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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period ended June 30, 2004 [   ]
    
    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
    
    (IRS Employerof Incorporation or Organization)
    
    Identification No.)
 13111 Northwest Freeway, Suite 500, Houston, Texas
    
    77040(Address of Principal Executive Offices)
    
    (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 [X]  No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
[   ]  No[X] At July 30, 2004, the registrant had 10,581,986 shares of common stock
outstanding.




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TABLE OF CONTENTS FORM 10-Q  
 Item
    

PagePART I1. Financial StatementsConsolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    1Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003
    
    
   2Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements
    
    
    42. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    103. Quantitative and Qualitative Disclosures about Market Risks
   
    

    204. Controls and Procedures
    
    

    20PART
II1. Legal Proceedings
   
    

    212. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
   
    
    213. Defaults Upon Senior Securities
   
    

    214. Submission of Matters to a Vote of Security Holders
    
    

   215.
Other Information
    
    
    216. Exhibits and Reports on Form 8-K
    
    
    21Certification of CEO pursuant to Rule 13a-14a or 15d-14aCertification of CFO pursuant to Rule 13a-14a or 15d-14aCertification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share amounts) June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27
    
    
    $
    17Restricted cash
    
    
    30
    
    
    
    102Accounts receivable  trade, net
    
    
    20,866
    
    
    
    19,335Inventories
    
    
    15,600
    
    
    
    12,083Notes receivable, current portion
    
    
    1,339
    
    
    
    1,462Deferred income taxes
    
    
    4,486
    
    
    
    2,613Current assets of discontinued operations
    
    
    1,665
    
    
    
    13,630Assets held for sale
    
    
    
    
    
    
    119Prepaids and other current assets
    
    
    3,180
    
    
    
    4,159Total current assets
    
    
    47,193
    
    
    
    53,520Property and equipment, net
    
    
    19,169
    
    
    
    20,240Notes receivable, less current portion
    
    
    387
    
    
    
    370Goodwill, net
    
    
    68,020
    
    
    
    68,726Other intangible assets, net
    
    
    1,221
    
    
    
    2,228Other assets
    
    
    442
    
    
    
    453Total assets
    
    $
    136,432
    
    
    $
    145,537LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable  trade
    
    $
    10,447
    
    
    $
    7,822Accrued expenses and other
    
    
    6,571
    
    
    
    6,620Current liabilities of discontinued operations
    
    
    568
    
    
    
    1,406Current maturities of long-term debt
    
    
    1,337
    
    
    
    10,093Total current liabilities
    
    
    18,923
    
    
    
    25,941Long-term debt, less current maturities
    
    
    12,058
    
    
    
    14,263Other long-term liabilities
    
    
    154
    
    
    
    177Deferred income taxes
    
    
    3,971
    
    
    
    2,790Commitments 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 June 30, 2004
and December 31, 2003
    
    
    11
    
    
    
    11Warrants, 517,862 issued and outstanding at
June 30, 2004 and December 31, 2003
    
    
    853
    
    
    
    853Additional paid-in capital
    
    
    122,957
    
    
    
    122,954Retained deficit
    
    
    (22,495
    )
    
    
    (21,452
    )Total stockholders equity
    
    
    101,326
    
    
    
    102,366Total liabilities and stockholders equity
    
    $
    136,432
    
    
    $
    145,537
 The accompanying notes are an integral part of these consolidated financial statements. 1




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands except per share amounts) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Products
    
    $
    22,379
    
    
    $
    20,221
    
    
    $
    39,864
    
    
    $
    38,727Services
    
    
    5,860
    
    
    
    7,807
    
    
    
    11,665
    
    
    
    15,10328,239
    
    
    
    28,028
    
    
    
    51,529
    
    
    
    53,830Cost of revenues:Products
    
    
    15,869
    
    
    
    14,057
    
    
    
    28,387
    
    
    
    27,095Services
    
    
    4,032
    
    
    
    5,018
    
    
    
    7,519
    
    
    
    9,89519,901
    
    
    
    19,075
    
    
    
    35,906
    
    
    
    36,990Gross profit
    
    
    8,338
    
    
    
    8,953
    
    
    
    15,623
    
    
    
    16,840Operating expenses
    
    
    6,274
    
    
    
    6,746
    
    
    
    11,863
    
    
    
    12,624Income from operations
    
    
    2,064
    
    
    
    2,207
    
    
    
    3,760
    
    
    
    4,216Interest expense
    
    
    558
    
    
    
    778
    
    
    
    1,336
    
    
    
    1,552Interest income
    
    
    99
    
    
    
    62
    
    
    
    113
    
    
    
    118Write-down of acquired note receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,703Other (income) expense, net
    
    
    73
    
    
    
    3
    
    
    
    58
    
    
    
    (15
    )Income from continuing operations before
provision for income taxes
    
    
    1,532
    
    
    
    1,488
    
    
    
    2,479
    
    
    
    1,094Provision for income taxes
    
    
    597
    
    
    
    517
    
    
    
    957
    
    
    
    446Income from continuing operations
    
    
    935
    
    
    
    971
    
    
    
    1,522
    
    
    
    648Loss from discontinued operations, net of tax
    
    
    (2,441
    )
    
    
    (209
    )
    
    
    (2,565
    )
    
    
    (206
    )Net income (loss)
    
    $
    (1,506
    )
    
    $
    762
    
    
    $
    (1,043
    )
    
    $
    442Basic earnings (loss) per common share:Continuing operations
    
    $
    .09
    
    
    $
    .09
    
    
    $
    .14
    
    
    $
    .06Discontinued operations
    
    $
    (.23
    )
    
    $
    (.02
    )
    
    $
    (.24
    )
    
    $
    (.02
    )Net income (loss) per common share
    
    $
    (.14
    )
    
    $
    .07
    
    
    $
    (.10
    )
    
