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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Quarterly Period ended March 31, 2005o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Transition Period from  to
 Commission file number: 000-19580 T-3 ENERGY SERVICES, INC.  Delaware
    
    76-0697390(State or Other Jurisdiction
    
    (IRS Employerof Incorporation or Organization)
    
    Identification No.)7135 Ardmore, Houston, Texas
(Address of Principal Executive Offices)
    
    77054
(Zip Code)
 (Registrants telephone number, including area code): (713) 996-4110 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ At May 5, 2005, the registrant had 10,581,986 shares of common stock outstanding.




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TABLE OF CONTENTS FORM 10-Q PART I Item
    
    Page1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Comprehensive Income for the Three Months
Ended March 31, 2005 and 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    52. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    103. Quantitative and Qualitative Disclosures about Market Risks
    
    
    194. Controls and Procedures
    
    
    19PART II1. Legal Proceedings
    
    
    202. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    203. Defaults Upon Senior Securities
    
    
    204. Submission of Matters to a Vote of Security Holders
    
    
    205. Other Information
    
    
    206. Exhibits
    
    
    20Certification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
  i




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands except for share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    566
    
    
    $
    95Accounts receivable  trade, net
    
    
    19,510
    
    
    
    21,145Inventories
    
    
    18,181
    
    
    
    16,399Notes receivable, current portion
    
    
    689
    
    
    
    1,173Deferred income taxes
    
    
    2,189
    
    
    
    2,086Prepaids and other current assets
    
    
    2,203
    
    
    
    3,194Total current assets
    
    
    43,338
    
    
    
    44,092Property and equipment, net
    
    
    19,336
    
    
    
    19,632Notes receivable, less current portion
    
    
    365
    
    
    
    365Goodwill, net
    
    
    73,070
    
    
    
    73,229Other intangible assets, net
    
    
    3,238
    
    
    
    3,445Other assets
    
    
    1,503
    
    
    
    1,578Total assets
    
    $
    140,850
    
    
    $
    142,341LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable  trade
    
    $
    11,150
    
    
    $
    10,383Accrued expenses and other
    
    
    7,265
    
    
    
    6,428Current maturities of long-term debt
    
    
    45
    
    
    
    44Total current liabilities
    
    
    18,460
    
    
    
    16,855Long-term debt, less current maturities
    
    
    15,024
    
    
    
    18,824Other long-term liabilities
    
    
    118
    
    
    
    130Deferred income taxes
    
    
    2,280
    
    
    
    2,216Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value, 25,000,000 shares
authorized, no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.001 par value, 50,000,000 shares authorized,
10,581,986 shares issued and outstanding at March 31, 2005
and December 31, 2004
    
    
    11
    
    
    
    11Warrants, 517,862 issued and outstanding at
March 31, 2005 and December 31, 2004
    
    
    853
    
    
    
    853Additional paid-in capital
    
    
    122,963
    
    
    
    122,962Retained deficit
    
    
    (19,163
    )
    
    
    (19,933
    )Accumulated other comprehensive income
    
    
    304
    
    
    
    423Total stockholders equity
    
    
    104,968
    
    
    
    104,316Total liabilities and stockholders equity
    
    $
    140,850
    
    
    $
    142,341
 The accompanying notes are an integral part of these condensed consolidated financial statements. 1




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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 EndedMarch 31,2005
    
    
    2004Revenues:Products
    
    $
    20,725
    
    
    $
    17,434Services
    
    
    8,677
    
    
    
    5,85629,402
    
    
    
    23,290Cost of revenues:Products
    
    
    12,178
    
    
    
    12,462Services
    
    
    8,474
    
    
    
    3,54320,652
    
    
    
    16,005Gross profit
    
    
    8,750
    
    
    
    7,285Operating expenses
    
    
    6,915
    
    
    
    5,589Income from operations
    
    
    1,835
    
    
    
    1,696Interest expense
    
    
    531
    
    
    
    778Interest income
    
    
    23
    
    
    
    14Other (income) expense, net
    
    
    16
    
    
    
    (15
    )Income from continuing operations before provision for income taxes
    
    
    1,311
    
    
    
    947Provision for income taxes
    
    
    574
    
    
    
    360Income from continuing operations
    
    
    737
    
    
    
    587Income (loss) from discontinued operations, net of tax
    
    
    33
    
    
    
    (124
    )Net income
    
    $
    770
    
    
    $
    463Basic earnings (loss) per common share:Continuing operations
    
    $
    .07
    
    
    $
    .05Discontinued operations
    
    
    
    
    
    
    (.01
    )Net income per common share
    
    $
    .07
    
    
    $
    .04Diluted earnings (loss) per common share:Continuing operations
    
    $
    .07
    
    
    $
    .05Discontinued operations
    
    
    
    
    
    
    (.01
    )Net income per common share
    
    $
    .07
    
    
    $
    .04Weighted average common shares outstanding:Basic
    
    
    10,582
    
    
    
    10,582Diluted
    
    
    10,634
    
    
    
    10,592
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (in thousands)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    770
    
    
    $
    463Adjustments to reconcile net income to net cash
provided by operating activities:(Income) loss from discontinued operations, net of tax
    
    
    (33
    )
    
    
    124Bad debt expense
    
    
    79
    
    
    
    128Depreciation and amortization
    
    
    878
    
    
    
    630Amortization of deferred loan costs
    
    
    90
    
    
    
    413Loss on sale of assets
    
    
    18
    
    
    
    36Deferred taxes
    
    
    295
    
    
    
    425Amortization of stock compensation
    
    
    1
    
    
    
    2Changes in assets and liabilities:Accounts receivable  trade
    
    
    1,539
    
    
    
    2,586Inventories, net
    
    
    (1,796
    )
    
    
    (1,301
    )Prepaids and other current assets
    
    
    988
    
    
    
    89Notes receivable
    
    
    484
    
    
    
    68Other assets
    
    
    (29
    )
    
    
    6Accounts payable  trade
    
    
    761
    
    
    
    730Accrued expenses and other
    
    
    849
    
    
    
    (736
    )Assets held for sale, net
    
    
    
