<PAGE> 1
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UNITED STATES
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 JUNE 30, 1999
------------------------
COMMISSION FILE NUMBER 001-13593
IRI INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2044681
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION. NO.)
</TABLE>
1000 LOUISIANA, SUITE 5900, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 651-8002
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
------------------------
Indicate by check 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 [ ]
Number of shares outstanding of each class of common stock, $0.01 par value
per share, at August 16, 1999:
39,900,000 Common Shares
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
2
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
3
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................................ $ 19,877 51,399 42,420 98,631
Cost of goods sold.................................. 24,005 35,931 39,833 70,314
-------- ------ ------- ------
Gross profit (loss)....................... (4,128) 15,468 2,587 28,317
Selling and administrative expense.................. 8,894 6,820 14,959 14,179
Restructuring charge................................ 653 -- 1,458 --
-------- ------ ------- ------
Operating income (loss)................... (13,675) 8,648 (13,830) 14,138
-------- ------ ------- ------
Other income (expense):
Interest income................................... 317 599 639 1,311
Interest expense.................................. (205) (132) (334) (229)
Other, net........................................ (1,673) (3,366) (3,539) (2,977)
-------- ------ ------- ------
(1,561) (2,899) (3,234) (1,895)
-------- ------ ------- ------
Income (loss) before income taxes......... (15,236) 5,749 (17,064) 12,243
Income taxes (benefit).............................. (5,646) 224 (5,972) 2,346
-------- ------ ------- ------
Net income (loss)......................... $ (9,590) 5,525 (11,092) 9,897
======== ====== ======= ======
Basic and diluted net income (loss) per common
share............................................. $ (0.24) 0.14 (0.28) 0.25
======== ====== ======= ======
Weighted average shares outstanding................. 39,900 39,900 39,900 39,900
======== ====== ======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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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, 1998.......... $399 168,514 43,308 (1,962) 210,259
Other................................ -- 273 -- -- 273
Comprehensive income:
Net loss.......................... -- -- (11,092) -- (11,092)
Foreign currency translation
adjustment...................... -- -- -- 102 102
-------
Total comprehensive income... (10,990)
---- ------- ------- ------ -------
Balances at June 30, 1999.............. $399 168,787 32,216 (1,860) 199,542
==== ======= ======= ====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(11,092) 9,897
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization.......................... 2,572 2,172
Amortization of goodwill............................... 627 620
Amortization of negative goodwill...................... (2,683) (2,683)
Change in employee benefit accounts.................... (78) (107)
Changes in assets and liabilities, net of effects of
acquisitions:
Marketable securities................................ (4,907) (4,251)
Accounts receivable.................................. 8,186 6,759
Inventories.......................................... 4,299 (11,531)
Other current assets................................. 1,875 (1,162)
Other noncurrent assets.............................. 33 226
Accounts payable and accrued liabilities, customer
advances and other liabilities...................... (5,394) (11,350)
-------- -------
Net cash used in operations....................... (6,562) (11,410)
-------- -------
Cash flows used in investing activities -- capital
expenditures.............................................. (1,169) (6,072)
-------- -------
Cash flows from financing activities --
Payments on capital lease obligation...................... (138) (81)
Payments on notes payable................................. -- (64)
Other..................................................... 273 (24)
-------- -------
Net cash flows provided by (used in) financing
activities....................................... 135 (169)
-------- -------
Increase in cash and cash equivalents....................... (7,596) (17,651)
Cash and cash equivalents at beginning of year.............. 37,475 49,473
-------- -------
Cash and cash equivalents at end of period.................. $ 29,879 31,822
======== =======
Supplemental cash flow information:
Interest paid............................................. $ 334 229
