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T-3 Energy Services, Inc. (TTES)

Q4 2008 Earnings Call

March 2, 2009 11:00 am ET

Executives

Michael Anderson - [PE, VP, Business Development and IR]

Gus Halas - Chairman, President and CEO

James Mitchell - SVP and CFO

Analysts

Collin Gerry - Raymond James

John Tasdemir - Tristone Capital

Chris Glisten - Simmons & Company

Bo McKenzie - Lafitte Capital

Joe Gibney - Capital One

Terese Fabian - Sidoti & Company

Victor Marchon - RBC Capital Markets

Brian Uhlmer - Pritchard Capital Partners

William Conroy - Smh Capital

Stephen Gengaro - Jefferies & Company

Operator

Good morning everyone and welcome to the Fourth Quarter 2008 Earnings Release Conference Call for T-3 Energy Services. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to [Mr. Michael Anderson]. Please go ahead, sir.

Michael Anderson

Thank you. Good morning and welcome to our review of the financial results for the fourth quarter and year 2008. A copy of the press release and annual report and Form 10-K covering our financial results are posted on the company's web site at www.t3 energy.com.

Mr. Gus Halas, President, Chairman, and Chief Executive Officer, and Jay Mitchell, Senior Vice President and Chief Financial Officer will be joining me for this morning's conference call. We will also begin with some opening comments and details regarding the fourth quarter and year 2008 financial performance, followed by a question-and-answer period.

Before we begin discussing the financial details, please remember that during the course of this conference call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including financial business, future financial performance, operating results, and the prospects for the oil and gas services business.

As you know, and it's difficult to make projections or other forward-looking statements in a cyclical industry such as the risks, assumptions, and uncertainties involved in these forward-looking statements, including the level of crude oil and natural gas prices, rig demand, and operational other risks which are described in the company's Form 10-K and other filings with the US Securities and Exchange Commission.

The forward-looking statements are based upon managements' expectations and beliefs and although these statements are based upon reasonable assumptions, actual results might materially differ from those expected results due to a variety of factors.

The company assumes no obligation to update publicly any information, forward-looking statements, whether as a result of new information, future events or otherwise.

For a discussion of additional risks and uncertainties that could impact the company's results, please review the T-3 Energy Services annual report and Form 10-K for the year ending December 31, 2008.

Also note that certain information discussed in this news release is considered non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternate report to the company's reported results.

That concludes the preliminary details of the call. I will now turn it over to Gus.

Gus Halas

Thank you, Michael. First I would like to focus on our fourth quarter 2008 results. T-3 achieved diluted earnings per share loss of $0.69 per share with revenue of $78.6 million, which compares to fourth quarter 2007 diluted earnings per share of $0.67 and revenue of about $64 million.

Our results were materially affected by $23.5 million pre-tax or $28.5 million net of tax, goodwill impairment charge.

Also, our quarterly results include $900,000 tax benefit as a result of strategic alternative cost incurred in prior quarters that become fully deductible for tax purposes during the fourth quarter. Adjusting for these fourth quarter costs, our diluted earnings per share was $0.80 per share for the fourth quarter.

When looking at the entire year as a whole, 2008 yielded both a number of notable challenges and successes. This past year presented several unexercised strategic growth opportunities, sourcing related product introduction challenges within our wellhead products division and 18 month delay in an operations permit for our newly expanded BOP Remanufacturing Center, and the onset of global economic recession. If that was not enough, Mother Nature also joined in testing our organization with two major hurricanes.

Despite these challenges mentioned and thanks to the outstanding teamwork of our employees, a number of financial records were set in 2008 including margins, quarterly revenues, firm order backlog, full backlog and most importantly to me, our safety incident rate.

As we enter 2009 we represented contrasting pictures between the status of several key business metrics and financial and commodity market.

T-3 Energy has experienced some cancellation of order but that total net order cancellations have only been $3.8 million.

Through 2008 and year-to-date it was anticipated the T-3 Energy would experience a precipitous drop in both co-backlog and order backlog between Q3 and Q4 due to a record Q4 shipments and weaker than desired capital equipment market we have seen contradiction year-to-date.

T-3 Energy has observed some improvements in both [coke backlog] and firm order backlog since December 31, 2008.

From December 31, 2008 to February 23, 2009 T-3's firm order backlog has increased from $76 million to $78 million and coal backlog has increased from $90 million to $206 million.

It's important to note that essentially all the coke backlog increased as a result international opportunities for our Pressure Control Group. Though many of these quoted opportunities are result of international projects T-3 does recognize that the current market conditions can influence their future viability.

Consequently, there are two key international regions in which T-3 Energy is well suited to respond to market needs based on the presence of our two international pressure control service facilities in [Acridness] Mexico and Dubai, in the UAE.

We believe that the current stability in our backlog is a direct result of our customer base we had strategically targeted, specifically those requiring equipments and service for firm contracts versus the speculative rig market.

We also believe that our strong aftermarket and customer driven engineering capabilities will allow us to maintain a base level of business in a contracting market in which customers focus on existing equipment maintenance versus new equipment expenses.

To appreciate the current position T-3 Energy's revenue pipeline a comparison to both full backlog and firm order backlog to the same period of 2008 is required.

As of February 28, 2008 T-3's full backlog was $207 million compared to the February 23, 2009 quote backlog which was $206 million. Firm order backlog as of February 28, 2008 was $70 million compared to $78 million as of February 23, 2009.

However, having stated these facts we are fully aware of the macro economic conditions, commodity prices and frozen credit markets and we have been impacted throughout the company and in particular our wellhead and pipeline valve divisions.

