs. New
federal, provincial, regional or state restrictions on emissions of greenhouse gases that may be
imposed in areas of the United States or elsewhere in the world, including Canada, where we conduct
business could adversely affect our operations and demand for our services and products.
Because of our interests outside the United States, we must comply with United States laws and
other foreign jurisdiction laws related to pursuing, owning, and exploiting foreign investments,
agreements and other relationships. The Company is subject to all such laws, including, but not
limited to, the Foreign Corrupt Practices Act of 1977, or FCPA, and similar worldwide anti-bribery
laws in non-U.S. jurisdictions which generally prohibit companies and their intermediaries from
making improper payments to non-U.S. officials for the purpose of obtaining or retaining business.
Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world
that have experienced governmental corruption to some degree, and in certain circumstances strict
compliance with anti-bribery laws may conflict with local customs and practices. Despite our
training and compliance programs, our internal control policies and procedures may not protect us
from acts committed by our employees or agents.
Additionally, our U.S. operations are subject to the requirements of the federal Occupational
Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the
health and safety of employees. In addition, OSHAs hazard communication standard requires that
information be maintained about hazardous materials used or produced in our operations and that
this information be provided to employees, state and local government authorities and citizens. We
believe that our U.S operations are in substantial compliance with these OSHA requirements.
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Our operations outside of the U.S. are potentially subject to similar foreign governmental
controls governing the discharge of material into the environment and environmental protection. We
believe that our foreign operations are in substantial compliance with current requirements of
those governmental entities, and that compliance with these existing requirements has not had a
materially adverse effect on our results of operations or finances. However, there is no
assurance that this trend of compliance will continue in the future or that such compliance will
not be material. For instance, any future restrictions on emissions of greenhouse gases that are
imposed in foreign countries in which we operate, such as in Canada, pursuant to the Kyoto Protocol
or other locally enforceable requirements could adversely affect demand for our products.
Employees
As of December 31, 2008, we had 748 employees, 203 of whom were salaried and 545 of whom were
paid on an hourly basis. Substantially all of our work force is employed within the United States,
Canada and India. We consider our relations with our employees to be good. None of our employees
are covered by a collective bargaining agreement.
Available Information
We file annual, quarterly and current reports and other information electronically with the
SEC. You may read and copy any materials we file with the SEC at the SECs Public Reference Room
at 100 F. Street, NE, Washington, DC 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site
(
www.sec.gov
) that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC, including our filings.
Our Internet address is
www.t3energyservices.com
. We make available free of charge,
on or through the Investor Relations section of our Internet website, access to our filings of our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 with the United States Securities and Exchange Commission, or SEC. Our
website provides a hyperlink to a third party SEC filings website where these reports may be
viewed and printed at no cost as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. You can also obtain information about us at the NASDAQ
Global Select Market internet site (
www.nasdaq.com
). The contents of our website or any other website are
not, and shall not be deemed to be, incorporated into this report.
Cautionary Note Regarding Forward-Looking Statements
Certain statements contained in or incorporated by reference in this Annual Report, our
filings with the Securities and Exchange Commission, or the Commission, and our public releases,
including, but not limited to, information regarding the status and progress of our operating
activities, the plans and objectives of our management, assumptions regarding our future
performance and plans, and any financial guidance provided therein are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section
21E of the Securities Exchange Act of 1934, or the Exchange Act. The words believe, may,
will, estimate, continues, anticipate, intend, budget, predict, project, expect
and similar expressions identify these forward-looking statements, although not all forward-looking
statements contain these identifying words. These forward-looking statements are made subject to
certain risks and uncertainties that could cause actual results to differ materially from those
stated. Risks and uncertainties that could cause or contribute to such differences include,
without limitation, those discussed in the section entitled Risk Factors included in this Annual
Report and our subsequent Commission filings.
These forward-looking statements are largely based on our expectations and beliefs concerning
future events, which reflect estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market conditions and other factors
relating to our operations and business environment, all of which are difficult to predict and many
of which are beyond our control.
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Although we believe our estimates and assumptions to be reasonable, they are inherently
uncertain and involve a number of risks and uncertainties that are beyond our control. Our
assumptions about future events may prove to be inaccurate. We caution you that the
forward-looking statements contained in this Annual Report are not guarantees of future
performance, and we cannot assure you that those statements will be realized or the forward-looking
events and circumstances will occur. Actual results may differ materially from those anticipated
or implied in the forward-looking statements due to the factors listed in the section entitled
Risk Factors included in this Annual Report and our subsequent Commission filings. All
forward-looking statements speak only as of the date of this report. We do not intend to publicly
update or revise any forward-looking statements as a result of new information, future events or
otherwise, except as required by law. These cautionary statements qualify all forward-looking
statements attributable to us or persons acting on our behalf.
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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 this Annual
Report before you decide to invest in our securities. The risks described below 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
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, in 2008 alone, oil prices ranged from as low as $32.40 per barrel to as high
as $145.31 per barrel and were $44.50 per barrel on February 26, 2009. Similarly, natural gas prices
have ranged from monthly averages as low as $5.74 per million British thermal units, or MMBtu, to
as high as $12.77 per MMBtu during 2008. 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 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 ability and 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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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;
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9
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the ability of our customers to obtain sufficient amounts of capital; 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.
Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
Our results of operations are materially affected by conditions in the domestic capital
markets and the economy generally. The stress experienced by domestic capital markets that began in
the second half of 2007 continued and substantially increased during the second half of 2008.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to
increased volatility and diminished expectations for the economy and the markets going forward.
These factors, combined with volatile oil and gas prices, declining business and consumer
confidence and increased unemployment, have precipitated a worldwide economic slowdown and fears of
a sustained recession. In addition, the fixed-income markets are experiencing a period of extreme
volatility which has negatively impacted market liquidity conditions.
As a result, capital markets have experienced decreased liquidity, increased price volatility,
credit downgrade events and increased probabilities of default. These events and the continuing
market upheavals may have an adverse effect on us because our liquidity and ability to fund our
capital expenditures is dependent in part upon our bank borrowings and access to the public capital
markets. Our revenues are likely to decline in such circumstances. In addition, in the event of
extreme prolonged market events, such as the current global credit crisis, we could incur
significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of
loss due to market volatility.
Factors such as business investment, government spending, the volatility and strength of the
capital markets, and inflation all affect the business and economic environment and, ultimately,
the profitability of our business. Purchasers of our goods and services may delay or be unable to
make timely payments to us. Adverse changes in the economy could affect earnings negatively and
could have a material adverse effect on our business, results of operations and financial
condition. The current mortgage crisis has also raised the possibility of future legislative and
regulatory actions in addition to the recent enactment of the Emergency Economic Stabilization Act
of 2008, or EESA, that could further impact our business. We cannot predict whether or when such
actions may occur, or what impact, if any, such actions could have on our business.
Our inability to deliver our backlog on time could affect our future sales and profitability and
our relationships with our customers.
At December 31, 2008, our backlog was approximately $76.1 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 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. Acquisitions involve numerous risks, including:
10
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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 a material 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.
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 three years. We believe this
revenue growth is primarily attributable to our business expansion and to our advantage of
delivering original equipment products and providing aftermarket services more rapidly than our
competitors. To continue our expansion while maintaining our rapid response competitive advantage,
we plan to further expand our operations by adding new facilities, upgrading existing facilities
and increasing manufacturing and repair capacity when appropriate based off of market conditions.
We believe our future success depends in part on our ability to manage this expansion when it is
relevant. 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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If we do not develop and commercialize new competitive products, our revenues 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.
11
The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of
our goodwill and/or long-lived assets.
From 2003 through 2005, we incurred goodwill impairments related to continuing and
discontinued operations totaling $29.5 million. In 2008, we incurred goodwill impairments related
to our pressure and flow control reporting unit totaling $23.5 million. See footnote 4 to the
consolidated financial statements included in this report for further discussion of our goodwill
impairment. There was no long-lived asset impairments during 2006,
2007 or 2008 and there were no such goodwill impairments during 2006 or 2007. As of December 31, 2008,
we had approximately $87.9 million of goodwill and
$79.5 million of long-lived assets. Our estimates of the value
of our goodwill and/or long-lived assets could be
further reduced as a result of our assessment of various factors, if they are sustained, such as:
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further deterioration in global economic conditions;
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changes in our outlook for future profits and cash flows due to, but not limited
to, increased or unanticipated competition, further reductions in anticipated customer
capital spending, revisions to our current business plan or adverse legal or regulatory
judgments;
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further reductions in the market price of our stock;
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increased costs of capital;
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reductions in valuations of other public companies within our industry; or
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valuations observed in acquisition transactions within our industry.
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One of our competitive strengths is our established brand name and to the extent any joint venture
that we participate in uses our brand name and delivers products or services that are not up to our
standards of quality or service, this could diminish the value of our brand name and adversely
affect our business.
We currently participate in an international joint venture that uses our brand name in which
our rights and ability to control the joint venture are limited. One of our competitive strengths
is our established brand name and to the extent any such joint venture uses our brand name and
delivers products and services that are not up to our standards of quality or service, our
reputation and credibility could be damaged. Any such diminishment of the value of our brand name
may lead to a loss in customer confidence, damage existing customer relationships, decrease market
acceptance of our brand name, reduce demand for our goods and services, result in the loss of
future business or impair our ability to expand in these markets, any of which could adversely
affect our business, financial condition and results of operations.
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. Our future success will depend in substantial part on the continued service of our key
employees and our continued ability to attract, retain and motivate outstanding and highly skilled
individuals in the competitive labor markets in which we compete. The loss of the services of one
or more of our key employees could impede implementation and execution of our business strategy and
result in the failure to reach our goals.
In order to attract, retain and motivate qualified personnel, we have granted, and in the
future expect to continue to grant, performance-based awards under our 2002 Long-Term Incentive
Plan (the Plan). Our shareholder proposal for an amendment and
restatement of the Plan to increase the number of common stock
authorized for issuance was rejected at the 2008 Annual Meeting of
Shareholders. As of December 31, 2008, there were only 6,584 shares of our common stock
available for issuance outstanding under the Plan. Unless we are successful in increasing the
numbers of approved shares available for issuance under the Plan, we may not be able to retain key
employees or find suitable replacements on a timely basis or at all, and our business could be
disrupted.
Although we have employment and non-competition agreements with our Chairman, President and
Chief Executive Officer, 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 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.
12
Some of our products require the use of elastomer products in their manufacture. Any negative
developments in the availability or costs of these elastomer products could adversely affect our
business, financial conditions and results of operations.
We are dependent upon third party sources, including competitors, for elastomer products used
in the manufacture of some of our products, the availability of which cannot be assured. Any
sustained interruption in the availability of these elastomer products could impair the
manufacturing of our products and have a material adverse effect on our business, financial
condition and results of operations. If there is a significant increase in the costs of such
elastomer products and we are unable to pass the increased costs on to our customers in the form of
higher prices, it could cause our cash flow and results of operations to decline.
Shortages of raw materials may restrict our operations.
The forgings, castings and outsourced coating services necessary for us to make our products
can be 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.
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 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.
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.
We
may be faced with product liability claims which could materially and
adversely affect our earnings.
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. Our contractual
disclaimers of responsibility for consequential damages 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.
13
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. However, 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. Strict and, under certain circumstances,
joint and several 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 and services. We may not be able to recover some or any of these costs from insurance.
We are 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, 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 exposure to these risks will increase as our international operations expand. 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.
14
We could be adversely affected by violations of the U.S. FCPA and similar worldwide anti-bribery
laws.
The U.S. FCPA and similar anti-bribery laws in other jurisdictions generally prohibit
companies and their intermediaries from making improper payments to non-U.S. officials for the
purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery
laws. We operate in many parts of the world that have experienced governmental corruption to some
degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with
local customs and practices. Although we have procedures and controls in place to monitor internal
and external compliance, if we are found to be liable for FCPA violations (either due to our own
acts or our inadvertence, or due to the acts or inadvertence of others, including our partners in
our various strategic alliances), we could suffer from civil and criminal penalties or other
sanctions, which could have a material adverse effect on our business, financial condition, and
results of operations.
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 possible 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.
Risks Relating 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 will likely continue to experience,
substantial volatility. During 2008, the sale prices of our common stock on The NASDAQ Global
Select Market ranged from a low of $8.05 to a high of $84.80 per share. The closing sales price of our
common stock on February 23, 2009 was $9.73 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.
15
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 (including staggered elections for our board
members) 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, our senior credit
facility restricts 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.
Item 1B.
Unresolved Staff Comments
None.
16
Item 2.
Properties
We operated 22 manufacturing facilities as of December 31, 2008. Our facilities range in size
from 3,000 square feet to approximately 189,000 square feet of manufacturing and related space, or
an aggregate of approximately 606,000 square feet. Of this total, 434,000 square feet of
manufacturing and related space is located in leased premises under leases expiring at various
dates through 2016.
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Size
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Manufacturing Facility
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(Square Feet)
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Leased/Owned
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Buffalo, Texas
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10,200
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Leased
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Casper, Wyoming
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14,045
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Leased
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Conway, Arkansas
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14,144
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Leased
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Grand Junction, Colorado
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3,200
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Leased
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Houma, LouisianaMain Street
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42,500
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Owned
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Houma, LouisianaVenture Boulevard
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61,000
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Owned/Leased
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Houston, TexasArdmore Street
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189,000
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Owned
(1)
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Houston, TexasCypress N. Houston Road
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35,000
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Owned
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Houston, TexasCreekmont Drive
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50,710
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Owned/Leased
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Indianapolis, Indiana
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11,400
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Leased
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Jennings, Louisiana
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25,000
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Leased
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Lafayette, Louisiana
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9,250
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Leased
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Midland, Texas
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4,800
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Leased
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Nisku, Alberta, Canada
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33,000
|
|
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Leased
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Nisku, Alberta, Canada
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13,000
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Leased
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Oklahoma City, Oklahoma
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16,000
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Leased
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Perryton, Texas
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3,000
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Leased
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Pune, India
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10,000
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|
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Leased
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Robstown, Texas
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10,000
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|
|
Leased
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Rock Springs, Wyoming
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25,600
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|
|
Leased
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Shreveport, Louisiana
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8,600
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|
|
Leased
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Tyler, Texas
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16,900
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Leased
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(1)
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We exercised our purchase option right for our Ardmore
facility during February 2008. The owner of this property contended
that we failed to timely exercise our purchase option right under the
base lease and a sublease, and we filed suit seeking a declaratory
judgment that the purchase option right was valid and enforceable.
The trial court granted summary judgment in our favor, finding the
purchase option enforceable. However, the time for appeal has not
expired. We have transferred the purchase price for the Ardmore
facility to an escrow account pending final resolution of this
dispute. If we are ultimately unsuccessful in enforcing our purchase
option right, we may be required to find a new facility. In such an
event, we believe that appropriate alternative properties are
available, although likely at a higher cost.
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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, expansion into Grand Junction, Colorado and
Conway,
Arkansas
17
during 2007 and, during 2008, expanding our BOP repair capacity from 7 stacks per
month to 11 stacks per month and creating an India-based manufacturing facility. During 2009, we
will continue to expand capacity by opening additional facilities for our wellhead and pipeline
product lines.
Item 3.
Legal Proceedings
We are involved in various claims and litigation arising in the ordinary course of business.
In December 2001, a lawsuit was filed against us in the 14th Judicial District Court of
Calcasieu Parish, Louisiana as
Aspect Energy LLC v. United Wellhead Services, Inc
. 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. We tendered the defense of this claim under our
comprehensive general liability insurance policy and our umbrella policy. During the fourth
quarter of 2008, the plaintiffs reached a settlement with our insurance carrier that was fully
covered by our insurance policies.
In July 2003, a lawsuit was filed against us in the U.S. District Court, Eastern District of
Louisiana as
Chevron, U.S.A. v. Aker Maritime, Inc
. The lawsuit alleged that a wholly owned
subsidiary of the Company, the assets and liabilities of which were sold in 2004, failed to deliver
the proper bolts and/or sold defective bolts to the plaintiffs contractor to be used in connection
with a drilling and production platform in the Gulf of Mexico. The 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
our 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
us and three other defendants. The jury awarded the plaintiffs damages in the amount of $2.9
million, of which we estimate our share to be $1.0 million. We have accrued approximately $1.1
million, net of tax, for our share of the damages and attorney fees, court costs and interest, as a
loss from discontinued operations in the consolidated statement of operations for the year ended
December 31, 2007.
Our environmental remediation and compliance costs have not been material during any of the
periods presented. We have 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. We believe our involvement at this site was minimal. While no
agency-approved final allocation of our liability has been made with respect to the Lake Calumet
Cluster site, based upon our involvement with this site, we do not expect that our ultimate share
of remediation costs will have a material impact on our financial position, results of operations
or cash flows.
We have
also agreed, as part of the sale of a business in 2001, to indemnify the buyers for certain
specified environmental cleanup and monitoring activities associated with a former manufacturing
site. Through December 31, 2008, we have reimbursed the buyers for an immaterial amount of
monitoring expenses in connection with this indemnification agreement. The environmental
monitoring activities, for which we may bear partial liability, are anticipated to continue at
least through the year 2024. We and the buyers have engaged a licensed engineer to conduct a
post-closure corrective action subsurface investigation on the property. The purpose of the work
is to fulfill the requirements of a Connecticut DEP investigation and the Connecticut
Remediation Standard Regulations for developing an approach for site closure. Phase I and II
investigations have been completed, and a Phase III site investigation is currently ongoing and is
expected to be finalized during 2009. We are presently unable to estimate the amount, if any, of
future costs that may be payable in connection with this indemnification agreement.
While the ultimate outcome and impact of any ordinary course proceedings and claims incidental
to our business cannot be predicted with certainty, our management does not believe that the
resolution of any of these matters, or the amount of the liability, if any, ultimately incurred
with respect to such other proceedings and claims, will have a material adverse effect on our
financial position, liquidity, capital resources or result of operations.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders in the fourth quarter of 2008.
18
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our
common stock trades on The NASDAQ Global Select Market under the symbol TTES.
The following table sets forth, for each of the periods indicated, the high and low sale
prices per share of our common stock on The NASDAQ Global Select Market:
|
|
|
|
|
|
|
|
|
|
|
Price Range
|
|
|
High
|
|
Low
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
22.21
|
|
|
$
|
18.04
|
|
Second Quarter
|
|
$
|
34.96
|
|
|
$
|
20.10
|
|
Third Quarter
|
|
$
|
43.15
|
|
|
$
|
28.29
|
|
Fourth Quarter
|
|
$
|
52.72
|
|
|
$
|
37.81
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
53.41
|
|
|
$
|
37.70
|
|
Second Quarter
|
|
$
|
80.28
|
|
|
$
|
41.06
|
|
Third Quarter
|
|
$
|
84.80
|
|
|
$
|
34.22
|
|
Fourth Quarter
|
|
$
|
38.49
|
|
|
$
|
8.05
|
|
The year end closing sales price of our common stock was $47.01 on December 31, 2007, the last
trading day for 2007, and $9.44 on December 31, 2008, the last trading day for 2008.
As of the close of business on February 23, 2009, 12,547,458 shares of our common stock were
outstanding and there were approximately 123 record holders of our common stock, not including the
number of persons or entities who hold stock in nominee or street name through various brokerage
firms and banks. On February 23, 2009, the last closing sale price reported on The NASDAQ Global
Select Market for our common stock was $9.73 per share.
Dividend Policy
We have not paid or declared dividends on our common stock since our inception and do not
anticipate paying any cash dividends in the foreseeable future. We currently intend to retain
future earnings to support our operations and growth. Any future dividends 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. In addition, our senior credit
facility restricts the payment of dividends.
