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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 1-13593
IRI INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified In Its Charter)
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<S> <C>
DELAWARE 75-2044681
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1000 LOUISIANA, SUITE 5900
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (713) 651-8002
Securities Registered Pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
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Common Stock, $.01 par value New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
As of March 22, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $142,143,750 based on the last reported
sale price of the Registrant's Common Stock on the New York Stock Exchange.
39,900,000 shares of Common Stock were outstanding on March 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
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LOCATION IN FORM 10-K INCORPORATED DOCUMENT
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Part III Proxy Statement for the Registrant's
Consisting of Items 10, 11, 12 and 1999 Annual Stockholder's Meeting
13
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ITEM 1. BUSINESS
IRI International Corporation (the "Company" or "we" or "us") is one of the
world's largest manufacturers of land-based drilling well-servicing rigs and rig
component parts for use in the global oil and gas industry. We are principally
engaged in the design, manufacture, service, sale and rental of onshore and
offshore oil field equipment for the domestic and international markets. Our IRI
and Cardwell operations design and produce rigs to meet the special requirements
of our global clientele for service in remote areas and harsh climatic
conditions. Our Bowen Tools Division is a leading manufacturer of down hole
fishing and drilling tools. We offer a complete line of oil field power
equipment, including top drives, power swivels, wireline pressure control
equipment and coiled tubing systems, which complement our drilling and well-
servicing rigs. We also manufacture and maintain a significant inventory of
replacement parts for rigs produced by us and others, enabling us to meet the
needs of our customers on a timely basis. Our Specialty Steel Division produces
premium alloy steel for commercial and military use and for use in manufacturing
oil field equipment products.
We market our oil field equipment primarily through our own sales force and
through designated agents and distributors in every major oil and gas producing
region in the world. We maintain 27 domestic and 7 international sales, parts
and service centers in areas of significant drilling and production operations.
Our network of service centers in the United States provides our customers with
refurbishment or repair services as well as ready access to replacement parts
for equipment in the field. Our worldwide sales and marketing activities are
closely coordinated with and supported by a staff of engineers and design
technicians. This allows us to provide our customers with products meeting their
customized design specifications.
Our predecessor was founded in 1985 through the combination of
Ingersoll-Rand Oilfield Products Company and the Ideco Division of Dresser
Industries, Inc. and was acquired by Energy Services International Ltd. in 1994
("ESI"). We acquired the business and operations of the Bowen Tools Division
(the "Bowen Acquisition") on March 31, 1997 and Cardwell International, Ltd.
(the "Cardwell Acquisition") on April 17, 1997 (together, the "Acquisitions").
In October 1997, we merged with ESI, and ESI, as the surviving entity, changed
its name to IRI International Corporation. In November 1997, we consummated the
initial public offering of 12,000,000 shares of our Common Stock.
DRILLING AND WELL-SERVICING RIGS
Products
We design, construct and sell a total of 48 standard models of drilling and
well-servicing rigs under the IDECO(R), FRANKS(R), CARDWELL(TM) and IRI(TM)
brand names. Our products include:
- land-based skid mounted rigs;
- offshore drilling and well-servicing rigs;
- self-propelled drilling and well-servicing rigs;
- slant hole drilling rigs; and
- heli-rigs.
In addition to our standard models, we manufacture customized drilling and
well-servicing rigs to customer specifications to accommodate, among other
things, extreme weather conditions, moving systems or hook load capacities. We
also design, manufacture and sell component products used in the original
construction, modernization or repair of land and offshore rigs, including
masts, derrick, substructures and other components used in hoisting, power
transmission, pumping and mud systems. The sale of drilling and well-servicing
rigs and component parts accounted for $55.8 million (or 31.8%) of our revenues
for 1998.
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Competition
Our principal competitors in the manufacture of drilling rigs and
components are National-Oilwell, Inc., Continental Emsco Company and Varco
International, Inc. Our revenues and earnings are affected by the actions of
competitors, including price changes, introduction of new or improved products
and changes in the supply of, and improvements in the deliverability of,
competing products.
Backlog
Sales of our drilling and well-servicing rigs are made almost exclusively
on the basis of written purchase orders or contracts. We include in our rig
backlog those orders or purchase commitments that we are reasonably certain will
be consummated based on industry practice, the historical relationship between
us and the customer or the financial terms of the sale, including cash advances,
letters of credit or similar credit support arrangements. Giving pro forma
effect to the Acquisitions as if they had occurred on January 1, 1997, the total
value of our rig backlog as of December 31, 1998 and 1997 was $21.3 million and
$69.4 million, respectively. We cannot assure that the contracts included in our
backlog will ultimately generate anticipated revenues in the period expected or
otherwise.
We attempt to mitigate the financial risks in sales to our international
customers by requiring, where commercially feasible, cash advances, irrevocable
letters of credit or similar credit support arrangements. As of December 31,
1998, we have received approximately $3.3 million in cash down payments and
approximately $7.8 million of letters of credit or assignments of letters of
credit to support customer orders.
Customers
Sales of drilling and well-servicing rigs are made to various customers,
which change from year to year depending on the size and timing of rig purchase
orders. In 1998, our largest customer, Ukrgasprom, accounted for 16.3% of the
revenues of our oil field equipment segment, and our second largest customer,
Varyeganneftegas, accounted for 10.7% of the revenues of our oil field equipment
segment. Because a large number of our customers are based in Russia and other
former Soviet republics, the turmoil in Russia and the other former Soviet
republics may materially adversely affect our future revenues and results of
operations.
FISHING AND DRILLING TOOLS
Our Bowen Tools Division designs, manufactures, sells and rents fishing and
drilling tools under the BOWEN(R) brand name. These include:
- external and internal catch fishing tools;
- junk catch fishing tools;
- milling and cutting tools;
- accessory tools such as jars, jar intensifiers and bumper subs; and
- repair and remedial tools.
Fishing and drilling tool sales and rentals accounted for $56.7 million (or
32.4%) of our revenues for 1998.
Competition
In the fishing and drilling tool business, like the rig manufacturing
business, our revenues and earnings are affected by the actions of competitors,
including price charges, introduction of new or improved products and changes in
the supply of, and improvements in the deliverability of, competing products.
Our primary competitors are Houston Engineers Inc. and Spring Engineers, Inc. in
the manufacture of fishing tools and Houston Engineers Inc. and Dailey
International Inc. in the manufacture of drilling tools.
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CUSTOMERS
The Bowen Tools Division's two largest customers accounted for 18.7% and
17.2% of its revenues in 1998. The loss of either of these customers could have
a material adverse effect on the division's and our revenues and results of
operations.
POWER AND WIRELINE/PRESSURE CONTROL EQUIPMENT
Power Equipment
In addition to fishing and drilling tools, our Bowen Tools Division also
manufactures products for the power equipment market, including:
- power-swivel systems used in well-servicing and drilling applications;
- top drives;
- power subs;
- bucking units;
- power tongs; and
- coiled tubing systems.
The market for power equipment is very competitive. We compete on the basis
of product design and quality, ability to meet delivery requirements and price.
Our principal competitor in this segment is Tesco Corporation. In addition, our
power equipment products compete with products manufactured by Maritime
Hydraulics U.S. Inc., Canadian Rig Ltd. and Varco International, Inc.
Wireline/Pressure Control Equipment
We manufacture wire line and pressure control equipment under the BOWEN(R)
brand name. These products include:
- small blowout preventers;
- unions;
- tool traps;
- tool catchers;
- lubricator risers;
- control heads;
- stuffing boxes; and
- wellhead adapters.
The market for pressure control equipment is very competitive. We compete
on the basis of product design, quality, ability to meet delivery requirements
and price. Our principal competitors in the market include Hydrolex, Inc., Elmar
Ltd. and Texas Oil Tools.
Sales and rentals of power and wireline/pressure control equipment products
accounted for $19.5 million (or 11.1%) of our revenues for 1998.
REPLACEMENT PARTS AND REFURBISHMENT
We manufacture and maintain a significant inventory of replacement parts
and replacement components. We also refurbish older rigs for our customers. We
believe that these businesses will grow over the next several years because of
increased worldwide rig utilization and the age of the international rig fleet,
most of which
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were constructed prior to 1982. We believe we are well positioned to provide
replacement parts and refurbishment services as a result of the large number of
operating rigs manufactured under our brand names and the preference of
equipment owners to obtain replacement parts and refurbishment services from the
original manufacturer. Replacement parts and refurbishment services accounted
for $32.6 million (or 18.6%) of our revenues for 1998.
SPECIALTY STEEL PRODUCTS
Our Specialty Steel Division manufactures premium specialty steel forgings
for commercial and military use and for use in manufacturing oil field equipment
products. Specialty steel products accounted for $10.4 million (or 5.9%) of our
revenues for 1998.
We manufacture over 100 different alloys to form forged products in round,
square and rectangular solid, trepanned, counter bored and stepped forms to meet
customer specifications. We sell our specialty steel products primarily to
customers in the heavy equipment, aircraft, petroleum and power generation
industries in North America and to the United States military. We also sell our
specialty steel products as feedstock directly to forgers and extruders. The
Division's largest customer accounted for 11.4% of the Division's revenue for
1998. In addition, 14.7% of steel production for 1998 was sold to the government
and military sectors.
Competition
The U.S. specialty steel market is highly competitive due primarily to the
high cost of freight associated with moving small amounts of high tonnage
finished goods. Competitive factors include price, delivery, quality and
service. Steel ingots and billets are commodities and are extremely price
competitive. Our major competitors in the specialty steel market are National
Forge Company Inc., Ellwood Group Inc., Scot Forge Company Inc., Erie Forge and
Steel Inc. and First Miss Steel Inc.
Customers
The Specialty Steel Division's largest customer accounted for 11.4% of the
Specialty Steel Division's revenues for 1998. This customer has gradually
reduced its purchases in 1998 and we do not expect any purchases from this
customer in 1999. The loss of this customer may materially adversely affect the
revenues and operating results of the Specialty Steel Division, though it will
not materially adversely affect our revenues and operating results taken as a
whole.
ENGINEERING AND PRODUCT DEVELOPMENT
We maintain a staff of engineers and design technicians to:
- design and test new products, components and systems for use in
manufacturing and drilling applications;
- enhance the capabilities of existing products; and
- assist our sales organization and customers with special requirements and
products.
We intend to continue our research, engineering and product development programs
to develop proprietary products that are complementary to our existing products,
particularly with respect to harsh environment rigs and equipment. Our total
engineering and product development expenses for 1998 were $3.4 million. We have
budgeted $2.7 million for engineering and product development expenses for 1999.
MARKETING, SALES AND DISTRIBUTION
We market our oil field products primarily through our own sales force and
through designated agents and distributors in every major oil and gas producing
region in the world. Our customers include international and domestic drilling
contractors and international and domestic oil and gas exploration and
production compa-
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nies, including foreign state-owned oil and gas enterprises. We maintain 27
domestic and 7 international sales, parts and service centers in areas of
significant drilling and production operations.
See Note 13 to the Financial Statements for financial information related
to our revenues by geographic region.
RAW MATERIALS
We purchase our components, parts and raw materials from several commercial
sources. With respect to our Specialty Steel Division, the raw materials used to
manufacture specialty steel products consist of premium steel scrap and various
alloys, of which we believe there is an adequate supply in the North American
market. We believe that the loss of any of our suppliers would not have a
material adverse effect on our operations.
