General
The following discussion and analysis of our historical results of operations and financial condition for the three and six months ended June 30, 2009 and 2008 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 included in our Annual Report on Form 10-K for the year ended December 31, 2008.
We operate under one reporting segment, pressure control. Our pressure control business has three product lines: pressure and flow control, wellhead and pipeline, which generated 77%, 16% and 7% of our total revenue for the three months ended June 30, 2009 and 78%, 15% and 7% of our total revenue for the six months ended June 30, 2009. We offer original equipment products and aftermarket parts and services for each product line. Aftermarket parts and services include all remanufactured products and parts, repair and field services. Original equipment products generated 86% and 84% and aftermarket parts and services generated 14% and 16% of our total revenues for the three and six months ended June 30, 2009.
Recent Developments
In connection with the joint venture arrangement with Aswan International Engineering Company LLC ("Aswan") in Dubai, we entered into a contribution agreement effective April 1, 2009 and contributed cash of approximately $2.0 million in exchange for a 50% interest in the joint venture's equipment and operating capital. The joint venture, which is named T-3 Energy Services Aswan Middle East LLC (the "Middle East Joint Venture"), is operated and controlled by both parties in equal percentages. Under the terms of the agreement, we will provide the Middle East Joint Venture with a license and technical assistance to repair, manufacture, remanufacture and service equipment for customers in the United Arab Emirates, Kuwait, Qatar, Bahrain, Oman, Yemen, Algeria, Egypt, Pakistan and Iraq. Aswan will provide the Middle East Joint Venture with manufacturing space pursuant to a sublease agreement along with its competence and experience in Dubai with respect to agency support and operations support. Outlook
Our worldwide operations are primarily driven by the level and complexity of oil and natural gas wells being drilled and completed which is in turn primarily driven by current and anticipated price levels for oil and natural gas. Steep declines in commodity prices have reduced cash flows of oil and gas producers and have led to significant reductions in drilling activity, particularly in the United States. During the second quarter, the average world wide rig count dropped by approximately 25% from the first quarter 2009 average, and these levels are approximately 44% below their peak monthly average in September 2008. Commensurate with this decline in activity, our revenues declined 11% and backlog declined by approximately 24% during the second quarter of 2009 when compared to the first quarter of 2009. Fortunately, after eight consecutive months of decline, rig count activity appears to be stabilizing.
Our backlog at June 30, 2009 was $45.4 million (including wellhead backlog of $3.4 million), which is down $14.0 million from March 31, 2009 and $30.7 million from December 31, 2008. This reflects the reality that our sales exceeded our bookings during the first half of 2009. We do not expect the United States market to improve during the remainder of 2009, and we remain focused on international expansion and opportunistic acquisitions, if available, that would be logical extensions of our core competencies. Despite the depressed domestic levels of drilling, we have succeeded in selling product outside of the United States, and approximately 61% of second quarter revenues came from orders destined for use outside of the United States. Also, during the quarter, the Company booked approximately $41.8 million, which we believe is generally indicative of a base level of revenues if the current environment continues indefinitely. Beyond 2009, we believe the long-term outlook for our industry remains positive although the timing for a recovery is uncertain.

We believe that oil and gas market prices and the drilling rig count in the United States, Canada and international markets serve as key indicators of demand for the products we manufacture and sell and for our services. The following table sets forth oil and gas price information as of the end of each fiscal quarter and average monthly rig count data for each fiscal quarter for the past two years:

                          WTI        Henry Hub      United States      Canada       International
  Quarter Ended:          Oil           Gas           Rig Count       Rig Count       Rig Count
  June 30, 2007        $  64.97      $    7.66             1,757           139             1,002
  September 30, 2007   $  75.46      $    6.25             1,788           348             1,020
  December 31, 2007    $  90.68      $    7.40             1,790           356             1,017
  March 31, 2008       $  97.94      $    8.72             1,770           507             1,046
  June 30, 2008        $ 126.35      $   11.47             1,864           169             1,084
  September 30, 2008   $ 118.05      $    9.00             1,978           432             1,096
  December 31, 2008    $  58.35      $    6.38             1,898           408             1,090
  March 31, 2009       $  42.91      $    4.49             1,326           329             1,025
  June 30, 2009        $  59.44      $    3.80               947           104               982

Source: West Texas Intermediate Crude Average Spot Price for the Quarter indicated: Department of Energy, Energy Information Administration (www.eia.doe.gov); NYMEX Henry Hub Natural Gas Average Spot Price for the Quarter indicated: (www.oilnergy.com); Average Rig count for the Quarter indicated: Baker Hughes, Inc. (www.bakerhughes.com).