Recent Sales of Unregistered Securities
;
Issuer Purchases of Equity Securities
We did not sell any unregistered securities nor did we make any repurchases of our common
stock during the year ended December 31, 2008.
Securities Authorized by Issuance under Equity Compensation Plans
See Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
19
Item 6.
Selected Financial Data
The following selected consolidated financial data for each of the five years in the period
ended December 31, 2008 has been derived from our audited annual consolidated financial statements.
The following information should be read in conjunction with our consolidated financial statements
and the related notes thereto and Managements Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere in this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands except for per share amounts)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
285,329
|
|
|
$
|
217,434
|
|
|
$
|
163,145
|
|
|
$
|
103,218
|
|
|
$
|
67,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
(1),(2),(3),(4),(5)
|
|
|
29,060
|
|
|
|
40,761
|
|
|
|
28,754
|
|
|
|
13,813
|
|
|
|
6,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
(1),(2),(3),(4),(5)
|
|
|
13,045
|
|
|
|
26,507
|
|
|
|
18,415
|
|
|
|
8,055
|
|
|
|
2,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
(6)
|
|
|
(48
|
)
|
|
|
(1,257
|
)
|
|
|
(323
|
)
|
|
|
(3,542
|
)
|
|
|
(1,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(1),(2),(3),(4),(5),(6)
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
$
|
18,092
|
|
|
$
|
4,513
|
|
|
$
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.05
|
|
|
$
|
2.26
|
|
|
$
|
1.74
|
|
|
$
|
0.76
|
|
|
$
|
0.27
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
(0.33
|
)
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
$
|
1.71
|
|
|
$
|
0.43
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
(1),(2),(3),(4),(5)
|
|
$
|
1.02
|
|
|
$
|
2.19
|
|
|
$
|
1.68
|
|
|
$
|
0.75
|
|
|
$
|
0.27
|
|
Discontinued operations
(6)
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
(0.33
|
)
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
(1),(2),(3),(4),(5),(6)
|
|
$
|
1.02
|
|
|
$
|
2.08
|
|
|
$
|
1.65
|
|
|
$
|
0.42
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,457
|
|
|
|
11,726
|
|
|
|
10,613
|
|
|
|
10,582
|
|
|
|
10,582
|
|
Diluted
(7)
|
|
|
12,812
|
|
|
|
12,114
|
|
|
|
10,934
|
|
|
|
10,670
|
|
|
|
10,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
287,112
|
|
|
|
300,562
|
|
|
|
162,643
|
|
|
|
140,788
|
|
|
|
142,341
|
|
Long-term debt, less current maturities
|
|
|
18,753
|
|
|
|
61,423
|
|
|
|
|
|
|
|
7,058
|
|
|
|
18,824
|
|
|
|
|
(1)
|
|
In 2007, we recorded a $2.5 million, or
$1.9 million net of tax or diluted EPS of $0.16 per share charge associated with a change of control payment and
the immediate vesting of previously unvested stock options and restricted stock held by Gus D.
Halas pursuant to the terms of his then existing employment agreement.
|
|
(2)
|
|
In 2006, we recorded a $0.4 million, or
$0.3 million net of tax or diluted EPS of $0.02 per share charge associated with the Form S-1 registration
statement and subsequent amendments. The Form S-1 registration statement was converted into a
Form S-3 registration statement in September 2006, which was used by First Reserve Fund VIII
to sell 4.5 million shares of our common stock on November 30, 2006 in a series of block
trades.
|
|
(3)
|
|
In 2005, we recorded a $0.6 million, or
$0.4 million net of tax or diluted EPS of $0.04 per share charge associated with the termination of a public
offering.
|
|
(4)
|
|
In 2008, we recorded a $23.5 million, or
$20.5 million net of tax or diluted EPS of $1.60 per share charge to continuing operations for the impairment of
goodwill related to our pressure and flow control reporting unit.
|
|
(5)
|
|
In 2008, we incurred approximately $4.7 million, or
$3.1 million net of tax or diluted EPS of $0.24 per share of costs related to the pursuit of strategic
alternatives.
|
|
(6)
|
|
In 2007, we recorded a $1.8 million, or
$1.1 million net of tax or diluted EPS of $0.09 per share charge, due to a jury verdict incurred
against one of our discontinued businesses. In 2005, we completed the sale of substantially
all of the assets of our distribution segment. In 2004, we committed to dispose of
substantially all of the assets within our products segment, except for certain assets related
to our custom coatings business, along with certain assets within our pressure control
segment. The results of operations attributable to those assets are reported as discontinued
operations. This resulted in $2.8 million and $0.5 million goodwill and other intangibles
impairment charges in 2005 and 2004, respectively, and $0.8 million and $2.4 million
long-lived asset impairment charges in 2005 and 2004, respectively.
|
|
(7)
|
|
For the years ended December 31, 2008, 2007, 2006, 2005, and 2004 there were 492,128,
208,000, 5,325, 85,553 and 451,945 options, respectively, and 0, 0, 0, 332,862 and 517,862
warrants, respectively, that were not included in the computation of diluted earnings per
share because their inclusion would have been anti-dilutive. For the year ended December 31,
2008, there were 5,027 shares of restricted stock that were not included in the computation of
diluted earnings per share because their inclusion would have been anti-dilutive. For the
year ended December 31, 2006, there were 25,000 shares of unvested restricted stock that were
not included in the computation of diluted earnings per share because the current market price
at the end of the period did not exceed the target market price.
|
20
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Selected
Financial Data and the consolidated financial statements and related notes included elsewhere in
this Annual Report. This discussion contains forward-looking statements reflecting our current
expectations, estimates and assumptions concerning events and financial trends that may affect our
future operating results or financial position. Actual results and the timing of events may differ
materially from those contained in these forward-looking statements due to a number of factors,
including those discussed in the sections entitled Risk Factors and Forward-Looking Information
appearing elsewhere in this Annual Report.
Introduction
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 both onshore and offshore applications throughout the world. Our
customer base consists of other oilfield service companies, major and independent oil and gas
companies, national energy companies and pipeline companies.
We are a publicly traded Delaware corporation with principal executive offices located at 7135
Ardmore, Houston, Texas 77054. Our common stock is traded on The
NASDAQ Global Select Market under the
symbol TTES.
Significant Events Affecting our Financial Results
During July 2008, we entered into a joint venture arrangement with Aswan International
Engineering Company LLC 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. We anticipate the joint venture will be operational in the first quarter of 2009.
During May 2008, we exercised our option to purchase certain fixed assets and inventory of
HP&T Products, Inc. in India for approximately $0.5 million. We used these assets in the creation
of an India-based manufacturing facility that began operations during September 2008.
During January 2008, we acquired Pinnacle, located in Oklahoma City, Oklahoma for
approximately $2.4 million. Pinnacle 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. We plan to expand Pinnacles facility into a full service repair facility
similar to our other locations.
During November 2007, we further expanded into the Rocky Mountain Region by opening a wellhead
service facility in Grand Junction, Colorado.
During October 2007, we acquired EEC for approximately $72.3 million and HP&T for
approximately $25.9 million. EEC manufactures valves, chokes, control panels, and their associated
parts for sub-sea applications, extreme temperatures, and highly corrosive environments. HP&T
designs gate valves, manifolds, chokes and other products. Both companies are headquartered in
Houston, Texas.
In April 2007, we closed an underwritten offering among us, First Reserve Fund VIII (as a
selling stockholder) and Bear, Stearns & Co. Inc., Simmons & Company International, and Pritchard
Capital Partners, LLC (the Underwriters), pursuant to which we sold 1,000,059 shares of our
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.
During the first quarter of 2007, we expanded into Arkansas by opening a facility to provide
wellhead and pipeline products and repair and field services to oil and gas production and pipeline
transmission companies whose operations are actively involved in the Fayetteville Shale in the
Arkoma Basin.
During the second quarter of 2006, we expanded into the Midwest region by opening a facility
in Indianapolis, Indiana, and continued our expansion into the Rocky Mountain region by opening a
facility in Casper, Wyoming.
21
In January 2006, we completed the purchase of KC Machine LLC, located in Rock Springs, Wyoming
to continue to expand our pressure and flow control, wellhead and pipeline products and services to
those customers located in the Rocky Mountain region. In addition, during the first quarter of
2006, we also expanded into the East Texas region by opening two facilities to provide wellhead and
pipeline products, repairs and field services for companies whose operations are actively involved
in the Cotton Valley, Barnett Shale and Austin Chalk fields.
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;
|
|
|
|
|
selling, general and administrative expenses as a percentage of revenue;
|
|
|
|
|
operating income;
|
|
|
|
|
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
22
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. Historically, as a result of
increased activity in the oil and gas industry, there have been 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.
Operating Income.
We monitor operating income as a measure for budgeting and for evaluating
actual results against our budgets.
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:
|
|
|
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;
|
|
|
|
|
as a measure for budgeting and for evaluating actual results against our budgets;
|
|
|
|
|
to assess compliance with financial ratios and covenants included in our senior
credit facility;
|
|
|
|
|
in communications with lenders concerning our financial performance; and
|
|
|
|
|
to evaluate the viability of potential acquisitions and overall rates of return.
|
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. We believe this measure allows our management team to evaluate 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 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 safety performance and customer and market demands.
|
|
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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.
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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.
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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.
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23
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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.
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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, or NBIC, the American Petroleum
Institute, or 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, 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.
24
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements. We prepare these financial statements in conformity with
accounting principles generally accepted in the United States. As such, we are required to make
certain estimates, judgments and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. We base our estimates on historical experience, available
information and various other assumptions we believe to be reasonable under the circumstances. We
evaluate our estimates on an on-going basis; however, actual results may differ from these
estimates under different assumptions or conditions. Our significant accounting policies are
described in our consolidated financial statements included in this Annual Report beginning on page
F-1. The accounting policies we believe to be the most critical to our reporting of our financial
condition and results of operations and that require managements most difficult, subjective or
complex judgments and estimates are described below.
Revenue Recognition
.
Our products and services are sold based upon purchase orders or
contracts with the customer that include fixed or determinable prices and that do not include right
of return or other similar provisions or other significant post delivery obligations. We record
revenue when all of the following criteria have been met: evidence of an arrangement exists;
delivery to and acceptance by the customer has occurred; the price to the customer is fixed and
determinable; and collectability is reasonably assured. We also recognize revenue as services are
performed in accordance with the related contract provisions. Customer advances or deposits are
deferred and recognized as revenue when we have completed all of our performance obligations
related to the sale. The amounts billed for shipping and handling costs are included in revenue and
the related costs are included in costs of sales.
Accounts Receivable and Customer Credit Risk.
Accounts receivable are stated at the historical
carrying amount, net of allowances for uncollectible accounts. We establish an allowance for
uncollectible accounts based on specific customer collection issues we have identified.
Uncollectible accounts receivable are written off when a settlement is reached for an amount less
than the outstanding historical balance or when we have determined the balance will not be
collected. Substantially all of our customers are engaged in the energy industry. This
concentration of customers may impact our overall exposure to credit risk, either positively or
negatively, in that customers may be similarly affected by changes in economic and industry
conditions. We perform credit evaluations of our customers and do not generally require collateral
in support of our domestic trade receivables. We may require collateral to support our
international customer receivables. Most of our international sales, however, are to large
international or national companies. In 2008, 2007 and 2006, there was no individual customer who
accounted for 10% or greater of our consolidated revenues.
Inventories.
Inventories are stated at the lower of cost or market. Cost includes, where
applicable, manufacturing labor and overhead. The first-in, first-out method is used to determine
the cost of substantially all of our inventories. We regularly review inventory quantities on hand
and record a provision for excess and slow moving inventory to write down the recorded cost of
inventory to its estimated fair market value. This analysis is based primarily on the length of
time the item has remained in inventory and managements consideration of current and expected
market conditions.
Long-Lived Assets.
Long-lived assets include property, plant and equipment and definite-lived
intangibles. We make judgments and estimates in conjunction with the carrying value of these
assets, including amounts to be capitalized, depreciation and amortization methods, useful lives
and the valuation of acquired definite-lived intangibles. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
, we test for the impairment of
long-lived assets upon the occurrence of a triggering event. We base our evaluation
on impairment indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements and other external market conditions or
factors that may be present. If these impairment indicators are present or other factors exist that
indicate the carrying amount of an asset may not be recoverable, we determine whether an impairment
has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest
level for which identifiable cash flows exist. The undiscounted cash flow analysis consists of
estimating the future cash flows that are directly associated with and expected to arise from the
use and eventual disposition of the asset over its remaining useful life. These cash flows are
inherently subjective and require significant estimates based upon historical experience and future
expectations reflected in our budgets and internal projections. If the undiscounted cash flows do
not exceed the carrying value of the long-lived asset, an impairment has occurred, and we recognize
a loss for the difference between the carrying amount and the estimated fair value of the asset.
The fair value of the asset is measured using quoted market prices or, in the absence of quoted
25
market prices, is based on an estimate of discounted cash flows. Cash flows are generally
discounted at an interest rate commensurate with our weighted average cost of capital for a similar
asset. We have assessed the current market conditions and have concluded, at the present time,
that a triggering event has not occurred under SFAS No. 144 that
requires an impairment analysis of long-lived assets. We will continue to monitor for events or
conditions that could change this assessment. For the years ended December 31, 2008, 2007 and
2006, no significant impairment charges were recorded for assets of continuing operations.
Goodwill.
In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No.
142), we test for the impairment of goodwill on at least an annual basis. Our annual test of
impairment of goodwill is performed as of December 31. Our goodwill impairment test involves a
comparison of the fair value of each of our reporting units, as defined under SFAS No. 142, with
its carrying amount. The fair value is determined using discounted cash flows and earnings
multiples of comparable publicly traded companies. The key discounted cash flow assumptions used
to determine the fair value of our reporting units included: a) cash flow periods of 5 years, b)
terminal values calculated as 6.5 times the terminal year EBITDA and c) a discount rate of 15.24%.
If the fair value is less than the carrying value, the asset is considered impaired. The amount of
the impairment, if any, is then determined based on an allocation of the reporting unit fair
values. For the years ended December 31, 2007 and 2006, no impairment occurred for goodwill of
continuing operations. At December 31, 2008, we completed the annual impairment test required by
SFAS No. 142. Our calculations indicated the fair values of the wellhead and pipeline reporting
units exceeded their net book values and, accordingly, goodwill was not considered to be impaired.
However, due to a number of factors, including the current global economic environment, our current
estimate of our customers drilling activities, increased costs of capital and the decrease in our
market capitalization, our calculations for the pressure and flow control reporting unit indicated
its net book value exceeded its fair value and, accordingly, goodwill was considered to be
impaired. We used the estimated fair value of the pressure and flow control reporting unit from
the first step as the purchase price in a hypothetical acquisition of the reporting unit. The
significant hypothetical purchase price allocation adjustments made to the assets and liabilities
of the pressure and flow control reporting unit for this calculation were in the following areas:
(1) adjusting the carrying value of property, plant and equipment to their estimated aggregate fair
values; (2) adjusting the carrying value of other intangible assets to their estimated aggregate
fair values; and (3) recalculating deferred income taxes under Financial Accounting Standards Board
Statement No. 109,
Accounting for Income Taxes
, after considering the likely tax basis a
hypothetical buyer would have in the assets and liabilities. We recognized a goodwill impairment
of $23.5 million for the year ended December 31, 2008 related to our pressure and flow control
reporting unit. See note 4 to the consolidated financial statements included in this report for
further discussion of our goodwill impairment. Remaining goodwill by reporting unit was $70.7
million, $13.6 million and $3.6 million for the pressure and flow control, wellhead and pipeline
reporting units, respectively. At December 31, 2008, the estimated fair value of the wellhead and
pipeline reporting units exceeded the recorded net book value of these reporting units by 6% and
23%, respectively. Should our estimate of the fair value of any of our reporting units decline in
future periods, due to further, and sustained, deterioration in global economic conditions, changes
in our outlook for future profits and cash flows, further reductions in the market price of our
stock, increased costs of capital, reductions in valuations of other public companies within our
industry or valuations observed in acquisition transactions within our industry, further impairment
of goodwill could be required.
Self Insurance.
We are self-insured up to certain levels for our group medical coverage. The
amounts in excess of the self-insured levels are fully insured, up to a limit. Liabilities
associated with these risks are estimated by considering historical claims experience. Although we
believe adequate reserves have been provided for expected liabilities arising from our self-insured
obligations, there is a risk that our insurance may not be sufficient to cover
any particular loss or that our insurance may not cover all losses. For example, while we
maintain product liability insurance, this type of insurance is limited in coverage, and it is
possible an adverse claim could arise in excess of our coverage. Finally, insurance rates have in
the past been subject to wide fluctuation. Changes in coverage, insurance markets and the industry
may result in increases in our cost and higher deductibles and retentions.
Income Taxes.
We provide for income taxes in accordance with SFAS No. 109,
Accounting for
Income Taxes
(SFAS No. 109). This standard takes into account the differences between financial
statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled.
The effect of a change in tax rates is recognized as income or expense in the period that includes
the enactment date. Our effective tax rates for 2008, 2007 and 2006 were 52.4%, 36.0% and 35.5%,
respectively.
26
We operate in several domestic tax jurisdictions and certain foreign tax jurisdictions. As a
result, we are subject to domestic and foreign tax jurisdictions and tax agreements and treaties
among the various taxing authorities. Determination of taxable income in any jurisdiction requires
the interpretation of the related tax laws and regulations and the use of estimates and assumptions
regarding significant future events. Changes in tax laws, regulations, agreements and treaties,
foreign currency exchange restrictions or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we must pay during any given
year.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when
it is more likely than not that some or all of the deferred tax assets will expire before
realization of the benefit or that future deductibility is not probable. The ultimate realization
of the deferred tax assets depends upon our ability to generate sufficient taxable income of the
appropriate character in the future. This requires management to use estimates and make
assumptions regarding significant future events such as the taxability of entities operating in the
various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we
consider all reasonably available positive and negative evidence, including our past operating
results, the existence of cumulative losses in the most recent years and our forecast of future
taxable income. In estimating future taxable income, we develop assumptions, including the amount
of future state, federal and international pretax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment. When the likelihood of the realization of existing
deferred tax assets changes, adjustments to the valuation allowance are charged, in the period in
which the determination is made, either to income or goodwill, depending upon when that portion of
the valuation allowance was originally created.
As of December 31, 2008, we had gross deferred tax assets of $14.1 million offset by a
valuation allowance of $3.5 million.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109
(FIN 48), which clarified the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109, on January 1, 2007. FIN 48
clarifies the application of SFAS No. 109 by defining criteria that an individual tax position must
meet for any part of the benefit of that position to be recognized in the financial statements.
Additionally, FIN 48 provides guidance on the measurement, derecognition, classification and
disclosure of tax positions, along with accounting for the related interest and penalties. The
cumulative effect of adopting FIN 48, as discussed further in Note 9 of the consolidated financial
statements, was recorded in retained earnings and other accounts as applicable.
Stock-Based Compensation.
We account for stock-based compensation in accordance with SFAS No.
123 (Revised 2004)
Share-Based Payment
(SFAS No. 123R). SFAS No. 123R addresses the accounting
for all share-based payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. Effective January 1, 2006, we
adopted the fair value recognition provisions of SFAS No. 123R using the modified-prospective
transition method. Under that transition method, compensation cost is recognized for all awards
granted or settled after the adoption date as well as for any awards that were granted prior to the
adoption date for which the requisite service has not yet been rendered. We recognized $5.5
million, $3.2 million and $1.9 million of employee stock-based compensation expense related to
stock options and restricted stock during the years ended December 31, 2008, 2007 and 2006,
respectively.
