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Tesco Corporation 10-K 2008
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0001193125-08-038897.txt : 20080227
0001193125-08-038897.hdr.sgml : 20080227
20080226173514
ACCESSION NUMBER: 0001193125-08-038897
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20071231
FILED AS OF DATE: 20080227
DATE AS OF CHANGE: 20080226

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: TESCO CORP
CENTRAL INDEX KEY: 0001022705
STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533]
IRS NUMBER: 980053204
FISCAL YEAR END: 1231

FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-28778
FILM NUMBER: 08643979

BUSINESS ADDRESS:
STREET 1: 3993 W. SAM HOUSTON PARKWAY N.
STREET 2: SUITE 100
CITY: HOUSTON
STATE: TX
ZIP: 77043
BUSINESS PHONE: 713-359-7000

MAIL ADDRESS:
STREET 1: 3993 W. SAM HOUSTON PARKWAY N.
STREET 2: SUITE 100
CITY: HOUSTON
STATE: TX
ZIP: 77043

FORMER COMPANY:
FORMER CONFORMED NAME: Tesco CORP
DATE OF NAME CHANGE: 20061229

FORMER COMPANY:
FORMER CONFORMED NAME: TESCO CORP
DATE OF NAME CHANGE: 19960911


10-K
1
d10k.htm
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2007


Form 10-K for fiscal year ended December 31, 2007


Table of Contents


Index to Financial Statements


 

STYLE="line-height:3px;margin-top:0px;margin-bottom:2px;border-bottom:0.5pt solid #000000"> 

UNITED STATES

STYLE="margin-top:0px;margin-bottom:0px" ALIGN="center">SECURITIES AND EXCHANGE COMMISSION

SIZE="3">Washington, D.C. 20549

Form 10-K

STYLE="font-size:8px;margin-top:0px;margin-bottom:0px"> 





þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ALIGN="center">For the Fiscal Year Ended December 31, 2007

 





¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ALIGN="center">For the transition period from                      to
                    

Commission file
number: 0-28778

Tesco Corporation

SIZE="1">(Exact name of registrant as specified in its charter)

 



























Alberta 76-0419312

(State or Other Jurisdiction

FACE="Times New Roman" SIZE="1">of Incorporation or Organization)

 

(I.R.S. Employer

FACE="Times New Roman" SIZE="1">Identification No.)

3993 West Sam Houston Parkway North

FACE="Times New Roman" SIZE="2">Suite 100

Houston, Texas

 77043-1221
(Address of Principal Executive Offices) (Zip Code)

713-359-7000

FACE="Times New Roman" SIZE="1">(Registrant’s telephone number, including area code)

Securities to be registered
pursuant to Section 12(b) of the Act:

 
















Title of Each Class

 

SIZE="1">Name of Each Exchange On Which Registered

Common Shares, without par value 

Toronto Stock Exchange

FACE="Times New Roman" SIZE="2">Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:

STYLE="margin-top:2px;margin-bottom:0px" ALIGN="center">None

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act.    Yes  ¨    No  þ

FACE="Times New Roman" SIZE="2">Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  FACE="WINGDINGS">þ    No  ¨

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
















Large accelerated filer  þ

  Accelerated filer  ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

  Smaller reporting company  ¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ¨    No  þ

FACE="Times New Roman" SIZE="2">Aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant: $554,101,683. This figure is estimated as of February 19, 2008, at which date the closing price of the
registrant’s shares on the Nasdaq Global Market was $21.67 per share.

Number of shares of Common Stock outstanding as of
February 19, 2008: 36,846,210

DOCUMENTS INCORPORATED BY REFERENCE

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Listed below is the document parts of which are incorporated herein by reference and the part of this report into which the document is incorporated:
Proxy Statement for 2008 Annual Meeting of Stockholders—Part III

 

STYLE="line-height:0px;margin-top:0px;margin-bottom:0px;border-bottom:0.5pt solid #000000"> 

 






Table of Contents


Index to Financial Statements



TABLE OF CONTENTS

 












































































































































































      Page
  PART I  

Item 1.

  


Business

  1

Item 1A.

  


Risk Factors

  10

Item 1B.

  


Unresolved Staff Comments

  16

Item 2.

  


Properties

  17

Item 3.

  


Legal Proceedings

  18

Item 4.

  


Submission of Matters to a Vote of Security Holders

  19
  PART II  

Item 5.

  


Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  20

Item 6.

  


Selected Financial Data

  22

Item 7.

  


Management’s Discussion and Analysis of Financial Condition and Results of Operations

  24

Item 7A.

  


Quantitative and Qualitative Disclosures About Market Risk

  48

Item 8.

  


Financial Statements and Supplementary Data

  49

Item 9.

  


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  49

Item 9A.

  


Controls and Procedures

  49

Item 9B.

  


Other Information

  51
  PART III  

Item 10.

  


Directors and Executive Officers and Corporate Governance

  52

Item 11.

  


Executive Compensation

  52

Item 12.

  


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  52

Item 13.

  


Certain Relationships and Related Transactions and Director Independence

  52

Item 14.

  


Principal Accountant Fees and Services

  52
  PART IV  

Item 15.

  


Exhibits and Financial Statement Schedules

  53

 


i







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PART I

 





ITEM 1.BUSINESS.

General

STYLE="margin-top:6px;margin-bottom:0px">Background

Tesco Corporation (“TESCO” or
the “Company”) is a global leader in the design, manufacture and service delivery of technology based solutions for the upstream energy industry. We seek to change the way people drill wells by delivering safer and more efficient solutions
that add real value by reducing the costs of drilling for, and producing, oil and gas.

TESCO was created on December 1, 1993 through
the amalgamation of Shelter Oil and Gas Ltd., Coexco Petroleum Inc., Forewest Industries Ltd. and Tesco Corporation. The amalgamated corporation continued under the name Tesco Corporation, which is organized under the laws of Alberta Canada. Unless
the context indicates otherwise, a reference in this Form 10-K to “TESCO”, “the Company”, “we” or “us” includes Tesco Corporation and its subsidiaries.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our principal executive offices are located at 3993 West Sam Houston Parkway North, Suite 100, Houston, Texas 77043, our telephone number is
(713) 359-7000, and our Internet website address is www.tescocorp.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on our
Internet website. These reports are posted on our website as soon as reasonably practicable after such reports are electronically filed in the United States (“U.S.”) with the U.S. Securities and Exchange Commission (“SEC”) and in
Canada on the System for Electronic Document Analysis and Retrieval (“SEDAR”). Our Ethics Policy is also posted on our website. Our common stock is traded on the Toronto Stock Exchange under the symbol “TEO” and on the Nasdaq
Global Market under the symbol “TESO.”

Reporting

FACE="Times New Roman" SIZE="2">By the end of 2006, we determined that we no longer qualified for foreign private issuer status related to periodic reporting of our financial results with the SEC. As a result, we were required to prepare and file
our Annual Report on Form 10-K reporting our annual results for the year ended December 31, 2006 and file quarterly reports on Form 10-Q for our future quarterly results thereafter. Also, at December 31, 2006, we began reporting our
results in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Accordingly, we have restated our results of operations and financial position for the years 2003 through 2006 to conform to
U.S. GAAP. Although we are a U.S. registrant with the SEC, we are still organized under the laws of Alberta and are therefore subject to the Business Corporation Act (Alberta). We are also a reporting issuer (or the equivalent) in each of the
provinces and territories of Canada and are subject to securities legislation in each of those jurisdictions.

Effective January 1,
2006, we adopted the U.S. dollar as our reporting currency since a majority of our revenue is closely tied to the U.S. dollar, and reporting our results in U.S. dollars facilitates comparability to other oil and gas service companies. Unless
indicated otherwise, all amounts stated in this Form 10-K are denominated in U.S. dollars. All references to US$ or to $ are to U.S. dollars and references to C$ are to Canadian dollars.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Changing the reporting currency affects the presentation in our Consolidated Financial Statements, but not the underlying accounting records, which are
maintained in the functional currency of our business units. The functional currency for our Canadian operations is the Canadian dollar; however the U.S. dollar became the functional currency in all other regions, effective January 1, 2006. The
financial results for Canadian operations have been translated into U.S. dollars as described in Note 2 of the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

 


1







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Index to Financial Statements


Segments

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">We organize our activities into three business segments, Top Drives, Casing Services and Research
and Engineering, and our financial and operating data are presented consistent with that structure. The Top Drive business is comprised of top drive sales, top drive rentals and after-market sales and service. The Casing Services business includes
CASING DRILLING® and our proprietary and conventional Tubular Services. The Research and Engineering (“R&E”) segment is comprised of our research and development activities
related to our Casing Services technology and Top Drive model development. For financial information regarding each segment, including revenues from external customers and a measure of profit or loss, refer to Part II, Item 7 of this Form 10-K
(Management’s Discussion and Analysis of Financial Condition and Results of Operation).

In addition, please refer to Part II,
Item 8, Note 13 of the Consolidated Financial Statements for segment and geographic information.

Top Drive Segment

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Our Top Drive segment sells equipment and provides services to drilling contractors and oil and gas operating companies throughout the world. We primarily
manufacture top drives that are used in drilling operations to rotate the drill string while suspended from the derrick above the rig floor. We also provide rental top drives on a day-rate basis for land and offshore drilling rigs, offering a range
of systems that can be installed in practically any mast configuration, including workover rigs. Our rental fleet is composed of hydraulically powered top drive systems, with power ratings of 460 to 1,205 horsepower and load path ratings of 150 to
650 tons, each equipped with its own independent diesel engine driven hydraulic power unit. This unique combination permits a high level of portability and installation flexibility.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our top drive system rental fleet is deployed strategically around the world to be available to customers on a timely basis. Top drive rental revenue
from our customers was $109.7 million in 2007, $101.9 million in 2006, and $74.5 million in 2005. The geographic distribution of the 110 unit fleet at December 31, 2007 included the following regions (in order of the size of our rental fleet in
each region): the United States, South America, Asia Pacific, Mexico, Canada, Russia and the Middle East. We continue to see increasing demand for rental top drives internationally. Thus, we plan to increase our fleet size to approximately 120 units
and to evaluate the allocation of our fleet throughout the world. Additionally, subject to market conditions, we intend to revitalize our top drive rental fleet by selling certain used units and replacing them with newer models. We intend to manage
our fleet revitalization program to minimize disruptions to our rental operations.

We also offer for sale a range of portable and
permanently installed top drive products that includes both hydraulically and electrically powered machines capable of delivering 400 to 1,350 horsepower, with a rated lifting capacity of 150 to 650 tons. With each top drive we sell, we offer the
services of top drive technicians who provide customers with training, installation and support services. In response to market demand and requests from a specific client, in 2006 we commercialized a new alternating current (“AC”) electric
top drive model, the EMI400, available with 150 and 250 ton load path configurations. A growing need for high performance, compact electric top drives installed on late-generation automated drilling rigs provided significant opportunity for the EMI
machine. In 2006 this platform accounted for the largest unit count of top drives that we sold. The EMI machine utilizes more standard commercial AC induction drive technology, allowing the end user to specify its preferred power electronics
and motor combination and permitting us to select components from a larger vendor base.

In response to market trends in 2006 we began the
development of two new top drive drilling systems: the hydraulic HXI system and the AC electric EXI system. We developed the HXI machine to meet demands from both our third party, largely drilling contractor client base and our rental fleet needs.
The HXI is a new generation of our current hydraulic HMI system, incorporating a full suite of operational features and providing a significant gain in performance at the quill. The HXI machine has a load path rating of 250 tons and has a 700
horsepower self-contained diesel driven hydraulic power unit. The EXI system is a completely new design and

 


2







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Index to Financial Statements



offers a full suite of operational features. We developed the EXI system in response to market demands for a high performance compact electric top drive
system, commonly required on modern fast moving rigs frequently used in pad drilling operations. The EXI system has a load path rating of 350 tons, generates 600 horsepower at the quill and uses commercial AC induction drive technology, allowing for
ease in rig interface and permitting the selection of components from a broad range of power electronics providers.

We first
commercialized the EXI and HXI machines in 2007 and are currently standard products offered globally. We plan to add HXI machines to our rental fleet as part of an upgrade program as well as sell them to our traditional customer base. We intend to
offer the EXI system as a sale item only.

In 2007, we increased our manufacturing capacity and sales of new top drive units. As a result,
in 2007 we sold 102 new top drive units compared to 86 new units sold in 2006 and 21 new units sold in 2005. Additionally, we routinely sell top drive units from our rental fleet. In 2007, we sold 20 used top drive units, compared with 8 used units
sold in 2006 and 14 used units sold in 2005. We include the sales proceeds of used top drive units in revenues and the net book value of the equipment sold in cost of sales and services. Revenue from top drive sales was $127.6 million in 2007, $81.5
million in 2006 and $30.8 million in 2005.

We also provide Top Drive after-market sales and support to our customers on an ongoing basis
and maintain regional stocks of high-demand parts, as well as trained field and shop service personnel to support both our own rental units and units owned by our customers. Revenue from Top Drive after-market sales and support was $51.9 million in
2007, $35.8 million in 2006 and $20.5 million in 2005.

Raw materials

FACE="Times New Roman" SIZE="2">We buy raw material and components from many different vendors located throughout the world. We also buy many electrical components, including permanent magnet and induction motors and drives, as well as hydraulic
components such as motors, from suppliers located in the United States. In order to manufacture many of our proprietary parts, we require substantial quantities of steel forgings. There continues to be inflationary pressure on forgings, machined
products and fabrications for our top drives. However, during 2007 we experienced more stability in the price of steel and associated products when compared to 2006. Beginning in 2007, we initiated a program to expand our sourcing of forgings,
machined products and fabrications from regions outside of North America in an effort to lower our manufacturing costs.

The competitive
nature of the Top Drive business requires that we select our component sources from, and establish supply relationships with, vendors who are prepared to develop components and systems that allow us to produce high performance, reliable
and compact machines. In both our electric and hydraulic top drive systems we source key components, such as AC motors, power electronics, and hydraulic systems, from vendors who have developed these components for commercial, often
non-oilfield applications, and who have adapted them for service conditions specific to our applications. Consequently, our ability to maintain timely deliveries and to provide long term support of certain models may depend on the supply of
these components and systems.

We manufacture five distinct model series of top drive systems, using hydraulic, permanent magnet AC and
induction AC technology. We believe that we are industry leaders in the development and provision of permanent magnet technology in both portable and permanently installed top drive systems. This technology provides very high power density, allowing
for high performance and low weight. In smaller horsepower systems, we use AC induction technology and late generation power electronics. As a result of the customized nature of the motors used in our top drive products, our ability to supply
certain of our AC electric top drive models depends upon the supply of certain AC motors and variable frequency drive technology obtained from a specific manufacturer.

 


3







Table of Contents


Index to Financial Statements


Seasonality

SIZE="2">Our top drive rental business is subject to seasonal cycles, associated with winter-only, summer-only, dry-season or regulatory-based access to drilling locations. The most significant of these occur in Canada and Russia, where
traditionally the first and fourth calendar quarters of each year are the busiest as the contractor fleet can access drilling locations that are only accessible when frozen. However, we feel we have limited exposure to this issue because as of
December 31, 2007 less than 10% of our top drive rental fleet operated in Canada and Russia.

In certain Asia Pacific and South
American regions, we are subject to decline in activities due to seasonal rains. Further, seasonal variations in the demand for hydrocarbons in North America can affect our business, as our activity follows the active drilling rig count reasonably
closely. We actively manage our highly mobile rental fleet around the world to minimize the impact of geographically specific seasonality.

SIZE="2">The top drive sales business is typically unaffected by seasonality.

Inventory

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Since mid-2006 we have increased our manufacturing capacity to meet our customer and internal demand. Our current capacity allows us to build 10 to 14 top
drive units per month, depending on system complexity, compared with total production in 2005 of 28 top drive units. This increase in top drive units sold to customers has increased our installed base throughout the world which has provided
expansion opportunities for our after-market sales and service business. Also, over the last three years, our average revenue per unit sold has increased due to a shift in market demand to larger, more complex units. These factors have driven our
increase in inventory levels. In 2006 we initiated a Sales and Operational Planning program to balance market demand with inventory and our ability to supply top drives. We believe that our Top Drive business needs to maintain manufacturing
inventory of two quarters of production to limit our exposure in the event that the sales market softens and allows us to effectively manage our supply chain and workforce. In addition, we must maintain additional inventory of long lead time
items and semi-finished goods to support our after-market sales and service business and our manufacturing operations. During the installation of a new inventory planning and purchasing system at our manufacturing plant in 2007, we experienced
implementation problems with our purchasing process that caused inventory to increase significantly above desired levels at December 31, 2007. We believe that during 2008, our inventory levels will return to desired levels.

STYLE="margin-top:18px;margin-bottom:0px">Customers

Our customers for top drive sales and
after-market sales and service include drilling contractors, rig builders and equipment brokers and occasionally, major and independent oil and gas companies and national oil companies who wish to own and manage their own top drive systems. Our
customers for our rental fleet include drilling contractors, major and independent oil and gas companies and national oil companies. Demand for our Top Drive products depends primarily upon capital spending of drilling contractors and oil and gas
companies and the level of drilling activity. Additionally, our top drive business is distributed globally with 65% of our top drive revenues generated in the North American markets (excluding Mexico) and 35% in international markets.

STYLE="margin-top:18px;margin-bottom:0px">Backlog

We consider a product sale order as backlog
when the customer has signed a purchase contract, submitted the purchase order and, if required by the purchase agreement, paid a non-refundable deposit. We ended 2007 with a backlog of 38 top drive units, with a total value of $39.2 million,
compared to a backlog of 68 units at December 31, 2006, with a total value of $57.7 million. Our backlog since mid-2006 has declined as a consequence of significantly increasing our manufacturing capacity to 10 to 14 top drives per month and
our sales efforts not increasing at the same rate as our manufacturing capacity. We believe that for our Top Drive business, a backlog of two quarters of production is reasonable and allows us to effectively manage our supply chain and workforce,
yet be responsive to our client base.

 


4







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Index to Financial Statements


Revenue from services is recognized as the services are rendered, based upon agreed daily, hourly or job
rates. Accordingly, there is no backlog for services. Customers may cancel orders, but they forfeit their non-refundable deposit, if any. There can be no assurance that our backlog for our fee-for-service business will ultimately be realized as
revenue or if so at a profit.

Competitive conditions

FACE="Times New Roman" SIZE="2">We were the first top drive manufacturer to provide portable top drives for land drilling rigs, thereby accelerating the growth of the onshore top drive market. According to recent industry data, approximately 50% of
operating land drilling rigs are currently equipped with top drive systems, excluding the former Soviet Union and China where few rigs operate with top drives today. By contrast, approximately 95% of offshore rigs are equipped with top drives. In
our estimation, significant further market potential exists for our top drive drilling system technology, including both portable and permanently installed applications. Further, where many top drive systems approach the end of their useful lives
and are inefficient or may not have legacy parts available, we believe a market for replacement systems will be created. This represents an important opportunity for TESCO.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our top drives offer portability and flexibility, permitting drilling companies to conduct top drive drilling for all or any portion of a well. Our
electric top drive systems utilize late-generation alternating current technology, with most models employing permanent magnet or induction motors and a computerized Programmable Logic Control (“PLC”) system. The non-sparking and
lightweight permanent magnet technology employed in our larger, high horsepower systems represents a significant technological advancement over more conventional electric top drives.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our primary competitors in the sale of top drive systems are National Oilwell Varco, Inc. (“NOV”) and Canrig Drilling Technology Ltd., a
subsidiary of Nabors Industries Ltd. We have the second largest third party installed base, following NOV, and are also the number two global provider of top drives, again following NOV. Of the three major top drive system providers, we are the only
company that maintains a sizeable fleet of assets solely for the purposes of rental. Competition in the sale of top drive systems takes place primarily on the basis of the features and capacities of the equipment, the quality of the services and
technical support offered, and, to a lesser extent, price.

Casing Services Segment

STYLE="margin-top:6px;margin-bottom:0px">Tubular Services

Our Casing Services business segment
includes a substantial tubular services business, which we previously referred to as the casing running business. Casing is steel pipe that is installed in the well bore of oil, gas or geothermal wells to maintain the structural and pressure
integrity of the well bore, isolate water bearing surface sands, prevent communication between subsurface strata, and provide structural support of the wellhead and other casing and tubing strings in the well. Most operators and drilling contractors
install casing using specialized service companies, like ours, who use specialized equipment and personnel trained for this purpose. This service is typically offered as a “call out” service on a well-by-well basis. Every well drilled
requires at least one casing string and many require three or more strings.

We have
made a two-pronged entry into the tubular services market over the past several years. The first was the development of our technology-based Proprietary Casing Running Service (“PCRS”), which uses certain components of our CASING
DRILLING® technology, in particular the Casing Drive System™ (CDS™), to provide a more automated method for running casing and, if required, reaming the casing into the hole. The
CDS™ is a tool which facilitates running and reaming casing into a well bore on any rig equipped with a top drive. PCRS can be used with any top drive and offers improved safety and efficiency over traditional methods. PCRS was initially
launched in Canada in 2002, and has since expanded into our other regional markets.