While the new leadership within our wellhead group is expanding our footprint internationally we are primarily tied to the North American gas market as such we will see a decline in revenues as activity continues to decline. Still there maybe some focused opportunities to expand and improve this business.

Our wellhead business unit has approximately 4% of the domestic service wellhead market share. And currently includes ten locations. We have extremely good customer acceptance for our company are size.

In a domestic market, where it is strategically important for us to be in many locations, some of our locations have more match than others and some of these strategic locations will have difficulty to remain in viable in a slowdown. To improve our overall market position in this business unit and to improve the viability of these small domestic locations, you may see us look to value adding small opportunities if they are attractively priced.

The other hand the pipeline valve division is the dependant on building infrastructure, specifically for gathering stations and will be affected by the slowdown in North America and by low natural gas prices. The wellhead and pipeline valve divisions represent 27% of our total revenues at 15% and 12%, respectively. In addition, our efforts to identify further revenue opportunities, we are more focused inwardly to ensure that our organization is fully prepared to exit the downturn as a stronger and more agile company.

We have identified and are taking action to ensure that we have a surviving and even prospering company during difficult times. This is something we have the expertise in and are confident that we have a plan in place to successfully react to the current crisis. Our efforts undertaken in Q4 as well as those taken year-to-date, provide me further assurance the T-3 is fully capable of accomplishing these goals.

A key importance to our immediate operational strategy is the operations liquidity. Liquidity in a down market cycle is one of the most important key to success in a competitive and contracting market. As far as our revolving line of credit, our present debt is $18.8 million, leaving an additional approximately $160 million available line of credit.

Additionally, we have continued to generate positive operating cash, which should allow us further aggressive reductions in our present debt. Clearly, the primary goal is to have adequate cash to conduct day-to-day business and have the capability to absorb any negative impact created by the current economic conditions.

Additionally, cash can be used to either find acquisitions that fit our strategy, or go organically. T-3 Energy has been successful on both counts and we will continue to look for potential value acquisitions that will help fulfill our vision. Even though we are focusing inwardly to our business, we believe that this current market may present acquisition opportunities as valuations relax and sellers become more motivated to stabilize their own balance sheets.

We have just discussed where such an acquisition may make sense in wellhead business units. Ensuring that these options remain viable requires T-3 Energy to protect the cash flow being generated. Though, T-3 is undertaking several efforts at this time, key actions continue to include. SG&A evaluation, plant personnel reductions in our strategic portion of the business, tighter CapEx controls, manufacturing and sourcing and deduction of overtime expenses.

Consequently, we must work to serve our customers, by and means to generate value for their organizations in a contract. Our engineering organization continues to search for customer-driven solutions that enhance the value of our customers existing capital equipment.

And currently T-3 has several products under independent laboratory testing in order to qualify their use in extreme thermal and chemical exposures found in international applications, but more particularly in the Middle East. T-3's extreme exposure last month have been under testing for several months now, and have already exhibited better than anticipated result.

It is projected that the final test will be concluded by March 31, 2009 allowing further market opportunities in international markets in which T-3 Energy is now currently competing. Upgrading our supply chain was a primary goal for the past year and becomes increasingly important as we look for ways to reduce our cost and stabilize margins. Our supply chain team was recently reinforced and we are continuing to realize their benefits in all facets of our business.

We have increased the pressure on all suppliers. The T-3 energy to ensure that we are receiving the best prices available, this has been particularly successful in renegotiating forgings and rough machine parts, a significant portion of T-3 Energy's existing cost equipment sold.

As I have previously mentioned, we have already experienced some deterioration in the markets and which compete and we fully expect additional deterioration for the next several months to come. Nevertheless, the actions described above, as well as countless others are being taken to enhance our company's improved shareholder value.

With that we conclude the management's discussion portion and I will turn it over to James Mitchell for financial results.

James Mitchell

Thank you, Gus. As just mentioned, we had record earnings in the fourth quarter of 2008 of $0.86 per diluted share, or $10.9 million before considering two items. Those two items are the goodwill impairment charge of $1.62 per diluted share and a tax benefit of $900,000, or $0.07 per diluted share related to strategic alternative costs. Including these two items, the fourth quarter had a net loss from continuing operations of $8.7 million, or $0.69 per diluted share.

Full-year 2008 net income from continuing operations was $13.0 million, or $1.02 per diluted share excluding the $23.5 million goodwill impairment and the $4.7 million of the strategic alternative costs 2008 annual net income from continuing operations was $36.6 million, or $2.86 per diluted share. I want to briefly go through the two unusual items we had in the quarter.

Firstly, we completed our goodwill impairment analysis as of December 31st and concluded that the fair value of our pressure and flow control reporting unit did not exceed its booked value. However, FAS 142 analysis calculated a partial impairment of the goodwill for this unit of $23.5 million before-tax, or $20.5 million after-tax. Our remaining goodwill as of December 31, 2008 was $70.7 million for the pressure and flow control group, $13.6 million for wellhead and $3.6 million for pipeline.

Obviously, we do not currently anticipate future goodwill write-down. However, sustained deterioration in economic conditions, company outlook on market prices could change this conclusion. For a more thorough discussion the risks relating to this and other items I would refer you to discussions and the risk factors in today's filings on From 10-K.

Now, there is another unusual item related to tax, which is not negative. Last quarter, we discussed that the company had incurred cumulative cost of $4.7 million related to strategic alternatives that we could not benefit for tax purposes. These costs did become tax deductible in the fourth quarter and we recorded a tax benefit related to them of approximately $900,000, or $0.07 per diluted share.