    $
    .04Diluted earnings (loss) per common share:Continuing operations
    
    $
    .09
    
    
    $
    .09
    
    
    $
    .14
    
    
    $
    .06Discontinued operations
    
    $
    (.23
    )
    
    $
    (.02
    )
    
    $
    (.24
    )
    
    $
    (.02
    )Net income (loss) per common share
    
    $
    (.14
    )
    
    $
    .07
    
    
    $
    (.10
    )
    
    $
    .04Weighted average common shares outstanding:Basic
    
    
    10,582
    
    
    
    10,582
    
    
    
    10,582
    
    
    
    10,582Diluted
    
    
    10,587
    
    
    
    10,586
    
    
    
    10,588
    
    
    
    10,583
 The accompanying notes are an integral part of these consolidated financial statements. 2




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (1,043
    )
    
    $
    442Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Loss from discontinued operations, net of tax
    
    
    2,565
    
    
    
    206Bad debt expense
    
    
    246
    
    
    
    54Depreciation and amortization
    
    
    1,271
    
    
    
    1,502Amortization of deferred loan costs
    
    
    590
    
    
    
    448Write-down of acquired note receivable
    
    
    
    
    
    
    1,703Write-down of other intangible assets, net
    
    
    150
    
    
    
    Deferred taxes
    
    
    (530
    )
    
    
    (165
    )Amortization of stock compensation
    
    
    3
    
    
    
    9Changes in assets and liabilities:Accounts receivable  trade
    
    
    (1,729
    )
    
    
    (1,987
    )Inventories, net
    
    
    (3,517
    )
    
    
    (371
    )Prepaids and other current assets
    
    
    1,196
    
    
    
    1,749Notes receivable
    
    
    106
    
    
    
    138Other assets
    
    
    11
    
    
    
    112Accounts payable  trade
    
    
    2,625
    
    
    
    (1,747
    )Accrued expenses and other
    
    
    (52
    )
    
    
    (524
    )Assets held for sale, net
    
    
    119
    
    
    
    8Net cash provided by operating activities
    
    
    2,011
    
    
    
    1,577Cash flows from investing activities:Purchases of property and equipment
    
    
    (998
    )
    
    
    (736
    )Proceeds from sales of property and equipment
    
    
    628
    
    
    
    17Net cash used in investing activities
    
    
    (370
    )
    
    
    (719
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    1,295
    
    
    
    748Payments on long-term debt
    
    
    (12,256
    )
    
    
    (1,737
    )Debt financing costs
    
    
    
    
    
    
    (120
    )Net cash used in financing activities
    
    
    (10,961
    )
    
    
    (1,109
    )Net cash provided by (used in) discontinued operations
    
    
    9,258
    
    
    
    (404
    )Net decrease in restricted cash
    
    
    (72
    )
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    10
    
    
    
    (655
    )Cash and cash equivalents, beginning of year
    
    
    17
    
    
    
    854Cash and cash equivalents, end of period
    
    $
    27
    
    
    $
    199
 The accompanying notes are an integral part of these consolidated financial statements. 3




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T-3 ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  1.
    
    BASIS OF PRESENTATION The accompanying unaudited 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). All significant intercompany
balances and transactions have been eliminated in consolidation. Operating
results for the three and six months ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2004. 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, 2003. Certain reclassifications were made to
previously reported amounts in the consolidated financial statements and notes
to make them consistent with the current presentation format. Stock-Based Compensation At June 30, 2004, 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, 2003. 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    (1,506
    )
    
    $
    762
    
    
    $
    (1,043
    )
    
    $
    442Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects
determined under fair value
method for all awards, net of
related tax effects
    
    
    14
    
    
    
    (75
    )
    
    
    (56
    )
    
    
    (155
    )Net income (loss), as adjusted
    
    $
    (1,492
    )
    
    $
    687
    
    
    $
    (1,099
    )
    
    $
    287Basic EPS:As reported
    
    $
    (.14
    )
    
    $
    .07
    
    
    $
    (.10
    )
    
    $
    .04As adjusted
    
    $
    (.14
    )
    
    $
    .07
    
    
    $
    (.10
    )
    
    $
    .03Diluted EPS:As reported
    
    $
    (.14
    )
    
    $
    .07
    
    
    $
    (.10
    )
    
    $
    .04As adjusted
    
    $
    (.14
    )
    
    $
    .06
    
    
    $
    (.10
    )
    
    $
    .03
 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 June 30, 2004 and 2003 were computed on a weighted average basis:
risk-free interest rate of 4.12% and 3.87%, respectively, expected volatility
of 42.44% and 43.21%, respectively, expected life of 4 years for each period
and no expected dividends. The following assumptions for the six months ended
June 30, 2004 and 2003 were computed on a weighted average basis: risk-free
interest rate of 4.12% and 3.80%, respectively, 4




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expected volatility of 42.44% and 43.44%, 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. Write-down of Acquired Note Receivable Prior to the merger of the Company and Industrial Holdings, Inc. (IHI),
IHI sold a subsidiary, Beaird Industries Inc. (Beaird), to an entity
controlled by Don Carlin and Robert Cone, and IHI received a $3.5 million
promissory note from the former subsidiary as the purchase price. Mr. Carlin
is a former director, and Mr. Cone is a former executive officer and director
of the Company. During the first quarter of 2003, the Company was informed by
Beaird of its inability to make timely interest payments and that efforts to
restructure its debt obligations had to date been unsuccessful. Accordingly,
the Company wrote-down approximately 50% of the note, because management
believed that the notes net realizable value was approximately $1.7 million.
In the fourth quarter of 2003, the Company learned that efforts to refinance
Beaird had failed, and management determined that the note was uncollectible
and wrote-off the remaining balance of the note. The first quarter of 2003
write-down amount appears in the Statement of Operations for the six months
ended June 30, 2003 under the caption Write-down of acquired note receivable.  2.
    
