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Tesco (NASDAQ:TESO)

Q3 2013 Earnings Call

November 04, 2013 11:00 am ET

Executives

Julio Manuel Quintana - Chief Executive Officer, President and Executive Director

Robert L. Kayl - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Joseph D. Gibney - Capital One Securities, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the TESCO Corporation Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to your host Julio Quintana, President and Chief Executive Officer. Please go ahead.

Julio Manuel Quintana

Thank you, Stephanie. Good morning, ladies and gentlemen, and welcome to TESCO's Third Quarter 2013 Earnings Conference Call. I'm Julio Quintana, TESCO's President and CEO, and I'll be hosting our call today. Bob Kayl, our Chief Financial Officer, is with me on the call. I'll begin with some general comments on the quarter, then Bob will give you an overview of our financial results. Following Bob's remarks, I'll return and provide an update on our business and plans for the future.

Before I begin, it is important to note that during the course of this call, Bob and I will make forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and Canadian Securities Legislation. These statements are based on current expectations that involve risks and uncertainties, which could cause results to vary from those anticipated. These risks and uncertainties have been and are more fully described in our annual reports and quarterly reports filed with the SEC and with the Securities Regulatory Authorities in Canada. You should not place any undue reliance on these forward-looking statements made in the conference call nor do we intend to update these forward-looking statements.

Also, we will use certain non-GAAP measures. The earnings release issued this morning contains an explanation and a reconciliation of these measures to GAAP measures. And we refer you to that release for additional information.

Now on to our third quarter results. We reported net income and EPS in Q3 of $11.7 million or $0.29 per share on $132 million of revenue compared to $10.2 million of net income or $0.26 per share in Q2 of 2013 on $129 million of revenue. Operating income increased during the quarter to $17.8 million, up from operating income of $13.8 million for Q2. This represents a 29% increase in operating income over the second quarter.

Given our current drilling activity levels in North America, we are pleased with our results for the third quarter. With strengthening activity in our international business units, our Tubular Services business enjoyed the highest quarterly revenue in the company's history and exceeded 1,000 automated jobs in the quarter for the first time, closing the quarter with 1,063 jobs performed.

Although our Top Drive business has continued to be negatively impacted by the decreased activity -- active rig count in North America, our Top Drives strategy is shift to international markets, especially to Russia and Latin America has mostly offset the decline we experienced in North America. Today, our Top Drive backlog stands at 27 units. With the increased focus on our base businesses and continuous improvement in our operational efficiency, we are well positioned to meet the challenges and opportunities for the rest of 2013 and beyond. I'll go into this in more detail after Bob summarizes the financial results. Bob?

Robert L. Kayl

Thank you, Julio. I will discuss our third quarter operating results by business segment, and then give some comments on our corporate and research and engineering expenses.

Starting with Top Drives. Revenue totaled $78 million for the quarter, a slight increase sequentially from Q2. The increase from Q2 is primarily a result of increased Top Drive sales and rental services. We sold 26 units in Q3 compared to 24 units in Q2 and 28 units in Q3 2012. Of the 26 units sold in Q3, there were 21 new units and 5 used units from our rental fleet.

In Q2, the 24 units consisted of 21 new units and 3 used units. With the 21 new units delivered to customers in Q3, we ended the quarter with a backlog of 26 Top Drive units with a potential value of $37.6 million, up from 10 units with a potential value of $12.9 million at the end of Q2.

Today, our backlog stands at 27 units with several sales pending. We do not include a sale in our backlog until the contract is signed and we have received a non-refundable deposit, if required by the contract.

Top Drive rental revenue was $32.6 million in Q3, up from $30.8 million in Q2 and $28.8 million in Q3 2012. Our revenue increased from last quarter, primarily due to an increase in operating days in the Asia Pacific region and Russia. Currently, our fleet of rental Top Drives stands at 130 units, a decrease from the 133 units we had at the end of Q2.

Aftermarket sales and service revenue was $14.8 million in Q3, down from $16.1 million in Q2 and $16 million in Q3 2012. The decrease from Q2 is primarily due to a decline in aftermarket part sales in the Middle East.

Our Top Drive operating margin was 25% in Q3, an increase from 23% in Q2 and 24% in Q3 2012. The increase from Q2 is primarily due to the mix of new Top Drive models delivered in Q3, higher used unit sales and increased Top Drive rental operating days.