======== =======
Income taxes paid......................................... $ 190 5,019
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,879 37,475
Marketable securities, at fair value (cost of $9,311 at
June 30, 1999 and $3,743 at December 31, 1998)......... 7,907 3,000
Accounts receivable, less allowance for doubtful accounts
of $1,915 at June 30, 1999 and $960 at December 31,
1998................................................... 20,961 29,147
Inventories............................................... 104,852 109,151
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 2,117 4,429
Other current assets...................................... 2,818 2,381
-------- -------
Total current assets.............................. 168,534 185,583
Property, plant and equipment, net........................ 47,789 49,192
Other assets.............................................. 3,731 4,391
-------- -------
$220,054 239,166
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 11,468 14,128
Customer advances......................................... 1,976 3,303
Other liabilities......................................... 2,414 3,906
-------- -------
Total current liabilities......................... 15,858 21,337
Negative goodwill, less accumulated amortization............ 1,343 4,026
Accrued postretirement benefits............................. 3,070 3,148
Other long term liabilities................................. 241 396
-------- -------
Total liabilities................................. 20,512 28,907
Shareholders' Equity
Preferred stock, $1.00 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................................ 168,787 168,514
Retained earnings......................................... 32,216 43,308
Accumulated other comprehensive income.................... (1,860) (1,962)
-------- -------
Total shareholders' equity........................ 199,542 210,259
-------- -------
Commitments and contingencies..................... $220,054 239,166
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
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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 June 30, 1999 and
for the three and six months ended June 30, 1999 and 1998 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, 1998.
(2) INVENTORIES
Inventories consist of the following at June 30, 1999 and December 31, 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials.......................................... $ 33,516 $ 46,743
Work-in-process........................................ 18,161 21,241
Finished goods......................................... 53,175 41,167
-------- --------
Total........................................ $104,852 $109,151
======== ========
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $18.6 million at June 30,
1999 for the manufacture and delivery of drilling rigs during the remainder of
fiscal 1999. At June 30, 1999, the Company was contingently liable for
approximately $5.1 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 (LOSS) PER COMMON SHARE
Stock options outstanding at June 30, 1999 of 2,388,500 shares were not
considered in the computation of net loss per common share because there was a
loss for the period and inclusion of option shares is antidilutive. Stock
options outstanding at June 30, 1998 of 3,886,000 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.
(5) SPECIAL CHARGES
In the second quarter of 1999, the Company continued its restructuring
program in which the workforce was reduced 42 employees in addition to the
reduction of 375 employees in the first quarter. Expenses related to employee
severance incurred in connection with the restructuring program have been
reported as a
8
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
restructuring charge of $653,000 for the three months ended June 30, 1999 and
$1,458,000 for the six months ended June 30, 1999.
In the second quarter of 1999, the Company wrote-off $2.1 million for
pre-contract engineering and design costs incurred for a contract that did not
materialize, incurred a $2.2 million charge for contract adjustments, expensed
$2.0 million to increase inventory excess and obsolescence reserves, increased
trade account receivable reserves by $.9 million and incurred software
implementation and other charges of $.9 million.
(6) 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 adopted SOP 98-5 in the first
quarter of 1999 which did not have a material impact on its financial statements
or accounting policies.
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. SFAS No. 137 deferred the effective date of
SFAS No. 133 such that the statement is effective for financial statements for
fiscal years beginning after June 15, 2000. 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 2001.