    DISCONTINUED OPERATIONS During the fourth quarter of 2003, the Company committed to a formal plan
to sell certain non-core assets within its Products segment. The sale of these
assets was consummated in February 2004. 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. The assets sold comprised substantially all of the
assets of LSS  Lone Star  Houston Inc., Bolt Manufacturing Co., Inc. (d/b/a
Walker Bolt Manufacturing Company) and WHIR Acquisition, Inc. (d/b/a Ameritech
Manufacturing) (collectively, the Fastener Businesses). The Fastener
Businesses primarily manufacture and distribute a broad line of standard and
metric fasteners, in addition to manufacturing specialty fasteners and parts in
small quantities for the commercial and aerospace industries, as well as the
military. At December 31, 2003, these assets constituted a business and thus
were classified as discontinued operations in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Accordingly, the Fastener Businesses
results of operations for 2004 and 2003 have been reported as discontinued
operations. 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, 2003 for additional information. During the second quarter of 2004, the Company committed to a formal plan
to sell substantially 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. A portion of
the remaining Products segment assets were sold during May and June 2004 and
qualified as discontinued operations in accordance with SFAS No. 144. The
Company received $1.0 million and $0.4 million, respectively, in cash at the
closings. The assets sold comprised substantially all of the assets of one of
the two operating divisions of Moores Pump & Services, Inc., known as Moores
Machine Shop and TPS Total Power Systems, Inc. (TPS). Moores Machine Shop
primarily is engaged in the manufacture and production of downhole and
completion products and equipment. TPS distributes new electric motors;
provides complete rewinding, repair and rebuilding for used AC/DC electric
motors and generators; and repairs and manufactures used flood pumps and waste
disposal pumps for governmental entities in Louisiana and Texas. The remaining
assets of Moores Pump & Services, Inc. (Moores Pump) and Control Products of
Louisiana, Inc. (CPL) were unsold as of June 30, 2004, but the Company
intends to sell these assets during the third quarter of 2004. These assets
constitute businesses and thus are also classified as discontinued operations
in accordance with SFAS No. 144. Accordingly, the results of operations of
Moores Machine Shop, TPS, Moores Pump and CPL for 2004 and 2003 have been
reported as discontinued operations in this Form 10-Q. T-3 assessed the realizability of the Companys recorded goodwill and
other intangibles at December 31, 2003, in accordance with SFAS No. 142. As a
result, T-3 recorded a goodwill impairment charge during the 5




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fourth quarter of 2003 for the Products Segment operations. At June 30, 2004,
Pressure Control goodwill was allocated based on the relative fair values of
the portion of the reporting unit being disposed and the portion of the
reporting unit remaining. This resulted in a goodwill impairment charge of
$0.3 million, related to the assets being sold within the Companys Pressure
Control segment, during the three months ended June 30, 2004. In addition to
the goodwill impairment charge, the Company recorded a $0.2 million charge to
other intangible assets and a $2.4 million charge to tangible assets related to
the Products and Pressure Control dispositions during the three months ended
June 30, 2004. Accordingly, these impairment charges have been reported as
discontinued operations. T-3 reassessed the realizability of the Pressure
Control segments recorded goodwill and other intangibles at June 30, 2004 in
accordance with SFAS No. 142 and no further impairment was recorded. Net revenues from discontinued operations for the three months ended June
30, 2004 and 2003 were $2.5 million and $9.4 million, respectively. For the
same periods, loss before benefit for income taxes was $3.5 million and $0.3
million, respectively. Net revenues from discontinued operations for the six
months ended June 30, 2004 and 2003 were $8.8 million and $19.5 million,
respectively. For the same periods, loss before benefit for income taxes was
$3.7 million and $0.3 million, respectively.  3.
    
    ASSETS HELD FOR SALE During the second quarter of 2004, the Company also sold certain assets of
the spray weld division of O&M Equipment, L.P. for cash of $0.3 million. These
assets did not constitute a business; however, they did qualify as assets held
for sale in accordance with SFAS No. 144. Accordingly, they are presented as
such on the December 31, 2003 consolidated balance sheet. The disposition of
these assets resulted in a loss on sale of $50,000, which includes a $150,000
write-down of other intangible assets. The results of operations are
classified in income from continuing operations for 2004 and 2003.  4.
    
    INVENTORIES Inventories consist of the following (dollars in thousands): June 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    2,804
    
    
    $
    2,250Work in process
    
    
    2,865
    
    
    
    2,143Finished goods and component parts
    
    
    9,931
    
    
    
    7,690$
    15,600
    
    
    $
    12,083
  5.
    
    NEWLY ISSUED ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). FIN 46 requires unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse the risks and rewards of ownership among their owners and other
parties involved. The provisions of FIN 46 are applicable immediately to all
variable interest entities created after January 31, 2003 and require certain
disclosures for all variable interest entities. In December 2003, the FASB
published a revision to FIN 46 (FIN 46R) to clarify some of the provisions of
the interpretation and to defer the effective date of implementation for
certain entities created before January 31, 2003. Under the guidance of FIN
46R, entities that do not have interests in structures that are commonly
referred to as special purpose entities (SPEs) are required to apply the
provisions of the interpretation in financial statements for periods ending
after March 14, 2004. The adoption of the provisions applicable to SPEs and
all other variable interests obtained after January 31, 2003 did not have an
impact on the Companys consolidated financial statements. As of June 30,
2004, the Company had no variable interest entities and there was no effect on
its consolidated balance sheet, statement of operations, and cash flows. 6




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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 and six months ended June 30, 2004 and 2003, as follows (in thousands
except per share data): Three Months EndedJune 30,2004
    
    2003Numerator:Income from continuing operations
    
    $
    935
    
    
    $
    971Loss from discontinued operations
    
    
    (2,441
    )
    
    
    (209
    )Net income (loss)
    
    $
    (1,506
    )
    
    $
    762Denominator:Weighted average common shares outstanding  basic
    
    
    10,582
    
    
    
    10,582Shares for dilutive stock options
    
    
    5
    
    
    