Contingencies.
We record an estimated loss from a loss contingency when information available
prior to the issuance of our financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies such as
environmental, legal and income tax matters requires us to use judgment. While we believe that our
accruals for these matters are adequate, the actual loss from a loss contingency could be
significantly different than the estimated loss, resulting in an adverse effect on our results of
operations and financial position.
Foreign Currency Translation
.
The functional currency for most of our international
operations is the applicable local currency. The accounting records for all of our international
subsidiaries are maintained in local currencies.
27
Results of operations for foreign subsidiaries with functional currencies other than the U.S.
dollar are translated using average exchange rates during the period. Assets and liabilities of
these foreign subsidiaries are translated using the exchange rates in effect at the balance sheet
dates, and the resulting translation adjustments are included as Accumulated Other Comprehensive
Income, a component of stockholders equity.
For non-U.S. subsidiaries where the functional currency is the U.S. dollar, inventories,
property, plant and equipment and other non-monetary assets, together with their related elements
of expense, are translated at historical rates of exchange. Monetary assets and liabilities are
translated at current exchange rates. All other revenues and expenses are translated at average
exchange rates. Translation gains and losses for these subsidiaries are recognized in our results
of operations during the period incurred. The gain or loss related to individual foreign currency
transactions are reflected in results of operations when incurred.
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. The initial application of SFAS No.
157 is limited to financial assets and liabilities and non-financial assets and liabilities
recognized at fair value on a recurring basis. 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. On January 1, 2009, SFAS No. 157 became effective
on a prospective basis for non-financial assets and liabilities that are not measured at fair value
on a recurring basis. The application of SFAS No. 157 to our non-financial assets and liabilities
will primarily relate to assets acquired and liabilities assumed in a business combination and
asset impairments, including goodwill and long-lived assets. This application of SFAS No. 157 is
not expected to have a material 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 expect that the adoption of SFAS No. 141R
will have an effect on the accounting for our business combinations after January 1, 2009, but the
effect will be dependent upon acquisitions at that time and therefore is not currently estimable.
We do not expect the provisions of SFAS No. 141R regarding the income statement recognition of
changes to valuation allowances and tax uncertainties established before the adoption of SFAS No.
141R to have a material impact on our consolidated financial position, results of operations and
cash flows.
Outlook
Our worldwide operations are primarily driven by the level and complexity of oil and natural
gas wells being drilled and completed. The current global economic slowdown has led to a steep
decline in oil and natural gas prices, with current oil prices approximately 80% below their
historic highs in July 2008. These price declines have reduced cash flows of oil and gas producers
and have led to significant reductions in planned drilling activity for 2009, particularly in North
America where our operations have a material amount of exposure. As our customers backlog and
utilization rates continue to decline, we anticipate that they will cut spending for our products
and services, request faster response times to match their shorter visibility and request creative
ways to decrease costs. To meet customer needs in the current and anticipated environment, we have
introduced programs to meet faster response times for certain products and services and to sell
tailored service packages to our customers to save costs.
Our backlog at December 31, 2008 was the highest ever year-end backlog, but it is down $18.1
million or 19% from September 30, 2008. This reflects the reality that our sales exceeded our
bookings for the fourth quarter, when average drilling activity levels and commodity prices were
higher than they are today. As we look forward, we believe that, although lower than the fourth
quarter of 2008, our outlook for the first quarter of 2009 is favorable, as evidenced by our strong
backlog for our pressure and flow control product line and our continued level of quoting activity.
The outlook beyond the first quarter of 2009 is more difficult to ascertain. Although a number of
factors influence exploration and production spending, the Companys business is highly dependent
on the general economic environment in the United States and other major world economies, which
ultimately impacts energy consumption and the resulting demand for our products and services.
Demand could also be affected by the
28
availability of credit as many companies that spend in the industry or consume energy fund a
portion of those expenditures with debt. At the moment, current commodity prices and higher than
normal levels of inventories for oil and natural gas imply a negative impact on the level of
activity and capital spending in our industry which would, in turn, imply a negative impact on
pricing of and demand for our product and service lines in 2009. In the past, these declines have
typically occurred in the United States before spreading into international markets.
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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March 31, 2007
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$
|
58.08
|
|
|
$
|
7.17
|
|
|
|
1,733
|
|
|
|
532
|
|
|
|
982
|
|
June 30, 2007
|
|
$
|
64.97
|
|
|
$
|
7.66
|
|
|
|
1,757
|
|
|
|
139
|
|
|
|
1,002
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|
September 30, 2007
|
|
$
|
75.46
|
|
|
$
|
6.25
|
|
|
|
1,788
|
|
|
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348
|
|
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|
1,020
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|
December 31, 2007
|
|
$
|
90.68
|
|
|
$
|
7.40
|
|
|
|
1,790
|
|
|
|
356
|
|
|
|
1,017
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|
March 31, 2008
|
|
$
|
97.94
|
|
|
$
|
8.72
|
|
|
|
1,770
|
|
|
|
507
|
|
|
|
1,046
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|
June 30, 2008
|
|
$
|
126.35
|
|
|
$
|
11.47
|
|
|
|
1,868
|
|
|
|
199
|
|
|
|
1,084
|
|
September 30, 2008
|
|
$
|
118.05
|
|
|
$
|
9.00
|
|
|
|
1,987
|
|
|
|
439
|
|
|
|
1,096
|
|
December 31, 2008
|
|
$
|
58.35
|
|
|
$
|
6.38
|
|
|
|
1,896
|
|
|
|
407
|
|
|
|
1,090
|
|
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Source:
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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).
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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.
Results of Operations
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
Revenues
.
Revenues increased $67.9 million, or 31.2%, in the year ended December 31, 2008
compared to the year ended December 31, 2007. Excluding the acquisitions of EEC and HP&T, which
were completed in October 2007, and Pinnacle, which was completed in January 2008, revenues
increased approximately $9.2 million, or 4.4%, from the year ended December 31, 2007. Excluding
EEC and HP&T, our pressure and flow control products revenue increased approximately $6.1 million
from the year ended December 31, 2007. This revenue increase was attributable to improved demand
for our pressure and flow control 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. This increase in the pressure and flow control products and services
was partially offset by a $4.1 million decrease in our Canadian pressure and flow control revenues
from the year ended December 31, 2007 due to continued weakness in the region. Our pipeline
product line revenues increased approximately $3.5 million from the year ended December 31, 2007,
due to an increase in the number of original equipment products we manufacture. Excluding
Pinnacle, our wellhead product line revenues decreased approximately $0.4 million from the year
ended December 31, 2007, due to lower activity with certain of our larger customers in 2008. 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 17.4% from $64.8 million at December
31, 2007 to $76.1 million at December 31, 2008. Also, as a percentage of revenues, our original
equipment product revenues accounted for approximately 80% of total revenues during the year ended
December 31, 2008, as compared to approximately 76% of total revenues during the same period in
2007.
29
Cost of Revenues
.
Cost of revenues increased $37.0 million, or 26.9%, in the year ended
December 31, 2008 compared to the year ended December 31, 2007, primarily as a result of the
increase in revenues described above. Gross profit as a percentage of revenues was 38.9% in the
year ended December 31, 2008 compared to 36.8% in the year ended December 31, 2007. Gross profit
margin was higher in 2008 due to increased sales of higher margin products and services and
operational efficiencies, partially offset by costs of approximately $1.4 million associated with
lost absorption, downtime pay and minimal property damage due to the impact of Hurricanes Gustav
and Ike. Gross profit margin was also lower in 2007 due to 2007 gross profit margins being
affected by 2006 pricing on choke orders and cost overruns on large bore BOPs quoted in 2006 at
one of our pressure and flow control facilities where the manufacturing capacity expansion had not
yet been completed.
Operating Expenses
.
Operating expenses consist of selling, general and administrative
expenses and a charge for goodwill impairment during 2008. For the year ended December 31, 2008,
we recognized a goodwill impairment of $23.5 million related to our pressure and flow control
reporting unit. See footnote 4 to the consolidated financial statements included in this report
for further discussion of our goodwill impairment. Selling, general and administrative expenses
increased $19.1 million, or 48.7%, in the year ended December 31, 2008 compared to the year ended
December 31, 2007. The acquisitions of EEC, HP&T and Pinnacle accounted for $6.1 million, or
32.0%, of this increase in total selling, general and administrative expenses. Selling, general
and administrative expenses for the year ended December 31, 2008 included $4.7 million of costs
incurred related to the pursuit of strategic alternatives. Selling, general and administrative
expenses for the year ended December 31, 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. Selling, general and administrative expenses, excluding
the strategic alternatives costs in 2008 and the compensation charge in 2007, as a percentage of
revenues were 18.8% in the year ended December 31, 2008 compared to 16.9% in the year ended
December 31, 2007. The increase in selling, general and administrative expenses as a percentage of
revenues, excluding the strategic alternatives costs in 2008 and the compensation charge in 2007,
as compared to the year ended December 31, 2007, is primarily due to increased other intangible
assets amortization costs of $2.1 million primarily incurred as a result of the October 2007
acquisitions of EEC and HP&T and the January 2008 acquisition of Pinnacle, as well as increased
employee stock-based compensation expense of $2.3 million and increased health insurance and
payroll costs associated with an increase in headcount.
Interest Expense
.
Interest expense for the year ended December 31, 2008 was $2.4 million
compared to $1.2 million in the year ended December 31, 2007. The increase was primarily
attributable to higher debt levels during 2008, incurred in connection with our 2007 acquisitions
of EEC and HP&T and our 2008 acquisition of Pinnacle.
Interest Income
.
Interest income for the year ended December 31, 2008 was $0.1 million
compared to $0.9 million in the year ended December 31, 2007. The decrease was primarily
attributable to lower levels of cash held in our bank accounts, due to greater levels of debt
repayments during 2008.
Other Income (Expense), net
. Other income (expense), net decreased $0.4 million for the year
ended December 31, 2008 primarily due to the decreased earnings of our unconsolidated affiliate in
Mexico, which we account for under the equity method of accounting.
Income Taxes
.
Income tax expense for the year ended December 31, 2008 was $14.4 million as
compared to $14.9 million in the year ended December 31, 2007. The decrease was due to a decrease
in income before taxes, primarily related to goodwill impairment recognized for our pressure and
flow control reporting unit for the year ended December 31, 2008. Also, during the fourth quarter
of 2008, we recorded a tax benefit of $0.9 million as a result of the deductibility of $2.6 million
of strategic alternative costs, of which $2.2 million was recorded in the third quarter of 2008 and
$0.4 million was recorded in the second quarter of 2008. These strategic alternative costs were
previously determined to be non-deductible during the third quarter of 2008. Our effective tax
rate was 52.4% in the year ended December 31, 2008 compared to 36.0% in the year ended December 31,
2007. The higher rate in 2008 resulted primarily from approximately $15.0 million of the $23.5
million goodwill impairment not being deductible, partially offset by higher deductions for certain
expenses related to production activities, the utilization of R&D tax credits during 2008 and
extraterritorial income exclusion tax deductions available for years prior to 2007. In March and
June 2008, we filed amended tax returns for the years 2006, 2005 and 2004, which resulted in
30
an income tax expense reduction of $1.0 million. In addition, the 2007 effective tax rate
included approximately $0.6 million of income tax expense related to certain compensation expenses
that were non-deductible under Section 162(m) of the Internal Revenue Code, whereas the 2008
effective tax rate included approximately $0.1 million of income tax expense for such
non-deductible compensation. These decreases were partially offset by additional income tax
expense due to a $0.3 million increase in our liability for unrecognized tax benefits, and an
increase in income tax expense of approximately $0.1 million related to a portion of the change in
our valuation allowance.
Income from Continuing Operations
.
Income from continuing operations was $13.0 million in the
year ended December 31, 2008 compared with $26.5 million in the year ended December 31, 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 year ended December 31, 2008 was $0.1 million
as compared to $1.3 million in the year ended December 31, 2007. The decrease in loss in 2008 is
primarily due to a jury verdict of $1.1 million, net of tax, during 2007 against one of our
discontinued businesses.
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Revenues
.
Revenues increased $54.3 million, or 33.3%, in the year ended December 31, 2007
compared to the year ended December 31, 2006. The acquisitions of EEC and HP&T, which were
completed in October 2007, accounted for $9.9 million, or 18.3%, of this total revenue increase.
Excluding EEC, HP&T and Canada revenues, approximately $25.4 million of the revenue increase was
attributable to improved demand for our pressure and flow control 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 and the increase in our manufacturing capacity
through facility expansions and improvements. The 2007 revenue increase is also the result of
increased customer orders for our pipeline and wellhead product lines, whose revenues increased
$8.8 million and $13.8 million, respectively, due to geographic expansion and an increase in the
number of original equipment products we manufacture. Our pipeline and wellhead product lines
revenues increased approximately 90% and 29%, respectively, from the year ended December 31, 2006
to December 31, 2007. We believe that our T-3 branded products have gained market acceptance,
resulting in greater sales to customers that use our products in both their domestic and
international operations. For example, T-3 original equipment product revenues increased
approximately 58% in the year ended December 31, 2007 as compared to the year ended December 31,
2006. In addition, our original equipment product revenues accounted for approximately 76% of
total revenues during the year ended December 31, 2007, as compared to 65% of total revenues during
the same period in 2006. These revenue increases were partially offset by weaker activity for our
Canadian operations, whose revenues decreased $3.6 million from 2006 to 2007.
Cost of Revenues
.
Cost of revenues increased $34.4 million, or 33.4%, in the year ended
December 31, 2007 compared to the year ended December 31, 2006, primarily as a result of the
increase in revenues described above. Gross profit as a percentage of revenues was 36.8% in the
year ended December 31, 2007 compared to 36.9% in the year ended December 31, 2006. Gross profit
margin was slightly lower in 2007 primarily due to our 2007 gross profit margins being affected by
2006 pricing on choke orders, cost overruns on 2006 quoted large bore blowout preventers at one of
our pressure and flow control facilities where the manufacturing capacity expansion has not yet
been completed, increased depreciation costs associated with the increase in our manufacturing
capacity and lower absorption of fixed costs associated with our geographic expansion. The
slowdown in drilling activity in Canada also contributed to lower utilization for our Canadian
operations. These decreases were partially offset by increased sales of higher margin products and
services and operational efficiencies.
Operating Expenses
.
Operating expenses consist solely of selling, general and administrative
expenses during 2007 and 2006. Selling, general and administrative expenses increased $7.8
million, or 25.0%, in the year ended December 31, 2007 compared to the year ended December 31,
2006. The acquisitions of EEC and HP&T during October 2007 accounted for $1.3 million, or 16.4%,
of this total selling, general and administrative expenses increase. Selling, general and
administrative expenses as a percentage of revenues were 18.0% in the year ended December 31, 2007
compared to 19.2% in the year ended December 31, 2006. This decrease in selling, general and
administrative expenses as a percentage of revenues is primarily due to selling, general and
administrative expenses
31
consisting primarily of fixed costs along with variable costs, such as payroll and benefits, not
increasing proportionately with revenues. Additionally, this decrease is also due to $0.4 million
of terminated public offering costs incurred in the year ended December 31, 2006. This decrease in
selling, general and administrative expenses was partially offset with the $2.5 million
compensation charge related to the second quarter 2007 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 existing employment agreement and
higher general insurance costs and engineering costs.
Interest Expense
.
Interest expense for the year ended December 31, 2007 was $1.2 million
compared to $0.9 million in the year ended December 31, 2006. The increase was primarily
attributable to higher debt levels incurred during the last quarter of 2007, in connection with our
partially financed acquisitions of EEC and HP&T.
Interest Income
.
Interest income for the year ended December 31, 2007 was $0.9 million
compared to $0.1 million in the year ended December 31, 2006. The increase was primarily
attributable to interest earned on the proceeds received from the April 2007 common stock offering.
Other Income (Expense), net
. Other income (expense), net increased $0.4 million for the year
ended December 31, 2007 primarily due to the earnings of our unconsolidated affiliate in Mexico,
which we account for under the equity method of accounting.
Income Taxes
.
Income tax expense for the year ended December 31, 2007 was $14.9 million as
compared to $10.2 million in the year ended December 31, 2006. The increase was primarily due to
an increase in income before taxes. Our effective tax rate was 36.0% in the year ended December
31, 2007 compared to 35.5% in the year ended December 31, 2006. The higher rate in the 2007 period
resulted primarily from certain compensation expenses being non-deductible under Section 162(m),
partially offset by higher deductions for certain expenses related to production activities and the
increased availability of foreign and research and development tax credits during 2007.
Income from Continuing Operations
.
Income from continuing operations was $26.5 million in the
year ended December 31, 2007 compared with $18.4 million in the year ended December 31, 2006 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 were reported as discontinued operations for all periods presented.
Loss from discontinued operations, net of tax for the year ended December 31, 2007 was $1.3 million
as compared to $0.3 million in the year ended December 31, 2006. The increase in loss in 2007 is
primarily due to a jury verdict of $1.1 million, net of tax, during 2007 against one of our
discontinued businesses.
Liquidity and Capital Resources
At December 31, 2008, we had working capital of $71.2 million, long-term debt of $18.8 million
and stockholders equity of $211.1 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. We believe our 2009 liquidity needs will be met based on cash flows
from our operations.
Net Cash Provided by Operating Activities.
Net cash provided by operating activities was
$43.1 million for the year ended December 31, 2008 compared to $14.0 million in 2007 and $19.0
million in 2006. The increase in net cash provided by operating activities for 2008 as compared to
2007 was primarily attributable to increased profit and improved accounts receivable collections,
as well as increased customer prepayments for our products. This was partially offset by increased
tax deposits due to higher taxable income during 2008 and lower inventory turns during 2008. The
decrease of $5.0 million for 2007 as compared to 2006 was primarily attributable to increases in
our receivables and inventory due to increased sales and production activity in 2007, along with
increased tax deposits due to higher taxable income during 2007 and decreases in customer
prepayments for our products.
32
Net Cash Used in Investing Activities.
Principal uses of cash are for capital expenditures and
acquisitions. For the years ended December 31, 2008, 2007 and 2006, we made capital expenditures of
approximately $11.3 million, $7.0 million and $9.1 million, respectively. Cash consideration paid
for business acquisitions, net of cash acquired, was $2.7 million, $90.9 million and $2.2 million
for the years ended December 31, 2008, 2007 and 2006, respectively (see Note 2 to our consolidated
financial statements).
Net Cash Provided by (Used in) Financing Activities.
Sources of cash from financing activities
primarily include borrowings under our senior credit facility, proceeds from issuances of common
stock and proceeds from the exercise of stock options and warrants. Principal uses of cash include
payments on the senior credit facility and long-term debt. Financing activities used ($37.8)
million and ($6.0) million of net cash for the years ended December 31, 2008 and 2006,
respectively, and provided $90.8 million of net cash for the year ended December 31, 2007. We
made repayments on our revolving credit facility of $45.0 million and $8.0 million for the years
ended December 31, 2008 and 2006, respectively, with no such repayments during 2007. We had
borrowings under our revolving credit facility of $5.0 million, $58.0 million and $3.0 million and
net borrowings (repayments) under our swing line credit facility of ($2.7) million, $3.3 million
and ($2.0) million in the years ended December 31, 2008, 2007 and 2006, respectively. 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 to our consolidated financial
statements) during 2007, with no such proceeds in 2008 and 2006. We had proceeds from the exercise
of stock options of $3.2 million, $2.3 million and $0.7 million in the years ended December 31,
2008, 2007 and 2006, respectively. We had excess tax benefits from stock-based compensation of
$1.8 million, $2.0 million and $0.3 million in the years ended December 31, 2008, 2007 and 2006,
respectively.
