##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission file number: 000-19580
 T-3 ENERGY SERVICES, INC.
  Delaware
    
    76-0697390(State or Other Jurisdiction 
of Incorporation or Organization)
    
    (IRS Employer
Identification No.)7135 Ardmore, Houston, Texas
(Address of Principal Executive Offices)
    
    77054
(Zip Code)
 (713) 996-4110
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 FORM 10-Q
 Item
    
    
    PagePART I1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005
    
    
    1Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    52. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    143. Quantitative and Qualitative Disclosures about Market Risk
    
    
    244. Controls and Procedures
    
    
    24PART II1. Legal Proceedings
    
    
    251A. Risk Factors
    
    
    252. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    323. Defaults Upon Senior Securities
    
    
    324. Submission of Matters to a Vote of Security Holders
    
    
    325. Other Information
    
    
    326. Exhibits
    
    
    32iCertification of CEO pursuant to Rule 13-14a/15d-14aCertification of CFO Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands except for share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,242
    
    
    $
    1,162Accounts receivable  trade, net
    
    
    28,529
    
    
    
    21,527Inventories
    
    
    27,614
    
    
    
    18,268Notes receivable, current portion
    
    
    734
    
    
    
    480Deferred income taxes
    
    
    2,118
    
    
    
    1,731Prepaids and other current assets
    
    
    1,082
    
    
    
    5,887Total current assets
    
    
    62,319
    
    
    
    49,055Property and equipment, net
    
    
    24,113
    
    
    
    18,652Notes receivable, less current portion
    
    
    35
    
    
    
    327Goodwill, net
    
    
    71,130
    
    
    
    69,607Other intangible assets, net
    
    
    2,681
    
    
    
    2,325Other assets
    
    
    645
    
    
    
    822Total assets
    
    $
    160,923
    
    
    $
    140,788LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable  trade
    
    $
    15,763
    
    
    $
    12,943Accrued expenses and other
    
    
    12,778
    
    
    
    9,439Current maturities of long-term debt
    
    
    4,511
    
    
    
    36Total current liabilities
    
    
    33,052
    
    
    
    22,418Long-term debt, less current maturities
    
    
    
    
    
    
    7,058Other long-term liabilities
    
    
    46
    
    
    
    82Deferred income taxes
    
    
    3,045
    
    
    
    2,018Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value, 5,000,000 and 25,000,000 shares
authorized at September 30, 2006 and December 31, 2005,
respectively, no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.001 par value, 20,000,000 and 25,000,000 shares
authorized at September 30, 2006 and December 31, 2005,
respectively, 10,736,871 shares issued and outstanding
at September 30, 2006 and 10,581,986 shares issued and
outstanding at December 31, 2005
    
    
    11
    
    
    
    11Warrants, 327,862 issued and outstanding at September 30, 2006
and 332,862 issued and outstanding at December 31, 2005
    
    
    644
    
    
    
    644Additional paid-in capital
    
    
    125,145
    
    
    
    123,175Retained deficit
    
    
    (2,217
    )
    
    
    (15,420
    )Accumulated other comprehensive income
    
    
    1,197
    
    
    
    802Total stockholders equity
    
    
    124,780
    
    
    
    109,212Total liabilities and stockholders equity
    
    $
    160,923
    
    
    $
    140,788
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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (in thousands except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Products
    
    $
    33,439
    
    
    $
    16,464
    
    
    $
    86,903
    
    
    $
    41,554Services
    
    
    10,744
    
    
    
    9,327
    
    
    
    31,028
    
    
    
    29,05844,183
    
    
    
    25,791
    
    
    
    117,931
    
    
    
    70,612Cost of revenues:Products
    
    
    21,273
    
    
    
    10,634
    
    
    
    56,412
    
    
    
    27,087Services
    
    
    6,082
    
    
    
    6,140
    
    
    
    17,452
    
    
    
    18,42427,355
    
    
    
    16,774
    
    
    
    73,864
    
    
    
    45,511Gross profit
    
    
    16,828
    
    
    
    9,017
    
    
    
    44,067
    
    
    
    25,101Operating expenses
    
    
    8,723
    
    
    