 


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The second prong of our entry into the tubular services market was to acquire existing casing running
businesses. This began with our November 2002 acquisition of the assets and business of Bo Gray Casing and A&M Tubular Maintenance. In June 2005, we acquired the assets of Latco International, Inc. (“Latco”) which carried on business
in Southeast Asia, expanding our tubular services presence in the region. During November 2005, we acquired the assets and business of Cheyenne Services, Inc. (“Cheyenne”) and Tong Corporation, Lamb Energy Services L.L.C., and Tong
Specialty, L.L.C. (collectively “Tong”). Both Cheyenne and Tong provided equipment and personnel for the installation of tubing and casing in the U.S. Gulf of Mexico and onshore in Louisiana and Texas, including power tongs,
pick-up/lay-down units, torque monitoring services, connection testing services and power swivels for new well construction in work-over and re-entry operations. Additionally, Cheyenne has been a leader in the installation service of deep water
smart well completion equipment using its MCLRS™ (Multiple Control Line Running System™) proprietary and patented technology. This technology substantially improves the quality of the installation of high-end well completions and we have
seen market expansion of this technology.

During the second half of 2007, we
acquired four businesses that provide conventional casing running and tubular services. One of these businesses is based in Colorado and services the Rockies region, including the Piceance basin and the remaining three businesses are based in
Alberta, Canada and service the northwest Alberta and northeast British Columbia regions. The combined purchase price of these acquisitions was approximately $21.5 million. These acquisitions expand and strengthen our position in these growing
regions and provide expansion opportunities for our proprietary CDS™ business as well as our CASING DRILLING® offering. All of these acquisitions were funded by draws under our
revolving credit facility. For a description of these acquisitions, see Note 4 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Revenue from the tubular services business increased from $51.8 million in 2005 and $143.3 million in 2006 to $158.7 million in 2007, primarily due to
market activity, the growing acceptance of our PCRS offering as well as the effect of the acquisitions during 2005 and 2007. In early 2006 we introduced the brand name Azimuth Tubular Services™ to identify and differentiate our tubular services
business.

CASING DRILLING®

Our Casing Services business segment also includes our CASING DRILLINGFACE="Times New Roman" SIZE="1">® technology, a revolutionary method for drilling wells which allows them to be drilled with conventional oilwell casing, thereby reducing both drilling time and the incidence of unscheduled
drilling events. CASING DRILLING® also minimizes or eliminates the use of conventional drill pipe and drill collars, the problems associated with their use and the time spent
“tripping” or removing and reconnecting the drill pipe.

In conventional
drilling, the entire string of drill pipe must be removed from the hole each time a drill bit or item of downhole equipment must be replaced. To “trip” or remove and reconnect the drill pipe is a time-consuming process which leaves the
hole exposed to a variety of potential well bore integrity problems. With CASING DRILLING®, the well is not drilled with drill pipe; instead, it is drilled with the same standard oilwell
casing that is normally inserted in the hole after completion of conventional drilling. The CASING DRILLING® bottomhole assembly, comprising the drill bit and other downhole tools, such as
drilling motors, rotary steerable drilling systems, measurement–while–drilling equipment and logging–while–drilling apparatus, are lowered on wireline, or alternatively drill pipe or a tubing string inside the casing and latched
to the bottom joint of casing, retaining the ability to maintain the circulation of drilling fluid at all times. In certain applications, the CASING DRILLING® bottomhole assembly can be
conveyed into the wellbore by use of the rig’s mud pumps. Tools are recovered in a similar fashion, by use of wireline, or alternatively drill pipe or a tubing string. Since the casing remains in the well at all times, wellbore integrity is
preserved, and the risk of a well control incident is reduced. Because the well is cased as it is drilled, the potential for unintentional sidetracking is significantly reduced. The risk of tool loss in the hole is also reduced.

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We began to provide CASING DRILLINGFACE="Times New Roman" SIZE="1">® as a fully commercial service in 2002, through drilling service contracts with oil and gas operators. Through the end of 2007, we have drilled over 390 wells and 2.6 million feet of hole
using this proprietary technology.

Through the end of 2007, we have participated in
the drilling of 16 wells where CASING DRILLING® was used in conjunction with industry standard rotary steerable directional drilling technology. We anticipate that the integration of these
technologies will develop into a valuable offering to the industry, particularly for high-end offshore applications.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">Our revenue from CASING DRILLING® in
2007 was $14.6 million compared to $23.7 million in 2006 and $25.1 million in 2005. In 2005, we decided to discontinue providing CASING DRILLING® services as a rig contractor and focus on
providing CASING DRILLING® project management services. As a result, we sold our drilling rigs in December 2005 and returned our leased rigs in late 2006. Included in CASING DRILLINGFACE="Times New Roman" SIZE="1">®
revenues for 2006 and 2005 are $9.0 million and $18.3 million, respectively, related to CASING DRILLING® activities as a rig
contractor. During 2007, we did not provide CASING DRILLING® services as a rig contractor, and we currently do not own or lease any drilling rigs.

STYLE="margin-top:18px;margin-bottom:0px">Raw materials

We source our raw materials for the
Casing Services Segment in the same way we do for the Top Drive segment. We refer to the comments under the heading “Raw materials” in the description of the Top Drive segment above.

STYLE="margin-top:18px;margin-bottom:0px">Seasonality

As with our Top Drive business, our
Casing Services business is subject to seasonal cycles, primarily associated with winter-only, summer-only, dry-season or regulatory-based access to drilling locations. In Canada, many drilling locations are inaccessible except when frozen. In
certain of our Asia Pacific and South American operations, we are subject to decline in activities due to seasonal rains.

Inventory

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">Although we manufacture the proprietary equipment used to provide CASING DRILLINGFACE="Times New Roman" SIZE="1">® and other Casing Services, the Casing Services Segment does not require levels of inventory and working capital as high as those required for the Top Drive Segment. As the business continues to
expand, levels of inventory for this segment are expected to increase.

Customers

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Our Casing Services customers are primarily oil and gas operating companies, including major and independent companies, national oil companies and, on
occasion, drilling contractors that have the contractual obligation requiring them to provide tubular running and handling services. Demand for our Casing Services strongly depends upon capital spending of oil and gas companies and the level of
drilling activity. Additionally, our Casing Services business is primarily focused in the North American markets (excluding Mexico) where 88% of our Casing Services revenues are generated with the remaining 12% from international markets.

Competitive conditions

The
conventional tubular services market consists principally of several large, global operators and a large number of small and medium-sized operators that typically operate in limited geographic areas where the market is highly fragmented. We have
combined the purchased conventional businesses with our PCRS offering and deliver all tubular services through the Azimuth Tubular Services™ brand name. Our Azimuth business

 


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represents a significant entry into the global tubular services market. The largest global competitors in this market are Weatherford International, Ltd.
(“Weatherford”), Franks International, Inc. (“Franks”) and BJ Services Company. We estimate that we are the third largest provider of services in the global tubular services market based on revenue, with a market share of
approximately 10%. Competition in the conventional tubular services market takes place primarily on the basis of the quality of the services offered, the quality and utility of the equipment provided, the proximity of the service provider and
equipment to the work site and to a certain extent on price.

We are not currently
aware of any commercially or technically viable direct competition for our proprietary CASING DRILLING® retrievable process, services or products, although several of our competitors are
known to have developed prototypes that are similar, and in some cases have deployed them in a field environment. We continue to be the only company offering customers a broad range of tool sizes and the possibility of using casing to drill
directional wells combined with costly downhole equipment, while providing assurance that such equipment can readily be retrieved when the drilling is complete.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">The primary competition to our CASING DRILLINGSIZE="1">® process remains the traditional drill pipe drilling process and to a lesser extent other methods for casing while drilling that do not involve a retrievable bottom hole assembly. Such alternative methods of
casing while drilling are of limited use because the cutting structure and downhole tools must be left in the well when the drilling is complete, and they cannot be combined with rotary steerable technology which permits the drilling of directional
(i.e. non-vertical) wells. While we offer such alternative (i.e. non-retrievable) methods in addition to our proprietary CASING DRILLING® process, Weatherford has the largest share of
the non-retrievable portions of the market.

We are aware of competitive technology similar to our Casing Drive System™ (CDS™).
We believe that we continue to be the market leader in this technology, with the largest market share. Other companies offering similar technology include NOV, Weatherford, and Franks. Our CDS™ system is unique in its ability to be easily and
quickly installed on any top drive system and we have the advantage of being able to offer skilled and trained personnel at the field level who have a specialized knowledge of top drive drilling system operations.

STYLE="margin-top:18px;margin-bottom:0px">Research and Engineering

As a technology
driven company, we continue to invest significantly in research and development activities, primarily related to our proprietary technologies in Casing Services and Top Drive model development. The total amount spent on company sponsored research
and development activities during 2007 was $12.0 million, compared with $6.0 million in 2006 and $3.9 million in 2005.

Intellectual Property

We pursue patent protection in appropriate jurisdictions for the innovations that have significant potential application to our core
businesses. We hold patents and patent applications in the United States, Canada, Europe, Norway, and various other countries. We also hold rights, through patent license agreements, to other patented and/or patent pending technologies. Our patent
portfolio currently includes 82 issued patents and in excess of 120 pending patent applications.

We generally retain all intellectual
property rights to our technology through non-disclosure and technology ownership agreements with our employees, suppliers, consultants and other third parties with whom we do business.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The overall design of our portable top drive assembly is protected by patents that will continue in force for several more years. Various specific
aspects of the design of the top drive and related equipment are also patented, including the torque track system that improves operational handling by absorbing the torque generated by our top drive.

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Our CASING DRILLINGSIZE="1">® method and retrievable apparatus are protected by patents that will continue in force for several more years. An additional more recently issued patent protects the combination of the retrievable drill bit assembly
with a rotary steerable tool. Our Casing Drive System™ (CDS™) is protected by patents on some of the gripping tools and on the “link tilt” system, which is a method of handling the casing.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">We hold numerous patents related to the installation and utilization of certain accessories for casing for purposes of casing rotation. Various other
related methods and tools are patent protected as well.

Please see Part I, Item 1A. “Risk Factors—We have been the subject
of patent infringement claims and we may not be able to protect or enforce our intellectual property rights.” In addition, for a discussion of legal proceedings involving our intellectual property, please see Part I, Item 3. “Legal
Proceedings.”

Environmental Matters

FACE="Times New Roman" SIZE="2">We did not incur any material expenditures in 2007, 2006 or 2005 as a result of environmental protection requirements, nor do we anticipate environmental protection requirements to have any material financial or
operational effects on our capital expenditures, earnings or competitive position in future years.

Employees

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">As of December 31, 2007, the total number of employees of TESCO and its subsidiaries worldwide was 1,864. We believe our relationship with our
employees is good.

 


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ITEM 1A.
RISK FACTORS.

This report contains
forward-looking statements within the meaning of Canadian and United States securities laws, including the United States Private Securities Litigation Reform Act of 1995. From time to time, our public filings, press releases and other communications
(such as conference calls and presentations) will contain forward-looking statements. Forward-looking information is often, but not always identified by the use of words such as “anticipate”, “believe”, “expect”,
“plan”, “intend”, “forecast”, “target”, “project”, “may”, “will”, “should”, “could”, “estimate”, “predict” or similar words suggesting
future outcomes or language suggesting an outlook. Forward-looking statements in this document include, but are not limited to, statements with respect to expectations of our prospects, future revenues, earnings, activities and technical results.

Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information currently
available to, TESCO concerning our anticipated financial performance, business prospects, strategies and regulatory developments. Although management considers these assumptions to be reasonable, based on information currently available to it, they
may prove to be incorrect. The forward-looking statements in this document are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by applicable law.

By their very nature, forward-looking
statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of
important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">These risks and uncertainties include, but are not limited to, the impact of changes in oil and natural gas prices and worldwide and domestic economic
conditions on drilling activity and demand for and pricing of our products and services, other risks inherent in the drilling services industry (e.g. operational risks, potential delays or changes in customers’ exploration or development
projects or capital expenditures, the uncertainty of estimates and projections relating to levels of rental activities, uncertainty of estimates and projections of costs and expenses, risks in conducting foreign operations, the consolidation of our
customers, and intense competition in our industry), and risks associated with our intellectual property and with the performance of our technology. These risks and uncertainties may cause our actual results, levels of activity, performance or
achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and
other uncertainties and potential events.

Fluctuations in the demand for and prices of oil and gas could negatively impact our business.

Fluctuations in the demand for and prices of oil and gas impact the levels of drilling activity by our customers and potential
customers. The prices are primarily determined by supply, demand, government regulations relating to oil and gas production and processing, and international political events, none of which can be accurately predicted. In times of declining
activity, not only is there less opportunity for us to sell our products and services but there is increased competitive pressure that tends to reduce prices and therefore margins.

FACE="Times New Roman" SIZE="2">We face risks due to the cyclical nature of the energy industry and the corresponding credit risk of our customers.

FACE="Times New Roman" SIZE="2">Changing political, economic or military circumstances throughout the energy producing regions of the world can impact the market price of oil and gas for extended periods of time. As most of our accounts receivable
are with customers involved in the oil and gas industry, any significant change in circumstances could result in financial exposure in relation to affected customers.

SIZE="1"> 


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Our CASING DRILLINGSIZE="1">® technology is relatively new and subject to general market acceptance.

FACE="Times New Roman" SIZE="2">We believe our CASING DRILLING® technology provides significant advantages to our customers and potential customers. However, this is relatively new
technology, subject to the risk of market acceptance and potential technical problems.

Our revenues and earnings are subject to fluctuations period
over period and are difficult to forecast.

Our revenues and earnings may vary significantly from quarter to quarter depending upon:

 







  

the level of drilling activity worldwide, as well as the particular geographic focus of the activity;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the variability of customer orders, which are particularly unpredictable in international markets;

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the levels of inventories of our products held by end-users and distributors;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the mix of our products sold or leased and the margins on those products;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

new products offered and sold or leased by us or our competitors;

 








  

weather conditions or other natural disasters that can affect our operations or our customers’ operations;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

changes in oil and gas prices and currency exchange rates, which in some cases affect the costs and prices for our products;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the level of capital equipment project orders, which may vary with the level of new rig construction and refurbishment activity in the industry;

 







  

changes in drilling and exploration plans which can be particularly volatile in international markets;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the variability of customer orders or a reduction in customer orders, which may leave us with excess or obsolete inventories; and

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the ability to manufacture and timely deliver customer orders, particularly in the Top Drive segment due to the increasing size and complexity of our models.

In addition, our fixed costs cause our margins to decrease when demand is low and manufacturing capacity is
underutilized.

Any significant consolidation or loss of end-user customers could have a negative impact on our business.

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Exploration and production company operators and drilling contractors have undergone substantial consolidation in the last few years. Additional
consolidation is probable. In addition, many oil and gas properties could be transferred over time to different potential customers.

SIZE="2">Consolidation of drilling contractors results in fewer end-users for our products and could result in the combined contractor standardizing its equipment preferences in favor of a competitor’s products.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">In addition, merger activity among both major and independent oil and gas companies also affects exploration, development and production activity, as
these consolidated companies attempt to increase efficiency and reduce costs. Generally, only the more promising exploration and development projects from each merged entity are likely to be pursued, which may result in overall lower post-merger
exploration and development budgets. Moreover, some end-users prefer not to use relatively new products or premium products in their drilling operations.

SIZE="2">Concentration of our revenue and management in the United States involves risk.

In 2007 approximately 61% of our
revenue was obtained from operations in the U.S. (reduced from 66% during 2006). Also, during 2006 we relocated our corporate headquarters from Canada to the U.S. and began to

 


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use the U.S. dollar as our functional and reporting currency. The concentration of revenue and management functions in the U.S. involves certain risks,
including the following:

 







  

increased vulnerability to fluctuations in the U.S. economy; in particular, a severe economic downturn or prolonged recession in the U.S. could have a greater
impact on our ability to do business than would otherwise be the case;

 







  

the devaluation of the U.S. dollar during 2007, particularly in relation to the Canadian dollar in which the U.S. dollar lost approximately 15% of its value in
2007, negatively impacted our financial results. A continued devaluation of the U.S. dollar could increase our Canadian manufacturing costs and our cost of doing business outside of the U.S. in general and it may not be possible to raise the prices
and rates we charge customers in U.S. dollars to compensate for these increased costs, or to hedge our exposure to devaluation of the U.S. dollar through currency swaps and other financial instruments; and

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the U.S. limits the number of visas available to non-U.S. professionals and executives who wish to work in the U.S. The potential inability to obtain such a visa
may prevent us from transferring our non-U.S. employees to the U.S, or may restrict our ability to recruit qualified international executives to fill management positions at our corporate headquarters.

STYLE="margin-top:18px;margin-bottom:0px">Our profitability is driven to a large extent by our ability to deliver the products we manufacture in a timely manner.

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Disruptions to our production schedule may adversely impact our ability to meet delivery commitments. If we fail to deliver products according to contract
terms, we may suffer financial penalties and a diminution of our commercial reputation and future product orders.

We have been the subject of patent
infringement claims and we may not be able to protect or enforce our intellectual property rights.

In three separate actions, we
were sued by VARCO I/P, Inc., Franks International, Inc. and Weatherford International, Inc. who have alleged that our CDS™ tool and other equipment and processes violate certain of their patents. See Item 3 “Legal Proceedings.”
Our CDS™ tool is used in our tubular services and casing running service. We believe that these suits are without merit and we intend to continue to defend ourselves vigorously. In the event that we are not successful in defending ourselves in
one or more of these matters, it may have a material adverse effect on our Casing Services Segment and, therefore, on our business. In addition, in the future we may be subject to other infringement claims and if any of our products were found to be
infringing, our consolidated financial results may be adversely affected.

Some of our products and the processes used to produce them have
been granted U.S. and international patent protection, or have patent applications pending. Nevertheless, patents may not be granted from our applications and, if patents are issued, the claims allowed may not be sufficient to protect our
technology. Recent changes in U.S. patent law may have the effect of making certain of our patents more likely to be the subject of claims for invalidation.

FACE="Times New Roman" SIZE="2">Our competitors may be able to independently develop technology that is similar to ours without infringing on our patents. This is especially true internationally where the protection of intellectual property rights
may not be as effective. In addition, obtaining and maintaining intellectual property protection internationally may be significantly more expensive than doing so domestically. We may have to spend substantial time and money defending our patents.
After our patents expire, our competitors will not be legally constrained from marketing products substantially similar to ours.

Our foreign
operations and investments involve special risks.

We sell products and provide services in parts of the world where the political
and legal systems are very different from those in the United States and Canada. In places like Russia, Latin America, the Middle East and

 


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Asia/Pacific, we may have difficulty or extra expense in navigating the local bureaucracies and legal systems. We may face challenges in enforcing contracts
in local courts or be at a disadvantage when we have a dispute with a customer that is an agency of the state. We may be at a disadvantage to competitors that are not subject to the same international trade and business practice restrictions that
U.S. and Canadian law impose on us.

While diversification is desirable, it can expose us to risks related to cultural, political and
economic factors of foreign jurisdictions which are beyond our control. As a general rule, we have elected not to carry political risk insurance against these risks. Such risks include:

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

loss of revenue, property and equipment as a result of hazards such as wars or insurrection;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the effects of currency fluctuations and exchange controls, such as devaluation of foreign currencies and other economic problems;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

changes or interpretations in laws, regulations and policies of foreign governments, including those associated with changes in the governing parties,
nationalization, and expropriation; and

 







  

protracted delays in securing government consents, permits, licenses, or other regulatory approvals necessary to conduct our operations.

We operate in an intensively competitive industry and if we fail to compete effectively our business will suffer.

Competitive risks may include decisions by existing competitors to attempt to increase market share by reducing prices and
decisions by customers to adopt competing technologies. The drilling industry is driven primarily by cost minimization. Our strategy is aimed at reducing drilling costs through the application of new technology. Our competitors, many of whom have a
more diverse product line and access to greater amounts of capital, have the ability to compete against the cost savings generated by our technology by reducing prices and by introducing competing technologies. We have limited resources to sustain a
prolonged price war and maintain the investment required to continue the commercialization and development of our new technologies.

To compete in
our industry, we must continue to develop new technologies and products.

The markets for our products and services are
characterized by continual technological developments and we have identified our products as providing technological advantages over other competitive products. As a result, substantial improvements in the scope and quality of product function and
performance can occur over a short period of time. If we are not able to develop commercially competitive products in a timely manner in response to changes in technology, our business may be adversely affected. Our future ability to develop new
products depends on our ability to:

 







  

design and commercially produce products that meet the needs of our customers,

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

successfully market new products, and

 







  

obtain and maintain patent protection.

SIZE="2">We may encounter resource constraints, technical barriers, or other difficulties that may delay introduction of new products and services in the future. Our competitors may introduce new products or obtain patents before we do and achieve a
competitive advantage. Additionally, the time and expense invested in product development may not result in commercial applications.

