<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1998
OR
[ ] 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 001-13593
IRI INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2044681
----------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 Louisiana,
Suite 5900,
Houston, Texas 77002
------------------------------------- ----------------------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (713) 651-8002
----------------------
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 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 1998
---------------------------- -----------------------------------
Common stock, 39,900,000
$0.01 par value per share
<PAGE> 2
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<S> <C> <C>
September 30, December 31,
Assets 1998 1997
------ ------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 37,770 $ 49,473
Marketable securities, at fair value (cost of $409 at September 30, 1998
and $7,448 at December 31, 1997) 34 8,218
Accounts receivable, less allowance for doubtful accounts of $412 at
September 30, 1998 and $455 at December 31, 1997 28,695 33,130
Inventories 118,714 100,901
Costs and estimated earnings in excess of billings on uncompleted contracts 6,985 8,853
Other current assets 1,869 1,444
--------- ---------
Total current assets 194,067 202,019
Property, plant and equipment, net 50,569 43,219
Other assets 4,700 5,836
--------- ---------
$ 249,336 $ 251,074
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 18,194 $ 27,797
Customer advances 8,236 7,546
Other liabilities 3,808 4,786
--------- ---------
Total current liabilities 30,238 40,129
Negative goodwill, less accumulated amortization 5,368 9,393
Accrued postretirement benefits 2,192 2,420
Other long-term liabilities 458 726
--------- ---------
Total liabilities 38,256 52,668
Shareholders' equity:
Preferred stock, $1 par value, 25,000,000 shares authorized, none issued - -
Common stock, $0.01 par value, 100,000,000 shares authorized,
39,900,000 shares issued and outstanding 399 399
Additional paid-in capital 168,514 168,538
Retained earnings 43,622 30,926
Accumulated other comprehensive loss (1,455) (1,457)
--------- ---------
Total shareholders' equity 211,080 198,406
Commitments and contingencies
--------- ---------
$ 249,336 $ 251,074
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 40,650 $ 54,345 $ 139,281 $ 112,130
Cost of goods sold 29,586 41,690 99,900 86,816
-------- --------- ---------- ---------
Gross profit 11,064 12,655 39,381 25,314
Administrative and selling expense 6,991 6,943 21,170 15,871
Restructuring charge 429 - 429 _
-------- --------- ---------- ---------
Operating income 3,644 5,712 17,782 9,443
-------- --------- ---------- ---------
Other income (expense):
Interest income 455 49 1,766 128
Interest expense (24) (3,393) (253) (6,540)
Losses on trading securities (399) - (2,375) _
Special charge - - (631) _
Other, net (437) 333 (807) 259
-------- --------- ---------- ---------
(405) (3,011) (2,300) (6,153)
-------- --------- ---------- ---------
Income before income taxes 3,239 2,701 15,482 3,290
Income taxes 440 171 2,786 339
-------- --------- ---------- ---------
Net income $ 2,799 $ 2,530 $ 12,696 $ 2,951
======== ========= ========== =========
Basic and diluted net income per common share $ 0.07 $ 0.08 $ 0.32 $ 0.10
======== ========= ========== =========
Weighted average shares outstanding 39,900 30,000 39,900 30,000
======== ========= ========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholders'
stock capital earnings loss equity
-------- ------------ ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 $ 399 $ 168,538 $ 30,926 $ (1,457) $ 198,406
Net income (unaudited) - - 12,696 - 12,696
Other (unaudited) - (24) - - (24)
Translation adjustment (unaudited) - - - 2 2
----- --------- --------- --------- ---------
Balances at September 30, 1998
(unaudited) $ 399 $ 168,514 $ 43,622 $ (1,455) $ 211,080
===== ========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
Nine Months Ended
September 30,
--------------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,696 $ 2,951
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 4,159 2,115
Gain on sale of assets - (371)
Amortization of negative goodwill (4,026) (4,026)
Change in employee benefit accounts (228) (273)
Changes in assets and liabilities, exclusion of effects of acquisitions:
Marketable securities 8,184 -
Accounts receivable 4,435 (3,508)
Inventories (17,813) (16,464)
Other current assets 1,443 (5,076)
Other non current assets 185 -
Accounts payable and accrued liabilities,
Customer advances and other liabilities (9,928) 10,464
Change in cumulative translation adjustment 2 -
-------- --------
Net cash flows used in operations (891) (14,188)
-------- --------
Cash flows from investing activities:
Capital expenditures (10,558) (2,368)
Acquisition of Bowen assets, net of liabilities assumed - (77,264)
Acquisition costs of Cardwell, net of liabilities assumed - (12,574)
-------- --------