    5,578
    
    
    
    23,056
    
    
    
    15,714Income from operations
    
    
    8,105
    
    
    
    3,439
    
    
    
    21,011
    
    
    
    9,387Interest expense
    
    
    234
    
    
    
    146
    
    
    
    744
    
    
    
    1,219Interest income
    
    
    (6
    )
    
    
    (15
    )
    
    
    (18
    )
    
    
    (69
    )Other (income) expense, net
    
    
    (205
    )
    
    
    (10
    )
    
    
    (681
    )
    
    
    19Income from continuing operations before
provision for income taxes
    
    
    8,082
    
    
    
    3,318
    
    
    
    20,966
    
    
    
    8,218Provision for income taxes
    
    
    2,978
    
    
    
    1,214
    
    
    
    7,613
    
    
    
    3,052Income from continuing operations
    
    
    5,104
    
    
    
    2,104
    
    
    
    13,353
    
    
    
    5,166Loss from discontinued operations, net of tax
    
    
    (20
    )
    
    
    (3,856
    )
    
    
    (150
    )
    
    
    (3,781
    )Net income (loss)
    
    $
    5,084
    
    
    $
    (1,752
    )
    
    $
    13,203
    
    
    $
    1,385Basic earnings (loss) per common share:Continuing operations
    
    $
    .48
    
    
    $
    .20
    
    
    $
    1.26
    
    
    $
    .49Discontinued operations
    
    $
    
    
    
    $
    (.37
    )
    
    $
    (.01
    )
    
    $
    (.36
    )Net income (loss) per common share
    
    $
    .48
    
    
    $
    (.17
    )
    
    $
    1.25
    
    
    $
    .13Diluted earnings (loss) per common share:Continuing operations
    
    $
    .46
    
    
    $
    .20
    
    
    $
    1.23
    
    
    $
    .48Discontinued operations
    
    $
    
    
    
    $
    (.36
    )
    
    $
    (.01
    )
    
    $
    (.35
    )Net income (loss) per common share
    
    $
    .46
    
    
    $
    (.16
    )
    
    $
    1.22
    
    
    $
    .13Weighted average common shares outstanding:Basic
    
    
    10,625
    
    
    
    10,582
    
    
    
    10,601
    
    
    
    10,582Diluted
    
    
    11,003
    
    
    
    10,716
    
    
    
    10,881
    
    
    
    10,659
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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    13,203
    
    
    $
    1,385Adjustments to reconcile net income to net cash
provided by operating activities:Loss from discontinued operations, net of tax
    
    
    150
    
    
    
    3,781Bad debt expense
    
    
    78
    
    
    
    55Depreciation and amortization
    
    
    2,550
    
    
    
    2,412Amortization of deferred loan costs
    
    
    186
    
    
    
    235Write-off of deferred loan costs
    
    
    
    
    
    
    370Loss on sale of assets
    
    
    41
    
    
    
    23Deferred taxes
    
    
    628
    
    
    
    (1,989
    )Employee stock-based compensation expense
    
    
    1,308
    
    
    
    Amortization of stock compensation
    
    
    1
    
    
    
    3Excess tax benefits from stock-based compensation
    
    
    (217
    )
    
    
    Changes in assets and liabilities:Accounts receivable  trade
    
    
    (6,621
    )
    
    
    (3,415
    )Inventories
    
    
    (9,216
    )
    
    
    (5,461
    )Prepaids and other current assets
    
    
    4,812
    
    
    
    (203
    )Other assets
    
    
    (26
    )
    
    
    19Accounts payable  trade
    
    
    2,652
    
    
    
    2,920Accrued expenses and other
    
    
    3,185
    
    
    
    4,251Net cash provided by operating activities
    
    
    12,714
    
    
    
    4,386Cash flows from investing activities:Purchases of property and equipment
    
    
    (7,436
    )
    
    
    (1,043
    )Proceeds from sales of property and equipment
    
    
    164
    
    
    
    53Cash paid for acquisitions, net of cash acquired
    
    
    (2,248
    )
    
    
    Collections on notes receivable
    
    
    38
    
    
    
