| T-3 ENERGY SERVICES INC Item 1A Risk Factors Risks Relating to the Oil and Gas Industry and Our Business If we are unable to successfully manage our growth and implement our business plan, our results of operations will be adversely affected |
| We have experienced significant revenue growth in 2005 |
| To maintain our advantage of delivering new products and providing aftermarket services more rapidly than our competitors, we plan to further expand our operations by adding new facilities, upgrading existing facilities and increasing manufacturing capacity |
| We believe our future success depends in part on our ability to manage this expansion |
| The following factors could present difficulties for us: • inability to integrate operations between existing and new or expanded facilities; • shortage of operating equipment and raw materials necessary to operate our expanded business; • lack of a sufficient number of qualified technical and operating personnel; and • managing the increased costs associated with our expansion |
| Our business depends on spending by the oil and gas industry, and this spending and our business may be adversely affected by industry conditions that are beyond our control |
| We depend on our customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and gas |
| Industry conditions are influenced by numerous factors over which we have no control, such as: • the level of drilling activity; • the level of oil and gas production; • the demand for oil and gas related products; • domestic and worldwide economic conditions; • political instability in the Middle East and other oil producing regions; • the actions of the Organization of Petroleum Exporting Countries; • the price of foreign imports of oil and gas, including liquefied natural gas; • weather conditions; • technological advances affecting energy consumption; • the level of oil and gas inventories; • the cost of producing oil and gas; • the price and availability of alternative fuels; • merger and divestiture activity among oil and gas producers; and • governmental regulation |
| 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 |
| 10 _________________________________________________________________ [62]Table of Contents 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 |
| Historical prices for oil and gas have been volatile and are expected to continue to be volatile |
| 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 |
| We rely on a few key employees whose absence or loss could disrupt our operations or be adverse to our business |
| Many key responsibilities within our business have been assigned to a small number of employees |
| The loss of their services, particularly the loss of our Chairman, President and Chief Executive Officer, Gus D Halas, and the managers of our wellhead and pipeline product lines, Alvin Dueitt and Jimmy Ray, respectively, could be adverse to our business |
| Although we have employment and non-competition agreements with Mr |
| Halas and some of our other key employees, as a practical matter, those agreements will not assure the retention of our employees, and we may not be able to enforce all of the provisions in any employment or non-competition 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 |
| Shortages of raw materials may restrict our operations |
| The forgings and castings necessary for us to make our products are in high demand from our competitors and from participants in other industries |
| There can be no assurance that we will be able to continue to purchase these raw materials on a timely basis or at acceptable prices |
| Shortages could result in increased prices that we may be unable to pass on to customers |
| In addition, during periods of shortages, delivery times may be substantially longer |
| Any significant delay in our obtaining raw materials would have a corresponding delay in the manufacturing and delivery of our products |
| Any such delay might jeopardize our relationships with our customers and result in a loss of future business |
| Our industry has recently experienced shortages in the availability of qualified personnel |
| Any difficulty we experience replacing or adding qualified personnel could adversely affect our business |
| Our operations require the services of employees having technical training and experience in our business |
| As a result, our operations depend on the continuing availability of such personnel |
| Shortages of qualified personnel are occurring in our industry |
| If we should suffer any material loss of personnel to competitors, or be unable to employ additional or replacement personnel with the requisite level of training and experience, our operations could be adversely affected |
| A significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both |
| 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: • unanticipated costs and exposure to unforeseen liabilities; • difficulty in integrating the operations and assets of the acquired businesses; • our ability to properly maintain effective internal controls over an acquired company; and 11 _________________________________________________________________ [63]Table of Contents • risk of entering markets in which we have limited prior experience |
| Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have an adverse effect on our business |
| In addition, we may incur indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions |
| Debt service requirements could represent a burden on our results of operations and financial condition and the issuance of additional equity securities could be dilutive to our existing stockholders |
| The oilfield service industry in which we operate is highly competitive, which may result in a loss of market share or a decrease in revenue or profit margins |
| Many of our competitors have greater financial and other resources than we do |
| 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, manufacturing capabilities, availability of plant capacity, price, 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 do not develop and commercialize new competitive products, our revenue may decline |