    4Weighted average common shares outstanding and
Assumed conversions  diluted
    
    
    10,587
    
    
    
    10,586Basic earnings (loss) per common share:Continuing operations
    
    $
    .09
    
    
    $
    .09Discontinued operations
    
    
    (.23
    )
    
    
    (.02
    )Net income (loss) per common share
    
    $
    (.14
    )
    
    $
    .07Diluted earnings (loss) per common share:Continuing operations
    
    $
    .09
    
    
    $
    .09Discontinued operations
    
    
    (.23
    )
    
    
    (.02
    )Net income (loss) per common share
    
    $
    (.14
    )
    
    $
    .07
 For the three months ended June 30, 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. For the three
months ended June 30, 2003, there were 580,329 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. The Companys Class B, C and D
warrants totaling 2,971,217 warrants expired on January 14, 2003. Six Months EndedJune 30,2004
    
    2003Numerator:Income from continuing operations
    
    $
    1,522
    
    
    $
    648Loss from discontinued operations
    
    
    (2,565
    )
    
    
    (206
    )Net income (loss)
    
    $
    (1,043
    )
    
    $
    442Denominator:Weighted average common shares outstanding  basic
    
    
    10,582
    
    
    
    10,582Shares for dilutive stock options
    
    
    6
    
    
    
    1Weighted average common shares outstanding and
Assumed conversions  diluted
    
    
    10,588
    
    
    
    10,583Basic earnings (loss) per common share:Continuing operations
    
    $
    .14
    
    
    $
    .06Discontinued operations
    
    
    (.24
    )
    
    
    (.02
    )Net income (loss) per common share
    
    $
    (.10
    )
    
    $
    .04
 7




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##### Table of Contents



Six Months EndedJune 30,2004
    
    2003Diluted earnings (loss) per common share:Continuing operations
    
    $
    .14
    
    
    $
    .06Discontinued operations
    
    
    (.24
    )
    
    
    (.02
    )Net income (loss) per common share
    
    $
    (.10
    )
    
    $
    .04
 For the six months ended June 30, 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. For the six
months ended June 30, 2003, there were 580,329 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 all assets are held in the United States. As discussed in Note 2,
the Company sold substantially all of the remaining assets of its Products
segment, except for certain assets related to the Companys custom coatings
business, and accordingly, their results of operations for 2004 and 2003 have
been reported as discontinued operations. In June 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 and six
months ended June 30, 2004 and 2003 is as follows: (dollars in thousands)PressureControl
    
    Distribution
    
    Corporate
    
    ConsolidatedThree months ended June 30:2004Revenues
    
    $
    16,783
    
    
    $
    11,456
    
    
    $
    
    
    
    $
    28,239Depreciation and amortization
    
    
    390
    
    
    
    65
    
    
    
    186
    
    
    
    641Income (loss) from operations
    
    
    2,877
    
    
    
    842
    
    
    
    (1,655
    )
    
    
    2,064Capital expenditures
    
    
    249
    
    
    
    360
    
    
    
    173
    
    
    
    7822003Revenues
    
    $
    18,187
    
    
    $
    9,841
    
    
    $
    
    
    
    $
    28,028Depreciation and amortization
    
    
    511
    
    
    
    88
    
    
    
    178
    
    
    
    777Income (loss) from operations
    
    
    3,873
    
    
    
    439
    
    
    
    (2,105
    )
    
    
    2,207Capital expenditures
    
    
    101
    
    
    
    15
    
    
    
    227
    
    
    
    343
 (dollars in thousands)PressureControl
    
    Distribution
    
    Corporate
    
    ConsolidatedSix months ended June 30:2004Revenues
    
    $
    32,039
    
    
    $
    19,490
    
    
    $
    
    
    
    $
    51,529Depreciation and amortization
    
    
    770
    
    
    
    134
    
    
    
    367
    
    
    
    1,271Income (loss) from operations
    
    
    5,738
    
    
    
    984
    
    
    
    (2,962
    )
    
    
    3,760Capital expenditures
    
    
    360
    
    
    
    368
    
    
    
    270
    
    
    
    9982003Revenues
    
    $
    34,223
    
    
    $
    19,607
    
    
    $
    
    
    
    $
    53,830Depreciation and amortization
    
    
    982
    
    
    
    174
    
    
    
    346
    
    
    
    1,502Income (loss) from operations
    
    
    6,779
    
    
    
    970
    
    
    
    (3,533
    )
    
    
    4,216Capital expenditures
    
    
    234
    
    
    
    89
    
    
    
    413
    
    
    
    736
 8




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##### Table of Contents



8.
    
    CONTINGENCIES The Company is, from time to time, involved in various legal actions
arising in the normal course of business. Management does not believe there are
any existing or potential legal actions involving the Company that 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 (PRP) with respect to one site designated for
cleanup under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) 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 June 30, 2004, the Company had no letters of credit outstanding.  9.
    
    SUBSEQUENT EVENTS On July 9, 2004, the Company sold certain assets of CPL for $0.5 million
in cash. CPL primarily repairs and manufactures control valves and related
equipment. As discussed in Note 2, these assets constituted a business and
accordingly their results of operations have been reported as discontinued
operations in 2004 and 2003. 9




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##### Table of Contents



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 and six months ended June 30, 2004 and 2003
should be read in conjunction with the 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, 2003 included in our
Annual Report on Form 10-K. We have historically operated in three segments; however, during the
second quarter of 2004, the Company sold substantially all of the remaining
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 for 2004 and 2003 have been reported as discontinued
operations. Due to this sale of substantially all of the assets of its 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 June 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 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 are sold primarily to customers in the upstream and downstream oil
and gas industry located in the Texas and Louisiana Gulf Coast region. The following table sets forth certain statistics that are reflective of
recent historical market conditions: WTI
    
    Henry Hub
    
    United States
    
    Gulf of MexicoQuarter Ended:
    
    Oil (1)
    
    Gas (2)
    
    Rig Count (3)
    
    Rig Count (4)December 31, 2002.
    