    
    
    
    (32
    )Net cash provided by operating activities
    
    
    4,894
    
    
    
    3,631Cash flows from investing activities:Purchases of property and equipment
    
    
    (472
    )
    
    
    (216
    )Proceeds from sales of property and equipment
    
    
    54
    
    
    
    91Net cash used in investing activities
    
    
    (418
    )
    
    
    (125
    )Cash flows from financing activities:Net borrowings (repayments) under revolving credit facility
    
    
    (3,788
    )
    
    
    1,199Payments on long-term debt
    
    
    (11
    )
    
    
    (12,246
    )Net cash used in financing activities
    
    
    (3,799
    )
    
    
    (11,047
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (3
    )
    
    
    Net cash provided by (used in) discontinued operations
    
    
    (203
    )
    
    
    7,775Net increase in restricted cash
    
    
    
    
    
    
    (99
    )Net increase in cash and cash equivalents
    
    
    471
    
    
    
    135Cash and cash equivalents, beginning of period
    
    
    95
    
    
    
    17Cash and cash equivalents, end of period
    
    $
    566
    
    
    $
    152
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 (in thousands)
 Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    770
    
    
    $
    463Other comprehensive income:Foreign currency translation adjustment
    
    
    (119
    )
    
    
    Comprehensive income
    
    $
    651
    
    
    $
    463
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation have been included. These financial statements include
the accounts of T-3 Energy Services, Inc. and its subsidiaries (T-3 or the Company). All
significant intercompany balances and transactions have been eliminated in consolidation.
Operating results for the three months ended March 31, 2005, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2005. For further information, refer
to the consolidated financial statements and footnotes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. Certain reclassifications were made to
previously reported amounts in the consolidated financial statements and notes to reflect
discontinued operations and to make them consistent with the current presentation format. Stock-Based Compensation At March 31, 2005, the Company had a stock option plan, which is described more fully in the
Companys Annual Report on Form 10-K for the year ended December 31, 2004. The Company accounts
for that plan under the recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and earnings per common
share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation to stock-based employee plans (dollars in thousands, except per share
data): Three Months EndedMarch 31,2005
    
    
    2004Net income, as reported
    
    $
    770
    
    
    $
    463Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects
    
    
    (66
    )
    
    
    (70
    )Net income, as adjusted
    
    $
    704
    
    
    $
    393Basic EPS:As reported
    
    $
    .07
    
    
    $
    .04As adjusted
    
    $
    .07
    
    
    $
    .04Diluted EPS:As reported
    
    $
    .07
    
    
    $
    .04As adjusted
    
    $
    .07
    
    
    $
    .04
 For the purpose of estimating the fair value disclosures above, the fair value of each stock
option has been estimated on the grant date with a Black-Scholes option pricing model. The
following assumptions for the three months ended March 31, 2005 and 2004 were computed on a
weighted average basis: risk-free interest rate of 4.18% and 4.12%, respectively, expected
volatility of 38.91% and 42.44%, respectively, expected life of 4 years for each period and no
expected dividends. The effects of applying SFAS No. 123 may not be indicative of future amounts
since additional future awards are anticipated and the estimation of values involves subjective
assumptions that may vary materially as a result of actual events. 5




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2. DISCONTINUED OPERATIONS During the first quarter of 2004, the Company sold certain non-core assets within its Products
segment. The Company received $7.4 million in cash at closing that was immediately used to pay
down the term loan under its senior credit facility. During the second and third quarters of 2004, the Company sold all of the remaining assets
within its Products segment, except for certain assets related to the Companys custom coatings
business, along with certain assets within its Pressure Control segment for approximately $2.5
million. The assets sold constituted businesses and thus their results of operations have been reported
as discontinued operations during 2005 and 2004. Due to the sale of substantially all of the
assets of the Companys Products segment and since the Companys custom coatings business is
insignificant to the consolidated results of the Company and also has similar economic
characteristics, customers and products to the Companys Pressure Control segment, the Company
realigned its operating segments during 2004. The three historical reporting segments of Pressure
Control, Products and Distribution now operate under two reporting segments: Pressure Control and
Distribution. Accordingly, all historical segment results reflect the new operating structure.
See Note 2 to the Companys consolidated financials statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 for additional information. Net revenues from discontinued operations for the three months ended March 31, 2005 and 2004
were $0 million and $6.3 million, respectively. For the same periods, income (loss) before
provision (benefit) for income taxes was approximately $0.1 million and $(0.2) million,
respectively. 3. INVENTORIES Inventories consist of the following (dollars in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    3,664
    
    
    $
    3,197Work in process
    
    
    4,251
    
    
    
    2,985Finished goods and component parts
    
    
    10,266
    
    
    
    10,217$
    18,181
    
    
    $
    16,399
 4. DEBT On September 30, 2004, the Company amended and restated its senior credit facility and
subordinated term loan. The amended and restated senior credit facility provides for a $50 million
revolving line of credit, maturing September 30, 2007, that can increase by up to $25 million (not
to exceed a total commitment of $75 million). The senior credit facility consists of a revolving
credit facility that includes a swing line subfacility up to $5 million and a letter of credit
subfacility up to $5 million. The Company has capitalized $0.6 million of deferred loan costs in
connection with the amended and restated senior credit facility. The Company expects to use the
proceeds from any advances made pursuant to the senior credit facility to refinance indebtedness,
for working capital purposes, capital expenditures, to fund acquisitions and for general corporate
purposes. The applicable interest rate of the senior credit facility is governed by the Companys
leverage ratio and ranges from prime plus 0.75% or LIBOR plus 1.75% to prime plus 2.00% or LIBOR
plus 3.00%. The Company is required to prepay the senior credit facility under certain
circumstances with the net cash proceeds of certain asset sales, insurance proceeds and equity
issuances subject to certain conditions. The senior credit facility provides, among other
covenants and restrictions, that the Company comply with certain financial covenants, including a
limitation on capital expenditures, a minimum fixed charge coverage ratio, a minimum consolidated
net worth, maximum leverage and senior leverage ratios. As of March 31, 2005, the Company was in
compliance with the covenants under the senior credit facility. The senior credit facility is
collateralized by substantially all of the Companys assets. 6