Now on to Tubular Services. Revenue was a record $54.2 million in Q3, up 3% from $52.7 million in Q2 and up 15% from $47 million in Q3 2012. Automated casing running revenue was a record $43.6 million in Q3, up from $43.1 million in Q2, as a result of increased demand in the Latin America and North America regions for our automated offerings. Our Q3 2012 automated casing running revenue was $36.5 million.

As Julio mentioned in his opening remarks, the number of jobs utilizing our automated Casing Drive System was a record 1,063 jobs in Q3, marking the first time we have exceeded 1,000 automated jobs in a quarter. This was up from 975 jobs in Q2 and 902 jobs in Q3 of 2012. The higher automated job count from Q2 was primarily due to increased activity in Latin America and North America. Additionally, a significant amount of current U.S. drilling activity in shale formations requires directional and horizontal drilling techniques, which we believe are good applications for automated service offerings.

Our CDS fleet stood at 297 units at the end of Q3, compared to 298 units at the end of Q2. We recorded $3.6 million of revenue from CDS equipment sales in Q3, up from $3.1 million in Q2 and $1.6 million in Q3 2012.

Also, we recorded $1.2 million of revenue from our MCLRS offerings in Q3, up from $600,000 in Q2 and down from $3.4 million in Q3 2012.

Conventional casing running revenue increased to $10.6 million in Q3 compared to $9.6 million in Q2, primarily due to an increase in the number of conventional jobs in the Middle East and Latin American markets. Our Q3 2012 conventional revenue was $10.5 million.

Overall, Tubular Services operating income in Q3 was $9.6 million with an operating margin of 18%, compared to operating income of $11.3 million in Q2 and $5.3 million in Q3 2012. The decrease from Q2 is primarily due to a $1.9 million benefit to operating expenses recorded in Q2 due to a favorable determination of a legacy contract dispute. Corrective for this onetime item in Q2, we actually experienced a slight increase sequentially in our operating margins.

Now on to corporate expenses, which were $9.1 million for Q3 compared to $12.5 million for Q2 and $6.5 million in Q3 2012. The decrease from Q2 is primarily due to decreased legal fees.

Research and engineering costs for Q3 were $2.1 million compared to $2.5 million in Q2 and to $1.8 million in Q3 2012. Research and engineering continues to be a strategic investment for the company. And we plan to continue to invest in our proprietary technologies.

Our effective tax rate for Q3 was 32% compared to 20% in Q2 and 45% in Q3 of 2012. Our effective tax rate, which is income tax expense as a percentage of pre-tax earnings, fluctuates depending on the mix of pre-tax earnings in the various tax jurisdictions in which we operate around the world.

In addition, our effective tax rate for Q2 was impacted by $1.4 million decrease in tax expense for the favorable determination and settlements of legacy tax cases in 2 foreign jurisdictions.

Turning to the balance sheet. At September 30, 2013, cash and cash equivalents were $65.2 million compared to $22 million at December 31, 2012 and $46.1 million at the end of Q2. We built nearly $20 million in cash on our balance sheet this quarter.

During the 9 months ended September 30, 2013, net cash provided by operating activities of $53.6 million was partially offset by cash used for capital expenditures. Total capital expenditures were $8.4 million in Q3 compared to $7.6 million in Q2 and $15.8 million in Q3 2012. We project our total capital expenditures for 2013 to be between $35 million and $40 million based on current market conditions.

I'll now turn the discussion back to Julio

Julio Manuel Quintana

Thanks, Bob. Let me recap we're at. Giving the current drilling activity levels in North America, we are pleased with the results for the third quarter. With strengthening activity in our international business units, our Tubular Services business is continuing to strengthen quarter-over-quarter, and we anticipate this trend to continue for the remainder of 2013 and into 2014. This business segment booked record quarterly revenue during Q3, topping the previous record established in the second quarter of 2013. This takes us a little deeper into the business lines.

As Bob mentioned, we delivered 21 new units and 5 used units to third parties during the quarter. We ended the quarter with a backlog of 26 units, up from 10 units we had in the backlog at the end of Q2. Our current backlog of 27 units and sustained order activity provide a level of confidence that the PLOT [ph] sales business will remain steady in the near and medium-term.

Aftermarket revenue decreased slightly from the second quarter. We are keenly focused on this business line and see it as a key growth engine as the global Top Drive installed base continues to expand and we involve this offering as part of our TESCO 3.0 strategy.