    $
    27.83
    
    
    $
    4.33
    
    
    
    847
    
    
    
    108March 31, 2003
    
    $
    34.10
    
    
    $
    5.91
    
    
    
    901
    
    
    
    104June 30, 2003
    
    $
    28.98
    
    
    $
    5.74
    
    
    
    1,028
    
    
    
    104September 30, 2003
    
    $
    30.21
    
    
    $
    4.89
    
    
    
    1,088
    
    
    
    105December 31, 2003.
    
    $
    31.18
    
    
    $
    5.45
    
    
    
    1,109
    
    
    
    102March 31, 2004
    
    $
    34.77
    
    
    $
    5.72
    
    
    
    1,121
    
    
    
    95June 30, 2004
    
    $
    38.32
    
    
    $
    6.15
    
    
    
    1,164
    
    
    
    92
  (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 Rig Count for the quarter calculated by us
using weekly data published by Baker Hughes Incorporated.(4)
    
    Source: Average Gulf of Mexico Rig Count 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. The level of exploration and production, 10




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##### Table of Contents



our primary driver, 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 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 for those
commodities. The United States drilling rig count has increased steadily
throughout 2003 and the first half of 2004. However, the average Gulf of Mexico
rig count remained at relatively low levels throughout 2003 before a further
decline in the first half of 2004. 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 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 continuing price and general uncertainty in the
Gulf of Mexico market will cause near-term activity levels to remain flat for
the second half of 2004. 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 have increased our Pressure Control
segments engineering and technical sales staff to improve our ability to
service our customers and plan to introduce new high quality pressure equipment
in both the domestic and international onshore and offshore oil and gas markets
in the second half of 2004. We will seek to increase market penetration and
revenue increases beyond 2004 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, 2003. 11




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##### Table of Contents



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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Pressure Control
    
    $
    16,783
    
    
    $
    18,187
    
    
    $
    32,039
    
    
    $
    34,223Distribution
    
    
    11,456
    
    
    
    9,841
    
    
    
    19,490
    
    
    
    19,60728,239
    
    
    
    28,028
    
    
    
    51,529
    
    
    
    53,830Cost of revenues:Pressure Control
    
    
    11,228
    
    
    
    11,788
    
    
    
    21,338
    
    
    
    22,568Distribution
    
    
    8,673
    
    
    
    7,287
    
    
    
    14,568
    
    
    
    14,42219,901
    
    
    
    19,075
    
    
    
    35,906
    
    
    
    36,990Gross profit:Pressure Control
    
    
    5,555
    
    
    
    6,399
    
    
    
    10,701
    
    
    
    11,655Distribution
    
    
    2,783
    
    
    
    2,554
    
    
    
    4,922
    
    
    
    5,1858,338
    
    
    
    8,953
    
    
    
    15,623
    
    
    
    16,840Selling, general and administrative expenses:Pressure Control
    
    
    2,678
    
    
    
    2,526
    
    
    
    4,963
    
    
    
    4,876Distribution
    
    
    1,941
    
    
    
    2,115
    
    
    
    3,938
    
    
    
    4,215Corporate
    
    
    1,655
    
    
    
    2,105
    
    
    
    2,962
    
    
    
    3,5336,274
    
    
    
    6,746
    
    
    
    11,863
    
    
    
    12,624Income (loss) from operations:Pressure Control
    
    
    2,877
    
    
    
    3,873
    
    
    
    5,738
    
    
    
    6,779Distribution
    
    
    842
    
    
    
    439
    
    
    
    984
    
    
    
    970Corporate
    
    
    (1,655
    )
    
    
    (2,105
    )
    
    
    (2,962
    )
    
    
    (3,533
    )$
    2,064
    
    
    $
    2,207
    
    
    $
    3,760
    
    
    $
    4,216
 Three Months ended June 30, 2004 Compared with Three Months ended June 30, 2003 Revenues.On a consolidated basis, revenues increased $0.2 million, or
0.8%, in 2004 compared to 2003. This increase was primarily attributable to the
increased pipe and valve sales in our Distribution segment, a slight increase
in United States drilling activity offset by the continued softness in the Gulf
of Mexico drilling activity and continued pricing pressure for all our products
and services. Revenues for the Pressure Control segment decreased $1.4 million, or 7.7%,
in 2004 compared to 2003. The decrease was primarily attributable to the
continued softness in the Gulf of Mexico drilling rig activity and continued
pricing pressure for our products and services. This decrease was partially
offset by increased revenues resulting from an improved United States onshore
rig count. Revenues for the Distribution segment increased $1.6 million, or 16.4%, in
2004 compared to 2003 due to increased pipe and valve distribution sales. Cost of Revenues.On a consolidated basis, cost of revenues increased $0.8
million, or 4.3%, in 2004 compared to 2003 as a result of the increase in
revenues described above. Gross profit as a percentage of revenues was 29.5% in
2004 compared to 31.9% in 2003. Gross profit margin was slightly lower on a
consolidated basis in 2004 due to continued pricing pressure in both segments,
fixed costs that did not decrease proportionally with the decrease of the
Pressure Control group revenues and an increase in product modification 12