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The amended and restated subordinated term loan increased the Companys $12 million
subordinated term loan with an additional advance of $3 million. The Company has capitalized $0.3
million of deferred loan costs in connection with the amended and restated subordinated term loan.
The subordinated term loan bears interest at a fixed rate of 10% per annum and matures on September
30, 2008. The subordinated term loan provides, among other restrictions, that the Company comply
with certain financial covenants, including a limitation on capital expenditures, a minimum fixed
charge coverage ratio, a minimum consolidated net worth, maximum leverage and senior leverage
ratios. Also, the Company is not permitted to make principal payments on the subordinated term
loan while the senior credit facility is outstanding. As of March 31, 2005, the Company was in
compliance with the covenants under the subordinated term loan. The subordinated term loan is
collateralized by a second lien on substantially all of the Companys assets. 5. NEWLY ISSUED ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB 43,
Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. This statement requires that abnormal amounts be
recognized as current period charges in all circumstances. In addition, SFAS 151 requires that the
allocation of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15,
2005. The Company does not believe the implementation of SFAS 151 will have a material impact on
its financial statements. In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which is a revision
of SFAS No. 123, Accounting for Stock-Based Compensation. Generally, the approach to accounting
for share-based payments in SFAS 123 (R) is similar to the approach described in SFAS 123.
However, SFAS 123 (R) requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair values. SFAS 123
(R) is effective at the beginning of the annual period beginning after June 15, 2005. The Company
expects to adopt the standard on January 1, 2006. The Company is currently evaluating the impact
this will have, but does not expect it to have a material impact on its financial condition,
results of operations and cash flows. In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1) and FASB Staff
Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (FSP 109-2). FSP 109-1 clarifies the
guidance in SFAS No. 109 and provides that the new deduction for qualified domestic production
activities under the American Jobs Creation Act of 2004 (the Act) should be accounted for as a
special deduction under SFAS 109, not as a tax-rate reduction, because the deduction is contingent
on performing activities identified in the Act. FSP 109-2 addresses the effect of the Acts
one-time deduction for qualifying repatriations of foreign earnings. FSP 109-2 allows additional
time for companies to determine whether any foreign earnings will be repatriated under the Acts
one-time deduction for repatriated earnings and how the Act affects whether undistributed earnings
continue to qualify for SFAS 109s exception from recognizing deferred tax liabilities. FSP 109-1
and FSP 109-2 were both effective upon issuance. The Company is currently evaluating the impact
the adoption of FSP 109-1 and FSP 109-2 will have on its financial position, results of operations
or cash flows. 7




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6. EARNINGS (LOSS) PER SHARE Basic net income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted net income (loss)
per common share is the same as basic but includes dilutive stock options and warrants using the
treasury stock method. The following tables reconcile the numerators and denominators of the basic and diluted per
common share computations for net income (loss) for the three months ended March 31, 2005 and 2004,
as follows (in thousands except per share data): Three Months EndedMarch 31,2005
    
    
    2004Numerator:Income from continuing operations
    
    $
    737
    
    
    $
    587Income (loss) from discontinued operations
    
    
    33
    
    
    
    (124
    )Net income
    
    $
    770
    
    
    $
    463Denominator:Weighted average common shares outstanding  basic
    
    
    10,582
    
    
    
    10,582Shares for dilutive stock options
    
    
    52
    
    
    
    10Weighted average common shares outstanding and
Assumed conversions  diluted
    
    
    10,634
    
    
    
    10,592Basic earnings (loss) per common share:Continuing operations
    
    $
    .07
    
    
    $
    .05Discontinued operations
    
    
    
    
    
    
    (.01
    )Net income per common share
    
    $
    .07
    
    
    $
    .04Diluted earnings (loss) per common share:Continuing operations
    
    $
    .07
    
    
    $
    .05Discontinued operations
    
    
    
    
    
    
    (.01
    )Net income per common share
    
    $
    .07
    
    
    $
    .04
 For the three months ended March 31, 2005, there were 294,945 options and 517,862 warrants
that were not included in the computation of diluted earnings per share because their inclusion
would have been anti-dilutive. For the three months ended March 31, 2004, there were 584,379
options and 517,862 warrants that were not included in the computation of diluted earnings per
share because their inclusion would have been anti-dilutive. 7. REPORTABLE SEGMENTS The Companys determination of reportable segments considers the strategic operating units
under which the Company sells various types of products and services to various customers. The accounting policies of the segments are the same as those of the Company. The Company
evaluates performance based on income from operations excluding certain corporate costs not
allocated to the segments. Inter-segment revenues are not material. Substantially all revenues
are from domestic sources and Canada and all assets are held in the United States and Canada. As
discussed in Note 2, the Company sold substantially all of the assets of its Products segment,
except for certain assets related to the Companys custom coatings business, and accordingly, its
results of operations for 2005 and 2004 have been reported as discontinued operations. In 2004,
the Company realigned its operating segments due to the sale of substantially all of the assets of
its Products reporting segment. Since the Companys custom coatings business is insignificant to
the consolidated results of the Company and also has similar economic characteristics, customers
and products to the Pressure Control reporting segment, the three historical reporting segments of
Pressure Control, Products and Distribution now operate under two reporting segments: Pressure
Control and Distribution. Accordingly, all historical segment results reflect the new operating
structure. Segment information for the three months ended 8




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March 31, 2005 and 2004 is as follows: (dollars in thousands)PressureControl
    
    
    Distribution
    
    
    Corporate
    
    
    ConsolidatedThree months ended March 31:2005Revenues
    
    $
    19,782
    
    
    $
    9,620
    
    
    $
    
    
    
    $
    29,402Depreciation and amortization
    
    
    617
    
    
    
    64
    
    
    
    197
    
    
    
    878Income (loss) from operations
    
    
    2,999
    
    
    
    211
    
    
    
    (1,375
    )
    
    
    1,835Capital expenditures
    
    
    366
    
    
    
    50
    
    
    