Net cash flows used in investing activities (10,558) (92,206)
-------- --------
Cash flows from financing activities:
Proceeds from sale of assets - 523
Proceeds from notes payable - 113,482
Payments on notes payable (72) (6,653)
Debt issuance costs - (3,852)
Payments on capital lease obligation (158) (157)
Other (24) -
-------- --------
Net cash flows provided by (used in) financing activities (254) 103,343
-------- --------
Decrease in cash and cash equivalents (11,703) (3,051)
Cash and cash equivalents at beginning of period 49,473 8,635
-------- --------
Cash and cash equivalents at end of period $ 37,770 $ 5,584
======== ========
Supplemental cash flow information:
Interest paid $ 253 $ 5,846
======== ========
Income taxes paid $ 5,219 $ -
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
The accompanying condensed consolidated financial statements of IRI
International Corporation and subsidiaries (the "Company") as of
September 30, 1998 and for the three and nine months ended September 30,
1998 and 1997 have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and are unaudited; however, they
include all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of management, are necessary for a fair
presentation for such periods. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The
results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
Certain footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been omitted herein. The interim information
should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial
statements. Comprehensive income includes net income and other
comprehensive income which is generally comprised of changes in the fair
value of available-for-sale marketable securities, foreign currency
translation adjustments and adjustments to recognize additional minimum
pension liabilities. The Company had accumulated other comprehensive loss
at December 31, 1997 of $1,457,000 consisting entirely of an adjustment
to recognize additional minimum pension liability. The Company had other
comprehensive income for the three and nine months ended September 30,
1998 of $201,000 and $2,000, respectively, consisting of foreign currency
translation adjustments.
(2) Inventories
Inventories consist of the following at September 30, 1998 and
December 31, 1997 (in thousands):
1998 1997
---- ----
Raw materials $46,178 $ 39,087
Work-in-process 32,619 28,771
Finished goods 39,917 33,043
-------- ---------
Total $118,714 $ 100,901
======== =========
6
<PAGE> 7
(3) Commitments and Contingencies
The Company has contract commitments aggregating $32.3 million at
September 30, 1998 for the manufacture and delivery of drilling rigs
during the remainder of fiscal 1998. At September 30, 1998, the Company
was contingently liable for approximately $4.6 million in letters of
credit which guarantee the Company's performance for payment to third
parties in accordance with specified contractual terms and conditions.
These letters of credit are primarily secured by the Company's cash,
accounts receivable and inventory. Management does not expect any
material losses to result from these off-balance-sheet instruments as it
anticipates full performance on the related contracts.
(4) Net Income per Common Share
Stock options outstanding at September 30, 1998 of 3,866,000 million
shares were not considered in the computation of net income per common
share because the exercise price exceeded the average market price for
the period and are therefore antidilutive.
(5) Acquisitions
On March 31, 1997, the Company acquired certain assets and assumed
certain liabilities of Bowen Tools, Inc. ("Bowen"), a wholly-owned
subsidiary of the French chemical concern L'Air Liquide, for a total cash
consideration of $75.1 million. On April 17, 1997, the Company also
acquired the stock of Cardwell International Ltd. ("Cardwell"), a
privately owned company, as well as certain assets held by affiliates of
Cardwell for approximately $12 million in cash at closing and partial
payment ($3 million) of a note payable to bank. In addition, the Company
incurred approximately $3.2 million ($2.6 million for Bowen and $.6
million for Cardwell) of transaction costs in connection with the
acquisitions.
The following sets forth selected consolidated financial information for
the Company on a pro forma basis for the nine months ended September 30,
1997, assuming the Bowen and Cardwell acquisitions had occurred on
January 1, 1997 (in thousands, except per share amounts):
Revenues $ 134,450
==========
Gross profit $ 34,603
==========
Operating income $ 10,440
==========
Net income $ 1,228
==========
Net income per common share $ 0.04
==========
Pro forma adjustments primarily relate to additional interest expense
resulting from debt to finance the acquisitions, additional depreciation
and amortization expenses as a result of the purchase price allocations
to property, plant and equipment and excess of cost over net tangible
assets purchased and the related tax effects of these adjustments.