Today, our installed base stands at over 1,200 Top Drive units around the world. This installed base increased by over 12% in 2012 and more than 20% over the past 2 years. This base has proved to be an annuity and provide organic growth for TESCO in future years and should continue to grow based on our current sales level and backlog.

On the rental front, we had an increased revenue and increased operating days from our rental business compared to the second quarter of this year. Business increased activity was driven by both our North American and international locations, and we expect this trend to continue. In Q3, 85% of our Top Drive rental revenue was sourced from our international operations.

Switching to Tubular Services. We are proud of our accomplishments in Tubular Services, which generated a quarterly record of $54.2 million in revenue in Q3. Our automated casing running business continues to be strong and also generated a record revenue of $43.6 million in Q3. We performed 1,063 automated casing running jobs in Q3, which is the highest quarterly job in our history. Also included in the automated casing running revenue was $3.6 million of CDS equipment sales. We are confident that our automated casing running activity will continue to increase in the coming quarters, consistent with our belief that every Top Drive rig will eventually run casing with an automated system such as our CDS.

We have achieved Tubular Services critical mass in most of the countries where we operate and are expanding in several key international markets. This will continue to drive profitable growth in this segment going forward. With the new product offerings and continued focus on cost and efficiency, we continue to drive profitability expansion in Tubular Services.

In addition, we expect to grow our offshore Tubular Services revenue over the coming quarters, which currently stand at about 15% of our revenue. We have recently received a couple of contract wins in key geographies, including the deepwater Gulf of Mexico, which should significantly grow our offshore business, a key component of our TESCO 3.0 strategy. We are committed to making this business a major contributor to TESCO, both in revenue and to the bottom line.

Overall, our TESCO 3.0 strategy continues to take hold. Our focus on execution excellence is driving performance in many aspects of the business. Top Drive margins are expanding, Tubular Services revenue is growing and margins continue to expand, inventory is declining, new R&D products continue to show promise and our cost balance continues to build. We believe that we hit the bottom in Q1 of this year. We expect the rest of 2013 to hold and are growing confident of 2014.

Stephanie, we will now take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the Ryan Fitzgibbon with Global Hunter Securities.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Julio, if you can touch base a little bit more on your prior comments there, I'm talking about new product offerings and then international market expansion. Can you elaborate a little bit more as to how the new step you guys have put in the market over the last 18 months is performing and then touch base on what international markets you guys are actually looking to expand into at this point?

Julio Manuel Quintana

Certainly. So let's start on the Top Drive side. Certainly as we've told you in the past, the ESI unit, which is the largest horsepower 500-ton unit, and 250-ton in the market, was something we've put in over the last couple of years. We had the setback last year with a quality problem, but that's all behind us and frankly, we're getting some nice orders. I think that's going to continue to be a major seller for us going forward. So I think that's really a win for us. That's one. On the Tubular Services side, there's many product offering as well as the compact CDS units that we introduced over the last 12 months, both have taken hold and really are in the infancy of commercialization. So that was actually -- both were actually the things that we're pretty excited about. On the R&D side , I think I mentioned last quarter that we were looking at launch a control system during this quarter. We're doing that as we speak. So the first module that control system -- rig control system is being field tested with one of our customers as we speak, and we are still looking to trying to get the entire system commercialized between the end of the year and early Q1. So those are the main products that come to mind. In terms of the international presence, the strategy has been and continues to be running into continued fill-in, primarily fill-in, in the areas where we already operate. But as I mentioned during my comments, one of the key issues for Tubular Services is we need to get more into the more lucrative offshore markets. And we have some of that in Asia, some of that -- probably in Asia, actually, some of that in the Middle East, some of that offshore places like Mexico and Gulf of Mexico. And as I mentioned, we have a couple of nice wins there over the last quarter and really we're going to focus on trying to drive that offshore number from 15% to substantially higher than that.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

And I guess, Bob, in your prepared remarks, you talked about being at 27 units now on the Top Drive backlog and some nice orders potentially hitting soon. Can you kind of quantify those, is that one offer as we should expect or there's something bigger in the hopper that can surprise us going into the Q4 release.

Robert L. Kayl

I wouldn't say there's any large fleet deals. I think we've witnessed consistent order flow through the first 9 months of the year and I think that trend will continue. But nothing that significantly large fleet order or vice versa that it's all just singles too we've had. A couple of key customers that have bought several units, and I think that will continue.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

And then last one for me. $20 million of cash generated in the quarter, pretty impressive. Any update or thoughts on uses of cash on a go-forward basis, given that you're generating so much more than your CapEx needs?