For
example, from time to time, we have incurred significant losses in the development of new technologies which were not successful for various commercial or technical reasons. If we are unable to successfully implement technological or research and
engineering type activities, our growth prospects may be reduced and our future revenues may be materially and adversely affected. Moreover, we may experience operating losses after new products are introduced and commercialized because of high
start-up costs, unexpected manufacturing costs or problems, or lack of demand.

 


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We provide warranties on our products and if our products fail to operate properly our business will suffer.

We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our products
are often deployed in harsh environments including subsea applications. The failure of these products to operate properly or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of
parts and equipment or monetary reimbursement to a customer. We have in the past experienced quality problems with raw material vendors, which required us to recall and replace certain equipment and components. We have also in the past received
warranty claims and we expect to continue to receive them in the future. Such claims may exceed the reserve we have set aside for them. To the extent that we incur substantial warranty claims in any period because of quality issues with our
products, our reputation, ability to obtain future business and earnings could be materially and adversely affected.

We rely on the availability of
raw materials, component parts and finished products to produce our products.

We buy raw materials, components and precision
machining or sub-assembly services from many different vendors located in Canada, the United States, Europe, Eastern Europe and the Middle East. In order to manufacture many of our proprietary parts, we purchase large steel forgings. The price and
lead times for the forgings have increased along with the general increase of steel prices around the world. Further, uncertainty regarding compliance with certain material toughness specifications may make it necessary for us to order additional
forgings to manufacture certain replacement parts. We also source a substantial amount of electrical components, including permanent magnet motors and drives as well as a substantial amount of hydraulic components, including hydraulic motors, from
suppliers located in the U.S. The inability of suppliers to meet performance, quality specifications and delivery schedules could cause delays in manufacturing and make it difficult or impossible for us to meet outstanding orders or accept new
orders for the manufacture of the affected equipment.

The design of some of our equipment is based on components provided by specific sole source
manufacturers.

Some of our products have been designed around components which are only available from one source of supply. In
some cases, a manufacturer has developed or modified the design of a component at our request, and consequently we are the only purchaser of such items. If the manufacturer of such an item should go out of business or cease or refuse to manufacture
the component in question, or raise the price of such components unduly, we may have to identify alternative components and redesign portions of our equipment. This could cause delays in manufacturing and make it difficult or impossible for us to
meet outstanding orders or accept new orders for the manufacture of the affected equipment.

Our products and services are used in hazardous
conditions, and we are subject to risks relating to potential liability claims.

Most of our products are used in hazardous drilling
and production applications where an accident or a failure of a product can have catastrophic consequences. For example, the unexpected failure of a top drive to rotate a drill string during drilling operations could result in the loss of control
over a well, leading to blowout and the discharge of pollutants into the environment. Damages arising from an occurrence at a location where our products are used have in the past and may in the future result in the assertion of potentially large
claims against us.

While we maintain insurance coverage against these risks, and attempt to limit our exposure to such risks through
contracts with our customers, these measures may not protect us against liability for certain kinds of events, including blowouts, cratering, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment, damage or loss
from inclement weather or natural disasters, and losses resulting from business interruption. Our insurance coverage generally provides that we assume a portion of the risk in the form of a self-insured retention, and may not be adequate in risk
coverage or policy limits to cover all losses or liabilities that we may incur. The occurrence of an event not fully insured or indemnified against, or the failure of a customer or

 


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insurer to meet its indemnification or insurance obligations, could result in substantial losses. Moreover, we may not be able in the future to maintain
insurance at levels of risk coverage or policy limits that we deem adequate. Any significant claims made under our policies will likely cause our premiums to increase. Any future damages caused by our products or services that are not covered by
insurance, are in excess of policy limits or are subject to substantial deductibles, could reduce the our earnings and cash available for operations.

SIZE="2">We are subject to legal proceedings and may, in the future, be subject to additional legal proceedings.

We are
currently involved in legal proceedings described in Part I, Item 3. “Legal Proceedings” below. From time to time, we may become subject to additional legal proceedings which may include employment, tort, intellectual property, tax
and other claims. We are also subject to complaints or allegations from former, current or prospective employees from time to time, alleging violations of employment-related laws. Lawsuits or claims could result in decisions against us which could
have a material adverse effect on our financial condition, results of operations or cash flows.

Our business requires the retention and recruitment
of a skilled workforce and key employees, and the loss of such employees could result in the failure to implement our business plans.

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">As a technology based company, we depend upon skilled engineering and other professionals in order
to engage in product innovation and ensure the effective implementation of our innovative technology, especially CASING DRILLING®. We compete for these professionals, not only with other
companies in the same industry, but with oil and gas service companies generally and other industries. In periods of high energy and industrial manufacturing activity, demand for the skills and expertise of these professionals increases, which can
make the hiring and retention of these individuals more difficult and expensive. Failure to recruit and retain such individuals may result in our inability to maintain a competitive advantage over other companies and loss of customer satisfaction.

The loss or incapacity of certain key employees for any reason, including our President and Chief Executive Officer, Julio M. Quintana,
could have a negative impact on our ability to implement our business plan due to the specialized knowledge these individuals possess.

SIZE="2">Both the Top Drive and Casing Services segments rely on the skills and availability of trained and experienced trades and technicians to provide efficient and necessary services to us and our customers. Hiring and retaining such individuals
are critical to the success of our business plan. Retention of staff and the prevention of injury to staff are essential in order to provide high level of service.

SIZE="2">Our debt and other financing obligations restrict our ability to take certain actions and require the maintenance of certain financial ratios; failure to comply with these requirements could result in acceleration of our debt.

Our debt and other financing obligations contain restrictive covenants. A breach of any of these covenants could preclude us or our
subsidiaries from issuing letters of credit, from borrowing under our credit agreements and could accelerate our debt and other financing obligations and those of our subsidiaries. If this were to occur, we might not be able to repay such debt and
other financing obligations.

Additionally, our credit agreements are collateralized by equity interests in all of our subsidiaries. A
breach of the covenants under these agreements could permit the lenders to exercise their rights to foreclose on these collateral interests.

The
occurrence or threat of terrorist attacks could materially impact our business.

The occurrence or threat of future terrorist
attacks could adversely affect the economies of the United States and other developed countries. A lower level of economic activity could result in a decline in energy

 


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consumption, which could cause a decrease in spending by oil and gas companies for exploration and development. In addition, these risks could trigger
increased volatility in prices for crude oil and natural gas which could also adversely affect spending by oil and gas companies. A decrease in spending for any reason could adversely affect the markets for our products and thereby adversely affect
our revenue and margins and limit our future growth prospects. Moreover, these risks could cause increased instability in the financial and insurance markets and adversely affect our ability to access capital and to obtain insurance coverage that we
consider adequate or are required to obtain by our contracts with third parties.

Environmental compliance and remediation costs and the costs of
environmental liabilities could exceed our estimates.

The energy industry is affected by changes in public policy, federal, state
and local laws and regulations. The adoption of laws and regulations curtailing exploration and development drilling for oil and gas for economic, environmental and other policy reasons may adversely affect our operations due to our customers having
limited drilling and other opportunities in the oil and gas exploration and production industry. The operations of our customers, as well as our properties, are subject to increasingly stringent laws and regulations relating to environmental
protection, including laws and regulations governing air emissions, water discharges, waste management and workplace safety.

Management has
concluded that we maintained effective internal control over financial reporting as of December 31, 2007. If we discover a material weakness in the future, we may not be able to provide reasonable assurance regarding the reliability of our
financial statements. As a result, investors could lose confidence in our reported results which could have a negative effect on the trading of our securities.

FACE="Times New Roman" SIZE="2">Effective internal control over financial reporting is necessary for us to provide reasonable assurance with respect to our financial reports. If we cannot provide reasonable assurance with respect to our financial
reports, investors could lose confidence in our reported financial information, which could have a negative effect on the trading of our securities.

FACE="Times New Roman" SIZE="2">As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006 and in our Quarterly Reports on Form 10-Q for each of the first three quarters of 2007, management’s assessment of our
internal controls over financial reporting identified material weaknesses in our internal controls related to (1) the corporate financial reporting organization’s monitoring and oversight role of our U.S. Casing Services Business Unit, and
(2) the overall financial reporting of our U.S. Casing Services Business Unit, including the complement of personnel, review and approval of manual journal entries, timely reconciliations of databases and bank account reconciliations and the
existence, accuracy and completeness of fixed asset records. During 2007, we made significant progress in implementing the remediation plans that we established to address these material weaknesses which resulted in the successful remediation of the
above referenced material weaknesses in internal controls as of December 31, 2007 and our management’s determination that our internal controls over financial reporting were effective as of December 31, 2007. Although we determined
that our internal controls over financial reporting were effective, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or
overriding of controls or fraud. Therefore, even effective internal controls over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

STYLE="font-size:18px;margin-top:0px;margin-bottom:0px"> 






ITEM 1B.
UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2.
PROPERTIES.

The following table details our
principal facilities, including (i) all properties which we own, and (ii) those leased properties which serve as corporate or regional headquarters.

 

















































































































































Location

 Approximate
Square Footage
(Buildings)
 Owned or
Leased
 

Description

Houston, Texas

 26,549 Leased Corporate headquarters.

Houston, Texas

 67,820 Owned Headquarters for North American operations in both Top Drive and Casing Services segments, and our U.S. regional operations base which also provides equipment repair and maintenance for U.S. and
certain overseas operations.

Kilgore, Texas

 21,950 Owned Regional operations base for the Casing Services segment in East Texas and Northern Louisiana.

Lafayette, Louisiana

 12,259 Owned Regional operations base for the Casing Services segment in southern Louisiana and the Gulf of Mexico.

Calgary, Alberta, Canada

 36,900 Owned Headquarters and operations base for Canadian operations, research and development, and certain other corporate functions.

Calgary, Alberta, Canada

 85,000 Owned Manufacturing of top drives and other equipment.

Buenos Aires, Argentina

 3,935 Leased Regional headquarters for Latin America, including Mexico.

Aberdeen, Scotland

 10,915 Leased Regional headquarters for Europe, including the former Soviet Union, and West Africa

Dubai, United Arab Emirates

 1,560 Leased Regional headquarters for the Middle East, North Africa, and East Africa

Jakarta, Indonesia

 7,469 Leased Regional headquarters for the Asia Pacific region, including India, China, Japan, Australia and New Zealand

In addition, we lease operational facilities at four locations in Texas, two in Louisiana, two in
Colorado, and one in each of Arkansas, Wyoming and Utah. Each of these locations supports operations in its local area, primarily for the Casing Services segment.

FACE="Times New Roman" SIZE="2">Outside the U.S., we lease additional operating facilities at three locations in Alberta, Canada, as well as in Mexico, Venezuela, Colombia, Ecuador, Argentina, Brazil, Bolivia, Scotland, Norway, Russia, Dubai,
Singapore, Indonesia, and Australia. The majority of these facilities support both the Top Drive and Casing Services segments.

Our
existing equipment and facilities are considered by management to be adequate to support our operations.

 


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ITEM 3.
LEGAL PROCEEDINGS.

In the normal course of our
business, we are subject to legal proceedings brought by or against us and our subsidiaries. None of these proceedings involves a claim for damages exceeding ten percent of the current assets of TESCO and its subsidiaries on a consolidated basis.

The estimates below represent management’s best estimates based on consultation with internal and external legal counsel. There can
be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings.

Patent Litigation

Varco I/P, Inc. (“Varco”) filed suit against us in April 2005 in the U.S. District Court for the Western District of
Louisiana, alleging that our CDS™ infringes certain of Varco’s U.S. patents. We filed a countersuit against Varco in June 2005 in the U.S. District Court for the Southern District of Texas, Houston Division seeking invalidation of the
Varco patents in question. In July 2006, the Louisiana case was transferred to the federal district court in Houston, and as a result, the issues raised by Varco have been consolidated into a single proceeding in which we are the plaintiff. We also
filed a request with the U.S. Patent and Trademark Office for reexamination of the patent on which Varco’s claim of infringement is based. The U.S. Patent and Trademark Office has accepted the Varco patent for reexamination, and the
reexamination remains in process. The district court has granted our motion to stay the infringement litigation pending the outcome of the reexamination. The outcome and amounts of any future financial impacts from this litigation are not
determinable.

Franks International, Inc. (“Franks”) filed suit against us in the United States District Court for the Eastern
District of Texas, Marshall Division, on January 10, 2007, alleging that our CDS™ infringes two patents held by Franks. We filed a response denying Franks allegation that our CDS™ is infringing their patents and have asserted the
invalidity of their patents. The case is in the discovery phase. The outcome and amounts of any future financial impacts from this litigation are not determinable.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">Weatherford International, Inc. and Weatherford/Lamb Inc. (“Weatherford”) filed suit
against us in the United States District Court for the Eastern District of Texas, Marshall Division, on December 5, 2007, alleging that various TESCO technologies infringe a total of ten patents held by Weatherford. The technologies referred to
in the claim include the CDS™, the CASING DRILLING® system and method, a float valve, and the locking mechanism for the controls of the tubular handling system. We have filed a general
denial seeking a judicial determination that we do not infringe the patents in question and/or that the patents are invalid. The case is in the early stages of analysis and discovery. The outcome and amounts of any future financial impacts from this
litigation are not determinable.

Mexico Litigation

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">In the past, we have been advised by Mexican tax authorities that they believe significant expenses incurred by our Mexican operations in 1996 through
2000 are not deductible for Mexican tax purposes. Formal reassessments disallowing these deductions were issued for 1996 through 2000. All of these reassessments were appealed to the Mexican court system and in May 2002, we paid a deposit of $3.3
million with the Mexican tax authorities in order to appeal such reassessments. Between 2003 and 2007, we obtained final court rulings deciding all years in dispute in our favor, except for 1996 for which litigation continues over a new reassessment
for 1996 as discussed below. As of December 31, 2007, the years 1997 through 2000 have become statute barred. We continue to believe that the basis for these reassessments was incorrect, and that the ultimate resolution of those outstanding matters
that remain will likely not have a material adverse effect on our financial position, results of operations or cash flows.

In regards to
the year 1996, in October 2005, the Mexican Supreme Court denied our appeal of the original 1996 Mexican tax reassessment. In 2005, we estimated that the total exposure for 1996 was $2.1 million and

 


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recorded a charge of $1.4 million to other expense relating to interest and penalties and $0.7 million to income tax expense. As a result of this and
previous court decisions, a revised reassessment was to be calculated by Mexican authorities, subject to our appeal. There was some uncertainty as to how the amount of the 1996 reassessment should be calculated as a result of the final court
decision. In July 2007, we received a new reassessment for 1996 in the amount of approximately $3.4 million. We believe that, as of the date of the new reassessment, the 1996 tax year had already become statute barred, thus making this new
reassessment invalid. We have appealed the new reassessment to the Mexican Tax Court. We requested a refund of the deposited amount and in October 2007 we received a refund of approximately $3.7 million (the original deposit amount of $3.3 million
plus $0.4 million in interest). Therefore, in the third quarter of 2007 we reversed the 2005 accrual for taxes, interest and penalties ($1.4 million related to interest and penalties was included in Other Income and $0.7 million benefit in Income
Tax Expense).

With the return of the $3.3 million deposit, the Mexican tax authorities issued a resolution indicating that TESCO was owed
an additional $3.4 million in interest but this amount was retained by the tax authorities as a deposit for the new assessment received in July 2007. As previously discussed, we believe that the July assessment is invalid. However due to the
uncertainty regarding the ultimate amount that will be received from the Mexican tax authorities, we have not recognized this asset.

In
2006, Mexican tax authorities formally requested information from us regarding expenses we deducted in 2001 and 2002. At the time of this filing, no reassessments have been received for these years and management is unable to predict the outcome of
this review or estimate the amount of any additional taxes that may be claimed as owed.

In July 2006, we received a claim for withholding
tax, penalties and interest related to payments over the periods from 2000 to 2004 in a foreign jurisdiction. We disagree with this claim and are currently litigating this matter. However, at June 30, 2006 we accrued our estimated pre-tax
exposure on this matter at $3.8 million, with $2.6 million included in other expense and $1.2 million included in interest expense. During 2007, we accrued an additional $0.2 million of interest expense related to this claim.

STYLE="font-size:18px;margin-top:0px;margin-bottom:0px"> 






ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

SIZE="2">No matters were submitted to a vote of our security holders during the fourth quarter of 2007.

 


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PART II

 






ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Our outstanding shares of common stock, without par, are listed on the Toronto Stock Exchange under the symbol “TEO” and on the Nasdaq Global
Market under the symbol “TESO”. The following table outlines the share price trading range and volume of shares traded by quarter for 2007 and 2006.

 




































































































































































































   Toronto Stock Exchange  Nasdaq Global Market
   Share Price Trading Range Share
Volume
  Share Price Trading Range Share
Volume
       High          Low           High          Low     
   (C$ per share) (in thousands)  ($ per share) (in thousands)

2007

          

1st Quarter

  31.15  19.80 3,062  26.94  16.98 11,887

2nd Quarter

  36.70  29.83 4,470  33.38  23.70 11,395

3rd Quarter

  36.94  26.15 3,816  34.76  26.20 9,161

4th Quarter

  30.38  20.11 4,221  31.12  19.85 11,257

2006

          

1st Quarter

  25.48  19.02 6,390  22.07  16.42 6,972

2nd Quarter

  25.30  20.07 2,360  22.87  18.05 6,590

3rd Quarter

  24.44  16.35 2,700  21.91  14.62 2,532

4th Quarter

  22.09  16.89 2,169  19.22  14.93 4,041

As of February 19, 2008, there were approximately 254 holders of record of TESCO common
stock, including brokers and other nominees.

We have not declared or paid any dividends since 1993 and do not expect to declare or pay
dividends in the near future. Any decision to pay dividends on our Common Shares will be made by our Board of Directors on the basis of our earnings, financial requirements and other relevant conditions existing at the time. Pursuant to our Amended
and Restated Credit Agreement, we are currently prohibited from paying dividends to shareholders.

 


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Performance Graph

FACE="Times New Roman" SIZE="2">The following performance graph and table compares the yearly percentage change in the cumulative shareholder return for the five year period commencing on December 31, 2002 and ending on December 31, 2007
on our common shares (assuming a $100 investment was made on December 31, 2002) with the total cumulative return of the S&P TSX Composite Index and the Philadelphia Oil Service Sector Index (“OSX”) assuming reinvestment of
dividends.



LOGO

 


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ITEM 6.
SELECTED FINANCIAL DATA.

TESCO CORPORATION AND
CONSOLIDATED SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA

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  Years Ended December 31, 
  2007  2006  2005  2004  2003 
  (In millions, except share and per share amounts) 

STATEMENTS OF INCOME (LOSS) DATA:

     

Revenue

     

-Top Drives

 $289.2  $219.2  $125.8  $91.8  $95.2 

-Casing Services

  173.2   167.0   77.0   46.3   37.4 
                    
  462.4   386.2   202.8   138.1   132.6 
                    

Operating Income (Loss)

     

-Top Drives

  68.8   64.9   23.5   11.5   6.9 

-Casing Services

  21.4   28.4   19.0   6.4   0.3 

-Research and Engineering

  (12.0)  (6.0)  (3.9)  (2.5)  (6.4)

-Corporate and Other

  (29.7)  (26.4)  (20.9)  (13.5)  (16.9)
                    
  48.5   60.9   17.7   1.9   (16.1)

Interest Expense, net

  3.2   3.2   1.4   2.6   3.3 

Other (Income) Expense

  2.8   4.1   1.9   2.2   3.9 
                    

Income (Loss) Before Income Taxes

  42.5   53.6   14.4   (2.9)  (23.3)

Income Taxes

  10.2   23.3   6.3   2.7   (7.1)
                    

Income (Loss) Before Cumulative Effect of Accounting Change

  32.3   30.3   8.1   (5.6)  (16.2)

Cumulative Effect of Accounting Change, net of income taxes (a)

  —     0.2   —     —     —   
                    

Net income (loss)

 $32.3  $30.5  $8.1  $(5.6) $(16.2)
                    

Average Number of Common Shares Outstanding

     

Basic

  36,604,338   35,847,266   35,173,264   34,778,463   34,542,532 

Diluted

  37,403,932   36,593,409   35,628,543   34,778,463   34,542,532 

Earnings (Loss) per Average Share of Common Stock

     

Basic:

     

Before Cumulative Effect of Accounting Change

 $0.88  $0.85  $0.23  $(0.16) $(0.47)

Cumulative Effect of Accounting Change (a)

  —     —     —     —     —   
                    
 $0.88  $0.85  $0.23  $(0.16) $(0.47)
                    

Diluted:

     

Before Cumulative Effect of Accounting Change

 $0.86  $0.83  $0.23  $(0.16) $(0.47)

Cumulative Effect of Accounting Change (a)

  —     —     —     —     —   
                    
 $0.86  $0.83  $0.23  $(0.16) $(0.47)
                    

Cash Dividends per Common Share

 $—    $—    $—    $—    $—   

BALANCE SHEET DATA:

     

Total Assets

 $476.7  $372.2  $310.3  $224.9  $253.5 

Debt and Capital Leases

  80.8   44.5   41.3   14.9   52.0 

Shareholders’ Equity

  304.9   239.4   203.5   177.9   166.7 

CASH FLOW DATA:

     

Cash Flow From Operating Activities

 $25.3  $4.9  $14.8  $8.9  $17.9 

Cash Flows (Used In) From Investing Activities

  (64.4)  (33.2)  (26.6)  0.6   (16.5)

Cash Flows (Used In) From Financing Activities

  48.9   9.7   30.2   (37.9)  8.5 

OTHER DATA:

     

Adjusted EBITDA (b)

 $79.2  $85.0  $36.7  $19.0  $(0.9)

Net Cash (Debt) (c)

  (57.7)  (29.6)  (5.9)  0.8   (11.7)

 

SIZE="2">NOTE: Our consolidated financial statements for the three years ended December 31, 2007, which are discussed in the following notes, are included in this Form 10-K under Item 8.