The pro forma information is not necessarily indicative of the results
that actually would have been achieved had such transactions been
consummated as of January 1, 1997, or that may be achieved in the future.
7
<PAGE> 8
(6) Special Charges
On April 28, 1998, the Company terminated a proposed merger with Hitec
ASA, a Norwegian Corporation. External expenses incurred in connection
with the merger have been reported as a special charge of $631,000 in the
quarter ended June 30, 1998.
On October 8, 1998, the Company announced a restructuring program in
which the workforce would be reduced by up to 315 employees. Expenses
incurred in connection with the restructuring program have been reported
as a restructuring charge of $429,000 for the three and nine months ended
September 30, 1998.
(7) New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting of the Costs of
Start-up Activities, which is effective for financial statements issued
for periods beginning after December 15, 1998. The Company believes SOP
98-5 will not have a material impact on its financial statements or
accounting policies. The Company will adopt the provisions of SOP 98-5 in
the first quarter of 1999.
The Company is assessing the reporting and disclosure requirements of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement requires a public business enterprise to
report financial and descriptive information about its reportable
operating segments. The statement is effective for financial statements
for periods beginning after December 15, 1997, but is not required for
interim financial statements in the initial year of its application. The
Company will adopt the provisions of SFAS No. 131 in its December 31,
1998 consolidated financial statements.
The Company is also assessing the reporting and disclosure requirements
of SFAS No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefits. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits. It does not
address measurement or recognition. The statement is effective for fiscal
years beginning after December 31, 1997. The Company has not determined
the effect of adoption of this statement on its financial statements.
The Company is also assessing the reporting and disclosure requirements
of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards
for derivative instruments and hedging activities. The statement is
effective for financial statements for fiscal years beginning after June
15, 1999. The Company believes SFAS No. 133 will not have a material
impact on its financial statements or accounting policies. The Company
will adopt the provisions of SFAS No. 133 in the first quarter of 2000.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto.
OVERVIEW
The Company manufactures land-based drilling and well-servicing rigs,
rig component parts, and downhole tools and related equipment for use in the
domestic and international markets. The Company's revenues are substantially
dependent upon the condition of the oil and gas industry and worldwide levels of
exploration, development and production activity, including the number of oil
and gas wells being drilled, the depth and drilling conditions of such wells,
the number of well completions and the level of workover activity. Exploration,
development and production activity is largely dependent on the prevailing view
of future oil and natural gas prices, which have been characterized by
significant volatility over the last 20 years. Oil and natural gas prices are
influenced by numerous factors affecting the supply of and demand for oil and
gas, including the level of drilling activity, worldwide economic activity,
interest rates and the cost of capital, environmental regulation, tax policies,
political requirements of national governments, coordination by OPEC and the
cost of producing oil and gas. Demand for the Company's products in certain
emerging market countries may depend somewhat less on the prevailing view of
future oil and natural gas prices, as such countries may generally place greater
emphasis on their need for internal development, energy self-sufficiency or hard
currency earnings.
Steadily declining oil prices, the financial crisis in Russia and
unsettled economic conditions in emerging markets have resulted in a consequent
decline in the worldwide level of exploration, development and production
activity in the oil and gas industry. This has materially adversely affected the
Company's revenues and operating income in the current quarter, as described
below, as well as the level of its dependable backlog. Management believes these
industry conditions will continue and may worsen, further affecting adversely
the Company's financial results of operations. Accordingly, management has
assessed and begun to implement a variety of measures to minimize the adverse
effects of industry conditions on the Company's business and financial
performance, including its announced restructuring program that will reduce its
workforce by up to 315 employees. The Company is considering other cost
reduction measures, including plant closings, in response to these conditions.
No assurance can be given, however, that this or any measure will be sufficient
to offset the negative effects of prevailing industry conditions on the
Company's business and financial performance.
RESULTS OF OPERATIONS
Sales of new rigs manufactured by the Company can produce large
fluctuations in revenues depending on the size and the timing of the
construction of rig orders. Individual orders of rig packages range from $1
million to $25 million and cycle times for the design, engineering and
manufacturing of rig packages range from six to nine months. These fluctuations
may affect the Company's quarterly revenues and operating income.