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##### Table of Contents



and development expenses associated with certain high pressure equipment. Cost of revenues for the Pressure Control segment decreased $0.6 million,
or 4.8%, in 2004 compared to 2003. The decrease is primarily a result of the
decrease in revenues described above. Gross profit as a percentage of revenues
was 33.1% in 2004 compared to 35.2% in 2003. Gross profit margin was slightly
lower in 2004 due to continued pricing pressure, fixed costs that did not
decrease proportionally and an increase in product modification and development
expenses associated with certain high pressure equipment. Cost of revenues for the Distribution segment increased $1.4 million, or
19.0%, in 2004 compared to 2003, primarily due to the increase in revenues in
2004. Gross profit as a percentage of revenues was 24.3% in 2004 compared to
26.0% in 2003. Gross profit margin was slightly lower in 2004 due to continued
pricing pressure and increased freight and general insurance costs. Operating expenses.On a consolidated basis, operating expenses decreased
$0.5 million, or 7.0%, in 2004 compared to 2003. Operating expenses as a
percentage of revenues was 22.2% in 2004 compared to 24.1% in 2003. This
decrease was due to cost reduction strategies, including lower self-insured
medical costs and headcount reductions. Operating expenses for the Pressure Control segment increased $0.2
million, or 6.0%, in 2004 compared to 2003. Operating expenses as a percentage
of revenues were 16.0% in 2004 compared to 13.9% in 2003. The increase was
primarily a result of the write-down of other intangible assets associated with
the disposition of certain spray welding assets. Operating expenses for the Distribution segment decreased $0.2 million, or
8.2%, in 2004 compared to 2003. As a percentage of revenues, operating
expenses decreased from 21.5% in 2003 to 16.9% in 2004, primarily because as
revenues increased, operating expenses did not increase proportionally in
addition to decreased costs due to cost reduction strategies such as lower
self-insured medical costs, partially offset by costs associated with the
expansion of the Distribution segment. Operating expenses for Corporate operations decreased $0.5 million, or
21.4%, in 2004 compared to 2003. This was primarily attributable to cost
reduction strategies and headcount reductions. Interest Income.Interest income 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 (benefit) for 2004 was $0.6 million as
compared to $0.5 million in 2003. The effective tax rate was 39.0% in 2004
compared to 34.7% in 2003, resulting from the effect of non-deductible expenses
and state income taxes, net of the Federal benefit provided. Income from Continuing Operations.On a consolidated basis, net income
from continuing operations was $0.9 million in 2004 compared with $1.0 million
in 2003 as a result of the foregoing factors. Discontinued operations.During the fourth quarter of 2003, we committed
to a formal plan to sell certain non-core assets within our Products segment,
primarily certain assets of LSS  Lone Star  Houston Inc., Bolt Manufacturing
Co., Inc. and WHIR Acquisition, Inc. The sale of these assets was consummated
in February 2004. During the second quarter of 2004, we continued to focus
more on our business strategy as it related to the Pressure Control segment and
received inquiries for substantially all of the remaining assets within our
Products segment, primarily Moores Machine Shop, TPS, and Moores Pump.
Accordingly, we committed to formal plans to sell these remaining assets within
our Products segment, along with certain assets within our Pressure Control
segment, primarily CPL. The sales of the Moores Machine Shop and TPS assets
were consummated during May and June 2004, respectively, and the assets of
Moores Pump and CPL are expected to be sold during the third quarter of 2004.
For the three months ended June 30, 2004, we recorded a loss of $2.9 million
for the above dispositions. Included in this loss was a goodwill impairment
charge of $0.3 million, a $0.2 million charge to other intangible assets and a
$2.4 million charge to tangible assets. These assets constitute 13




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businesses and their results of operations were reported in discontinued
operations in 2003 and 2004 in accordance with SFAS No. 144 Six Months ended June 30, 2004 Compared with Six Months ended June 30, 2003 Revenues.On a consolidated basis, revenues decreased $2.3 million, or
4.3%, in 2004 compared to 2003. Although United States drilling activity
increased from period to period and oil and natural gas prices increased
slightly, the continued softness in the Gulf of Mexico rig count and increased
pricing pressure in our Pressure Control segment were the major causes of the
decline in our revenues. This decrease was partially offset by increased
revenues from some of our Pressure Control products and services resulting from
an improved United States onshore rig count. Revenues for the Pressure Control segment decreased $2.2 million, or 6.4%,
in 2004 compared to 2003. The decrease was primarily attributable to the
continued softness in the Gulf of Mexico drilling rig activity and continued
pricing pressure for our products and services. This decrease was partially
offset by increased revenues resulting from an improved United States onshore
rig count. Revenues for the Distribution segment decreased $0.1 million, or 0.6%, in
2004 compared to 2003 due to increased competition and continued pricing
pressure. Cost of Revenues.On a consolidated basis, cost of revenues decreased $1.1
million, or 2.9%, in 2004 compared to 2003 as a result of the decrease in
revenues described above. Gross profit as a percentage of revenues was 30.3% in
2004 compared to 31.3% in 2003. Gross profit margin was slightly lower on a
consolidated basis in 2004 because of continued pricing pressure and fixed
costs that did not decrease proportionally, slightly offset by cost reduction
strategies, including lower self-insured medical costs. Cost of revenues for the Pressure Control segment decreased $1.2 million,
or 5.5%, in 2004 compared to 2003. The decrease was primarily a result of the
decrease in revenues described above. Gross profit as a percentage of revenues
was 33.4% in 2004 compared to 34.1% in 2003. Gross profit margin was slightly
lower due to continued pricing pressure and an increase in product modification
and development expenses. Cost of revenues for the Distribution segment increased $0.1 million, or
1.0%, in 2004 compared to 2003. Gross profit as a percentage of revenues was
25.3% in 2004 compared to 26.4% in 2003. Gross profit margin was slightly
lower in 2004 due to continued pricing pressure and increased freight and
general insurance costs. Operating expenses.On a consolidated basis, operating expenses decreased
$0.8 million, or 6.0%, in 2004 compared to 2003. Operating expenses as a
percentage of revenues was 23.0% in 2004 compared to 23.5% in 2003. Operating
expenses decreased due to cost reduction strategies, including lower
self-insured medical costs and headcount reductions offset by expenses
associated with the improvement of the Pressure Control segments engineering
and technical sales support division. Operating expenses for the Pressure Control segment increased $0.1
million, or 1.8%, in 2004 compared to 2003. Operating expenses as a percentage
of revenues were 15.5% in 2004 compared to 14.2% in 2003. The increase was
primarily a result of the write-down of other intangible assets associated with
the disposition of certain spray welding assets and additional expenses
associated with the improvement of our engineering and technical sales support
division. Operating expenses for the Distribution segment decreased $0.3 million, or
6.6%, in 2004 compared to 2003. As a percentage of revenues, operating
expenses decreased from 21.5% in 2003 to 20.2% in 2004, primarily due to cost
reduction strategies, including lower self-insured medical costs, offset
partially by costs associated with the expansion of the Distribution segment. Operating expenses for Corporate operations decreased $0.6 million, or
16.2%, in 2004 compared to 2003. This was primarily attributable to cost
reduction strategies and headcount reductions. 14