INTELLECTUAL PROPERTY
We own or have license to use a number of U.S. and foreign patents covering
a variety of products. Although on the whole the patents are important to us, no
single patent is essential to our business. In general, we depend upon product
name recognition, manufacturing quality control and application of our expertise
rather than patented technology in the conduct of our business. We enjoy product
brand name recognition, principally through our BOWEN(R), IDECO(R), FRANKS(R),
CARDWELL(TM), and IRI(TM) trademarks, and considers such trademarks to be
important to our business.
EMPLOYEES
As of December 31, 1998, we employed a total of 1,203 persons, of whom 30
were employed outside the United States. Approximately 46% of these employees
were salaried and the balance were compensated on an hourly basis. Approximately
26% of our employees are represented by a union or are parties to a collective
bargaining agreement. The collective bargaining agreement between us and our
employees is effective for the period from July 1997 until July 2000, covers
approximately 315 employees and contains customary provisions with respect to
wages, hours and working conditions for certain production and maintenance
employees in the Bowen Tools Division. The collective bargaining agreement
required a 4.5% wage increase in its first year, and 3% increases in its second
and third years. We consider our relations with our employees to be good.
RISKS AND INSURANCE
Our operations are subject to the usual hazards inherent in manufacturing
products and providing services for the oil and gas industry. These hazards
include:
- personal injury and loss of life;
- business interruptions;
- property and equipment damage; and
- pollution or environmental damage.
We maintain comprehensive insurance covering our assets and insuring against
risks at levels that we believe are appropriate and in accordance with industry
practice. We cannot assure, however, that our insurance coverage will be
adequate in all circumstances or against all hazards or risks, or that we will
be able to maintain adequate insurance coverage in the future at commercially
reasonable rates or on acceptable terms.
Our services and products are used in drilling, production and
well-servicing operations. These types of operations are subject to inherent
risks, including:
- Property damage;
- Personal injury;
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- Suspension of operations; and
- Loss of production.
We maintain product liability and worker's compensation insurance. Although the
limits of our insurance coverage against an accident are generally in accordance
with industry practice, such insurance may not be adequate to protect the us
against liability or losses accruing from all the consequences of such an
incident.
ENVIRONMENTAL MATTERS
Our manufacturing operations are subject to a broad range of federal, state
and local environmental laws, both in the United States and in foreign
jurisdictions, including those governing:
- discharges into the air and water;
- handling and disposal of solid and hazardous wastes; and
- remediation of contaminated soil and groundwater.
Our policy is to eliminate and minimize generation of wastes at our facilities
through plant operations, process design and maintenance. We continually strive
to reduce wastes by sending these materials off-site for recycling and/or
re-use.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability without regard to fault, on certain classes of
persons for the release of a hazardous substance into the environment. These
persons include the owner and operator of the disposal site or sites where the
release occurred and companies that sent hazardous substances to such sites.
Persons who are responsible for releases of hazardous substances under CERCLA
may be subject to joint and several liability for the costs of cleaning up
hazardous substances that have been released into the environment.
We currently own or lease, and have in the past owned or leased, numerous
properties that have been used for the manufacture and storage of products and
equipment containing or requiring oil and/or other hazardous substances.
Although we have used standard operating and disposal practices, hazardous
substances may have been disposed of or released on or under the properties
owned or leased by us or on or under other locations where such wastes have been
taken for disposal. In addition, many of these properties have been operated by
third parties whose treatment and disposal or release of hydrocarbons or other
wastes was not under our control. These properties and the wastes disposed
thereon may be subject to CERCLA, the Resource Conservation and Recovery Act and
analogous state laws. Under such laws, we could be required to remediate any
hazardous substances or wastes discovered on or under these properties.
Various federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos containing materials
("ACM"). These laws and regulations may impose liability for the release of ACM.
We are aware of the presence of ACM at our facilities, but we believe that such
material is in acceptable condition at this time. Although we cannot give any
assurances, we believe that any future costs related to remediation of ACM at
these sites will not be material, either on an annual basis or in the aggregate.
We have tried to reduce the impact of costs related to actual or potential
environmental conditions at the Bowen Tools Division facilities through our
contractual arrangements with Air Liquide America Corporation ("Air Liquide").
Air Liquide and Bowen agreed to indemnify us for costs relating to environmental
conditions existing at these facilities prior to our purchase of the Bowen Tools
Division. We cannot assure that Air Liquide or Bowen will meet its obligations
under the indemnification arrangements or that there will not be future
contamination for which we might be fully liable and that may require us to
incur significant costs that could have a material adverse effect on our
financial condition and results of operations.
Although we believe we are currently in substantial compliance with
environmental laws and regulations, as is the case with most industrial
manufacturers, we could incur significant costs related to environmental
compliance in the future. Future environmental compliance may involve
remediating existing conditions at our
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facilities or modifing our operations. These potential costs may have a material
adverse effect on our financial condition and results of operations. Moreover,
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional, presently
unquantifiable, costs or liabilities to us.
ITEM 2. PROPERTIES
The principal offices and facilities owned or leased by us and their
current uses are described in the following table:
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FACILITY SIZE PROPERTY SIZE
LOCATION (SQ. FT.) (ACRES) TENANCY USE
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Pampa, TX............ 1,000,000 499 Owned Rig and specialty steel
manufacturing, administration and
warehousing
Houston, TX.......... 539,700 19 Owned Drilling tool manufacturing,
administration and warehousing
Beaumont, TX(1)...... 350,000 10 Owned Rig parts sales and warehousing
El Dorado, KS(2)..... 139,912 23 Owned Rig parts sales and warehousing
Houston, TX.......... 16,249 N/A Leased Executive Offices
Houston, TX.......... 50,154 2 Owned Administration
</TABLE>
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(1) Rig manufacturing was ceased at this facility in early 1999.
(2) Rig manufacturing was ceased at this facility in December 1998.
We also own or lease facilities at 34 domestic and international locations,
substantially all of which are sales, service or warehouse locations.
ITEM 3. LEGAL PROCEEDINGS
There are pending or threatened against us various claims, lawsuits and
administrative proceedings all arising from the ordinary course of business with
respect to commercial product liability and employee matters. Although no
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effects such outcomes may have on
us, we believe that any ultimate liability resulting from the outcome of such
proceedings to the extent not otherwise provided for will not have a material
adverse effect on our consolidated financial statements.
We maintain comprehensive liability insurance. We believe such coverage to
be of a nature and amount sufficient to ensure that we are adequately protected
from any material financial loss as a result of such claims. We currently are
not the subject of any legal actions for which we are neither insured nor
indemnified and which we believe will individually or in the aggregate have a
material adverse effect on our financial condition, results of operations or
liquidity, nor to our knowledge is any such litigation threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $0.01 per share (the "Common Stock") became
listed on the New York Stock Exchange on November 14, 1997 under the symbol
"IIR". Prior to that time there was no public market for our common stock. Our
common stock closed at $3 9/16 on March 22, 1999.
The following table sets forth (as reported by New York Stock Exchange) for
the periods indicated the prices of the Common Stock.
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FISCAL 1999 HIGH LOW
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1st Quarter (through March 22, 1999)........................ 4 3/8 2 7/8
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FISCAL 1998 HIGH LOW
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1st Quarter................................................. 14 1/2 10
2nd Quarter................................................. 14 15/16 10 3/4
3rd Quarter................................................. 12 1/4 4 3/8
4th Quarter................................................. 6 3/4 2 1/2
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FISCAL 1997 HIGH LOW
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4th Quarter (from November 13, 1997)........................ 21 1/8 12 3/4
</TABLE>
The number of record holders of the Common Stock as of March 22, 1999 was
73. Pursuant to our Incentive Plan, 1,896,000 shares of Common Stock are subject
to outstanding options at March 22, 1999. An additional 600,000 options have
been authorized but not yet issued.
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain future earnings to provide for the continual growth
and development of our business.
During 1998, we made no sales of equity securities not registered under the
Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information
for the Company. The information presented for the period from September 20,
1994 through March 31, 1995, for the year ended March 31, 1996, the nine month
period ended December 31, 1996, the fiscal year ended December 31, 1997 and the
fiscal year ended December 31, 1998 is derived from our audited financial
statements. The information presented for the period from April 1, 1994 through
September 19, 1994 is derived from the audited financial statements of the
Company while owned by Dresser Industries, Inc. and Ingersoll-Rand Corporation
(the "Predecessor"). The information for the nine month period ended December
31, 1995 and the twelve month period ended December 31, 1996 is derived from our
unaudited financial statements. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company,
including the notes thereto, included elsewhere in this Annual Report.
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THE COMPANY PREDECESSOR
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NINE MONTHS PERIOD FROM PERIOD FROM
TWELVE MONTHS ENDED ENDED SEPTEMBER 20, APRIL 1, 1994
DECEMBER 31, DECEMBER 31, YEAR ENDED 1994 TO TO
----------------------------- ----------------- MARCH 31, MARCH 31, SEPTEMBER 19,
1998 1997(1) 1996 1996 1995 1996 1995 1994
-------- -------- ------- ------- ------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue....................... $175,045 $185,366 $75,663 $62,298 $39,141 $52,506 $20,206 $16,473
Cost of goods sold(2)......... 126,626 139,204 53,030 44,968 28,815 36,877 14,058 16,216
-------- -------- ------- ------- ------- ------- ------- -------
Gross profit (loss)........... 48,419 46,162 22,633 17,330 10,326 15,629 6,148 257
Selling, general and
administrative expense...... 30,526 23,543 10,810 8,220 5,400 7,990 2,305 2,102
Restructuring charge.......... 590 -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
Operating income (loss)....... 17,303 22,619 11,823 9,110 4,926 7,639 3,843 (1,845)
Interest expense.............. (360) (8,762) (662) (615) -- (47) (25) (2,675)
Other income
(expense) -- net............ (1,278) (1,464) 141 (20) 210 371 8 106
Income taxes.................. (3,283) (2,786) (98) (98) -- -- (263) --
-------- -------- ------- ------- ------- ------- ------- -------
Net income (loss) before
extraordinary item.......... 12,382 12,535 11,204 8,377 5,136 7,963 3,563 (4,414)
Extraordinary charge on early
extinguishment of debt, net
of tax benefit.............. -- (1,512) -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
Net income after extraordinary
item........................ 12,382 11,023 11,204 8,377 5,136 7,963 (3,563) (4,414)
======== ======== ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding................. 39,900 31,275 30,000 30,000 30,000 30,000 30,000 30,000
======== ======== ======= ======= ======= ======= ======= =======
Income (loss) per common
share....................... $ 0.31 $ 0.35 $ 0.37 $ 0.28 $ 0.17 $ 0.27 $ 0.12 $ (0.15)
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
------------------------------------------------
DECEMBER 31, MARCH 31,
----------------------------- ----------------
1998 1997 1996 1996 1995
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $164,246 $161,890 $38,658 $35,461 33,767
Total assets.............................................. 239,166 251,074 58,671 46,631 40,130
Long-term debt and obligation under capital lease less
current
installments............................................ 319 586 522 -- --
Shareholder's equity...................................... 210,259 198,406 24,903 16,526 8,563
</TABLE>
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(1) The Company acquired the business and operations of the Bowen Tools Division
on March 31, 1997 and Cardwell International, Ltd. on April 17, 1997.
(2) Amortization of negative goodwill decreased cost of goods sold in all
periods except the period from April 1, 1994 through September 19, 1994
(predecessor periods). See Notes to Pro Forma Condensed Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
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ITEM 7. 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 "Selected Consolidated
Financial Information," the Consolidated Financial Statements and Notes thereto
and the other information included elsewhere in this Annual Report on Form 10-K.
Our fiscal year was changed from the twelve-month period ending March 31 to
the calendar year, effective December 31, 1996.
