<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 March 31, 1997
[ ] 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)
15835 Park Ten Place, Suite 115, Houston, Texas 77084
(Address of principal executive offices) (Zip Code)
(281) 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 May 14, 1997
----- ---------------------------
Common stock, $0.01 par value 21,248,272 shares
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ERC INDUSTRIES, INC.
INDEX
PAGE
----
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
March 31, 1997 and December 31, 1996.................. 2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1997 and March 31, 1996.. 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and March 31, 1996.. 4
Notes to Condensed Consolidated Financial Statements..... 5
Management's Discussion and Analysis..................... 7
PART II
OTHER INFORMATION.......................................... 9
Signature Page........................................... 10
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ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except for share amounts)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1
Trade accounts receivable, net of allowance for
doubtful accounts of $534 and $534, respectively 12,589 11,738
Inventory 17,792 15,314
Prepaid expenses and other current assets 289 257
Deferred tax assets 618 651
------- -------
Total current assets 31,288 27,961
Property, plant and equipment, net 5,638 4,932
Other assets 577 532
Deferred tax assets-noncurrent 170 170
Excess cost over net assets acquired, net 1,581 1,714
------- -------
Total assets $39,254 $35,309
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due within one year $ 6,898 $ 3,295
Accounts payable 9,370 9,655
Other accrued liabilities 2,714 2,912
------- -------
Total current liabilities 18,982 15,862
------- -------
Long-term debt 2,503 1,826
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $1; authorized and
unissued - 10,000,000 shares - -
Common stock, par value $0.01; authorized - 30,000,000 shares;
21,248,272 issued and outstanding 213 213
Additional paid-in capital 11,791 11,791
Retained earnings from January 10, 1989 5,772 5,552
Translation adjustment (7) 65
------- -------
Total shareholders' equity 17,769 17,621
------- -------
Total liabilities and shareholders' equity $39,254 $35,309
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
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ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------
1997 1996
------ ------
<S> <C> <C>
Revenues $16,534 $ 9,828
Cost of goods sold 12,578 7,789
------- -------
Gross profit 3,956 2,039
Selling, general and administrative expenses 3,436 2,030
------- -------
Operating income 520 9
------- -------
Other (income) expense:
Interest expense 143 101
Other, net 38 (5)
------- -------
181 96
------- -------
Income (loss) before provision (benefit) for
income taxes 339 (87)
Provision (benefit) for income taxes 119 (17)
------- -------
Net income (loss) $ 220 $ (70)
======= =======
Net income (loss) per share $0.01 $(0.01)
======= =======
Weighted average number of shares
outstanding 21,248 13,864
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(3,028) $ (144)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (328) (338)
Proceeds from sale of property, plant and equipment 6 -
------- -------
Net cash used in investing activities (322) (338)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net 3,616 675
Proceeds from issuance of debt - 365
Principal payments on long-term debt and capital
lease obligations (195) -
------- -------
Net cash provided by financing activities 3,421 1,040
------- -------
Effect of exchange rate changes on cash (72) -
------- -------
Net increase (decrease) in cash and cash equivalents (1) 558
Cash and cash equivalents, beginning of period 1 -
------- -------
Cash and cash equivalents, end of period $ 0 $ 558
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The information contained herein with respect to March 31, 1997 and the
three months ended March 31, 1997 and 1996, 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,
1996. Included are all adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial information for the three
months ended March 31, 1997 and 1996. The results of interim periods are
not necessarily indicative of results to be expected for the year.
(2) Supplemental Cash Flow Information:
In connection with the Barton Wood acquisition in late 1993, the Company
leased, and has an option to purchase certain equipment from the Barton
lenders ("Lessors") at any time during the term of the lease, which extends
through February, 1998. As a result, the Company exercised a portion of this
purchase option in February 1997. This noncash transaction totaled $800,000.
(3) Acquisition of Seaboard
On September 27, 1996, the Company acquired 100% of the issued and
outstanding capital shares of Seaboard Lloyd Limited ("Seaboard"), a private
company incorporated in Scotland under the Companies Acts of the United
Kingdom in a privately negotiated transaction.
The Company paid a purchase price of $1,580,000 cash for the issued share
capital of Seaboard. The source of the funds for the purchase was
approximately $1,080,000 in cash on hand and $500,000 borrowed under the
Company's existing credit facility.