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##### Table of Contents



Interest Income.Interest income was generated from seller notes
receivable that arose in conjunction with the sale by Industrial Holdings, Inc.
of several business units in 2001. Write-down of Acquired Note Receivable.In the first quarter of 2003, we
wrote down a note receivable that was acquired in conjunction with the disposal
by Industrial Holdings, Inc. of Beaird Industries, Inc. (Beaird) prior to the
completion of its merger with us. During the first quarter of 2003, we were
informed by Beaird of its inability to make timely payments and that its
ongoing refinancing efforts to date had been unsuccessful. A reserve of
approximately 50% of the note was recorded because we believed at that time
that the notes net realizable value was approximately $1.7 million at March
31, 2003. This note was fully written off in the fourth quarter of 2003
because of Beairds failed refinancing efforts and the unlikelihood of any
future collections. Income Taxes.Income tax expense for 2004 was $1.0 million as compared to
$0.4 million in 2003. The effective tax rate was 38.6% in 2004 compared to
40.8% in 2003, resulting from the effect of non-deductible expenses and state
income taxes, net of the Federal benefit provided. Income from Continuing Operations.On a consolidated basis, net income
from continuing operations was $1.5 million in 2004 compared with $0.6 million
in 2003 as a result of the foregoing factors. Discontinued operations.During the fourth quarter of 2003, we committed
to a formal plan to sell certain non-core assets within our Products segment,
primarily certain assets of LSS  Lone Star  Houston Inc., Bolt Manufacturing
Co., Inc. and WHIR Acquisition, Inc. The sale of these assets was consummated
in February 2004. During the second quarter of 2004, we continued to focus
more on our business strategy as it related to the Pressure Control segment and
received inquiries for substantially all of the remaining assets within our
Products segment, primarily Moores Machine Shop, TPS, and Moores Pump.
Accordingly, we committed to formal plans to sell these remaining assets within
our Products segment, along with certain assets within our Pressure Control
segment, primarily CPL. The sales of the Moores Machine Shop and TPS assets
were consummated during May and June 2004, respectively, and the assets of
Moores Pump and CPL are expected to be sold during the third quarter of 2004.
For the three months ended June 30, 2004, we recorded a loss of $2.9 million
for the above dispositions. Included in this loss was a goodwill impairment
charge of $0.3 million, a $0.2 million charge to other intangible assets and a
$2.4 million charge to tangible assets. These assets constitute businesses and
their results of operations were reported in discontinued operations in 2003
and 2004 in accordance with SFAS No. 144. Liquidity and Capital Resources At June 30, 2004, we had working capital of $28.3 million, current
maturities of long-term debt of $1.3 million, long-term debt of $12.1 million
and stockholders equity of $101.3 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 First Reserve) and internally generated funds. Net Cash Provided by Operating Activities.For the six months ended June
30, 2004, net cash provided by operating activities was $2.0 million compared
to $1.6 million provided in the same period in 2003. Cash provided by
operations increased in 2004 as compared to 2003 because of decreased payments
on accounts payable and increased collections of accounts receivable, partially
offset by increases in certain inventories to take advantage of favorable
pricing and expansion of the Distribution segment. Net Cash Used in Investing Activities.Principal uses of cash are for
capital expenditures and acquisitions. Investing activities used cash of $0.4
million in the six months ended June 30, 2004 compared to $0.7 million in the
same period in 2003. For the six months ended June 30, 2004 and 2003, we made
capital expenditures of approximately $1.0 million and $0.7 million,
respectively. Net Cash Used in Financing Activities.Sources of cash from financing
activities include borrowings under credit facilities and sales of equity
securities. Financing activities used net cash of $11.0 million in the six 15