    56
    
    
    
    4722004Revenues
    
    $
    15,256
    
    
    $
    8,034
    
    
    $
    
    
    
    $
    23,290Depreciation and amortization
    
    
    380
    
    
    
    69
    
    
    
    181
    
    
    
    630Income (loss) from operations
    
    
    2,861
    
    
    
    142
    
    
    
    (1,307
    )
    
    
    1,696Capital expenditures
    
    
    111
    
    
    
    8
    
    
    
    97
    
    
    
    216
 8. CONTINGENCIES The Company is, from time to time, involved in various legal actions arising in the normal
course of business. In December 2001, a lawsuit was filed against the Company in the
14th Judicial District Court of Calcasieu Parish, Louisiana. The lawsuit alleges that
certain equipment purchased from and installed by a wholly owned subsidiary of the Company was
defective in assembly and installation. The plaintiffs have alleged certain damages in excess of
$5 million related to repairs and activities associated with the product failure and have also
claimed unspecified damages with respect to certain expenses, loss of production and damage to the
reservoir. The Company has tendered the defense of this claim under its comprehensive general
liability insurance policy and its umbrella policy. Management does not believe that the outcome
of such legal actions involving the Company will have a material adverse effect on the Companys
financial position, results of operations, or cash flows. The Companys environmental remediation and compliance costs have not been material during any
of the periods presented. T-3 has been identified as a potentially responsible party with respect
to one site designated for cleanup under the Comprehensive Environmental Response Compensation and
Liability Act and similar state laws. The Companys involvement at this site is believed to have
been minimal. Because it is early in the process, no determination of the Companys actual
liability can be made at this time. As such, management has not currently accrued for any future
remediation costs related to this site. However, based upon the Companys involvement with this
site, management does not expect that its share of remediation costs will have a material impact on
its financial position, results of operations and cash flows. In July 2001, the Company discovered preliminary information concerning deep soil
contamination at one of its leased facilities. This preliminary information is limited, and the
contamination source has not yet been identified. The Company has informed the landlord of the
existence of the contamination and has requested that they remediate the property as required by
the lease. Management expects that the landlord will comply with its obligations under the lease to
investigate the environmental condition and take any action required under applicable laws.
Management does not believe that the Company has contributed to or is responsible for remediation
of the site. At March 31, 2005, the Company had $1.3 million of letters of credit outstanding. This
primarily consists of a $1.2 million standby letter of credit issued by Wells Fargo to secure the
HSBC Bank Operating Loan, which is the revolving line of credit used for the Oilco Group of
Canadas (Oilco) daily operating requirements. This letter of credit has an effective date of
December 2, 2004 and a maturity date of June 15, 2005.   9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS General The following discussion of our historical results of operations and financial condition for
the three months ended March 31, 2005 and 2004 should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere in this Form 10-Q and our
financial statements and related managements discussion and analysis of financial condition and
results of operations for the year ended December 31, 2004 included in our Annual Report on Form
10-K. We have historically operated in three segments; however, during 2004, the Company sold
substantially all of the assets of its Products segment, except for certain assets related to the
Companys custom coatings business. Accordingly, the Products segments results of operations have
been reported as discontinued operations. Due to the sale of substantially all of the assets of the
Products segment and since the Companys custom coatings business is insignificant to the
consolidated results of the Company and also has similar economic characteristics, customers and
products to the Pressure Control segment, the Company realigned its operating segments during 2004.
The three historical reporting segments of Pressure Control, Products and Distribution now operate
under two reporting segments: Pressure Control and Distribution. Accordingly, all historical
segment results reflect the new operating structure. Our Pressure Control segment manufactures,
remanufactures and repairs high pressure, severe service products, including valves, chokes,
actuators, blowout preventers, manifolds and wellhead equipment; manufactures accumulators and
rubber goods; and applies custom coatings to customers products used primarily in the oil and gas
industry. Our Distribution segment engages in the specialty distribution of pipes, valves, stud
bolts, gaskets and other ancillary products. Our products and services have historically been sold
primarily to customers in the upstream and downstream oil and gas industry located in the Texas and
Louisiana Gulf Coast region and Canada. The following table sets forth certain statistics that are reflective of recent historical
market conditions: WTI
    
    
    Henry Hub
    
    
    United States
    
    
    Gulf of Mexico
    
    
    CanadaQuarter Ended:
    
    Oil(1)
    
    
    Gas(2)
    
    
    Rig Count(3)
    
    
    Rig Count (3)
    
    
    Rig Count(3)December 31, 2003
    
    $
    31.18
    
    
    $
    5.45
    
    
    
    1,109
    
    
    
    102
    
    
    
    408March 31, 2004
    
    $
    34.77
    
    
    $
    5.72
    
    
    
    1,121
    
    
    
    95
    
    
    
    528June 30, 2004
    
    $
    38.32
    
    
    $
    6.15
    
    
    
    1,164
    
    
    
    92
    
    
    
    202September 30, 2004
    
    $
    43.89
    
    
    $
    5.56
    
    
    
    1,229
    
    
    
    90
    
    
    
    326December 31, 2004
    
    $
    48.30
    
    
    $
    7.26
    
    
    
    1,249
    
    
    
    95
    
    
    
    420March 31, 2005
    
    $
    49.90
    
    
    $
    6.47
    
    
    
    1,279
    
    
    
    95
    
    
    
    521
   (1)
    
    Source: Average price per barrel for the quarter calculated by us using daily data published by the United States Department of Energy on its
website, www.eia.doe.gov.(2)
    
    Source: Average price per MM/BTU for the quarter calculated by us using daily data published on www.oilnergy.com.(3)
    
    Source: Average United States, Gulf of Mexico and Canada Rig Counts for the quarter calculated by us using weekly data published by Baker Hughes
Incorporated. Demand for our products and services is cyclical and dependent upon activity in the oil and
gas industry and the profitability, cash flow and willingness of oil and gas companies and drilling
contractors to spend capital on the exploration, development and production of oil and gas reserves
in the Gulf of Mexico and the United States Gulf Coast regions where our products and services are
primarily sold, and to a lesser degree, Canada. The level of exploration and production,
especially in the Gulf of Mexico, is highly sensitive to current and projected oil and natural gas
prices, which have historically been characterized by significant volatility. Over the last
several 10




