TESCO NET LOSS $97.8 MLN

Tesco Corporation ("TESCO" or the "Company") (NASDAQ: TESO) today reported third quarter 2016 financial and operating results.

Tesco Corporation Reports Third Quarter 2016 Results

• Liquidity of $90 million and no debt at the end of the third quarter
• Reported U.S. GAAP diluted EPS was a loss of $(0.48) on a net loss of $22.1 million and adjusted EPS was a loss of $(0.37) on an adjusted net loss of $17.3 million, after $0.11 in charges
• Adjusted EBITDA loss was $9.1 million for the third quarter, compared to a loss of $7.5 million for the second quarter
• First offshore catwalk system delivered during the quarter
• Automated Rig Controls technology gets commercialized with six systems in the field with positive feedback

Fernando Assing, Tesco's Chief Executive Officer, commented, "With global energy markets signaling the formation of an oilfield services activity bottom late in 2016, we are well positioned competitively and have a liquidity position that will allow us to take advantage of opportunities to start growing our business and deploying our new technologies."

Tesco reported revenue of $30.4 million for the third quarter ended September 30, 2016, down from $33.6 million, or 10%, in the second quarter of 2016, and down from $61.4 million, or 50%, for the third quarter of 2015. The sequential decline in revenue was primarily from expected lower new product sales.

Tesco reported a U.S. GAAP net loss of $22.1 million, or $(0.48) per share, for the third quarter ended September 30, 2016. Our adjusted net loss for the quarter was $17.3 million, or $(0.37) per share, excluding special items, consisting primarily of several charges related to inventory and restructuring costs. This compares to a U.S. GAAP net loss of $18.9 million, or $(0.47) per diluted share, in the second quarter of 2016, and a U.S. GAAP net loss of $19.9 million, or $(0.51) per diluted share, for the third quarter of 2015. Adjusted net loss in the second quarter of 2016 was $15.8 million, or $(0.39) per diluted share, and in the third quarter of 2015 was $12.5 million, or $(0.32) per diluted share.

Adjusted EBITDA loss was $9.1 million for the third quarter compared to adjusted EBITDA loss of $7.5 million in the second quarter of 2016 on a 10% revenue decline. For the third quarter of 2016, U.S. GAAP operating loss was $21.9 million and adjusted operating loss was $17.4 million, which excludes the impact of $4.5 million of charges. This compares to the second quarter 2016 U.S. GAAP operating loss of $19.2 million and adjusted operating loss of $16.0 million, which excludes $3.2 million of charges.

Cash and cash equivalents as of September 30, 2016 decreased from the second quarter by $7.3 million to $90.1 million primarily due to restructuring payments of $0.8 million, $3 million of certain international receivables not collected until October and the cash collateralization of $2 million of letters of credit due to the non-renewal of the credit facility. During the quarter, Tesco elected not to proceed with a credit facility replacement as the costs and restrictions were not proportional to the borrowing availability.

Free cash flow was a use of cash of $5.7 million before approximately $0.8 million of restructuring payments. The sequential decline was primarily caused by the $3 million in collection delays, higher capital spending of over $1 million and lower used equipment sales of over $1 million. However, inventory declined by approximately $5 million, excluding reserves, from product sales and improved supply chain management.

Products Segment

• Revenue for Q3 2016 was $17.0 million, a $4 million, or 17%, decrease from Q2 2016 and an $11.8 million, or 41%, decrease from Q3 2015.
• Product sales for Q3 2016 included three top drive units (3 new and 0 used), compared to six units (3 new and 3 used) sold in Q2 2016 and five units (5 new and 0 used) sold in Q3 2015. During the third quarter, the carrying value of inventory associated with new hydraulic top drives was determined to be above current market prices due to availability of used equipment in the market.
• There were 118 top drives in our rental fleet at the end of the third quarter with a utilization of 21%. While the rental fleet remained flat, utilization improved from 15% in the prior quarter.
• U.S. GAAP operating loss before adjustments in the Products segment for Q3 2016 was $7.4 million, or (44)% of sales, a $4.7 million, or 174%, a decrease from Q2 2016. Third quarter operating loss and operating margin after adjustments were $3.8 million and (22)%, respectively, with sequential decremental margins of 39%. This sequential decline in profitability was due to lower sales and a less profitable mix of product sales.
• At September 30, 2016, top drive backlog was nine units, with a total potential value of $7.8 million, compared to nine units at June 30, 2016, with a potential value of $8.5 million. This compares to a backlog of 20 units at September 30, 2015, with a potential value of $20.0 million. Today, our top drive backlog stands at 12 units with a potential value of $11.5 million.

Tubular Services Segment

• Revenue for Q3 2016 was $13.4 million, a $0.4 million, or 3%, increase from Q2 2016 and a $19.2 million, or 59%, decrease from Q3 2015. This sequential increase was driven primarily by higher sales of accessories and used CDS equipment that offset weakness in offshore markets. While activity in U.S. land increased during the quarter, unsustainable pricing by smaller competitors continued but is slowly leading to attrition.
• U.S. GAAP operating loss before adjustments in the Tubular Services segment for Q3 2016 was $8.0 million, a $1.3 million improvement from Q2 2016. Third quarter operating loss and operating margin after adjustments were $7.2 million and (54)%, respectively. This slight sequential decrease was primarily due to the lower mix of offshore revenue and ramp-up costs for reactivating U.S. land crews for expected fourth quarter activity.