    707Net cash used in investing activities
    
    
    (9,482
    )
    
    
    (283
    )Cash flows from financing activities:Net borrowings (repayments) under revolving credit facility
    
    
    (2,547
    )
    
    
    8,790Payments on long-term debt
    
    
    (36
    )
    
    
    (15,033
    )Proceeds from exercise of stock options
    
    
    443
    
    
    
    Excess tax benefits from stock-based compensation
    
    
    217
    
    
    
    Net cash used in financing activities
    
    
    (1,923
    )
    
    
    (6,243
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (58
    )
    
    
    15Cash flows of discontinued operations (Revised  See note 1):Operating cash flows
    
    
    (171
    )
    
    
    2,725Investing cash flows
    
    
    
    
    
    
    (172
    )Financing cash flows
    
    
    
    
    
    
    Net cash provided by (used in) discontinued operations
    
    
    (171
    )
    
    
    2,553Net increase in cash and cash equivalents
    
    
    1,080
    
    
    
    428Cash and cash equivalents, beginning of period
    
    
    1,162
    
    
    
    95Cash and cash equivalents, end of period
    
    $
    2,242
    
    
    $
    523
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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 (in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    5,084
    
    
    $
    (1,752
    )
    
    $
    13,203
    
    
    $
    1,385Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (22
    )
    
    
    631
    
    
    
    395
    
    
    
    434Comprehensive income (loss)
    
    $
    5,062
    
    
    $
    (1,121
    )
    
    $
    13,598
    
    
    $
    1,819
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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION
  Stock-Based Compensation
  New Accounting Pronouncements
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2. BUSINESS COMBINATIONS AND DISPOSITIONS
 Business Combinations
    Fair value of tangible and intangible assets,
net of cash acquired
    
    $
    1,327Goodwill recorded
    
    
    1,309Total liabilities assumed
    
    
    (388
    )Common stock issued
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    2,248
 Dispositions
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3. INVENTORIES
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    5,459
    
    
    $
    4,420Work in process
    
    
    12,154
    
    
    
    6,891Finished goods and component parts
    
    
    10,001
    
    
    
    6,957$
    27,614
    
    
    $
    18,268
 4. DEBT
  5. EARNINGS (LOSS) PER SHARE
   Three Months EndedSeptember 30,2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    5,104
    
    
    $
    2,104Loss from discontinued operations
    
    
    (20
    )
    
    
    (3,856
    )Net income (loss)
    
    $
    5,084
    
    
    $
    (1,752
    )Denominator:Weighted average common shares outstanding  basic
    
    
    10,625
    
    
    
    10,582Shares for dilutive stock options, restricted stock and
warrants
    
    
    378
    
    
    
    134Weighted average common shares outstanding and
assumed conversions  diluted
    
    
    11,003
    
    
    
    10,716
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Three Months EndedSeptember 30,2006
    
    
    2005Basic earnings (loss) per common share:Continuing operations
    
    $
    .48
    
    
    $
    .20Discontinued operations
    
    
    
    
    
    
    (.37
    )Net income (loss) per common share
    
    $
    .48
    
    
    $
    (.17
    )Diluted earnings (loss) per common share:Continuing operations
    
    $
    .46
    
    
    $
    .20Discontinued operations
    
    
    
    
    
    
    (.36
    )Net income (loss) per common share
    
    $
    .46
    
    
    $
    (.16
    )
  Nine Months EndedSeptember 30,2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    13,353
    
    
    $
    5,166Loss from discontinued operations
    
    
    (150
    )
    
    
    (3,781
    )Net income
    
    $
    13,203
    
    
    $
    1,385Denominator:Weighted average common shares outstanding  basic
    
    
    10,601
    
    
    
    10,582Shares for dilutive stock options, restricted stock and
warrants
    
    
    280
    
    
    
    77Weighted average common shares outstanding and
assumed conversions  diluted
    
    
    10,881
    
    
    
    10,659Basic earnings (loss) per common share:Continuing operations
    
    $
    1.26
    
    
    $
    .49Discontinued operations
    
    
    (.01
    )
    