Results of Segment Operations
The following discussion of the results of operations of the Company's
oilfield equipment, downhole products and specialty steel segments does not
reflect the allocation of corporate and unallocated administrative expenses,
amortization of negative goodwill and amortization of goodwill on an individual
segment basis. Certain information that reconciles the discussion of the results
of operations of the individual segments to the Company's Condensed Consolidated
Financial Statements is as follows:
9
<PAGE> 10
<TABLE>
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------------- ---------------------
1998 1997 1998 1997
------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues
Oilfield equipment $19,677 $29,310 $69,857 $60,640
Downhole products 17,568 22,339 60,744 42,015
Specialty steel 3,427 3,024 9,027 9,803
Eliminations (22) (328) (347) (328)
------- ------- -------- --------
Total $40,650 $54,345 $139,281 $112,130
======= ======= ======== ========
Segment operating income
Oilfield equipment $ 3,008 $ 3,190 $ 12,821 $ 5,834
Downhole products 3,062 4,040 11,855 6,022
Specialty steel 1,092 1,114 2,347 2,880
------- ------- -------- --------
Total 7,162 8,344 27,023 14,736
Corporate overhead and unallocated
administrative expenses (4,117) (3,675) (11,886) (8,766)
Amortization of negative goodwill 1,341 1,342 4,025 4,026
Amortization of goodwill (313) (299) (951) (553)
Restructuring charge (429) - (429) -
------- ------- -------- --------
Operating income $ 3,644 $ 5,712 $ 17,782 $ 9,443
======= ======= ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
Oilfield Equipment
Revenues and operating income for the oilfield equipment unit were
$19.7 million and $3.0 million, respectively, for the three months ended
September 30, 1998, as compared to $29.3 million and $3.2 million, respectively,
for the three months ended September 30, 1997. The decrease in revenues was due
primarily to the effects of lower oil prices and the destabilization of the
Russian economy. The decrease in operating income was due to reduced revenues,
partially offset by a reduction in the cost structure. Gross margin for the
three months ended September 30, 1998 was 19.9%, as compared to 14.1% for the
three months period ended September 30, 1997. The increase in gross margin was
due primarily to increased productivity and a favorable mix between manufactured
equipment and buyouts.
Downhole Products
Revenues and operating income for the downhole products unit were $17.6
million and $3.1 million, respectively, for the three months ended September 30,
1998, as compared to $22.3 million and $4.0 million, respectively, for the three
months ended September 30, 1997. Revenues decreased primarily due to lower rig
activity, resulting in decreased demand for fishing tools and wireline
equipment, and a reduction in rental revenues. Gross margin for the three months
ended September 30, 1998 was 28.4%, flat compared to 28.5% for the three months
ended September 30, 1997.
10
<PAGE> 11
Specialty Steel
Revenues and operating income for the specialty steel unit were $3.4
million and $1.1 million, respectively, for the three months ended September 30,
1998, as compared to $3.0 and $1.1 million, respectively, for the three months
ended September 30, 1997. The increase in revenues was due primarily to
increased military sales, partially offset by reduced demand from a major
customer. Gross margin for the three months ended September 30, 1998 was 33.0%,
as compared to 38.1% for the three months ended September 30, 1997. The decrease
in gross margin was primarily due to an unfavorable mix as lower margin military
sales increased and higher margin commercial sales decreased.
Corporate and Administrative Expenses
Corporate and administrative expenses were $4.1 million for the three
months ended September 30, 1998, as compared to $3.7 million for the three
months ended September 30, 1997.
Restructuring Charge
The Company incurred a restructuring charge of $429,000 in the third
quarter of 1998 in connection with a restructuring program which will result in
the reduction of 315 employees.
Other Income (Expense)
Interest income increased $406,000 for the three months ended
September 30, 1998 over the comparable period in 1997 due to higher average cash
balances in the current year. Interest expense decreased $3.4 million for the
three months ended September 30, 1998, as compared to the prior year quarter, as
a result of the repayment of debt in November 1997 with the proceeds from the
Company's initial public offering.