| To remain competitive in the market for pressure control products and services, we must continue to develop and commercialize new products |
| If we are not able to develop commercially competitive products in a timely manner in response to industry demands, our business and revenues will be adversely affected |
| Our future ability to develop new products depends on our ability to: • design and commercially produce products that meet the needs of our customers; • successfully market new products; and • protect our proprietary designs from our competitors |
| We may encounter resource constraints or technical or other difficulties that could delay introduction of new products and services |
| Our competitors may introduce new products before we do and achieve a competitive advantage |
| Additionally, the time and expense invested in product development may not result in commercial products or provide revenues |
| We could be required to write off our entire investment in a new product that does not reach commercial viability |
| Moreover, we may experience operating losses after new products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand |
| The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of our goodwill |
| Since 2003, we have incurred goodwill impairments related to continuing and discontinued operations totaling dlra29dtta5 million |
| As of December 31, 2005, we had approximately dlra69dtta6 million of goodwill |
| Our estimates of the value of our goodwill could be reduced as a result of various factors, some of which are beyond our control |
| We may be faced with product liability claims |
| Most of our products are used in hazardous drilling and production applications where an accident or a failure of a product can cause personal injury, loss of life, damage to property, equipment or the environment, or suspension of operations |
| Despite our quality assurance measures, defects may occur in our products |
| Any defects could give rise to liability for damages, including consequential damages, and could impair the market’s acceptance of our products |
| To mitigate our risk of liability for damages, we attempt to disclaim responsibility for consequential damages, but our disclaimers may not be effective |
| We carry product liability insurance as a part of our commercial general liability coverage of dlra1 million per occurrence with a dlra2 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 |
| 12 _________________________________________________________________ [64]Table of Contents 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 |
| 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 |
| Uninsured or underinsured claims or litigation or an increase in our insurance premiums could adversely impact our results |
| We maintain insurance to cover potential claims and losses, including claims for personal injury or death resulting from the use of our products |
| We carry comprehensive insurance, including business interruption insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims |
| We do not believe any of the litigation to which we currently are subject will result in any material uninsured or underinsured losses |
| 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 US 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, and 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 |
| Joint and several, and strict liability may be incurred in connection with discharges or releases of petroleum hydrocarbons and wastes on, under or from our properties and facilities, many of which have been used for industrial purposes for a number of years, oftentimes by third parties not under our control |
| Private parties who use our products and facilities where our petroleum hydrocarbons or wastes are taken for reclamation or disposal may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations and for personal injury or property damage |
| In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly requirements could have a material adverse effect on our business |
| We may not be able to recover some or any of these costs from insurance |
| We will be subject to political, economic and other uncertainties as we expand our international operations |
| We intend to continue our expansion into international oil and gas producing areas such as Mexico and Canada |
| Our international operations are subject to a number of risks inherent in any business operating in foreign countries including, but not limited to: • political, social and economic instability; • currency fluctuations; and • government regulation that is beyond our control |
| Our operations have not yet been affected to any significant extent by such conditions or events, but as our international operations expand, the exposure to these risks will increase |
| To the extent we make investments in 13 _________________________________________________________________ [65]Table of Contents foreign facilities or receive revenues in currencies other than US dollars, the value of our assets and our income could be adversely affected by fluctuations in the value of local currencies |
| If we are unable to complete our assessment of the adequacy of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock |
| Under Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to include in each of our future annual reports on Form 10-K, beginning with our annual report for the fiscal year ended December 31, 2007, a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and a related attestation of our independent auditors |
| We are currently undertaking a comprehensive effort in preparation for compliance with Section 404 |
| This effort includes the documentation and evaluation of our internal controls under the direction of our management |
| We have been making various changes to our internal control over financial reporting as a result of our review efforts |
| To date, we have not identified any material weaknesses in our internal control over financial reporting, as defined by the Public Company Accounting Oversight Board |