Other Segments and Expenses

• Research and engineering U.S. GAAP costs for Q3 2016 were $1.2 million, compared to $1.4 million in Q2 2016 and $2.1 million in Q3 2015. We continue to invest in the development, commercialization, and enhancement of our proprietary technologies.
• Corporate and other U.S. GAAP costs for Q3 2016 were $5.3 million, a $0.5 million, or 9%, decrease from Q2 2016 and a $0.9 million, or 15%, decrease from Q3 2015. On an adjusted basis, the Q3 2016 costs decreased by $0.5 million and $0.6 million from Q2 2016 and Q3 2015, respectively.
• Net foreign exchange losses for Q3 2016 were $0.4 million, compared to $0.0 million in Q2 2016 and $2.0 million in Q3 2015.
• The effective tax rate for Q3 2016 was a 2% benefit compared to a 1% benefit in Q2 2016 and an 11% expense in Q3 2015.
• Total capital expenditures were $2.6 million in Q3 2016, primarily for tubular services equipment, a $1.5 million increase from Q2 2016 and a $0.5 million, or 24%, increase from Q3 2015.

Outlook

While U.S. rig count is expected to continue to increase in the fourth quarter of 2016, weakness in international markets and pricing pressure in most markets is expected to continue. We do not expect any pricing improvement in the near-term given the excess service capacity in the market.

Products revenue is expected to be flat to slightly down sequentially as rental utilization in certain markets is expected to decline and the mix of new products has a lower average selling price. Aftermarket Sales and Services revenue is expected to increase slightly following recent increases in quoting activity. Products adjusted operating loss is expected to be flat to slightly improved sequentially as higher-margin product sales and aftermarket activity offset lower rental utilization.

Tubular Services revenue is expected to increase slightly sequentially from increased U.S. land activity and market share gains. Offshore activity is expected to run at levels similar to the third quarter. Adjusted operating loss is expected to be flat sequentially as improved profitability in U.S. land is offset by lower profits from accessory and used CDS sales.

Sequential Corporate and R&E expenses are expected to decrease slightly in the fourth quarter. Depreciation expense in the fourth quarter should remain flat sequentially.

As a result of these factors, adjusted EBITDA loss is expected to slightly improve sequentially in the fourth quarter. We also expect cash usage to decline but at a reduced pace compared with the third quarter as collections improve.

"During the third quarter we completed key short-term restructuring activities. We continue to look for cost optimization opportunities and to evaluate the effectiveness of our global footprint, with further actions identified for implementation before the end of 2016," Mr. Assing said. "We made progress on our initiatives and investments to add volume and improve our operating efficiencies. These initiatives are aligned with our long-term strategy and will focus on reduced costs, service offering integration and drilling performance, that deliver operational and well improvements and clear cost advantages."

"Within Products, we made progress on our new pipe-handling technologies for both newbuilds and rig upgrades. During the quarter we completed in-house testing of the Pipe Drive System and expect the first field trials to begin in the fourth quarter. We shipped our first offshore catwalk and are seeing increased demand for high-end automated land catwalks in the Middle East, especially for rentals. We also commercialized our first generation automated rig-control software ("ARC") that provides advanced drilling functionalities through the top drive. We have six ARC contracts primarily in North America with growing customer interest in international markets."

"In Tubular Services, we were pleased with the pace of CDS Evolution conversion in our targeted trial U.S. markets, with revenue doubling sequentially to almost one third of the total in those markets. We are performing field trials of the new multi-plug launcher, which will round out our cementing accessories portfolio. By incorporating cementing accessories with our CDS Evolution offering, the value proposition for the customer and quality of the cementing job is greatly enhanced and costs significantly reduced. The combined offering should allow us to continue to increase the conversion adoption rate next year while gaining market share and improving profitability even as prices remain under pressure. Offshore, we have developed several new customer relationships, an indication Tesco is increasingly considered a clear alternative to the two dominant players in the market."

"Finally, as we commercialize the R&E projects developed over the last few years, we will continue to invest in drilling performance innovation in 2017. Our focus will be on shorter development time rig mechanization products and rig controls that provide clear economic benefits to our customers."

"Looking ahead, we see signs that our markets are beginning to bottom. North America rig count has been steadily improving and international rig count in our key markets has started to stabilize. However, it is likely pricing will remain challenged until excess capacity is reduced and some pricing power returns. As a result, we continue to plan for a lower-for-longer market environment while we begin to make investments to gain market share and scale to leverage the eventual recovery," Mr. Assing concluded.

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Earlier: 

TESCO NEEDS MONEY 

TESCO NET LOSS $56.8 MLN 

TESCO NET LOSS $133.8 MLN 

TESCO CORPORATION DOWN 57% 

TESCO CORP LOSS $35.7 MLN