    
    (.36
    )Net income per common share
    
    $
    1.25
    
    
    $
    .13Diluted earnings (loss) per common share:Continuing operations
    
    $
    1.23
    
    
    $
    .48Discontinued operations
    
    
    (.01
    )
    
    
    (.35
    )Net income per common share
    
    $
    1.22
    
    
    $
    .13
  6. SEGMENT INFORMATION
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(dollars in thousands)PressureControl
    
    Corporate
    
    ConsolidatedThree months ended September 30:2006Revenues
    
    $
    44,183
    
    
    $
    
    
    
    $
    44,183Depreciation and amortization
    
    
    610
    
    
    
    286
    
    
    
    896Income (loss) from operations
    
    
    11,369
    
    
    
    (3,264
    )
    
    
    8,105Capital expenditures
    
    
    1,982
    
    
    
    225
    
    
    
    2,2072005Revenues
    
    $
    25,791
    
    
    $
    
    
    
    $
    25,791Depreciation and amortization
    
    
    587
    
    
    
    208
    
    
    
    795Income (loss) from operations
    
    
    5,240
    
    
    
    (1,801
    )
    
    
    3,439Capital expenditures
    
    
    212
    
    
    
    84
    
    
    
    296
 (dollars in thousands)PressureControl
    
    Corporate
    
    ConsolidatedNine months ended September 30:2006Revenues
    
    $
    117,931
    
    
    $
    
    
    
    $
    117,931Depreciation and amortization
    
    
    1,790
    
    
    
    760
    
    
    
    2,550Income (loss) from operations
    
    
    29,576
    
    
    
    (8,565
    )
    
    
    21,011Capital expenditures
    
    
    6,547
    
    
    
    889
    
    
    
    7,4362005Revenues
    
    $
    70,612
    
    
    $
    
    
    
    $
    70,612Depreciation and amortization
    
    
    1,807
    
    
    
    605
    
    
    
    2,412Income (loss) from operations
    
    
    14,367
    
    
    
    (4,980
    )
    
    
    9,387Capital expenditures
    
    
    741
    
    
    
    302
    
    
    
    1,043
 7. COMMITMENTS AND CONTINGENCIES
 th
 st
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8. STOCKHOLDERS EQUITY
 Common Stock
  Warrants
  10




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Additional Paid-In Capital
  9. STOCK-BASED COMPENSATION
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income (loss), as reported
    
    $
    (1,752
    )
    
    $
    1,385Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
    
    
    (95
    )
    
    
    383Net income (loss), as adjusted
    
    $
    (1,847
    )
    
    $
    1,768Basic EPS:As reported
    
    $
    (.17
    )
    
    $
    .13As adjusted
    
    $
    (.17
    )
    
    $
    .17Diluted EPS:As reported
    
    $
    (.16
    )
    
    $
    .13As adjusted
    
    $
    (.17
    )
    
    $
    .17
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Stock Option Awards
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2006Expected volatility
    
    
    52.79
    %
    
    
    52.79
    %Risk-free interest rate
    
    
    4.42
    %
    
    
    4.42
    %Expected term (in years)
    
    
    4
    
    
    
    4
  Weighted
    
    
    Weighted
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    ValueOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    (In Thousands)Outstanding at January 1, 2006
    
    
    536,053
    
    
    $
    8.99Granted
    
    
    402,000
    
    
    
    12.25Exercised
    
    
    (54,885
    )
    
    
    8.07Forfeited
    
    
    (23,312
    )
    
    
    8.45Outstanding at September 30, 2006
    
    
    859,856
    
    
    $
    10.59
    
    
    
    7.74
    
    
    $
    8,668Vested or expected to vest at
September 30, 2006
    
    
    824,859
    
    
    $
    10.59
    
    
    
    7.70
    
    
    $
    8,333Exercisable at September 30, 2006
    
    
    345,189
    
    
    $
    9.74
    
    
    
    6.01
    
    
    $
    4,084
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Restricted Stock Awards
   WeightedAverageGrant DateRestricted Stock
    
    Shares
    
    
    Fair ValueNon-Vested at January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    100,000
    
    
    
    17.60Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Non-Vested at September 30, 2006
    