Results of Operations
Three Months ended June 30, 2009 Compared with Three Months ended June 30, 2008 Revenues. Revenues decreased $11.9 million, or 17.6%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Excluding the acquisition of Azura Energy Systems Surface Inc. ("Azura"), which was completed in March 2009, revenues decreased approximately $14.3 million, or 21.1% from the three months ended June 30, 2008. Our pressure and flow control products revenue decreased approximately $5.7 million, or 11.6%, from the three months ended June 30, 2008, primarily attributable to decreased demand resulting from the depressed global economy and consequent lower commodity prices and their effects on drilling activities. Our pipeline product line revenues decreased approximately $5.5 million, or 60.7%, from the three months ended June 30, 2008, due to the depressed global economy and a decrease in bookings for larger pipeline-related projects quarter-over-quarter. Excluding Azura, our wellhead product line revenues decreased approximately $3.1 million, or 31.4%, from the three months ended June 30, 2008, due to the depressed global economy and resulting lower activity in 2009 with certain larger customers. Across all three product lines, we have experienced pricing pressures that have resulted in a decrease in our standard pricing on some of our product offerings. Additionally, our wellhead and pipeline product line businesses are closely tied to North American drilling and production activities, and the drop in their revenues resulted from the 58% decrease in the second quarter of 2009 average North American rig counts from their recent highs in September 2008.
Gross Profit. Gross profit as a percentage of revenues was 37.1% in the three months ended June 30, 2009 compared to 40.0% in the three months ended June 30, 2008. Gross profit margin was lower in 2009 primarily due to a shift in mix from higher margin service revenues to product revenues, pricing pressure across all three product lines and delays in our ability to secure low-cost country sourcing for some of our wellhead product offerings. Our gross profit margins for our pressure and flow control, pipeline and wellhead product lines were 38.9%, 29.2% and 29.7% for the three months ended June 30, 2009 compared to 40.9%, 36.6% and 38.8% for the three months ended June 30, 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $2.3 million, or 14.7%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Selling, general and administrative expenses for the three months ended June 30, 2009 included $0.5 million of costs related to Azura's ongoing operations. Selling, general and administrative expenses for the three months ended June 30, 2008 included $2.5 million of costs related to the pursuit of strategic alternatives. Selling, general and administrative expenses, excluding the Azura costs in 2009 and the strategic alternative costs in 2008, as a percentage of revenues were 23.2% and 19.7% in the three months ended June 30, 2009 and 2008. The increase in selling, general and administrative expenses as a percentage of revenues, excluding the Azura and strategic alternatives costs, as compared to the three months ended June 30, 2008 is primarily due to selling, general and administrative expenses not decreasing in the same proportion as revenue, as well as facility closing costs of $0.1 million and increased employee termination costs of $0.1 million associated with a reduction in force during the three months ended June 30, 2009.
Interest Expense. Interest expense for the three months ended June 30, 2009 was $0.2 million compared to $0.6 million in the three months ended June 30, 2008. The decrease was attributable to lower outstanding debt levels during the three months ending June 30, 2009.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of unconsolidated affiliates for the three months ended June 30, 2009 was $0.4 million compared to $0.3 million in the three months ended June 30, 2008. The increase was attributable to our share of the earnings of the Middle East Joint Venture during the three months ending June 30, 2009.
Other Income, net. Other income, net for the three months ended June 30, 2009 was $0.2 million compared to $0.1 million in the three months ended June 30, 2008. The increase was primarily attributable to income of $0.4 million related to the settlement of a business interruption insurance claim for Hurricane Gustav, offset by net other expenses of $0.2 million.