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months ended June 30, 2004 compared to $1.1 million used in the same period in
2003. During 2004, we had borrowings of $1.3 million under our long-term debt
credit facilities compared to $0.7 million during 2003. During 2004, we made
principal payments of $12.3 million on our long-term debt, exclusive of our
revolving credit facility, compared to $1.8 million in 2003. Net Cash Provided by (Used In) Discontinued Operations.For the six months
ended June 30, 2004, net cash provided by discontinued operations was $9.3
million compared to $0.4 million used in the same period in 2003. Cash was
provided by discontinued operations in 2004 primarily because of our receipt of
$7.4 million in cash in February 2004, $1.0 million in cash in May 2004 and
$0.4 million in cash in June 2004 upon the sales of assets of these operations. Principal Debt Instruments.As of June 30, 2004, we had an aggregate of
$13.4 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 June 30, 2004, as a result of the funded debt-to-EBITDA
ratio covenant, as defined in the credit agreement for our senior credit
facility, our availability under our revolving credit facility was limited to
$7.2 million. On December 17, 2001, we entered into a senior credit facility with Wells
Fargo, N.A. and General Electric Capital Corporation maturing December 17,
2004. Concurrently, we entered into a $12.0 million subordinated term loan
with Wells Fargo Energy Capital, Inc. maturing December 17, 2005. The senior
credit facility includes a revolving credit facility of the lesser of a defined
borrowing base (based upon 85% of eligible accounts receivable and 50% of
eligible inventory) or $25.0 million, a term loan of $16.5 million and an
optional facility for up to an additional $30.0 million in the form of a
revolving credit commitment for future acquisitions based upon specific
criteria. The senior credit facilitys term loan is payable in equal quarterly
installments of $0.8 million. The applicable interest rate of the senior
credit facility is governed by our trailing-twelve-month funded debt-to-EBITDA
ratio and ranges from prime plus 1.25% or LIBOR plus 2.25% to prime plus 2.00%
or LIBOR plus 3.00%. At June 30, 2004, the senior credit facility bore
interest at prime plus 1.75%, with interest payable quarterly. We are required
to prepay the senior credit facility under certain circumstances with the net
cash proceeds of certain asset sales, insurance proceeds, equity issuances and
institutional debt, and if, and for so long as, our funded debt-to-EBITDA ratio
for the previous fiscal year is 2.25 to 1 or greater, with 50% of excess cash
flow as determined under the senior credit agreement. In connection with the
sale of certain assets of the Products segment in February 2004 (see Note 2 to
our 2003 consolidated financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2003 for additional information), we
used the net proceeds to pay down the term loan included in the senior credit
facility. The remaining balance of the loan was concurrently paid off with
other funds. In connection with the additional sales of assets of the Products
segment in May and June 2004, we used the net proceeds to pay down the
revolving credit facility. The senior credit facility provides, among other
covenants and restrictions, that we comply with certain financial covenants,
including a limitation on capital expenditures, a minimum fixed charge coverage
ratio, minimum consolidated tangible net worth and a maximum funded
debt-to-EBITDA ratio. As of June 30, 2004, 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 subordinated term loan bears interest at a fixed rate of 9.50% with
interest payable quarterly. The principal balance is due in full on December
17, 2005. The effective interest rate, including amortization of loan costs,
is 11.02%. The subordinated term loan provides, among other restrictions, that
we maintain a minimum fixed charge coverage ratio and a maximum funded
debt-to-EBITDA ratio. Under the terms of our senior credit facility, we are
not currently permitted to make principal payments on the subordinated term
loan. As of June 30, 2004, 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 senior credit facility and from other sources of debt 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. 16




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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 June 30, 2004 is as follows (in thousands): Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    YearsLong-term debt
    
    $
    13,395
    
    
    $
    1,337
    
    
    $
    12,058
    
    
    $
    
    
    
    $
    Operating leases
    
    
    4,101
    
    
    
    1,129
    
    
    
    1,676
    
    
    
    930
    
    
    
    366Total contractual obligations
    
    $
    17,496
    
    
    $
    2,466
    
    
    $
    13,734
    
    
    $
    930
    
    
    $
    366
 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 will 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; 17




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
    
    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 assume we will be successful in reducing our cost structure and
adapting to the changing environment. 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 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 long-term 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, to obtain technologically
advanced products through internal research and development and/or
acquisitions, and to expand internationally. 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 have assumed successful commercialization of, and
above-average 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. During 2003 and the second quarter 2004, we had goodwill impairments
related to continuing and discontinued operations totaling $26.4 million and
$0.3 million, respectively. As of June 30, 2004, we had approximately $68.0
million of goodwill after the aforementioned impairments. 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 further impairment charges and therefore adversely
affect our results. Uninsured judgments or a rise in insurance premiums could adversely impact our
results. Although we maintain insurance to cover potential claims and losses, we
could become subject to a judgment for which we are not adequately insured.
Additionally, the terrorist attacks that occurred in the U.S., 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. Uninsured 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 items of
litigation, we do not believe any of 18




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the items of litigation we are currently subject to will result in any material
uninsured losses. However, it is possible an unexpected judgment could be
rendered against us in cases in which we could be uninsured and beyond the
amounts we currently have reserved or anticipate incurring. Our insurance coverage may be inadequate to cover certain contingent
liabilities. Our business exposes us to possible 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. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain

adequate insurance coverage at rates we believe are reasonable. Our operations are subject to regulation by federal, state and local
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 federal, state and local 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 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. Three 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. Three of our directors, Mark E. Baldwin, 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 19




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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. 
 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 revolving credit facility and certain of our term debt. As of June 30,
2004, our revolving credit facility had a principal balance of $1.3 million
with an interest rate that floats with prime or LIBOR. A 1.0% increase in
interest rates could result in a $0.01 million annual increase in interest
expense on the existing principal balances. 
 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 Corporate Controller),
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 Corporate Controller believe:  i.
    
    that our disclosure controls and procedures are designed to ensure
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
Corporate Controller, as appropriate to allow timely decisions
regarding required disclosure; andii.
    
    that our disclosure controls and procedures are effective. Changes in Internal Controls Over Financial Reporting There have been no significant changes in our internal controls over
financial reporting during the period covered by this report that has
materially affected, or are reasonably likely to materially affect, our control
over financial reporting. 20




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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 its consolidated financial condition or results of
operations. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders  a.
    
    The Annual Meeting of Stockholders of the Company was held May 27,
2004.b.
    
    The following persons were elected at that meeting as Class III
directors: Number of VotesName of Nominee
    
    For
    
    WithheldStephen A. Snider
    
    
    10,252,258
    
    
    
    10,253Ben A. Guill
    
    
    10,221,703
    
    
    
    40,808Gus D. Halas
    
    
    10,232,618
    
    
    
    29,893
 The Class II directors terms expire at the 2006 Annual Meeting of
Stockholders. The Class I director, whose term expires at the 2005
Annual Meeting of Stockholders, is Mark E. Baldwin. 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K  a.
    
    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)
 21




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b.
    
    Reports on Form 8-K On April 8, 2004, the Company filed a Current Report on Form 8-K
disclosing the resignation of Steven J. Brading, the Companys Vice
President and Chief Financial Officer. On June 14, 2004, the Company filed a Current Report on Form 8-K
disclosing the divestitures of certain net assets within its Products
segment. 22




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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 30th day of July
2004. T-3 ENERGY SERVICES, INC.By:
    /s/ MICHAEL T. MINOMichael T. Mino (CorporateController and Vice President) 23




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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.