Income Taxes
The Company's effective income tax rate for financial reporting
purposes for the three months ended September 30, 1998 of approximately 14
percent was significantly lower than the U.S. federal statutory rate of 35
percent. The lower effective rate was primarily the result of the tax benefits
from the use by the Company of its Foreign Sales Corporation subsidiary,
non-taxable income arising from the amortization of negative goodwill, and a
reduction in the valuation allowance of approximately $0.9 million against
deferred tax assets which are more likely than not of being realized.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Oilfield Equipment
Revenues and operating income for the oilfield equipment unit were
$69.9 million and $12.8 million, respectively, for the nine months ended
September 30, 1998, as compared to $60.6 million and $5.8 million, respectively,
for the nine months ended September 30, 1997. The increase in revenues resulted
from increased sales of rig packages by the IRI Division, an increase in spare
parts and refurbishment activity, and the inclusion of the operating results of
the Company's subsidiary, Cardwell International, Ltd., for the full nine months
period in 1998, compared to six months in 1997. Increased operating income
resulted from increased sales volume and a favorable mix between manufactured
equipment and buyouts in the period. Gross margin for the nine months ended
September 30, 1998 was 22.7%, as compared to 14.0% for the nine months period
ended September 30, 1997. The increase in gross margin was due primarily to
improved pricing, increased productivity and a favorable mix between
manufactured equipment and buyouts.
11
<PAGE> 12
Downhole Products
Revenues and operating income for the downhole products unit were $60.7
million and $11.9 million, respectively, for the nine months ended September 30,
1998, as compared to $42.0 million and $6.0 million, respectively, for the nine
months ended September 30, 1997. Increased revenues and operating income for the
downhole products unit were primarily attributable to improved pricing and the
inclusion of the operating results of the Bowen Tools Division for the full nine
months period in 1998, compared to six months in 1997. Gross margin for the nine
months ended September 30, 1998 was 29.8%, as compared to 24.8% for the nine
months ended September 30, 1997. The increase in gross margin was primarily due
to improved pricing.
Specialty Steel
Revenues and operating income for the specialty steel unit were $9.0
million and $2.3 million, respectively, for the nine months ended September 30,
1998, as compared to $9.8 and $2.9 million, respectively, for the nine months
ended September 30, 1997. The decrease in revenues was primarily the result of
reduced demand from a major customer. Gross margin for the nine months ended
September 30, 1998 was 27.3%, as compared to 30.6% for the nine months ended
September 30, 1997. The decrease in gross margin was primarily due to the
reduction of high margin business from a major customer.
Corporate and Administrative Expenses
Corporate and administrative expenses were $11.9 million for the nine
months ended September 30, 1998, as compared to $8.8 million for the nine months
ended September 30, 1997. The increase was due primarily to the inclusion of
Bowen and Cardwell for the full nine months period in 1998, compared to six
months in 1997.
Other Income (Expense)
Interest income increased $1.6 million for the nine months ended
September 30, 1998 over the comparable period in 1997 due to higher average cash
balances in the current year. Interest expense decreased $6.3 million for the
nine months ended September 30, 1998 as compared to the prior year period, as a
result of the repayment of debt in November 1997. The Company incurred a special
charge of $631,000 in the first six months of 1998 relating to expenses incurred
in connection with the Company's proposed acquisition of Hitec ASA, which was
terminated on April 28, 1998.
Income Taxes
The Company's effective income tax rate for financial reporting
purposes for the nine months ended September 30, 1998 of approximately 18
percent was significantly lower than the U.S. federal statutory rate of 35
percent. The lower effective rate was primarily the result of result of the tax
benefits from the use by the Company of its Foreign Sales Corporation
subsidiary, non-taxable income arising from the amortization of negative
goodwill, and a reduction in the valuation allowance of approximately $2.1
million against deferred tax assets which are more likely than not of being
realized.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash, cash equivalents and
marketable securities of $37.8 million, compared to $57.7 million at
December 31, 1997. At September 30, 1998, the Company's working capital was
$163.8 million, compared to $161.9 million at December 31, 1997.
Net cash flows used in operations of $891,000 for the nine months ended
September 30, 1998 was primarily attributable to a temporary build-up in
inventory resulting from increased sales and problems associated with the
introduction of a new management information system. Capital expenditures of
$10.6 million consist primarily of expenditures for rental tools and equipment
and new machinery at the Company's downhole products unit.
Management believes that current working capital, in conjunction with
borrowings under its current credit facility, will be sufficient to meet the
Company's short-term (i.e., less than one year) and long-term liquidity needs.
YEAR 2000
The Company has initiated a three-phase Year 2000 compliance program:
(1) During the first phase, the Company will identify all non-Year 2000
compliant hardware and software systems and other technology, and contact all
key suppliers and customers; (2) during the second phase, the Company will
ascertain the extent to which its systems and technologies and those of its key
suppliers and customers are non-Year 2000 compliant and will prioritize its
Year 2000 response accordingly; and (3) during the third phase, the Company
will replace or remediate its non-Year 2000 compliant systems and technologies
and develop a contingency plan with respect to systems and other technology
that cannot be replaced or remediated in time and with respect to key
suppliers and customers that have not become Year 2000 compliant.