Net Cash Used In Discontinued Operations
.
For the years ended December 31, 2008, 2007, and
2006, net cash used in discontinued operations was $0.1 million, $0.2 million and $0.1 million,
respectively. This consisted of operating cash flows of $0.1 million, $0.2 million and $0.1
million, respectively. There were no investing or financing cash flows.
Principal Debt Instruments.
As of December 31, 2008, we had an aggregate of approximately
$18.8 million borrowed under our senior credit facility and debt instruments entered into or
assumed in connection with acquisitions, as well as other bank financings. As of December 31,
2008, availability under our senior credit facility was
$160.4 million. Although we pay commitment fees for
$180 million under the senior credit facility, our availability
in future periods is limited to the lesser of (a) three times the
Company's EBITDA on a trailing-twelve-months basis less the Company's
outstanding borrowings, standby letters of credit and other debt (as
defined under our senior credit facility) and (b) the amount of
additional borrowings that would result in interest payments on all
of the Company's debt that exceed one third of the Company's EBITDA
on a trailing-twelve-months basis. As such, a
decline in our EBITDA from our 2008 results, an increase in
borrowing or a combination of the two could reduce the availability
under our facility below our current committed amounts.
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. 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. However, in light of the
current financial turmoil affecting the banking system and financial markets, there is no assurance
that the senior lenders will approve such advancements or have the ability to fund such borrowing
requests.
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
December 31, 2008, the swing line portion of our senior credit facility bore interest at 3.3%, with
interest payable quarterly, and the revolver portion of our credit facility bore interest at a
weighted average rate of 2.5%, with interest payable monthly. The effective interest rate of our
senior credit facility, including amortization of deferred loan costs, was 5.9% during 2008. The
effective interest rate, excluding amortization of deferred loan costs, was 5.3% during 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
33
senior credit facility provides, among other covenants and restrictions, that we comply with the
following financial covenants: a minimum interest coverage ratio of 3.0 to 1.0, a maximum leverage
ratio of 3.0 to 1.0 and a limitation on capital expenditures of no
more than 75% of current year EBITDA, or $45.7
million as of December 31, 2008. As of December 31, 2008, we were in compliance with the covenants under the senior credit
facility, with an interest coverage ratio of 25.3 to 1.0, a leverage ratio of 0.32 to 1.0, and
year-to-date capital expenditures of $11.3 million. 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 December 31, 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 during
2009.
However, in light of the current financial turmoil, we are exposed to some credit risk related
to our senior credit facility to the extent that our senior lenders, including Wells Fargo Bank as
administrative agent, may be unable to provide necessary funding to us under our senior credit
facility if they experience liquidity problems. While we believe our 2009 liquidity needs will be
met based on cash flows from our operations, if our senior lenders are unable to provide funding in
accordance with their commitment, our ability to meet our current and long term needs could be
adversely impacted and our operations could be negatively impacted.
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 will be available at terms acceptable to us, if available at all.
Capital Expenditures.
Our budgeted capital expenditures for 2009 (excluding acquisitions) are
approximately $5.4 million. Our budget for 2009 is subject to further review and may be reduced
from $5.4 million based off of market conditions. Excluded from this budget is approximately $3.5
million of capital expenditures expected to be incurred in 2009 that were budgeted in prior years.
Contractual Obligations
A summary of our outstanding contractual obligations and other commercial commitments at
December 31, 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
Long-term debt
|
|
$
|
18,758
|
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
18,750
|
|
|
$
|
|
|
Operating leases
|
|
|
4,680
|
|
|
|
2,064
|
|
|
|
2,156
|
|
|
|
454
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
23,438
|
|
|
$
|
2,069
|
|
|
$
|
2,159
|
|
|
$
|
19,204
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, our FIN 48 unrecognized tax benefits totaled $1.2 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, $0.5
million of post-closing purchase price adjustments related to the
34
acquisition of HP&T has been excluded from the above table. This amount is expected to be paid in
the first quarter of 2009.
Related Party Transactions
We have transactions in the ordinary course of business with certain related parties.
Management believes these transactions were made at the prevailing market rates or terms.
We lease certain buildings under noncancelable operating leases from employees of the Company.
Lease commitments under these leases are approximately $0.9 million for 2009 through 2012. Rent
expense to related parties was $0.4 million, $0.1 million and $0.1 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
We sell pressure control products to and perform services for our unconsolidated affiliate in
Mexico, which is a joint venture between the Company and Servicios Y Maquinaria De Mexico, S.A. de
C.V., or SYMMSA, a subsidiary of GRUPO R, a conglomerate of companies that provides services to the
energy and industrial sectors in Mexico. The total amount of these sales was approximately $0.4
million and $2.1 million for the years ended December 31, 2008 and 2007, respectively, and the
total accounts receivable due from the Mexico joint venture was approximately $50,000 and $0.7
million at December 31, 2008 and 2007, respectively.
Any reportable transactions between related parties and us other than in the ordinary course
of business will be reviewed and approved in advance by our Audit Committee.
Inflation
Inflation is a factor in the United States economy and may increase the cost to acquire or
replace property, plant and equipment and may increase the costs of labor and supplies. Although we
believe that inflation has not had any material effect on our operating results, our business may
be affected by inflation in the future. To the extent permitted by competition, regulation and our
existing agreements, we have and will continue to pass through increased costs to our customers in
the form of higher fees.
Seasonality
We believe that our business is not subject to any significant seasonal factors, and we do not
anticipate significant seasonality in the future although severe weather and natural phenomena can
temporarily affect the manufacturing and provision of as well as demand for our products and
services. Several of our manufacturing facilities are concentrated near the Gulf of Mexico and can
suffer interruptions from hurricanes, which could adversely impact operations.
Item 7A.
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 December 31, 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 $18.8 million. A 1.0% increase in interest rates could result
in a $188,000 increase in annual interest expense based on the December 31, 2008 outstanding
principal balance. As of December 31, 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 and Indian operations and our unconsolidated affiliate in Mexico. Less than 1% of our
net assets are impacted by changes in foreign currency in relation to the U.S. dollar.
35
The functional currency for most of our international operations is the applicable local
currency. The accounting records for all of our international subsidiaries are maintained in local
currencies.
Results of operations for foreign subsidiaries with functional currencies other than the U.S.
dollar are translated using average exchange rates during the period. Assets and liabilities of
these foreign subsidiaries are translated using the exchange rates in effect at the balance sheet
dates, and the resulting translation adjustments are included as Accumulated Other Comprehensive
Income, a component of stockholders equity. We recorded a $(3.1) million adjustment to our equity
account for the year ended December 31, 2008 to reflect the net impact of the change in foreign
currency exchange rate related to our international operations.
For non-U.S. subsidiaries where the functional currency is the U.S. dollar, inventories,
property, plant and equipment and other non-monetary assets, together with their related elements
of expense, are translated at historical rates of exchange. Monetary assets and liabilities are
translated at current exchange rates. All other revenues and expenses are translated at average
exchange rates. Translation gains and losses for these subsidiaries are recognized in our results
of operations during the period incurred. The gain or loss related to individual foreign currency
transactions are reflected in results of operations when incurred. We recorded a gain of
approximately $36,000 during the year ended December 31, 2008.
Item 8.
Financial Statements and Supplementary Data
The financial statements and supplementary data required hereunder are included in this report
as set forth in the Index to Consolidated Financial Statements on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that material
information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, or Exchange Act, is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission, or SEC, and that any material information
relating to us is recorded, processed, summarized and reported to our management including our
Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, as appropriate to allow
timely decisions regarding required disclosures. In designing and evaluating our disclosure
controls and procedures, our management recognizes that controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving desired control
objectives. In reaching a reasonable level of assurance, our management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by Rule 13a-15(b) of the Exchange Act, our management carried out an evaluation,
with the participation of our principal executive officer (our CEO) and our principal financial
officer (our CFO), of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of
the period covered by this report. Based on those evaluations, the 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 the 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 December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
36
Our managements assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2008 is set forth on page F-2 of this Annual Report and is
incorporated by reference herein.
Ernst & Young LLP, the independent registered accounting firm that audited the Companys
financial statements included in this Annual Report, has issued an audit report on the Companys
internal control over financial reporting as of December 31, 2008. This report appears on page F-3
of this Annual Report.
Item 9B. Other Information
During
November 2008, Keith A. Klopfenstein, the Companys recently appointed Senior
Vice President Pressure Control Group received a base salary increase
from $168,000 per year to approximately $201,000 per year.
On
November 16, 2008, Keith A. Klopfenstein, the Companys recently
appointed Senior Vice President Pressure Control Group, received a
base salary increase from $167,764 per year to $201,317 per year. All other
terms of Mr. Klopfensteins employment agreement remain in
effect.
37
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
The information required by this item is incorporated herein by reference to the material
appearing in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A to be filed no later than
120 days after the end of the fiscal year covered by this Annual Report.
Item 11.
Executive Compensation
The information required by this item is incorporated herein by reference to the material
appearing in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A to be filed no later than
120 days after the end of the fiscal year covered by this Annual Report.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated herein by reference to the material
appearing in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A to be filed no later than
120 days after the end of the fiscal year covered by this Annual Report.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the material
appearing in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A to be filed no later than
120 days after the end of the fiscal year covered by this Annual Report.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the material
appearing in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A no later than 120 days after
the end of the fiscal year covered by this Annual Report.
38
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
|
|
The following documents are filed as part of this report:
|
|
1.
|
|
Financial Statements
|
|
|
|
|
See Index to Consolidated Financial Statements set forth on page F-1.
|
|
|
2.
|
|
Financial Statement Schedules
|
|
|
|
|
None.
|
|
|
3.
|
|
Exhibits
|
|
|
|
|
See the Exhibit Index appearing on page EX-1.
|
(b)
|
|
Exhibits
|
|
|
|
See Item 15(a)(3) above.
|
|
(c)
|
|
Financial Statement Schedules
|
|
|
|
None.
|
39
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 2
nd
day of March, 2009.
|
|
|
|
|
|
|
|
T-3 ENERGY SERVICES, INC.
|
|
|
By:
|
/s/ James M. Mitchell
|
|
|
|
James M. Mitchell (Chief Financial
|
|
|
|
Officer and Senior Vice President)
|
|
|
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Gus D. Halas and James M.
Mitchell and each of them, his true and lawful attorney-in-fact and agent, with full powers of
substitution, for him and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this Annual Report of Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission granting
to said attorney-in-fact, and each of them, full power and authority to perform any other act on
behalf of the undersigned required to be done in connection therewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on the
2
nd
day of March, 2009.
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
|
|
|
|
By: /s/ Gus D. Halas
Gus D. Halas
|
|
|
|
President, Chief Executive Officer and Chairman
(Principal Executive Officer)
|
|
|
|
|
|
By: /s/ James M. Mitchell
James M. Mitchell
|
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
By: /s/ James M. Tidwell
James M. Tidwell
|
|
|
|
Director
|
|
|
|
|
|
By: /s/ Lisa W. Rodriguez
Lisa W. Rodriguez
|
|
|
|
Director
|
|
|
|
|
|
By: /s/ Robert L. Ayers
Robert L. Ayers
|
|
|
|
Director
|
|
|
|
|
|
By: /s/ Thomas R. Bates, Jr.
Thomas R. Bates, Jr.
|
|
|
|
Director
|
40
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
T-3 Energy Services, Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
|
|
F-9
|
|
|
F-10
|
F-1
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in the Securities Exchange Act of 1934
Rule 13a-15(f). The Companys internal control system was designed to provide reasonable assurance
to the Companys management and Board of Directors regarding the reliability of financial
reporting and the preparation and fair presentation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In making its assessment, management has utilized the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated
Framework
. Based on this assessment, management has concluded that, as of December 31, 2008, the
Companys internal control over financial reporting is effective to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP, the independent registered public accounting firm that audited the
Companys financial statements included in this annual report, has issued an audit report on the
Companys internal control over financial reporting as of December 31, 2008. This report appears
on the following page.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
T-3 Energy Services, Inc.
We have audited T-3 Energy Services, Inc.s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). T-3
Energy Services, Inc.s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, T-3 Energy Services, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
F-3
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of T-3 Energy Services, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2008, and our
report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
February 27, 2009
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
T-3 Energy Services, Inc.
We have audited the accompanying consolidated balance sheets of T-3 Energy Services, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of T-3 Energy Services, Inc. and subsidiaries at
December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007 the
Company adopted Financial Accounting Standard Board (FASB) Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), T-3 Energy Services, Inc.s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
February 27, 2009
F-5
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
838
|
|
|
$
|
9,522
|
|
Accounts receivable trade, net
|
|
|
47,822
|
|
|
|
44,180
|
|
Inventories
|
|
|
58,422
|
|
|
|
47,457
|
|
Deferred income taxes
|
|
|
5,131
|
|
|
|
3,354
|
|
Prepaids and other current assets
|
|
|
4,585
|
|
|
|
5,824
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
116,798
|
|
|
|
110,337
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
46,071
|
|
|
|
40,073
|
|
Goodwill, net
|
|
|
87,929
|
|
|
|
112,249
|
|
Other intangible assets, net
|
|
|
33,477
|
|
|
|
35,065
|
|
Other assets
|
|
|
2,837
|
|
|
|
2,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
287,112
|
|
|
$
|
300,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
$
|
26,331
|
|
|
$
|
20,974
|
|
Accrued expenses and other
|
|
|
19,274
|
|
|
|
15,156
|
|
Current maturities of long-term debt
|
|
|
5
|
|
|
|
74
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,610
|
|
|
|
36,204
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
18,753
|
|
|
|
61,423
|
|
Other long-term liabilities
|
|
|
1,628
|
|
|
|
1,101
|
|
Deferred income taxes
|
|
|
10,026
|
|
|
|
11,186
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 25,000,000 shares
authorized, no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 50,000,000 shares
authorized, 12,547,458 and 12,320,341 shares issued
and outstanding at December 31, 2008 and 2007,
respectively
|
|
|
13
|
|
|
|
12
|
|
Warrants, 10,157 and 13,138 issued and outstanding at
December 31, 2008 and 2007, respectively
|
|
|
20
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
171,042
|
|
|
|
160,446
|
|
Retained earnings
|
|
|
40,036
|
|
|
|
27,039
|
|
Accumulated other comprehensive income
|
|
|
(16
|
)
|
|
|
3,125
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
211,095
|
|
|
|
190,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
287,112
|
|
|
$
|
300,562
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
241,328
|
|
|
$
|
176,579
|
|
|
$
|
121,294
|
|
Services
|
|
|
44,001
|
|
|
|
40,855
|
|
|
|
41,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,329
|
|
|
|
217,434
|
|
|
|
163,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
148,667
|
|
|
|
112,566
|
|
|
|
77,747
|
|
Services
|
|
|
25,784
|
|
|
|
24,890
|
|
|
|
25,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,451
|
|
|
|
137,456
|
|
|
|
103,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
110,878
|
|
|
|
79,978
|
|
|
|
60,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
23,500
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
58,318
|
|
|
|
39,217
|
|
|
|
31,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,818
|
|
|
|
39,217
|
|
|
|
31,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
29,060
|
|
|
|
40,761
|
|
|
|
28,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,357
|
)
|
|
|
(1,231
|
)
|
|
|
(903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
148
|
|
|
|
876
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
568
|
|
|
|
988
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for
income taxes
|
|
|
27,419
|
|
|
|
41,394
|
|
|
|
28,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
14,374
|
|
|
|
14,887
|
|
|
|
10,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
13,045
|
|
|
|
26,507
|
|
|
|
18,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(48
|
)
|
|
|
(1,257
|
)
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
$
|
18,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.05
|
|
|
$
|
2.26
|
|
|
$
|
1.74
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.02
|
|
|
$
|
2.19
|
|
|
$
|
1.68
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.02
|
|
|
$
|
2.08
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,457
|
|
|
|
11,726
|
|
|
|
10,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,812
|
|
|
|
12,114
|
|
|
|
10,934
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Year Ended December 31, 2008, 2007 and 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Warrants
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
Balance, December 31, 2005
|
|
|
10,582
|
|
|
$
|
11
|
|
|
|
333
|
|
|
$
|
644
|
|
|
$
|
123,175
|
|
|
$
|
(15,420
|
)
|
|
$
|
802
|
|
|
$
|
109,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,092
|
|
|
|
|
|
|
|
18,092
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,092
|
|
|
|
(23
|
)
|
|
|
18,069
|
|
Expiration of warrants
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock from
exercise of stock options
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
657
|
|
Tax benefit from exercise of
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
Employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
1,893
|
|
Amortization of stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
10,762
|
|
|
$
|
11
|
|
|
|
328
|
|
|
$
|
644
|
|
|
$
|
126,054
|
|
|
$
|
2,672
|
|
|
$
|
779
|
|
|
$
|
130,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,250
|
|
|
|
|
|
|
|
25,250
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,346
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,250
|
|
|
|
2,346
|
|
|
|
27,596
|
|
Issuance of stock from
Public offering
|
|
|
1,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
22,156
|
|
|
|
|
|
|
|
|
|
|
|
22,157
|
|
Issuance of restricted stock
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock from
exercise of stock options
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
Issuance of stock from
exercise of warrants
|
|
|
315
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
(618
|
)
|
|
|
4,646
|
|
|
|
|
|
|
|
|
|
|
|
4,028
|
|
Tax benefit from exercise of
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
2,019
|
|
Employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,223
|
|
|
|
|
|
|
|
|
|
|
|
3,223
|
|
Cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(883
|
)
|
|
|
|
|
|
|
(883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
12,320
|
|
|
$
|
12
|
|
|
|
13
|
|
|
$
|
26
|
|
|
$
|
160,446
|
|
|
$
|
27,039
|
|
|
$
|
3,125
|
|
|
$
|
190,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,997
|
|
|
|
|
|
|
|
12,997
|
|
Foreign currency
translation adjustment,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,141
|
)
|
|
|
(3,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,997
|
|
|
|
(3,141
|
)
|
|
|
9,856
|
|
Issuance of restricted stock
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock from
exercise of stock options
|
|
|
205
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
3,211
|
|
Issuance of stock from
exercise of warrants
|
|
|
3
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Tax benefit from exercise of
stock options and vesting
of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
Employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
12,547
|
|
|
$
|
13
|
|
|
|
10
|
|
|
$
|
20
|
|
|
$
|
171,042
|
|
|
$
|
40,036
|
|
|
$
|
(16
|
)
|
|
$
|
211,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
$
|
18,092
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
48
|
|
|
|
1,257
|
|
|
|
323
|
|
Bad debt expense
|
|
|
384
|
|
|
|
151
|
|
|
|
112
|
|
Depreciation and amortization
|
|
|
8,349
|
|
|
|
4,971
|
|
|
|
3,520
|
|
Amortization of deferred loan costs
|
|
|
212
|
|
|
|
223
|
|
|
|
261
|
|
Write-off of deferred loan costs
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Loss (gain) on sale of assets
|
|
|
(26
|
)
|
|
|
12
|
|
|
|
24
|
|
Deferred taxes
|
|
|
(2,900
|
)
|
|
|
(732
|
)
|
|
|
1,471
|
|
Employee stock-based compensation expense and amortization of stock compensation
|
|
|
5,529
|
|
|
|
3,223
|
|
|
|
1,894
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,820
|
)
|
|
|
(2,019
|
)
|
|
|
(328
|
)
|
Equity in earnings of unconsolidated affiliate
|
|
|
(115
|
)
|
|
|
(638
|
)
|
|
|
|
|
Write-off of property and equipment, net
|
|
|
101
|
|
|
|
27
|
|
|
|
156
|
|
Impairment of goodwill
|
|
|
23,500
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of effect of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable trade
|
|
|
(4,247
|
)
|
|
|
(6,026
|
)
|
|
|
(4,201
|
)
|
Inventories
|
|
|
(11,859
|
)
|
|
|
(8,942
|
)
|
|
|
(8,958
|
)
|
Prepaids and other current assets
|
|
|
896
|
|
|
|
229
|
|
|
|
315
|
|
Other assets
|
|
|
(414
|
)
|
|
|
(136
|
)
|
|
|
(40
|
)
|
Accounts payable trade
|
|
|
5,714
|
|
|
|
497
|
|
|
|
1,353
|
|
Accrued expenses and other
|
|
|
6,789
|
|
|
|
(3,430
|
)
|
|
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
43,138
|
|
|
|
13,971
|
|
|
|
18,999
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(11,300
|
)
|
|
|
(7,045
|
)
|
|
|
(9,055
|
)
|
Proceeds from sales of property and equipment
|
|
|
94
|
|
|
|
101
|
|
|
|
223
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(2,732
|
)
|
|
|
(90,893
|
)
|
|
|
(2,248
|
)
|
Equity investment in unconsolidated affiliate
|
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
Collections on notes receivable
|
|
|
15
|
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,923
|
)
|
|
|
(98,304
|
)
|
|
|
(10,612
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under swing line credit facility
|
|
|
(2,665
|
)
|
|
|
3,330
|
|
|
|
(1,973
|
)
|
Borrowings under revolving credit facility
|
|
|
5,000
|
|
|
|
58,000
|
|
|
|
3,000
|
|
Repayments under revolving credit facility
|
|
|
(45,000
|
)
|
|
|
|
|
|
|
(8,000
|
)
|
Payments on long-term debt
|
|
|
(97
|
)
|
|
|
(68
|
)
|
|
|
(36
|
)
|
Debt financing costs
|
|
|
(78
|
)
|
|
|
(1,062
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
3,211
|
|
|
|
2,348
|
|
|
|
657
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
22,157
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
38
|
|
|
|
4,028
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
1,820
|
|
|
|
2,019
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(37,771
|
)
|
|
|
90,752
|
|
|
|
(6,024
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(34
|
)
|
|
|
(81
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
(94
|
)
|
|
|
(209
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
|
(94
|
)
|
|
|
(209
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(8,684
|
)
|
|
|
6,129
|
|
|
|
2,231
|
|
Cash and cash equivalents, beginning of year
|
|
|
9,522
|
|
|
|
3,393
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
838
|
|
|
$
|
9,522
|
|
|
$
|
3,393
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-9
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of T-3 Energy
Services, Inc., and its wholly owned subsidiaries (the Company). The Companys 50% investment in
its unconsolidated Mexico affiliate is accounted for under the equity method of accounting. All
significant intercompany accounts and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to conform prior year financial information to the
current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. As of December 31, 2008 and 2007, there were no cash
equivalents.