Julio Manuel Quintana

Yes. That is something that often the investors ask us to talk about, Ryan, would we do any kind of stock buyback or any kind of dividend. And it is something that, obviously, as a board we discuss, what to do with the cash. We believe, at this point, including those items, by the way, we believe at this point, the right thing to do is to continue to focus on some acquisitions. There are some opportunities out there that we are chasing, as I think I mentioned multiple times. And we intend to use the cash for those opportunities as they come our way.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

And to that point, Julio, are those more new product expansions or should we think of that as further market penetration, some of the acquisition given to your script.

Julio Manuel Quintana

Our strategy has kind of 3 legs. As you know, Ryan, you have the Tubular Services, the broad-based Tubular Services part of the strategy and in that case, the acquisitions would tend to be more geographical access to market or concentration of market share in different markets, and then the other 2 legs are either the rig maintenance side of the business or the rig mechanization side of the business. In the case of rig mechanization, we certainly could spend some money buying companies with specific products that are nice additions to our Top Drive business around pipe handling. On the rig maintenance side, it would be a combination of some companies with geographical presence, particularly around third-party equipment and/or some products.

Operator

Our next question comes from Geoff Pittel [ph] with Corps and Capital Market[ph].

Unknown Analyst

Maybe just touching a little bit on what Ryan just asked about. If you could, be interested in hearing your thoughts specifically on Russia and how you envision that market evolving over the next year or so. Seems like there is a lot of optimism about them really high grading their rig fleet, and I would imagine that's translating with your results there, is that fair?

Julio Manuel Quintana

Yes, absolutely. Russia is the biggest revenue source for TESCO of any single country outside the U.S. Has been for the last 2 or 3 years, we have a great name there. I certainly see that momentum continuing. It's been a pretty strong couple of years and rig contractors kind of go through ebbs and flows. So if we may end up getting a little lower per quarter or two, I think, but in general, for example, a lot of bookings here in July as we announced during last fall came from Russia. And so, they're kind of bullish in spurts of 10 or 20 top drives at a time. But anyway, I agree with the assessment, which is the country is committed to an upgrading of the entire rig fleet, and that they're certainly nowhere near as advanced on that front as the U.S. is in terms of just getting the absorption done, and I think that continues for the next 5 to 10 years. So we're quite bullish in Russia and expect that to continue to be favorable to us for the foreseeable future.

Unknown Analyst

Okay. That's good news. And then just transitioning to a modeling question. I think you referenced $3.6 million in CDS unit sales. I know you guys don't disclose how many units you sold, but was there any difference in the number of units versus the Q2 total or was that more of a pricing and mix component that drove the uptick?

Robert L. Kayl

There's really consistent pricing. So the increase is due to a few more units, but we don't quote the number of units, that's correct.

Operator

Our next question comes from Daniel Burke with Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Julio, I was wondering if you could give maybe just a little bit more color on some of the -- I know you mentioned the Gulf of Mexico deepwater, but some of the other contract wins you had alluded to in sort of the offshore Tubular Services business.

Julio Manuel Quintana

Sure. So the places where we've been focused and have made gains is Saudi. So Saudi was a contract that we won for land and offshore. And then we proved ourselves more and more, then we get to do more and more offshore work and are doing that. In the case of Asia Pacific, both Malaysia and Indonesia are primarily offshore markets, and we've made nice gains there over the last few quarters. And I think we're pretty solid there and continuing to push. Offshore Mexico is one that has a lot of promise for us. We will do some more offshore and are actually making some nice headwinds in Mexico, so I think that continues. They need our help and they need our technology. And so I think that continues. We've actually been doing now for a couple of quarters some work offshore West Africa, and kind of remotely. And so really kind of where we're taking that whole West Africa market is something that we're still evaluating, but we think we can help a lot there. And then in the Gulf of Mexico, really the contract there, without naming the customer, is pretty important for us in that historically, we've been kind of this completions MCLRS kind of company in the Gulf of Mexico, and we're saying, look, we can take a broader position there and go after some bigger contracts that are really kind of holding through some of the entire offering. And I think what's happened is we have kind of crossed over as a company to being recognized or we're the number 3 Tubular Services company in the world at this point in terms of size. And so I think we've finally made a name for ourselves that allows us to kind of hold our own in some of the offshore environments. And so we're saying, okay well nobody has a name, let's get after it. So that all bodes pretty well for us, Daniel, and we're pretty excited about it.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay, great. And then with regard to the CapEx outlook into 2014, I mean, is this year's spend sufficient to sustain the growth opportunities you see in front of you in 2014 or does that number -- that CapEx number naturally migrate a little higher whether because of offshore opportunities or onshore opportunities.