9
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(7) KEY SEGMENT FINANCIAL INFORMATION
The Company operates through three business segments consisting of Oilfield
Equipment, Downhole Tools, and Specialty Steel. Financial information by
segments for the three and six months ended June 30, 1999 and 1998 is summarized
below (in thousands):
<TABLE>
<CAPTION>
OILFIELD DOWNHOLE SPECIALTY CORPORATE
EQUIPMENT PRODUCTS STEEL AND OTHER TOTAL
--------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Quarter ended June 30, 1999:
Sales to unaffiliated customers....... 8,480 9,812 1,335 250 19,877
Segment Operating income (loss)....... (6,095) (718) (570) (6,292) (13,675)
Depreciation and amortization......... 128 1,101 10 57 1,296
Amortization of negative goodwill..... -- -- -- 1,342 1,342
Quarter ended June 30, 1998:
Sales to unaffiliated customers....... 25,118 23,600 2,694 (13) 51,399
Segment Operating income (loss)....... 4,772 5,655 737 (2,516) 8,648
Depreciation and amortization......... 105 1,781 8 54 1,948
Amortization of negative goodwill..... -- -- -- 1,342 1,342
</TABLE>
<TABLE>
<CAPTION>
OILFIELD DOWNHOLE SPECIALTY CORPORATE
EQUIPMENT PRODUCTS STEEL AND OTHER TOTAL
--------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1999:
Sales to unaffiliated customers....... 19,447 21,138 2,505 (670) 42,420
Segment Operating income (loss)....... (5,490) 1,305 168 (9,813) (13,830)
Depreciation and amortization......... 257 2,179 21 115 2,572
Amortization of negative goodwill..... -- -- -- 2,684 2,684
Six months ended June 30, 1998:
Sales to unaffiliated customers....... 50,180 43,176 5,600 (325) 98,631
Segment Operating income (loss)....... 9,813 8,793 1,255 (5,723) 14,138
Depreciation and amortization......... 187 1,866 15 104 2,172
Amortization of negative goodwill..... -- -- -- 2,684 2,684
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
OVERVIEW
General
We manufacture land-based drilling and well-servicing rigs and rig
component parts for use in the domestic and international markets. 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 have a substantial impact on our revenues.
Exploration, development and production activity is largely dependent on the
prevailing view of future oil and natural gas prices which have been
significantly volatile for the last 20 years. Oil and natural gas prices are
influenced by 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 our products in certain emerging market
countries may be greatly influenced by their need for internal development,
energy self-sufficiency or hard currency earnings rather than the conventional
factors relating to the price of oil and natural gas.
During the latter half of 1998 and the first quarter of 1999, declining oil
prices coupled with the deteriorating economic conditions in Russia and other
emerging markets resulted in a sharp drop in customer spending and a
dramatically lower rig utilization rate worldwide. Our revenues, operating
income and backlog have been adversely affected by these events and the value of
our receivables and inventory may be further affected by these events. Despite a
recent increase in oil prices during the second quarter of 1999, customer
spending and rig utilization rates have not increased. Although the recent
increase in oil and gas prices may eventually have a positive impact on our
operations, our second quarter results of operations continue to reflect the
adverse market conditions prevalent during the first six months of 1999. In
addition, our gross margins and general and administrative expenses were also
adversely affected by a special charge of $8.7 million relating to project
development, restructuring costs, software implementation and other special
charges.
We continue to implement a variety of measures to consolidate our
manufacturing operations in Pampa and Houston, Texas and other cost reduction
programs. These actions reduced our workforce by an aggregate of 724 employees
through July 1999. On an ongoing basis we will continue to consider the
possibility of further consolidation and cost reduction measures but we cannot
give any assurance that these or any other measures will be sufficient to offset
the negative impact of the existing industry conditions.
Foreign Exchange Transactions
We have attempted to limit our exposure to foreign currency fluctuations.
Sales denominated in foreign currencies are made only by the down hole tools
segment. With the exception of our Canadian subsidiary, we maintain our cash,
cash equivalents and investments in U.S. dollar denominated accounts (except to
the extent needed for local operating expenses). We have not engaged in and do
not currently intend to engage in any significant hedging or currency trading
transactions to compensate for adverse currency fluctuations among foreign
currencies.
RESULTS OF OPERATIONS
Sales of new rigs manufactured by us 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 of rig packages range from
six to nine months. These fluctuations in the size and timing of orders, may
affect our quarterly revenues and operating income.
