TESCO NET LOSS $13.7 MLN
TESCO Corporation Reports First Quarter 2017 Results:
- Liquidity of $83.1 million and no debt at the end of the first quarter, after funding approximately $1.1 million of payments for restructuring, $1.6 million for U.S. property taxes and $6 million of receivables growth
- Reported U.S. GAAP diluted EPS was a loss of $(0.29) on a net loss of $13.7 million and adjusted EPS was a loss of $(0.29) on an adjusted net loss of $13.4 million, after $0.3 million in charges
- Adjusted EBITDA loss was $4.7 million for the first quarter, compared to a loss of $4.4 million for the fourth quarter of 2016
|Condensed Consolidated Statements of Income|
|(in $ millions, except per share information)|
|Three Months Ended March 31,|
|Cost of sales and services||42.5||46.9|
|Selling, general and administrative||6.3||6.3|
|Long-lived asset impairments||—||35.5|
|Research and engineering||0.8||1.6|
|Interest expense, net||—||0.4|
|Foreign exchange loss (gain)||(0.1)||1.2)|
|Loss before income taxes||(12.7)||(56.3)|
|Income tax provision||1.0||0.5|
|Loss per share:|
|Weighted average number of shares:|
First Quarter Operating Results
Fernando Assing, TESCO's President and Chief Executive Officer, commented, "While our first quarter results reflect the benefit of the stronger U.S. land market, the results also reflect the continued weakness in multiple international and offshore markets. We continue to deploy our new technologies and commercial innovation to be positioned to take advantage of opportunities in these markets as they begin to recover in subsequent quarters."
TESCO reported revenue of $36.7 million in the first quarter of 2017, up from $35.3 million, or 4%, in the fourth quarter of 2016, and up from $35.5 million, or 3%, in the first quarter of 2016. The sequential increase in revenue was primarily from higher sales of new products and aftermarket services as well as land tubular services in the U.S.
TESCO reported a U.S. GAAP net loss of $13.7 million, or $(0.29) per share, in the first quarter of 2017. Adjusted net loss for the quarter was $13.4 million, or $(0.29) per share, excluding special items, consisting primarily of charges related to restructuring costs. This compares to a U.S. GAAP net loss of $20.1 million, or $(0.43) per diluted share, in the fourth quarter of 2016, and a U.S. GAAP net loss of $56.8 million, or $(1.45) per diluted share, in the first quarter of 2016. Adjusted net loss in the fourth quarter of 2016 was $13.3 million, or $(0.28) per diluted share, and in the first quarter of 2016 was $17.9 million, or $(0.46) per diluted share.
Adjusted EBITDA loss was $4.7 million in the first quarter of 2017 compared to an adjusted EBITDA loss of $4.4 million in the fourth quarter of 2016 on a 4% revenue increase. For the first quarter of 2017, U.S. GAAP operating loss was $12.9 million and adjusted operating loss was $12.1 million, which excludes the impact of $0.8 million of charges. This compares to the fourth quarter 2016 U.S. GAAP operating loss of $18.9 million and adjusted operating loss of $13.1 million, which excluded $5.8 million of charges.
Cash and cash equivalents as of March 31, 2017 decreased from the fourth quarter of 2016 by $8.4 million to $83.1 million primarily due to restructuring payments of $1.1 million, U.S. property taxes of $1.6 million and higher receivables of $6.0 million.
Free cash flow was a use of cash of $9.2 million before approximately $1.1 million of restructuring payments. The sequential decline was primarily caused by an increase in accounts receivable of over $6.0 million, driven by sequential revenue increase and nearly $4 million in international collection delays that have been substantially collected so far this quarter.
- Revenue in the first quarter of 2017 was $20.1 million, a $1.3 million, or 7%, increase from the fourth quarter of 2016 and a $3.5 million, or 21%, increase from the first quarter of 2016.
- Product sales in the first quarter of 2017 included six top drive units (5 new and 1 used), compared to six units (4 new and 2 used) sold in the fourth quarter of 2016, and six units (3 new and 3 used) sold in the first quarter of 2016. Product sales in the first quarter of 2017 also included one new catwalk compared to two used catwalks in the fourth quarter of 2016.
- Aftermarket sales and services increased by $1.6 million, or 22%, compared to the fourth quarter of 2016 primarily due to higher recertification activity, which included several top drive upgrades, partially offset by reduced part sales.
- There were 116 top drives in our rental fleet at the end of the first quarter with a utilization of 14%. The decreased sequential utilization was primarily due to reduced rental activity in Russia.
- U.S. GAAP operating loss before adjustments in the Products segment for the first quarter of 2017 was $0.9 million, or (4)% of revenue, a $4.4 million, or 83%, improvement from the fourth quarter of 2016. First quarter operating loss and operating margin after adjustments were $0.7 million and (3)% respectively. This sequential increase in profitability was due to the volume and mix benefit from higher new product sales and aftermarket activity, partially offset by lower rental activity.
- At March 31, 2017, the top drive backlog was 5 units with a total potential value of $4.1 million, compared to 10 units at December 31, 2016, with a potential value of $9.3 million. This compares to a backlog of 10 units at March 31, 2016, with a potential value of $9.5 million. The trend towards short delivery times and intra-quarter book-and-ship transactions continued in 2017. Most of the top drives expected to ship in the second quarter are likely to be booked and shipped intra-quarter. Today, our top drive backlog stands at 5 units with a potential value of $4.1 million, with several contracts signed but awaiting receipt of deposits.