OVERVIEW
General
We manufacture land-based drilling and well-servicing rigs and rig
component parts for use in the domestic and international markets. Our 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 our 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.
As a result of the continued decline in oil prices and the deteriorating
economic conditions in Russia and other emerging markets, the oil and gas
industry has dramatically reduced its capital expenditures for exploration,
development and production activities. Our revenues, operating income and
backlog have been adversely affected by these events. We believe that these
industry conditions may further deteriorate and negatively impact our future
results of operations.
Accordingly, we have assessed and begun to implement a variety of measures
to minimize the adverse effects of industry conditions on the our business and
financial performance. We consolidated our manufacturing operations in Pampa and
Houston, Texas and implemented other cost reduction measures. These measures
reduced our workforce by a total of 690 employees through March 1999. We are
considering further consolidation and cost reduction measures but we cannot
assure that these or any other measures will be sufficient to offset the
negative effects of prevailing industry conditions on the our business and
financial performance.
Foreign Exchange Transactions
Sales denominated in currencies other than U.S. dollars are made only by
the Bowen Tools Division. We attempt to limit our exposure to foreign currency
fluctuations by limiting the amount of sales denominated in currencies other
than U.S. dollars and by, with the exception of our Canadian subsidiary,
maintaining our cash and cash equivalents in U.S. dollar denominated accounts
and investments (except to the extent needed for local operating expenses). For
the twelve month period December 31, 1996 and the fiscal years ended December
31, 1997 and 1998, Bowen's Canadian sales (expressed in U.S. dollars) were $4.2
million, $4.4 million and $3.9 million, respectively, and all other non-U.S.
dollar denominated sales (expressed in U.S. dollars) were $9.1 million, $7.4
million and $9.5 million, respectively. We have not engaged in and do not
currently intend to engage in any significant hedging or currency trading
transactions designed to compensate for adverse currency fluctuations among
foreign currencies.
11
<PAGE> 12
Negative Goodwill
On September 20, 1994, all of our outstanding capital stock was acquired by
an affiliate of certain of our stockholders for $5.0 million in cash (the
"Company Acquisition"). The Company Acquisition was recorded using the purchase
method of accounting and the purchase price allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the date of the
Company Acquisition. The excess of the fair value of net assets acquired over
the consideration paid was applied against non-monetary assets (property, plant
and equipment), reducing the balances of these assets at the date of the Company
Acquisition to zero, and the remaining excess of the fair value of net assets
acquired over consideration paid was recorded as negative goodwill. The purchase
price has been allocated to the assets acquired and liabilities assumed based up
on their fair values at the date of the acquisition as follows (in thousands):
<TABLE>
<S> <C>
Inventories................................................. $ 33,287
Other current assets........................................ 7,743
Current liabilities......................................... (7,372)
Accrued retirement benefits................................. (1,821)
Negative goodwill........................................... (26,837)
--------
$ 5,000
========
</TABLE>
Negative goodwill is being amortized using the straight-line method over
five years ending September 19, 1999. The comparability of the results of
operations between the years ended March 31, 1995 (which included the results of
operations of our predecessor from April 1, 1994 to September 19, 1994) and
March 31, 1996 is affected by, in addition to the amortization of negative
goodwill (which reduces the post-Company Acquisition cost of sales), the
exclusion of depreciation expense related to fixed assets written down to zero
on the Company Acquisition date, both of which have a positive effect on
earnings. See Note 1 to the Consolidated Financial Statements. Amortization of
negative goodwill decreased cost of goods sold by $5.4 million in each of the
fiscal years ended December 31, 1998 and 1997 and the twelve month period ended
December 31, 1996 and the year ended March 31, 1996 and $2.7 million for the
period from September 20, 1994 through March 31, 1995.
RESULTS OF OPERATIONS
In June 1997, we changed our fiscal year from a March 31 year-end to a
December 31 year-end, effective with the period ended December 31, 1996, in
order to harmonize the fiscal years of IRI, Cardwell and Bowen. The following
discussion of the results of operations of our business units does not reflect
allocation of corporate overhead expense, unallocated administrative expense or
amortization of goodwill and negative goodwill. See Note 13 to our Financial
Statements for a presentation of segment information.
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 or rig packages range from
six to nine months. These fluctuations may affect our quarterly revenues and
operating income.
The lack of material tax provisions for the historical periods discussed
below results primarily from (i) the amortization of negative goodwill which
does not give rise to taxable income and (ii) the availability of net operating
loss carry forwards. As discussed above, negative goodwill is being amortized
over five years ending September 19, 1999. See "-- Negative Goodwill." See Note
9 to our Consolidated Financial Statements for a discussion of our net operating
loss carry forwards.
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 and unallocated administrative expenses, amortization of
negative goodwill and amortization of goodwill on an individual segment basis.
Certain
12
<PAGE> 13
information that reconciles the discussion of the results of operations of the
individual segments to the our Consolidated Financial Statements is as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------------------------------------------------------ -------------
PERIOD FROM
TWELVE MONTHS NINE MONTHS SEPTEMBER 20, PERIOD FROM
ENDED ENDED 1994 APRIL 1, 1994
DECEMBER 31, DECEMBER 31, YEAR ENDED THROUGH THROUGH
----------------------------- ----------------- MARCH 31, MARCH 31, SEPTEMBER 19,
1998 1997 1996 1996 1995 1996 1995 1994
-------- -------- ------- ------- ------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oil field equipment...... $ 88,395 $106,529 $61,537 $52,029 $30,668 $40,176 $14,399 $12,545
Down hole tools.......... 76,249 65,336 -- -- -- -- -- --
Specialty steel.......... 10,401 13,501 14,126 10,269 8,473 12,330 5,807 3,928
-------- -------- ------- ------- ------- ------- ------- -------
Total.............. $175,045 $185,366 $75,663 $62,298 $39,141 $52,506 $20,206 $16,473
======== ======== ======= ======= ======= ======= ======= =======
Segment operating income
(loss)
Oil field equipment...... $ 13,533 $ 15,617 $ 9,889 $ 7,399 $ 1,607 $ 4,141 $ 1,269 $ (671)
Down hole tools.......... 17,186 11,869 -- -- -- -- -- --
Specialty steel.......... 1,668 4,503 3,528 2,879 2,003 2,608 1,240 232
-------- -------- ------- ------- ------- ------- ------- -------
Total.............. 32,387 31,989 13,417 10,278 3,610 6,749 2,509 $ (439)
Corporate overhead and
unallocated
administrative
expenses............... (18,596) (13,862) (6,961) (5,194) (2,710) (4,477) (1,350) (1,406)
Restructuring charge..... 590 -- -- -- -- -- -- --
Amortization of negative
goodwill............... 5,367 5,370 5,367 4,026 4,026 5,367 2,684 --
Amortization of
goodwill............... 1,265 878 -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. $ 17,303 $ 22,619 $11,823 $ 9,110 $ 4,926 $ 7,639 $ 3,843 $(1,845)
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Oil Field Equipment
Revenues and operating income for the oil field equipment unit were $88.4
million and $13.5 million, respectively, for the fiscal year ended December 31,
1998, as compared to $106.5 million and $15.6 million, respectively, for the
fiscal year ended December 31, 1997. Decreased operating income resulted from
the economic and financial turmoil in Russia and the Asia-Pacific region and the
downward turn in oil prices, both of which resulted in a decreased demand for
our products. Gross Margin for the fiscal year ended December 31, 1998 was
19.5%, as compared to 17.8% for the fiscal year ended December 31, 1997. This
increase resulted principally from an extensive cost restructuring program and a
favorable mix between manufactured equipment and buy-outs.
Down Hole Tools
Revenues and operating income for the down hole tools unit were $76.2
million (or $6.4 million per month) and $17.2 million (or $1.4 million per
month), respectively, for the fiscal year ended December 31, 1998, as compared
to $65.3 million (or $7.3 million per month) and $11.9 million (or $1.3 million
per month), respectively, for the nine months ended December 31, 1997. Decreased
monthly revenues at the down hole tools unit were primarily attributable to the
downward trends in the oil industries. Gross margin for the fiscal year ended
December 31, 1998 was 33.0%, as compared to 26.5% for the fiscal year ended
December 31, 1997. The increase in monthly operating income and gross margin was
primarily due to the full impact of price increases in the last two quarters of
1997, an increase in the amount of manufacturing overhead absorbed into
inventory and management's cost-cutting initiatives.
Specialty Steel
Revenues and operating income for the specialty steel unit were $10.4
million and $1.7 million, respectively, for the fiscal year ended December 31,
1998, as compared to $13.5 million and $4.5 million,
13
<PAGE> 14
respectively, for the fiscal year ended December 31, 1997. The decrease in
revenues was primarily the result of reduced demand from a major customer.
Because of the loss of the high margin business that we transacted with this
major customer, our gross margins also decreased from 34.6% for the fiscal year
ended December 31, 1997 to 17.5% for the fiscal year ended December 31, 1998.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $18.6 million for the fiscal year
ended December 31, 1998, as compared to $13.9 million for the fiscal year ended
December 31, 1997. The increase was due primarily to the inclusion of corporate
administrative expenses for our Bowen Tools Division and Cardwell operations for
the full year in 1998 as compared to only nine months for 1997. In addition,
corporate administrative expenses increased as a result of the higher
professional fees associated with being a public company and the implementation
of new software systems.
Interest expense decreased from $8.8 million for the fiscal year ended
December 31, 1997 to $0.4 million for the fiscal year ended December 31, 1998.
Interest expense decreased mainly because we repaid our debt with the proceeds
from the initial public offering of our Common Stock.
Restructuring Charge
The Company incurred a restructuring charge of $590,000 in 1998 in
connection with its restructuring program.
Other Income (Expense)
Other expenses were $1.3 million for the fiscal year ended December 31,
1998, as compared to $1.5 million for the fiscal year ended December 31, 1997.
Other expense for 1998 includes:
- $2.2 million of interest income (due to higher cash balances in 1998);
- $2.7 million of losses on trading securities (as compared to a gain of
$0.8 million for 1997);
- $0.6 million of special charges (relating to expenses incurred in
connection with the proposed acquisition of Hitec ASA, which was
terminated on April 28, 1998); and
- $0.2 million of miscellaneous other expenses.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31,
1996
Oil Field Equipment
Revenues and operating income for the oil field equipment unit were $106.5
million and $15.6 million, respectively, for the fiscal year ended December 31,
1997, as compared to $61.5 million and $9.9 million, respectively, for the
twelve month period ended December 31, 1996. For the fiscal year ended December
31, 1997, revenues and operating income reflect contributions thereto by
Cardwell of $30.0 million and $4.5 million. The increase in revenues resulted
from the Cardwell Acquisition and increased sales of rig packages by the IRI
Division. Increased operating income resulted from the IRI Division's increased
sales in the period. Gross Margin for the fiscal year ended December 31, 1997
was 18.4%, as compared to 22.1% for the twelve month period ended December 31,
1996. This decrease resulted principally from the inclusion of Cardwell's
operations (gross margin of 15% in the results for the twelve month period ended
December 31, 1997). Cardwell's comparatively lower gross margin resulted from
lower margin rig manufacturing contracts entered into prior to the date of the
Cardwell Acquisition, the pricing terms of which reflected Cardwell's lower
fixed overhead cost structure. We have implemented a uniform pricing policy that
we believe will result in higher overall gross margins.