11
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Results of Segment Operations
The following discussion of the results of operations of our oil field
equipment, down hole tools and specialty steel segments does not reflect the
allocation of corporate overhead and unallocated administrative expenses and
amortization of goodwill and negative goodwill on an individual segment basis.
Certain information that reconciles the discussion of the results of operations
of the individual segments to our Condensed Consolidated Financial Statements is
as follows:
<TABLE>
<CAPTION>
THE COMPANY
------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues
Oil field equipment............................. $ 8,480 $25,118 $ 19,447 $50,180
Down hole tools................................. 9,812 23,600 21,138 43,176
Specialty steel................................. 1,335 2,694 2,505 5,600
Eliminations.................................... 250 (13) (670) (325)
-------- ------- -------- -------
Total........................................ $ 19,877 $51,399 $ 42,420 $98,631
======== ======= ======== =======
Segment operating income (loss)
Oil field equipment............................. $ (6,095) $ 4,772 $ (5,490) $ 9,813
Down hole tools................................. (718) 5,655 1,305 8,793
Specialty steel................................. (570) 737 168 1,255
-------- ------- -------- -------
Total........................................ (7,383) 11,164 (4,017) 19,861
Corporate overhead and unallocated
administrative expenses...................... (6,667) (3,527) (10,411) (7,769)
Amortization of negative goodwill............... 1,342 1,342 2,684 2,684
Amortization of goodwill........................ (314) (331) (628) (638)
Restructuring Costs............................. (653) -- (1,458)
-------- ------- -------- -------
Operating income (loss)......................... $(13,675) $ 8,648 $(13,830) $14,138
======== ======= ======== =======
</TABLE>
Oil Field Equipment
Revenues and operating income for the oil field equipment segment decreased
to $8.5 million and $(6.1) million, respectively, for the second quarter of 1999
and $19.4 million and $(5.5) million, respectively, for the first six months of
1999, as compared to $25.1 million and $4.8 million, respectively, for the
second quarter of 1998 and $50.2 million and $9.8 million, respectively, for the
first six months of 1998. The economic and financial turmoil in Russia and the
Asia-Pacific region together with the downward turn in oil prices during the
first quarter of 1999 led to a sharp decrease in the demand for our products.
Decreased sales of rig packages resulted in a decrease in revenues and operating
income and sharply reduced our gross margin, which, for the second quarter of
1999 was (61.3)%, as compared to 23.2% for the second quarter of 1998, and for
the first six months of 1999 was (19.8)%, as compared to 23.8% for the first six
months of 1998. Our gross margin was also negatively impacted by a $2.1 million
write-off for pre-contract engineering and design costs incurred for a contract
that did not materialize and a $2.2 million charge for contract adjustments.
Down Hole Tools
Revenues and operating income for the down hole tools segment were $9.8
million and $(0.7) million, respectively, for the second quarter of 1999 and
$21.1 million and $1.3 million for the first six months of 1999, as compared to
$23.6 million and $5.7 million, respectively, for the second quarter of 1998 and
$43.2 million and $8.8 million, respectively for the first six months of 1998.
The downward trends in the oil industries prevailing during the first quarter of
1999 had a significant negative impact on our customer's demand for
12
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fishing tools and power equipment, particularly in international markets, and,
accordingly, on our revenues and operating income. As a result of decreased
sales volume and an increase in inventory excess and obsolescence reserves of
$2.0 million, our gross margin for the second quarter and the first six months
of 1999 decreased to 0.6% and 19.7%, respectively, as compared to 33% and 30.3%
for the second quarter and the first six months, respectively, of 1998.
Specialty Steel
Revenues and operating income for the specialty steel segment were $1.3
million and $(0.6) million, respectively, for the second quarter of 1999 and
$2.5 million and $0.2 million, respectively for the first six months of 1999, as
compared to $2.7 million and $0.7 million, respectively, for the second quarter
of 1998 and $5.6 million and $1.3 million for the first six months of 1998.