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years, the United States drilling rig count has fluctuated due to world economic and political
trends that influence the supply and demand for energy, the price of oil and natural gas and the
level of exploration and drilling. The United States drilling rig count has increased steadily
throughout 2004 and 2005. However, the average Gulf of Mexico rig counts remained relatively flat
during 2004 and 2005. Our revenue growth will continue to be heavily dependent upon the timing and strength of the
recovery in the Gulf of Mexico market and our gains in market share outside the Gulf of Mexico.
The extent and timing of any recovery in the Gulf of Mexico market and gains in market share
outside the Gulf of Mexico are not predictable. As illustrated in the table above, the market
price of oil and gas alone is not an indicator of a recovery in these markets. Many external
factors, including world economic and political conditions, quotas established by OPEC
(Organization of Petroleum Exporting Countries) and weather conditions, will influence the recovery
and continued strength of the industry. Based on our assessment of external factors and our
current levels of inquiry and quotation, we believe that activity levels will increase throughout
the remainder of 2005. We expect that we will be able to maintain our market share in the Gulf of Mexico and
high-pressure gas markets. Because of the volatility of those markets, key aspects of our strategy
to build stockholder value include expanding into international markets through agency agreements
or acquisitions; acquiring products and services that complement our existing Pressure Control
products and services in the manufacturing and aftermarket service arenas; emphasizing
inter-company coordination through bundled products and services, combined sales efforts and
inter-company purchases; completing strategic add-on Pressure Control acquisitions both
domestically and internationally; and internally growing the Distribution segment domestically. By
diversifying our revenue base to lessen our dependence on the Gulf of Mexico market, and expanding
our products and services offered to both the domestic and international onshore drilling and
production markets, we will seek to enhance our revenues and profitability. We expanded into the
Canadian market with the acquisition of Oilco during the fourth quarter of 2004 and are beginning
to see the benefits of this acquisition in 2005. We have increased our Pressure Control segments
technical sales staff to improve our ability to service our customers and have begun to introduce
new high quality pressure equipment in both the domestic and international onshore and offshore oil
and gas markets. We will seek to increase market penetration and revenue increases during 2005
from these new products and service capabilities. Critical Accounting Policies and Estimates The preparation of our financial statements requires us to make certain estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Our estimation process generally relates to potential bad debts, obsolete and slow moving
inventory, and the valuation of long-lived and intangible assets. Our estimates are based on
historical experience and on our future expectations that we believe to be reasonable under the
circumstances. The combination of these factors results in the amounts shown as carrying values of
assets and liabilities in the financial statements and accompanying notes. Actual results could
differ from our current estimates and those differences may be material. These estimates may change as events occur, as additional information is obtained and as our
operating environment changes. There have been no material changes or developments in our
evaluation of the accounting estimates and the underlying assumptions or methodologies that we
believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form
10-K for the year ending December 31, 2004. 11




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Results of Operations The following table sets forth certain operating statement data for each of our segments for
each of the periods presented (in thousands). Reclassifications have been made for discontinued
operations to previously reported amounts to make them consistent with current presentation format. Three Months EndedMarch 31,2005
    
    
    2004Revenues:Pressure Control
    
    $
    19,782
    
    
    $
    15,256Distribution
    
    
    9,620
    
    
    
    8,03429,402
    
    
    
    23,290Cost of revenues:Pressure Control
    
    
    13,376
    
    
    
    10,110Distribution
    
    
    7,276
    
    
    
    5,89520,652
    
    
    
    16,005Gross profit:Pressure Control
    
    
    6,406
    
    
    
    5,146Distribution
    
    
    2,344
    
    
    
    2,1398,750
    
    
    
    7,285Selling, general and administrative expenses:Pressure Control
    
    
    3,407
    
    
    
    2,285Distribution
    
    
    2,133
    
    
    
    1,997Corporate
    
    
    1,375
    
    
    
    1,3076,915
    
    
    
    5,589Income (loss) from operations:Pressure Control
    
    
    2,999
    
    
    
    2,861Distribution
    
    
    211
    
    
    
    142Corporate
    
    
    (1,375
    )
    
    
    (1,307
    )$
    1,835
    
    
    $
    1,696
 Three Months ended March 31, 2005 Compared with Three Months ended March 31, 2004 Revenues.On a consolidated basis, revenues increased $6.1 million, or 26.2%, in 2005 compared
to 2004. This increase was primarily attributable to increased revenues from certain Pressure
Control products and services resulting from an improved United States onshore rig count, the
purchase of Oilco during the fourth quarter of 2004, and increased pipe and valve distribution
sales due to the addition of new distribution facilities during the third quarter of 2004 and
improved market conditions during 2005. Revenues for the Pressure Control segment increased $4.5 million, or 29.7%, in 2005 compared
to 2004. The increase was primarily attributable to increased revenues resulting from an improved
United States onshore rig count and the purchase of Oilco during the fourth quarter of 2004. Revenues for the Distribution segment increased $1.6 million, or 19.7%, in 2005 compared to
2004 due to increased pipe and valve distribution sales due to the addition of new distribution
facilities during the third quarter of 2004 and improved market conditions during 2005. Cost of Revenues.On a consolidated basis, cost of revenues increased $4.7 million, or 29.0%,
in 2005 compared to 2004 as a result of the increase in revenues described above. Gross profit as a
percentage of revenues was 29.8% in 2005 compared to 31.3% in 2004. Gross profit margin was
slightly lower on a consolidated basis in 2005 due to continued pricing pressure and the product
mix sold and services performed in 12