Robert L. Kayl

I think, Daniel, we should say it'll stay fairly consistent with what we're spending in 2013. Now, to the extent that we get a large contract that needs more equipment, then we would potentially spend a little more on CapEx if we could specifically tie it to a contract. I think we're comfortable with the investment we've made over the last couple of years in a lot of these areas. But again, if we have something big come in, there could be more CapEx.

Julio Manuel Quintana

And just in general, Daniel, we tend to spend about $1 or a little less than a $1 for every dollar sold of annual revenue that we pick up in Tubular Services. So if we were to get a $20 million contract, we would buy to buy[ph] kind of $10 million to $20 million with the CapEx, but typically as Bob says, we will get that on the back of a signed commitment of some kind. And so it gives us comfort. If we're overspending CapEx, say, in 2014, that will be a good thing. That means we're really capturing a lot of Tubular Services work. But we don't anticipate really having to overspend of cash flow in 2013 except for acquisition opportunity.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. And then maybe to pin one last one. You were asked about Russia earlier, Julio, the other important international market, I think of you all is obviously Mexico. It's been a tricky market this year. Could you update with me with how you all are positioned there looking forward?

Julio Manuel Quintana

Sure. Again, it's one that our investors ask about a lot for obvious reasons. It is the single biggest rental market we have in the world. I'm explaining the biggest customer we've in the world. We really haven't seen any problems at all, Daniel, over the last 12 months because we operate almost exclusively in the southern region and offshore, which is -- they're kind of higher margin oil basins. So as a result when the country pulled back, it pulled back in the north, which is primarily a gas basin along the border, and then Veracruz specific area, which is a low margin oil region. And that's where a lot of the big service companies got hit pretty hard over the last 12 months, but we haven't felt that at all. So certainly Mexico has been solid for us and continues to be a -- we expect to continue to be a nice solid business for us. We are in the middle of renegotiating and bidding on the Top Drive contracts that we have right now. And that is to sort out between now and the end of the year, but we think we're well positioned to keep that business. We've done a great job for them, expect it to continue to be a big market for us.

Operator

Our next question comes from Marc Bianchi with Cowen and Company.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Curious, just a modeling question with regard to SG&A. It ticked down here, I think you mentioned in the prepared comments, there was lower legal fees, if I have got that right. Can you just talk to that a little bit and maybe what a go forward number 2 years would be?

Robert L. Kayl

Sure, Marc. Yes, as we you -- as we had the second quarter call, we obviously highlighted the increase in the corporate cost as increased legal fees. Pretty much most of those legal fees were issues that are behind us. So the current quarter's corporate expense is around, it's $9 million, it's probably a pretty good run rate to expect going forward. And that's consistent where we were if you look back a year ago -- well, not a year ago because we have some reversal of incentive comp in the comparable quarter from 2012. But if you look at our trends over the last couple of years, it's kind of been in that $8.5 million to $9 million run rate for corporate cost. And I think that's where we'll probably stay for the foreseeable future.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Okay, okay. Great. With regard to the offshore and growing the Tubular Services in the offshore division, how are you gaining share there? What's kind of the maybe the one or two things that you'd point out that are enabling you to continue to grow in that area?

