<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 March 31, 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 333-31157
IRI INTERNATIONAL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2044681
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 Louisiana, Suite 5900, Houston, Texas 77002
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
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 May 12, 1998
- ------------------------------ -------------------------------
Common stock, $0.01 par value 39,900,000
per share
<PAGE> 2
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
------ --------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57,356 $ 49,473
Marketable securities, at fair value (cost of $2,003 at March 31, 1998
and $7,448 at December 31, 1997) 1,971 8,218
Accounts receivable, less allowance for doubtful accounts of $512 at
March 31, 1998 and $455 at December 31, 1997 35,932 33,130
Inventories 95,159 100,901
Costs and estimated earnings in excess of billings on uncompleted contracts 4,155 8,853
Other current assets 1,881 1,444
---------- ---------
Total current assets 196,454 202,019
Property, plant and equipment, net 45,367 43,219
Other assets 5,556 5,836
--------- ---------
$ 247,377 $ 251,074
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 18,832 $ 27,797
Customer advances 6,824 7,546
Other liabilities 7,912 4,786
--------- ---------
Total current liabilities 33,568 40,129
Negative goodwill, less accumulated amortization 8,051 9,393
Accrued postretirement benefits 2,362 2,420
Other long-term liabilities 618 726
--------- ---------
Total liabilities 44,599 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 168,538 168,538
Retained earnings 35,298 30,926
Accumulated other comprehensive income (1,457) (1,457)
--------- ---------
Total shareholders' equity 202,778 198,406
Commitments and contingencies
--------- ---------
$ 247,377 $ 251,074
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $ 47,232 $ 16,594
Cost of goods sold 34,383 12,452
-------- --------
Gross profit 12,849 4,142
Administrative and selling expense 7,359 2,297
-------- --------
Operating income 5,490 1,845
-------- --------
Other income (expense):
Interest income 712 54
Interest expense (97) (265)
Other, net 389 23
-------- --------
1,004 (188)
-------- --------
Income before income taxes 6,494 1,657
Income taxes 2,122 --
-------- --------
Net income $ 4,372 $ 1,657
======== ========
Basic and diluted net income per common share $ 0.11 $ 0.06
======== ========
Weighted average shares outstanding 39,900 30,000
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
-------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 $ 399 $168,538 $ 30,926 $ (1,457) $198,406
Net income (unaudited) -- -- 4,372 -- 4,372
-------- -------- -------- -------- --------
Balances at March 31,
1998 (unaudited) $ 399 $168,538 $ 35,298 $ (1,457) $202,778
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,372 $ 1,657
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,151 48
Amortization of negative goodwill (1,342) (1,342)
Change in employee benefit accounts (58) (242)
Changes in assets and liabilities:
Marketable securities 6,247 --
Accounts receivable (2,802) 1,620
Inventories 5,742 (4,648)
Other current assets 4,261 (917)
Other non current assets 280 --
Accounts payable and accrued liabilities, customer advances
and other liabilities (6,599) (4,324)
-------- -------
Net cash used in operations 11,252 (8,148)
-------- -------
Cash flows from investing activities:
Capital expenditures (3,299) (435)
Acquisition of Bowen assets, net of liabilities assumed -- (74,477)
Deferred acquisition costs of Cardwell -- (135)
-------- -------
Net cash used in investing activities (3,299) (75,047)
-------- -------
Cash flows from financing activities:
Proceeds from notes payable 17 99,843
Payments on notes payable (28) (5,000)
Debt issuance costs -- (3,807)
Payments on capital lease obligation (59) (35)
-------- -------
Net cash flows used in financing activities (70) 91,001
-------- -------
Increase in cash and cash equivalents 7,883 7,806
Cash and cash equivalents at beginning of year 49,473 8,635
-------- -------
Cash and cash equivalents at end of year $ 57,356 $16,441
======== =======
Supplemental cash flow information:
Interest paid $ 97 $ 265
======== =======
Income taxes paid $ 1,240 $ --
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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 March 31,
1998 and for the three months ended March 31, 1998 and 1997 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 financial
statements and notes.
