<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-14439
ERC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0382879
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
16920 Park Row, Houston, Texas 77084
(Address of principal executive offices) (Zip Code)
(713) 398-8901
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 11, 1995
Common stock, $0.01 par value 13,863,656 shares
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ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C>
FINANCIAL INFORMATION:
Condensed Balance Sheets -
September 30, 1995 (unaudited) and December 31, 1994................... 2
Condensed Statements of Income
(Unaudited) - Three and Nine Months Ended September 30, 1995 and 1994.. 3
Condensed Statements of Cash Flows
(Unaudited) - Nine Months Ended September 30, 1995 and 1994............ 4
Notes to Condensed Financial Statements................................. 5
Management's Discussion and Analysis.................................... 7
PART II
OTHER INFORMATION........................................................ 9
Signature Page.......................................................... 10
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ - $ 312
Trade accounts receivable, net of
allowance for doubtful accounts of
$428 and $512, respectively 7,206 5,664
Inventory 8,542 6,936
Prepaid expenses and other
current assets 35 57
Deferred tax asset 527 434
------- -------
Total current assets 16,310 13,403
Property, plant and equipment, net 2,990 3,102
Other assets 470 701
Excess cost over net assets
acquired, net 1,751 1,913
------- -------
$21,521 $19,119
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt due within one year $ 394 $ 533
Line of credit 2,825 -
Accounts payable 3,934 3,607
Other accrued liabilities 1,908 1,326
------- -------
Total current liabilities 9,061 5,466
------- -------
Long-term debt 1,917 2,841
Deferred taxes 129 129
------- -------
2,046 2,970
------- -------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, par value $1; authorized and
unissued - 10,000,000 shares - -
Common stock, par value $.01; authorized - 30,000,000
shares; issued and outstanding - 13,863,656 shares 139 139
Additional paid-in capital 5,232 5,232
Retained earnings from January 10, 1989 5,043 5,312
------- -------
Total shareholders' equity 10,414 10,683
------- -------
$21,521 $19,119
======= =======
</TABLE>
See notes to condensed financial statements.
2
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ERC INDUSTRIES, INC.
CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues $9,271 $8,584 $25,714 $23,653
Cost of goods sold 7,423 6,449 19,964 17,920
------ ------ ------- -------
Gross profit 1,848 2,135 5,750 5,733
------ ------ ------- -------
Selling, general and administrative expenses 1,992 1,659 5,832 5,276
------ ------ ------- -------
Operating income (144) 476 (82) 457
------ ------ ------- -------
Other (income) expense:
Interest expense 117 93 314 235
Other, net 4 (42) (34) (78)
------ ------ ------- -------
121 51 280 157
------ ------ ------- -------
(Loss) income before (benefit) provision for
income taxes (265) 425 (362) 300
(Benefit) provision for income taxes (79) 113 (93) 124
------ ------ ------- -------
Net (loss) income $ (186) $ 312 $ (269) $ 176
------ ------ ------- -------
Net (loss) income per share $ (.01) $ .02 $ (.02) $ .01
------ ------ ------- -------
Weighted average number of shares outstanding 13,864 13,864 13,864 13,864
====== ====== ======= =======
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
ERC INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (269) $ 176
Adjustments to reconcile net (loss) income to
net cash used in by operating activities:
Depreciation and amortization 778 756
Bad debt expense 130 -
Deferred tax (benefit) provision (93) 112
(Gain) on sale of property, plant and equipment (5) (6)
Non-cash charge for income taxes - -
Decrease (increase) in other assets 163 (1)
Net effect of changes in operating accounts (2,347) (3,571)
------- --------
Net cash used in operating activities (1,643) (2,534)
------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (411) (563)
Proceeds from sale of property, plant and equipment 14 8
------- --------
Net cash used in investing activities (397) (555)
------- --------
Cash flows from financing activities:
Line of credit borrowings, net 2,075 2,145
Principal payments on long-term debt and capital
lease obligations (347) (369)
Payments pursuant to reorganization plan:
Payments made on plan obligations - (23)
------- --------
Net cash provided by financing activities 1,728 1,753
------- --------
Net decrease in cash and cash equivalents (312) (1,336)
Cash and cash equivalents, beginning of period 312 1,336
------- --------
Cash and cash equivalents, end of period $ - $ -
======= ========
</TABLE>
See notes to financial statements.