Reduced demand from a major customer and a general recession in industry-wide
demand due to market conditions significantly impacted our revenues and
operating income. Because of the loss of the high margin business that we
transacted with this major customer, the overall reduction in our sale volume,
our gross margin decreased from 28.8% for the second quarter of 1998 and 23.8 %
for the first six months of 1998 to (40.4)% for the second quarter of 1999 and
9.3% for the first six months of 1999.
Corporate and Administrative
Corporate and administrative expenses were $6.7 million for the second
quarter of 1999 and $10.4 million for the first six months of 1999, as compared
to $3.5 million for the second quarter of 1998 and $7.8 million for the first
six months of 1998. This increase resulted primarily from increased professional
fees associated with due diligence costs related to prospective acquisitions,
professional fees, costs related to Year 2000 compliance, consulting services
related to information technology systems and costs related to the
implementation of new software systems at the down hole tools division. There
was also a $0.9 million increase in the provision for doubtful accounts
receivable.
Other Income (Expense)
Other expenses decreased to $1.7 million for the second quarter of 1999, as
compared to $3.4 million for the second quarter of 1998, but increased to $3.5
million for the first six months of 1999, as compared to $3.0 million for the
first six months of 1998. Losses on investments in marketable securities netted
$1.5 million in the second quarter of 1999, as compared to losses of $2.4
million during the second quarter of 1998, and netted $3.3 million for the first
six months of 1999, as compared to $2.0 for the first six months of 1998. Also,
the Company incurred a special charge of $0.6 million in the second quarter of
1998 relating to expenses in connection with the Company's proposed acquisition
of Hitec ASA, which terminated on April 28, 1998. There was no such charge in
1999.
Interest income decreased by $0.3 million in the second quarter of 1999 and
$0.7 million in the first six months of 1999, as compared to the second quarter
of 1998 and the first six months of 1999, respectively, because of lower average
cash balances during the first six months of 1999.
Income Taxes
We recorded a deferred tax asset of $2.0 million in the second quarter of
1999, which we believe is more likely than not to be realized by future taxable
income.
ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS No. 137 deferred the effective date for SFAS 133 to all quarters of fiscal
years beginning after June 15, 2000. This statement requires that all
derivatives be recognized on the balance sheet, measured at fair value. Adoption
of this statement is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had cash and cash equivalents and marketable
securities of $37.8 million, compared to $40.5 million at December 31, 1998. Our
working capital was $152.7 million compared to $164.2 million at December 31,
1998. This decrease in working capital at June 30, 1999 resulted from a decrease
in cash and cash equivalents, accounts receivable, inventories and other current
assets and current liabilities, partially offset by an increase in marketable
securities. At June 30, 1999, the ratio of our current assets to current
liabilities was approximately 10.6:1.
At June 30, 1999, approximately $4.6 million was available for additional
borrowings and letters of credit under the Revolving Credit Facility. At this
time, we have no outstanding indebtedness other than contingent liabilities in
the form of stand-by letters of credit.
We believe that our balance sheet, significant liquidity and cash flow from
operations will be sufficient to meet our short term and long term liquidity
needs. We believe that any credit facilities that we may need in the future will
be available on commercially acceptable terms, though there can be no assurances
in this regard.
The Revolving Credit Facility
We have a revolving credit facility that matures on June 30, 2000, and
under its terms we may reborrow all amounts repaid prior to its maturity. After
the initial public offering of our common stock, we reduced the commitment under
our revolving credit facility to $9.7 million.
Our obligations under our revolving credit facility are secured by first
priority security interests in substantially all of our assets, including all
personal property and material real property, the pledge by us of all of the
outstanding capital stock of Cardwell and the pledge by us or Cardwell, as the
case may be, of 66% of the outstanding capital stock of each of our direct and
indirect foreign subsidiaries. These obligations are also guaranteed by
Cardwell. Our revolving credit facility contains certain representations and
warranties, covenants and events of default customary for facilities of this
type.