The operating results of Seaboard are included in operations from the date
of acquisition. The following represents the pro-forma results of operations
as if the acquisition of Seaboard had occurred on January 1, 1996 (in
thousands, except per share data):
Three Months Ended
March 31, 1996
---------------------
Revenues $ 12,914
Net loss (202)
Net loss per share (.01)
5
<PAGE>
(4) Recent Accounting Pronouncement:
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share", was issued. This statement, which is required to be
adopted in the fourth quarter of fiscal 1997, established standards for
computing and presenting earnings per share ("EPS") and applies to entities
with publicly held common stock. This statement simplifies the standards for
computing EPS under existing accounting principles and makes it more
comparable to international accounting standards. This statement requires
restatement of all prior-period EPS data presented, however, management
believes that the adoption of this standard will not have a significant
impact on the financial statements.
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, increased by 20% to 853 for the three
months ended March 31, 1997, compared with 708 for the three months ended March
31, 1996. The average active rig count is a clear indicator of the market in
which the Company operates.
The Company's revenues increased by $6,706,000 for the three months ended March
31, 1997 to $16,534,000 from $9,828,000 for the three months ended March 31,
1996, a 68.2% increase. The increase in revenues was due to new customers added,
increased activity with existing customers as a result of higher drilling
activity, higher international sales volume, and the inclusion of the sales of
Seaboard Lloyd Limited.
The gross margin for the three months ended March 31, 1997 increased by
$1,917,000 to $3,956,000, from $2,039,000 for the three months ended March 31,
1996. The gross profit percentage was 23.9% for the three months ended March
31, 1997 compared with 20.7% for the three months ended March 31, 1996. This
increase is a result of (i) outsourcing of manufacturing at lower costs (ii)
product mix shift toward higher margin products, and (iii) the acquisition of
Seaboard Lloyd Ltd.
Selling, general and administrative expenses increased by $1,406,000 to
$3,436,000 for the three months ended March 31, 1997 from $2,030,000 for the
three months ended March 31, 1996. The primary reasons for the increase were
costs associated with international marketing efforts, additional sales
personnel, and the acquisition of Seaboard Lloyd Ltd.
The Company generated operating income of $520,000 for the three months ended
March 31, 1997 compared with operating income of $9,000 for the three months
ended March 31, 1996. The increase in operating profit was due primarily to
increased sales partially offset by increased selling, general and
administrative expenses.
Other expense, net increased by $85,000. This was principally due to an
increase in interest expense as a result of higher inventory levels since March
of 1996, which required an increase in the company's line of credit borrowing.
The provision for income taxes for the three months ended March 31, 1997 and
1996 resulted in an expense of $119,000 and a benefit of $17,000, respectively.
7
<PAGE>
Liquidity and Capital Resources
Working capital increased by $207,000 to $12,306,000 at March 31, 1997 compared
with $12,099,000 at December 31, 1996. The increase is due primarily to higher
inventory levels offset by higher current liabilities.
Pursuant to the Company's long-term debt agreements, approximately $6,898,000 in
principal payments are due over the next twelve months. The Company believes
its line of credit facility, combined with cash generated from operations, will
be adequate to fund its operations for at least the next twelve months.
The Company currently anticipates incurring capital expenditures of
approximately $2,900,000 through 1997, principally for vehicles and computer
purchases. 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.
Recent Accounting Pronouncement
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
per Share", was issued. This statement, which is required to be adopted in the
fourth quarter of fiscal 1997, established standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock. This statement simplifies the standards for computing EPS under
existing accounting principles and makes it more comparable to international
accounting standards. This statement requires restatement of all prior-period
EPS data presented, however, management believes that the adoption of this
standard will not have a significant impact on the financial statements.
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, results of operations, or cash flows.
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.
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
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: May 14, 1997 ERC INDUSTRIES, INC.
/s/ Wendell R. Brooks
---------------------------------
Wendell R. Brooks
President, Secretary & Director
/s/ James E. Klima
--------------------------------
James E. Klima
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,123
<ALLOWANCES> 534
<INVENTORY> 17,792
<CURRENT-ASSETS> 31,288
<PP&E> 15,304
<DEPRECIATION> 9,666
<TOTAL-ASSETS> 39,254
<CURRENT-LIABILITIES> 18,982
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 17,556
<TOTAL-LIABILITY-AND-EQUITY> 39,254
<SALES> 16,534
<TOTAL-REVENUES> 16,534
<CGS> 12,578
<TOTAL-COSTS> 3,436
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 339
<INCOME-TAX> (119)
<INCOME-CONTINUING> 220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 220
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