    
    100,000
    
    
    $
    17.60
  13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 General
    Recent Developments
   Strategy
  
    
    Expand our manufacturing capacity through facility expansions and improvements. We have
expanded our manufacturing capacity to increase the volume and number of products we
manufacture, with an emphasis on our pressure and flow control product line. We have
invested approximately $4.9 million during 2006 on this expansion effort, which includes
increasing our BOP manufacturing capacity from ten to 25 units per month by upgrading and
expanding our machining capabilities at our existing facilities, along with our expansion
into East Texas, Casper and Indianapolis by opening four facilities
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during that period. We expect to invest up to $4 million over the remainder of 2006 and
2007 on our future expansion plans, which include:
 
    
    establishing manufacturing capacity for 12 multi-bowl wellhead units per month;
    
    opening one facility for our wellhead product line;
    
    opening two facilities for our pipeline product line; and
    
    expanding our elastomer producing capacity in North America.
 
    
    Continue new product development. Since April 2003, we have introduced 29 new
products, and we will continue to focus on new product development across all of our
product lines, with a continued focus on pressure and flow control products and more
recently on wellhead products. To support this effort, we presently have an engineering
department staff consisting of 21 employees and contract personnel compared to eight
employees at September 30, 2005.
    
    Expand our geographic areas of operation. We intend to expand our geographic areas of
operation, with particular focus on field services for our wellhead and pipeline product
lines. We are expanding our wellhead and pipeline repair and remanufacturing services by
establishing facilities in areas we believe will have high drilling activity, such as the
Barnett Shale in North Texas, the Cotton Valley trend in the East Texas Basin, the
Fayetteville Shale in the Arkoma Basin, and the Rocky Mountain and Appalachian regions. For
example, in the first half of 2006, we continued our expansion into the Rocky Mountain
region by acquiring KC Machine LLC, located in Rock Springs, Wyoming, and opening a
facility in Casper, Wyoming. In addition, we expanded into the East Texas Region by
opening two facilities and the Midwest region by opening a facility in Indianapolis,
Indiana.
    
    Pursue strategic acquisitions and alliances. Our acquisition strategy will focus on
broadening our markets and existing product offerings. For example, in January 2006, we
acquired KC Machine LLC, located in Rock Springs, Wyoming. In addition, in July 2005, we
entered into a joint participation agreement with SYMMSA, a subsidiary of GRUPO R, a
conglomerate of companies that provides services to the energy and industrial sectors in
Mexico. We will continue to seek similar strategic acquisition and alliance opportunities
in the future.
 How We Generate Our Revenue
     15




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How We Evaluate Our Operations
  
    
    revenue and facility output;
    
    material and labor expenses as a percentage of revenue;
    
    selling, general and administrative expenses as a percentage of revenue;
    
    EBITDA; and
    
    financial and operational models.
 Revenue and Facility Output
  Material and Labor Expenses as a Percentage of Revenue
   Selling, General and Administrative Expenses as a Percentage of Revenue
  EBITDA
  
    
    as a measure of operating performance that assists us in comparing our performance on a
consistent basis because it removes the impact of our capital structure and asset base
from our operating results;
    
    as a measure for budgeting and for evaluating actual results against our budgets;
    
    to assess compliance with financial ratios and covenants included in our senior credit facility;
    
    in communications with lenders concerning our financial performance; and
    
    to evaluate the viability of potential acquisitions and overall rates of return.
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Financial and Operational Models
  Loss Management
 Customer Satisfaction.
 Employee Productivity
 Management System Compliance
 How We Manage Our Operations
  
    
    safety and environmental management systems;
    
    quality management systems;
    
    statistical tracking systems; and
    
    inventory turnover rates.
 Safety and Environmental Management Systems
    17




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Quality Management Systems
  Statistical Tracking Systems
  Inventory Turnover Rates
  Critical Accounting Policies and Estimates
   New Accounting Pronouncements
  18




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Outlook
  WTI
    
    Henry Hub
    
    United States
    
    Canada
    
    InternationalQuarter Ended:
    
    Oil
    
    Gas
    
    Rig Count
    
    Rig Count
    
    Rig CountDecember 31, 2004
    
    $
    48.30
    
    
    $
    7.26
    
    
    