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(a)Effective January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) to account for our stock-based compensation program. We
elected to adopt the modified prospective application method provided by SFAS 123(R). Under SFAS No. 123(R), we use the same fair value methodology pursuant to SFAS 123 but we are required to estimate the pre-vesting forfeiture rate beginning
on the date of grant. On January 1, 2006, the date we adopted SFAS No. 123(R), we recorded a one-time cumulative benefit of $0.2 million, after-tax, to record an estimate of future forfeitures on outstanding unvested awards at the date of
adoption.

 





(b)Our management evaluates our performance based on non-GAAP measures, of which a primary performance measure is Adjusted EBITDA which consists of earnings (net income or loss)
available to common shareholders before cumulative effect of accounting change, net interest expense, income taxes, non-cash stock compensation expense, non-cash impairments, depreciation and amortization and other non-cash items. This measure may
not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. The measure should not be considered in isolation or as a substitute for operating income, net
income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with U.S. GAAP. The amounts included in the Adjusted EBITDA calculation, however, are derived from amounts included
in the historical Consolidated Statements of Income data.

We believe Adjusted EBITDA is useful to an investor in evaluating
our operating performance because it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as income taxes, net interest expense, depreciation and amortization, and non-cash stock
compensation expense which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired; it helps investors more
meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest) and asset base (primarily depreciation and amortization) and actions that do not affect
liquidity (stock compensation expense) from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of
the asset purchase in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.

FACE="Times New Roman" SIZE="2">Adjusted EBITDA is derived from the Consolidated Statements of Income as follows (in millions):

 




















































































































































































































































   Years Ended December 31, 
   2007  2006  2005  2004  2003 

Net Income (Loss)

  $32.3  $30.5  $8.1  $(5.6) $(16.2)

Income Taxes

   10.2   23.3   6.3   2.7   (7.1)

Depreciation and Amortization

   27.0   22.5   17.3   14.5   13.7 

Net Interest Expense

   3.2   3.2   1.4   2.6   3.3 

Stock Compensation Expense—non-cash

   6.5   5.7   3.6   2.4   1.3 

Impairment of Assets—non-cash

   —     —     —     2.4   4.1 

Cumulative Effect of Accounting Change, net of income taxes

   —     (0.2)  —     —     —   
                     

Adjusted EBITDA

  $79.2  $85.0  $36.7  $19.0  $(0.9)
                     

 





(c)Net Cash (Debt) represents the amount that Cash and Cash Equivalents exceeds (or is less than) total Debt of the Company. Net Cash (Debt) is not a calculation based upon U.S. GAAP.
The amounts included in the Net Cash (Debt) calculation, however, are derived from amounts included in the historical Consolidated Balance Sheets. In addition, Net Cash (Debt) should not be considered as an alternative to operating cash flows or
working capital as a measure of liquidity. We have reported Net Cash (Debt) because we regularly review Net Cash (Debt) as a measure of the Company’s performance. However, the Net Cash (Debt) measure presented in this document may not always be
comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. Net Cash (Debt) is derived from the Consolidated Balance Sheets as follows (in millions):
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   Years Ended December 31, 
   2007  2006  2005  2004  2003 

Cash

  $23.1  $14.9  $35.4  $15.7  $40.3 

Current Portion of long term debt and capital lease

   (10.0)  (10.0)  (0.4)  (2.6)  (49.1)

Bank borrowings

   —     —     —     (10.0)  —   

Long term debt and capital lease

   (70.8)  (34.5)  (40.9)  (2.3)  (2.9)
                     

Net Cash (Debt)

  $(57.7) $(29.6) $(5.9) $0.8  $(11.7)
                     

 


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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FACE="Times New Roman" SIZE="2">FORWARD-LOOKING INFORMATION AND RISK FACTORS

This annual report on Form 10-K contains
forward-looking statements within the meaning of Canadian and United States securities laws, including the United States Private Securities Litigation Reform Act of 1995. From time to time, our public filings, press releases and other communications
(such as conference calls and presentations) will contain forward-looking statements. Forward-looking information is often, but not always identified by the use of words such as “anticipate”, “believe”, “expect”,
“plan”, “intend”, “forecast”, “target”, “project”, “may”, “will”, “should”, “could”, “estimate”, “predict” or similar words suggesting
future outcomes or language suggesting an outlook. Forward-looking statements in this annual report on Form 10-K include, but are not limited to, statements with respect to expectations of our prospects, future revenues, earnings, activities and
technical results.

Forward-looking statements and information are based on current beliefs as well as assumptions made by, and information
currently available to, us concerning anticipated financial performance, business prospects, strategies and regulatory developments. Although management considers these assumptions to be reasonable based on information currently available to it,
they may prove to be incorrect. The forward-looking statements in this annual report on Form 10-K are made as of the date it was issued and we do not undertake any obligation to update publicly or to revise any of the included forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

By their very
nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that outcomes implied by forward-looking statements will not be achieved. We caution readers not to place undue reliance on these
statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements.


These risks and uncertainties include, but are not limited to, the impact of changes in oil and natural gas prices and worldwide and domestic economic
conditions on drilling activity and demand for and pricing of our products and services, other risks inherent in the drilling services industry (e.g. operational risks, potential delays or changes in customers’ exploration or development
projects or capital expenditures, the uncertainty of estimates and projections relating to levels of rental activities, uncertainty of estimates and projections of costs and expenses, risks in conducting foreign operations, the consolidation of our
customers, and intense competition in our industry), and risks; including litigation risks, associated with our intellectual property and risks associated with the performance of our technology. These risks and uncertainties may cause our actual
results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. When relying on our forward-looking statements to make decisions, investors and others should
carefully consider the foregoing factors and other uncertainties and potential events.

Copies of our Canadian public filings are available
at www.tescocorp.com and at www.sedar.com. Our U.S. public filings are available at www.tescocorp.com and at www.sec.gov.

FACE="Times New Roman" SIZE="2">The following review of TESCO’s financial condition and results of operations should be read in conjunction with its financial statements and related notes included in this Form 10-K. Unless indicated otherwise,
all dollar amounts in this Annual Report on Form 10-K are denominated in United States (U.S.) dollars. All references to US$ or to $ are to U.S. dollars and references to C$ are to Canadian dollars.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Certain reclassifications have been made to prior years’ presentation to conform to the current year presentation.

STYLE="margin-top:18px;margin-bottom:0px">OVERVIEW

Business

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">We are a global leader in the design, manufacture and service of technology based solutions for the upstream energy industry. We seek to change the way
people drill wells by delivering safer and more efficient solutions that add real value by reducing the costs of drilling for and producing oil and gas.

 


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Index to Financial Statements


We organize our activities into three business
segments, Top Drive, Casing Services and Research and Engineering, and our financial and operating data are presented consistent with that structure. The Top Drive business comprises top drive sales, top drive rentals and after-market sales and
service. The Casing Services business includes CASING DRILLING® and our proprietary and conventional Tubular Services. The Research and Engineering (“R&E”) segment is
comprised of our research and development activities related to our proprietary technologies in Casing Services and Top Drive model development. For a detailed description of these business segments, see Part I, Item 1. “Business”
above.

Revenue for the year ended December 31, 2007 was $462.4 million,
compared to $386.2 million in 2006, an increase of $76.2 million, or 20%. This increase is primarily due to increased activities in the Top Drive segment, particularly top drive sales and after-market sales and support due to the substantial
increase in the top drive unit sales and increased activity in the Casing Services segment particularly, our proprietary casing services activities. Included in CASING DRILLING® revenues
for 2006 is $9.0 million from contract CASING DRILLING® activities which were discontinued in 2006.

FACE="Times New Roman" SIZE="2">Operating Income for the year ended December 31, 2007 was $48.5 million, compared to $60.9 million in 2006, a decrease of $12.4 million. This decrease is primarily attributable to decreased operating income in
Casing Services, increased costs in our Research and Engineering segment and increased selling, general and administrative expenses which were partially offset by increased operating income from Top Drives. Results for each business segment are
discussed in further detail below.

Net Income for the year ended December 31, 2007 was $32.3 million, or $0.86 per diluted share,
compared to $30.5 million in 2006, or $0.83 per diluted share, an increase of $1.8 million. Other than the changes in Operating Income discussed above, in 2007 we benefited from a $3.4 million benefit related to 2006 return to accrual adjustments as
a result of filing our Canadian, U.S. and other foreign tax returns and the reversal of $1.4 million in accrued interest and penalties related to the favorable resolution of a Mexico tax claim, partially offset by a $1.8 million foreign exchange
loss related to the U.S. dollar receivables held by our Canadian operations and the weakening of the U.S. dollar during the period, a $1.7 million charge related to a reduction in deferred tax assets attributable to reduced statutory tax rates for
Canadian federal taxes and a $1.2 million loss related to the expiration of the Turnkey E&P warrants. Additionally, our 2006 Net Income included an accrual of $2.6 million related to a withholding taxes and penalties related to payments over the
period from 2000 to 2004 in a foreign jurisdiction, an interest expense accrual of $1.2 million in 2006 arising out of a claim for foreign withholding tax on payments made over the period from 2000 to 2004 and a $1.6 million charge related to a
reduction in deferred tax assets attributable to reduced statutory tax rates for both Canadian federal and provincial (Alberta) taxes.

SIZE="2">Business Environment

Strong oil and gas drilling activity in 2007 continued to provide significant opportunities for
us to expand our customer base. One of the key indicators of our business is the number of active drilling rigs. The average annual number of active drilling rigs (excluding rigs drilling in Russia or onshore China for which reliable estimates are
not available) is as follows:

 
























































































   Years Ended December 31,
       2007          2006          2005    

United States

  1,763  1,648  1,380

Canada

  342  470  458

Latin America (including Mexico)

  354  324  316

Europe, Africa and Middle East

  408  373  368

Asia Pacific

  241  228  225
         

Worldwide average (source: Baker Hughes rig count)

  3,108  3,043  2,747
         

 


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During 2007, North America average rig activity was flat even though Canada experienced a decline in rig
activity. However the international markets continued to expand. As a result, we continued our emphasis of increasing revenues and operating income outside of North America to create a more balanced portfolio between the North American and the
international markets. Our 2007 financial performance, as measured in revenues and operating income for both business segments, in North America and throughout the rest of the world, reflects this change in focus that has been made over the last few
years. For example, our 2007 revenues outside of North America (consisting of Canada and the U.S.) increased 43% to $120.8 million compared to 2006, and our 2006 revenues increased 80% to $84.4 million as compared to 2005.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">According to World Oil, drilling activity for the last three years and forecast for 2008 is:

STYLE="font-size:12px;margin-top:0px;margin-bottom:0px"> 
































































































































   For the Years Ended December 31,
   2008  2007  2006  2005
   (forecast)*         

Wells drilled

        

-US

  52,383  49,195  48,929  41,189

-Canada

  15,002  18,011  24,700  23,790

-Latin America

  4,572  4,681  4,717  4,575

-Europe, N. Africa, Middle East

  10,746  10,156  9,815  9,013

-Far East

  21,477  20,236  19,846  15,236
            

Worldwide

  104,180  102,279  108,007  93,803
            

 





*forecast released by World Oil on January 25, 2008

SIZE="2">We believe that the anticipated continuing strength in drilling activity and, in particular, well complexity provides significant opportunities for us. We are committed to expanding our role as a leading service provider to the drilling
industry. All of our services and products are delivered through geographic business units to provide customers with a single point of contact for all of our products and services.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">We continue to see strong demand for all our products. In North America rig activity is at a
twenty year high and the demand for top drives, both sales and rentals, remain strong. Demand for our proprietary tubular services also remains strong due primarily to our technology differentiation. While our conventional tubular services business
in the U.S. remains steady, competition for services and personnel have impacted our ability to increase prices to cover rising costs. Even though the overall North American market remained strong throughout 2007, we have seen a weakening in the
Gulf of Mexico and Canadian markets. The weakness in the Gulf of Mexico markets has negatively impacted our business, but in the Canadian markets, our Casing Services segment has grown despite the general industry slowdown. On the CASING
DRILLING® front, our current activity has recently increased.

Internationally,
demand for all our services is strong. The increased rig count throughout 2007 coupled with the increased complexity of wells drilled indicates a strong market for all our products and services.

STYLE="margin-top:18px;margin-bottom:0px">Outlook

During 2007, we delivered 102 new top
drive units to customers, compared to 86 new units delivered to customers in 2006. We ended 2007 with a backlog of 38 top drive units compared to a backlog of 68 units at December 31, 2006. Our backlog since mid-2006 has declined as a
consequence of significantly increasing our manufacturing capacity to 10 to 14 top drives per month, to meet both our customer and internal demand and our sales efforts not increasing at the same rate as our manufacturing capacity. We believe that
for our Top Drive business, a backlog of two quarters of production is reasonable and allows us to effectively manage our supply chain and workforce, yet be responsive to our client base.

SIZE="1"> 


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We continue to see increasing demand for rental top drives internationally. Therefore, we plan to
increase our fleet size to approximately 120 units and to continue to evaluate the allocation of our fleet throughout the world. Additionally, subject to market conditions, we intend to revitalize our top drive rental fleet by selling certain used
units and replacing them with newer models. We will manage our fleet revitalization program such that disruptions to our rental operations are minimized. Based on current market activity, we believe that 2008 new unit sales will be similar to 2007.
We continue to focus on lowering our manufacturing costs through better international sourcing and to find ways to minimize the impact of the fluctuations in the value of the U.S. dollar on our sales margins. For our top drive after market sales and
services business, we expect a continuing increase as our third party installed base continues to expand around the globe.

Our increased
manufacturing capacity since mid-2006 has increased the number of top drive units sold to customers and has increased our installed base throughout the world, providing expansion opportunities for our after-market sales and service business. Also,
over the last three years, our average revenue per top drive unit sale has increased due to a shift in market demand to larger, more complex units. These factors have driven our increase in inventory levels. We believe that our Top Drive business
needs to maintain manufacturing inventory of two quarters of production to limit our exposure in the event that the sales market softens and allows us to effectively manage our supply chain and workforce. In addition, we must maintain
additional inventory of long lead-time items and semi-finished goods to support our after-market business and for our manufacturing operations. During the installation of a new inventory planning and purchasing system at our manufacturing plant in
2007, we experienced implementation problems with our purchasing process that caused inventory to increase significantly above desired levels at December 31, 2007. We believe that during 2008, our inventory levels will return to desired
levels.

We continue to move our Casing Services business forward with new customers
in both Tubular Services and CASING DRILLING®. On the Tubular Services front, we expect our CDS™ proprietary casing running business and MCLRS™ activities to increase in 2008
compared to 2007 and our conventional activity to remain at a level consistent with 2007. We continue to address the high cost structure of our North American Tubular Services business by optimizing personnel and assets in operating areas that
provide the highest returns. Additionally, we continue to expand our tubular services activities in selected international locations. However, as we experienced in 2007, our Tubular Services margins are impacted by competition for the retention and
recruitment of experienced personnel (cost pressures) and in our ability to increase prices to offset cost inflation. With respect to our CASING DRILLING® business, we are continuing our
investment and believe that its performance should improve in 2008 compared to 2007. During 2007, we incurred a substantial expense to build our resource base to grow CASING DRILLING® at a
faster rate. We believe that these investments will yield growth in our CASING DRILLING® revenues in 2008.

SIZE="1"> 


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RESULTS OF OPERATIONS

SIZE="2">Years Ended December 31, 2007 and 2006

Revenue, operating income and net income for the years ended
December 31, 2007 and 2006 were as follows:

 










































































































































































































































































































































































































































































































   Years Ended December 31,  %
Change
 
   2007  2006  
      % of
Revenues
     % of
Revenues
  

REVENUES

        

Top Drive

        

-Sales

  $127,592    $81,521    57 

-After-market support

   51,872     35,781    45 

-Rental operations

   109,681     101,902    8 
              

Total Top Drive

   289,145  63   219,204  57  32 

Casing Services

        

-Conventional

   108,203     105,384    3 

-Proprietary

   50,452     37,920    33 

-CASING DRILLING®

   14,578     23,669    (38)
              

Total Casing Services

   173,233  37   166,973  43  4 
                  

Total Revenues

  $462,378  100  $386,177  100  20 
                  

OPERATING INCOME

        

Top Drive

  $68,853  24  $64,880  30  6 

Casing Services

   21,408  12   28,409  17  (25)

Research and Engineering

   (12,011) n/a   (5,956) n/a  102 

Corporate and Other

   (29,730) n/a   (26,430) n/a  12 
              

Total Operating Income

  $48,520  10  $60,903  16  (20)
              

NET INCOME

  $32,302  7  $30,545  8  6 
              

Top Drive Segment

FACE="Times New Roman" SIZE="2">Our Top Drive segment comprises top drive sales, after-market sales and support and top drive rental activities.

SIZE="2">Revenues—Revenue for the year ended December 31, 2007 increased $70.0 million compared to 2006, primarily driven by a $46.1 million increase in Top Drive sales, a $16.1 million increase in Top Drive after-market support and
a $7.8 million increase in Top Drive rental operations.

Revenues from Top Drive sales increased $46.1 million, or 57%, to $127.6 million
as compared to 2006, primarily the result of the sale of 122 units in 2007 compared to 94 units during 2006. During 2007, we sold 122 top drive units, of which 102 were new units and 20 were used units. During 2006, we sold 94 top drive units, of
which 86 were new units and eight were used units. The selling price per unit varies significantly depending on the model, whether the unit was previously operated in our rental fleet and whether a power unit was included in the sale. When top drive
units in our rental fleet are sold, the sales proceeds are included in revenues and the net book value of the equipment sold is included in cost of sales and services. Revenues related to the sale of used units sold in 2007 and 2006 were $18.9
million and $6.7 million, respectively.

In addition to selling top drive units, we provide after-market sales and service to support our
installed base. Revenues from Top Drive after-market support increased $16.1 million, or 45%, to $51.9 million as compared to 2006, primarily due to the increase in our third party installed base and our efforts to expand this service.


 


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Revenues from Top Drive rental activities increased $7.8 million, or 8%, to $109.7 million as compared to
2006, primarily due to higher average rental rates offset by a decrease in the number of operating days. The decrease in rental days was due to the increased number of used units sold in 2007 and, for units that were replaced, the time lag between
when the used units were removed from operations to be prepared for sale and when the new units are mobilized for operations. The number of top drive operating days and average daily operating rates for 2007 and 2006 and the number of rental units
in our fleet at year-end 2007 and 2006 were:

 














































   Years Ended
December 31,
   2007  2006

Number of operating days

   23,086   23,873

Average daily operating rates

  $4,310  $3,653

Number of units in rental fleet, end of year

   110   115

We define an operating day as a day that a unit in our rental fleet is under contract and
operating. We do not include stand-by days in our definition of an operating day.

A stand-by day is a day in which we are paid an amount,
which may be less than the full contract rate, to have a top drive rental unit available to a customer but that unit is not operating. In 2007, stand-by revenues from rental operations decreased $4.2 million to $10.5 million due to demand for our
top drive rental units.

Operating Income—Top Drive Operating Income for the year ended December 31, 2007 increased $4.0
million to $68.9 million compared to 2006. This increase was primarily driven by the increase in the number of Top Drive units sold in 2007 compared to 2006 (122 units in 2007 compared to 94 units in 2006), higher sales margins on our used Top Drive
sales and the reversal of $2.2 million in warranty reserves, partially offset by increased manufacturing costs of our top drives and lower margins in our rental business due to costs related to reallocating our fleet from North American markets to
international markets, start-up costs related to new contracts in certain international markets, particularly Mexico, and increased maintenance, refurbishment and recertification costs due to the high utilization of our rental fleet. Our increased
manufacturing costs were primarily driven by the weakening of the U.S. dollar, as a majority of our manufacturing costs are incurred in Canadian dollars, and increased costs associated with the disruption of installing a new planning system in our
manufacturing plant earlier in the year and the introduction of the two new “X” series top drives into production. The reversal of certain of our warranty reserve in 2007 relates to reserves originally provided in 2005 related to load path
parts of certain equipment sold to customers and used in our rental fleet and in 2006 to correct technical problems with our EMI 400 top drives as substantially all of our warranty work was completed at December 31, 2007. For further
description of the reversal of certain warranty reserves, see Note 10 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

STYLE="margin-top:18px;margin-bottom:0px">Casing Services Segment

FACE="Times New Roman" SIZE="2">Our Casing Services segment includes Tubular Services and CASING DRILLING®.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">Revenues—Revenues for the year ended December 31, 2007 increased $6.3 million to
$173.2 million as compared to 2006. The increase in revenue reflects increased activity in both conventional and proprietary casing running services, primarily in North America offset by decreased CASING DRILLINGSIZE="1">® activities. Included in CASING DRILLING® revenues for 2006 is $9.0 million from contract CASING DRILLINGSIZE="1">® activities from leased rigs returned in late 2006.