4
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ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to September 30, 1995 and
the three and nine months ended September 30, 1995 and 1994, has not been
audited but was prepared in conformity with the accounting principles and
policies described in the Company's annual report (Form 10-K) for the year
ended December 31, 1994. Included are all adjustments which, in the
opinion of management, are necessary for a fair presentation of the
financial information for the three and nine months ended September 30,
1995 and 1994. The results of interim periods are not necessarily
indicative of results to be expected for the year.
(2) FASB No. 109, "Accounting for Income Taxes" requires recording deferred tax
liabilities or assets for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
September 30,
1995
--------------
(in thousands)
<S> <C>
Deferred tax liabilities:
Tax over book depreciation...... $ 129
-------
Total deferred tax liabilities.. 129
-------
Deferred tax assets:
Net operating loss.............. 8,011
Tax over book inventory basis... 1,129
Other........................... 209
Valuation allowance............. (8,822)
-------
Total deferred tax assets....... 527
-------
Net deferred tax asset...... $ 398
=======
</TABLE>
At September 30, 1995 the Company had net operating loss carryforwards
available to offset future taxable income in the approximate amount of
$23,329,000. These amounts expire between the years 2001 and 2003.
Special limitations exist under the law which may restrict utilization of
the regular tax and alternative minimum tax net operating loss
carryforwards.
5
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(3) The following is a summary of the provision for income taxes for the three
and nine months ended September 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current - federal
(due to alternative minimum tax) $ $ (11) $ $ 0
Non-cash charge
in lieu of federal income taxes (377) 0
Deferred benefit (79) 501 (93) 124
----- ----- ----- -----
Provision for income taxes $ (79) $ 113 $ (93) $ 124
===== ===== ===== =====
</TABLE>
The non-cash charge in lieu of income taxes represents the amount of
federal income taxes that the Company would pay absent the net operating
loss carryforward that was generated before the Company effected a quasi-
reorganization. During the quarter ended September 30, 1994, the Company
reversed the effect of the anticipated uses of the NOL's recognized as a
deferred tax benefit of $377,000 during the first quarter of the year.
Such charges or credits are offset by increases or decreases in additional
paid-in capital.
(4) The following is a summary of the net effect of the changes in operating
accounts on cash flows from operating activities for the nine months ended
(in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
-------------- --------------
<S> <C> <C>
Trade accounts receivable, net $(1,672) $(1,551)
Inventories (1,606) (1,787)
Prepaid expenses and other current assets 22 271
Accounts payable 327 (455)
Other accrued expenses 582 241
Excess cost over net assets - (290)
------- -------
Net effect of changes in operating accounts $(2,347) $(3,571)
======= =======
</TABLE>
The Company made the following cash payments: (i) interest of $314,000 and
$216,441 for the nine months ended September 30, 1995 and 1994,
respectively, and (ii) income taxes of $6,800 and $30,000 for the nine
months ended September 30, 1995 and 1994, respectively.
6
<PAGE>
ERC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated, a leading industry observer, was 746 for the three months ended
September 30, 1995 compared with 783 for the three months ended September 30,
1994, a 4.7% decrease. For the nine months ended September 30, 1995 the rig
count decreased by 6.6% to 709 compared with 759 for the comparable period last
year. The average active rig count is a clear indicator of the market in which
the Company operates based on prior years' experience.
In contrast to the change in the rig count, the Company's revenues increased by
$687,000 (8.0%) to $9,271,000 for the three month period ended September 30,
1995, from $8,584,000 for the three month period ended June 30, 1994. In
addition, the Company's nine month revenues increased by $2,061,000 (8.7%) to
$25,714,000 for the nine months ended September 30, 1995, from $23,653,000 for
the nine months ended September 30, 1994. The increase in revenues is
principally the result of (i) certain large customers increasing their levels of
activity, (ii) an increase in the Company's customer base, and (iii) increases
in international business.
Cost of goods sold increased by $974,000 and $2,044,000 for the three and nine
month periods ended September 30, 1995 and 1994, respectively. The decline in
gross profit margins is primarily due to unfavorable manufacturing cost
variances at the Barton Wood facility. These unfavorable variances were created
by machine tool downtime. The Company has implemented a major machine
refurbishment program to correct these problems.