Income Taxes. Income tax expense for the three months ended June 30, 2009 was $2.7 million as compared to $3.6 million in the three months ended June 30, 2008. The decrease was primarily due to a decrease in income before taxes. Our effective tax rate was 35.2% for the three months ended June 30, 2009 compared to 32.2% for the three months ended June 30, 2008. The higher tax rate in 2009 is attributable to our utilization of additional research and development, or R&D, tax credits during the three months ended June 30, 2008. In June 2008, we filed amended tax returns for the years 2006 and 2005, which resulted in an income tax expense reduction of $0.3 million. The higher tax rate in 2009 is also the result of decreased availability of foreign tax credits and lower deductions for certain expenses related to production activities for the three months ended June 30, 2009, in comparison to the three months ended June 30, 2008.
Income from Continuing Operations. Income from continuing operations was $4.9 million in the three months ended June 30, 2009 compared with $7.5 million in the three months ended June 30, 2008 as a result of the foregoing factors. Six Months ended June 30, 2009 Compared with Six Months ended June 30, 2008 Revenues. Revenues decreased $18.3 million, or 13.4%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Excluding the acquisition of Azura, which was completed in March 2009, revenues decreased approximately $21.5 million, or 15.7% from the six months ended June 30, 2008. Our pressure and flow control products revenue decreased approximately $6.8 million, or 6.8%, from the six months ended June 30, 2008, primarily attributable to decreased demand for our pressure and flow control products and services resulting from the depressed global economy and consequent lower commodity prices and their effects on drilling activities. Our pipeline product line revenues decreased approximately $9.4 million, or 54.5%, from the six months ended June 30, 2008, due to the depressed global economy and a decrease in bookings for larger pipeline-related projects period-over-period. Excluding Azura, our wellhead product line revenues decreased approximately $5.3 million, or 26.3%, from the six months ended June 30, 2008, due to the depressed global economy and resulting lower activity in 2009 with certain larger customers. Across all three product lines, we have experienced pricing pressures that have resulted in a decrease in our standard pricing on some of our product offerings. Additionally, our wellhead and pipeline product line businesses are closely tied to North American drilling and production activities, and the drop in their revenues resulted from year-to-date 45% decrease in year-to-date average North American rig counts from their recent highs in September 2008.
Gross Profit. Gross profit as a percentage of revenues was 37.7% in the six months ended June 30, 2009 compared to 39.6% in the six months ended June 30, 2008. Gross profit margin was lower in 2009 primarily due to a shift in mix from higher margin service revenues to product revenues, pricing pressure across all three product lines and delays in our ability to secure low-cost country sourcing for some of our wellhead product offerings. Our gross profit margins for our pressure and flow control, pipeline and wellhead product lines were 39.2%, 30.4% and 30.7% for the six months ended June 30, 2009 compared to 39.5%, 39.3% and 40.8% for the six months ended June 30, 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3.0 million, or 10.6%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Selling, general and administrative expenses for the six months ended June 30, 2009 included $3.9 million of separation costs for Gus D. Halas, our former President, Chief Executive Officer and Chairman of the Board, as well as $0.6 million of costs related to Azura's ongoing operations and $0.1 million related to Azura acquisition costs (collectively, the "Azura costs"). Selling, general and administrative expenses for the six months ended June 30, 2008 included $2.5 million of costs related to the pursuit of strategic alternatives. Selling, general and administrative expenses, excluding the separation and Azura costs in 2009 and the strategic alternatives costs in 2008, as a percentage of revenues were 22.7% and 19.0% in the six months ended June 30, 2009 and 2008. The increase in selling, general and administrative expenses as a percentage of revenues, excluding the separation and Azura costs in 2009 and the strategic alternatives costs in 2008, as compared to the six months ended June 30, 2008 is primarily due to selling, general and administrative expenses not decreasing in the same proportion as revenue, as well as increased employee stock-based compensation expense of $0.3 million, increased accounts receivable reserves of $0.3 million, abandoned