SIZE="2">Tubular services conventional revenue is principally generated from our conventional casing and tubing business, including our Multi-Control Line Running Systems™ (“MCLRS™”) activities. Our Conventional Tubular Services
business generated revenue of $108.2 million in 2007, an increase of $2.8 million from 2006. Our MCLRS
TM services revenues as a percentage of
Conventional Tubular Services revenues were 12% in 2007 as compared to 10% in 2006. Our remaining Conventional Tubular Services business was unchanged in 2007

 


29







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Index to Financial Statements



from 2006 primarily, due to increased competition in the U.S. markets partially offset by $5.4 million in revenues related to our 2007 acquisitions completed
in the second half of 2007. For a description of these acquisitions, see Note 4 to the Consolidated Financial Statements in this Form 10-K (Financial Statements and Supplementary Data).

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Tubular services proprietary revenue is principally generated from our casing and tubing business utilizing our proprietary casing running technology and
the sale of our CDS units and related equipment. Our proprietary tubular services business generated revenue of $50.5 million in 2007, an increase of $12.5 million, or 33%, from 2006, which is primarily due to our proprietary job activity as our job
count increased from 1,134 in 2006 to 1,406 in 2007. Our revenues related to the sale of CDS and related equipment was approximately the same between the two periods. The proprietary job count increase is a reflection of our proprietary Casing Drive
System™ fleet which increased from 155 units at December 31, 2006 to 177 units at December 31, 2007.

FACE="Times New Roman" SIZE="2">CASING DRILLING® revenue in 2007 was $14.6 million compared to $23.7 million in 2006. Included in CASING DRILLINGSIZE="1">® revenues for 2006 is $9.0 million in revenues from contract CASING DRILLING® activities which were discontinued in late 2006. As of December 31, 2006,
we no longer provide contract drilling services. Our 2007 CASING DRILLING® revenues were approximately equal to those in 2006 excluding the 2006 CASING DRILLINGSIZE="1">® revenues related to our contract drilling activities. Included in our 2007 CASING DRILLING® revenues was $1.0 million for mobilization efforts for an
offshore Norway project which has been indefinitely suspended.

Operating
Income
—Casing Services’ operating income for the year ended December 31, 2007 decreased $7.0 million to $21.4 million compared to 2006. The decrease in Casing Services’ 2007 operating income compared to 2006 was primarily
driven by an increased cost base, including labor and benefit costs, in our Tubular Services businesses resulting from competitive pressures in the industry and increased costs associated with the build-up of resources for our CASING DRILLINGFACE="Times New Roman" SIZE="1">®
business and expansion of our Tubular Services businesses throughout the world but was partially offset by increased margins in Proprietary Tubular Services.

STYLE="margin-top:18px;margin-bottom:0px">Research and Engineering Segment

Research and
Engineering’s (“R&E”) operating loss is comprised of our R&E activities and was $12.0 million for 2007, an increase of $6.0 million from 2006. This increase is primarily due to expenditures related to the development and
market introduction of a new generation of hydraulic and electric Top Drives in the summer of 2007 and additional product development activity focusing on the commercialization and enhancement of existing proprietary technologies in Casing Services.

Corporate and Other

Corporate and
Other is primarily comprised of the corporate level general and administrative expenses and corporate level selling and marketing expenses. Corporate and Other’s operating loss for the year ended December 31, 2007 increased $3.3 million to
a $29.7 million loss compared to 2006. This increase is primarily due to the professional fees incurred in the first quarter of 2007 as a result of our transition from a foreign private issuer to a U.S. reporting company, the various issues and
events related to the delayed filing of our initial Annual Report on From 10-K, the increased auditing fees associated with our initial year of testing our internal controls pursuant to Section 404 of the Sarbanes Oxley Act, costs associated
with the restatements of our quarterly results for the second and third quarters of 2006 and the costs associated with the Company’s self-initiated review of the Company’s stock option practices and related accounting. Corporate and
Other’s operating loss includes bad debt expense (benefit) which was $1.2 million for 2007 and ($1.7) million for 2006. The 2006 bad debt benefit reflects the collection of a receivable previously written off when the customer filed for
bankruptcy in 2003.

 


30







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Net Income

 






































































































































































   Years ended December 31,
   2007  2006
      % of
revenue
     % of
revenue

Operating Income

  $48,520  10  $60,903  16

Interest Expense

   4,324  1   4,542  1

Interest Income

   (1,150) —     (1,331) —  

Foreign Exchange Losses

   2,899  1   1,068  —  

Other (Income) Expense

   (18) —     3,016  1

Income Taxes

   10,163  2   23,309  6
              

Net Income Before Cumulative Effect of Accounting Change

  $32,302  7  $30,299  8
              

Interest Expense—Interest expense for 2007 decreased $0.2 million primarily due to
interest expense in 2006 including an accrual of $1.2 million arising out of a claim for foreign withholding tax on payments made over the period from 2000 to 2004 (see Note 10 to the Consolidated Financial Statements) partially offset by interest
expense related to higher average debt levels during 2007.

Interest Income—Interest income for 2007 decreased $0.1 million to
$1.2 million primarily due to lower average cash balances on hand as compared to 2006 during 2007.

Foreign Exchange
Losses
—Foreign exchange losses increased $1.8 million to $2.9 million primarily due to the weakening of the U.S. dollar during 2007 against the Canadian dollar related to an increase in U.S. dollar net receivables held by our Canadian
operations.

Other (Income) Expense—Other (Income) Expense includes non-operating income and expenses, including investment
activities. Following is a detail of the significant items that are included in Other (Income) Expense for 2007 and 2006 (in thousands):

 























































































   Years ended
December 31,
   2007  2006

Expiration of Turnkey Warrants

  $1,176  $—  

Reversal of accrued interest and penalties related to Mexico tax claim

   (1,341)  —  

Withholding tax and penalty accrual in a foreign jurisdiction

   —     2,589

Other

   147   427
        

Other (Income) Expense

  $(18) $3,016
        

For a description of these items, see Notes 2, 8 and 10 to the Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

Income Taxes—TESCO is an
Alberta, Canada corporation. We conduct business and are taxable on profits earned in a number of jurisdictions around the world. Our income tax expense is provided based on the laws and rates in effect in the countries in which operations are
conducted or in which TESCO and/or its subsidiaries are considered residents for income tax purposes. Income tax expense as a percentage of pre-tax earnings fluctuates from year to year based on the level of profits earned in each jurisdiction in
which we operate and the tax rates applicable to such profits.

Our effective tax rate for 2007 was 24% compared to 44% in 2006. The 2007
effective tax rate reflects a $3.4 million benefit related to 2006 return to accrual adjustments as a result of our Canadian, U.S. and other foreign tax returns and a $0.8 million benefit primarily related to the favorable resolution of a Mexico tax
claim

 


31







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Index to Financial Statements



offset by a $1.7 million charge related to a reduction in deferred tax assets attributable to reduced statutory tax rates for Canadian federal taxes. Our
2007 effective tax rate also includes a $1.5 million benefit related to the release of the valuation allowance established against the foreign tax credits generated in 2006, which was offset by a valuation allowance established against foreign tax
credits generated in 2007 and a valuation allowance established against 2007 losses of certain foreign subsidiaries. The 2006 effective tax rate was higher than the federal statutory rate primarily due to a $1.6 million charge related to a reduction
in deferred tax assets attributable to Canadian tax law changes which incrementally reduced the statutory tax rates for both Canadian federal and provincial (Alberta) taxes.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The benefit related to filing our 2006 U.S. federal and state tax returns was $2.2 million and was primarily due to an allocation of 2006 earnings
between our U.S. subsidiary and U.S. branch in the preparation of our tax returns. Because this allocation was not performed in the preparation of our 2006 income tax provision, such benefit should have been recorded in 2006. We believe that the
effect of recording this tax adjustment in 2007 instead of 2006 is immaterial to both the current year and prior year financial statements taken as a whole.

FACE="Times New Roman" SIZE="2">No provision is made for taxes that may be payable on the repatriation of accumulated earnings in our foreign subsidiaries on the basis that these earnings will continue to be used to finance the activities of these
subsidiaries.

For a further description of income tax matters, see Note 8 to the Consolidated Financial Statements included in Part II,
Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

Years Ended December 31, 2006 and 2005

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Our performance for the year ended December 31, 2006 improved compared to the year ended December 31, 2005 primarily due to Casing
Services’ acquisitions in November 2005, strong oil and gas drilling activity and management’s focus on growing the Casing Services segment, improving the Top Drive rental fleet utilization and increasing Top Drive product and after-market
sales. Revenue, operating income and net income for the years ended December 31, 2006 and 2005 were as follows:

 










































































































































































































































































































































































































































































































   Years Ended December 31,  %
Change
 
   2006  2005  
      % of
Revenues
     % of
Revenues
  

REVENUES

        

Top Drive

        

-Sales

  $81,521    $30,753    165 

-After-market support

   35,781     20,537    74 

-Rental operations

   101,902     74,486    37 
              

Total Top Drive

   219,204  57   125,776  62  74 

Casing Services

        

-Conventional

   105,384     39,397    167 

-Proprietary

   37,920     12,441    205 

-CASING DRILLING®

   23,669     25,134    (6)
              

Total Casing Services

   166,973  43   76,972  38  117 
                  

Total Revenues

  $386,177  100  $202,748  100  90 
                  

OPERATING INCOME

        

Top Drive

  $64,880  30  $23,512  19  176 

Casing Services

   28,409  17   19,019  25  49 

Research and Engineering

   (5,956) n/a   (3,925) n/a  52 

Corporate and Other

   (26,430) n/a   (20,860) n/a  27 
              

Total Operating Income

  $60,903  16  $17,746  9  243 
              

NET INCOME

  $30,545  8  $8,050  4  279 
              

 


32







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Revenue for the year ended December 31, 2006 was $386.2 million, compared to $202.7 million in 2005,
an increase of $183.5 million, or 90%. This increase is primarily due to increased activities in the Top Drive segment, particularly top drive sales and after-market support due to the substantial increase in the top drive unit sales and strong
increases in Casing Services revenue. Increased revenues in both of these business segments are discussed in further detail below.

SIZE="2">Operating Income for the year ended December 31, 2006 was $60.9 million, compared to $17.7 million in 2005, an increase of $43.2 million. This increase is primarily attributable to increased activities in both of our business segments
and improved margins in Top Drives offset by increased costs in our Research and Engineering segment and increased selling, general and administrative expenses which are discussed in further detail below. Casing Services’ 2005 operating income
includes an $8.4 million gain on sale of the drilling rigs sold in December 2005 to Turnkey E & P Inc. (“Turnkey”), which is included in gain on sale of operating assets in the accompanying consolidated statements of income.

Net Income for the year ended December 31, 2006 was $30.5 million, compared to $8.1 million in 2005, an increase of $22.4 million.

Top Drive Segment

SIZE="2">Revenues—Revenue for the year ended December 31, 2006 increased $93.4 million compared to 2005 primarily driven by a $50.8 million increase in Top Drive sales, a $15.2 million increase in Top Drive after-market support and
a $27.4 million increase in Top Drive rental operations.

Revenues from Top Drive sales and after-market support increased $66.0 million to
$117.3 million as compared to 2005, primarily the result of the sale of 94 units in 2006 compared to 35 units during 2005 and a 74% increase in after-market sales and service revenues. During 2006, we sold 94 top drive units, of which 86 were new
units and eight were used units. During 2005, we sold 35 top drive units, of which 21 were new units and 14 were used units. The selling price per unit varies significantly depending on the model, whether the unit was previously operated in our
rental fleet and whether a power unit was included in the sale. When top drive units in our rental fleet are sold, the sales proceeds are included in revenues and the net book value of the equipment sold is included in cost of sales and services.
Revenues related to the sale of used units sold in 2006 and 2005 were $6.7 million and $10.0 million, respectively.

In addition to selling
top drive units, we provide after-market sales and service to support our installed base. Revenues from Top Drive after-market support increased $15.2 million, or 74%, to $35.8 million as compared to 2006, primarily due to our efforts to establish
service and parts centers, including sales personnel, in strategic locations closer to the installed base.

Revenues from Top Drive rental
activities increased $27.4 million, or 37%, to $101.9 million as compared to 2005, primarily due to an increase in the number of operating days, higher average rental rates and increased stand-by revenues. The number of top drive operating days and
average daily operating rates for 2006 and 2005 and the number of rental units in our fleet at year-end 2006 and 2005 were:

 














































   Years Ended
December 31,
   2006  2005

Number of operating days

   23,873   21,713

Average daily operating rates

  $3,653  $3,000

Number of units in rental fleet, end of year

   115   111

We define an operating day as a day that a unit in our rental fleet is under contract and
operating. We do not include stand-by days in our definition of an operating day.

 


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A stand-by day is a day in which we are paid an amount, which may be less than the full contract rate, to
have a top drive rental unit available to a customer but that unit is not operating. In 2006, stand-by revenues from rental operations increased $5.4 million to $14.7 million due to demand for our top drive rental units.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Operating Income—Top Drive Operating Income for the year ended December 31, 2006 increased $41.4 million to $64.9 million compared to
2005. Like the increase in revenue of this same time period, this growth is primarily driven by the increase in the number of Top Drive units sold in 2006 compared to 2005 (94 units in 2006 compared to 35 units in 2005) and an increase in Top Drive
rental activities primarily due to increased fleet utilization resulting in an increased number of rental days and higher average rental rates partially offset by increased operating costs related to our manufacturing operations, including amounts
expensed for inventory obsolescence.

Top Drive’s 2005 Operating Income was negatively impacted by a $6.6 million charge related to
the replacement of load path parts of certain equipment sold to customers and in our rental fleet. This charge was net of amounts contractually recoverable from the manufacturer of the steel forgings used to make such load path parts. For further
information see Note 10 in the Consolidated Financial Statements.

Casing Services Segment

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">Revenues—Revenues for the year ended December 31, 2006 increased $90.0 million to
$167.0 million as compared to 2005. The increase in revenue reflects increased activity as a result of our two acquisitions in November 2005, increased activity in both conventional and proprietary casing running services, primarily in North America
and increased CASING DRILLING® activities. As discussed in Note 4 to the Consolidated Financial Statements, assuming the November 2005 casing services acquisitions occurred at the beginning
of the year, 2005 pro-forma revenues for the Casing Services segment would have been $114.0 million.

Tubular services conventional revenue
is principally generated from our conventional casing and tubing business, including our Multi-Control Line Running Systems™ (“MCLRS™”) activities. The conventional tubular services generated revenue of $105.4 million in 2006, an
increase of $66.0 million from 2005. The increase in conventional tubular services revenues is primarily due to the two acquisitions in November 2005 and increased activities.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Tubular services proprietary revenue is principally generated from our casing and tubing business utilizing our proprietary casing running technology.
Our proprietary tubular services business generated revenue of $37.9 million in 2006, an increase of $25.5 million from 2005. This increase is the result of the increase in our proprietary Casing Drive System™ fleet which increased from 77
units at December 31, 2005 to 155 units at December 31, 2006.

CASING
DRILLING® revenue in 2006 was $23.7 million compared to $25.1 million in 2005. Included in CASING DRILLING® revenues for 2006 and
2005 is $9.0 million and $18.3 million, respectively, in revenues from contract drilling activities related to owned rigs sold in late 2005 and the leased rigs returned in late 2006. As of December 31, 2006 we no longer provide contract
drilling services. The increase in CASING DRILLING® revenue, exclusive of contract drilling, was primarily related to the increase in the CASING DRILLINGSIZE="1">® projects in south Texas, the Rocky Mountain region and in the North Sea.

Operating
Income
—Casing Services’ operating income for the year ended December 31, 2006 increased $9.4 million to $28.4 million compared to 2005. Casing Services’ 2005 operating income included an $8.4 million gain on sale of the
drilling rigs which is included in gain on sale of operating assets in the accompanying consolidated statements of income. Excluding this 2005 gain, Casing Services’ 2005 operating income would have been $10.6 million. The increase in Casing
Services’ 2006 operating income compared to 2005 operating income, excluding the impact of the 2005 gain, was primarily driven by the increase in both proprietary and conventional casing running services and the two acquisitions in November
2005.

 


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Casing Services’ 2005 operating income includes a gain on the sale of operating assets. In December
2005, we sold four drilling rigs for proceeds of $35.0 million plus warrants, generating a gain of $8.4 million. These rigs were sold to Turnkey. At closing, we received $35.0 million in cash in addition to warrants exercisable over a two year
period to purchase one million shares of Turnkey stock at a price of C$6.00. We estimated the fair value of these warrants to be $1.0 million on December 13, 2005 using the Black-Scholes option pricing model. We incurred transaction costs of
$0.7 million in relation to this disposal.

Research and Engineering Segment

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">R&E’s operating loss is comprised of our R&E activities and was $6.0 million for 2006, an increase of $2.1 million from 2005. This
increase is primarily due to additional product development activity focusing on the commercialization and enhancement of existing proprietary technologies in Casing Services and the development of a new generation of Top Drive units.

STYLE="margin-top:18px;margin-bottom:0px">Corporate and Other

Corporate and Other is primarily
comprised of the corporate level general and administrative expenses and corporate level selling and marketing expenses. Corporate and Other’s operating loss for the year ended December 31, 2006 increased $5.6 million to a $26.4 million
loss compared to 2005 due to increased legal expenses, higher expenses related to compliance with Section 404 of the Sarbanes Oxley Act, staff and management additions and higher stock compensation costs.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Corporate and Other’s operating loss includes bad debt expense (benefit) which was ($1.7) million for 2006 and $2.3 million for 2005. The 2006 bad
debt benefit reflects the collection of a receivable previously written off when the customer filed for bankruptcy in 2003.

Net Income


 






































































































































































  Years ended December 31,
  2006 2005
     % of
revenue
    % of
revenue

Operating Income

 $60,903  16 $17,746  9

Interest Expense

  4,542  1  2,038  1

Interest Income

  (1,331) —    (611) —  

Foreign Exchange Losses

  1,068  —    2,425  1

Other (Income) Expense

  3,016  1  (488) —  

Income Taxes

  23,309  6  6,332  3
            

Net Income Before Cumulative Effect of Accounting Change

 $30,299  8 $8,050  4
            

Interest Expense—Interest expense for 2006 increased $2.5 million primarily due to an
interest expense accrual of $1.2 million in 2006 arising out of a claim for foreign withholding tax on payments made over the period from 2000 to 2004 (see Note 10 to the Consolidated Financial Statements) and higher average debt levels during the
year.

Interest Income—Interest income for 2006 increased $0.7 million to $1.3 million primarily due to higher average cash
balances on hand during 2006 as compared to 2005.

Foreign Exchange Losses—Foreign exchange losses decreased $1.3 million to
$1.1 million primarily due to fluctuations of exchange rates in relation to the U.S. dollar compared to the weakening of the U.S. dollar against the Canadian dollar in 2005.

SIZE="1"> 


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Index to Financial Statements


Other (Income) Expense—Other (Income) Expense includes gains and losses on the sale of
non-operating assets and investments. Following is a detail of the significant items that are included in Other (Income) Expense for 2006 and 2005 (in thousands):

 
























































































   Years ended December 31, 
       2006          2005     

Withholding tax and penalty accrual in a foreign jurisdiction

  $2,589  $—   

Gain on sale of Drillers Technology Corp. shares

   —     (1,853)

1996 Mexican tax penalty accrual

   —     1,342 

Other

   427   23 
         

Other (Income) Expense

  $3,016  $(488)
         

For a description of these items, see Notes 2, 8 and 10 to the Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

Income Taxes—Our effective
tax rate was 44% for both 2006 and 2005.