Selling, general and administrative (SG&A) expenses increased by $333,000 to
$1,992,000 for the three month period ended September 30, 1995 compared with
$1,659,000 for the three month period ended September 30, 1994. For the nine
month period ended September 30, 1995, SG&A increased by $556,000 to $5,832,000
from $5,276,000 for the nine months ended September 30, 1994. SG&A expenses
have increased due to the opening of two additional domestic sales offices,
increase in international sales personnel, administrative head count increases
at Barton Wood, and one-time relocation and severance expenses.
The Company recorded operating losses of $265,000 and $362,000 for the three and
nine months ended September 30, 1995, compared to an operating income of
$425,000 and $300,000 for the three and nine months ended September 30, 1994.
The operating loss for the three months ended September 30, 1995, is due to an
increase in cost of goods sold associated with unfavorable manufacturing cost
variances discussed above, combined with an increase in selling, general and
administrative expenses relating principally to increased sales coverage as
discussed above.
The provision for income taxes for the three and nine months ended September 30,
1995 resulted in a benefit of $79,000 and $93,000, respectively. The provision
for income taxes for the three and nine months ended September 30, 1994 was
$113,000 and $124,000.
7
<PAGE>
Financial Position
Working Capital decreased by $688,000 to $7,249,000 at September 30, 1995
compared with $7,937,000 at December 31, 1994. The decrease in working capital
was due to the reclassification of the line of credit facility from a long term
obligation to a short term obligation maturing on February 26, 1996. This was
the effect of a February 27, 1995 amendment which resulted in the bank lowering
its lending rate by one-half of one percent (.50%).
The line of credit balance at September 30, 1995 was $2,825,000 compared with
$750,000 at December 31, 1994. The increase in the line of credit was due to
increased inventory levels of approximately $1,606,000 and increases in account
receivables of approximately $1,672,000.
Pursuant to the Company's long-term debt agreements, approximately $394,000 in
principal payments are due over the next twelve months.
As of September 30, 1995, the Company had $150,000 in letter of credit
obligations outstanding under the credit agreement and $2,825,000 in line of
credit borrowings, leaving a balance of $25,000 available for borrowings. The
Company believes that it is currently in compliance with all covenants under the
credit agreement. The Company has an agreement with its principal lender which
will provide an additional $1,000,000 line of credit under the same terms and
conditions of its present borrowing facility. The additional line of credit
will be used to finance expansion and growth, as well as operational needs. The
Company believes that amounts available under its current and additional line of
credit facility, combined with cash generated from operations, are adequate to
fund its operations for at least the next twelve months.
The Company currently anticipates incurring for the remainder of 1995, capital
expenditures of as much as $250,000, principally for manufacturing equipment,
facility improvements and additions and vehicle purchases for use in its day-to-
day operations. The Company expects to fund these expenditures from cash
provided by operations, additional capital lease obligations and from the
Company's line of credit facility.
8
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and disputes in the normal
course of its business. Management of the Company believes the
disposition of all such claims, individually or in the aggregate, will
not have a material adverse effect on the Company's financial
condition or results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27--Financial Data Schedule
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 1995 ERC INDUSTRIES, INC.
_____________________________________
(Registrant)
/s/ Wendell R. Brooks
-------------------------------------
Wendell R. Brooks
President
/s/ James E. Klima
-------------------------------------
James E. Klima
Vice President and Chief
Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,634
<ALLOWANCES> 428
<INVENTORY> 8,542
<CURRENT-ASSETS> 16,310
<PP&E> 11,752
<DEPRECIATION> 8,762
<TOTAL-ASSETS> 21,521
<CURRENT-LIABILITIES> 9,061
<BONDS> 0
<COMMON> 139
0
0
<OTHER-SE> 10,275
<TOTAL-LIABILITY-AND-EQUITY> 21,521
<SALES> 25,714
<TOTAL-REVENUES> 25,714
<CGS> 19,964
<TOTAL-COSTS> 5,702
<OTHER-EXPENSES> (34)
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 314
<INCOME-PRETAX> (362)
<INCOME-TAX> (93)
<INCOME-CONTINUING> (269)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