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both segments. This decrease in gross profit margin was partially offset by the slightly improved
margins from our onshore products and services. Cost of revenues for the Pressure Control segment increased $3.3 million, or 32.3%, in 2005
compared to 2004. The increase is primarily a result of the increase in revenues described above.
Gross profit as a percentage of revenues was 32.4% in 2005 compared to 33.7% in 2004. Gross profit
margin was lower in 2005 due to pricing pressure and the product mix sold and services performed
during 2005. This decrease in gross profit margin was partially offset by the improved margins
from our onshore products and services. Cost of revenues for the Distribution segment increased $1.4 million, or 23.4%, in 2005
compared to 2004, primarily due to the increase in revenues in 2005. Gross profit as a percentage
of revenues was 24.4% in 2005 compared to 26.6% in 2004. Gross profit margin was lower in 2005 due
to continued pricing pressure and the volume and mix of pipe and valve sales. Operating expenses.On a consolidated basis, operating expenses increased $1.3 million, or
23.7%, in 2005 compared to 2004. This increase was due to the increase in revenues described
above. Operating expenses as a percentage of revenues were 23.5% in 2005 compared to 24.0% in
2004. This decrease in operating expenses as a percentage of revenues is due to cost reduction
strategies, including lower overall self-insured medical costs, partially offset by increased
external reporting and consulting costs. Operating expenses for the Pressure Control segment increased $1.1 million, or 49.1%, in
2005 compared to 2004. This increase was due to the increase in revenues described above.
Operating expenses as a percentage of revenues were 17.2% in 2005 compared to 15.0% in 2004. The
increase in operating expenses as a percentage of revenues was primarily a result of increased
external reporting and consulting costs, increased allocation of self-insured medical costs and an
increase in headcount. Operating expenses for the Distribution segment increased $0.1 million, or 6.8%, in 2005
compared to 2004. This increase was due to the increase in revenues described above. As a
percentage of revenues, operating expenses decreased from 24.9% in 2004 to 22.2% in 2005, primarily
because operating expenses did not increase proportionally with increases in revenues, and also as
a result of decreased costs due to cost reduction strategies such as headcount reductions. This
decrease was partially offset by increased external reporting and consulting costs and increased
allocation of self-insured medical costs. Operating expenses for Corporate operations increased $0.1 million, or 5.2%, in 2005 compared
to 2004. This increase was primarily attributable to increased external reporting and consulting
costs. This increase was partially offset by cost reduction strategies, including lower
self-insured medical costs. Interest Income.Interest income primarily was generated from seller notes receivable that
arose in conjunction with the sale by Industrial Holdings, Inc. of several business units in 2001. Income Taxes.Income tax expense for 2005 was $0.6 million as compared to $0.4 million in
2004. The effective tax rate was 43.8% in 2005 compared to 38.0% in 2004, resulting from the
effect of non-deductible expenses, primarily amortization of other intangible assets, and state
income taxes, net of the Federal benefit provided. Income from Continuing Operations.On a consolidated basis, net income from continuing
operations was $0.7 million in 2005 compared with $0.6 million in 2004 as a result of the foregoing
factors. Discontinued operations.During 2004, we sold certain non-core assets within our Products
segment. These assets constituted businesses and thus their results of operations have been
reported in discontinued operations in 2005 and 2004. 13




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Liquidity and Capital Resources At March 31, 2005, we had working capital of $24.9 million, current maturities of long-term
debt of $0.05 million, long-term debt of $15.0 million and stockholders equity of $105.0 million.
Historically, our principal liquidity requirements and uses of cash have been for debt service,
capital expenditures, working capital and acquisition financing, and our principal sources of
liquidity and cash have been from cash flows from operations, borrowings under long-term debt
arrangements and issuances of equity securities. We have historically financed acquisitions through
bank borrowings, sales of equity (primarily to affiliates of First Reserve Corporation) and
internally generated funds. Net Cash Provided by Operating Activities.For the three months ended March 31, 2005, net cash
provided by operating activities was $4.9 million compared to $3.6 million provided in the same
period in 2004. Cash provided by operations increased in 2005 as compared to 2004 because of
decreased prepaids and other current assets, increased accrued expenses and other, and payments
received on notes receivable. This increase was partially offset by increases in certain
inventories, primarily work in process at March 31, 2005. Net Cash Used in Investing Activities.Principal uses of cash for the three months ended March
31, 2005 and 2004 were for capital expenditures. Investing activities used cash of $0.4 million in
the three months ended March 31, 2005 compared to $0.1 million in the same period in 2004. For the
three months ended March 31, 2005 and 2004, we made capital expenditures of approximately $0.5
million and $0.2 million, respectively. Net Cash Used in Financing Activities.Principal uses of cash in financing activities for the
three months ended March 31, 2005 and 2004 included payments under credit facilities. Financing
activities used net cash of $3.8 million in the three months ended March 31, 2005 compared to $11.0
million used in the same period in 2004. During 2005, we made net repayments on our revolving
credit facility of $3.8 million compared to borrowings of $1.2 million in 2004. We also made
principal payments of $0.01 million on our long-term debt, exclusive of our revolving credit
facility, compared to $12.2 million in 2004. Net Cash Provided by (Used In) Discontinued Operations.For the three months ended March 31,
2005, net cash used in discontinued operations was $0.2 million compared to $7.8 million provided
by discontinued operations in the same period in 2004. Cash was provided by discontinued
operations in 2004 primarily due to our receipt of $7.4 million in cash in February 2004 upon the
sales of assets of these operations. Principal Debt Instruments.As of March 31, 2005, we had an aggregate of $15.1 million
borrowed under our senior credit facility and debt instruments entered into or assumed in
connection with acquisitions, as well as other bank financings. As of March 31, 2005, as a result
of the lesser of the leverage ratio covenant and the senior leverage ratio covenant, as defined in
the credit agreement for our senior credit facility, our availability under our revolving credit
facility was limited to $35.0 million. On September 30, 2004, we amended and restated our senior credit facility and subordinated
term loan. The amended and restated senior credit facility provides for a $50 million revolving
line of credit, maturing September 30, 2007, that we can increase by up to $25 million (not to
exceed a total commitment of $75 million). The senior credit facility consists of a revolving
credit facility that includes a swing line subfacility up to $5 million and a letter of credit
subfacility up to $5 million. We have capitalized $0.6 million of deferred loan costs in
connection with the amended and restated senior credit facility. We expect to use the proceeds
from any advances made pursuant to the senior credit facility to refinance indebtedness, for
working capital purposes, capital expenditures, to fund acquisitions and for general corporate
purposes. The applicable interest rate of the senior credit facility is governed by our leverage
ratio and ranges from prime plus 0.75% or LIBOR plus 1.75% to prime plus 2.00% or LIBOR plus 3.00%.
At March 31, 2005, the senior credit facility bore interest at 6.5%, with interest payable
quarterly. The effective interest rate, including amortization of deferred loan costs, was 30.9%.
The effective interest rate, excluding amortization of deferred loan costs, was 12.0%. We are
required to prepay the senior credit facility under certain circumstances with the net cash
proceeds of certain asset sales, insurance proceeds and equity issuances subject to certain
conditions. The senior credit facility provides, among other covenants and restrictions, that we
comply with certain financial covenants, including a limitation on 14