QUARTERLY PERIOD ENDED DECEMBER 31, 2007

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Revenues and operating income by business segment and net income for each of the three month periods ended December 31, 2007, September 30, 2007 and
December 31, 2006 were (in thousands):

 




























































































































































































































































































































































































































   Three Month Period Ended 
   December 31,
2007
  September 30,
2007
  December 31,
2006
 

REVENUES

    

Top Drives:

    

-Sales

  $33,854  $29,164  $29,768 

-Aftermarket sales and service

   15,497   13,710   9,125 

-Rental

   28,339   29,144   27,868 
             

Total Top Drive

   77,690   72,018   66,761 
             

CASING SERVICES

    

-Conventional

  $28,929  $27,209  $29,290 

-Proprietary

   11,445   11,024   12,384 

-CASING DRILLING®

   6,317   3,639   5,911 
             

Total Casing Services

   46,691   41,872   47,585 
             

Total Revenues

  $124,381  $113,890  $114,346 
             

OPERATING INCOME

    

Top Drive

  $17,263  $15,260  $22,727 

Casing Services

   6,378   2,887   7,679 

Research and engineering

   (3,472)  (3,544)  (2,203)

Selling, general & administrative

   (6,835)  (5,990)  (8,926)
             

Total Operating Income

  $13,334  $8,613  $19,277 
             

NET INCOME

  $6,589  $10,839  $10,467 
             

Certain reclassifications have been made to
prior 2007 quarter presentation to be consistent with the presentation for the three months ended December 31, 2007. During the three months ended December 31, 2007 we determined that certain CDSSIZE="1"> related product sales and related cost of sales should have been included in the Casing Services business segment. As such we reclassified these revenues and related cost of sales from the Top Drive business unit to
the Casing Services business unit.

 


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Quarterly Period Ended December 31, 2007 Compared to Quarterly Period Ended September 30, 2007

Revenue for the three months ended December 31, 2007 was $124.4 million, compared to $113.9 million for the three months ended
September 30, 2007, an increase of $10.5 million or 9%, due to an increase of $5.7 million in the Top Drive segment and $4.8 million in the Casing Services segment.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

The increase in the Top Drive segment revenues is primarily the result of increased top drive sales and aftermarket support activities. During the three months
ended December 31, 2007, we sold 29 top drive units (20 new units and nine used units) as compared to 25 units (23 new units and two used units) during the three months ended September 30, 2007. The decrease in new top drive unit sales was
due to fewer units produced for customers during the fourth quarter 2007 due to the level of manufacturing capacity that was devoted to building replacement rental units in response to strong market demand for rental units. During the three months
ended December 31, 2007 we delivered 12 units to our rental fleet.

 







  

Our Top Drive rental revenues decreased $0.8 million compared to the three months ended September 30, 2007 resulting from a 3% decrease in operating days, due
to the time lag that occurred when used units sold from the rental fleet were prepared for sale and prior to the time that the new replacement units were mobilized for operations.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







 

 

The increase in the Casing Services segment revenues was primarily due to an increase of $2.7 million, or 74%, in CASING
DRILLING® revenue due to increased activity. Our Tubular Services revenues for both conventional and proprietary activities were essentially the same between the two periods. Included in
our CASING DRILLING® revenues for the three months ended December 31, 2007 was $1.0 million for mobilization efforts for an offshore Norway project which has been indefinitely
suspended.

Operating income for the three months ended December 31, 2007 was $13.3 million, compared to $8.6
million for the three months ended September 30, 2007, an increase of $4.7 million, or 55% primarily attributable to the Casing Services business segment.

 







  

Top Drive operating income increased $2.0 million primarily due to increased used top drive sales partially offset by fewer new top drive sales discussed above and
a margin decrease in our rental activities due to the sale of used units. Additionally, during the three months ended December 31, 2007 and the three months ended September 30, 2007, we reversed $1.6 million and $0.6 million, respectively, in
warranty reserves.

 







 

 

Casing Services operating income increased $3.5 million, or 121%, primarily due to lower operating costs, improved
margins in our proprietary business and lower operating losses in our CASING DRILLING® business.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">R&E expenses for the three months ended December 31, 2007 were essentially unchanged at
$3.5 million as compared to the three months ended September 30, 2007.

Corporate and Other expenses increased to $6.8 million for the
three months ended December 31, 2007 as compared to $6.0 million for the three months ended September 30, 2007, primarily due to higher incentive costs.

FACE="Times New Roman" SIZE="2">Net income for the three months ended December 31, 2007 was $6.6 million, compared to $10.8 million for the three months ended September 30, 2007, a decrease of $4.2 million, or 39%. This decrease is
primarily due to a loss of $1.2 million related to the expiration of the Turnkey warrants, a $1.8 million foreign exchange loss related to the U.S. dollar receivables held by our Canadian operations and the weakening of the U.S. dollar during the
period and a $1.7 million charge related to a reduction in deferred tax assets attributable to Canadian

 


37







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Index to Financial Statements



tax law changes which incrementally reduced statutory tax rates for Canadian federal taxes while the 2007 third quarter period included a $4.8 million tax
benefit related to the filing of our 2006 Canadian and U.S. income tax returns including the benefit related to the release of a valuation allowance.

SIZE="2">Quarterly Period Ended December 31, 2007 Compared to Quarterly Period Ended December 31, 2006

Revenue for
the three months ended December 31, 2007 was $124.4 million, compared to $114.3 million for the three months ended December 31, 2006, an increase of $10.1 or 9%, due to an increase of $10.9 million in the Top Drive segment offset by a $0.9
million decrease in the Casing Services segment.

 







  

The increase in the Top Drive segment revenues is primarily the result of increased average new top drive sales prices, the increase in used units sold and
increased aftermarket support activities. During the three months ended December 31, 2007, we sold 29 top drive units (20 new units and nine used units) as compared to 30 units (29 new units and one used unit) during the three months ended
December 31, 2006. The decrease in new top drive unit sales was due to the level of manufacturing capacity that was devoted to building rental units during the fourth quarter 2007 in response to strong market demand. During the three months
ended December 31, 2007 we delivered 12 units to our rental fleet.

 







  

Our Top Drive rental revenues increased $0.4 million as operating days were approximately the same for the two periods.

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







 

 

Our Casing Services segment revenues decreased less than $1.0 million between the two periods. Included in our CASING
DRILLING® revenues for the three months ended December 31, 2007 was $1.0 million for mobilization efforts for an offshore Norway project which has been indefinitely suspended. The
three month period ended December 31, 2006 included $0.3 million in revenues from contract CASING DRILLING® services which we discontinued in late 2006.


Operating income for the three months ended December 31, 2007 was $13.3 million, compared to $19.3 million for the three months ended
December 31, 2006, a decrease of $6.0 million, or 31% primarily due to the following.

 







  

Top Drive operating income decreased $5.5 million primarily due to decreased new sales margins as a result of increased manufacturing costs due to the weakening of
the U.S. dollar and lower rental margins partially offset by increased used top drive sales. Additionally, during the three months ended December 31, 2007, we reversed $1.6 million in warranty reserves provided in 2006 and 2005 as substantially
all of our warranty work was completed in 2007.

 







  

Casing Services operating income decreased $1.3 million, or 17% primarily due to increased operating costs.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">R&E expenses for the three months ended December 31, 2007 were $3.5 million, compared to
$2.2 million for the three months ended December 31, 2006 primarily due to increased activities involving our Tubular Services and CASING DRILLING® businesses.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Corporate and Other expenses decreased to $6.8 million for the three months ended December 31, 2007 as compared to $8.9 million for the three months
ended December 31, 2006 due to lower costs related to legal, accounting and compliance costs associated with our transition in 2006 from a foreign private issuer to a domestic reporting issuer under the Securities Exchange Act of 1934.

Net income for the three months ended December 31, 2007 was $6.6 million, compared to $10.5 million for the three months ended
December 31, 2006, a decrease of $3.9 million, or 37%. This decrease is primarily due a $1.8 million foreign exchange loss related to the U.S. dollar receivables held by our Canadian operations and the weakening of the U.S. dollar during the
period, a $1.7 million charge related to a reduction in deferred tax assets attributable to Canadian tax law changes which incrementally reduced statutory tax rates for Canadian federal taxes and a $1.2 million loss from the expiration of the
Turnkey warrants.

 


38







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Index to Financial Statements


ERRORS PRIOR TO 2006 AND OUR JANUARY 1, 2006 ADJUSTMENT TO RETAINED EARNINGS

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">In December 2006, our board of directors and management conducted a self-initiated review of our past stock option granting practices and related
accounting. The review of our stock option practices did not uncover any evidence of fraud or manipulative intent. However, we concluded that we had improperly accounted for stock compensation expense for certain stock option grants and, as a
result, determined that the total pre-tax impact to correct these miscalculations was $1.8 million, of which $0.5 million relates to years prior to 2006 and is discussed in “Prior Year Errors and Adjustments to Retained Earnings” below,
$0.9 million relates to 2006 and is included in our 2006 results and $0.4 million relates to future periods. The results of our review were also reported to regulatory authorities, the Toronto Stock Exchange and the Nasdaq Global Market. No
penalties or sanctions were imposed on us by these authorities.

During the course of our stock option review in early 2007, we noted
certain administrative discrepancies in our granting practices which required us to re-measure the amount of stock compensation expense for certain stock option grants previously recognized. Additionally, we identified other accounting errors
relating to prior years. We evaluated these prior year accounting errors using guidance provided under SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
” (“SAB No. 108”). SAB No. 108 was issued in order to eliminate diversity in practice surrounding how public companies quantify financial statement misstatements.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatement: the “roll-over”
method and the “iron-curtain” method. The roll-over method focuses primarily on the impact of a misstatement on the income statement, including the reversing effect on prior year misstatements, but its use can lead to the accumulation of
misstatements in the balance sheet. The iron-curtain method focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to our application
of the guidance in SAB No. 108, we used the roll-over method for quantifying financial statement misstatements.

In SAB No. 108,
the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of our financial statements and the related financial statement disclosures using a dual
approach of both the iron-curtain and the roll-over methods. As these adjustments are not material to any of the years prior to 2006 under the roll-over method, we have elected to apply the guidance in SAB No. 108 by adjusting the carrying
values of assets and liabilities as of January 1, 2006 with an offsetting adjustment of $0.8 million recorded to retained earnings as of such date, as the cumulative amount of these errors would have been material to the year prior to adoption
of SAB No. 108. The following table summarizes the effects as of January 1, 2006 of applying the guidance in SAB No. 108 (in thousands):

 


























































































































































































   Period in which the
Misstatement Originated (a)
  Adjustment
Recorded as
of January 1,
2006
 
   Cumulative
Prior to
January 1,

2005
  Year Ended
December 31,
2005
  

Expense/(Income)

          

Stock Compensation (b)

  $30  $467  $497 

Depreciation Expense (c)

   377   168   545 

Cost of Sales Accrual (d)

   —     152   152 

Cost of Sales Accrual (e)

   211   (332)  (121)

Deferred Income Taxes (f)

   (211)  (25)  (236)
             

Impact on Net Income (g)

  $407  $430  
          

Retained Earnings (h)

    $837 
       

 





(a)We previously quantified these errors under the roll-over method and concluded that they were immaterial, both individually and in the aggregate, to each of the years presented.

 


39







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(b)We did not properly calculate the fair value of certain stock option grants to employees and we did not properly account for modifications of grants related to certain previously
terminated employees. As a result of this error, stock compensation expense was understated with a corresponding adjustment to capital surplus. We recorded a $0.5 million increase in capital surplus with a corresponding reduction in retained
earnings to correct this misstatement.




(c)We did not properly calculate depreciation expense for certain Casing Services equipment acquired in 2002. As a result of this error depreciation expense was understated. We
recorded a $0.5 million decrease in property, plant and equipment, net with a corresponding decrease in retained earnings to correct this misstatement.




(d)We improperly deferred certain costs to be billed to a customer which were not included in the service agreement. As a result of this error cost of sales and services were
understated. We recorded a $0.2 million decrease in accounts receivable with a corresponding reduction in retained earnings to correct this misstatement.




(e)We improperly accrued certain costs related to our Top Drive business activities. As a result of this error cost of sales and services were understated in 2004 and overstated in
2005. We recorded a $0.1 million reduction in accrued liabilities with a corresponding increase in retained earnings to correct this misstatement.




(f)As a result of these misstatements described above, our income tax expense was overstated in each of the periods. We recorded a $0.2 million decrease in deferred income taxes
payable with a corresponding increase in retained earnings to correct this misstatement.




(g)Impact on net income represents the net overstatement of net income for the indicated periods resulting from these misstatements.




(h)Represents the net reduction to Retained Earnings recorded as of January 1, 2006 to record the adoption of SAB No. 108.
STYLE="margin-top:18px;margin-bottom:0px">LITIGATION AND CONTINGENCIES

In the normal course of
our business, we are subject to legal proceedings brought by or against us and our subsidiaries. As described in Part I, Item 3 of this Form 10-K (Legal Proceedings) and in Notes 8 and 10 of the Consolidated Financial Statements included in
Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data), we are currently subject to litigation regarding patents and regarding taxes in Mexico. Our estimates of exposure related to this litigation represent our best
estimates based on consultation with internal and external legal counsel. There can be no assurance as to the eventual outcome or the amount of loss we may suffer as a result of these proceedings. We do not believe that any such proceedings
currently underway against the Company, either individually or in the aggregate, will have a material adverse effect on the our consolidated financial position, results of operations or cash flows.

STYLE="margin-top:18px;margin-bottom:0px">LIQUIDITY AND CAPITAL RESOURCES

Our net cash and
cash equivalents or debt position as of December 31, 2007 and 2006 was as follows (in thousands):

 























































































   Years Ended December 31, 
       2007          2006     

Cash

  $23,072  $14,923 

Current Portion of long term debt

   (9,991)  (9,991)

Long term debt

   (70,803)  (34,509)
         

Net Debt

  $(57,722) $(29,577)
         

The increase in Net Debt during 2007 was primarily due to debt incurred to finance the four Casing
Services acquisitions of $21.5 million and an increase in our inventories during the year. For further discussion regarding

 


40







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Index to Financial Statements



the Casing Services acquisitions, see Note 4 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K (Financial
Statements and Supplementary Data).

On June 5, 2007, TESCO entered into a $125 million amended and restated credit agreement
between us and our existing lenders dated as of November 2, 2005 (the “Prior Credit Agreement”). The $125 million facility consisted of $100 million revolver and $25 million term loan. On December 21, 2007, TESCO and our existing
lenders entered into an amendment to the $125 million amended and restated credit agreement (collectively with the June 5, 2007 $125 million amended and restated credit agreement, the “Amended Credit Agreement”) to make an additional
$45 million of revolving loans available to us. The Amended Credit Agreement provides for up to $145 million in revolving loans including up to $15 million of swingline loans (collectively, the “Revolver”). The Term Loan terms and maturity
date remains unchanged.

The Amended Credit Agreement has a term of five years and all outstanding borrowings on the Revolver will be due
and payable on June 5, 2012. Amounts available under the Revolver are reduced by letters of credit issued under the Amended Credit Agreement not to exceed $20 million in the aggregate of all undrawn amounts and amounts that have yet to be
disbursed under all existing letters of credit. Amounts available under the swingline loans may also be reduced by letters of credit or by means of a credit to a general deposit account of the applicable borrower. As of December 31, 2007, we
had $6.6 million in letters of credit outstanding and $77.6 million available under the Revolver.

The Amended Credit Agreement
contains covenants that we consider usual and customary for an agreement of this type, including a leverage ratio, a minimum net worth, and a fixed charge coverage ratio. Pursuant to the terms of the Amended Credit Agreement, we are prohibited from
incurring any additional indebtedness outside the existing Credit Facility, in excess of $15 million, paying cash dividends to shareholders and other restrictions which are standard to the industry. The Amended Credit Agreement is secured by
substantially all our assets. All of our direct and indirect material subsidiaries in the United States and Canada are guarantors of any borrowings under the Amended Credit Agreement. Additionally, our capital expenditures are limited to 70% of
consolidated EBITDA plus net proceeds from asset sales. The capital expenditure limit decreases to 60% of consolidated EBITDA plus net proceeds from asset sales for fiscal quarters ending after June 30, 2010. As of December 31, 2007, we
believe that we are in compliance with our debt covenants in the Amended Credit Agreement. For further description of the Amended Credit Agreement, see Note 6 to the Consolidated Financial Statements in this Form 10-K (Financial Statements and
Supplementary Data).

Our investment in working capital, excluding cash and current portion of long-term debt, increased $42.3 million to
$149.3 million at December 31, 2007 from $107.0 million at December 31, 2006. The increase during 2007 was primarily attributable to higher inventory balances due to increased inventory levels and the strengthening of the Canadian
dollar, which increased the U.S. dollar value of our Canadian inventories. As we continue to expand our services internationally, our investment in working capital will increase accordingly.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our increased manufacturing capacity since mid-2006 has increased the number of top drive units sold to customers and our installed base throughout the
world, providing expansion opportunities for our after-market sales and service business. Also, over the last three years, our average revenue per top drive unit sale has increased due to a shift in market demand to larger, more complex units. These
factors have driven our increase in inventory levels. We believe that our Top Drive business needs to maintain manufacturing inventory of two quarters of production to limit our exposure in the event that the sales market softens and allows us
to effectively manage our supply chain and workforce. In addition, we must maintain additional inventory of long lead-time items and semi-finished goods to support our after-market business and for our manufacturing operations. During the
installation of a new inventory planning and purchasing system at our manufacturing plant in 2007, we experienced implementation problems with our purchasing process that caused inventory to increase significantly above desired levels at
December 31, 2007. Based on current market activity, we believe that 2008 new unit sales will be similar to 2007. As we intend to maintain our current production levels, we believe that during 2008, our inventory levels will return to
desired levels.

 


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Following is the calculation of working capital, excluding cash and current portion of long-term debt, at
December 31, 2007 and 2006 (in thousands):

 































































































































   December 31, 
   2007  2006 

Current Assets

  $253,185  $198,924 

Current Liabilities

   (90,775)  (87,015)
         

Working Capital

   162,410   111,909 

Less:

   

Cash and Cash Equivalents

   (23,072)  (14,923)

Current Portion of Long-Term Debt

   9,991   9,991 
         

Working Capital, Excluding Cash and Current Portion of Long-Term Debt

  $149,329  $106,977 
         

During 2007, our capital expenditures were $65.0 million, primarily related to the addition of
proprietary tubular services equipment in the Casing Services segment. We project our capital expenditures for 2008 to be approximately $80 to $90 million. The planned increase from our 2007 capital spending levels is directly related
to our strategy to increase the size of our rental fleet to approximately 120 units by the end of 2008 as well as our fleet revitalization program by selling certain rental units from the fleet and replacing them with newer models. We intend to fund
our fleet revitalization program with proceeds from the sale of used rental units.

We believe cash generated from operations and amounts
available under our existing credit facilities will be sufficient to fund our working capital needs and capital expenditures.

Contractual Obligations

The following is a summary of our significant future contractual obligations by year as of December 31, 2007 (in thousands):

 




























































































































































   Payments Due by Period
   Total  Less Than
1 Year
  1-3 Years  3-5 Years  More Than
5 Years

Long-term debt obligations

  $80,794  $9,991  $10,018  $60,785  $—  

Operating lease obligations

   14,498   3,903   5,570   3,497   1,528

Interest

   18,217   4,747   7,960   5,510   —  

Manufacturing purchase commitments

   27,187   27,187   —     —     —  
                    
  $140,696  $45,828  $23,548  $69,792  $1,528
                    

At December 31, 2007, we had accrued $0.6 million related to uncertain tax positions, all of which
are anticipated to be resolved within the next twelve months.

Future interest payments were forecast based upon the applicable rates in
effect at December 31, 2007 of 6.39% for the Secured Revolver, 6.00% for the Secured Revolver—Swingline and 6.25% for the Term Loan.

Major
Customers and Credit Risk

Our accounts receivable are principally with major international and state oil and gas service and
exploration and production companies and are subject to normal industry credit risks. We perform ongoing credit evaluations of customers and grant credit based upon past payment history, financial condition and anticipated industry conditions.
Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. Many of our customers are located in international areas that are inherently subject to
risks of economic, political and civil instabilities, which may impact our ability to collect those accounts receivable.

 


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For the years ended December 31, 2007, 2006 and 2005, no single customer represented more than 10% of
total revenue.

ENVIRONMENTAL MATTERS

SIZE="2">We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the Comprehensive Environmental Response, Compensation, and Liability Act;

STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 







  

the Resources Conservation and Recovery Act;

 







  

the Clean Air Act;

 







  

the Federal Water Pollution Control Act; and

 







  

the Toxic Substances Control Act.

SIZE="2">In addition to the federal laws and regulations, states and other countries where we do business may have numerous environmental, legal, and regulatory requirements by which we must abide. We evaluate and address the environmental impact of
our operations by assessing and remediating contaminated properties in order to avoid future liabilities and complying with environmental, legal, and regulatory requirements. On occasion, we are involved in specific environmental claims, including
the remediation of properties we own or have operated, as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has programs in place to maintain environmental compliance and to prevent the
occurrence of environmental contamination.

We do not expect costs related to these remediation activities to have a material adverse
effect on our consolidated financial position, results of operations or cash flows. Accrued liabilities for environmental matters were $0.1 million as of December 31, 2007, and $0.1 million as of December 31, 2006 for the remediation of
one of our owned properties.

TRANSACTIONS WITH RELATED PARTIES

SIZE="2">Turnkey E & P Inc.