14
<PAGE> 15
Down Hole Tools
We acquired the Bowen Tools Division on March 31, 1997 and prior to such
date we had no down hole tools unit. Revenues and operating income for the down
hole tools unit were $65.3 million and $11.9 million, respectively, for the nine
months ended December 31, 1997, as compared to $52.3 million and $5.7 million,
respectively, for the nine months ended December 31, 1996. Increased revenues
and operating income at the Bowen Tools Division were primarily attributable to
increased drilling activity in the U.S. Gross margin for the nine months ended
December 31, 1997 was 26.5%, as compared to 24.0% for the nine months period
ended December 31, 1996. The increase in gross margin was primarily due to
improved pricing, increased volume and more efficient capacity utilization.
Specialty Steel
Revenues and operating income for the specialty steel unit were $13.5
million and $4.5 million, respectively, for the fiscal year ended December 31,
1997, as compared to $14.1 million and $3.5 million, respectively, for the
twelve month period ended December 31, 1996. The decrease in revenues was
primarily the result of reduced demand from a major customer. Gross margin for
the fiscal year ended December 31, 1997 was 33.4%, as compared to 26.2% for the
twelve month period ended December 31, 1996.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $13.9 million for the fiscal year
ended December 31, 1997, as compared to $7.0 million for the twelve month period
ended December 31, 1996. The increase was due primarily to the inclusion of
Bowen and Cardwell's administrative expenses of $3.2 million and $1.2 million,
respectively, for the 1997 period.
Interest expense increased from $0.7 million for the twelve month period
ended December 31, 1996 to $8.8 million for the fiscal year ended December 31,
1997. The increase in interest expense is a result of (i) borrowings on March
31, 1997 under a $65.0 million five-year term loan (the "Term Loan") provided to
us by certain financial institutions, as lenders, Credit Lyonnais New York
Branch, as a lender and as administrative agent, and Lehman Commercial Paper
Inc., as a lender and as advisor, manager and syndication agent (collectively,
the "Lenders"), and the issuance of $31.0 million aggregate principal amount of
Senior Subordinated Increasing Rate Notes (the "Senior Notes") on such date to
fund the Acquisitions and (ii) borrowings under a $25.0 million three-year
revolving credit facility between us and the Lenders with a $20 million sublimit
for the issuance of letters of credit (the "Revolving Credit Facility") during
the period to fund working capital requirements of Cardwell. On November 19,
1997, we used the gross proceeds of the initial public offering of the Common
Stock to repay in full the Term Loan and fully redeem the Senior Notes.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995
Oil Field Equipment
Revenues and operating income for the oil field equipment unit were $52.0
million and $7.4 million, respectively, for the nine month period ended December
31, 1996, as compared to $30.7 million and $1.6 million, respectively, for the
nine month period ended December 31, 1995. The increases in revenues and
operating income were primarily attributable to an increase in sales of our oil
field equipment products to exploration and production companies and contract
drillers. The elevated levels of sales of our products reflected the increased
oil and gas exploration and production activity worldwide. Gross margin for the
nine month period ended December 31, 1996 was 19.7% compared to 13.7% for the
nine month period ended December 31, 1995, as a result of price increases,
greater fixed overhead absorption and more efficient capacity utilization due to
increased manufacturing volume.
Specialty Steel
Revenues and operating income for the specialty steel unit were $10.3
million and $2.9 million respectively, for the nine month period ended December
31, 1996, as compared to $8.5 million and
15
<PAGE> 16
$2.0 million, respectively, for the nine month period ended December 31, 1995.
The increases in revenues and operating income were primarily the result of
increased sales to steel service centers and a major customer. Gross margin for
the nine month period ended December 31, 1996 was 29.9%, as compared to 24.8%
for the nine month period ended December 31, 1995, as a result of more efficient
capacity utilization.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $5.2 million, representing 8.3% of
revenues, for the nine month period ended December 31, 1996 and $2.7 million,
representing 6.9% of revenues, for the nine month period ended December 31,
1995. The higher levels of expense were a consequence of establishing a
corporate headquarters in Houston, Texas, and expanding our management team and
related support personnel.
Interest expense was $0.6 million for the nine month period ended December
31, 1996, compared to $0.2 million of interest income for the nine month period
ended December 31, 1995, due to borrowings by us under a former credit facility
established in April 1996. The funds borrowed were used by us to fund increased
working capital needs necessitated by the increases in the orders for its oil
field equipment products during the nine month period ended December 31, 1996.
ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is effective for all quarters of fiscal years beginning after June 15,
1999. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had cash, cash equivalents and marketable
securities of $40.5 million, compared to $57.7 million at December 31, 1997. At
December 31, 1998, our working capital was $164.3 million, compared to $161.9
million at December 31, 1997. This increase in working capital at December 31,
1998 was attributable to the increase in manufactured inventories. At December
31, 1998, our current assets to current liabilities ratio was approximately
8.7:1.
At December 31, 1998, approximately $6.7 million was available for
additional borrowings under the Revolving Credit Facility.
We believe that cash flows from operations in conjunction with borrowings
under the Revolving Credit Facility and credit facilities that may be arranged
in the future, if necessary, will be sufficient to meet our short-term (i.e.,
less than one year) and long-term liquidity needs. Though there can be no
assurance in this regard, we believe that any credit facilities arranged in the
near future would be on commercially reasonable terms.
The Revolving Credit Facility
The Revolving Credit Facility matures on March 31, 2000, and prior thereto
amounts repaid may be reborrowed. After the initial public offering of our
common stock, we reduced the commitment under the Revolving Credit Facility to
$9.7 million.
Our obligations under the 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. The Revolving Credit Facility contains certain representations and
warranties, covenants and events of default customary for facilities of this
type.
16
<PAGE> 17
YEAR 2000
Our Year 2000 Compliance Program
We have initiated a three-phase Year 2000 compliance program:
1. We will identify non-Year 2000 compliant hardware and software
systems and other technology, and contact key suppliers and customers;
2. We will ascertain the extent to which our systems and technologies
and those of our key suppliers and customers are non-Year 2000 compliant
and will prioritize our Year 2000 response accordingly; and
3. We will replace or remediate our non-Year 2000 compliant systems
and technologies and develop contingency plans 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.
Our State of Readiness
The first phase is currently in progress and should be complete by the end
of the second quarter. Of the inventory taken thus far, we have identified
issues with some of our information technology systems that support our most
significant business operations. The Enterprise Resource Planning ("ERP") system
that supports the down hole tools unit requires a software upgrade that is
planned for installation by the end of the second quarter of 1999. The ERP
system that supports the oil field equipment and specialty steel units also
requires a software upgrade that is planned for installation in the third
quarter of 1999. The installation of these software upgrades will require the
allocation of significant internal resources to test the upgraded ERP systems
prior to their implementation. Other significant information technology systems
that may not be compliant are:
- the accounting software system currently used in the Canadian operations;
- our payroll system; and
- the design engineering software system.
We will have a better understanding of these systems and their respective Year
2000 compliance once we have completed the first phase of our Year 2000
compliance program.
We have inventoried some of the more critical non-information technology
systems of the down hole tools unit. Approximately 85% of our production
machines for the down hole tools unit are manual or "numerical control"
equipment not affected by Year 2000 issues. The balance of our production
machines are "computer numerical control" machines; these machines produce about
30% to 40% of our production output. Although we have been notified by the
manufacturer of these machines that the controls on these machines are Year 2000
compliant, we have not yet verified whether or not these machines are indeed
Year 2000 compliant. We have not completed our inventory of the production
machines for our other units or other non-information technology systems.
We have also initiated the inventorying of key third party relationships
for Year 2000 compliance. Although we have begun to contact some of the key
suppliers of the down hole tools unit, we have not yet assessed the extent and
content of the responses received from those suppliers. We have not begun to
inventory the key customers for any of the business units and the key suppliers
for the oil field equipment unit and the specialty steel unit but we believe
that the loss of any of our suppliers would not have a material adverse effect
on our operations. We plan to complete the inventory of key third party
relationships by the end of the second quarter of 1999.
We have retained outside consultants to help evaluate our Year 2000
readiness and our comprehensive project plan detailing the steps necessary for
us to become Year 2000 compliant. We expect the report and project plan to be
ready by the middle of the second quarter of 1999. We intend to complete our
inventory of all information technology and non-information technology related
systems by the end of the second quarter of
17
<PAGE> 18
1999. We also expect to engage outside consultants to assist us in the testing
of our systems and the remediation of any Year 2000 issues.
Costs to Address Year 2000 Issues
To date, the costs incurred by our Year 2000 compliance program have been
minimal. We estimate our expenses relating to Year 2000 issues will be
approximately $1.3 million, but they could be as high as $2.0 million. We also
expect to allocate significant internal resources to the inventorying, testing
and remediation of Year 2000 issues, though we have not quantified the costs of
allocating these internal resources. 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 vendors of our ERP systems for our
three business 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.
Risks Associates with Year 2000 Issues
We believe that much of the risk associated with Year 2000 will be
mitigated by the installation of the minor software patches on our ERP systems.
However, we are presently unable to fully determine the risk of any other
non-compliant Year 2000 software, hardware, and other technologies and the
material impact it represents to our business. We will have a better
understanding of these risks once the inventory has been completed and the
systems have been analyzed and prioritized with respect to their importance to
our business. We are 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 any significant failures could have an material adverse effect on
our results of operations and financial condition. At the very least, any
significant failures may force us to curtail production, prevent us from meeting
customers demands on a timely basis, and/or impede our ability to monitor
customer orders and inventory.
Contingency Plans
We have not yet been able to determine the extent to which we need
contingency plans because our inventory is not yet complete. We plan to have
contingency plans developed by the end of the third quarter of 1999 for all
those systems and relationships that are critical to our business. All
non-critical systems and relationships will be assessed for contingency plans in
the fourth quarter of 1999.
CAPITAL EXPENDITURES
For the fiscal year ended December 31, 1998, we used cash flow from
operations of $1.7 million primarily to increase inventory levels to support
anticipated increases in sales. We believe that cash generated from operations
and amounts available under the Revolving Credit Facility will be sufficient to
fund operations, working capital needs, capital expenditure requirements and
financing obligations.
Capital expenditures for 1998 totaled $10.0 million, including $1.2 million
for the oilfield equipment and specialty steel segments, of which $0.6 million
was for data processing equipment and $0.5 million was for machinery and
equipment. $8.8 million in capital expenditures was expended for rental tools
and equipment and new machinery at our down hole tools segment. For 1999, we
have budgeted capital expenditures of $4.5 million, including $1.0 million for
maintenance capital expenditures, $2.0 million for rental tools and $1.5 million
for software upgrades and related expenditures. Capital expenditures are
expected to be funded with available cash and cash flow generated from
operations.
18
<PAGE> 19
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 market risk exposures come from interest rate risks, foreign
exchange rate risks, and equity price risks. Our exposure to interest rate risks
in minimal with respect to indebtedness. We repaid substantially all of our
outstanding indebtedness in November 1997. However, at December 31, 1998, we had
approximately $37.5 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" with respect to our Bowen 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 December 31, 1998, we had approximately $3.0 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 purpose 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Exhibits, which appears on Page F-1
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 20
PART III.
Information required by Item 10 "Directors and Executive Officers of the
Registrant," Item 11 "Executive Compensation," Item 12 "Security Ownership of
Certain Beneficial Owners and Management" and Item 13 "Certain Relationships and
Related Transactions" of Form 10-K are herein incorporated by reference to the
Proxy Statement for the 1998 Annual Meeting of Stockholders of the Company.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) Financial Statements
See Index to Financial Statements and Schedules which appears on page F-1
hereof.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the Exhibit Index following the signature page
hereof are filed herewith in response to this Item.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................