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.
Accounts Receivable and Allowance for Uncollectible Accounts
Accounts receivable are stated at the historical carrying amount, net of allowances for
uncollectible accounts. The Company establishes an allowance for uncollectible accounts based on
specific customer collection issues the Company has identified. Uncollectible accounts receivable
are written off when a settlement is reached for an amount less than the outstanding historical
balance or when the Company has determined the balance will not be collected. The Companys
allowance for uncollectible accounts is presented in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance at beginning of year
|
|
$
|
285
|
|
|
$
|
294
|
|
|
$
|
257
|
|
Charged to expense
|
|
|
384
|
|
|
|
182
|
|
|
|
112
|
|
Write-offs
|
|
|
(318
|
)
|
|
|
(191
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
351
|
|
|
$
|
285
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
Major Customers and Credit Risk
Substantially all of the Companys customers are engaged in the energy industry. This
concentration of customers may impact the Companys overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes in economic and
industry conditions. The Company performs credit evaluations of its customers and does not
generally require collateral in support of its domestic trade receivables. The Company may require
collateral to support its international customer receivables. Most of the Companys international
sales, however, are to large international or national companies. In 2008, 2007 and 2006, there was
no individual customer who accounted for 10% or greater of consolidated revenues.
F-10
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories are stated at the lower of cost or market. Cost includes, where applicable,
manufacturing labor and overhead. The first-in, first-out method is used to determine the cost of
substantially all of the inventories at December 31, 2008 and 2007. Inventories consist of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
8,063
|
|
|
$
|
7,640
|
|
Work in process
|
|
|
14,680
|
|
|
|
16,319
|
|
Finished goods and component parts
|
|
|
35,679
|
|
|
|
23,498
|
|
|
|
|
|
|
|
|
|
|
$
|
58,422
|
|
|
$
|
47,457
|
|
|
|
|
|
|
|
|
The Company regularly reviews inventory quantities on hand and records a provision for excess
and slow moving inventory. This analysis is based primarily on the length of time the item has
remained in inventory and the Companys managements consideration of current and expected market
conditions. During 2008, 2007 and 2006, the Company recorded $1,950,000, $1,026,000 and $721,000,
respectively, in charges to earnings to write down the recorded cost of inventory to its estimated
fair market value.
Prepaids and Other Current Assets
Prepaids and other current assets consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Vendor deposits
|
|
$
|
1,198
|
|
|
$
|
1,815
|
|
Prepaid insurance
|
|
|
2,127
|
|
|
|
2,637
|
|
Other current assets
|
|
|
1,260
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
$
|
4,585
|
|
|
$
|
5,824
|
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. For property and
equipment acquired as a result of business combinations (see Note 2), cost is determined based upon
fair values as of the acquisition dates. Depreciation is computed using the straight-line method
over estimated useful lives. Expenditures for replacements and major improvements are capitalized.
Expenditures for maintenance, repairs and minor replacements are expensed as incurred. Leasehold
improvements are amortized over the lesser of the estimated useful life or term of the lease.
Long-Lived Assets
Long-lived assets include property, plant and equipment and definite-lived intangibles. The
Company makes judgments and estimates in conjunction with the carrying value of these assets,
including amounts to be capitalized, depreciation and amortization methods, useful lives and the
valuation of acquired definite-lived intangibles. In accordance with SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-Lived Assets
, the Company tests for the impairment of long-lived
assets upon the occurrence of a triggering event. For long-lived assets to be held and used, the
Company bases its evaluation on impairment indicators such as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability measurements and other
external market conditions or factors that may be present. If these impairment indicators are
present or other factors exist that indicate the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through the use of an
undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows
exist. The undiscounted cash flow analysis consists of estimating the future cash flows that are
directly associated with and expected to arise from the use and eventual
F-11
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disposition of the asset over its remaining useful life. These cash flows are inherently
subjective and require significant estimates based upon historical experience and future
expectations reflected in the Companys budgets and internal projections. If the undiscounted cash
flows do not exceed the carrying value of the long-lived asset, impairment has occurred, and the
Company recognizes a loss for the difference between the carrying amount and the estimated fair
value of the asset. The fair value of the asset is measured using quoted market prices or, in the
absence of quoted market prices, is based on an estimate of discounted cash flows. Cash flows are
generally discounted at an interest rate commensurate with the Companys weighted average cost of
capital for a similar asset. The Company has assessed the current market conditions and has
concluded, at the present time, that its disposition of the asset
over its remaining useful life. These cash flows are inherently
subjective and require significant estimates based upon historical
experience and future expectations reflected in the Companys
budgets and internal projections. If the undiscounted cash flows do
not exceed the carrying value of the long-lived asset, impairment has
occurred, and the Company recognizes a loss for the difference
between the carrying amount and the estimated fair value of the
asset. The fair value of the asset is measured using quoted market
prices or, in the absence of quoted market prices, is based on an
estimate of discounted cash flows. Cash flows are generally
discounted at an interest rate commensurate with the Companys
weighted average cost of capital for a similar asset. The Company has
assessed the current market conditions and has concluded, at the
present time, that a triggering event has not occurred under
SFAS No. 144 that requires an impairment analysis of
long-lived assets. The Company will continue to monitor for events or
conditions that could change this assessment. For the years ended
December 31, 2008, 2007 and 2006, no significant impairment
charges were recorded for assets of continuing operations. The Company
will continue to monitor for events or conditions that could change this assessment. For the years
ended December 31, 2008, 2007 and 2006, no significant impairment charges were recorded for assets
of continuing operations.
Goodwill
In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the
Company tests for the impairment of goodwill on at least an annual basis. The Companys annual
test of impairment of goodwill is performed as of December 31. The Companys goodwill impairment
test involves a comparison of the fair value of each of the Companys reporting units, as defined
under SFAS No. 142, with its carrying amount. The fair value is determined using discounted cash
flows and other market-related valuation models, including earnings multiples and comparable asset
market values. Certain estimates and judgments, including future earnings and cash flow levels,
future interest rates and future stock market valuation levels, are required in the application of
the fair value models. If the fair value is less than the carrying value, the asset is considered
impaired. The amount of the impairment, if any, is then determined based on an allocation of the
reporting unit fair values. For the years ended December 31, 2007 and 2006, no impairment occurred
for goodwill of continuing operations. For the year ended December 31, 2008, the Company
recognized a goodwill impairment of $23.5 million related to its pressure and flow control
reporting unit. See footnote 4 for further discussion of the Companys goodwill impairment. Should
the Companys estimate of the fair value of any of its reporting units decline in future periods,
due to further deterioration in global economic conditions, changes in the Companys outlook for
future profits and cash flows, further, and sustained, reductions in the market price of the
Companys stock, increased costs of capital, reductions in valuations of other public companies
within the Companys industry or valuations observed in acquisition transactions within the
Companys industry, further impairment of goodwill could be required.
Other Intangible Assets
Other intangible assets include non-compete agreements, customer lists, patents and technology
and other similar items. The Company assigns useful lives to its intangible assets based on the
periods over with the assets are expected to contribute directly or indirectly to the future cash
flows of the Company. The Company makes judgments and estimates in conjunction with determining
the fair value and useful lives of these intangible assets. The Companys estimates require
assumptions about demand for the Companys products and services, future market conditions and
technological developments. The estimates are dependent upon assumptions regarding oil and gas
prices, the general outlook for economic growth, available financing for the Companys customers,
political stability in major oil and gas producing areas, and the potential obsolescence of various
types of equipment the Company sells, among other factors. If our assumptions regarding these
factors change, we may be required to recognize an asset impairment or modify the amortization
period with respect to the intangible assets impacted by the assumption changes. Covenants not to
compete are amortized on a straight-line basis over the terms of the agreements, which range from
one to five years. Customer lists were acquired as part of the acquisitions of Pinnacle Wellhead,
Inc., Energy Equipment Corporation, Oilco and KC Machine and were recorded based upon their fair
market value at the acquisition dates. Customer lists are amortized on a straight-line basis over
a period ranging from five to twenty years. Patents and technology were acquired as part of the
acquisition of HP&T Products, Inc. and were recorded based upon their fair market value as of the
date of the acquisition. Patents and technology are amortized on a straight-line basis over their
estimated economic lives ranging from ten to seventeen years. The patents and technology acquired
as part of the acquisition of HP&T Products, Inc. are amortized on a straight-line basis over
fifteen years.
F-12
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Loan Costs
Deferred loan costs were incurred in connection with the arrangement of the Companys senior
credit facility (see Note 7). Net deferred loan costs of $0.9 million and $1.0 million are included
in Other Assets on the December 31, 2008 and 2007 balance sheets, respectively. Deferred loan
costs are amortized over the term of the senior credit facility, which is five years. Accumulated
amortization was $0.3 million and $0.04 million at December 31, 2008 and 2007, respectively.
Amortization of deferred loan costs for the years ended December 31, 2008, 2007 and 2006, which is
classified as interest expense, was $0.2 million, $0.2 million and $0.3 million, respectively.
Accumulated amortization and interest expense also included the write-off of deferred loan costs of
$0.05 million for the year ended December 31, 2007. This write-off of deferred loan costs related
to the Company amending and restating its senior credit facility in October 2007.
Self-Insurance
The Company is self-insured up to certain levels for its group medical coverage. The amounts
in excess of the self-insured levels are fully insured, up to a limit. Liabilities associated with
these risks are estimated by considering historical claims experience. Although management
believes adequate reserves have been provided for expected liabilities arising from the Companys
self-insured obligations, there is a risk that the Companys insurance may not be sufficient to
cover any particular loss or that its insurance may not cover all losses. For example, while the
Company maintains product liability insurance, this type of insurance is limited in coverage, and
it is possible an adverse claim could arise in excess of the Companys coverage. Finally, insurance
rates have in the past been subject to wide fluctuation. Changes in coverage, insurance markets and
the industry may result in increases in the Companys cost and higher deductibles and retentions.
Income Taxes
The Company follows the liability method of accounting for income taxes in accordance with
SFAS No. 109,
Accounting for Income Taxes
. Under this method, deferred income taxes are recorded
based upon the differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the underlying
assets or liabilities are recovered or settled.
In accordance with SFAS No. 109, the Company records a valuation allowance in each reporting
period when management believes that it is more likely than not that any deferred tax asset created
will not be realized. Management will continue to evaluate the appropriateness of the allowance in
the future based upon the operating results of the Company.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109 (FIN 48)
, which clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109. The Company adopted FIN 48
on January 1, 2007, as required. The cumulative effect of adopting FIN 48, as discussed further in
Note 9, was recorded in retained earnings and other accounts as applicable.
In accounting for income taxes, we are required by FIN 48 to estimate a liability for future
income taxes. The calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations. We recognize liabilities for anticipated tax audit issues
in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If we ultimately determine that payment of these amounts is
unnecessary, we reverse the liability and recognize a tax benefit during the period in which we
determine that the liability is no longer necessary. We record an additional charge in our
provision for taxes in the period in which we determine that the recorded tax liability is less
than we expect the ultimate assessment to be.
F-13
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
The Company records an estimated loss from a loss contingency when information available prior
to the issuance of its financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial statements and the amount of
the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal
and income tax matters requires the Company to use its judgment. While the Company believes that
its accruals for these matters are adequate, the actual loss from a loss contingency could be
significantly different than the estimated loss, resulting in an adverse effect on the results of
operations and financial position of the Company.
Revenue Recognition
The Companys products and services are sold based upon purchase orders or contracts with the
customer that include fixed or determinable prices and that do not include right of return or other
similar provisions or other significant post delivery obligations. The Company records revenue when
all of the following criteria have been met: evidence of an arrangement exists; delivery to and
acceptance by the customer has occurred; the price to the customer is fixed and determinable; and
collectability is reasonably assured. The Company also recognizes revenue as services are
performed in accordance with the related contract provisions. Customer advances or deposits are
deferred and recognized as revenue when the Company has completed all of its performance
obligations related to the sale. The amounts billed for shipping and handling costs are included in
revenue and the related costs are included in costs of sales.
Foreign Currency Translation
The functional currency for most of the Companys international operations is the applicable
local currency. The accounting records for all of the Companys international subsidiaries are
maintained in local currencies.
Results of operations for foreign subsidiaries with functional currencies other than the U.S.
dollar are translated using average exchange rates during the period. Assets and liabilities of
these foreign subsidiaries are translated using the exchange rates in effect at the balance sheet
dates, and the resulting translation adjustments are included as Accumulated Other Comprehensive
Income, a component of stockholders equity.
For non-U.S. subsidiaries where the functional currency is the U.S. dollar, inventories,
property, plant and equipment and other non-monetary assets, together with their related elements
of expense, are translated at historical rates of exchange. Monetary assets and liabilities are
translated at current exchange rates. All other revenues and expenses are translated at average
exchange rates. Translation gains and losses for these subsidiaries are recognized in the
Companys results of operations during the period incurred. The gain or loss related to individual
foreign currency transactions are reflected in results of operations when incurred.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(Revised 2004)
Share-Based Payment
(SFAS No. 123R). SFAS No. 123R addresses the accounting for
all share-based payment awards, including shares issued under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights. Effective January 1, 2006, the Company
adopted the fair value recognition provisions of SFAS No. 123R using the modified-prospective
transition method. Under the transition method, compensation cost is recognized for all awards
granted or settled after the adoption date as well as for any awards that were granted prior to the
adoption date for which the requisite service has not yet been rendered.
F-14
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flows
Supplemental disclosures of cash flow information is presented in the following table (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,408
|
|
|
$
|
527
|
|
|
$
|
588
|
|
Income taxes
|
|
|
14,277
|
|
|
|
11,373
|
|
|
|
7,236
|
|
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Management bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results could differ from
those estimates.
Newly Issued Accounting Standards
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. The initial application of SFAS No.
157 is limited to financial assets and liabilities and non-financial assets and liabilities
recognized at fair value on a recurring basis. The Company 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. On January 1, 2009, SFAS
No. 157 became effective on a prospective basis for non-financial assets and liabilities that are
not measured at fair value on a recurring basis. The application of SFAS No. 157 to the Companys
non-financial assets and liabilities will primarily relate to assets acquired and liabilities
assumed in a business combination and asset impairments, including goodwill and long-lived assets.
This application of SFAS No. 157 is not expected to have a material 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 expects that the adoption of SFAS
No. 141R will have an effect on the accounting for its business combinations after January 1, 2009,
but the effect will be dependent upon acquisitions at that time and therefore is not currently
estimable. Management does not expect the provisions of SFAS No. 141R regarding the income
statement recognition of changes to valuation allowances and tax uncertainties established before
the adoption of SFAS No. 141R to have a material impact on the Companys consolidated financial
position, results of operations and cash flows.
2. BUSINESS COMBINATIONS AND DISPOSITIONS:
Business Combinations
On May 29, 2008, the Company exercised its option to purchase certain fixed assets and
inventory of HP&T Products, Inc. in India at their estimated fair value of $0.4 million. During
the first quarter of 2009, the Company expects to make a further payment of $0.1 million based on
the final fair market valuation of the fixed assets and inventory. The purchase of these assets
was funded from the Companys working capital and the use of its senior credit facility.
F-15
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$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 temperatures, 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.
On January 12, 2006, the Company completed the purchase of KC Machine LLC for approximately
$2.5 million. KC Machine is located in Rock Springs, Wyoming and is a full service facility that
maintains and repairs drilling rigs (both oil and gas) and related support equipment. The
acquisition of KC Machine continues the Companys expansion of its pressure and flow control,
wellhead and pipeline products and services to customers located in the Rocky Mountain region. The
acquisition was funded from the Companys working capital and the use of its senior credit
facility.
The acquisitions discussed above were accounted for using the purchase method of accounting.
Results of operations for the above acquisitions are included in the accompanying 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 consolidated balance sheet at December 31, 2007 related to the EEC and HP&T
acquisitions were based on preliminary information and were subject to change when final asset
valuations were obtained and the potential for liabilities had been evaluated. No material changes
to the EEC and HP&T preliminary allocations were made during 2008 and the balances included in the
consolidated balance sheet at December 31, 2008 are considered to be final. The balances included
in the consolidated balance sheet at December 31, 2008 related to the Pinnacle acquisition are
considered to be final. The Pinnacle acquisition is not material to the Companys consolidated
financial statements, and therefore a preliminary purchase price allocation is not presented.