Now let me turn to the income statement. Revenues for the fourth quarter of 2008 increased to a record quarterly amount of $78.6 million. This is up from $64.4 million in the same period in 2007, and up from $69.8 million in the sequential quarter. Annual revenues for 2008 increased to $285.3 million, also a record from $217.4 million for 2007.

Looking more into the quarterly details of the business units, we can see that PCG our largest business unit increased to $60.0 million of revenues for the quarter. This is an increase of $10.6 million, or 22% versus Q3 of 2008 when we did have a hurricane.

Our pipeline revenues actually decreased to $6.1 million. This is a decrease of $3 million, or about a third versus Q3, 2008. And a decrease of $1.9 million or 23% versus last year's quarter. I do want to point out this is the third consecutive quarter, where we had a decrease in backlog for the pipeline business, the decrease of $3.2 million, which is a decrease of 45% compared to the Q3 number earlier reported.

Wellhead revenues increased in a quarter to $12.5 million. This is our only business without a backlog and actually performed quite well in Q4. There was an increase of $1.2 million, or 10% sequentially an increase of $1.8 million, or 17% compared to last year's quarter.

Looking at the mix of the revenues, the mix of the revenues was actually remained somewhat consistent as a percent of revenues. Our original equipment product revenues were approximately 80%, which compares to 81% during the third quarter of 2008. If you add to this number, the remanufacturing work that we had totaled product revenues come out to $65.9 million. That’s an increase of $6.3 million or 11%, sequentially, and an increase of $11.1 million or 20% compared to last year's quarter.

Service revenues were $12.7 million for the quarter. That’s up sequentially from the $10.2 million a 24% increase.

Turning to gross profits, the gross profit as a percent of revenues was 39% in the current quarter and that compares to 36% in Q4 of last year and 38% in the previous quarter.

Gross profit as a percentage of revenues was 39% for the full-year of 2008, and that’s up nicely from 37% for the full-year of 2007.

Looking to the quarterly details of gross profit margins, we see gross margins on service revenues are 41%, up from 40%, sequentially, primarily as a result of some hurricane cost that decreased the numbers during the last quarter.

The higher margins are driven by some work at our pipeline and wellhead business unit, including at the wellhead business units where we had some high margin rentals for the quarter.

For product gross margins, were 38% for the quarter, that’s up sequentially from 37% in Q3, again due primarily to hurricane related issues. But, if you look at where we were last year, that’s up from 36% fiscal, a nice healthy increase from the there.

Operating expenses, the total quarterly operating expenses were $37.6 million which includes SG&A expenses of $14.1 million and goodwill impairment of the 23.5 that we discussed earlier. The prior quarter, the total operating expenses were $15.7 million and that included the $2.2 million of strategic alternative cost that we had discussed at that time, excluding these cost SG&A expenses increased about $600,000, and that split about 300,000 for legal, environmental and audit and about the other half of that goes to PCG where we had increases in commissions and bonuses for the quarter due to higher sales and earnings.

Moving down the statement, income statement and looking at operating income. Operating income for the fourth quarter of 2008 excluding the goodwill impairment in Q4 of $23.5 million and the strategic alternative cost in Q3 at $2.2 million. Operating income actually increased $3.4 million sequentially, for 39% incremental margin.

The increase in operating income by business unit is as follows. PCG increased $3.8 million or 37% from incremental margin of 36%; pipeline decreased $1.0 million or 42% or a decremental margin of 32%; and wellhead increased about $100,000 for only a 6% incremental margin.

Corporate cost, actually decreased by about $400,000 from the sequential quarter. Operating income excluding the goodwill charge for the fourth quarter of 2008 increased $2.8 million to $16.2 million from $13.4 million in the prior year. For the full-year operating income excluding the goodwill charge and strategic alternative cost during 2008 increased $16.5 million to $57.3 million compared to $40.8 million during 2007.

Income tax expense. Income tax expense for the quarter was $1.2 million, now we had an expense even though we had a pre-tax loss of $7.4 million primarily related to the non-deductibility of approximately $15 million to the $23.5 million in goodwill impairment. This was slightly offset by a $900,000 tax benefit related to the deductibility of the strategic alternative cost we previously discussed. Excluding the $0.9 million benefit related to strategic alternative costs and the goodwill impairment, our effective tax rate for the quarter was 32% which compares to 34% in last years quarter. Total income tax for the year was $14.4 million compared to $14.9 million for 2007. On a rate basis excluding the unusual items, our effective tax rate for 2008 was 34% compared to 36% in 2007.

Moving on to the balance sheet. Give a couple of highlights here. First, the accounts receivable at the end of the quarter were $47.8 million and we had a DSO with 57 days that’s actually down slightly from sequential quarter where we were at 58 days. Inventory was at $58.4 million down slightly from $59.8 million. Our inventory turns increased to $3.3 million up from $2.8 million in the prior quarter. The company does remain focused on working capital and it's showing in the numbers. If you look at the cash flow, you can see operating cash flow for the quarter was $15.8 million, CapEx for the quarter was $3.8 million so that gives free cash flow of $12.0 million.

Cash flow for the full-year, we had operating cash flow of $43.1 million, CapEx of $11.3 million for the full-year which gives free cash flow of $31.8 million. So we had good cash flow position for the full-year.

As Gus mentioned, on December 31, 2008 we had outstanding debt of $18.8 million on our senior credit facility. We also had letters of credit of about $800,000. The company pays commitment fees on $180 million facility. So availability under our senior credit facility as of December 31 was $160.4 million.