Consolidated Balance Sheet -- December 31, 1998 and 1997....
Consolidated Statement of Operations -- Years ended December
31, 1998 and 1997, and nine months ended December 31,
1996......................................................
Consolidated Statement of Cash Flows -- Years ended December
31, 1998 and 1997, and nine months ended December 31,
1996......................................................
Consolidated Statement of Shareholders' Equity -- Years
ended December 31, 1998 and 1997, and nine months ended
December 31, 1996.........................................
Notes to Consolidated Financial Statements..................
</TABLE>
All schedules are omitted as the required information is inapplicable or
presented in the consolidated financial statements or related notes.
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IRI International Corporation:
We have audited the consolidated financial statements of IRI International
Corporation and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IRI
International Corporation as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for the years ended December 31, 1998 and
1997, and the nine months ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG LLP
Houston, Texas
March 18, 1999
22
<PAGE> 23
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 37,475 $ 49,473
Marketable securities, at fair value (cost of $3,743 at
December 31, 1998 and $7,448 at December 31, 1997)..... 3,000 8,218
Accounts receivable, less allowance for doubtful accounts
of $960 at December 31, 1998 and $455 at December 31,
1997................................................... 29,147 33,130
Inventories............................................... 109,151 100,901
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 4,429 8,853
Other current assets...................................... 2,381 1,444
-------- --------
Total current assets.............................. 185,583 202,019
Property, plant and equipment, net........................ 49,192 43,219
Other assets.............................................. 4,391 5,836
-------- --------
$239,166 $251,074
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 16 $ 38
Accounts payable.......................................... 8,094 19,453
Accrued liabilities....................................... 6,018 8,344
Customer advances......................................... 3,303 7,546
Other liabilities......................................... 3,644 4,527
Current installments of obligation under capital lease.... 262 221
-------- --------
Total current liabilities......................... 21,337 40,129
Negative goodwill, less accumulated amortization............ 4,026 9,393
Obligation under capital lease, less current installments... 319 586
Accrued postretirement benefits other than pensions......... 1,562 1,481
Pension liability........................................... 1,586 939
Other long term liabilities................................. 77 140
-------- --------
Total liabilities................................. 28,907 52,668
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 in
1998 and 1997.......................................... 399 399
Additional paid-in capital................................ 168,514 168,538
Retained earnings......................................... 43,308 30,926
Accumulated other comprehensive income.................... (1,962) (1,457)
-------- --------
Total shareholders' equity........................ 210,259 198,406
-------- --------
Commitments and contingencies..................... $239,166 $251,074
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ DECEMBER 31,
1998 1997 1996
------------ -------- ------------
<S> <C> <C> <C>
Revenues................................................ $175,045 $185,366 $62,298
Cost of goods sold...................................... 126,626 139,204 44,968
-------- -------- -------
Gross profit.......................................... 48,419 46,162 17,330
Selling and administrative expense...................... 30,526 23,543 8,220
Restructuring charge.................................... 590 -- --
-------- -------- -------
Operating income...................................... 17,303 22,619 9,110
-------- -------- -------
Other income (expense):
Interest income....................................... 2,213 746 90
Interest expense...................................... (360) (8,762) (615)
Other, net............................................ (3,491) 718 (110)
-------- -------- -------
(1,638) (7,298) (635)
-------- -------- -------
Income before income taxes and extraordinary
item............................................. 15,665 15,321 8,475
Income taxes............................................ 3,283 2,786 98
-------- -------- -------
Income before extraordinary item...................... 12,382 12,535 8,377
Extraordinary item -- extinguishment of debt (net of tax
benefit of $841)...................................... -- (1,512) --
-------- -------- -------
Net income.................................... $ 12,382 $ 11,023 $ 8,377
======== ======== =======
Basic earnings (loss) per share
Income before extraordinary item...................... $ 0.31 $ 0.40 $ 0.28
Extraordinary item.................................... -- (0.05) --
-------- -------- -------
Net income per common share............................. $ 0.31 $ 0.35 $ 0.28
======== ======== =======
Weighted average shares outstanding..................... 39,900 31,275 30,000
======== ======== =======
Diluted earnings (loss) per share
Income before extraordinary item...................... $ 0.31 $ 0.40 $ 0.28
Extraordinary item.................................... -- (0.05) --
-------- -------- -------
Net income per common share............................. $ 0.31 $ 0.35 $ 0.28
======== ======== =======
Weighted average shares outstanding..................... 39,905 31,295 30,000
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<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 March 31, 1996............. $300 $ 4,700 $11,526 $ -- $ 16,526
Comprehensive income:
Net income........................ -- -- 8,377 -- 8,377
Other comprehensive income........ -- -- -- -- --
--------
Total comprehensive income... 8,377
---- -------- ------- ------- --------
Balances at December 31, 1996.......... 300 4,700 19,903 -- 24,903
---- -------- ------- ------- --------
Proceeds from initial public
offering, net of costs............ 99 163,838 -- -- 163,937
Comprehensive income:
Net income........................ -- -- 11,023 -- 11,023
Change in minimum pension
liability adjustment............ -- -- -- (1,457) (1,457)
--------
Total comprehensive income... 9,566
---- -------- ------- ------- --------
Balances at December 31, 1997.......... 399 168,538 30,926 (1,457) 198,406
---- -------- ------- ------- --------
Other................................ -- (24) -- -- (24)
Comprehensive income:
Net income........................ -- -- 12,382 -- 12,382
Change in minimum pension
liability adjustment............ -- -- -- (531) (531)
Foreign currency translation
adjustment...................... -- -- -- 26 26
--------
Total comprehensive income... 11,877
---- -------- ------- ------- --------
Balance at December 31, 1998........... $399 $168,514 $43,308 $(1,962) $210,259
==== ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 12,382 $ 11,023 $ 8,377
Adjustments to reconcile net income to net cash
provided by operations:
Extraordinary charge............................... -- 1,512 --
Depreciation and amortization...................... 4,032 4,871 98
Amortization of goodwill........................... 1,255 880 --
Amortization of negative goodwill.................. (5,367) (5,367) (4,026)
Change in employee benefit accounts................ 728 129 (53)
Loss on sale of assets............................. -- (372) --
Changes in assets and liabilities, net of effects
of acquisitions:
Marketable securities............................ 5,218 (8,218) --
Accounts receivable.............................. 3,983 (14,772) (2,594)
Inventories...................................... (8,250) (21,058) (6,840)
Other current assets............................. 3,487 (6,918) (125)
Other non current assets......................... 190 (113) --
Accounts payable and accrued liabilities......... (13,685) 17,682 2,728
Customer advances and other liabilities.......... (5,631) 593 1,264
-------- --------- -------
Net cash used in operations................... (1,658) (20,128) (1,171)
-------- --------- -------
Cash flows from investing activities:
Capital expenditures.................................. (10,005) (5,755) (911)
Acquisition of Bowen net assets, net of cash
acquired........................................... -- (77,693) --
Acquisition of Cardwell net assets, net of cash
acquired........................................... -- (12,574) --
-------- --------- -------
Net cash flows used in investing activities... (10,005) (96,022) (911)
Cash flows from financing activities:
Payments on capital lease obligation.................. (226) (312) (144)
Proceeds from notes payable........................... -- 113,482 3,157
Debt issuance costs................................... -- (3,971) --
Payments on notes payable............................. (85) (116,671) --
Issuance of common stock.............................. -- 163,937 --
Proceeds from sale of assets.......................... -- 523 --
Other................................................. (24) -- --
-------- --------- -------
Net cash flows provided by (used in) financing
activities.................................. (335) 156,988 3,013
-------- --------- -------
Increase (decrease) in cash and cash equivalents........ (11,998) 40,838 931
Cash and cash equivalents at beginning of year.......... 49,473 8,635 7,704
-------- --------- -------
Cash and cash equivalents at end of year...... $ 37,475 $ 49,473 $ 8,635
======== ========= =======
Supplemental cash flow information:
Interest paid......................................... $ 360 $ 8,762 $ 303
======== ========= =======
Income taxes paid..................................... $ 5,219 $ 158 $ --
======== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
IRI International Corporation (IRI or Company), a Delaware corporation, was
formed on July 30, 1985, through the combination of Ingersoll-Rand Oilfield
Products Company, a wholly-owned subsidiary of Ingersoll-Rand Company,
established August 1, 1980, and the Ideco Division of Dresser Industries, Inc.
On November 19, 1997, the Company sold 9.9 million shares of its common stock
through an initial public offering (IPO). Net proceeds totaled approximately
$163.9 million and were used partially to repay debt incurred in connection with
the acquisitions (see Notes 3 and 6).
The Company manufactures and sells a full line of oil and gas mobile well
servicing and drilling rigs, deep oil and gas skid-mounted drilling rigs,
associated drilling equipment (Oilfield Equipment), and specialty steel products
(Specialty Steel). Raw materials are readily available and the Company is not
dependent upon a single or a few suppliers.
On September 20, 1994, all of the outstanding common and preferred stock of
IRI was acquired by Energy Services International (ESI) for cash of $5 million.
The acquisition has been recorded using the purchase method of accounting and
the purchase price has been allocated to the assets acquired and liabilities
assumed based upon their estimated fair values at the date of the acquisition.
The excess of the fair value of net assets acquired over consideration was
applied against nonmonetary assets (property, plant and equipment) reducing the
balances at the acquisition date to zero. The remaining excess of the fair value
of net assets acquired over consideration paid of $26.8 million was recorded as
negative goodwill and is being amortized using the straight-line method over 5
years. Negative goodwill amortization of $5.4 million for each of the years
ended December 31, 1998 and 1997, and $4.0 million for the nine months ended
December 31, 1996, is included in cost of goods sold in the accompanying
statements of operations.
IRI was subsequently merged into ESI in October 1997. ESI was the surviving
corporation and changed its name to IRI International Corporation.
During 1996, the Company elected to change its fiscal year end from March
31 to December 31.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Statements of Cash Flows
Cash equivalents of $37,500,000 and $49,500,000 at December 31, 1998 and
1997, respectively, consisted of interest-bearing cash deposits. For purposes of
the statement of cash flows, the Company considers all cash and short-term
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
During the years ended December 31, 1997 and 1996, the Company entered into
capital lease obligations of $309,000 and $810,000, respectively.
(c) Marketable Securities
Marketable securities at December 31, 1998 and 1997 consist of corporate
equity securities. The Company classifies its equity securities as trading
securities. Trading securities are bought and held principally for the purpose
of selling them in the near term and are recorded at fair value. Unrealized
holding losses of $743,000 and gains of approximately $770,000 are included in
other income for the years ended December 31, 1998 and 1997, respectively.
27
<PAGE> 28
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximate actual cost on a first-in, first-out
basis for all inventories excluding oilfield equipment work-in-process, parts
and raw materials, which are recorded at actual cost on a first-in, first-out
basis. Work-in-process inventories related to fixed price contracts are stated
at the accumulated cost of material, labor and manufacturing overhead, less the
estimated costs of units delivered. During 1998, the Company revised certain
estimates resulting in approximately $4 million in additional costs being
absorbed in the manufacturing process, which was previously expensed directly to
cost of sales. A portion of the incremental manufacturing overhead is
capitalized into inventory at December 31, 1998.
(e) Property, Plant and Equipment
Depreciation of property, plant and equipment is provided over the
estimated service lives of assets principally using the straight-line method.
Maintenance, repairs and minor replacements are charged to operations as
incurred; major repairs, replacements or improvements are capitalized.