The following schedule summarizes investing activities related to the Companys acquisitions
presented in the consolidated statements of cash flows for the years ended December 31, 2008, 2007
and 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Fair value of tangible and intangible assets,
net of cash acquired
|
|
$
|
2,801
|
|
|
$
|
68,811
|
|
|
$
|
1,327
|
|
Goodwill recorded
|
|
|
758
|
|
|
|
40,756
|
|
|
|
1,309
|
|
Total liabilities assumed
|
|
|
(827
|
)
|
|
|
(18,674
|
)
|
|
|
(388
|
)
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash
acquired
|
|
$
|
2,732
|
|
|
$
|
90,893
|
|
|
$
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
The acquisitions of KC Machine, HP&T and Pinnacle were not material to the Companys
consolidated financial statements, and therefore pro forma information is not presented. The
following presents the
F-16
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated financial information for the Company on a pro forma basis assuming the acquisition of
EEC had occurred as of the beginning of the period presented. The historical financial information
has been adjusted to give effect to pro forma items that are directly attributable to the
acquisition and expected to have a continuing impact on the consolidated results. These items
include adjustments to record the incremental amortization and depreciation expense related to the
increase in fair value of the acquired assets, interest expense related to the borrowing under the
Companys senior credit facility and to reclassify certain items to conform to the Companys
financial reporting presentation.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(In thousands, except per share
|
|
|
amounts)
|
|
|
(Unaudited)
|
Revenues
|
|
$
|
271,921
|
|
|
$
|
202,500
|
|
Income from continuing operations
|
|
$
|
27,137
|
|
|
$
|
19,524
|
|
Basic Earnings per share from continuing operations
|
|
$
|
2.31
|
|
|
$
|
1.84
|
|
Diluted Earnings per share from continuing operations
|
|
$
|
2.24
|
|
|
$
|
1.79
|
|
Included in the pro forma results above for the year ended December 31, 2007 are retention
bonuses paid to EEC employees by the former owners, totaling $3.7 million, net of tax, or $0.31 per
diluted share, amortization expense for intangibles created as part of the purchase of EEC,
totaling $0.8 million, net of tax, or $0.07 per diluted share and interest expense of $1.7 million,
net of tax, or $0.14 per diluted share. Included in the pro forma results for the year ended
December 31, 2006 is amortization expense for intangibles created as part of the purchase of EEC,
totaling $0.8 million, net of tax, or $0.07 per diluted share and interest expense of $1.7 million,
net of tax, or $0.15 per diluted share.
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 have been reported as discontinued
operations. The Company now operates under the one remaining historical reporting segment,
pressure control. Accordingly, all historical segment results reflect this operating
structure.
Operating results of discontinued operations are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
46
|
|
|
|
1,928
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(46
|
)
|
|
|
(1,928
|
)
|
|
|
(489
|
)
|
Interest expense
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
|
|
|
|
|
(2
|
)
|
|
|
67
|
|
F-17
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income taxes
|
|
|
(67
|
)
|
|
|
(1,930
|
)
|
|
|
(556
|
)
|
Benefit for income taxes
|
|
|
(19
|
)
|
|
|
(673
|
)
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(48
|
)
|
|
$
|
(1,257
|
)
|
|
$
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
The loss incurred in 2008 is primarily attributable to the results of a state sales tax audit
against one of the Companys discontinued businesses. The loss incurred in 2007 is primarily
attributable to a jury verdict during 2007 against one of the Companys discontinued businesses.
The loss incurred in 2006 is primarily attributable to losses on the sale of the distribution
segment.
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment and the estimated useful lives is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
Land
|
|
|
|
|
|
$
|
901
|
|
|
$
|
901
|
|
Buildings and improvements
|
|
3-40 years
|
|
|
13,465
|
|
|
|
11,498
|
|
Machinery and equipment
|
|
3-15 years
|
|
|
37,882
|
|
|
|
32,358
|
|
Vehicles
|
|
5-10 years
|
|
|
948
|
|
|
|
778
|
|
Furniture and fixtures
|
|
3-10 years
|
|
|
1,249
|
|
|
|
1,055
|
|
Computer equipment
|
|
3-7 years
|
|
|
5,200
|
|
|
|
4,469
|
|
Construction in progress
|
|
|
|
|
|
|
4,571
|
|
|
|
3,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,216
|
|
|
|
54,779
|
|
Less Accumulated depreciation
|
|
|
|
|
|
|
(18,145
|
)
|
|
|
(14,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
46,071
|
|
|
$
|
40,073
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2008, 2007 and 2006, was $5,130,000,
$3,892,000 and $2,985,000, respectively. Included in computer equipment costs are capitalized
computer software development costs of $1,468,000 and $1,311,000 at December 31, 2008 and 2007,
respectively. Depreciation expense related to capitalized computer software development costs was
$240,000, $182,000 and $160,000 for the years ended December 31, 2008, 2007 and 2006, respectively,
and is included in depreciation expense above.
4. GOODWILL:
Goodwill represents the excess of the cost over the net tangible and identifiable intangible
assets of acquired businesses. Identifiable intangible assets acquired in business combinations are
recorded based upon fair market value at the date of acquisition.
In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the
Company tests for the impairment of goodwill on at least an annual basis. The Companys annual
test of impairment of goodwill is performed as of December 31. The test for goodwill impairment,
as defined by SFAS No. 142, is a two-step approach. The first step is to compare the estimated
fair value of any reporting units within the Company that have recorded goodwill with the recorded
net book value (including the goodwill) of the reporting unit. If the estimated fair value of the
reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no
further testing is required. If, however, the estimated fair value of the reporting unit is below
the recorded net book value, then a second step must be performed to determine the goodwill
impairment required, if any. In this second step, the estimated fair value from the first step is
used as the purchase price in a hypothetical acquisition of the reporting unit. Purchase business
combination accounting rules are followed to determine a hypothetical purchase price allocation to
the reporting units assets and liabilities. The residual amount of goodwill that results from
this hypothetical purchase price allocation is compared to the recorded amount of goodwill for the
reporting unit, and the recorded amount is written down to the hypothetical amount, if lower.
SFAS No. 142 defines a reporting unit as an operating segment or one level below an operating
segment (referred to as a component), and also states that two or more components of an operating
segment shall be aggregated and deemed a single reporting unit if the components have similar
economic characteristics.
F-18
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 Company
evaluates its reporting units under SFAS No. 142,
Goodwill and Other Intangible Assets
, based upon
these three operating segments.
The Company estimates the fair value of its reporting units using discounted cash flows and
earnings multiples of comparable publicly traded companies. The key discounted cash flow
assumptions used to determine the fair value of the Companys reporting units included: a) cash
flow periods of 5 years, b) terminal values calculated at 6.5 times the terminal year EBITDA and c)
a discount rate of 15.24%.
Severe disruptions in the credit markets and reductions in global economic activity continued
throughout the fourth quarter of 2008 and had significant adverse impact on stock markets and oil
and gas commodity prices. These forces contributed to a significant decline in the Companys stock
price and corresponding market capitalization. For most of the fourth quarter, the Companys
market capitalization was below the recorded net book value of its balance sheet, including
goodwill.
Because quoted market prices for the Companys individual reporting segments was not
available, management must apply judgment in determining the estimated fair value of its reporting
units for purposes of performing the annual goodwill impairment test. Management uses all
available information to make these fair value determinations, including the discounting of
reporting units projected cash flow and publicly traded company multiples. A key component of
these fair value determinations is an assessment of the fair value using discounted cash flows and
other market-related valuation models in relation to the Companys market capitalization.
The accounting principles regarding goodwill acknowledge that the observed market prices of
individual trades of a Companys stock (and thus its computed market capitalization) may not be
representative of the fair value of the Company as a whole. Substantial value may arise from the
ability to take advantage of synergies and other benefits that flow from control over another
entity. Consequently, measuring the fair value of a collection of assets and liabilities that
operate together in a controlled entity is different from measuring the fair value of that entitys
individual common stock. In most industries, including the Companys, an acquiring entity
typically is willing to pay more for equity securities that give it a controlling interest than an
investor would pay for a number of equity securities representing less than a controlling interest.
Therefore, the above fair value calculations using discounted cash flows and other market-related
valuation models are compared to market capitalization plus a control premium.
At December 31, 2008, the Company completed the annual impairment test required by SFAS No.
142. The Companys calculations indicated the fair values of the wellhead and pipeline reporting
units exceeded their net book values and, accordingly, goodwill was not considered to be impaired.
However, due to a number of factors, including the current global economic environment, the
Companys current estimate of its customers drilling activities, increased costs of capital and
the decrease in the Companys market capitalization, the Companys calculations for the pressure
and flow control reporting unit indicated its net book value exceeded its fair value and,
accordingly, goodwill was considered to be impaired. The Company used the estimated fair value of
the pressure and flow control reporting unit from the first step as the purchase price in a
hypothetical acquisition of the reporting unit. The significant hypothetical purchase price
allocation adjustments made to the assets and liabilities of the pressure and flow control
reporting unit for this calculation were in the following areas: (1) adjusting the carrying value
of property, plant and equipment to their estimated aggregate fair values; (2) adjusting the
carrying value of other intangible assets to their estimated aggregate fair values; and (3)
recalculating deferred income taxes under Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes
, after considering the likely tax basis a hypothetical buyer would have
in the assets and liabilities. Based on this analysis, it was determined that $23.5 million of
goodwill impairment existed for the pressure and flow control group. This impairment was recorded
in operating expenses in the consolidated
F-19
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statement of operations for the year ended December 31,
2008. This non-cash charge did not impact the Companys liquidity position, debt covenants or cash
flows.
The Company has determined no impairment of its wellhead and pipeline reporting units exist;
however, should the Companys estimate of the fair value of any of its reporting units decline in
future periods, due to further, and sustained, deterioration in global economic conditions, changes
in the Companys outlook for future profits and cash flows, further reductions in the market price
of the Companys stock, increased costs of capital, reductions in valuations of other public
companies within the Companys industry or valuation observed in acquisition transactions within
the Companys industry, an impairment or additional impairment of goodwill could be required.
Remaining goodwill by reporting unit was $70.7 million, $13.6 million and $3.6 million for the
pressure and flow control, wellhead and pipeline reporting units, respectively. At December 31,
2008 the estimated fair value of the wellhead and pipeline reporting units exceeded the recorded
net book value of these reporting units by 6% and 23%, respectively. The Company will continue to
test on a consistent measurement date unless events occur or circumstances change between annual
impairment tests that would more likely than not reduce fair value of a reporting unit below its
carrying value.
The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007
are as follows (in thousands):
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
70,569
|
|
Acquisition of EEC
|
|
|
30,582
|
|
Acquisition of HP&T
|
|
|
10,174
|
|
Adjustments
|
|
|
924
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
112,249
|
|
Impairment of goodwill
|
|
|
(23,500
|
)
|
Acquisition of Pinnacle
|
|
|
758
|
|
Adjustments
|
|
|
(1,578
|
)
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
87,929
|
|
|
|
|
|
During 2008, the Company decreased goodwill by $24.3 million. This decrease was primarily
related to goodwill impairment of $23.5 million, a $1.6 million decrease in goodwill as a result of
foreign currency translation adjustments and a $0.3 million decrease related to a tax adjustment.
These decreases were partially offset by increases of $0.8 million and $0.3 million related to the
acquisitions of Pinnacle and EEC, respectively. During 2007, the Company increased goodwill by
$41.7 million. This increase was primarily related to $30.6 million and $10.2 million of goodwill
recorded as part of the EEC and HP&T acquisitions, respectively. The Company also recognized a
$0.9 million increase in goodwill as a result of foreign currency translation adjustments,
partially offset by a tax adjustment.
5. OTHER INTANGIBLE ASSETS:
Other intangible assets include non-compete agreements, customer lists, patents and technology
and other similar items, as described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Covenants not to compete
|
|
$
|
5,226
|
|
|
$
|
5,464
|
|
Customer lists
|
|
|
12,588
|
|
|
|
11,285
|
|
Patents and technology
|
|
|
22,538
|
|
|
|
22,281
|
|
Other intangible assets
|
|
|
1,223
|
|
|
|
1,239
|
|
|
|
|
|
|
|
|
|
|
|
41,575
|
|
|
|
40,269
|
|
Less: Accumulated amortization
|
|
|
(8,098
|
)
|
|
|
(5,204
|
)
|
|
|
|
|
|
|
|
|
|
$
|
33,477
|
|
|
$
|
35,065
|
|
|
|
|
|
|
|
|
During 2008, the Company allocated value to the intangible assets acquired in the Pinnacle
acquisition. The Company allocated $1,486,500 to customer lists, to be amortized over a period of
15 years.
F-20
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2007, the Company allocated value to the intangible assets acquired in the EEC and HP&T
acquisitions. The Company allocated $22,019,000 to patents and technology, $10,017,000 to customer
lists, $213,000 to covenants not to compete and $1,149,000 to other intangibles such as
trademark/tradename and backlog. The total weighted average amortization period related to the EEC
and HP&T acquisitions is 15.8 years, which is comprised of a weighted average period of 15 years
for patents and technologies, 20 years for customer lists, 3.3 years for covenants not to compete
and 7.1 years for other intangibles.
Covenants not to compete are amortized on a straight-line basis over the terms of the
agreements, which range from one to five years. Accumulated amortization was $4,041,000 and
$3,828,000 at December 31, 2008 and 2007, respectively. Amortization expense of $402,000,
$311,000, and $303,000, for the years ended December 31, 2008, 2007 and 2006, respectively, is
recorded as operating expense in the Consolidated Statements of Operations.
Customer lists were acquired as part of the acquisitions of Oilco, KC Machine, EEC and
Pinnacle and were recorded based upon their fair market value at the acquisition dates. Customer
lists are amortized on a straight-line basis over periods ranging from five to twenty years.
Accumulated amortization was $1,524,000 and $835,000 at December 31, 2008 and 2007, respectively.
Amortization expense of $809,000, $335,000 and $222,000 for the years ended December 31, 2008, 2007
and 2006, respectively, is recorded as operating expense in the Consolidated Statements of
Operations.
Patents and technology primarily consist of those that were acquired as part of the
acquisition of HP&T and were recorded based upon their fair market value at the acquisition date.
These patents and technology are amortized on a straight-line basis over fifteen years.
Accumulated amortization was $1,759,000 and $281,000 at December 31, 2008 and 2007, respectively.
Amortization expense of $1,478,000 and $263,000 for the years ended December 31, 2008 and 2007, is
recorded as operating expense in the Consolidated Statements of Operations and was not significant
for the year ended 2006.
The following table summarizes estimated aggregate amortization expense for other intangible
assets subject to amortization for each of the five succeeding fiscal years (in thousands):
|
|
|
|
|
Year ending December 31
|
|
|
|
|
2009
|
|
|
2,608
|
|
2010
|
|
|
2,231
|
|
2011
|
|
|
2,129
|
|
2012
|
|
|
2,111
|
|
2013
|
|
|
2,111
|
|
Excluded from the above amortization expense is $1.2 million of covenants not to compete and
patents for which the amortization period has not yet begun.
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Accrued payroll and related benefits
|
|
$
|
5,005
|
|
|
$
|
4,363
|
|
Accrued medical costs
|
|
|
826
|
|
|
|
534
|
|
Accrued taxes
|
|
|
3,106
|
|
|
|
1,796
|
|
Customer deposits/unearned revenue
|
|
|
4,928
|
|
|
|
2,952
|
|
F-21
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Accrued legal
|
|
|
1,874
|
|
|
|
1,848
|
|
Accrued acquisition costs
|
|
|
515
|
|
|
|
1,183
|
|
Other accrued liabilities
|
|
|
3,020
|
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
$
|
19,274
|
|
|
$
|
15,156
|
|
|
|
|
|
|
|
|
7. LONG-TERM DEBT:
Long-term debt from financial institutions consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Wells Fargo revolver
|
|
$
|
18,000
|
|
|
$
|
58,000
|
|
Wells Fargo swing line
|
|
|
750
|
|
|
|
3,415
|
|
Other Note Payables
|
|
|
8
|
|
|
|
82
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,758
|
|
|
|
61,497
|
|
Less Current maturities of long-term debt
|
|
|
(5
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
18,753
|
|
|
$
|
61,423
|
|
|
|
|
|
|
|
|
The Companys senior credit facility provides for a $180 million revolving line of credit,
maturing October 26, 2012, that 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 December 31, 2008, the Company had
$18.8 million borrowed under the 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. The Company expects 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 the Companys 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%. The Company has the option to choose between Base
Rate and LIBOR when borrowing under the revolver portion of its senior credit facility, whereas any
borrowings under the swing line portion of the senior credit facility are made using prime. At
December 31, 2008, the swing line portion of the Companys senior credit facility bore interest at
3.3%, with interest payable quarterly, and the revolver portion of its senior credit facility bore
interest at a weighted average rate of 2.5%, with interest payable monthly. The senior credit
facilitys effective interest rate, including amortization of deferred loan costs, was 5.9% during
2008. The effective interest rate, excluding amortization of deferred loan costs, was 5.3% during
2008. The Company is 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 the Companys ability to secure
additional forms of debt, with the exception of secured debt (including capital leases) with a
principal amount not exceeding 10% of the Companys net worth at any time. The senior credit
facility provides, among other covenants and restrictions, that the Company comply with the
following financial covenants: a minimum interest coverage ratio of 3.0 to 1.0, a maximum leverage
ratio of 3.0 to 1.0 and a limitation on capital expenditures of no more than 75% of current year EBITDA, or $45.7
million as of December 31, 2008. As of December 31, 2008, the Company in compliance with the covenants under the senior
credit facility, with an interest coverage ratio of 25.3 to 1.0, a leverage ratio of 0.32 to 1.0,
and year-to-date capital expenditures of $11.3 million. The senior credit facility is
collateralized by substantially all of the Companys assets.
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. $5.0 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 the Companys 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, the Companys 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 the Company and all of its material subsidiaries, and is collateralized by a first
lien on substantially all of the assets
F-22
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of T-3 Oilco Energy Services Partnership. As of December
31, 2008, there was no outstanding balance on the Canadian revolving credit facility.
The aggregate maturities of long-term debt during the five years subsequent to December 31,
2008, are as follows (dollars in thousands):
|
|
|
|
|
Year ending December 31
|
|
|
|
|
2009
|
|
$
|
5
|
|
2010
|
|
|
3
|
|
2011
|
|
|
|
|
2012
|
|
|
18,750
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
$
|
18,758
|
|
|
|
|
|
8. EARNINGS 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 table reconciles the numerators and denominators of the basic and
diluted per common share computations for net income for the years ended December 31, 2008, 2007
and 2006, as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
13,045
|
|
|
$
|
26,507
|
|
|
$
|
18,415
|
|
Loss from discontinued operations
|
|
|
(48
|
)
|
|
|
(1,257
|
)
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,997
|
|
|
$
|
25,250
|
|
|
$
|
18,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
12,457
|
|
|
|
11,726
|
|
|
|
10,613
|
|
Shares for dilutive stock options, restricted stock
and
warrants
|
|
|
355
|
|
|
|
388
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
12,812
|
|
|
|
12,114
|
|
|
|
10,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.05
|
|
|
$
|
2.26
|
|
|
$
|
1.74
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.02
|
|
|
$
|
2.19
|
|
|
$
|
1.68
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
1.02
|
|
|
$
|
2.08
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
For 2008, 2007 and 2006, there were 492,128, 208,000, and 5,325, options, respectively, that
were not included in the computation of diluted earnings per share because their inclusion would
have been anti-dilutive. For the year ended December 31, 2008, there were 5,027 shares of
restricted stock that were not included in the computation of diluted earnings per share because
their inclusion would have been anti-dilutive. For the year ended December 31, 2006, there were
25,000 shares of unvested restricted stock that were not included in the computation of diluted
earnings per share because the current market price at the end of the period did not exceed the
target market price.