Julio Manuel Quintana

Well, look, I really think that we -- when we embedded the CDS, Marc, we really kind of set a new standard on how to run casing and the concept of automation as a way to put pipe together. And that's pretty -- kind of created a name for us in terms of our reputation for doing things safer and in the best service volumes and so forth. Of course, for the last couple of 3 years, new tools have come to market and so they have began to compete against us. But also when those new tools come to market, they also substantiate our philosophy of running casing that's really kind of taken hold down at little scale. But then the result of all of that is, I think we have a great reputation as a great service provider in this space and that allowed us to get to this critical size. So it's a combination of reputation, now having a word with other people who kind of say, that a customer's going to say, "Okay. These guys really can do this high end offshore work and do it effectively." And so I think it's been that shift in reputation. Then once we have a shift reputation, then you say, "Okay, are you guys ready to go after it?" "Yes we are, let's go spend some money." And so then it's just a question of bidding on the jobs where you think you can make a difference, and going after them. And that really has been kind of the evolution over the last 5 to 6 years and has put us in a place where I think we can do pretty well. Now, we're not getting carried away and we're not going to go chase every offshore market. We're staying where we already operate with the exception of West Africa, a country I mentioned is a place where we already operate. And so we'll then just make sure that we fill in where we operate, benefit from the infrastructure we have in place already so that we can bid competitively and then I think our name will carry us, our name and service quality.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Okay. How should we think about the contribution to your margin in Tubular Services as the offshore portion grows? Maybe one way to ask it is, what percent of your total revenue in Tubular Services would be required to get to 20% operating margins?

Julio Manuel Quintana

Yes. So our position is still the same, which is we're going to run this business as a whole, to do business as a whole north of 20% OI. We have only 15% of our revenue today being offshore. Again, I'm doing this on the fly, bear with me. But if you look 15% to 30% offshore, that will definitely drive your margins into the low 20s. If you want to say the model is TESCO is going to get to 50% offshore, then that probably drive our margins into the high 20s. It's that kind of leverage that the offshore business has and we've recognized that for a long time. But again, we have to kind of establish ourselves as a legitimate player in that space. So it is a very leveraging business to continue to drive performance. Now, my position has always been and continues to be that with selling CDS, they're selling so many, continuing to fill-in our infrastructure. Even if we stay at 15% offshore, we'll still drive this to 20%. But it certainly gets a lot faster if you land a few big offshore contracts.

Operator

[Operator Instructions] Our next question comes from Joe Gibney with Capital One.

Joseph D. Gibney - Capital One Securities, Inc., Research Division

Bob, just a quick question for you. On the used sales in the quarter, just curious what the total dollar amount was for the used sales of the 5 units?

Robert L. Kayl

Yes, the 5 units used sale was $4.2 million of revenue.

Joseph D. Gibney - Capital One Securities, Inc., Research Division

Okay, helpful. And Julio, just a question on Top Drive rental. You seem to intimate that rental is actually up in North America, be a bit of a reversal for certainly what we've seen over the last couple of quarters, some degradation, utilization and average rate as a result of headwinds in North America. Just curious, have things shifted a little bit? Are you starting to see a little bit more activity gains and overall, perhaps rate lift or utilization absorption there? Just curious what's going on, on the NAN [ph] side of up Top Drive rental?

Julio Manuel Quintana

Yes, I think at the end of Q1, Joe, I mentioned that I thought we had bottomed, and it certainly has felt that way and has been that way. What we actually did there, I think it's a combination of several things. One is, yes, we've got a couple of more units, a few more units operating now than we did 3 quarters ago. That's one. Two, we have focus on costs and that helps drive margins a little bit. And so the combination of those, coupled with the combination of some strengthening international, so it's given us the overall performance. We haven't really seen any upward pricing pressure. I think as a whole, I would say North America, across all our businesses, is not experiencing any kind of strengthening of pricing. We can have a debate on what happens in 2014 and what point you would expect to see some upward pricing. But as of right now, obviously, pretty much across the board with our businesses, you're not seeing a lot of improvement in pricing.

Joseph D. Gibney - Capital One Securities, Inc., Research Division

Okay. Helpful. And last one for me just on the geographical mix in your Top Drive backlog, I think last quarter's reference just around 80% international. Is that sort of still an accurate number to be working with here? Is it creeping a little bit higher, given some of the reference to Russia and Latin America focus on the sales side?

Robert L. Kayl

With the deliveries, with the units we delivered during the third quarter, it's actually kind of 2/3 international, probably 1/3 North America, as lot of the units we delivered into the quarter were international based.

Operator

And I'm currently showing no further questions. I will now turn the call back over to management for closing remarks.

Julio Manuel Quintana

Thank you, Stephanie. In closing, I'd like to thank you for participating in the call today and your interest in TESCO. This year, TESCO enters its third decade. Our TESCO 3.0 strategy will continue to mold and form the basis for performance for the next 5 years. Today, we have a company which is healthier than ever. Our excellent employees, 2,000 plus strong, are prepared for and looking forward to an excellent 2014. Thank you, and we look forward to discussing next quarter results.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.

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