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capital expenditures, a minimum fixed charge coverage ratio, a minimum consolidated net worth,
maximum leverage and senior leverage ratios. As of March 31, 2005, we were in compliance with the
covenants under the senior credit facility. The senior credit facility is collateralized by
substantially all of our assets. The amended and restated subordinated term loan increased our $12 million subordinated term
loan with an additional advance of $3 million. We have capitalized $0.3 million of deferred loan
costs in connection with the amended and restated subordinated term loan. The subordinated term
loan bears interest at a fixed rate of 10% per annum and matures on September 30, 2008. The
effective interest rate, including amortization of deferred loan costs, was 10.7%. The
subordinated term loan provides, among other restrictions, that we comply with certain financial
covenants, including a limitation on capital expenditures, a minimum fixed charge coverage ratio, a
minimum consolidated net worth, maximum leverage and senior leverage ratios. Also, we are not
permitted to make principal payments on the subordinated term loan while the senior credit facility
is outstanding. As of March 31, 2005, we were in compliance with the covenants under the
subordinated term loan. The subordinated term loan is collateralized by a second lien on
substantially all of our assets. We believe that cash generated from operations and amounts available under our amended and
restated senior credit facility will be sufficient to fund existing operations, working capital
needs, capital expenditure requirements and financing obligations. We also believe any significant
increase in capital expenditures caused by any need to increase manufacturing capacity can be
funded from operations or through debt financing. We intend to pursue additional acquisition candidates, but the timing, size or success of any
acquisition effort and the related potential capital commitments cannot be predicted. We expect to
fund future cash acquisitions primarily with cash flow from operations and borrowings, including
the unborrowed portion of our senior credit facility or new debt issuances, but may also issue
additional equity either directly or in connection with an acquisition. However, there can be no
assurance that acquisition funds may be available at terms acceptable to us. A summary of our outstanding contractual obligations and other commercial commitments at March
31, 2005 is as follows (in thousands): Payments Due by PeriodLess than 1
    
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsLong-term debt
    
    $
    15,069
    
    
    $
    45
    
    
    $
    24
    
    
    $
    15,000
    
    
    $
    Letters of credit
    
    
    1,304
    
    
    
    1,304
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    5,420
    
    
    
    1,622
    
    
    
    2,536
    
    
    
    1,094
    
    
    
    168Total contractual obligations
    
    $
    21,793
    
    
    $
    2,971
    
    
    $
    2,560
    
    
    $
    16,094
    
    
    $
    168
 15




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Forward-Looking Information and Risk Factors Certain information in this Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify these forward-looking statements by the words expects,
projects, believes, anticipates, intends, plans, budgets, predicts, estimates and
similar expressions. We have based the forward-looking statements relating to our operations on our current
expectations, and estimates and projections about us and about the industries in which we operate
in general. These statements are not guarantees of future performance and involve risks,
uncertainties and assumptions. In addition, many of these forward-looking statements are based on
assumptions about future events that may prove to be inaccurate. Actual outcomes and results may
differ materially from what we have expressed or forecast in the forward-looking statements. Because we depend on the oil and gas industry, a decline in oil and gas prices or a decrease in
industry activity may negatively impact our profits. We are, and will continue to be, dependent upon the oil and gas industry and the level of oil
and gas exploration and production. The level of exploration and production depends upon the
prevailing view of future product prices. Many factors affect the supply and demand for oil and gas
and therefore influence product prices, including:  
    the level of production from known reserves;
    weather conditions;
    the actions of the Organization of Petroleum Exporting Countries;
    political instability in the Middle East and elsewhere;
    the level of oil and gas inventories;
    the cost of producing oil and gas;
    the level of drilling activity;
    worldwide economic activity; and
    governmental regulation. If there is a significant reduction in the demand for drilling services, cash flows of
drilling contractors or production companies or drilling or well servicing rig utilization rates,
then demand for our products will decline. 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. The oilfield service industry in which we operate is highly competitive. Many of our
competitors have greater financial and other resources than we do. Each of our operating units is
subject to competition from a number of similarly sized or larger businesses. Factors that affect
competition include price, quality and customer service. Strong competition may result in a loss of
market share and a decrease in revenue and profit margins. Our success will be affected by our
ability to lower our cost structure. Our forward-looking statements in this regard assume we will
be successful in reducing our cost structure and adapting to the changing environment. 16