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying among of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) Revenue Recognition
The Company recognizes construction contract revenues for rigs and
significant components using the percentage-of-completion method. Under the
percentage-of-completion method, revenues and profits are recognized based on
the percentage of completion throughout the performance period of the contract.
The percentage-of-completion is calculated based on the ratio of contract costs
incurred to date to total estimated contract costs after providing for all known
or anticipated costs. Costs include material, direct labor and engineering and
manufacturing overhead. Selling expenses and general and administrative expenses
are charged to operations as incurred. The effect of changes in estimates of
contract costs is recorded currently. If estimates of costs to complete
contracts indicate a loss, provision is made currently for the total loss
anticipated. All remaining revenue is generally recorded when the equipment is
shipped.
Costs and estimated earnings in excess of billing on uncompleted contracts
represent revenues earned under the percentage-of-completion method but not yet
billable under the terms of the contract. Amounts are billable under contracts
generally upon shipment of the products or completion of the contracts. Included
in revenues and cost of goods sold for the year ended December 31, 1998 is
$14,218,000 and $9,789,000, respectively, related to uncompleted contracts
($4,429,000, net) at December 31, 1998. Included in revenues
28
<PAGE> 29
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and cost of goods sold for the year ended December 31, 1997 is $34,842,000 and
$25,989,000, respectively, related to uncompleted contracts ($8,853,000 net) at
December 31, 1997.
(h) Earnings per Common Share
Weighted average shares for each of the periods presented were as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Weighted average shares outstanding -- basic........ 39,900 31,275
Incremental effect of options outstanding........... 5 --
Weighted average shares outstanding -- diluted...... 39,905 31,275
</TABLE>
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For the years and quarters presented herein,
basic and diluted earnings per share are the same except for the year and
quarter ending December 31, 1998. Options outstanding at December 31, 1997 are
anti-dilutive as the exercise price is greater than the market price at December
31, 1997. Options issued in December 1998 and outstanding at December 31, 1998
are dilutive and are included in Diluted EPS, but had no impact on EPS.
(i) Financial Instruments and Credit Risk Concentrations
The Company invests its excess cash in financial instruments, primarily
overnight investments and money market mutual funds. These financial instruments
could potentially subject the Company to concentrations of credit risk; however,
the Company's management considers the financial stability and creditworthiness
of a financial institution before investing the Company's funds. The carrying
amounts of the financial instruments in the accompanying financial statements
(cash, accounts receivable and payables) approximate fair value because of the
short maturities of these instruments. The capital lease obligation bears
interest at rates that approximate market rates and, thus the carrying amount
approximates estimated fair value.
A substantial portion of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations. Foreign sales also present
various risks, including risks of war, civil disturbances and governmental
activities that may limit or disrupt markets, restrict the movement of funds or
result in the deprivation of contract rights or the taking of property without
fair consideration. Most of the Company's foreign sales, however, are to large
international companies or are secured by letters of credit or similar
arrangements.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
29
<PAGE> 30
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(k) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities, minimum pension liabilities, and
foreign currency exchange gains and losses, and is presented in the consolidated
statements of stockholder's equity and comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
(3) ACQUISITIONS
On March 31, 1997, the Company acquired certain assets and assumed
liabilities of Bowen Tools, Inc. ("Bowen"), a wholly-owned subsidiary of the
French chemical concern L'Air Liquide, for a total 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 acquisitions were financed through a $65 million senior secured term loan
facility and $31 million of interim senior subordinated increasing rate notes.
The notes outstanding under the term loan facility and the senior subordinated
increasing rate notes were repaid with the proceeds from the Company's equity
offering (see note 1).
Bowen, headquartered in Houston, Texas, designs, manufactures and markets
fishing tools and drilling, power and wireline/pressure control equipment used
in the drilling and completion of oil and gas wells. Cardwell, headquartered in
El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield
equipment and supplies predominantly to foreign countries.
The acquisitions have been recorded using the purchase method of accounting
and results of operations of the acquired companies have been included in the
consolidated statement of operations of IRI from the dates of the respective
acquisitions. The cost of the Bowen and Cardwell acquisitions have been
allocated to the assets acquired and liabilities assumed based on their
respective fair values as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 57,389
Property, plant and equipment............................... 37,647
Excess of cost over fair value of net tangible assets of
businesses acquired, net.................................. 6,096
Other assets................................................ 812
Current liabilities......................................... (11,677)
--------
Total............................................. $ 90,267
========
</TABLE>
The excess of consideration given over the fair value of the net tangible
assets acquired of $6,096,000 is being amortized over five years using the
straight-line method.
30
<PAGE> 31
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following sets forth selected consolidated financial information for
the Company on a pro forma basis for the years ended December 31, 1997, assuming
the Bowen and Cardwell acquisitions had occurred on January 1, 1997 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
-----------
(UNAUDITED)
<S> <C>
Revenues.................................................... $207,776
========
Gross profit................................................ $ 51,244
========
Operating income............................................ $ 23,616
========
Net income.................................................. $ 9,300
========
Net income per common share................................. $ 0.30
========
</TABLE>
Pro forma adjustments primarily relate to additional interest expense
resulting from debt to finance the acquisitions, additional depreciation and
amortization expense 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.
(4) INVENTORIES
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials and supplies............................. $ 46,743 $ 39,087
Work in process........................................ 21,241 28,771
Finished goods......................................... 41,167 33,043
-------- --------
Total........................................ $109,151 $100,901
======== ========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Land and land improvements............................... $ 2,910 $ 2,869
Buildings................................................ 7,731 7,378
Machinery and equipment.................................. 46,965 36,318
------- -------
57,606 46,565
Less accumulated depreciation............................ (8,414) (3,346)
------- -------
Property, plant and equipment, net............. $49,192 $43,219
======= =======
</TABLE>
Machinery and equipment includes capitalized lease assets of $1,119,000 at
December 31, 1998 and 1997.
31
<PAGE> 32
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE
In connection with the acquisitions described in note 3, the Company
entered into a $65 million senior secured term loan facility due in quarterly
installments beginning June 30, 1997 through March 31, 2002 and a $31 million
interim senior subordinated increasing rate note due March 31, 1998. Amounts
outstanding under these notes were repaid with proceeds from the Company's
initial public offering in November 1997. The extinguishment of this debt
resulted in an extraordinary charge of $1,512,000 consisting of unamortized
financing costs of $2,353,000 and income tax benefit of $841,000.
The Company has a $9.7 million revolving credit facility which matures on
March 31, 2000. Amounts outstanding under the revolving credit facility are
secured by substantially all of the assets of the Company and accrue interest at
a rate per annum equal to the one, two, three or six month LIBOR plus 2 3/4%.
Amounts available under the revolving credit facility ($6.7 million at December
31, 1998) are limited to the excess of the revolving credit commitment over then
outstanding letter of credit obligations. The revolving credit facility
agreement contains provisions, among others, that restrict incurrence of
indebtedness, guarantees, acquisitions, and distributions to shareholders, and
require the Company to meet specified financial maintenance tests.
(7) SHAREHOLDERS' EQUITY
On October 14, 1997, the Company merged into ESI. ESI was the surviving
corporation and changed its name to IRI International Corporation. At the time
of the merger, ESI had 100 common shares issued and outstanding, no liabilities
and its sole asset was its investment in the Company. As a result of the merger,
each share of common stock of ESI was converted into 300,000 shares of the
surviving corporation, each treasury share of common stock was canceled and each
share of preferred stock of the Company, including accrued and unpaid dividends
thereon, was canceled. The authorized capital stock of the Company was increased
to 100,000,000 common shares and 25,000,000 preferred shares. The consolidated
financial statements, including all references to the number of shares of common
and preferred stock and all per share information, have been adjusted to reflect
the merger and the other changes in capital structure on a retroactive basis.
(8) COMPREHENSIVE INCOME
The accumulated balances for each classification of comprehensive income
are as follows:
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN MINIMUM OTHER
CURRENCY PENSION COMPREHENSIVE
ITEMS LIABILITY INCOME
-------- --------- -------------
<S> <C> <C> <C>
Beginning balance............................ $-- (1,457) (1,457)
Current period change........................ 26 (531) (505)
--- ------ ------
Ending balance............................... $26 (1,988) (1,962)
=== ====== ======
</TABLE>
There are no related tax effects allocated to each component of other
comprehensive income as deferred income tax expenses and benefits are offset by
changes in the valuation allowance.
(9) STOCK OPTIONS
In anticipation of the initial public stock offering, the Company granted
its Directors and certain of its officers and employees an aggregate of
1,933,000 options to purchase shares of common stock. Directors not
32
<PAGE> 33
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employed by the Company received options to purchase an aggregate of 160,000
shares of common stock having an exercise price that will be equal to the
initial public offering price. The options granted to Directors not employed by
the Company vest as to one-half of the option shares on the effective date of
the Offering and as to a further one-quarter of the option shares on the first
and second anniversaries of the effective date of the Offering. Certain
executive officers and employees received options to purchase an aggregate of
1,773,000 shares of common stock having an exercise price equal to the greater
of the initial public offering price and the fair market value of the option
shares on the date such options vest. The options granted to certain executive
officers and employees generally vest as to one-third of the option shares upon
the effective date of the Offering and as to a further one-third of the option
shares on the first and second anniversaries of the effective date of the
Offering. During 1998, the Company cancelled 1,931,000 outstanding stock options
and granted 1,645,000 new options.
The Company applies APB Opinion 25 in accounting for its plan. Accordingly,
no compensation cost has been recognized for stock options granted to employees.
