TESCO CORP LOSS $(35.7) MLN

• Global restructuring efforts generating cumulative annualized savings of $30 million 
• 6 Top Drive bookings suggest market resilience 
• Company readies deployment of new technologies as investments in R&E totaled $2.1 million 
• Second quarter reported diluted EPS loss of $0.71 
• Second quarter adjusted diluted EPS loss of $0.21, after $0.50 in charges, and positive adjusted EBITDA of $1.8 million

Tesco Corporation ("TESCO" or the "Company") (NASDAQ: TESO) today reported second quarter 2015 results.

Second Quarter Operating Results

Fernando Assing, TESCO's Chief Executive Officer, commented, "While we expected the second quarter of 2015 results to be negatively impacted by continued market weakness, the severity of the rig count decline and pricing in North America exceeded our expectations. In the second quarter, we took additional restructuring actions with an after-tax cost of $2.2 million, especially in our international markets, to lower our cost structure and better match current market activity. We are still projecting a slow recovery in commodity prices and related drilling activity for the remainder of 2015 and into 2016. Accordingly we are taking additional restructuring steps in the third quarter to reduce operating losses and improve cash generation."

TESCO reported a net loss of $27.5 million, or $(0.71) per diluted share, for the second quarter ended June 30, 2015. Excluding certain special items, consisting of a valuation allowance on Canadian deferred tax assets, restructuring costs, specific warranty reserves for new products, certain foreign currency losses and specific bad debt expense related to an international customer, TESCO reported an adjusted net loss for the quarter of $8.0 million, or $(0.21) per diluted share. This compares to a net loss of $8.3 million, or $(0.21) per diluted share, in the first quarter of 2015, and net income of $12.7 million, or $0.31 per diluted share, for the second quarter of 2014. Adjusted net loss in the first quarter of 2015 was $3.3 million, or $(0.08) per diluted share, and in the second quarter of 2014 was $11.9 million, or $0.29 per diluted share.

Adjusted operating loss during the second quarter was $9.0 million which excludes $4.7 million of restructuring costs, certain new product warranty costs and a bad debt expense reserve. Second quarter 2015 revenue was $74.5 million, compared to $91.7 million for the first quarter of 2015 and to $145.1 million for the second quarter of 2014, a decrease of 19% and 49%, respectively. Adjusted EBITDA has remained positive at $1.8 million for the second quarter of 2015 and $11.4 million for first half of 2015.

During the second quarter of 2015, cash and cash equivalents declined by approximately $9.8 million to $62.7 million, including over $10 million of outlays related to an extra dividend payment, severance payments and prior-year tax liabilities. Despite the circumstances, year-to-date, we have generated cash from operations of $1.7 million after restructuring expenses and inventory growth of $3 million from long lead-time purchases that could not be cancelled. While we were able to reduce accounts receivable by over $40 million, reductions in accounts payable, prior year tax liabilities and customer deposits partially offset this receivables drawdown. In addition, cash was consumed for capital expenditures of over $10 million primarily for prior year commitments. Excluding letters of credit, we had access to $114.6 million under our credit facility at the end of the second quarter. No shares were repurchased in the second quarter and the first and second quarter dividends were both paid in the second quarter for a total cash expenditure of $3.9 million.

Top Drives Segment

Revenue from the Top Drive segment for Q2 2015 was $41.5 million, an $8.5 million, or 17.0%, decrease from Q1 2015 and a $44.8 million, or 51.9%, decrease from Q2 2014.

Top Drive sales for Q2 2015 included 11 units (10 new and 1 used), compared to 14 units (14 new and 0 used) sold in Q1 2015 and 35 units (33 new and 2 used) sold in Q2 2014.

The rental top drive fleet remained unchanged at 135 during the second quarter with a utilization of 30%.

Operating loss before adjustments in the Top Drive segment for Q2 2015 was $2.8 million, a $7.4 million, or 160.9%, decrease from Q1 2015 and a $22.0 million, or 114.6%, decrease from Q2 2014. Our Top Drive operating margins before adjustments were (7)% in Q2 2015, a decrease from 9% and 22% in Q1 2015 and Q2 2014, respectively. Second quarter operating income and operating margin after adjustments were $0.7 million and 1.7%, respectively, with sequential decremental adjusted margins of 62%. This sequential decline in profitability is primarily related to the impact of reduced global top drive sales, lower rental pricing and utilization in North and South America, continued weakness in after-market bookings as customers defer maintenance and low manufacturing activity on plant utilization.

At June 30, 2015, Top Drive backlog was 20 units, with a total potential value of $20.0 million, compared to 24 units at March 31, 2015, with a potential value of $23.1 million. This compares to a backlog of 51 units at June 30, 2014, with a potential value of $56.7 million. Thirteen units of the backlog at the end of the second quarter are not scheduled to ship until 2016. Today, our backlog stands at 21 units with a potential value of $22 million.