Robert M. Tessari is Chairman of the Board and President of Turnkey E & P Inc.
(“Turnkey”) and serves on our Board of Directors and was our founder and former Chief Executive Officer and Chief Technology Officer. On November 16, 2007, TESCO, Turnkey and Mr. Tessari entered into a Consulting Agreement and
Intellectual Property Rights Assignment (the “Consulting Agreement”), effective as of July 16, 2007. The Agreement provides that Turnkey will make Mr. Tessari available to provide consulting services to us from time to time and
provide reasonable assistance in testing and developing our products and services. The term of the Consulting Agreement is for three years from its effective date and shall thereafter automatically renew for successive one year terms unless any
party gives 180 days’ written notice of termination prior to the renewal date. As consideration, Turnkey will (i) be reimbursed for all reasonable, ordinary and necessary expenses incurred by Mr. Tessari and (ii) will receive
preferred customer pricing on our products as follows:

 







  

For purchased products for Turnkey’s internal use, Turnkey shall receive preferred customer pricing equal to the lesser of (a) our direct cost plus ten
percent (10%) or (b) eighty-five percent (85%) of the lowest price charged to another one of our customers that is not an affiliate. In the event Turnkey can demonstrate that it can build a consumable product of ours at a
substantially lower cost than ours, Turnkey may offer to us the right to provide such product at such lower price. If we choose not to provide such product at such price, Turnkey may manufacture such product and pay us a royalty of 10% of
Turnkey’s manufacturing cost.

 







  

For rented products for Turnkey’s internal use, the preferred customer day rate pricing shall be calculated as the sum of (a) our direct manufacturing
cost of the product divided by 730 plus (b) 10%. Turnkey guarantees a minimum of 200 rental days per year for each rented product.

 


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In addition, in the event that Turnkey proposes development of a product or service (the “New
Technology”) that we do not want to design, test and/or commercialize, Turnkey shall have a limited, nonexclusive, nontransferable license to develop, manufacture and use the New Technology for its own internal purposes. If we subsequently
decide to manufacture the New Technology, we shall give notice to Turnkey, and Turnkey shall thereafter be obliged to purchase any additional products containing the New Technology from us at the prices set forth above. In that event, we shall repay
Turnkey three times the documented development cost of the New Technology. All intellectual property rights in any way related to inventions made or conceived or reduced to practice within the oilfield services field pursuant to the Consulting
Agreement will belong to us. During 2007, Turnkey purchased $0.7 million of products and services from us pursuant to the Consulting Agreement.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%;padding-bottom:3px;line-Height:95%; vertical-align:top">During 2007 prior to the effective date of the Consulting Agreement discussed above and 2006,
Turnkey purchased other CASING DRILLING®-related and other services and equipment from us in the amount of $1.9 million and $2.2 million, respectively. The prices we charged Turnkey prior
to July 16, 2007 were on terms similar to those that we charge other third parties. After that date, Turnkey was charged rates as specified in the Consulting Agreement. Also, during 2006, we provided drilling rigs to our CASING DRILLINGFACE="Times New Roman" SIZE="1">®
customers which we had leased from a third party. The crews for these drilling rigs were provided to us by Turnkey pursuant to a Rig Personnel Supply Agreement. Turnkey charged us $5.1 million
to supply these drilling rig crews in 2006 which represents the actual cost incurred by Turnkey plus a 15% markup. The Rig Personnel Supply Agreement terminated in late 2006. Prior to the effective date of the Consulting Agreement discussed above,
we believe that the prices we charged Turnkey and Turnkey charged us were on terms similar to those that would have been available from other third parties.

FACE="Times New Roman" SIZE="2">In 2005, we sold four drilling rigs to Turnkey for proceeds of $35.0 million plus warrants exercisable over a course of two years to purchase one million shares of Turnkey stock at a price of C$6.00. We received a
fairness opinion related to the sale of the rigs to Turnkey and as such believe that the terms of the rig sale were comparable to those that would have been available from other third parties. We did not exercise the warrants prior to their
expiration in December 2007 and therefore we recognized a $1.2 million loss related to the fair value of the warrants when they were received.

St.
Mary Land & Exploration Company

Our President and Chief Executive Officer is a member of the Board of Directors of St.
Mary Land & Exploration Company (“St. Mary”). St. Mary is engaged in the exploration, development, acquisition and production of natural gas and oil in the U.S. During 2007 and 2006, St. Mary purchased $0.1 million and $0.6
million, respectively, in Top Drive rental and Casing Services from us. We believe that the prices we charged St. Mary were on terms similar to those provided to other third parties.

FACE="Times New Roman" SIZE="2">Helix Energy Solutions Group, Inc.

Our Chief Financial Officer is a member of the Board of
Directors of Helix Energy Solutions Group, Inc. (“Helix”). Helix is an international offshore contract services provider and oil and gas exploration, development and production company. During 2007, Helix purchased $0.1 million in Casing
Services from us. We believe that the prices we charged Helix were on terms similar to those provided to other third parties.

Bennett Jones LLP

Additionally, our corporate counsel in Canada is Bennett Jones LLP. One of our directors is a partner at Bennett Jones LLP. During
2007 and 2006, we paid approximately $0.4 million and $0.4 million, respectively, for services from Bennett Jones LLP, excluding reimbursement by us of patent filing fees and other expenses. We believe that the rates we paid Bennett Jones LLP for
services are on terms similar to those that would have been available from other third parties.

 


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SIGNIFICANT ACCOUNTING POLICIES

FACE="Times New Roman" SIZE="2">The preparation and presentation of our financial statements requires management to make estimates that significantly affect the results of operations and financial position reflected in the financial statements. In
making these estimates, management applies accounting policies and principles that it believes will provide the most meaningful and reliable financial reporting. Management considers the most significant of these estimates and their impact to be:

Revenue Recognition—We recognize revenues when the earnings process is complete and collectibility is reasonably assured. We
recognize revenues from the sale of equipment when title, risk of loss and physical possession of the equipment is transferred to the customer, with no right of return. For sales transactions where title and risk of loss have transferred to the
customer but the supporting documentation does not meet all of the criteria for revenue recognition prior to the product being in the physical possession of the customer, the recognition of the revenues and related inventory costs from their
transactions are required to be deferred until the customer takes physical possession of the equipment. For service and rental activities, we recognize revenues as the services are rendered based upon agreed daily, hourly or job rates.


We provide product warranties on equipment sold pursuant to manufacturing contracts and provide for the anticipated cost of our warranties in cost of
sales when sales revenue is recognized. The accrual of warranty costs is an estimate based upon historical experience and upon specific warranty issues as they arise. We periodically review our warranty provision to assess its adequacy in the light
of actual warranty costs incurred. Because the warranty accrual is an estimate, it is reasonably possible that future warranty issues could arise that could have a significant impact on our financial statements.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Foreign Currency Translation—The U.S. dollar is the functional currency for all of our worldwide operations except for our operations in
Canada. For foreign operations where the local currency is the functional currency, specifically our Canadian operations, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at end-of-period exchange rates, and
the resulting translation adjustments are reported, net of their related tax effects, as a component of accumulated other comprehensive income in shareholders’ equity. Assets and liabilities denominated in currencies other than the functional
currency are remeasured into the functional currency prior to translation into U.S. dollars, and the resulting exchange gains and losses are included in income in the period in which they occur. Income and expenses are translated into U.S. dollars
at the average exchange rates in effect during the period.

Deferred Revenues—We generally require customers to pay a
non-refundable deposit for a portion of the sales price for top drive units with their order. These customer deposits are deferred until the customer takes title, risk of loss and physical possession of the product.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Accounting for Stock Options—We recognize compensation expense on options granted to employees and directors. This compensation expense is
based on the theoretical fair value of each option at its grant date, the estimation of which requires management to make assumptions about the future volatility of our stock price, future interest rates and the timing of employees’ decisions
to exercise their options.

Allowance for Doubtful Accounts Receivable—We perform ongoing credit evaluations of customers and
grant credit based upon past payment history, financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry
conditions. Many of our customers are located in international areas that are inherently subject to risks of economic, political and civil instabilities, which may impact management’s ability to collect those accounts receivable. The main
factors in determining the allowance needed for accounts receivable are customer bankruptcies, delinquency, and management’s estimate of ability to collect.

FACE="Times New Roman" SIZE="2">Excess and Obsolete Inventory Provisions—Quantities of inventory on hand are reviewed periodically to ensure they remain active part numbers and the quantities on hand are not excessive based on usage
patterns and

 


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known changes to equipment or processes. Significant or unanticipated changes in business conditions could impact the amount and timing of any additional
provision for excess or obsolete inventory that may be required.

Impairment of long-lived assets, goodwill and
intangibles
—Long-lived assets, which include property, plant and equipment, investments, goodwill and intangible and other assets, comprise a substantial portion of our assets. The carrying value of these assets is periodically reviewed for
impairment or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. This requires management to forecast future cash flows to be derived from the utilization of these assets based upon assumptions
about future business conditions or technological developments. Significant, unanticipated changes in circumstances could make these assumptions invalid and require changes to the carrying value of our long-lived assets.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Income Taxes—We use the liability method which takes into account the differences between financial statement treatment and tax treatment of
certain transactions, assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the tax asset will not be realized. Estimates of future taxable income and ongoing tax
planning have been considered in assessing the utilization of available tax losses and credits. Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with our
deferred tax assets.

RECENT ACCOUNTING PRONOUNCEMENTS

FACE="Times New Roman" SIZE="2">In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141 R, “Business Combinations (a revision of Statement No. 141). This Statement
applies to all transactions or other events in which an entity obtains control of one or more businesses, including those combinations achieved without the transfer of consideration. This Statement retains the fundamental requirements in Statement
No. 141 that the acquisition method of accounting be used for all business combinations. This Statement expands the scope to include all business combinations and requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at their fair values as of the acquisition date. Additionally, FASB No. 141R changes the way entities account for business combinations achieved in stages by requiring the identifiable assets and
liabilities to be measured at their full fair values. Additionally, contractual contingencies and contingent consideration shall be measured at fair value at the acquisition date. Also acquisition-related transaction costs are to be expensed in the
period incurred. This Statement is effective on a prospective basis to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.


In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of
ARB No.51.”
This Statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, this Statement requires that consolidated net income include the amounts attributable to both
the parent and the noncontrolling interest. This Statement is effective for interim periods beginning on or after December 15, 2008. We are currently evaluating the impact, if any, that the adoption of this Statement will have on our
consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109
” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adopted the provisions of FIN
No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, we recognized no material

 


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adjustment in our accrual for uncertain tax positions. At the date of adoption, we had an accrual for uncertain tax positions of $1.4 million which decreased
to $0.5 million at December 31, 2007. This liability is offset by our net income tax receivables and is included in Prepaid and Other Assets in the accompanying Condensed Consolidated Balance Sheet as we anticipate that these uncertainties will
be resolved in the next twelve months. We recognize interest related to uncertain tax positions in Interest Expense and penalties related to uncertain tax positions are recognized in Other Expense. At January 1, 2007, we had accrued $1.4
million, and at December 31, 2007, we had accrued $0.1 million for the potential payment of interest and penalties on uncertain tax positions.

SIZE="2">In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact, if any, that the adoption of this Statement will have on our consolidated financial statements.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This
statement permits entities to choose to measure financial assets and liabilities, except those that are specifically scoped out of the Statement, at fair value. The election to measure a financial asset or liability at fair value can be made on an
instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in
earnings. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, that the adoption of this Statement will have on our consolidated financial
statements.

SHARE CAPITAL

We have an
unlimited number of Common Shares authorized for issuance. At February 19, 2008, there were 36,846,210 Common Shares issued and outstanding. At December 31, 2007, there were 1,593,962 outstanding options exercisable into Common
Shares.

RECONCILIATION OF U.S. TO CANADIAN GAAP

FACE="Times New Roman" SIZE="2">Significant differences between U.S. and Canadian GAAP are described below. As discussed in Note 2 to the consolidated financial statements, prior to January 1, 2006 our consolidated financial statements were
prepared in accordance with Canadian GAAP. However, in conjunction with the preparation of our financial statements for the year ended December 31, 2006, we have retroactively restated our results of operations and financial position for all
years presented herein to be in compliance with U.S. GAAP. A reconciliation of our consolidated statements of income and consolidated balance sheet between U.S. and Canadian GAAP is provided in Note 15 to the Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K (Financial Statements and Supplementary Data).

The principal differences that result in
material measurement changes in our consolidated financial statements between U.S. and Canadian GAAP are:

 






 (a)Product development costs—Costs of product development that are required to be expensed in the period incurred under U.S. GAAP are capitalized and amortized under Canadian
GAAP.

 






 (b)Investment in marketable securities of affiliates—Under U.S. GAAP, marketable securities held as portfolio investments are carried on the balance sheet at market value at the
balance sheet date. For securities identified as available-for-sale, U.S. GAAP requires that unrealized gains and losses are reflected in shareholders’ equity as a component of accumulated other comprehensive income. However, under Canadian
GAAP unrealized gains and losses on marketable securities are included in income.

 


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 (c)Reduction of capital—In November 1993, we reduced our share capital by $11.0 million to eliminate its accumulated deficit by reducing share capital. U.S. GAAP does not allow
the reduction of capital to be shown in our consolidated financial statements. However, Canadian GAAP allows the reduction of capital to be shown in financial statements.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (d)Adoption of a U.S. accounting principle—During 2006, we determined that we had improperly accounted for stock compensation expense for certain stock option grants in prior
years and identified other accounting errors also relating to prior years. For U.S. GAAP, because these adjustments were not material to any of the years prior to 2006 under the roll-over method, we elected to apply the guidance in SAB No. 108
by adjusting the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment of $0.8 million recorded to retained earnings as of such date. However, under Canadian GAAP the cumulative effect method allowed by
SAB No. 108 is not permitted. Therefore prior year reported amounts have been adjusted to reflect the correction of these misstatements in the applicable year to which they relate.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (e)Debt issue costs—Effective for fiscal years beginning after October 2006, Canadian GAAP requires companies to elect to either (a) expense all debt issue costs as incurred, or
(b) deduct them in establishing the fair value of the principal amount of the debt and amortize using an effective interest rate calculation. Effective January 1, 2007, we elected to expense all debt issue costs as incurred. For Canadian GAAP
purposes, we restated prior year results to reflect the adoption of this accounting standard. Under U.S. GAAP, debt issue costs are deferred as an asset and amortized over the life of the debt term.
STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">In 2007, 2006 and 2005, the primary differences between net income under U.S. GAAP and Canadian GAAP is related to the amortization of product
development costs, the recognition of unrealized gains and losses on the Turnkey warrants, debt issue costs and the prior year errors discussed in “Prior Year Errors and Adjustment to Retained Earnings” that are reflected in the results
for the year in which they relate. These differences in net income did not materially impact the discussion of results of operations discussed above. Following is net income (loss) and earnings per share for each of the three years ended
December 31, 2007 in conformity with U.S. and Canadian GAAP (in thousands, except per share amounts):

 






























































































































   Years Ended December 31,
   2007  2006  2005

Net Income

      

U.S. GAAP

  $32,302  $30,545  $8,050

Canadian GAAP

   31,957   29,411   6,715

Net earnings - per common share (basic)

      

U.S. GAAP

  $0.88  $0.85  $0.23

Canadian GAAP

   0.87   0.82   0.19

Net earnings - per common share (diluted)

      

U.S. GAAP

  $0.86  $0.83  $0.23

Canadian GAAP

   0.85   0.80   0.19

 






ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

SIZE="2">From time to time, we use derivative financial instruments in the management of our foreign currency and interest rate exposures. We do not use derivative financial instruments for trading or speculative purposes and account for all such
instruments using the fair value method. Currency exchange exposures on foreign currency denominated balances and anticipated cash flows may be managed by foreign exchange forward contracts when it is deemed appropriate. Exposures arising from
changes in prevailing levels of interest rates relative to the contractual rates on our debt may be managed by entering into interest rate swap agreements when it is deemed appropriate.

SIZE="1"> 


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At December 31, 2007, we had entered into a series of 25 bi-weekly foreign currency forward
contracts with notional amounts aggregating C$43.8 million at a weighted average exchange rate of 1.00 to hedge approximately 50% of the Canadian dollar requirements of our Canadian manufacturing operations. Although the forward currency
contracts were entered into as an economic hedge of our currency exchange risk, they are not designated as a hedge for accounting purposes. Instead, they are accounted for using a fair value model with changes in each period being recorded in
Foreign Exchange Losses in our Consolidated Statements of Income. Based on quoted market prices as of December 31, 2007 for contracts with similar terms and maturity dates, we recorded an asset of $0.1 million to record these foreign currency
forward contracts at fair value at December 31, 2007, and to recognize the unrealized gain. A one percent change in exchange rates for the Canadian dollar would change the fair value of these forward currency contracts by approximately
$0.4 million.

We were not a party to any derivative financial instruments at December 31, 2006.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The carrying value of cash, investments in short-term commercial paper and other money market instruments, accounts receivable, accounts payable and
accrued liabilities approximate their fair value due to the relatively short-term period to maturity of the instruments.

We have certain
receivables that are not refundable or due within one year. We have reviewed these items, which are included in Intangible and Other Assets, by reference to their terms, including rates of interest earned, and determined that their fair value is not
materially different from their carrying value.

The fair value of our long-term debt depends primarily on current market interest rates
for debt issued with similar maturities by companies with risk profiles similar to ours. The fair value of our long term debt at December 31, 2007 is assumed to be approximately equal to the carrying value since the interest rate floats, based
on prime or LIBOR. A 1% change in interest rates would increase or decrease interest expense $0.8 million annually based on amounts outstanding at December 31, 2007.

FACE="Times New Roman" SIZE="2">Our accounts receivable are principally with oil and gas service and exploration and production companies and are subject to normal industry credit risks.

STYLE="font-size:18px;margin-top:0px;margin-bottom:0px"> 






ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The
financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presented beginning on page F-1.

 






ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">None.

 






ITEM 9A.
CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls
and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the
SEC reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such
information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of December 31, 2007, our Chief Executive Officer and
Chief Financial Officer participated with our management in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2007, our disclosure controls and procedures were effective.

 


49







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Management’s Report on Internal Control Over Financial Reporting

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">A company’s internal control over financial reporting is a process designed by, or under the supervision of, a public company’s Chief Executive
Officer and Chief Financial Officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). A company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment or breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override.

SIZE="2">Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

SIZE="2">Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness
of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).

Based on management’s assessment using the COSO criteria we have
concluded that, as of December 31, 2007, our internal control over financial reporting was effective.

The effectiveness of our
internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report which is included herein.

STYLE="margin-top:18px;margin-bottom:0px">Remediation Of Material Weaknesses

As
disclosed in our 2006 Annual Report on Form 10-K for the year ended December 31, 2006, and in our Quarterly Reports on Form 10-Q for each of the first three quarters of 2007, we reported material weaknesses in our internal control
over financial reporting related to (1) the control environment as to the corporate financial reporting organization’s monitoring and oversight role of our U.S. Casing Services Business Unit, and (2) the overall financial
reporting of our U.S. Casing Services Business Unit, including the complement of personnel, review and approval of manual journal entries, timely reconciliation of financial reporting databases, timely preparation, review and approval of bank
account reconciliations and the existence, accuracy and completeness of fixed asset records. A material weakness is a control deficiency, or combination of control deficiencies in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

As of
December 31, 2007, we had remediated the previously reported material weaknesses in our internal control over financial reporting related to (1) the corporate financial reporting organization’s monitoring and

 


50







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Index to Financial Statements



oversight role of our U.S. Casing Services Business Unit, and (2) the overall financial reporting of our U.S. Casing Services Business Unit, including
the complement of personnel, review and approval of manual journal entries, timely reconciliations of databases and bank account reconciliations and the existence, accuracy and completeness of fixed asset records. In response to the identified
material weaknesses, management, with oversight from our audit committee, dedicated significant resources, including the engagement of consultants to support management, in our efforts to improve our control environment and to remedy the identified
material weaknesses by focusing on (i) expanding our organizational capabilities to improve our control environment; (ii) implementing process changes to strengthen our internal control and monitoring activities; and (iii) placement
of additional staff to complete the account reconciliations timely, thus allowing for proper review and oversight.

Specifically, the
following remedial actions have been undertaken during 2007:

 







  

Redefined roles and enhanced staffing of our U.S. Casing Services Business Unit to ensure proper review and approval of manual journal entries, timely
reconciliation of financial reporting databases and timely preparation, review and approval of bank account reconciliations;

 







  

Implemented enhanced software and tracking systems to support the existence, accuracy and completeness of our accounting records for property plant and equipment
and the related depreciation expense;

 







  

Established a team at our U.S. Casing Services Business Unit focused on developing and implementing improvements in our overall financial reporting for this
business unit; and

 







  

Enhanced the corporate oversight processes, including requiring monthly review of significant accounts at the U.S. Casing Business Unit.