acquisition costs of $0.2 million, facility closing costs of $0.1 million and increased employee termination costs of $0.1 million associated with a reduction in force during the three months ended June 30, 2009.
Interest Expense. Interest expense for the six months ended June 30, 2009 was $0.5 million compared to $1.5 million in the six months ended June 30, 2008. The decrease was attributable to lower outstanding debt levels during the six months ending June 30, 2009.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of unconsolidated affiliates for the six months ended June 30, 2009 was $0.6 million compared to $0.4 million in the six months ended June 30, 2008. The increase was attributable to our share of the earnings of the Middle East Joint Venture during the six months ending June 30, 2009.
Other Income, net. Other income, net for the six months ended June 30, 2009 was $0.3 million compared to $0.1 million in the six months ended June 30, 2008. The increase was primarily attributable to income of $0.4 million related to the settlement of a business interruption insurance claim for Hurricane Gustav, offset by net other expenses of $0.1 million.
Income Taxes. Income tax expense for the six months ended June 30, 2009 was $4.8 million as compared to $7.8 million in the six months ended June 30, 2008. The decrease was primarily due to a decrease in income before taxes. Our effective tax rate was 35.3% for the six months ended June 30, 2009 compared to 31.3% for the six months ended June 30, 2008. The higher tax rate in 2009 is primarily attributable to our utilization, during 2008, of R&D tax credits and extraterritorial income tax exclusion tax deductions available for years prior to December 31, 2007. In March and June 2008, we filed amended tax returns for the years 2006, 2005 and 2004, which resulted in an income tax expense reduction of $1.1 million. The higher tax rate in 2009 is also the result of decreased availability of foreign tax credits and lower deductions for certain expenses related to production activities for the six months ended June 30, 2009, in comparison to the six months ended June 30, 2008.
Income from Continuing Operations. Income from continuing operations was $8.7 million in the six months ended June 30, 2009 compared with $17.0 million in the six months ended June 30, 2008 as a result of the foregoing factors. Liquidity and Capital Resources
At June 30, 2009, we had working capital of $69.5 million, long-term debt of $6.0 million and stockholders' equity of $226.5 million. Historically, our principal liquidity requirements and uses of cash have been for debt service, capital expenditures, working capital and acquisitions, and our principal sources of liquidity and cash have been from cash flows from operations, borrowings under our senior credit facility and issuances of equity securities.
Net Cash Provided by Operating Activities. Net cash provided by operating activities was $22.9 million for the six months ended June 30, 2009 compared to $23.4 million for the six months ended June 30, 2008. The decrease in net cash provided by operating activities was primarily attributable to decreased profit and decreased customer prepayments for our products, partially offset by improved accounts receivable collections.
Net Cash Used In Investing Activities. Our principal uses of cash are for capital expenditures and acquisitions. For the six months ended June 30, 2009 and 2008, we made capital expenditures of approximately $2.9 million and $5.6 million. We made equity investments in our unconsolidated affiliates of $2.0 million for the six months ended June 30, 2009, with no such investments for the six months ended June 30, 2008. Cash consideration paid for business acquisitions, net of cash acquired, was $8.2 million and $2.7 million for the six months ended June 30, 2009 and 2008 (see Note 2 to our condensed consolidated financial statements).
Net Cash Used in Financing Activities. Sources of cash from financing activities primarily include borrowings under our senior credit facility and proceeds from the exercise of warrants and stock options. Principal uses of cash include payments on our senior credit facility. Financing activities used net cash of $10.3