Because of the decrease in our revenues and operating income over the past
two quarters, we failed to comply with certain financial covenants in our
revolving credit facility. We are currently negotiating with the lender under
our revolving credit facility and we expect to obtain a waiver of such financial
covenants, though there can be no assurances in this regard.
YEAR 2000
Our Year 2000 Compliance Program
We have made progress in our Year 2000 compliance program. We have
completed major milestones in our inventorying of systems and hardware, testing
for production machines, and testing of our ERP systems. The following is table
provides an update of the key tasks identified in our Year 2000 compliance
program:
<TABLE>
<CAPTION>
KEY TASK EXPECTED COMPLETION DATE
-------- ------------------------
<S> <C> <C>
- - Final analysis of our relationships with key End of Third Quarter
customers and suppliers
- - Inventory of non-Year 2000 compliant hardware and Completed
software systems and other technology
- - Business impact assessment of non-Year 2000 compliant End of Third Quarter
systems and technologies and non-Year 2000 compliant
key customers and suppliers
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
KEY TASK EXPECTED COMPLETION DATE
-------- ------------------------
<S> <C> <C>
- - Replacement or remediation of non-Year 2000 compliant End of Third Quarter
systems and technologies. See Section on "State of
Readiness" below
- - Development of contingency plans with respect to End of November
systems and technologies that cannot be replace or
remediated in time and with respect to key suppliers
and customers that have not become Year 2000
compliant
</TABLE>
Our State of Readiness
Inventory, Remediation and Testing of Information Technology and Other
Technology Systems. We have completed our inventory of our information
technology and other technology systems and have been working to remediate the
problems that have been discovered. We are currently in the process of testing
many of our systems for Year 2000 readiness. The following details the major
components of our systems and the status of our testing with respect to those
systems:
<TABLE>
<S> <C> <C>
- - Network servers, LANS, WANS and PC's Testing almost complete
- - Down hole tools division ERP systems Testing completed
- - Oil field equipment division ERP systems Testing almost complete
- - Systems located at international locations Testing to be completed by mid-October
- - Non-IT technology systems (including production, Testing completed
machines, office equipment, security systems, phones,
etc.)
</TABLE>
The testing is being done by our employees and depending on the system,
involves the inquiry with the respective manufacturers regarding their systems
and the use of testing tools and written test procedures to document and
validate, as necessary, our systems testing. Although, as detailed above, we
have tested these systems for their respective Year 2000 readiness, we cannot
assure that all of our systems are Year 2000 compliant.
Analysis of Key Suppliers and Customers. We have also initiated the
inventorying of key third party relationships for Year 2000 compliance. Although
we have begun to contact the suppliers and customers of the down hole tools
unit, we have not yet assessed the extent and content of the responses received
from those suppliers and customers. We have not begun to inventory the suppliers
and customers for the oil field equipment unit and the specialty steel segment,
but we believe that the loss of any of our suppliers would not have a material
adverse effect on our operations. In order to increase our understanding of any
unforeseen risk exposures, we plan to do a more extensive analysis of those
suppliers and customers that are key to our operations. We plan to complete the
analysis of our key third party relationships by the end of the third quarter
1999.
Costs to Address Year 2000 Issues
To date, we have incurred expenses of approximately $250,000 that are
directly related to our Year 2000 compliance program. We estimate our expenses
relating to Year 2000 issues will be no more than $1 million. The replacement
and upgrade of several of our 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. In addition, our maintenance agreements with the
vendors of our ERP systems for the down hole tools and oil field equipment units
already include the cost of the software upgrades required for those systems. We
believe that the costs to complete our Year 2000 compliance program will not
have a material effect on our financial position, results of operations or cash
flows, though we cannot give any assurances in this regard.