As a reminder, our senior credit facility matures on October 26, 2012 and we currently have no plans or needs to renegotiate our facility. I have received some questions on this, so I would like to review the senior credit facility covenants, we have three main covenants there's an interest coverage ratio, there is a minimum allotted amount of 3.0 times. We are currently at 25.3 times not close there at all. There is maximum CapEx of 75% of EBITDA which meant $45.7 million, again we spent $11.3 million so substantially below the limits there. And our maximum leverage ratio is 3.0 times debt-to-EBITDA. We are currently at 0.32, but we do not anticipate liquidity issues in the coming year. This leverage ratio that I just discussed the 3.0 times debt-to-EBITDA does have the ability to limit our revolver to an amount below the full $180 million on which we pay commitment fees if our number should come down to a low enough level.

Moving on to bookings. Overall we did have a record quarter, but I would like to discuss little bit what happened with bookings, because our PCG and pipeline businesses, sale from backlog, bookings can be a better indicator for the businesses going than the results at one particular quarter maybe.

Q4 saw the second consecutive quarterly decline in bookings for the overall company. Total net bookings for the quarter were $60.5 million, that’s down $22.8 million or 27%, sequential, from $83.3 million. It’s the lowers quarterly bookings for 2008 in compares to revenue of $78.6 million. The book-to-bill ratio was 0.8, so backlog decreased during the quarter, it decreased to $76.1 million at December 31, that’s down $18.1 million or 19% over the sequential quarter compared to last year it's up $11.3 million or 17% from $64.8 million at the end of 2007.

This booking level is a better indicator for future revenues will be the necessarily just trying to look at trends and revenues as you all know.

Let me make a few comments on some housekeeping items regarding to share count, the weighted average shares outstanding for the quarter were 12,677 million that compares to 12,872 million, the decrease from the prior quarter is primarily attributable to the treasury stock method and we had a decrease in the average share price for the quarter. For the full-year the share count is 12,812 million versus 12,114 million, so again up slightly from the prior year.

With that I will conclude the financial discussion and turn it back over to Gus for concluding comments.

Gus Halas

Just a couple of comments before we go to questions. Over the last couple of years T-3 Energy has developed into reputable name-brand OEM provider with a history and a core confidence as a service-driven organization.

Even I knew manufacturing efforts rely on high defense customer service and responsiveness. Our organization continues to provide competitive deliveries and high quality products and I truly believe that this team is one of most responsive and solutions-driven teams in the industry. It is these competencies that have created a culture within T-3 Energy well suited for contracting market. Our history starts as an industry leader in the repair and remanufacture and service refresher and flow control products and we have never loss sight of these routes.

As we specifically look at fourth quarter 2008 I must also extend my congratulations to the team for achieving revenue record of 13% higher than the previous record. This was done while generating the lowest level of drill work and without one single recordable injury.

To set records of this nature it’s a testament to the dedication and the sense of ownership that our employees exhibit.

T-3 Energy is fully aware of the market conditions unfolding for all of us within the oil and gas industry. We are actively taking the necessary steps to ensure long-term success including international sales penetration, product development, cash flow protection, conservative balance sheet management, higher increases in manufacturing in-sourcing.

Also we would like to take this time to thank our loyal shareholders and those of you who continue to monitor the T-3 Energy's performance in the markets. Our industry has experienced an unprecedented devaluation in stock equity. As I have always mentioned we hope for the best but we are definitely prepared for the worst.

Now, we will be happy to answer any questions which you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will go first to Gerry Collin with Raymond James.

Collin Gerry - Raymond James

Hi guys it is Collin Gerry but close enough. I guess, Gus you gave us some pretty interesting numbers there on the what we are seeing right now and year-to-date in terms of quote backlog and order backlog and it sounds like really on a router base things are honing up pretty well due to some of the international expansion you have had, I was just wondering if you can maybe go into a little bit more discussion on what's driving that in particular areas and how do your capacity expansion development with the [Azlon] facility. How do those relate to growing that business and kind of capitalizing on what seems to be a pretty strong store there?

Gus Halas

Well, let me go through a couple of items and I will address them sort of backwards from how you asked. In terms of where most of our opportunities are coming from, ironically they are coming from the two locations where we do have the joint ventures which is primarily Mexico and the Middle East. There are some opportunities in the former Soviet Union and disbursed all around the world but it has been fairly positive.

However, I do not want to, I think Gerry you know me by now, I do not want paint such an optimistic picture that we sort of take our eyes off what's going on in the market. And one of the things that we have seen is that while our quote backlog is going up it is not a long term view from our customer standpoint.

And what I am saying by that is while they have what appears to be excellent insight in terms of what's happening in next three to six months in their business.

Traditionally, they were talking in the nine to twelve months and a much fair view of what was going on and we are not getting all that information so obviously you know that this management team is very conservative and so we do not want to paint a picture that's so rosy that we loose sight of some of those issues. And we have general concerns as always.

But to answer your question directly it is the two biggest areas are Mexico and Middle East and former Soviet Union for the most part and Southern Europe, but that's where we are getting our opportunities right now.

Collin Gerry - Raymond James

Okay. And just following up a little bit on that, as the industry kind of copes with the falling rig counts and declining commodity prices, are you all, tell us what you are seeing on the pricing front? Has it become a lot more competitive out there and obviously, maybe some of your raw material costs have come down a little bit, I'm thinking net pricing, while we are starting to see quite a bit of pressure there in the industry?

Gus Halas

Here the, in terms of absolute pricing pressure, we have not felt. You explained that as a step further. There have been a couple of major jobs that were quoted, decision was imminent and were pulled back for re-pricing. Now, we are not naïve enough to sort of ignore of why that may be done. So that's the only thing that I have, in terms of potential pricing sensitivity.