| Due to the number of controls to be examined, the complexity of the project, as well as the subjectivity involved in determining effectiveness of controls, we cannot be certain that all our controls will be considered effective |
| Therefore, we can give no assurances that our internal control over financial reporting will satisfy the new regulatory requirements |
| If we are unable to successfully implement the requirements of Section 404, it will prevent our independent auditors from issuing an unqualified attestation report on a timely basis as required by Section 404 |
| In that event, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock |
| 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 may continue to experience, substantial volatility |
| During 2005, the sale prices of our common stock on The Nasdaq National Market has ranged from a low of dlra6dtta62 to a high of dlra18dtta43 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: • actual or anticipated variations in quarterly operating results; • announcements of technological advances by us or our competitors; • current events affecting the political and economic environment in the United States; • conditions or trends in our industry, including demand for our products and services, technological advances and governmental regulations; • litigation involving or affecting us; • changes in financial estimates by us or by any securities analysts who might cover our stock; and • additions or departures of our key personnel |
| 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 |
| Two of our directors may have conflicts of interest because they are also officers or employees of First Reserve Corporation |
| The resolution of these conflicts of interest may not be in our or our stockholders’ best interests |
| Two of our directors, Joseph R Edwards and Ben A Guill, are also officers or employees of First Reserve Corporation, which controls the general partner of First Reserve Fund VIII, our majority stockholder |
| This may create conflicts of interest because these directors have responsibilities to First Reserve Fund VIII and its owners |
| 14 _________________________________________________________________ [66]Table of Contents Their duties as officers or employees of First Reserve Corporation may conflict with their duties as directors of our company regarding business dealings between First Reserve Corporation and us and other matters |
| The resolution of these conflicts may not always be in our or our stockholders’ best interests |
| We will renounce any interest in specified business opportunities, and First Reserve Fund VIII and its director designees on our board of directors generally have no obligation to offer us those opportunities |
| First Reserve Fund VIII has investments in other oilfield service companies that compete with us, and First Reserve Corporation and its affiliates, other than T-3, may invest in other such companies in the future |
| We refer to First Reserve Corporation, its other affiliates and its portfolio companies as the First Reserve group |
| Our certificate of incorporation provides that, so long as First Reserve Corporation and its affiliates continue to own at least 20prca of our common stock, we renounce any interest in specified business opportunities |
| Our certificate of incorporation also provides that if an opportunity in the oilfield services industry is presented to a person who is a member of the First Reserve group, including any individual who also serves as First Reserve Fund VIII’s director designee of our company: • no member of the First Reserve group or any of those individuals will have any obligation to communicate or offer the opportunity to us; and • such entity or individual may pursue the opportunity as that entity or individual sees fit, unless: • it was presented to a member of the First Reserve group in that person’s capacity as a director or officer of T-3; or • the opportunity was identified solely through the disclosure of information by or on behalf of T-3 |
| These provisions of our certificate of incorporation may be amended only by an affirmative vote of holders of at least 80prca of our outstanding common stock |
| As a result of these charter provisions, our future competitive position and growth potential could be adversely affected |
| 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 25cmam000cmam000 shares of preferred stock in one or more series on terms that may be determined at the time of issuance by our board of directors |
| Accordingly, we may issue shares of any series of preferred stock that would rank senior to the common stock as to voting or dividend rights or rights upon our liquidation, dissolution or winding up |
| Certain provisions in our charter documents have anti-takeover effects |
| Certain provisions of our certificate of incorporation and bylaws may have the effect of delaying, deferring or preventing a change in control of us |
| Such provisions, including those regulating the nomination and election of directors and limiting who may call special stockholders’ meetings, together with the possible issuance of our preferred stock without stockholder approval, may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a stockholder might consider to be in such stockholder’s best interest |
| Because we have no plans to pay any dividends for the foreseeable future, investors must look solely to stock appreciation for a return on their investment in us |
| We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future |
| We currently intend to retain any future earnings to support our operations and growth |
| Any payment of cash dividends in the future will be dependent on the amount of funds legally available, our earnings, financial condition, capital requirements and other factors that our board of directors may deem relevant |
| Additionally, certain of our debt agreements restrict the payment of dividends |
| Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment |
| Investors seeking cash dividends should not purchase our common stock |