15
<PAGE> 16
Risks Associated with Year 2000 Issues
We believe that much of the risk associated with Year 2000 will be
mitigated by the installation of the software upgrades on our ERP systems. We
are, however, presently unable to determine fully the risk to our business
presented by third party relationships. We are presently unable to determine
what effect the failure of us, our suppliers or our customers to become Year
2000 compliant will have on our business, but significant failures could have a
material adverse effect on our results of operations and financial condition. At
the very least, a significant failure may force us to curtail our production,
prevent us from meeting customer orders on a timely basis, and/or impede our
ability to monitor customer orders and inventory.
Contingency Plans for Year 2000
We have not yet been able to determine the extent to which we need
contingency plans because our Year 2000 inventory is not yet complete. It is our
intention to develop contingency plans by the end of November 1999.
CAPITAL EXPENDITURES
Capital expenditures for three months ended June 30, 1999 totaled
approximately $0.5 million, essentially all of which was spent for the
implementation of new software at the down hole tools division. We are funding
capital expenditures with available cash, cash flow from operations and borrows
under the revolving credit facility.
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 our control. 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 (including Russia and
countries of the Asia-Pacific region);
- 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.
INFLATION
Inflation has not had a material impact on our operating and occupancy
costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
This discussion of about our exposure to market risks and our
risk-management activities includes forward looking statements. These forward
looking statements involve risks and uncertainties, including economic and
competitive factors outside our control.
Our primary risk exposures come from interest rate risks, foreign exchange
rate risks, and equity price risks. Our exposure to interest rate risks are
minimal with respect to indebtedness. We repaid substantially all our
outstanding indebtedness in November 1997. However, at June 30, 1999, we had
approximately $29.9
16
<PAGE> 17
million of cash in interest bearing accounts. The rate of return on these
accounts will vary with the prevailing interest rates. We do not engage in any
significant interest rate swaps or other derivative activities designed to limit
our exposure to changes in interest rates.
Our direct exposure to foreign exchange risks is minimal. Except as
discussed above in the "Management Discussion and Analysis of Financial
Condition and Results of Operations" with respect to our down hole tools
division, all of our sales are denominated in U.S. dollars. However, foreign
exchange rate fluctuations may affect our revenues indirectly to the extent that
a stronger U.S. dollar affects our ability to compete on the basis of price. We
do not engage in any significant hedging or currency trading activities to limit
our sensitivity to changes in foreign exchange rates and/or interest rates.
At June 30, 1999, we had approximately $7.9 million of marketable
securities, consisting primarily of corporate equity securities. These
securities were acquired principally for trading purposes and are bought and
held by us for the purposes of selling them in the near term. Fluctuations in
interest rates and equity prices may adversely affect the value of our
marketable securities.
We do not believe there has been any material change in the market risks
faced by us since the end of 1998.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT 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.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 16, 1999 IRI INTERNATIONAL CORPORATION
By: /s/ ROBERT L. HARGRAVE
------------------------------------
Robert L. Hargrave
Chief Financial and Accounting
Officer
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*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)
</TABLE>
- ---------------
* Exhibit incorporated herein by reference to the Company's registration
statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997, as
amended.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 29,879
<SECURITIES> 7,907
<RECEIVABLES> 23,030
<ALLOWANCES> 2,065
<INVENTORY> 104,852
<CURRENT-ASSETS> 168,534
<PP&E> 58,775
<DEPRECIATION> 10,986
<TOTAL-ASSETS> 220,054
<CURRENT-LIABILITIES> 15,858
<BONDS> 0
0
0
<COMMON> 399
<OTHER-SE> 199,143
<TOTAL-LIABILITY-AND-EQUITY> 220,054
<SALES> 42,420
<TOTAL-REVENUES> 42,420
<CGS> 39,833
<TOTAL-COSTS> 56,250
<OTHER-EXPENSES> 2,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> (17,064)
<INCOME-TAX> 5,972
<INCOME-CONTINUING> (11,092)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,092)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