In the third and fourth quarters of 2007, we undertook and completed, as appropriate, our testing to validate compliance
with the enhanced policies, procedures and controls. We conducted this testing over these two quarters in order to be able to demonstrate operating effectiveness over a period of time that is sufficient to support our conclusion with respect to the
effectiveness of our internal control over financial reporting. In reviewing the results from this testing, we have concluded that the internal controls related to (1) the control environment as to the corporate financial reporting
organization’s monitoring and oversight role of our U.S. Casing Services Business Unit and (2) the overall financial reporting of our U.S. Casing Services Business Unit, including the complement of personnel, review and approval of manual
journal entries, timely reconciliation of financial reporting databases, timely preparation, review and approval of bank account reconciliations and the existence, accuracy and completeness of fixed asset records have been significantly improved and
that the above referenced material weaknesses in internal control over financial reporting have been remediated as of December 31, 2007.

SIZE="2">Changes in Internal Control over Financial Reporting

These remediation efforts have changed our internal control
over financial reporting in the fourth quarter of 2007 in a manner that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Other than the efforts taken as described above and the improvements resulting there from, there were no other changes in our internal control over
financial reporting during the quarter ended December 31, 2007 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

STYLE="font-size:18px;margin-top:0px;margin-bottom:0px"> 






ITEM 9B.
OTHER INFORMATION.

None.

STYLE="margin-top:0px;margin-bottom:0px"> 


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PART III

FACE="Times New Roman" SIZE="2">Items 10 through 14 will be included in TESCO’s Proxy Statement for our 2008 Annual Meeting of the Shareholders, and are incorporated herein by reference.

STYLE="font-size:18px;margin-top:0px;margin-bottom:0px"> 






ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

SIZE="2">The information required by this Item will be included under the section captioned “Election of Directors (Proposal 2)” in our Proxy Statement for the 2008 Annual Meeting of Shareholders, which information is incorporated into
this Annual Report by reference.

 






ITEM 11.
EXECUTIVE COMPENSATION.

The information required
by this Item will be included under the sections captioned “Executive Compensation” and “Certain Relationships and Related Transactions” in our Proxy Statement for the 2008 Annual Meeting of Shareholders, which information is
incorporated into this Annual Report by reference.

 






ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">The information required by this Item will be included under the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in our Proxy Statement for the 2008 Annual Meeting of Shareholders, which information is incorporated into this Annual Report by reference.

 






ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

FACE="Times New Roman" SIZE="2">The information required by this Item will be included under the section captioned “Certain Relationships and Related Transactions” in our Proxy Statement for the 2008 Annual Meeting of Shareholders, which
information is incorporated into this Annual Report by reference.

 






ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.

SIZE="2">Information required by this Item will be included under the section captioned “Ratification of the Appointment of the Independent Auditors” in our Proxy Statement for the 2008 Annual Meeting of Shareholders, which information is
incorporated into this Annual Report by reference.

 


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PART IV

 






ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 























































































































































(a) The following documents are filed as part of this report:

 

   
  (1)  Financial Statements   
        Page No.
   


Report of Independent Registered Public Accounting Firm

  F-2
   


Consolidated Balance Sheets - December 31, 2007 and 2006

  F-3
   


Consolidated Statements of Income for each of the three years in the period ended December 31, 2007

  F-4
   


Consolidated Statements of Shareholders’ Equity for each of three years in the period ended December 31, 2007

  F-5
   


Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007

  F-6
   


Notes to Consolidated Financial Statements

  F-7
 (2)  

Financial Statement Schedules

  
        Page No.
   


Schedule II—Valuation and Qualifying Accounts

  F-40

 





(b)Exhibits

 

































































Exhibit No.

  

Description

3.1*   Articles of Amalgamation of Tesco Corporation, dated December 1, 1993 (incorporated by reference to Exhibit 4.1 to Tesco Corporation’s Registration Statement on Form S-8 (File No.
333-139610) filed with the SEC on December 22, 2006)
3.2*    Amended and Restated By-laws of Tesco Corporation (incorporated by reference to Exhibit 3.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22,
2007)
4.1*    Form of Common Share Certificate for Tesco Corporation (incorporated by reference to Exhibit 4 to Tesco Corporation’s Annual Report on Form 10-K filed with the SEC on March 29,
2007)
4.2    Shareholder Rights Plan Agreement between Tesco Corporation and Computershare Trust Company Of Canada, as Rights Agent, Amended and Restated as of May 13, 2005
10.1*   Amended and Restated Credit Agreement dated as of June 5, 2007 by and among the Registrant, Tesco US Holding LP, the lender parties thereto and JP Morgan Chase Bank, NA (incorporated by
reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on June 7, 2007)
10.2*+  Amendment to Credit Agreement dated December 21, 2007 by and among the Registrant, Tesco US Holding LP, the lender parties thereto and JP Morgan Chase Bank, NA (incorporated by reference to
Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on December 26, 2007)
10.3*    Consulting Agreement and Intellectual Property Rights Assignment by and between Tesco Corporation, Turnkey E&P Inc. and Robert M. Tessari (incorporated by reference to Exhibit 10.1 to Tesco
Corporation’s Current Report on Form 8-K filed with the SEC on November 19, 2007)
10.4*    Lease between NK IV Tech, Ltd. and Tesco Corporation (US), for the lease of the corporate headquarters of Tesco Corporation, dated July 6, 2006 (incorporated by reference to Exhibit 10.9 to
Tesco Corporation’s Annual Report on Form 10-K filed with the SEC on March 29, 2007)

 


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Index to Financial Statements

























































































































































Exhibit No.

  

Description

10.5*      Preferred Supplier Agreement between Tesco Corporation and Turnkey E&P Inc., dated December 13, 2005 (incorporated by reference to Exhibit 10.4 to Tesco Corporation’s Annual Report
on Form 10-K filed with the SEC on March 29, 2007)
10.6*+  Form of Officer Indemnity Agreement (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on August 21, 2007)
10.7*+  Form of Director Indemnity Agreement (incorporated by reference to Exhibit 10.2 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on August 21, 2007)
10.8*+  Employment Agreement between Tesco Corporation and Julio M. Quintana dated September 1, 2004 (incorporated by reference to Exhibit 10.11 to Tesco Corporation’s Annual Report on
Form 10-K filed with the SEC on March 29, 2007)
10.9*+  Change of Control Agreement between Tesco Corporation and Julio M. Quintana, dated September 1, 2004 (incorporated by reference to Exhibit 10.12 to Tesco Corporation’s Annual Report on Form
10-K filed with the SEC on March 29, 2007)
10.10*+  Employment Agreement between Tesco Corporation and Anthony Tripodo, dated January 5, 2007 (incorporated by reference to Exhibit 10.13 to Tesco Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2006)
10.11*+  Change of Control Agreement between Tesco Corporation and Anthony Tripodo, dated January 5, 2007 (incorporated by reference to Exhibit 10.14 to Tesco Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2006)
10.12*+  Employment Agreement between Tesco Corporation and Anthony Tripodo, dated December 31, 2007 (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K
filed with the SEC on January 2, 2008)
10.13*+  Employment Agreement between Tesco Corporation and Nigel Lakey (incorporated by reference to Exhibit 10.2 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on
January 2, 2008)
10.14*+  Employment Agreement between Tesco Corporation and Jeffrey Foster (incorporated by reference to Exhibit 10.3 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on
January 2, 2008)
10.15*+  Amended and Restated Tesco Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 10.1 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22, 2007)
10.16+  Form of Instrument of Grant under Amended and Restated Tesco Corporation 2005 Incentive Plan
10.17*+  Tesco Corporation Employee Stock Savings Plan (incorporated by reference to Exhibit 10.2 to Tesco Corporation’s Current Report on Form 8-K filed with the SEC on May 22,
2007)
10.18+  Tesco Corporation Short Term Incentive Plan 2006
10.19+  Tesco Corporation Short Term Incentive Plan 2007
10.20+  Tesco Corporation Short Term Incentive Plan 2008
14*  Tesco Corporation Business Ethics Policy (incorporated by reference to Exhibit 14 to Tesco Corporation’s Annual Report on Form 10-K filed with the SEC on March 29, 2007)
21  Subsidiaries of Tesco Corporation
23  Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP
24  Power of Attorney (included on signature page)

 


54







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Exhibit No.

  

Description

31.1  Rule 13a-14(a)/15d-14(a) Certification, executed by Julio M. Quintana, President and Chief Executive Officer of Tesco Corporation
31.2  Rule 13a-14(a)/15d-14(a) Certification, executed by Anthony Tripodo, Executive Vice President and Chief Financial Officer of Tesco Corporation
32  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Julio M. Quintana, President and Chief Executive Officer of
Tesco Corporation and Anthony Tripodo, Executive Vice President and Chief Financial Officer of Tesco Corporation

 





*Incorporated by reference

+ Management contract or compensatory plan or
arrangement

 


55







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Index to Financial Statements


SIGNATURES

FACE="Times New Roman" SIZE="2">Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

























TESCO CORPORATION
By: /S/    JULIO M. QUINTANA
 

Julio M. Quintana, President and

FACE="Times New Roman" SIZE="1">Chief Executive Officer

Date: February 26, 2008

POWER OF ATTORNEY

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Julio M. Quintana and James A. Lank, and each
of them, acting individually, as his attorney-in-fact, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on
Form 10-K and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

FACE="Times New Roman" SIZE="2">Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


 




















































































































Signature

  

Title

 

Date

/S/    JULIO M. QUINTANA


Julio M. Quintana

  President and Chief Executive Officer and Director (Principal Executive Officer) February 26, 2008

/s/    ANTHONY TRIPODO

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Anthony Tripodo

  Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) February 26, 2008

/s/    NORMAN W. ROBERTSON

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Norman W. Robertson

  Chairman of the Board February 26, 2008

/s/    FRED J. DYMENT

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Fred J. Dyment

  Director February 26, 2008

/s/    GARY L. KOTT

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Gary L. Kott

  Director February 26, 2008

/s/    R. VANCE MILLIGAN

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">R. Vance Milligan

  Director February 26, 2008

/s/    PETER K. SELDIN

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Peter K. Seldin

  Director February 26, 2008

/s/    MICHAEL W. SUTHERLIN

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Michael W. Sutherlin

  Director February 26, 2008

/s/    ROBERT M. TESSARI

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Robert M. Tessari

  Director February 26, 2008

/s/    CLIFTON T. WEATHERFORD

STYLE="margin-top:0px;margin-bottom:1px" ALIGN="center">Clifton T. Weatherford

  Director February 26, 2008

 


56







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Index to Financial Statements



INDEX TO FINANCIAL STATEMENTS OF TESCO CORPORATION

AND CONSOLIDATED SUBSIDIARIES

STYLE="font-size:12px;margin-top:0px;margin-bottom:0px"> 








































   Page


Report of Independent Registered Public Accounting Firm

  F-2


Consolidated Balance Sheets—December 31, 2007 and 2006

  F-3


Consolidated Statements of Income for each of the three years in the period ended December 31, 2007

  F-4


Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2007

  F-5


Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007

  F-6


Notes to Consolidated Financial Statements

  F-7


Schedule II—Valuation and Qualifying Accounts

  F-40

 


F-1







Table of Contents


Index to Financial Statements




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of TESCO Corporation:

In our opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial position of TESCO Corporation and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in Management’s Report on Internal Control Over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule,
and on the Company’s internal control over financial reporting based on our audits (which were integrated audits in 2007 and 2006). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 8 to the consolidated
financial statements, the Company changed the manner in which it accounts for uncertainty in income taxes in 2007. As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based
payments in 2006.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

PricewaterhouseCoopers LLP

Houston, Texas

February 26, 2008

 


F-2







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Index to Financial Statements





TESCO CORPORATION

CONSOLIDATED BALANCE SHEETS

ALIGN="center">(In Thousands, except share amounts)

 






















































































































































































































































































































































































   December 31,
   2007  2006
ASSETS    

CURRENT ASSETS

    

Cash and Cash Equivalents

  $23,072  $14,923

Accounts Receivable Trade, net

   87,903   80,445

Inventories, net

   117,425   85,442

Deferred Income Taxes

   12,000   11,059

Prepaid and Other Assets

   12,785   7,055
        

Total Current Assets

   253,185   198,924

Property, Plant and Equipment, net

   169,812   132,343

Goodwill

   29,829   16,602

Deferred Income Taxes

   13,635   14,912

Intangible and Other Assets

   10,210   9,375
        

TOTAL ASSETS

  $476,671  $372,156
        
LIABILITIES & SHAREHOLDERS’ EQUITY    

CURRENT LIABILITIES

    

Current Portion of Long Term Debt

  $9,991  $9,991

Accounts Payable

   49,724   27,840

Deferred Revenues

   9,825   13,522

Warranty Reserves

   3,045   9,391

Income Taxes Payable

   —     3,775

Accrued and Other Current Liabilities

   18,190   22,496
        

Total Current Liabilities

   90,775   87,015

Long Term Debt

   70,803   34,509

Deferred Income Taxes

   10,187   11,203
        

Total Liabilities

   171,765   132,727
        

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY

    

First Preferred Shares; no par value; unlimited shares authorized; none issued and outstanding at December 31, 2007 or
2006

   —     —  

Second Preferred Shares; no par value; unlimited shares authorized; none issued and outstanding at December 31, 2007 or
2006

   —     —  

Common Shares; no par value; unlimited shares authorized; 36,844,763 and 36,019,246 shares issued and outstanding at December 31, 2007
and 2006, respectively

   154,332   139,266

Contributed Surplus

   15,972   13,348

Retained Earnings

   89,846   57,544

Accumulated Comprehensive Income

   44,756   29,271
        

Total Shareholders’ Equity

   304,906   239,429
        

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

  $476,671  $372,156
        

The accompanying notes are an integral part of these consolidated financial statements.


 


F-3







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Index to Financial Statements





TESCO CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

STYLE="margin-top:0px;margin-bottom:0px" ALIGN="center">(In Thousands, except per share and share information)

 


















































































































































































































































































































































































































































































































































































































   For the years ended December 31, 
   2007  2006  2005 

REVENUE

    

Products

  $191,927  $129,279  $51,289 

Services

   270,451   256,898   151,459 
             
   462,378   386,177   202,748 

OPERATING EXPENSES

    

Cost of Sales and Services

    

Products

   148,666   104,086   47,020 

Services

   209,178   179,108   114,862 
             
   357,844   283,194   161,882 

Selling, General and Administrative

   44,003   36,124   28,117 

Research and Engineering

   12,011   5,956   3,925 

Gain on Sale of Operating Assets

   —     —     (8,922)
             

Total Operating Expenses

   413,858   325,274   185,002 
             

OPERATING INCOME

   48,520   60,903   17,746 

OTHER EXPENSE

    

Interest expense

   4,324   4,542   2,038 

Interest income

   (1,150)  (1,331)  (611)

Foreign exchange losses

   2,899   1,068   2,425 

Other expense (income)

   (18)  3,016   (488)
             

Total Other Expense

   6,055   7,295   3,364 
             

INCOME BEFORE INCOME TAXES

   42,465   53,608   14,382 

INCOME TAXES

   10,163   23,309   6,332 
             

NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE

   32,302   30,299   8,050 

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of tax

   —     246   —   
             

NET INCOME

  $32,302  $30,545  $8,050 
             

Earnings per share:

    

Basic

  $0.88  $0.85  $0.23 

Diluted

  $0.86  $0.83  $0.23 

Weighted average number of shares:

    

Basic

   36,604,338   35,847,266   35,173,264 

Diluted

   37,403,932   36,593,409   35,628,543 

The accompanying notes are an integral part of these consolidated financial statements.

 


F-4







Table of Contents


Index to Financial Statements





TESCO CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND

STYLE="margin-top:0px;margin-bottom:0px" ALIGN="center">COMPREHENSIVE INCOME

(In
Thousands, except share amounts)

 





















































































































































































































































































































































































































































































































































































































































































































































  Common
Stock Shares
 Common
Shares
 Contributed
Surplus
 Retained
Earnings
  Accumulated
Comprehensive
Income (Loss)
  Total 

Balances at December 31, 2004

 34,957,680 $124,044 $6,336 $19,786  $27,677  $177,843 

Components of Comprehensive Income:

      

Net Income

 —    —    —    8,050   —     8,050 

Currency Translation Adjustment

 —    —    —    —     6,544   6,544 

Unrealized Gains on Securities, net of tax

 —    —    —    —     1,143   1,143 
         

Total Comprehensive Income

       15,737 

Issuance and Exercise of Stock Options

 562,059  6,958  2,927  —     —     9,885 
                    

Balances at December 31, 2005

 35,519,739  131,002  9,263  27,836   35,364   203,465 

Adoption of SAB No. 108

 —    —    497  (837)  —     (340)

Components of Comprehensive Income:

      

Net Income

 —    —    —    30,545   —     30,545 

Currency Translation Adjustment

 —    —    —    —     (5,194)  (5,194)

Unrealized Losses on Securities, net of tax

 —    —    —    —     (899)  (899)
         

Total Comprehensive Income

       24,452 

Issuance and Exercise of Stock Options

 499,507  8,264  3,588  —     —     11,852 
                    

Balances at December 31, 2006

 36,019,246  139,266  13,348  57,544   29,271   239,429 

Components of Comprehensive Income:

      

Net Income

 —    —    —    32,302   —     32,302 

Currency Translation Adjustment

 —    —    —    —     15,322   15,322 

Unrealized Losses on Securities, net of tax

 —    —    —    —     (404)  (404)

Reclassification Adjustment for Losses on Securities Included in Net Income, net of tax

 —    —    —    —     567   567 
         

Total Comprehensive Income

       47,787 

Issuance and Exercise of Stock Options

 825,517  15,066  2,624  —     —     17,690 
                    

Balances at December 31, 2007

 36,844,763 $154,332 $15,972 $89,846  $44,756  $304,906 
                    

The accompanying notes are an integral part of these consolidated financial statements.

 


F-5







Table of Contents


Index to Financial Statements





TESCO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

STYLE="margin-top:0px;margin-bottom:0px" ALIGN="center">(In Thousands)

 




































































































































































































































































































































































































































































































































































































































































































































































































































   For the Years Ended December 31, 
   2007  2006  2005 

OPERATING ACTIVITIES

    

Net Income

  $32,302  $30,545  $8,050 

Adjustments to Reconcile Net Income to

    

Cash Provided by Operating Activities:

    

Cumulative effect of accounting change, net of tax

   —     (246)  —   

Depreciation and amortization

   27,033   22,490   17,265 

Stock compensation expense

   6,521   5,747   3,620 

Deferred income taxes

   4,266   (5,182)  (2,030)

Amortization of financial items

   419   386   39 

Gain on sale of operating assets

   (15,180)  (4,500)  (9,519)

Gain on sale of other assets

   —     —     (1,853)

Changes in components of working capital, net of acquisition

    

Increase in accounts receivable trade

   (4,877)  (24,744)  (24,760)

Increase in inventories

   (19,597)  (45,378)  (11,600)

Decrease in income taxes recoverable

   —     1,607   1,889 

(Increase) decrease in prepaid and other current assets

   (3,396)  (809)  6,100 

Increase in accounts payable

   20,192   5,659   11,921 

Increase (decrease) in accrued and other current liabilities

   (18,350)  15,590   15,709 

Increase (decrease) in income taxes payable

   (3,069)  3,775   —   

Other

   (1,001)  —     —   
             

Net cash provided by operating activities

   25,263   4,940   14,831 
             

INVESTING ACTIVITIES

    

Additions to property, plant and equipment

   (65,033)  (46,196)  (15,117)

Proceeds on sale of operating assets

   20,998   6,715   46,706 

Proceeds on sale of other assets

   —     —     8,568 

Acquisitions of business, net of cash acquired

   (21,505)  —     (57,527)

(Increase) decrease in accounts receivable on sale of rigs

   —     6,000   (6,000)

Decrease in accounts payable-purchase of Bo Gray assets

   —     —     (2,975)

Other

   1,109   271   (224)
             

Net cash used in investing activities

   (64,431)  (33,210)  (26,569)
             

FINANCING ACTIVITIES

    

Issuances of debt

   102,085   51,883   54,761 

Repayments of debt

   (65,791)  (48,661)  (29,262)

Proceeds from exercise of stock options

   12,460   6,385   6,398 

Debt issuance costs

   (511)  —     (1,723)

Excess tax benefit associated with equity based compensation

   651   142   —   
             

Net cash provided by financing activities

   48,894   9,749   30,174 
             

Effect of foreign exchange losses on cash balances

   (1,577)  (1,952)  1,275 
             

Net Increase (decrease) in Cash and Cash Equivalents

   8,149   (20,473)  19,711 

Net Cash and Cash Equivalents, beginning of period

   14,923   35,396   15,685 
             

Net Cash and Cash Equivalents, end of period

  $23,072  $14,923  $35,396 
             

Supplemental Cash Flow Information

    

Cash paid during the year for interest

  $2,939  $2,972  $905 

Cash paid during the year for income taxes

  $13,749  $23,905  $9,030 

Cash receipts for interest

  $3,557  $1,278  $1,151 

Cash receipts for income taxes

  $4,467  $751  $3,149 

The accompanying notes are an integral part of these consolidated financial statements.


 


F-6







Table of Contents


Index to Financia