We have not experienced it to the levels that I would have expected by now. Again, when we started looking at our first quarter 2008, 2009, I really had no optimistic view on my behalf. This is we report them as we see them, and that's what we received in terms of quotes and backlog et cetera. But we do not want to ignore what's going on in the industry. I think we have carved out a little niche for ourselves as we may not have had the explosive growth on the upside because we did not participate as much as in the speculative end of the market as some of our competitors. But by the same token we are now experiencing a down side right now as much for in the present.

And I think the niche that we have carved out which is in essence satisfying our customer needs for specific contracts maybe buffering us in the short-term.

Collin Gerry - Raymond James

Okay and then final point, you mentioned a fairly small amount of backlog cancellations not in material but you have seen so far. Could you elaborate maybe as to potential risk going out further have those discussions become more prominent?

Gus Halas

Yeah here is the yes, that will, if you notice that there was a settle that statement. The $3.8 million that we had been cancelled is net the actual cancellations was $4.8 million and than the customer changed their mind and ordered it back again. And so that's why we emphasize net. Now in terms of orders getting pushed out, we have got about $8.3 million worth of orders that have been asked to be pushed in conjunction with their contract. And so that we are well aware of again its not, it is material by 10% but its not, we cant interpret how much of that is potential cancellation, how much of that but we see it as risk whenever we start looking at these particular numbers.

Collin Gerry - Raymond James

Okay that wraps it for me. Thanks, Gus.

Gus Halas

Thank you.

Operator

We will next to John Tasdemir with Tristone Capital.

John Tasdemir - Tristone Capital

Hi, good morning guys. yeah I must call on there somebody here on, I am looking at your bookings or your SG&A quotes saying its not does not look terrible considering the huge decline that we have seen in the US but can you help me think about how we kind of reached the apex in terms of revenue for this cycle in fourth quarter seeing that your backlog is down a bit from third quarter levels or is there something in the backlog that we are sure makes it look different?

Gus Halas

I think, I don’t know about Apex but I think we are seeing a leveling off and there we see more softness and we are more sensitive to all that right now. So, the answer, apex may or may not the right word but there is definitely softness and we expect that we are going to be impacted.

Plus it's going to become more normal because fourth quarter was extraordinary we had hurricane effects we had extraordinary quarter. And again because of that extraordinary quarter and so many quarters that we are setting on the dark almost are book-to-bill ratio was higher. We are examining what's going on in the first quarter but if it's not the apex it's somewhere around that I would guess --

John Tasdemir - Tristone Capital

So, you are suggesting that there was, you could have been busier in the fourth quarter had nothing for hurricane is that what you are telling me, essentially?

Gus Halas

No, no. We were so busy in the fourth quarter because we had to meet customer commitment. So it was extraordinary quarter from that aspect.

John Tasdemir - Tristone Capital

Right. Okay. Next one was SG&A, what's the run-rate as we look into the first quarter and through the year any out there?

Gus Halas

If you are looking at the G&A number in Q4 I think excluding all the noise out there was about $13.2 million. I think in to the first quarter of I think you are going to see a number somewhere around that albeit slightly lower for Q1. And that's a run rate something we are looking and taking a good hard look at right now, John.

John Tasdemir - Tristone Capital

Okay, so $13.2 million is pretty much a clean number?

Gus Halas

Yeah. John, also, this is not for shattering or doing anything else. But clearly, we run a fairly lean organization, but there is really nothing to sacrosanct. We have to look at every dollar just as we are looking at our vendors, we have to look internally as well to make sure that we are probably utilizing and we got real right size for what's coming on.

John Tasdemir - Tristone Capital

Also, off your current backlog, can you give me a breakout in kind of North America versus international?

James Mitchell

I think the size of it 60%, 61% is what I had somewhere.

John Tasdemir - Tristone Capital

Okay.

James Mitchell

60% for our give and take.

John Tasdemir - Tristone Capital

And that way it's more, I suspect as we see the order backlog for the outstanding quotes more driven internationally quotes. Just looking to my list, okay, I think that helps me for now. I might dive back in. Thanks a lot, guys.

James Mitchell

Okay. Thanks, John.

Operator

Next to Chris Glisten with Simmons & Company.

Chris Glisten - Simmons & Company

Thanks. Good morning.

Gus Halas

Good morning, Chris.

Chris Glisten - Simmons & Company

First question is looking at the year-to-date, I guess call it improvements in backlog and quoting activity. I was wondering if you can characterize what customers you are seeing that from in terms of is that all international? Is there some of that in the US. And if so if you could give us some color there will be helpful?

Gus Halas

It's a combination of both and it's for the international portion a lot of times it's US customers that are resident internationally as well. So we haven't broken out exactly how much is non-US that are with international programs or international locations versus actual international customers, but it’s a combination of both of those factors.

Chris Glisten - Simmons & Company

Okay. And in terms of you gave the breakout international versus domestic, do you have some more breakout for offshore versus onshore and moreover to subsea?

Gus Halas

42%?

James Mitchell

Yes, 42% offshore.

Gus Halas

42% is offshore. And the rest is onshore, but in that 42 number.

James Mitchell

I think 12% is actual subsea.

Gus Halas

12% subsea, and then the rest is jack-up.

Chris Glisten - Simmons & Company

Okay. And then finally, can you just give us quick update as today, where you stand with regard to outsourcing and your outlook in terms of the next couple months, how quickly you see the percent changing, and how quickly that involve?

Gus Halas

First of all, we were really focusing on outsourcing period, and whether it's outsourcing in North America or outside the country, and we are focusing in both those areas, where there it's a US or forger or somebody in India let's say we see that as outsourcing, and we are going to be looking for the best prices and best quality for our customers as well. So we are actively pursuing all aspects right now, that is what the what we call the reinforce supply chain organization is looking at. They are looking at, both in US and international opportunities.