Compensation expense is recorded for options granted to non-employee directors
based on the estimated fair value of the options on the date of grant. The
compensation cost that has been charged against income for non-employee director
options granted was $499,000 for the year ended December 31, 1997. The $499,000
was recognized in income in 1998 when the options were forfeited and cancelled.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards to employees under the plan
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share for the year ended December 31, 1997 would have been reduced
to the pro forma amounts indicated below (in thousands except per share data):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income
As reported............................................. $12,382 $11,023
======= =======
Pro forma............................................... $11,199 $ 7,216
======= =======
Basic and diluted earnings per share
As reported............................................. $ 0.31 $ 0.35
======= =======
Pro forma............................................... $ 0.28 $ 0.23
======= =======
</TABLE>
The fair value of each option grant is estimated on the date granted using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected life (years)....................................... 5 3.3
Risk-free interest rate..................................... 4.42 6.2%
Volatility.................................................. 70.0% 30.0%
Dividend yield.............................................. 0.0% 0.0%
</TABLE>
33
<PAGE> 34
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of
December 31, 1998 and 1997 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FIXED OPTIONS SHARES (000) EXERCISE PRICE
- - ------------- ------------ --------------
<S> <C> <C>
Outstanding at the beginning of the year............ -- $ --
Granted............................................. 1,933 18.00
Exercised........................................... --
Forfeited........................................... (2) 18.00
------ -------
Outstanding at December 31, 1997.................... 1,931 18.00
------ -------
Forfeited........................................... (1,931) (18.00)
------ -------
Granted............................................. 1,645 3.56
Exercised........................................... -- --
------ -------
Outstanding at December 31, 1998.................... 1,645 3.56
====== =======
Options exercisable at December 31, 1998............ 548 $ 3.56
====== =======
Weighted average fair value of options granted
during 1998....................................... 3.56
=======
</TABLE>
Weighted average remaining contracted life of stock options at December 31,
1998 was 9.9 years. (10) INCOME TAXES
Current income tax expense attributable to income before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
---------------- DECEMBER 31,
1998 1997 1996
------ ------ -----------------
<S> <C> <C> <C>
U. S. Federal............................ $2,609 $1,965 $98
State.................................... 425 312 --
Foreign.................................. 249 509 --
------ ------ ---
$3,283 $2,786 $98
====== ====== ===
</TABLE>
Income tax expense differs from the amount computed by applying the
statutory rate of 35 percent at December 31, 1998 and 1997 (34% at December 31,
1996) to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------ DECEMBER 31,
1998 1997 1996
------- ------- -----------------
<S> <C> <C> <C>
Computed "expected" tax expense........ $ 5,483 $ 5,362 $ 2,882
Change in the valuation allowance...... (998) (1,291) (1,504)
Amortization of negative goodwill...... (1,879) (1,879) (1,369)
Amortization of goodwill............... 442 308 --
State income taxes, net of federal
benefit.............................. 276 203 --
Other.................................. (41) 83 89
------- ------- -------
$ 3,283 $ 2,786 $ 98
======= ======= =======
</TABLE>
34
<PAGE> 35
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred federal income tax assets and liabilities as of
December 31, 1998 and December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Deferred income tax assets:
Capital loss carryforward................................ $ 690 $ --
Basis in inventories..................................... 4,201 4,744
Unrealized loss on marketable equity securities.......... 260 --
Employee benefits........................................ 1,102 823
Net operating loss carryforwards......................... 1,050 1,224
Alternative minimum tax credit carryover................. -- 565
Other, principally accrued liabilities................... 378 909
------ ------
Total gross deferred income tax assets........... 7,681 8,265
Less valuation allowance................................. 3,380 4,378
------ ------
Net deferred income tax assets................... 4,301 3,887
------ ------
Deferred income tax liabilities:
Costs and estimated earnings in access of billings on
uncompleted contracts................................. 1,917 3,010
Unrealized gain on marketable equity securities.......... -- 262
Basis in and depreciation of property, plant and
equipment............................................. 2,384 615
Prepaid pension cost..................................... -- --
------ ------
Total gross deferred income tax liabilities...... 4,301 3,887
------ ------
Net deferred income tax liability................ $ -- $ --
====== ======
</TABLE>
Because of the uncertainty of generating future taxable income, the Company
has provided a valuation allowance for deferred tax assets of $3,380,000 and
$4,378,000 at December 31, 1998 and December 31, 1997, respectively. The
valuation allowance decreased $998,000 during the year ended December 31, 1998
and $1,291,000 during the year ended December 31, 1997. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion of all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
Under the Internal Revenue Code of 1986, in general, a change of more than
50% in the composition of a company's equity owners during any three years
results in a limitation on such company's ability to utilize its loss
carryforwards in subsequent years. The Company has undergone such an ownership
change as a result of the sale described in note 1; accordingly, the amount of
the Company's preacquisition net operating loss carryforwards that may be
utilized per year is limited to approximately $300,000 (aggregate $3,300,000
available at December 31, 1998) expiring from 2003 through 2009. To the extent
such carryforwards are not utilized in a year, they may be utilized in
subsequent years.
35
<PAGE> 36
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) LEASES
At December 31, 1998, minimum future annual payments required under a
capital lease together with the present value of the net minimum lease payments
and noncancelable operating leases, primarily for repair facilities and offices
and office equipment, were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1999....................................................... $1,228 $314
2000....................................................... 860 313
2001....................................................... 303 --
2002....................................................... 42 --
2003....................................................... 17 --
------ ----
Total minimum lease payments..................... $2,450 627
====== ----
Less amount representing interest.......................... (46)
Present value of minimum lease payments.................... $581
====
</TABLE>
Total rental expense was $2,751,000 and $2,142,000 for the years ended
December 31, 1998 and 1997, respectively, and $860,000 for the nine months ended
December 31, 1996.
(12) PENSION AND OTHER POSTRETIREMENT PLANS
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pension and Other Post Retirement Benefits." This statement revises required
disclosures for pension and other post retirement benefits, but does not change
the method of accounting for such plans.
The Company has a noncontributory defined pension benefit plan, which
covers substantially all employees. Employees with 10 or more years of service
are entitled to pension benefits beginning at normal retirement age (65) based
on years of service and the employees' compensation for the 60 consecutive month
period in which his compensation is the highest. The plan incorporates
provisions for early retirement, the privilege to elect a life annuity,
surviving spouse benefits, and disability benefits.
Employees of the Company who were employees of Ingersoll-Rand Oilfield
Products Company or the Ideco Division of Dresser Industries, Inc., immediately
prior to becoming employees of IRI, are entitled to uninterrupted service tenure
for purposes of retirement benefit calculations. Benefits payable under the IRI
retirement plan are offset by benefits payable under the retirement plans of
Dresser and Ingersoll-Rand Oilfield Products Company.
The Company uses the accrued benefit cost method to compute the annual
contributions to the plan, with minimum and maximum contributions determined on
a cumulative basis and the Company having the flexibility to choose which
contribution to make and which can vary from one period to the next.
The accrued benefit cost includes a normal cost which is computed as the
present value of the pro rata portion for the benefit accrual during the year
being valued and a past service cost which is the present value of that portion
of the projected benefit which has been accrued up to the valuation date. The
unfunded past-service cost may be liquidated over a period of between 10 and 30
years.
In addition to the Company's defined benefit pension plan, the Company
sponsors a defined benefit health care plan that provides postretirement medical
benefits to retirees or full-time employees who retire attaining age 55 with at
least 10 years of service as of September 1, 1996. Current retirees receive
benefits for life while full time employees (future retirees) only receive
benefits until age 65. This plan is a contributory, with retirees contributing
20% of the health care costs. The Company's contribution is capped at a 5%
annual
36
<PAGE> 37
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
increase in health care costs, with the remaining increases to be paid by the
employee. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
The funded status and the amounts recognized in the balance sheets as of
December 31, 1998, 1997 and 1996, the date of the last actuarial valuation are
as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year... $ 8,061 7,289 7,382 1,841 1,821 1,624
Service cost.............................. 106 108 81 -- -- --
Interest cost............................. 520 571 419 134 144 103
Plan participants' contributions.......... -- -- -- 27 30 22
Actuarial (gain) loss..................... 322 691 (211) (28) 44 325
Benefits paid............................. (574) (598) (382) (145) (198) (253)
------- ------ ------ ------- ------- -------
Benefit obligation at end of
year............................ 8,435 8,061 7,289 1,829 1,841 1,821
------- ------ ------ ------- ------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year................................... 7,122 7,321 7,433 -- -- --
Actual return on plan assets.............. 301 499 270 -- -- --
Employer contribution..................... -- -- -- 118 168 231
Plan participants' contributions.......... -- -- -- 27 30 22
Benefits paid............................. (574) (598) (382) (145) (198) (253)
------- ------ ------ ------- ------- -------
Fair value of plan assets at end
of year......................... 6,849 7,122 7,321 -- -- --
------- ------ ------ ------- ------- -------
Funded status............................. (1,586) (939) 32 (1,829) (1,841) (1,821)
Unrecognized actuarial loss............... 1,988 1,457 595 323 360 323
------- ------ ------ ------- ------- -------
Net amount recognized............. $ 402 518 627 (1,506) (1,481) (1,498)
======= ====== ====== ======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost................... $ -- -- 627 -- -- --
Accrued benefit liability.............. (1,586) (939) -- (1,506) (1,481) (1,498)
Accumulated other comprehensive loss... 1,988 1,457 -- -- -- --
------- ------ ------ ------- ------- -------
Net amount recognized............. $ 402 518 627 (1,506) (1,481) (1,498)
======= ====== ====== ======= ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER
31:
Discount rate............................. 6.75% 7.30% 7.90% 6.75% 7.30% 7.75%
Expected return on plan assets............ 8.00% 8.00% 8.00% N/A N/A N/A
Rate of compensation increase............. N/A N/A N/A N/A N/A N/A
</TABLE>
37
<PAGE> 38
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The assumed health care cost trend rate was 10% in 1995 graded down to 5% after
12 years. Because health care cost increases over 5% annually are borne by the
employees, the amounts reported are not affected by increases in the assumed
health care cost trend rate.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................... $106 $ 108 $ 81 -- -- --
Interest cost.................................. 520 571 419 134 144 103
Expected return on plan assets................. (557) (570) (427) -- -- --
Recognized net actuarial loss.................. 9 7 2 45 -- --
---- ----- ----- ---- ---- ----
$ 69 69 73 179 144 103
==== ===== ===== ==== ==== ====
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $8,435,000, $8,435,000, and $6,849,000, respectively,
as of December 31, 1998; $8,061,000, $8,061,000 and $7,122,000, respectively, as
of December 31, 1997 and $7,289,000, $7,289,000, and $7,321,000, respectively,
as of December 31, 1996.
As of September 1, 1995, the pension plan was frozen insofar as future
accrual of pension benefits. Because the plan amendment to freeze the plan was
planned in conjunction with the ESI acquisition discussed in note 1, the
resulting curtailment gain was taken into consideration in remeasuring the
Company's projected benefit obligation and the date of the acquisition.
The Pension Guaranty Corporation provides protection to plan participants
by assuring employees that the fixed commitment of the Company for funding
vested accrued benefits of the plan will be paid up to specified maximum amounts
should the Company be unable to fund the fixed commitment.
The pension plan is administered by the Pension Committee which is
appointed by IRI's Board of Directors.
On August 11, 1995, the defined benefit health care plan was amended to
terminate all employees from the plan except those eligible to retire on June
30, 1995 and all current retirees. In addition under the amended plan, active
employees eligible to retire will, after the age of 65, receive through the
retirement plan, 80% of the cost of medical insurance with a 5% cap over a base
year premium of calendar 1996. Because it was expected that the plan would be
terminated in conjunction with the ESI acquisition discussed in note 1, the
effects were considered in measuring the Company's accumulated post retirement
benefit obligation as of the acquisition date.
The Company also has a defined contribution plan which covers most of its
employees. The plan provides mandatory minimum contributions from the Company to
eligible employees in the plan equal to 7 1/2% of their annual pay. Plan
participants become fully vested in contributions made by the Company following
three years of credited service. The Company recognized expense associated with
the plan of approximately $1,289,000, $1,076,000 and $665,00 for the years ended
December 31, 1998 and 1997, and the nine-months ended December 31, 1996,
respectively.
(13) RESTRUCTURING CHARGE
On October 8, 1998, the Company announced a restructuring program in which
the workforce would be reduced by up to 315 employees. Severance expenses
incurred in connection with the restructuring program have been reported as a
restructuring charge of $590,000. Substantially all amounts were paid as of
December 31, 1998. Subsequent to year end the Company consolidated manufacturing
operations in Pampa and Houston, closing two plants, and implemented other cost
reduction measures.
38
<PAGE> 39
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) BUSINESS SEGMENTS
In the fourth quarter, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, issued for fiscal years
ending December 15, 1998.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Financial data
for periods reported prior to the year ended 1998 have been restated to conform
to the presentation according to SFAS No. 131.
The Company operates through three business segments consisting of Oilfield
Equipment, Downhole Tools, and Specialty Steel. The Oilfield Equipment segment
is principally engaged in the design and manufacture of drilling and well
servicing rigs and components for use on land and offshore drilling platforms.
The Company specializes in providing small truck-mounted rigs to stationary land
deep drilling rigs to meet the functional requirements of customers drilling in
remote and harsh environments. The Downhole Products segment designs,
manufactures, sells and rents fishing and drilling tools. The Company's
Specialty Steel segment manufactures premium carbon, alloy and specialty steel
for use in commercial and military products as well as for the manufacture of
oilfield equipment products. IRI's steel products are also used in the
petroleum, aircraft and power generation industries.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income or loss before income taxes excluding
nonrecurring gains and losses and foreign exchange gains and losses.