    1,249
    
    
    
    420
    
    
    
    862March 31, 2005
    
    $
    49.73
    
    
    $
    6.47
    
    
    
    1,279
    
    
    
    521
    
    
    
    876June 30, 2005
    
    $
    53.05
    
    
    $
    6.95
    
    
    
    1,336
    
    
    
    241
    
    
    
    916September 30, 2005
    
    $
    63.19
    
    
    $
    9.64
    
    
    
    1,428
    
    
    
    497
    
    
    
    911December 31, 2005
    
    $
    60.00
    
    
    $
    12.80
    
    
    
    1,478
    
    
    
    572
    
    
    
    929March 31, 2006
    
    $
    63.27
    
    
    $
    7.91
    
    
    
    1,519
    
    
    
    665
    
    
    
    896June 30, 2006
    
    $
    70.41
    
    
    $
    6.65
    
    
    
    1,632
    
    
    
    282
    
    
    
    913September 30, 2006
    
    $
    70.42
    
    
    $
    6.17
    
    
    
    1,719
    
    
    
    494
    
    
    
    941
 www.bakerhughes.com www.eia.doe.gov
    Results of Operations
 Three Months ended September 30, 2006 Compared with Three Months ended September 30, 2005
 Revenues.
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Cost of Revenues.
 Operating Expenses.
 Interest Expense.
 Other (Income) Expense, net
 Income Taxes.
 Income from Continuing Operations.
 Discontinued Operations.
 20




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Nine Months ended September 30, 2006 Compared with Nine Months ended September 30, 2005
 Revenues.
 Cost of Revenues.
 Operating Expenses.
 Interest Expense.
 Other (Income) Expense, net
 Income Taxes.
 21




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Income from Continuing Operations.
 Discontinued Operations.
 Liquidity and Capital Resources
  Net Cash Provided by Operating Activities.
 Net Cash Used In Investing Activities.
 Net Cash Used In Financing Activities.
 Net Cash Provided by (Used In) Discontinued Operations.
 Principal Debt Instruments.
 22




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23




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Payments Due by PeriodLess than 1
    
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    YearsLong-term debt
    
    $
    4,511
    
    
    $
    4,511
    
    
    $
    
    
    
    $
    
    
    
    $
    Letters of credit
    
    
    190
    
    
    
    67
    
    
    
    123
    
    
    
    
    
    
    
    Operating leases
    
    
    5,636
    
    
    
    1,819
    
    
    
    2,862
    
    
    
    944
    
    
    
    11Total contractual obligations
    
    $
    10,337
    
    
    $
    6,397
    
    
    $
    2,985
    
    
    $
    944
    
    
    $
    11
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls Over Financial Reporting
  24




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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   If we are unable to successfully manage our growth and implement our business plan, our results of
operations will be adversely affected.
  
    
    inability to integrate operations between existing and new or expanded facilities;
    
    lack of a sufficient number of qualified technical and operating personnel;
    
    shortage of operating equipment and raw materials necessary to operate our expanded
business; and
    
    managing the increased costs associated with our expansion.
 Our business depends on spending by the oil and gas industry, and this spending and our
business may be adversely affected by industry conditions that are beyond our control.
  
    
    the level of drilling activity;
    
    the level of oil and gas production;
    
    the demand for oil and gas related products;
    
    domestic and worldwide economic conditions;
    
    political instability in the Middle East and other oil producing regions;
    
    the actions of the Organization of Petroleum Exporting Countries;
    
    the price of foreign imports of oil and gas, including liquefied natural gas;
    
    natural disasters or weather conditions, such as hurricanes;
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##### Table of Contents




    
    technological advances affecting energy consumption;
    
    the level of oil and gas inventories;
    
    the cost of producing oil and gas;
    
    the price and availability of alternative fuels;
    
    merger and divestiture activity among oil and gas producers; and
    
    governmental regulation.
  A decline in or substantial volatility of oil and gas prices could adversely affect the demand
and prices for our products and services.
   We rely on a few key employees whose absence or loss could disrupt our operations or be
adverse to our business.
  Our industry has recently experienced shortages in the availability of qualified personnel.
Any difficulty we experience replacing or adding qualified personnel could adversely affect our
business.
  Shortages of raw materials may restrict our operations.
  26