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Availability of a skilled workforce could affect our projected results. The workforce and labor supply in the oilfield service industry is aging and diminishing such
that there is an increasing shortage of available skilled labor. Our forward-looking statements in
this regard assume we will be able to maintain a skilled workforce. Our long-term growth depends upon technological innovation and commercialization. Our ability to deliver our growth strategy depends in part on the commercialization of new
technology. A central aspect of our growth strategy is to innovate our products and services, and
to obtain technologically advanced products through internal research and development and/or
acquisitions. The key to our success will be our ability to commercialize the technology that we
have acquired and demonstrate the enhanced value our technology brings to our customers
operations. Our forward-looking statements in this regard have assumed successful
commercialization of, and growth from, these new products and services. The cyclical nature of or a prolonged downturn in our industry could affect the carrying value of
our goodwill. As of March 31, 2005, we had approximately $73.1 million of goodwill. Our estimates of the
value of our goodwill could be reduced in the future as a result of various factors, some of which
are beyond our control. Any reduction in the value of our businesses may result in impairment
charges and therefore adversely affect our results. A rise in insurance premiums could adversely impact our results and affect our ability to
adequately insure for certain contingent liabilities. We maintain insurance to cover potential claims and losses, including claims for personal
injury or death resulting from the use of our products. We carry comprehensive insurance, subject
to deductibles, at levels we believe are sufficient to cover existing and future claims. The
terrorist attacks that occurred in the U.S. in 2001, as well as other factors, have generally
increased the cost of insurance for companies, including ours. Significant increases in the cost
of insurance and more restrictive coverage may adversely impact our results of operations. In
addition, we may not be able to maintain adequate insurance coverage at rates we believe are
reasonable. Uninsured or underinsured claims and litigation could adversely impact our results. In the ordinary course of business, we become the subject of various claims and litigation. We
maintain insurance to cover many of our potential losses and we are subject to various
self-retentions and deductibles with respect to our insurance. Although we are subject to various
ongoing litigation, we do not believe any of the litigation we are currently subject to will result
in any material uninsured or underinsured losses. However, it is possible an unexpected judgment
could be rendered against us in cases in which we could be uninsured or underinsured and beyond the
amounts we currently have reserved or anticipate incurring. Our operations are subject to regulation by governmental authorities that may limit our ability to
operate our business. Our business is affected by governmental regulations relating to our industry segments in
general, as well as environmental and safety regulations that have specific application to our
business. While we are not aware of any proposed or pending legislation, future legislation may
have an adverse effect on our business, financial condition, results of operations or prospects. We are subject to various environmental laws, including those governing air emissions, water
discharges and the storage, handling, disposal and remediation of petroleum and hazardous
substances. We have in the past and will likely in the future incur expenditures to ensure
compliance with environmental laws. Due to the possibility of unanticipated factual or regulatory
developments, the amount and timing of future environmental expenditures could vary substantially
from those currently anticipated. Moreover, certain of our facilities have 17




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been in operation for many years and, over that time, we and other predecessor operators have
generated and disposed of wastes that are or may be considered hazardous. Accordingly, although we
have undertaken considerable efforts to comply with applicable laws, it is possible that
environmental requirements or facts not currently known to us will require unanticipated efforts
and expenditures that cannot be currently quantified. 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. Two of our directors, Joseph R. Edwards and Ben A. Guill, are also current officers or
employees of First Reserve Corporation, which controls the general partner of First Reserve Fund
VIII, L.P. This may create conflicts of interest because these directors have responsibilities to
First Reserve Fund VIII and its owners. Their duties as directors or officers of First Reserve
Corporation may conflict with their duties as directors of the Company regarding business dealings
between First Reserve Corporation and the Company and other matters. The resolution of these
conflicts may not always be in our or our stockholders best interests. We will renounce 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. First Reserve Fund VIII has investments in other oilfield service companies that compete with
the Company, and First Reserve Corporation and its affiliates, other than T-3, may invest in other
such companies in the future. We refer to First Reserve Corporation, its other affiliates and its
portfolio companies as the First Reserve group. Our certificate of incorporation provides that, so
long as First Reserve Corporation and its affiliates continue to own at least 20% of the Companys
common stock, we renounce any interest in specified business opportunities. Our certificate of
incorporation also provides that if an opportunity in the oilfield services industry is presented
to a person who is a member of the First Reserve group, including any individual who also serves as
First Reserve Fund VIIIs director designee of the Company:  
    no member of the First Reserve group or any of those individuals will have any
obligation to communicate or offer the opportunity to the Company; and
    such entity or individual may pursue the opportunity as that entity or individual sees
fit,unless:
    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. These provisions of our certificate of incorporation may be amended only by an affirmative vote of
holders of at least 80% of its outstanding common stock. As a result of these charter provisions,
our future competitive position and growth potential could be adversely affected. 18




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Market risk generally represents the risk that losses may occur in the value of financial
instruments as a result of movements in interest rates, foreign currency exchange rates and
commodity prices. We are exposed to some market risk due to the floating interest rate under our amended and
restated revolving credit facility. As of March 31, 2005, our revolving credit facility, whose
interest rate floats with prime or LIBOR, did not have a balance. A 1.0% increase in interest
rates would not result in any increase in interest expense on the existing principal balances. We are also exposed to some market risk due to the foreign currency exchange rates related to
our Canadian operations. We conduct our Canadian business in the local currency, and thus the
effects of foreign currency fluctuations are largely mitigated because the local expenses of such
foreign operations are also denominated in the same currency. Assets and liabilities are
translated using the exchange rate in effect at the balance sheet date, resulting in translation
adjustments that are reflected as accumulated other comprehensive income in the stockholders
equity section on our consolidated balance sheet. Less than 1% of our net assets are impacted by
changes in foreign currency in relation to the U.S. dollar. We recorded a $0.1 million adjustment
to our equity account for the three months ended March 31, 2005 to reflect the net impact of the
change in foreign currency exchange rate. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, our management carried out an evaluation,
with the participation of our principal executive officer (the CEO) and our principal financial
officer (the CFO), of the effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 of the Securities and Exchange Act of 1934. Based on those evaluations, the CEO and
CFO have concluded that our disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us in the reports that we file or submit under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. Changes in Internal Controls Over Financial Reporting There have been no changes in our internal controls over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 19




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PART II 
 Item 1. Legal Proceedings The Company is involved in various claims and litigation arising in the ordinary course of
business. While there are uncertainties inherent in the ultimate outcome of such matters and it is
impossible to currently determine the ultimate costs that may be incurred, the Company believes the
resolution of such uncertainties and the incurrence of such costs should not have a material
adverse effect on the Companys consolidated financial condition or results of operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 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)
 20




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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 5th day of May 2005. T-3 ENERGY SERVICES, INC.By:
    /s/ MICHAEL T. MINOMichael T. Mino (Chief Financial
Officer and Vice President) 21




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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.