Chris Glisten - Simmons & Company

I guess coming out from a different angle, with utilization, are you still 100% with that 25% outsourcing level as we stand today?

James Mitchell

Well, in some cases we bought some of the work in, but for the most part we still are in the pressure control group we have a shortage of manpower in a couple of locations, so, we are it's sort of a combination of factors. We have not reached the point where we can in-source all the work that we are subcontracting locally.

Chris Glisten - Simmons & Company

Okay, that's very helpful. Thank you very much.

Operator

We will go next to Bo McKenzie with Lafitte Capital

Bo McKenzie - Lafitte Capital

Hey, guys, congratulations on the good quarter, Gus or James, what percentage of the service work is currently international. And along those lines given the large amount of products shipments, I guess you guys have had on the pressure control in the last a couple, are there other opportunities out there to expand in the international component of the services?

James Mitchell

Okay, are there opportunities? Yes. But we have to look at them very closely, because going internationally is very expensive, so we are actually looking at a couple of them. We have to be very mindful of what the impact is on our cash flow.

Bo McKenzie - Lafitte Capital

Right.

James Mitchell

As I have mentioned in the past on multiple occasions, very expensive from the legal and accounting and cultural issues in order to accommodate international you have to be very cognizant of what the cost impact is going to be. But to answer your question directly, yes. There are opportunities, yes, we have been approached, yes, we looked at different things, but we are very, very cautions, because we have to preserve our liquidity in our cash flow.

Bo McKenzie - Lafitte Capital

And do you see opportunities that might be comfortable to the JVs to put together the Middle East and then Norway and so forth that might allow you to get closer service depot to some of the BOP that have gone internationally?

Gus Halas

The answer is yes, but it still falls back on cost. I mean we are very conservative management team and we are going to evaluate the cost analysis in the ROI base and what we are going to be spending. And it is kind of difficult in new market to be able to say this is exactly what our return on investment is if things are falling.

Bo McKenzie - Lafitte Capital

Right.

Gus Halas

I mean we take into account Saudi Arabia if we have an opportunity to go in there. How do we view that with the rig count from what I am hearing falling from the 130 to 100 rigs, and what is our true opportunity. Those are the kind of things that we can look at.

Bo McKenzie - Lafitte Capital

Right. On the domestic side what the number of rigs being laid down, I guess from last couple of weeks seems like accelerating. How would you read sort of outlook on the service business on pressure control?

Gus Halas

There are two components. Let me start from there. There is field service, that was the focus of ours for 2008 and it's been a very, very successful endeavor, okay? So that's the field service work that a lot of time can bring in additional repair work. Because of our quick turnaround, because of our customer relationships, feel very good about that as they are not going to be focusing on new equipment that they are going to be focusing primarily on servicing their existing equipment and making sure that maximize their drilling capabilities.

Bo McKenzie - Lafitte Capital

All right, I guess lastly you talked about some of the acquisitions, well, not a lot, but are you starting to see things that are being pressure more by banks that are coming fed up with what's going on, or private equity shops that need to put more capital in to continue to hold some of these businesses sort of the unwilling seller-type of opportunities out there in the marketplace yet?

Gus Halas

Bo, as I mentioned earlier, we were constantly looking for opportunities of all types. And clearly this environment will lend itself to many opportunities and some of them having their components that you just mentioned. In other words having hardship issues or cash flow issues, and where we can have mutual benefits between the seller and ourselves, we're more than willing and very interested in conducting and moving forward with acquisition in the future.

Bo McKenzie - Lafitte Capital

Alright, great. Thanks guys.

Gus Halas

Thank you.

Operator

We'll go next to Joe Gibney with Capital One.

Joe Gibney - Capital One

Thank you. Good morning, everybody. Jay, just a follow-up on our CapEx side, expectations this year $11 million on '08, what are you ball park expectations here for '09?

James Mitchell

For the current year in '09 we are looking at about $5.4 million, $5.5 million is where we are right now, that includes some things we are doing on the (inaudible) that was about $1.5 million to $2 million over India, that’s something in India we expect to get a payback and at least that much this year, we wouldn’t be investing that money.

That goes without saying that we are looking at all the CapEx very closely right now and to the extent we are going to be able to delay something or push something out, doesn’t make sense, but if it does make sense to you, that we are definitely going to do that. As we have very short payback on most of the things we are looking at in high return.

Joe Gibney - Capital One

Okay, and Gus ask you very quarter, I know you hate it, overall what was the status of the Cypress and all third oil country here in Huston and what’s the general status here come down the quarter?

Gus Halas

I am here to say proudly that City of Houston has granted us license toward the flood plain which was hold up. We do not have the occupancy permit yet, but that’s in total I hope that’s the case, it's the formality, because it was the flood plain that they changed mid way through our construction that was holding this process up. So we have received approval on that part. Its just a matter of getting the occupancy permit, and so I am hoping that it’s a matter of a week or so, but we have compared to say Huston always reacting quickly plus our date 18 months later had come through with the license.

Joe Gibney - Capital One

Understood. And just to circle back on the surface wellhead side of business domestically, you mentioned some strategic locations might have some difficulties surviving, but are you working now and consolidating from your location and in particular where are some of the pressure points are, just a color there be helpful?

Gus Halas

Well there are two ways to look at that, and I will give you just an example if there is going back to Bo's question and in conjunction with what we are trying to do. If there is an acquisition that combine makes a location viable, we made not only consolidating with say another acquisition, but also expanding locations and Marcellus or other areas. So the evaluation is on going, and it's going to be complete whether or not if it doesn’t have the mass we need to move on, but if there another opportunities and another ways to do it then we want to pursue in order to make it a viable business.