Financial information by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
OILFIELD DOWNHOLE SPECIALTY CORPORATE
EQUIPMENT PRODUCTS STEEL AND OTHER ELIMINATIONS TOTAL
--------- -------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Sales to unaffiliated
customers..................... $ 88,395 $76,249 $10,401 $ -- -- $175,045
Operating income (loss).......... 13,533 17,186 1,668 (15,084) -- 17,303
Identifiable assets.............. 72,237 108,277 8,047 50,605 -- 239,166
Depreciation and amortization.... 379 3,283 69 301 -- 4,032
Amortization of negative
goodwill...................... -- -- -- 5,367 -- 5,367
Capital expenditures............. 745 8,836 214 210 -- 10,005
YEAR ENDED DECEMBER 31, 1997
Sales to unaffiliated
customers..................... $106,529 $67,166 $13,501 $ -- $(1,830) $185,366
Operating income (loss).......... 15,617 11,869 4,503 (9,370) -- 22,619
Identifiable assets.............. 94,011 86,030 9,457 61,576 -- 251,074
Depreciation and amortization.... 248 3,493 30 1,100 -- 4,871
Amortization of negative
goodwill...................... -- -- -- 5,367 -- 5,367
Capital expenditures............. 2,216 1,649 314 1,885 -- 6,064
NINE MONTHS ENDED DECEMBER 31, 1996
Sales to unaffiliated
customers..................... $ 52,029 $ -- $10,269 $ -- -- $ 62,298
Operating income (loss).......... 7,399 -- 2,879 (1,168) -- 9,110
Identifiable assets.............. 40,169 -- 6,956 11,546 -- 58,671
Depreciation and amortization.... 79 -- 10 9 -- 98
Amortization of negative
goodwill...................... -- -- -- 4,026 -- 4,026
Capital expenditures............. 545 -- 218 958 -- 1,721
</TABLE>
39
<PAGE> 40
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Export sales by geographic region based upon the ultimate destination in
which equipment or services were sold, shipped or provided to the customer by
the Company were as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- DECEMBER 31,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Russia..................................... $ 22,137 $ 47,375 $39,717
Europe (excluding Russia).................. 12,649 12,783 151
Asia (excluding Russia).................... 17,831 11,113 72
South America.............................. 15,829 9,166 634
Africa..................................... 17,469 14,432 --
Other...................................... 1,869 6,665 --
-------- -------- -------
Total export sales............... 87,784 101,534 40,574
Domestic sales............................. 87,261 83,832 21,724
-------- -------- -------
Total sales...................... $175,045 $185,366 $62,298
======== ======== =======
</TABLE>
In 1998, no one customer accounted for more than 10% of revenues. For the
year ended December 31, 1997, one customer accounted for 12.9% of revenue. For
the nine months ended December 31, 1996, two customers accounted for 38% and 14%
of revenues, respectively.
(15) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $21.3 million at December
31, 1998 for the manufacture and delivery of drilling and workover rigs during
fiscal year 1999.
At December 31, 1998, the Company was contingently liable for approximately
$3.0 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.
Various federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos containing materials
("ACMs"). Such laws and regulations may impose liability for the release of ACMs
and may provide for third parties to seek recovery from owners or operators of
facilities at which ACMs were or are located for personal injury associated with
exposure to ACMs. The Company is aware of the presence of ACMs at its
facilities, but it believes that such materials are in acceptable condition at
this time. The Company believes that any future costs related to remediation of
ACMs at these sites will not be material, either on an annual basis or in the
aggregate, although there can be no assurance with respect thereto.
The Company has sought to reduce the impact of costs arising from or
related to actual or potential environmental conditions at the Bowen Tools
Division facilities caused or created by Bowen or its predecessors in title
through the Company's contractual arrangements with Air Liquide America
Corporation ("Air Liquide). Pursuant to such arrangements, Air Liquide and Bowen
agreed to indemnify the Company for such costs. Air Liquide provided the Company
with certain environmental assessments with respect to most of the Bowen
properties conveyed to the Company. In some cases, these initial assessments
recommended the performance of further investigation to evaluate the need for
and to determine the extent of the removal or remediation of hazardous
substances required to address historical operations of Bowen. Air Liquide is
conducting a further environmental review of the Bowen Tools Division facilities
to determine the potential scope of remediation to be conducted at such
facilities by Air Liquide or Bowen. There can be no assurance
40
<PAGE> 41
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that Air Liquide or Bowen will meet its obligations under the indemnification
arrangements or that there will not be future contamination for which the
Company might be fully liable and that may require the Company to incur
significant costs that could have a material adverse effect on the Company's
financial conditions and results of operations.
Although the Company believes that it is in substantial compliance with
existing laws and regulations, there can be no assurance that substantial costs
for compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional, presently
unquantifiable, costs or liabilities to the Company.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial disposition, results of operations or
liquidity.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1998
Sales and other operating revenues........... $47,232 $51,399 $40,650 $35,764
Gross profit................................. 12,849 15,468 11,064 9,418
Net earnings (loss).......................... 4,372 5,525 2,799 (314)
Basic and diluted earnings (loss) common
share...................................... 0.11 0.14 0.07 (0.01)
1997
Sales and other operating revenues........... $16,594 $41,191 $54,345 $73,236
Gross profit................................. 4,142 8,519 12,653 20,848
Net earnings (loss).......................... 1,657 (1,236) 2,530 8,072
Basic and diluted earnings (loss) per common
share...................................... 0.06 (0.04) 0.08 0.23
1996
Sales and other operating revenues........... $13,365 $15,982 $28,870 $17,446
Gross profit................................. 5,303 2,895 7,622 6,813
Net earnings................................. 2,827 82 4,564 3,731
Basic and diluted earnings per common
share...................................... 0.10 0.00 0.15 0.12
</TABLE>
The Company acquired the business and operations of the Bowen Tools
Division on March 31, 1997 and Cardwell International, Ltd. on April 17, 1997
(see note 3).
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IRI INTERNATIONAL CORPORATION
By: /s/ MUNAWAR H. HIDAYATALLAH
----------------------------------
Munawar H. Hidayatallah
Executive Vice President and
Chief Financial Officer, Director
Date: March , 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Chairman of the Board and March , 1999
- - ----------------------------------------------------- Chief Executive Officer
Hushang Ansary
* Vice-Chairman of the Board March , 1999
- - -----------------------------------------------------
Daniel G. Moriarty
/s/ MUNAWAR H. HIDAYATALLAH Executive Vice President, March , 1999
- - ----------------------------------------------------- Chief Financial and
Munawar H. Hidayatallah Accounting Officer and
Director
* Secretary and Director March , 1999
- - -----------------------------------------------------
Abdallah Andrawos
* President and Chief Operating March , 1999
- - ----------------------------------------------------- Officer of the IRI Division
Gary W. Stratulate and Director
* Executive Vice President and March , 1999
- - ----------------------------------------------------- Chief Operating Officer of
Richard D. Higginbotham the Bowen Tools Division and
Director
* President and Chief Operating March , 1999
- - ----------------------------------------------------- Officer of Cardwell
Arthur C. Teichgraeber International, Ltd. and
Director
* Director March , 1999
- - -----------------------------------------------------
Nina Ansary
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Director March , 1999
- - -----------------------------------------------------
Frank C. Carlucci
* Director March , 1999
- - -----------------------------------------------------
Dr. Philip David
* Director March , 1999
- - -----------------------------------------------------
John D. Macomber
* Director March , 1999
- - -----------------------------------------------------
Edward L. Palmer
* Director March , 1999
- - -----------------------------------------------------
Stephen J. Solarz
* Director March , 1999
- - -----------------------------------------------------
Alexander B. Trowbridge
* Director March , 1999
- - -----------------------------------------------------
J. Robinson West
*By: /s/ MUNAWAR H. HIDAYATALLAH
------------------------------------------------
Munawar H. Hidayatallah
Attorney-In-Fact
</TABLE>
43
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*3.1 -- Form of Restated Certificate of Incorporation of IRI
International Corporation.
*3.2 -- Certificate of Ownership and Merger of ESI with the
Company filed on October 14, 1997.
*3.3 -- Amended and Restated By-Laws of the Company.
*4.2 -- Form of Registration Rights Agreement between the Company
and its current stockholders.
*10.1 -- Form of Indemnification Agreement among the Company and
its officers and directors.
*10.2 -- Employment Agreement, dated as of April 17, 1997, between
Cardwell and A.C. Teichgraeber and joined by the Company.
*10.3 -- Credit Agreement, dated as of March 31, 1997, among ESI,
the Company, the several lenders from time to time
parties thereto, Credit Lyonnais New York Branch and
Lehman Commercial Paper Inc. (the "Credit Agreement").
*10.3A -- Amendment No. 1 to the Credit Agreement.
*10.3B -- Form of Agreement and Consent to the Credit Agreement.
*10.4 -- Senior Subordinated Increasing Rate Note Purchase
Agreement, dated as of March 31, 1997, by and among the
Company, Energy Services International Limited and
Strategic Resource Partners Fund ("Senior Note Purchase
Agreement").
*10.4A -- Form of Agreement and Consent to the Senior Note Purchase
Agreement.
*10.5 -- Asset Purchase Agreement, dated as of January 20, 1997,
by and among Bowen Tools, Inc.-Delaware, Bowen, Air
Liquide and the Company.
*10.6 -- Acquisition Agreement, dated as of March 20, 1997, by and
among A.C. Teichgraeber, Teichgraeber Family Limited
Partnership, L.P., Arthur C. Teichgraeber Charitable
Remainder Trust, Greenwood Pipe and Threading Company,
EDCO Drilling Company Inc. and the Company.
*10.7 -- Equity Incentive Plan of the Company.
*10.8 -- Form of Nonqualified Stock Option Agreement.
*10.9 -- Collective Bargaining Agreement dated as of July 8, 1997
between Bowen and General Drivers, Warehousemen, Helpers,
Production Maintenance and Service Employees, Local Union
No. 968.
*21 -- List of Subsidiaries of the Company.
23.1 -- Consent of KPMG LLP.
27.1 -- Financial Data Schedule of the Company.
</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.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
IRI International Corporation:
We consent to incorporation by reference in the registration statement
(No. 333-40525) on Form S-8 of IRI International Corporation of our report
dated March 18, 1999, relating to the consolidated financial statements of IRI
International Corporation as of December 31, 1998 and 1997 and the related
statement of operations, shareholders' equity, and cash flows for the years
ended December 31, 1998 and 1997, and the nine months ended December 31, 1996,
which report appears in the December 31, 1998 annual report on Form 10-K of IRI
International Corporation.
KPMG LLP
Houston, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 37,475
<SECURITIES> 3,000
<RECEIVABLES> 30,107
<ALLOWANCES> 960
<INVENTORY> 109,151
<CURRENT-ASSETS> 185,583
<PP&E> 57,606
<DEPRECIATION> 8,414
<TOTAL-ASSETS> 239,166
<CURRENT-LIABILITIES> 21,337
<BONDS> 0
0
0
<COMMON> 399
<OTHER-SE> 209,860
<TOTAL-LIABILITY-AND-EQUITY> 239,166
<SALES> 175,045
<TOTAL-REVENUES> 175,045
<CGS> 126,626
<TOTAL-COSTS> 31,116
<OTHER-EXPENSES> 1,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360
<INCOME-PRETAX> 15,665
<INCOME-TAX> 3,283
<INCOME-CONTINUING> 12,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,382
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