F-23
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES:
The components of the provision (benefit) for income taxes for the years ended December 31 are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
16,449
|
|
|
$
|
14,163
|
|
|
$
|
7,546
|
|
Deferred
|
|
|
(2,836
|
)
|
|
|
(229
|
)
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
782
|
|
|
|
808
|
|
|
|
1,067
|
|
Deferred
|
|
|
7
|
|
|
|
10
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
43
|
|
|
|
648
|
|
|
|
73
|
|
Deferred
|
|
|
(71
|
)
|
|
|
(513
|
)
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes from
continuing operations
|
|
$
|
14,374
|
|
|
$
|
14,887
|
|
|
$
|
10,157
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes from
discontinued operations
|
|
$
|
(19
|
)
|
|
$
|
(673
|
)
|
|
$
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the actual tax rate to the statutory U.S. tax rate for the years ended
December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income tax expense at the statutory federal rate
|
|
$
|
9,597
|
|
|
$
|
14,488
|
|
|
$
|
10,000
|
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
5,250
|
|
|
|
|
|
|
|
|
|
Nondeductible expenses
|
|
|
397
|
|
|
|
765
|
|
|
|
177
|
|
State income taxes, net of federal benefit
|
|
|
786
|
|
|
|
532
|
|
|
|
719
|
|
Change in valuation allowance
|
|
|
138
|
|
|
|
|
|
|
|
(133
|
)
|
Section 199 deduction
|
|
|
(624
|
)
|
|
|
(531
|
)
|
|
|
(155
|
)
|
ETI deduction
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
R&D credit
|
|
|
(514
|
)
|
|
|
(155
|
)
|
|
|
|
|
Other tax credits
|
|
|
(241
|
)
|
|
|
(126
|
)
|
|
|
(36
|
)
|
Other
|
|
|
298
|
|
|
|
(86
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,374
|
|
|
$
|
14,887
|
|
|
$
|
10,157
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense for the year ended December 31, 2008 was $14.4 million as compared to $14.9
million in the year ended December 31, 2007. The decrease was due to a decrease in income before
taxes, primarily related to goodwill impairment recognized for the Companys pressure and flow
control reporting unit for the year ended December 31, 2008. See Note 4 for further discussion of
the Companys goodwill impairment. The Companys effective tax rate was 52.4% in the year ended
December 31, 2008 compared to 36.0% in the year ended December 31, 2007. The higher rate in 2008
resulted primarily from approximately $15.0 million of the $23.5 million goodwill impairment not
being deductible for tax purposes, partially offset by higher deductions for certain expenses related to production
activities and the utilization, during 2008, of R&D tax credits and extraterritorial income
exclusion tax deductions available for years prior to 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 $1.0 million. In addition, the 2007 effective tax rate included
approximately $0.6 million of income tax expense related to certain compensation expenses that were
non-deductible under Section 162(m) of the Internal Revenue Code, whereas the 2008 effective tax
rate included approximately $0.1 million of income tax expense for such
F-24
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
non-deductible
compensation. These decreases were partially offset by additional income tax expense due to a $0.3
million increase in the Companys liability for unrecognized tax benefits, and an increase in
income tax expense of approximately $0.1 million related to a portion of the change in the
Companys valuation allowance.
Income tax expense for the year ended December 31, 2007 was $14.9 million as compared to $10.2
million in the year ended December 31, 2006. The increase was primarily due to an increase in
income before taxes. The Companys effective tax rate was 36.0% in the year ended December 31,
2007 compared to 35.5% in the year ended December 31, 2006. The higher rate in the 2007 period
resulted primarily from certain compensation expenses being non-deductible under Section 162(m),
partially offset by higher deductions for certain expenses related to production activities and the
increased availability of foreign and R&D tax credits during 2007.
The components of deferred taxes as of December 31 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
4,111
|
|
|
$
|
4,303
|
|
Accrued expenses
|
|
|
1,474
|
|
|
|
1,478
|
|
Inventories
|
|
|
1,920
|
|
|
|
1,382
|
|
Intangible Assets
|
|
|
3,623
|
|
|
|
88
|
|
Allowance for doubtful accounts
|
|
|
244
|
|
|
|
101
|
|
Stock-based compensation
|
|
|
2,232
|
|
|
|
1,238
|
|
Other
|
|
|
479
|
|
|
|
74
|
|
|
|
|
14,083
|
|
|
|
8,664
|
|
Valuation allowance
|
|
|
(3,451
|
)
|
|
|
(3,643
|
)
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
10,632
|
|
|
|
5,021
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(4,756
|
)
|
|
|
(3,115
|
)
|
Intangible assets
|
|
|
(9,632
|
)
|
|
|
(8,706
|
)
|
Prepaid expenses
|
|
|
(741
|
)
|
|
|
(845
|
)
|
Other
|
|
|
(398
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(15,527
|
)
|
|
|
(12,853
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset (liability)
|
|
$
|
(4,895
|
)
|
|
$
|
(7,832
|
)
|
|
|
|
|
|
|
|
The Company and its subsidiaries file a consolidated federal income tax return. At December
31, 2008, the Company had net operating loss (NOL) carryforwards of approximately $11.1 million
for federal income tax purposes that expire beginning in 2019 and are subject to annual limitations
under Section 382 of the Internal Revenue Code. At December 31, 2008, the Company had NOL
carryforwards of approximately $1.9 million for state income tax purposes that expire from 2009
through 2010. At December 31, 2008, the Company had NOL carryforwards of approximately $0.5
million for foreign income tax purposes that do not expire. In 2008 and 2007, the Company recorded
reductions of $330,000 to its net operating loss carryforwards as a result of federal NOLs of
$330,000 that can be used in 2008 and 2007. In connection with the utilization of the federal NOLs
in 2008 and 2007, the Company recorded $330,000 of reductions to its valuation allowance against
goodwill as it was originally established through purchase accounting. Additionally, in 2008 the
Company recorded a reduction of $11,000 to its net operating loss carryforwards and valuation
allowance as a result of state NOLs of $11,000 that can be used in 2008. These 2008 decreases were
partially offset by a $149,000 increase in the NOL carryforwards and valuation allowance related to
net operating losses for certain foreign operations.
The Company operates in a number of domestic tax jurisdictions and certain foreign tax
jurisdictions under various legal forms. As a result, the Company is subject to domestic and
foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities.
Determination of taxable income in any jurisdiction requires the interpretation of the related tax
laws and regulations and the use of estimates and assumptions regarding significant future events.
Changes in tax laws, regulations, agreements and treaties,
F-25
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
foreign currency exchange restrictions
or the Companys level of operations or profitability in each taxing jurisdiction could have an
impact upon the amount of income taxes that the Company provides during any given year. The
Company has provided additional taxes for the anticipated repatriation of earnings of certain
foreign subsidiaries and equity investments where management has determined that the foreign
subsidiaries and equity investments earnings are not indefinitely reinvested. For foreign
subsidiaries and equity investments whose earnings are deemed to be indefinitely reinvested, no
provision for U.S. federal and state income taxes has been provided. Upon distribution of these
earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes
(subject to adjustment for foreign tax credits) and foreign withholding taxes. It is not
practical, however, to estimate the amount of taxes that may be payable on the eventual remittance
of these earnings after consideration of available foreign tax credits. The Companys income from
continuing operations before provision for income taxes is comprised of $30.0 million domestic
income and $(2.6) million foreign loss for the year ended December 31, 2008.
At December 31, 2008, the Company had $30.6 million in goodwill, net of accumulated
amortization that will be tax deductible in future periods.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a $0.9 million liability for unrecognized tax
benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained
earnings. As of the date of adoption and after the impact of recognizing the increase in liability
noted above, the Companys unrecognized tax benefits totaled $1.0 million. The changes in
unrecognized tax benefits for the years ended December 31, 2008 and 2007 is as follows (dollars in
thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
966
|
|
Additions based on tax positions during the year
|
|
|
98
|
|
Additions for tax positions of prior years
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(205
|
)
|
Settlements with taxing authorities
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
859
|
|
|
|
|
|
Additions based on tax positions during the year
|
|
|
544
|
|
Additions for tax positions of prior years
|
|
|
164
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(347
|
)
|
Settlements with taxing authorities
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,220
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits at December 31, 2008 and 2007, are $0.9
million and $0.6 million, respectively, of tax positions that, if recognized in future periods,
would impact the Companys effective tax rate. The Company recognizes potential accrued interest
and penalties related to unrecognized tax benefits as a component of income tax expense in the
consolidated statement of operations. This is an accounting policy election made by the Company
that is a continuation of the Companys historical policy and will continue to be consistently
applied in the future. The Company has accrued $0.4 million and $0.3 million as of December 31,
2008 and December 31, 2007, respectively, for the potential payment of interest and penalties.
During the year ended December 31, 2008 and December 31, 2007, the Company recognized $0.1 million
and $0.1 million, respectively, in potential interest and penalties associated with uncertain tax
positions.
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal income tax examinations by tax authorities for years before 2005 and
is no longer subject to state and local income tax examinations by tax authorities for years before
2004. All years for foreign jurisdictions are subject to tax examinations by tax authorities. The
Company anticipates that total unrecognized tax benefits will decrease by approximately $0.3
million during the next twelve months due to the expiration of statute of limitations.
F-26
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Section 162(m) of the Internal Revenue Code denies the Company a tax deduction for annual
compensation in excess of $1 million paid to its Chief Executive Officer, unless the compensation
is based on performance criteria that are established by a committee of outside directors and
approved, as to their material terms, by the Companys stockholders. Based on this authority, the
Companys ability to deduct compensation expense generated in connection with the exercise of
options granted under its stock incentive plan should not be limited by Section 162(m). The
Companys stock incentive plan has been designed to provide flexibility with respect to whether
restricted stock awards will qualify as performance-based compensation under Section 162(m) and,
therefore, be exempt from the deduction limit. If the forfeiture restrictions relating to a
restricted stock award are based solely upon the satisfaction of one of the performance criteria
set forth in the stock incentive plan, then the compensation expense relating to the award should
be deductible by the Company if the restricted stock award becomes vested. However, compensation
expense deductions relating to a restricted stock award will be subject to the Section 162(m)
deduction limitation if the award becomes vested based upon any other criteria set forth in the
award (such as vesting based upon continued employment with the Company or upon a change of
control). A portion of the restricted stock awards granted to the Companys Chief Executive
Officer in 2006, which were subject to vesting based on continued employment with the Company, and
which have since become fully vested pursuant to a change of control provision in the Chief
Executive Officers then existing employment agreement, are subject to the Section 162(m) deduction
limitation. In addition, the portion of total salary and bonus compensation that exceeds one
million dollars for the Companys Chief Executive Officer does not so qualify and is subject to the
limitation on deductibility under Section 162(m). As a result, the $2.5 million change of control
compensation charge recorded by the Company during the year ended December 31, 2007, was not fully
deductible, and the $0.3 million compensation expense related to the 2008 vesting of 10,000 shares
of restricted stock awards granted to the Companys Chief Executive Officer in 2007, will not be
deductible for the year ended December 31, 2008.
10. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the ordinary course of business with certain related parties.
Management believes these transactions were made at the prevailing market rates or terms.
The Company leases certain buildings under noncancelable operating leases from employees of
the Company. Lease commitments under these leases are approximately $0.9 million for 2009 through
2012. Rent expense to related parties was $0.4 million, $0.1 million, and $0.1 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
The Company sells pressure control products to and performs services for an unconsolidated
affiliate in Mexico, which is a joint venture between the Company and SYMMSA. The total amount of
these sales was approximately $0.4 million and $2.1 million for the year ended December 31, 2008
and 2007, respectively, and the total accounts receivable due from the Mexico joint venture was
approximately $50,000 and $0.7 million at December 31, 2008 and 2007, respectively.
11. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases certain buildings, equipment and vehicles under noncancelable operating
leases with related parties and other third parties. Total expense related to these leases included
in the accompanying statements of operations for the years ended December 31, 2008, 2007 and 2006
were $2,689,000, $2,130,000
F-27
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and $1,929,000, respectively. Aggregate minimum rental commitments for noncancelable operating
leases with terms exceeding one year, net of minimum sublease income, are as follows (dollars in
thousands):
|
|
|
|
|
Year ending December 31
|
|
|
|
|
2009
|
|
$
|
2,064
|
|
2010
|
|
|
1,450
|
|
2011
|
|
|
706
|
|
2012
|
|
|
368
|
|
2013
|
|
|
86
|
|
Thereafter
|
|
|
6
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
4,680
|
|
Less: minimum sublease income
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
$
|
4,680
|
|
|
|
|
|
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 14th Judicial District Court
of Calcasieu Parish, Louisiana as
Aspect Energy LLC v. United Wellhead Services, Inc
. 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 tendered the defense of this claim under its
comprehensive general liability insurance policy and its umbrella policy. During the fourth
quarter of 2008, the plaintiffs reached a settlement with the Companys insurance carrier that was
fully covered by the Companys insurance policies.
In July 2003, a lawsuit was filed against the Company in the U.S. District Court, Eastern
District of Louisiana as
Chevron, U.S.A. v. Aker Maritime, Inc
. The lawsuit alleged that a wholly
owned subsidiary of the Company, the assets and liabilities of which were sold in 2004, failed to
deliver the proper bolts and/or sold defective bolts to the plaintiffs contractor to be used in
connection with a drilling and production platform in the Gulf of Mexico. The 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 in the consolidated statement of
operations during the year ended December 31, 2007.
The Company has also agreed, as part of the sale of a business in 2001, to indemnify the
buyers for certain specified environmental cleanup and monitoring activities associated with
a former manufacturing site.
Through December 31, 2008, the Company has reimbursed the buyers for an immaterial amount
of monitoring expenses in connection with this indemnification agreement. The environmental
monitoring activities, for
which the Company may bear partial liability, are anticipated to
continue at least through the year 2024. The Company and the buyers have engaged a licensed
engineer to conduct a post-closure corrective action subsurface investigation
on the property. The purpose of the work is to fulfill the requirements of a Connecticut DEP
investigation and the Connecticut Remediation Standard Regulations for developing an approach for site closure. Phase I and II investigations have been completed, and a Phase III site investigation is currently ongoing and is expected to be finalized during 2009.
The Company is presently unable to estimate the amount, if any of future
costs that may be payable in connection with this indemnification agreement.
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. Management believes that the Companys involvement at this
site was 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 December 31, 2008, the Company had no significant letters of credit outstanding.
12. 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
F-28
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
year ended December 31, 2007, 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 him pursuant to the terms of his then existing employment agreement.
Common Stock
The Company issued 227,117 shares of common stock during the year ended December 31, 2008
primarily as a result of 205,456 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, the granting of 10,000 shares of restricted stock to James M. Mitchell, the
Companys Senior Vice President and Chief Financial Officer, and the granting of 8,680 shares of
restricted stock to certain members of the Companys Board of Directors.
Warrants
During the year ended December 31, 2008, a total of 2,981 warrants were exercised. The
following table sets forth the 10,157 outstanding warrants to acquire 10,157 shares of common stock
as of December 31, 2008:
|
|
|
|
|
|
|
Number of
|
|
|
common shares
|
Warrants to acquire common stock at $12.80 per share issued by IHI to the
former T-3 stockholders in connection with the merger with IHI,
currently exercisable, expiring on December 17, 2011
|
|
|
10,157
|
|
In connection with the merger with IHI, the Company valued the warrants using a Black-Scholes
option-pricing model.
Additional Paid-In Capital
During the year ended December 31, 2008, additional paid-in capital increased as a result of
the warrant exercises described above, employee stock-based 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 and vesting of
restricted stock.
13. EMPLOYEE BENEFIT PLANS:
Industrial Holdings, Inc. Stock Option Plans
IHI maintained an incentive stock plan and a non-employee director plan under which it granted
incentive or
F-29
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
non-qualified options to key employees and non-qualified options to non-employee
directors. The option price per share was the fair market value on the date of the grant and the
options granted were exercisable immediately to five years after the grant date in accordance with
the vesting provisions of the individual agreement set forth at the time of the award. All options
expire ten years from the date of the grant. All options vested at the time of the merger under
the change of control provision provided by the plan. As of January 1, 2002, all outstanding stock
options that were previously granted under this plan were assumed and continued under the T-3
Energy Services, Inc. 2002 Stock Incentive Plan.
T-3 Energy Services, Inc. 2002 Stock Incentive Plan
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 December 31, 2008, the Company had 1,352,292 shares reserved for issuance in
connection with the Plan. Outstanding stock options as of December 31, 2008 were 1,345,708 shares.
Prior to January 1, 2006, the Company accounted for the Plan under the recognition and
measurement provisions of APB 25 and related interpretations. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of SFAS 123R using the modified-prospective
transition method. Under that transition method, compensation cost is recognized for all awards
granted or settled after the adoption date as well as for any awards that were granted prior to the
adoption date for which the requisite service has not been rendered. The Company recognized
$5,529,000, $3,223,000 and $1,893,000 of employee stock-based compensation expense related to stock
options and restricted stock during the years ended December 31, 2008, 2007 and 2006, respectively.
The stock-based compensation expense for the year ended December 31, 2007, includes a charge of
$922,000 related to the immediate vesting of 66,667 unvested stock options and 75,000 unvested
shares of restricted stock held by Mr. Halas pursuant to the terms of his then existing employment
agreement as described in Note 12. The related income tax benefit recognized during the years
ended December 31, 2008, 2007 and 2006 was $1,815,000, $917,000 and $663,000, respectively.
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 following assumptions during the years ended December 31, 2008, 2007 and 2006, respectively:
risk-free interest rate of 2.28%, 4.50% and 4.42%, expected volatility of 50.00%, 40.00% and
52.79%, expected life of 4.7 years, 5 years and 4 years and no expected dividends. 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.
A summary of option activity under the Plan as of December 31, 2008, and changes during the
year then ended is presented below:
F-30
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
(In Thousands)
|
|
Outstanding at January 1, 2008
|
|
|
1,131,766
|
|
|
$
|
20.27
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
436,500
|
|
|
|
43.11
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(205,456
|
)
|
|
|
15.63
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(17,102
|
)
|
|
|
46.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,345,708
|
|
|
$
|
28.06
|
|
|
|
7.87
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
December 31, 2008
|
|
|
1,276,860
|
|
|
$
|
27.84
|
|
|
|
7.84
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
451,581
|
|
|
$
|
15.18
|
|
|
|
6.27
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the years ended December
31, 2008, 2007 and 2006 was $19.13, $12.15 and $5.58, respectively. The intrinsic value of options
exercised during the years ended December 31, 2008, 2007 and 2006 was $6,193,000, $6,643,000 and
$1,024,000, respectively.
As of December 31, 2008, total unrecognized compensation costs related to nonvested stock
options was $9.2 million. This cost is expected to be recognized over a weighted average period of
1.8 years. The total fair value of stock options vested was $7.0 million, $1.8 million and $0.3
million respectively, during the years ended December 31, 2008, 2007 and 2006.
On September 14, 2007, the Company and Gus D. Halas entered into an Employment Agreement (the
Agreement) which provides for a Stock Option Agreement (the Stock Option Agreement) that granted
stock options to purchase 30,000 shares of the Companys common stock at a strike price of $34.17
per share. These options shall vest in 1/3
rd
increments over three years, provided that
Mr. Halas remains employed with the Company through these vesting dates. The Agreement also
provided for two additional stock option awards of 30,000 shares each to be granted on September
14, 2008 and September 14, 2009. On September 27, 2008, stock options to purchase 30,000 shares of
the Companys common stock at a strike price of $40.16 per share were granted pursuant to the
Agreement. These options shall vest in 1/3
rd
increments over three years from their
grant date, provided that Mr. Halas remains employed with the Company through these vesting dates.
Restricted Stock Awards
The Employment Agreement previously described also provided for a Restricted Stock Award
Agreement (the Stock Agreement) that granted 10,000 shares of the Companys restricted common
stock to Gus D. Halas. Pursuant to the Stock Agreement, these shares vested on September 14, 2008.