I can't tell you how happy I am with what we have been enable to achieve with the management team in wellhead just in the last six months, but I am very happy with the results and I am very happy to say that there are some very unique opportunities for expansion. So, you saw that we have had increased third quarter to fourth quarter actually I think we had increased every quarter in the wellhead in 2008. And in theory, you think that that business should be contracting and there are some individualized opportunities that our team is going after, it's very well laid out, it's being a tax systematically and I am even know that’s going to be hit. I feel very good about the organization and the future whether it be short-term or long-term future for that division.

Joe Gibney - Capital One

Okay. And just one follow-up on the pipeline side, third consecutive quarter there you mentioned on the backlog decease were roughly 3 million, what portion of that, is all of that North America, is there any exposure international here and anything that you are considering here to kick start that portion of your business?

Gus Halas

It's almost all North America, there is some odd orders through third parties that open up, but I mean its negligible we are talking about less than 1%. Its mostly North America and its directly tied in that particular business because it has run so lean and it does primarily have a service proposition for North America its very difficult for us to expand. So that side of the business is going to be focused primarily on North America.

Joe Gibney - Capital One

Okay, helpful.

Gus Halas

Which by the way just to give you an indication, again the leadership understands the international business. And they are surfacing a lot of international opportunities. Not a lot I mean they are surfacing international opportunities.

James Mitchell

I appreciate, I will turn it back, thank you.

Gus Halas

Thank you, Joe.

Operator

Next question comes from Terese Fabian with Sidoti & Company.

Terese Fabian - Sidoti & Company

Hello, thank you. I have a question on your core backlog, you gave a number of pretty sharp increase between end of the year and February 23, I think going from $90 million to $206 million.

Gus Halas

That’s the quote back.

Terese Fabian - Sidoti & Company

Quote backlogs right, what does it actually means in terms of firm orders based on your experience of the conversion from quote backlog to firm orders?

Gus Halas

We have not provided that in the past, Terese, because we are sort of not wants to give guidance. So, but it has been I think if you, you cant track it numerically to a degree based on what’s happened in the past, the hit rate has not very greatly except for end of the year which there seems to be more lapsing quotes. So, we just sort of put it out as a matter of magnitude. And frankly to my surprise to be honest with you that we were up that high and frankly we were slightly up since last week.

Terese Fabian - Sidoti & Company

Yes, and it’s a pretty dramatic increase, more than double over that period of time.

Gus Halas

Yes, and that’s the reason and I am saying, it is dramatic, I mentioned it forward it is, if our hit rates conform to what have happened in the past that would be positive, but we can't really vouch for the viability of all of those projects.

Terese Fabian - Sidoti & Company

Okay. Another question on your debt pay down, debt nicely able to build last quarter and over the last year. So you expect to pay down the rest of it in 2009?

James Mitchell

Depending on strategic alternatives, we wouldn't anticipate that we will pay that down sometime during the first half of the year. We say finding something, some of the things, as Gus spoken about from an acquisition or other standpoint it would make sense to suspend our cash on. We do intend to be cash flow positive and able to pay down the debt.

Terese Fabian - Sidoti & Company

Okay.

James Mitchell

I just want to clarify one thing, because we talked about strategic alternatives, in a lot of levels and there were some big numbers out there, let's make sure that we are talking about some tuck-in acquisitions in this case.

Terese Fabian - Sidoti & Company

Right, okay. That’s good. And then a last question on the gross margin, they held up very nicely. Do you expect that to be able to continue or do you think that some of the pressures on the market would cause the margin decline?

James Mitchell

I can't imagine the time contracting market, that there is not going to be margin pressures and that’s one of the main reasons that we are forcefully looking at cost reductions all the way across the board including when the cost of goods sold sign. I can't imagine a scenario that that would not occur because frankly we are doing the same thing, I think it’s the full supply chain all the way from the E&P company straight through to every supplier that we may have. So the degree and the amount may vary, however, to guess on that but I do expect pricing pressure. We have not felt that yet but I can't imagine a scenario that we wouldn't feel it. We are hoping to mitigate that by having better sourcing costs, but be that as it may I don’t know how it’s going to be and how rationale the market is going to react.

Terese Fabian - Sidoti & Company

Thank you.

James Mitchell

You bet. Thank you.

Operator

Next to Victor Marchon with RBC Capital Markets.

Victor Marchon - RBC Capital Markets

Thanks, good morning. Most of my questions have been answered, I just wanted to follow-up on M&A, Gus. I just wonder if you can talk about the bid ask spread that you are seeing today versus say three to six months ago. Has it gone to the point where something could happen in the near-term versus something that’s still probably number of months away? And secondly are you guys seeing any opportunities outside of the wellhead business or is it primarily being the net business segment to-date?

Gus Halas

First of all can it happen? Yes, it can happen much sooner than Q4. I think there is a lot of opportunities that we just need to go through and evaluate them. And yes there are pretty much our strategy of complementary products, there are some opportunities and we are going to evaluate any opportunity that comes our way that helps our overall business. We will not move away from the upstream side at this point.

We will let you know if we decide to look at something else, but there are opportunities in other product lines and just a wellhead. But the wellhead is clearly something that we feel the production side has a lot of potential and if there are opportunities we want to pursue them vigorously.

Victor Marchon - RBC Capital Markets

Okay. And the other one I have just on the tax rate. How we would look at that for 2009?

Gus Halas

It seems like we have a lot of noise in the tax rate this quarter. Prospectively, you are looking at a number that's can be just north to 35%, assuming that there are no big changes at Washington of course. The number I would tend to use would be the 35% to 37% range.