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 no
other comprehensive income for the three months ended March 31, 1998 and
1997.
(2) Inventories
Inventories consist of the following at March 31, 1998 and December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Raw materials $36,534 $ 39,087
Work-in-process 22,127 28,771
Finished goods 36,498 33,043
------- --------
Total $95,159 $100,901
======= ========
</TABLE>
(3) Commitments and contingencies
The Company has contract commitments aggregating $50.8 million at March
31, 1998 for the manufacture and delivery of drilling rigs during the
remainder of fiscal 1998.
At March 31, 1998, the Company was contingently liable for approximately
$4.2 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.
<PAGE> 7
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) 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 three months ended March 31,
1997, assuming the Bowen and Cardwell acquisitions had occurred on
January 1, 1997 (in thousands, except per share amounts):
<TABLE>
<S> <C>
Revenues $ 39,004
========
Gross profit $ 13,431
========
Operating income $ 2,842
========
Net loss $ (9)
========
Net loss per common share $ 0.00
========
</TABLE>
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.
(5) Subsequent event
On March 8, 1998, the Board of Directors of the Company and of Hitec ASA,
a Norwegian Corporation ("Hitec") approved a transaction whereby the
businesses of the Company and Hitec were to be combined. On April 28,
1998, the merger discussions were terminated.
<PAGE> 8
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
and rig component parts 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.
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 orders. Individual orders of rig packages range from $1 million
to $25 million and cycle times for the design, engineering and manufacturing or
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 tools 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:
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES $ 25,062 $ 12,897
Oilfield equipment 19,576 --
Downhole tools
Specialty steel 2,906 3,697
Eliminations (312) --
-------- --------
Total $ 47,232 $ 16,594
======== ========
SEGMENT OPERATING INCOME
Oilfield equipment $ 5,041 $ 822
Downhole tools 3,138 --
Specialty steel 518 1,179
-------- --------
Total 8,697 2,001
Corporate overhead and unallocated
administrative expenses (4,242) (1,498)
Amortization of negative goodwill 1,342 1,342
Amortization of goodwill (307) --
-------- --------
Operating income $ 5,490 $ 1,845
======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Oilfield Equipment
Revenues and operating income for the oilfield equipment unit were
$25.1 million and $5.0 million, respectively, for the three months ended March
31, 1998, as compared to $12.9 million and $0.8 million, respectively, for the
three months ended March 31, 1997. For the three months ended March 31, 1998,
revenues and operating income reflect contributions thereto by the Company's
wholly-owned subsidiary, Cardwell International Ltd. ("Cardwell"), of $5.6
million and $0.6 million. The increase in revenues resulted from the acquisition
of Cardwell, which occurred on April 17, 1997, increased sales of rig packages
by the IRI Division, and an increase in refurbishment activity. Increased
operating income resulted from increased sales volume and a favorable mix
between spare parts and rig sales in the period. Gross margin for the three
months ended March 31, 1998 was 24.3%, as compared to 16.0% for the three months
period ended March 31, 1997. The increase in gross margin was due primarily to a
favorable mix between spare parts and rigs and increased pricing on rigs.
Downhole Tools
The Company acquired the Bowen Tools Division on March 31, 1997 and prior
to such date the Company had no downhole tools unit. Revenues and operating
income for the Bowen Tools Division were $19.6 million and $3.1 million,
respectively, for the three months ended March 31, 1998, as compared to $16.6
million and $2.0 million, respectively, for the three months ended March 31,
1997. Increased revenues and operating income at the Bowen Tools Division were
primarily attributable to
<PAGE> 10
increased drilling activity in the U.S. Gross margin for the three months ended
March 31, 1998 was 26.7%, as compared to 25.6% for the three months ended March
31, 1997. The increase in gross margin was primarily due to improved pricing and
a favorable mix between rentals and sales.