million for the six months ended June 30, 2009 compared to $17.8 million for the six months ended June 30, 2008. We made net repayments under our senior credit facility of $12.8 million and $22.4 million during the six months ended June 30, 2009 and 2008. We had proceeds from the exercise of stock options of $2.4 million and $3.1 million and from the excess tax benefits from stock-based compensation of $0.2 million and $1.7 million during the six months ended June 30, 2009 and 2008.
Principal Debt Instruments. Our senior credit facility provides for a $180 million revolving line of credit, maturing October 26, 2012, that we can increase by up to $70 million (not to exceed a total commitment of $250 million) with the approval of the senior lenders. The senior credit facility consists of a U.S. revolving credit facility that includes a swing line subfacility and letter of credit subfacility up to $25 million and $50 million. We expect to use the proceeds from any advances made pursuant to the senior credit facility for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes. As of June 30, 2009, we had an aggregate of approximately $6.1 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 June 30, 2009, availability under our senior credit facility was $160.1 million.
Our availability in future periods is limited to the lesser of (a) three times our EBITDA on a trailing-twelve-months basis, which totals $167.2 million at June 30, 2009, less our outstanding borrowings, standby letters of credits and other debt (as each of these terms are defined under our senior credit facility) and (b) the amount of additional borrowings that would result in interest payments on all of our debt that exceed one third of our EBITDA on a trailing-twelve-months basis. As such, given the decline in our EBITDA from the first to the second quarter, and the industry outlook for the remainder of the year, we expect availability to continue to decrease in 2009.
The applicable interest rate of the senior credit facility is governed by our leverage ratio and ranges from the Base Rate (as defined in the senior credit facility) to the Base Rate plus 1.25% or LIBOR plus 1.00% to LIBOR plus 2.25%. We have the option to choose between Base Rate and LIBOR when borrowing under the revolver portion of our senior credit facility, whereas any borrowings under the swing line portion of our senior credit facility are made using prime. At June 30, 2009, the revolver portion of our credit facility bore interest at a rate of 1.4%, with interest payable monthly. At June 30, 2009, we had no outstanding borrowings under the swing line portion of our senior credit facility. The effective interest rate of our senior credit facility, including amortization of deferred loan costs, was 5.5% during the first six months of 2009. The effective interest rate, excluding amortization of deferred loan costs, was 4.5% during the first six months of 2009. 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 also limits our ability to secure additional forms of debt, with the exception of secured debt (including capital leases) with a principal amount not exceeding 10% of our consolidated net worth at any time. The senior credit facility provides, among other covenants and restrictions, that we comply with the following financial covenants: a minimum interest coverage ratio of 3.0 to 1.0, a maximum leverage ratio of 3.0 to 1.0 and a limitation on capital expenditures of no more than 75% of current year EBITDA. As of June 30, 2009, we were in compliance with the covenants under the senior credit facility, with an interest coverage ratio of 47.2 to 1.0, a leverage ratio of 0.13 to 1.0, and year-to-date capital expenditures of $2.9 million, which represents 14% of current year EBITDA. The senior credit facility is collateralized by substantially all of our assets.
Our senior credit facility also provides for a separate Canadian revolving credit facility, which includes a swing line subfacility of up to U.S. $5.0 million and a letter of credit subfacility of up to U.S. $5.0 million. As of June 30, 2009, there was no outstanding balance on our Canadian revolving credit facility.
We believe that cash generated from operations and amounts available under our senior credit facility will be sufficient to fund existing operations, working capital needs, capital expenditure requirements, continued new product development and expansion of our geographic areas of operation, and financing obligations during 2009.
We intend to make strategic acquisitions but the timing, size or success of any strategic acquisition and the related potential capital commitments cannot be predicted. We expect to fund future acquisitions primarily with cash flow from operations and borrowings, including the unborrowed portion of our senior credit facility or new

debt issuances, but we may also issue additional equity either directly or in connection with an acquisition. There can be no assurance that acquisition funds will be available at terms acceptable to us.
Off-Balance Sheet Arrangements. We had no off-balance sheet arrangements as of June 30, 2009.
Subsequent Events
In July 2009, we received proceeds of $1.1 million related to the settlement of a business interruption insurance claim for Hurricane Ike. These proceeds will be reflected in our condensed consolidated financial statements for the three and nine months ended September 30, 2009. 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 goodwill and other long-lived 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.
During the quarter ended March 31, 2009, we changed the date of our annual goodwill impairment assessment from December 31 to October 1. This change was effected to allow more time and better support the completion of the assessment prior to our filing requirement for the Annual Report on Form 10-K as an accelerated filer. We believe that the resulting change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. We determined that the change in accounting principle related to the annual testing date is preferable under the circumstances and does not result in adjustments to the financial statements when applied retrospectively.
We recognized $23.5 million of goodwill impairment for our pressure and flow control reporting unit for the year ended December 31, 2008. During the first six months of 2009, we assessed the following indicators of impairment, and determined that there were no triggering events that would require an interim goodwill impairment test:
• further, and sustained, deterioration in global economic conditions;

• changes in our outlook for future profits and cash flows;

• further reductions in the market price of our stock; . . .