TESO

Tesco Corporation (TESO)

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Tesco Corporation (TESO)

Q1 2010 Earnings Call

May 7, 2010; 11:00 am ET

Executives

Julio Quintana - President & Chief Executive Officer

Bob Kayl - Chief Financial Officer

Analysts

Neal Dingmann - Wunderlich Securities

Chris Glasine - Simmons & Company

John Keller - Stephens Inc.

Terese Fabian - Sidoti & Co.

William Conroy - Pritchard Capital

Daniel Burke - Johnson Rice

David Griffiths - Unidentified Company

Doug Garber - FBR Capital Markets

Presentation

Operator

Good day ladies and gentlemen, and welcome to the TESCO Corporation, first quarter 2010 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to introduce your host for today’s conference, Mr. Julio Quintana, President and CEO.

Julio Quintana

Thank you Betty. Good morning ladies and gentlemen, and welcome to TESCO’s first quarter 2010 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 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 actual 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 yesterday contains an explanation and/or reconciliation of these measures to GAAP measures, and we’ll refer you to that release for additional information. Now on to our first quarter results.

We reported net income and EPS in Q1 of $2.2 million or $0.06 per share, and $86 million of revenue, compared to $9 million of net loss or $0.24 share loss in Q4 of 2009, and $85 million of revenue. Operating income increased during the quarter to $2.9 million, up from an operating loss of $13.9 million for Q4.

Likewise, operating margins for Q1 increased to 3% from a negative 16% in Q4. The increase in both operating income and net income from Q4 was primarily due to several one-time items recorded during the fourth quarter of 2009. We continue to see increased activity in many of our business lines, but we are still cautiously optimistic for the remainder of 2010.

I’ll get into this in more detail after Bob summarizes the financial results. Bob.

Bob Kayl

Thank you, Julio. I will discuss our first quarter 2010 operating results by business segments, and then give some comments on our corporate, and research and engineering expenses.

Starting with Top Drives; revenue totaled $52.1 million for the quarter, 23% lower than the same period last year, and down 3% sequentially from Q4. The decrease from Q4 is primarily a result of lower Top Drive sales. We sold 14 Top Drives in Q1 compared to 17 last quarter, and 32 units sold in the first quarter of 2009.

Of the 14 units sold in Q1, 12 were new units, one was the used unit from our rental fleet and one was a consignment sale. With the 12 new units delivered to customers in Q1, we ended the quarter with a backlog of 18 Top Drive units, with the value of $25.9 million, up from 11 units with the value of $16.1 million at the end of Q4.

During Q1 we continued to see improved Top Drive sales activity, and today our Top Drive backlog stands at 24 units with several sales pending. As you know, we don’t include a sale in our backlog until the contract is signed and we’ve received a non-refundable deposit, if required by the contract.

Top Drive rental revenue was $24.1 million in Q1, up from $22.2 million in Q4, and $23.6 million in Q1, 2009. The increase from Q4 is due to increased rental revenues throughout our operating locations, but particularly in North America and Latin America.

Currently our rental fleet of Top Drives stands at 117 units, the same as of the end of Q4, but down from a 126 units at the end of Q1 2009. Day rates for Top Drive rentals improved during the quarter.

We relocated several of our US units into international markets in 2009 where demand has been stronger. With the increased utilization and demand for our rental units, we are beginning to see some opportunity for further increase in our day rates in certain markets.

After market sales and services revenue was $10.9 million in Q1, down slightly from $11.1 million in Q4, and $15.8 million during Q1 2009. As we sell more Top Drive units, we expect this business to become a larger portion of our Top Drive segment in coming years.

Both operating income and margins increased in our Top Drive segment from Q4. Top Drive operating margins were 24% in Q1, compared to 16% in Q4. This increase is primarily due to a $5.4 million inventory adjustment and a $2.6 million accrual for litigations reserves recorded during Q4, 2009. Top Drive operating income was $12.4 million in Q1, compared to $8.4 million in Q4 2009, and $17.3 million in Q1 2009.

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