Specialty Steel
Revenues and operating income for the specialty steel unit were $2.9
million and $0.5 million, respectively, for the three months ended March 31,
1998, as compared to $3.7 and $1.2 million, respectively, for the three months
ended March 31, 1997. The decrease in revenues was primarily the result of
reduced demand from a major customer. Gross margin for the three months ended
March 31, 1998 was 17.8%, as compared to 31.9% for the three months ended March
31, 1997. The decrease in gross margin was primarily due to the reduction of
high margin business from a major customer.
Corporate, Administrative and Interest Expenses
Corporate and administrative expenses were $4.2 million for the three
months ended March 31, 1998, as compared to $2.6 million for the three months
ended March 31, 1997. The increase was due primarily to the inclusion of Bowen
Tools Division's and Cardwell's administrative expenses of $1.5 million and $0.4
million, respectively, for the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $59.3 million, compared to $57.7 million at December 31, 1997. At
March 31, 1998, the Company's working capital was $162.9 million, compared to
$161.9 million at December 31, 1997.
The New Revolving Credit Facility
The Company expects to enter into a commitment letter with Lehman
Commercial Paper Inc. during the second quarter of 1998 relating to a $100.0
million unsecured reducing revolving credit facility (the "New Credit
Facility"). The available credit under the New Credit Facility will (i) decrease
to $80.0 million on the third anniversary of the initial borrowing thereunder
(the "Initial Borrowing Date"), (ii) decrease to $50.0 million on the fourth
anniversary of the Initial Borrowing Date and (iii) terminate five years after
the Initial Borrowing Date. The New Credit Facility will also provide for a
$20.0 million sublimit for the issuance of letters of credit. In addition, the
Company anticipates that the New Credit Facility will contain standard terms and
conditions for facilities of this type.
Management believes that current working capital in conjunction with
borrowings under its current credit facility and the New Credit Facility, if
entered into, 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 established a task force that is currently working to
ascertain and resolve the potential problems associated with the year 2000, and
the processing of date sensitive information by the Company's computer and other
systems. Based on preliminary information, the Company believes that it will be
able to implement successfully the systems and programming changes necessary to
address the year 2000 issues, and does not expect the cost of such changes to
have a material impact on the Company's financial position, results of
operations or cash flows in future periods.
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.
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On March 8, 1998, the Board of Directors of the Company approved a
transaction whereby the businesses of the Company and Hitec ASA, a Norwegian
corporation ("Hitec") would be combined (the "Hitec Transaction"). On April 28,
1998, after the conclusion of the Company's due diligence investigation of
Hitec, and after the Company and Hitec were unsuccessful in completing
negotiations with respect to the Hitec Transaction, the Board of Directors of
the Company voted to terminate the Hitec Transaction.
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
The Company filed a report on Form 8-K on March 16, 1998 regarding the
press release announcing the Hitec Transaction.
<PAGE> 12
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: May 14, 1998
IRI INTERNATIONAL CORPORATION
/s/ Munawar H. Hidayatallah
---------------------------------
Munawar H. Hidayatallah
Executive Vice President,
Chief Financial and
Accounting Officer
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<S> <C>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*3.1 -- Form or 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).
</TABLE>
- -----------
* 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.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001044979
<NAME> IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 57,356
<SECURITIES> 1,971
<RECEIVABLES> 36,444
<ALLOWANCES> 512
<INVENTORY> 95,159
<CURRENT-ASSETS> 196,454
<PP&E> 49,864
<DEPRECIATION> 4,497
<TOTAL-ASSETS> 247,377
<CURRENT-LIABILITIES> 33,568
<BONDS> 0
0
0
<COMMON> 399
<OTHER-SE> 202,379
<TOTAL-LIABILITY-AND-EQUITY> 247,377
<SALES> 47,232
<TOTAL-REVENUES> 47,232
<CGS> 35,418
<TOTAL-COSTS> 34,383
<OTHER-EXPENSES> 7,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 6,494
<INCOME-TAX> 2,122
<INCOME-CONTINUING> 4,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,372
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