The fair value of these shares of restricted stock was determined based on the closing price of
the Companys stock on September 14, 2007. The Agreement also provides, subject to availability
and Compensation Committee approval, 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 Company has not yet entered into
a Restricted Stock Award Agreement with Mr. Halas to grant the 10,000 shares of restricted stock
that were due to be granted on September 14, 2008 due to the limited availability of shares for
issuance in connection with the Plan.
On December 10, 2008, the Compensation Committee of the Companys Board of Directors approved
the First Amendment (the Amendment) to the Employment Agreement entered into between the Company
and Gus D. Halas on September 14, 2007. The Amendment states that the Company intends to grant to
Mr. Halas 10,000 shares of restricted stock at such time as the shares necessary for such grant
become available under the Plan. Furthermore, if the restricted stock has not been granted prior to
the earlier of (a) September 14, 2009, (b) a Change of Control, as defined in Section 8 of the
Agreement, or (c) Mr. Halas termination of employment for
F-31
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reasons meeting the criteria set forth
in Section 9 of the Agreement, then the Company will pay to Mr. Halas an amount in cash equal to
10,000 multiplied by the closing share price of the Companys stock on the business day on which
the earliest of criteria (a), (b) or (c) discussed above is met, as applicable. In accordance with
SFAS No. 123R, the Company remeasures this share-based awards at fair value at each reporting
period and the pro-rata vested portion of the award is recognized as a liability.
On July 1, 2008, the Company granted 10,000 shares of restricted stock to James M. Mitchell.
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 annually in 1/3
rd
increments
beginning on July 1, 2009.
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
April 27, 2006, the Company and Gus D. Halas entered into two
Restricted Stock Award Agreements (the Stock Agreements).
The Stock Agreements each granted Mr. Halas 50,000 shares
of the Companys restricted common stock, or a total of
100,000 shares, effective January 12, 2006. Of these
100,000 shares granted, 25,000 shares vested on
January 12, 2007. As described in Note 12, 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
constituted a change of control pursuant to the terms of
the Companys 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.
A summary of the status of the Companys restricted stock awards as of December 31, 2008 and
changes during the period then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
Restricted Stock
|
|
Shares
|
|
|
Fair Value
|
|
Non-Vested at January 1, 2008
|
|
|
12,438
|
|
|
$
|
37.10
|
|
Granted
|
|
|
18,680
|
|
|
|
65.79
|
|
Vested
|
|
|
(12,438
|
)
|
|
|
37.10
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at December 31, 2008
|
|
|
18,680
|
|
|
$
|
65.79
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of shares of restricted stock granted during the
years ended December 31, 2008, 2007 and 2006 was $65.79, $32.00 and $17.60, respectively.
As of December 31, 2008, there was $0.8 million of total unrecognized compensation cost
related to the Companys restricted stock and that cost is expected to be recognized over a
weighted average period of 1.4 years. The two additional restricted stock awards of 10,000 shares
each that were to be granted on September 14, 2008 and September 14, 2009 to Mr. Halas are not
included in the above schedule since they are not considered granted for SFAS 123R purposes. As
noted above, the Company has not yet granted the 10,000
F-32
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of restricted stock that were due to
be granted to Mr. Halas on September 14, 2008 due to the limited availability of shares for
issuance in connection with the Plan.
Defined Contribution Plans
The Company sponsors a defined contribution retirement plan for most full-time and some
part-time employees. The plan provides for matching contributions up to 50% of the first 6% of
covered employees salaries or wages contributed and for discretionary contributions.
Contributions to this plan totaled approximately $597,000, $479,000, and $431,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
14. 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. No single customer accounted for 10% or more of consolidated revenues
during the three years ended December 31, 2008.
The accounting policies of the segment are the same as those of the Company as described in
Note 1. 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, Canada and India.
Business Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure
|
|
|
|
|
|
|
Control
|
|
Corporate
|
|
Consolidated
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
285,329
|
|
|
$
|
|
|
|
$
|
285,329
|
|
Depreciation and amortization
|
|
|
7,230
|
|
|
|
1,119
|
|
|
|
8,349
|
|
Income (loss) from operations
|
|
|
52,238
|
|
|
|
(23,178
|
)
|
|
|
29,060
|
|
Total assets
|
|
|
247,058
|
|
|
|
40,054
|
|
|
|
287,112
|
|
Capital expenditures
|
|
|
7,664
|
|
|
|
3,636
|
|
|
|
11,300
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
217,434
|
|
|
$
|
|
|
|
$
|
217,434
|
|
Depreciation and amortization
|
|
|
3,674
|
|
|
|
1,297
|
|
|
|
4,971
|
|
Income (loss) from operations
|
|
|
55,792
|
|
|
|
(15,031
|
)
|
|
|
40,761
|
|
Total assets
|
|
|
273,578
|
|
|
|
26,984
|
|
|
|
300,562
|
|
Capital expenditures
|
|
|
6,100
|
|
|
|
945
|
|
|
|
7,045
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
163,145
|
|
|
$
|
|
|
|
$
|
163,145
|
|
Depreciation and amortization
|
|
|
2,443
|
|
|
|
1,077
|
|
|
|
3,520
|
|
Income (loss) from operations
|
|
|
40,163
|
|
|
|
(11,409
|
)
|
|
|
28,754
|
|
Total assets
|
|
|
146,913
|
|
|
|
15,730
|
|
|
|
162,643
|
|
Capital expenditures
|
|
|
8,039
|
|
|
|
1,016
|
|
|
|
9,055
|
|
F-33
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Revenues
|
|
|
Long-Lived Assets
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
United States
|
|
$
|
270,967
|
|
|
$
|
199,985
|
|
|
$
|
142,034
|
|
|
$
|
160,912
|
|
|
$
|
176,952
|
|
|
$
|
88,235
|
|
Canada
|
|
|
14,362
|
|
|
|
17,449
|
|
|
|
21,111
|
|
|
|
6,277
|
|
|
|
10,435
|
|
|
|
9,483
|
|
India
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
285,329
|
|
|
$
|
217,434
|
|
|
$
|
163,145
|
|
|
$
|
167,477
|
|
|
$
|
187,387
|
|
|
$
|
97,718
|
|
The Companys Indian operations reflect no revenue for their initial year of 2008, as all
sales are intercompany and thus eliminate in consolidation.
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 2008 and 2007 is as follows (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2008
|
Revenues
|
|
$
|
69,170
|
|
|
$
|
67,690
|
|
|
$
|
69,838
|
|
|
$
|
78,631
|
|
Gross profit
|
|
|
27,171
|
|
|
|
27,080
|
|
|
|
26,298
|
|
|
|
30,329
|
|
Income (loss) from operations
|
|
|
14,422
|
|
|
|
11,299
|
|
|
|
10,602
|
|
|
|
(7,263
|
)
|
Income (loss) from continuing operations
|
|
|
9,513
|
|
|
|
7,516
|
|
|
|
4,706
|
|
|
|
(8,690
|
)
|
Loss from discontinued operations
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(28
|
)
|
Net income (loss)
|
|
|
9,511
|
|
|
|
7,507
|
|
|
|
4,697
|
|
|
|
(8,718
|
)
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.77
|
|
|
|
.60
|
|
|
|
.38
|
|
|
|
(.69
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
.77
|
|
|
|
.60
|
|
|
|
.38
|
|
|
|
(.69
|
)
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.75
|
|
|
|
.58
|
|
|
|
.37
|
|
|
|
(.69
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
.75
|
|
|
|
.58
|
|
|
|
.37
|
|
|
|
(.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
47,900
|
|
|
$
|
51,933
|
|
|
$
|
53,230
|
|
|
$
|
64,371
|
|
Gross profit
|
|
|
17,351
|
|
|
|
19,888
|
|
|
|
19,367
|
|
|
|
23,372
|
|
Income from operations
|
|
|
8,863
|
|
|
|
7,935
|
|
|
|
10,578
|
|
|
|
13,385
|
|
Income from continuing operations
|
|
|
5,499
|
|
|
|
5,313
|
|
|
|
7,221
|
|
|
|
8,474
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(1,075
|
)
|
|
|
(92
|
)
|
|
|
(90
|
)
|
Net income
|
|
|
5,499
|
|
|
|
4,238
|
|
|
|
7,129
|
|
|
|
8,384
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.51
|
|
|
|
.45
|
|
|
|
.59
|
|
|
|
.69
|
|
Discontinued operations
|
|
|
|
|
|
|
(.09
|
)
|
|
|
|
|
|
|
(.01
|
)
|
Net income (loss)
|
|
|
.51
|
|
|
|
.36
|
|
|
|
.59
|
|
|
|
.68
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
.51
|
|
|
|
.44
|
|
|
|
.58
|
|
|
|
.67
|
|
Discontinued operations
|
|
|
|
|
|
|
(.09
|
)
|
|
|
(.01
|
)
|
|
|
(.01
|
)
|
Net income (loss)
|
|
|
.51
|
|
|
|
.35
|
|
|
|
.57
|
|
|
|
.66
|
|
The results of operations for the quarter ended December 31, 2008 reflect the goodwill
impairment charge of $20.5 million (net of taxes of $3.0 million), or $1.62 per diluted share. See
Note 4 for a further discussion of the goodwill impairment charge. Also, during the quarter ended
December 31, 2008, the Company recorded a tax benefit of $0.9 million as a result of the
deductibility of $2.6 million of strategic alternative costs, of which $2.2 million was recorded in
the quarter ended September 30, 2008 and $0.4 million was recorded in the quarter ended June 30,
2008. Prior to the fourth quarter, these strategic alternative costs were deemed to be
non-deductible. The results of operations for the quarter ended
September 30, 2008 include strategic alternative costs of
approximately $2.3 million (net of taxes of ($0.1) million), or $0.18
per diluted share. Additionally, the results of operations for the
quarter ended June 30, 2008 include strategic alternative costs of
approximately $1.6 million (net of taxes of $0.9 million), or $0.12
per diluted share. The sum of the individual quarterly net income per
common share amounts may not agree with the year-to-date net income
per common share as each quarterly computation is based upon the
weighted average number of common shares outstanding during that
period.
F-34
T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
taxes of $0.9 million), or $0.12 per diluted
share. The sum of the individual quarterly net income per common share amounts may not agree with
the year-to-date net income per common share as each quarterly computation is based upon the
weighted average number of common shares outstanding during that period.
F-35
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Identification of Exhibit
|
2.1
|
|
|
|
Agreement and Plan of Merger dated May 7,
2001, as amended, among Industrial Holdings,
Inc., T-3 Energy Services, Inc. and First
Reserve Fund VIII, Limited Partnership
(incorporated herein by reference to Annex I
to the Definitive Proxy Statement on
Schedule 14A of T-3 dated November 9, 2001).
|
|
|
|
|
|
2.2
|
|
|
|
Plan and Agreement of Merger dated December
17, 2001, between T-3 Energy Services, Inc.
(the Company) and T-3 Combination Corp
(incorporated herein by referenced to
Exhibit 2.2 to the Companys Current Report
on Form 8-K dated December 31, 2001).
|
|
|
|
|
|
3.1
|
|
|
|
Certificate of Incorporation of T-3 Energy
Services, Inc. (incorporated herein by
reference to Exhibit 3.1 to the Companys
Current Report on Form 8-K dated December
31, 2001).
|
|
|
|
|
|
3.2
|
|
|
|
Certificate of Amendment to the Certificate
of Incorporation of T-3 Energy Services,
Inc. (incorporated herein by reference to
Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the period ended
June 30, 2005).
|
|
|
|
|
|
3.3
|
|
|
|
Certificate of Amendment to the Certificate
of Incorporation of T-3 Energy Services,
Inc. (incorporated herein by reference to
Exhibit 3.1 to the Companys Quarterly
Report on Form 10-Q for the period ended
June 30, 2006).
|
|
|
|
|
|
3.4
|
|
|
|
Certificate of Amendment to the Certificate
of Incorporation of T-3 Energy Services,
Inc. (incorporated herein by reference to
Exhibit 3.1 to the Companys Quarterly
Report on Form 10-Q for the period ended
June 30, 2007).
|
|
|
|
|
|
3.5
|
|
|
|
Amended and Restated Bylaws of T-3 Energy
Services, Inc. (incorporated herein by
reference to Exhibit 3.1 to the Companys
Current Report on Form 8-K dated December
11, 2007).
|
|
|
|
|
|
3.6
|
|
|
|
Amendment to Amended and Restated Bylaws of
T-3 Energy Services, Inc. (incorporated by
reference to Exhibit 3.1 to the Companys
Current Report on Form 8-K dated November 5,
2007)
|
|
|
|
|
|
4.1
|
|
|
|
Specimen Certificate of Common Stock, $.001
par value, of the Company (incorporated
herein by reference to Exhibit 4.1 to the
Companys 2001 Annual Report on Form 10-K).
|
|
|
|
|
|
4.2
|
|
|
|
Form of warrant to purchase 327,862 shares
of the Companys Common Stock at $12.80 per
share issued to former T-3 shareholders in
connection with the merger of T-3 and
Industrial Holdings, Inc. (incorporated
herein by reference to Annex VII to the
Definitive Proxy Statement on Schedule 14A
of T-3 dated November 9, 2001).
|
|
|
|
|
|
10.1
+
|
|
|
|
Employment Agreement by and between Gus D.
Halas and T-3 Energy Services, Inc.
(incorporated herein by reference to Exhibit
10.1 to the Companys Current Report on Form
8-K dated September 14, 2007).
|
|
|
|
|
|
10.2
+
|
|
|
|
Employment Agreement of Michael T. Mino
(incorporated herein by reference to Exhibit
10.2 to the Companys 2001 Annual Report on
Form 10-K).
|
|
|
|
|
|
10.3
+
|
|
|
|
T-3 Energy Services, Inc. 2002 Stock
Incentive Plan, as amended and restated
effective January 1, 2005 (incorporated by
reference to Appendix A to the Companys
Definitive Proxy Statement on Schedule 14A
filed on April 21, 2006).
|
|
|
|
|
|
10.4
+
|
|
|
|
Non-Statutory Stock Option Agreement dated
January 12, 2006, between T-3 Energy
Services, Inc. and Gus D. Halas
(incorporated herein by reference to Exhibit
10.1 to the Companys Current Report on Form
8-K dated January 18, 2006).
|
EX-1
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Identification of Exhibit
|
10.5
+
|
|
|
|
Non-Statutory Stock Option Agreement dated
January 12, 2006, between T-3 Energy
Services, Inc. and Michael T. Mino
(incorporated herein by reference to Exhibit
10.2 to the Companys Current Report on Form
8-K dated January 18, 2006).
|
|
|
|
|
|
10.6
+
|
|
|
|
Non-Statutory Stock Option Agreement dated
January 12, 2006, between T-3 Energy
Services, Inc. and Keith A. Klopfenstein
(incorporated herein by reference to Exhibit
10.3 to the Companys Current Report on Form
8-K dated January 18, 2006).
|
|
|
|
|
|
10.7
+
|
|
|
|
Form of Employee Non-Statutory Stock Option
Agreement under the Companys 2002 Stock
Incentive Plan, as amended and restated
effective July 30, 2002 (incorporated herein
by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K dated
January 18, 2006).
|
|
|
|
|
|
10.8
+
|
|
|
|
Form of Non-Employee Director Non-Statutory
Stock Option Agreement under the Companys
2002 Stock Incentive Plan, as amended and
restated effective July 30, 2002
(incorporated herein by reference to Exhibit
10.5 to the Companys Current Report on Form
8-K dated January 18, 2006).
|
|
|
|
|
|
10.9
+
|
|
|
|
Restricted Stock Award Agreement between T-3
Energy Services, Inc. and Gus D. Halas
(incorporated herein by reference to Exhibit
10.3 to the Companys Current Report on Form
8-K dated May 3, 2006).
|
|
|
|
|
|
10.10
+
|
|
|
|
Restricted Stock Award Agreement between T-3
Energy Services, Inc. and Gus D. Halas
(incorporated herein by reference to Exhibit
10.4 to the Companys Current Report on Form
8-K dated May 3, 2006).
|
|
|
|
|
|
10.11
|
|
|
|
Company Purchase Agreement for KC Machine,
LLC by and among Kelly Niswender, Carol
Niswender and T-3 Rocky Mountain Holdings,
Inc. dated as of January 12, 2006
(incorporated herein by reference to Exhibit
10.23 to the Companys 2005 Annual Report on
Form 10-K).
|
|
|
|
|
|
10.12
|
|
|
|
Stock Purchase Agreement by and Among T-3
Energy Services, Inc., Energy Equipment
Corporation, Energy Equipment Group, Inc.
and the Stockholders of Energy Equipment
Group, Inc. (incorporated herein by
reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K dated October 31,
2007).
|
|
|
|
|
|
10.13
|
|
|
|
Stock Purchase Agreement by and among T-3
Energy Services, Inc., HP&T Products, Inc.,
Federal International (2000) Ltd, George
Anderson, Vijay Chatufale and Joe Gruba
(incorporated herein by reference to Exhibit
2.2 to the Companys Current Report on Form
8-K dated October 31, 2007).
|
|
|
|
|
|
10.14+
|
|
|
|
Form of Restricted Stock Award Agreement
(incorporated herein by reference to Exhibit
10.1 to the Companys Quarterly Report on
Form 10-Q for the period ended September 30,
2007).
|
|
|
|
|
|
10.15+
|
|
|
|
Restricted Stock Award Agreement of Gus D.
Halas (incorporated herein by reference to
Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the period ended
September 30, 2007).
|
|
|
|
|
|
10.16
|
|
|
|
Second Amended and Restated Credit Agreement
dated as of October 26, 2007, among T-3
Energy Services, Inc. as U.S. Borrower, T-3
Energy Services (formerly known as T-3 Oilco
Energy Services Partnership) as Canadian
Borrower, Wells Fargo Bank, National
Association as U.S. Administrative Agent,
U.S. Issuing Lender and U.S. Swingline
Lender, and as Lead Arranger, Comerica Bank
as Canadian Administrative Agent, Canadian
Issuing Lender and Canadian Swingline
Lender, and the Lenders (incorporated herein
by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated
October 31, 2007).
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10.17+
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Employment Agreement by and between James M.
Mitchell and T-3 Energy Services, Inc.
(incorporated herein by reference to Exhibit
10.1 to the Companys Current Report on Form
8-K dated July 2, 2008).
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10.18+
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Restricted Stock Award Agreement of James M.
Mitchell (incorporated herein by reference
to Exhibit 10.2 to the Companys Current
Report on Form 8-K dated July 2, 2008).
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EX-2
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Exhibit
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Number
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Identification of Exhibit
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10.19+
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Employment Agreement by and between Keith A.
Klopfenstein and T-3 Energy Services, Inc.
(incorporated herein by reference to Exhibit
10.1 to the Companys Current Report on Form
8-K dated October 31, 2008).
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10.20+
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First Amendment to Employment Agreement by
and between Gus D. Halas and T-3 Energy
Services, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated December
10, 2008).
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14.1
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Senior Executive Ethics Policy (incorporated
herein by reference to Exhibit 14.1 to the
Companys 2003 Annual Report on Form 10-K).
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21.1*
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Subsidiaries of the Company.
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23.1*
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Consent of Ernst & Young LLP with respect to
the audited consolidated financial
statements of T-3 Energy Services, Inc. and
subsidiaries.
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31.1*
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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.
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31.2*
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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.
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32.1**
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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).
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32.2**
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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).
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*
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Filed herewith.
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**
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Furnished herewith.
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+
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Management contract or compensatory plan or arrangement
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EX-3
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