Tubular Services Segment

Revenue from the Tubular Services segment for Q2 2015 was $33.0 million, a $8.7 million, or 20.9%, decrease from Q1 2015 and a $25.8 million, or 43.9%, decrease from Q2 2014.

Operating loss before adjustments in the Tubular Services segment for Q2 2015 was $2.8 million, a $4.8 million, or 240.0%, decrease from Q1 2015 and a $14.1 million, or 124.8%, decrease from Q2 2014. Our Tubular Services operating margins were (9)% for Q2 2015, down from 5% and 19% in Q1 2015 and Q2 2014, respectively. Second quarter operating losses and operating margin after adjustments were $1.7 million and 5.2%, respectively, with sequential adjusted decremental margins of 52%. This sequential decline in profitability is primarily related to the full quarter impact of lower North America activity and pricing as well as lower activity and pricing in certain Latin America and Asia Pacific markets.

Other Segments and Expenses

Research and engineering costs for Q2 2015 were $2.1 million, compared to $2.9 million in Q1 2015 and $2.5 million in Q2 2014. We continue to invest in the development, commercialization, and enhancements of our proprietary technologies relating to our Top Drive and Tubular Services segments.

Corporate and other costs for Q2 2015 were $6.0 million, a $3.3 million, or 35.5%, decrease from Q1 2015 and a $3.2 million, or 34.8%, decrease from Q2 2014. Adjusted costs would have been $5.9 million primarily as a result of the restructuring efforts.

Net foreign exchange losses for Q2 2015 were $1.4 million, compared to losses of $3.2 million in Q1 2015 and gains of $1.1 million in Q2 2014. The largest foreign exchange losses were from Latin America.

Our effective tax rate for Q2 2015 was a 79% expense compared to a 6% benefit in Q1 2015 and a 36% expense in Q2 2014. The effective tax rate was mostly affected by a $15.3 million valuation allowance related to deferred tax assets in Canada.

Total capital expenditures were $2.9 million in Q2 2015, primarily for tubular services equipment and our test rig, a $4.4 million, or 60%, decrease from Q1 2015 and a $8.6 million, or 75%, decrease from Q2 2014.

Outlook

While North America rig count showed indications of hitting bottom during the second quarter of 2015, recent declines in commodity prices below $50 a barrel add uncertainty to levels of drilling activity in the second half of 2015 and 2016. International rig count is still expected to continue to decline slightly over the rest of the year. Requests for additional pricing concessions in North America have slowed with some additional requests for moderate pricing concessions from international customers continuing. The Company expects to incur an additional operating loss before restructuring charges in the third quarter of 2015.

The Company will remain focused on generating positive free cash flow during the second half of 2015 through spending controls and working capital reductions. The Company will continue to assess the timing of additional share repurchases under the remaining authorization of $73 million against market outlook and other investment opportunities.

Top Drives Segment

During the second half of 2015 the Company expects to ship approximately 3-5 top drives per quarter with bookings predicted to occur at a similar pace. After-market and rental activity recovery will depend on rig count increases.

Operating margins are expected to decline sequentially in the third quarter due to leverage impact on infrastructure of lower expected sales in all product lines.

Tubular Services Segment

Revenue increases from the Tubular Services segment will depend on higher drilling activity, despite some expected improvement in North America market share.

Operating margins are not expected to improve sequentially as additional weakness in certain international markets offsets restructuring benefits.

Other Segments and Expenses

Research and engineering costs are expected to run approximately $2.0 million per quarter and corporate and other costs are expected to run approximately $6.0 to $7.0 million per quarter for the balance of 2015.

The effective tax rate for the second half of 2015 will be sensitive to the impact of earnings and losses by tax jurisdiction as well as non-deductible items such as certain foreign exchange gains and losses.

Total capital expenditures for 2015 are expected to be approximately $12 to $15 million.

"Despite the current challenging market, we have continued to implement the strategy we outlined last year," Assing added. "We continue to gain tubular service market share in our targeted offshore markets and are encouraged by greater technology adoption in North America land, which is focused on helping our customers become more efficient and cost effective. We will ship our first third-party offshore top drive recertification project in the third quarter and believe we will have additional opportunities in this market. Finally, we are actively testing new pipe handling technologies on our new test rig that are expected to be deployed over the next few quarters."

"While our short-term priority remains cash generation and preservation and improved profitability, we plan to continue to implement our strategic plans and technology investments, deploying our cash and liquidity for shareholder returns, acquisitions and organic investments as market conditions dictate," he concluded.

tescocorp.com

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