The Company expects to complete the first phase of its Year 2000
compliance program by the end of the first quarter of 1999. The Company has
begun to contact its key suppliers, but has not yet begun to assess the extent
and content of any responses received. The Company has not yet begun to assess
the Year 2000 compliance of its "non-IT" systems such as embedded technology.
The Company expects that it will complete its entire Year 2000 compliance
program well in advance of the year 2000.
To date, the costs incurred by the Company's Year 2000 compliance
program have been minimal. The replacement and upgrade of several of the
Company's software and hardware systems in the ordinary course of business have
had the added benefit of resolving Year 2000 issues with respect to those
systems. Management believes that the costs to complete the Company's Year 2000
compliance program will not have a material effect on its financial position,
results of operations or cash flows, though there can be no assurance in this
regard.
13
<PAGE> 14
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting of the Costs of
Start-up Activities, which is effective for financial statements issued for
periods beginning after December 15, 1998. The Company believes SOP 98-5 will
not have a material impact on its financial statements or accounting policies.
The Company will adopt the provisions of SOP 98-5 in the first quarter of 1999.
The Company is assessing the reporting and disclosure requirements of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement requires a public business enterprise to report
financial and descriptive information about its reportable operating segments.
The statement is effective for financial statements for periods beginning after
December 15, 1997, but is not required for interim financial statements in the
initial year of its application. The Company will adopt the provisions of SFAS
No. 131 in its December 31, 1998 consolidated financial statements.
The Company is also assessing the reporting and disclosure requirements
of SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement
Benefits. This statement standardizes the disclosure requirements for pensions
and other postretirement benefits. It does not address measurement or
recognition. The statement is effective for fiscal years beginning after
December 31, 1997. The Company has not determined the effect of adoption of this
statement on its financial statements.
The Company is also assessing the reporting and disclosure requirements
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company believes
SFAS No. 133 will not have a material impact on its financial statements or
accounting policies. The Company will adopt the provisions of SFAS No. 133 in
the first quarter of 2000.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of the historical information contained in this
report, the matters described herein contain forward-looking statements that
involve risk and uncertainties including, but not limited to, economic and
competitive factors outside of the control of the Company. These factors more
specifically include: dependence on the oil and gas industry, competition from
various entities, the impact of government regulations, the instability of
certain foreign economies, currency fluctuations, risks of expropriation and
changes in law affecting international trade and investment. Forward-looking
statements are typically identified by the words "believe," "expect,"
"anticipate," "intend," "estimate," and similar expressions. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission (the "SEC") recently amended
Rules 14a-4 and 14a-5 of the Securities Exchange Act of 1934, as
amended. As so amended, Rule 14a-5 requires that if the date of the
annual meeting will change more than 30 days from the prior year, then
the Company must give notice to shareholders as to the dates after
which shareholder proposals are considered untimely. As the Company
expects to have its 1999 Annual Meeting of Stockholders at least 30
days earlier than the 1998 Annual Meeting (which was held on June 25,
1998), for purposes of the Company's 1999 Annual Meeting of
Stockholders, management may exclude any shareholder proposals received
after December 26, 1998 and management may use its discretionary voting
authority to vote on any proposal with respect to which the Company
receives notice after March 1, 1999, even if such proposal is not
discussed in the proxy statement for the 1999 Annual Meeting of
Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index following the
signature page hereof are filed herewith in response to
this item.
(b) Reports on Form 8-K
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly consented this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998
IRI INTERNATIONAL CORPORATION
/s/ JEFFREY M. JOHANSON
-----------------------------
Jeffrey M. Johanson
Executive Vice President and
Chief Financial Officer
16
<PAGE> 17
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
* 3.1 -- Form of Restated Certificate of Incorporation of IRI
International Corporation
* 3.2 -- Amended and Restated Bylaws of the Company
27.1 -- Financial Data Schedule (submitted as an exhibit only in
the electronic format of this Quarterly Report on Form
10-Q submitted to the Securities and Exchange
Commission).
- -----------
* Exhibit incorporated herein by reference to the Registrant's registration
statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997,
as amended.
17
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