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##### Table of Contents



We intend to expand our business through strategic acquisitions. Our acquisition
strategy exposes us to various risks, including those relating to difficulties in identifying
suitable acquisition opportunities and integrating businesses and the potential for increased
leverage or debt service requirements.
  
    
    unanticipated costs and exposure to unforeseen liabilities;
    
    difficulty in integrating the operations and assets of the acquired businesses;
    
    potential loss of key employees and customers of the acquired company;
    
    our ability to properly maintain effective internal controls over an acquired company; and
    
    risk of entering markets in which we have limited prior experience.
   The oilfield service industry in which we operate is highly competitive, which may result in a
loss of market share or a decrease in revenue or profit margins.
  If we do not develop and commercialize new competitive products, our revenue may decline.
  
    
    design and commercially produce products that meet the needs of our customers;
    
    successfully market new products; and
    
    protect our proprietary designs from our competitors.
  27




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##### Table of Contents



The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of
our goodwill.
  We may be faced with product liability claims.
  Liability to customers under warranties may materially and adversely affect our earnings.
  Uninsured or underinsured claims or litigation or an increase in our insurance premiums could
adversely impact our results.
  Our operations are subject to stringent environmental laws and regulations that may expose us
to significant costs and liabilities.
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We will be subject to political, economic and other uncertainties as we expand our international
operations.
  
    
    political, social and economic instability;
    
    currency fluctuations; and
    
    government regulation that is beyond our control.
  If we are unable to complete our assessment of the adequacy of our internal control over
financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could
lose confidence in the reliability of our financial statements, which could result in a decrease in
the value of our common stock.
  29




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##### Table of Contents



Risks Related to Our Common Stock
 The market price of our common stock may be volatile or may decline regardless of our
operating performance.
  
    
    actual or anticipated variations in quarterly operating results;
    
    announcements of technological advances by us or our competitors;
    
    current events affecting the political and economic environment in the United States;
    
    conditions or trends in our industry, including demand for our products and services,
technological advances and governmental regulations;
    
    litigation involving or affecting us;
    
    changes in financial estimates by us or by any securities analysts who might cover our stock; and
    
    additions or departures of our key personnel.
  Our largest stockholder is able to exercise significant influence over our company, and its
interests may conflict with those of our other stockholders.
  We may incur increased costs as a result of no longer being a controlled company.
  30




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##### Table of Contents



Two of our directors may have conflicts of interest because they are also directors or officers of
First Reserve Corporation. The resolution of these conflicts of interest may not be in our or our
stockholders best interests.
  We renounced any interest in specified business opportunities, and First Reserve Fund VIII and its
director designees on our board of directors generally will have no obligation to offer us those
opportunities.
  
    
    no member of the First Reserve group or any of those individuals will have any
obligation to communicate or offer the opportunity to us; and
    
    such entity or individual may pursue the opportunity as that entity or
individual sees fit,
  
    
    it was presented to a member of the First Reserve group in that persons
capacity as a director or officer of T-3; or
    
    the opportunity was identified solely through the disclosure of information by
or on behalf of T-3.
  Our ability to issue preferred stock could adversely affect the rights of holders of our common
stock.
  31




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##### Table of Contents



Certain provisions in our charter documents have anti-takeover effects.
  Because we have no plans to pay any dividends for the foreseeable future, investors must look
solely to stock appreciation for a return on their investment in us.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit Number
    
    Identification of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief Executive
Officer)32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief Financial
Officer)
 32




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##### Table of Contents



SIGNATURES
 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, on the 9th day of November 2006.
 T-3 ENERGY SERVICES, INC.By:
    /s/ MICHAEL T. MINOMichael T. Mino(Chief Financial Officer and Vice President) 33




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Identification of Exhibit31.1*
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended31.2*
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended32.1*
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief
Executive Officer)32.2*
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (Chief
Financial Officer)
 
 *
    
    Filed herewith.