Tubular Services Segment
- Revenue in the first quarter of 2017 was $16.6 million, a slight increase from the fourth quarter of 2016 of $16.5 million and a decrease from the first quarter of 2016 of $18.9 million. This sequential increase was driven primarily by higher service activity in U.S. land, partially offset by lower international and offshore activity in multiple markets.
- U.S. GAAP operating loss before adjustments in the Tubular Services segment in the first quarter of 2017 was $5.7 million, a $1.2 million improvement from the fourth quarter of 2016. First quarter operating loss and operating margin after adjustments were $5.1 million and (31)%, respectively, compared to $5.3 million and (32)% in the fourth quarter of 2016. The sequential improvement was primarily driven by improved profitability in U.S. land, partially offset by the impact of lower offshore activity.
Other Segments and Expenses
- Research and Engineering U.S. GAAP costs for the first quarter of 2017 were $0.8 million, compared to $1.5 million in the fourth quarter of 2016 and $1.6 million in the first quarter of 2016. We continue to invest in the development, commercialization, and enhancement of our proprietary technologies.
- Corporate and other U.S. GAAP costs for the first quarter of 2017 were $5.5 million, a $0.3 million, or 6%, increase from the fourth quarter of 2016 and a $2.5 million, or 31%, decrease from the first quarter of 2016. On an adjusted basis, the first quarter costs increased by $0.6 million compared to fourth quarter due to approximately $0.5 million higher employee-related costs.
- Net foreign exchange gain in the first quarter of 2017 was $0.1 million, compared to net foreign exchange losses of $1.1 million in the fourth quarter of 2016 and $1.2 million in the first quarter of 2016.
- The effective tax rate for the first quarter of 2017 was an 8% expense compared to a 1% benefit in the fourth quarter of 2016 and a 1% expense in the first quarter of 2016. Income tax expense increased sequentially as taxable income increased in certain international markets with limited loss carrybacks.
- Capital expenditures were $0.7 million in the first quarter of 2017, primarily for tubular services equipment and infrastructure projects, a $1.9 million decrease from the fourth quarter of 2016 and a $0.1 million, or 13%, decrease from the first quarter of 2016.
We anticipate U.S. rig count to continue to increase during the second quarter of 2017 but flatten in the second half of 2017. In addition, international and offshore markets are not expected to show much improvement in 2017. We have started to see some opportunities to increase pricing in U.S. land, however persistent overcapacity will likely limit our pricing power throughout 2017. We are also facing risks that cost escalation, which includes labor inflation and shortages, incremental logistics and equipment reactivation costs, will exceed price increases in the short term.
In the second quarter of 2017:
- Products revenue is expected to be higher sequentially, primarily from higher new and used product sales and some improvement in top drive rental utilization in various markets, as well as additional catwalk rentals. Products adjusted operating loss is expected to improve sequentially.
- Tubular Services revenue is expected to increase sequentially from increased North America land activity and higher new and used CDS sales. Tubular Services adjusted operating loss is expected to improve sequentially but incrementals are expected to be impacted by the onshore/offshore mix and activation costs for planned third quarter activity increases.
- Corporate and R&E expenses are expected to be slightly higher sequentially in the second quarter.
- As a result, adjusted EBITDA loss is expected to improve sequentially in the second quarter.
- Cash levels are expected to decline due to operating losses and certain tax payments, although at a reduced rate compared to the first quarter.
"During the first quarter and through this quarter, we have made continued progress on several key initiatives, including CDS™ Evolution adoption and top drive performance upgrades. Customer interest in offerings that reduce cost and improve drilling performance continues to increase," Mr. Assing said.
"Within Products, we completed several top drive upgrade projects with more booked for delivery over the next few quarters. We sold one catwalk and mobilized additional rental units internationally. With ARC, the number of contracted installations increased in established markets with customer trials in new international markets ongoing. Finally, we completed the upgrade of our test rig in Houston and showcased many of our new technologies to customers during the Offshore Technology Conference in May. Not only will the rig upgrades improve our testing capability, but they also increase the marketability for third party rental."
"In Tubular Services, we continue to gain adoption of the CDS Evolution model in our targeted trial U.S. markets. For example, we recently converted a multi-rig U.S. client based on the service quality and cost efficiency of this offering. In addition, our new multi-plug launcher system completed several field jobs with positive results and we will continue to ramp up our capacity in the second quarter. Global markets are increasingly understanding the value proposition of our automated offerings, with CDS sales expected to increase in the second quarter."
"As the market recovers, we remain highly focused on returning to a quarterly breakeven EBITDA run rate while minimizing cash usage over the next several quarters. The key drivers to achieving this will be: 1) growing CDS land Evolution adoption and gaining market share, particularly in North America, 2) accelerating CDS and tubular accessories sales 3) Gaining offshore Tubular Services market share in our established markets, including the benefits from rig reactivations, and 4) accelerating all AMSS offerings including ARC, as rigs reactivate. At the same time, we must carefully manage the ramp-up risks related to safety, quality, cost escalation and working capital management. With available technologies and a strong balance sheet and cash position to fund growth, our priority is on executing on these market opportunities," Mr. Assing concluded.
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