Victor Marchon - RBC Capital Markets

Great, that's all I have. Thank you.

Gus Halas

Thank you.

Operator

Next to Brian Uhlmer with Pritchard Capital.

Brian Uhlmer - Pritchard Capital Partners

Good morning, Gus. I had a couple of quick housekeeping. You just got the tax rate I was curious what was the backlog on February 23rd. I am not sure I heard that was $78.8 million?

Gus Halas

78.8.

Brian Uhlmer - Pritchard Capital Partners

Okay. And where you are talking about your leverage ratios, your valuable liquidity under revolver, what point and how much could they bring that availability down from the $180 million, Jay?

James Mitchell

I mean you are looking at something that is a trailing 12 months number. So if you are trying to include something from, you can see the EBITDA numbers for Q1, Q2, Q3, Q4 this year, obviously, all three of those are going to be in the numbers right now when we calculating them. Prospectively, when we are forecasting where things are going to go margin on the revenues that you see prospectively. And come up where things are going to be. We do not see it as being limitation to liquidity or to the business prospectively, albeit it may we can not draw the whole revolver.

I'm not sure if I have answered your question, but I think, I think I have given you a little guidance you can look into the historic numbers and you know that you will be able to see Q1, three quarter of visibility that is already out there, Q2 it half of the year.

Brian Uhlmer - Pritchard Capital Partners

Great. Okay, great. And finally, what are you are talking about last calls March 31, would that be the final testing and how quickly can you get to market after that test is complete?

James Mitchell

Once the test complete, we can go to market.

Brian Uhlmer - Pritchard Capital Partners

Immediately?

James Mitchell

Yes.

Brian Uhlmer - Pritchard Capital Partners

Okay. And the expectations are noses for sales into Middle East or would that be worldwide?

James Mitchell

Worldwide.

Brian Uhlmer - Pritchard Capital Partners

Great deal. Everything else is answered. Thank you.

James Mitchell

Thank you.

Operator

Next to William Conroy Smh Capital.

William Conroy - Smh Capital

Good morning, Gus and Jay. I apologize I missed a chunk of the call here. So, if some of repeated, again I apologize. Gus, I mean, cancellation, can you just give us a little bit more detail was that a BOP and what are the ramifications if any financially?

Gus Halas

On the calculation, we had cancellation charges and its dependent on how much we progress. And how much work we had done.

William Conroy - Smh Capital

You made whole on the once that you referenced on the call?

Gus Halas

We made whole for the work that we done.

William Conroy - Smh Capital

Right. Okay. Okay.

Gus Halas.

So, whatever percentage it was, we made whole.

William Conroy - Smh Capital

Got it, and service revenue increased in the quarter sequentially, what happened, is that coming back to work from the hurricane or can you just give little bit more detail there?

Gus Halas

Frankly, it is primarily coming back to work from the hurricane. We went up to, as you see, about $12.5 million, from just over $10 million. And we were shut down at our Gulf Coast locations for a couple of weeks.

William Conroy - Smh Capital

The rest has been covered. Thanks Gus.

James Mitchell

Just one thing to also talk about it, our field service business seems to be doing quite well. We have put a little lot more focus on it and that has picked up as well, so that was the second part.

Operator

Next to Stephen Gengaro with Jefferies & Company.

Stephen Gengaro - Jefferies & Company

Thanks. Good morning, gentlemen. You have gone over a lot already, but just a couple of quick questions. You mentioned I guess decremental for a one segment. But when you look at the decrementals that we should look for in '09.

Can you us a sense, A, which segments it should be greatest in which sections segments should be lower end. And then I think as a kind of follow-on would you look at what you are doing from a cost perspective. Do you have a sense for sort of what period we start to see those decrementals to get better also the cost initiatives you are putting in?

James Mitchell

Let me start with the last part, in terms of getting better, you have got a management team which, that’s always going to be here on the conservative side, and always going to look at the glass half empty, so keep in mind with that part. In terms of the businesses and how which one would be affected more, we do see the pipeline valve would probably percentage wise not in absolute dollars, percentage wise we were guessing that the pipeline valve with probably have the largest impact followed by wellhead and probably right after that would be pressure control in terms of how each one would be effected. Again you are looking at 12, 15 and 73% in terms of size it's based on the three that I just mentioned.

Gus Halas

Your gross profit numbers are around 40% of your tax rate decremental margin, so you would expect something at 40% plus or a little bit for pricing offset by some of the cost cutting that goes there. Initially you are in the 40% to 50% type range and as the year moves on, you would expect us to be able to pull that down to something that that gets the decremental margins closer towards the certainly where the gross profit numbers actually are.

Stephen Gengaro - Jefferies & Company

And answer that across the company those numbers you are talking about?

Gus Halas

That's across the whole company, correct.

Stephen Gengaro - Jefferies & Company

Okay, great. And as a final, I don't assume be left the comment on the consensus?

Gus Halas

No, we can't comment on that.

Stephen Gengaro - Jefferies & Company

Just figured I would ask. Okay, thanks.

Operator

And at this time, there are no further questions. I would like to turn the call back to Mr. Halas for any additional or closing comments.

Gus Halas

As I mentioned earlier, 2009 is going to be challenging year. I think and I know, and we feel very confident that this team would be able to carry us through, and we are ready for the challenges and I know there will be many. And thank you all for your support and continued observation of T-3. Thanks.

Operator

And that does conclude today's conference call. Again, we thank you for your participation and you may disconnect at this time.

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Source: T-3 Energy Services, Inc., Q4 2008 Earnings Call Transcript

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