<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 June 30, 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
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(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
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(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 August 14, 1997
----- ------------------------------
Common stock, $0.01 par value 21,248,272 shares
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ERC INDUSTRIES, INC.
INDEX
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<CAPTION>
PAGE
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PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996......................... 2
Condensed Consolidated Statement of Operations
Three and Six Months Ended June 30, 1997 and June 30, 1996.. 3
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 1997 and June 30, 1996............ 4
Notes to Condensed Consolidated Financial Statements........... 5
Management's Discussion and Analysis........................... 7
PART II
OTHER INFORMATION................................................ 9
Signature Page................................................. 10
</TABLE>
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PART I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
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<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 13,674 11,738
Inventory 19,635 15,314
Prepaid expenses and other current assets 312 257
Deferred tax asset 618 651
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Total current assets 34,239 27,961
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Property, plant and equipment, net 5,577 4,932
Other assets 885 532
Deferred tax asset-noncurrent 170 170
Excess cost over net assets acquired, net 1,590 1,714
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Total assets $42,461 $35,309
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital leases due
within one year $10,314 $ 3,295
Accounts payable 8,849 9,655
Other accrued liabilities 2,637 2,912
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Total current liabilities 21,800 15,862
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Long-term debt 2,418 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 11,958 11,791
Retained earnings from January 10, 1989 6,020 5,552
Translation adjustment 52 65
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Total shareholders' equity 18,243 17,621
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Total liabilities and shareholders' equity $42,461 $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 STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues $17,521 $11,817 $34,055 $21,645
Cost of goods sold 13,504 8,891 26,082 16,680
------- ------- ------- -------
Gross profit 4,017 2,926 7,973 4,965
Selling, general and administrative
expenses 3,416 2,479 6,852 4,509
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Operating income 601 447 1,121 456
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Other (income) expense:
Interest expense 190 91 333 192
Other, net (11) (9) 27 (14)
------- ------- ------- -------
179 82 360 178
------- ------- ------- -------
Income before provision for
income taxes 422 365 761 278
Provision for income taxes 174 115 293 98
------- ------- ------- -------
Net income $ 248 $ 250 $ 468 $ 180
======= ======= ======= =======
Net income per share $ 0.01 $ 0.02 $ 0.02 $ 0.01
======= ======= ======= =======
Weighted average number of
shares outstanding 21,248 15,790 21,248 14,838
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
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ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
-----------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (6,164) $ (1,529)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (578) (372)
Proceeds from sale of property, plant and equipment 6
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Net cash used in investing activities (572) (372)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings, net 7,111 (2,425)
Proceeds from issuance of debt - 268
Principal payments on long-term debt and capital
lease obligations (363) -
Net proceeds from issuance of common stock - 5,857
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Net cash provided by financing activities 6,748 3,700
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Effect of exchange rate changes on cash (13) -
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Net increase (decrease) in cash and cash equivalents (1) 1,799
Cash and cash equivalents, beginning of period 1 -
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Cash and cash equivalents, end of period $ - $ 1,799
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
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ERC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The information contained herein with respect to June 30, 1997 and the
three and six months ended June 30, 1997 and June 30, 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 and six months ended June 30, 1997 and
June 30, 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. The Company exercised a portion of this purchase
option in February 1997 for $800,000. This purchase was partially financed
with the issuance of a $705,000 note payable to the seller.
(3) Acquisition of Seaboard:
On September 27, 1996, the Company acquired 100% of the issued and
outstanding share capital 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 bank 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
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<S> <C> <C>
Revenues $13,633 $23,461
Net income (loss) 103 (99)
Net income (loss) per share .01 (.01)
</TABLE>
5
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(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. Management
believes that the adoption of this standard will not have a significant
impact on the financial statements.
(5) The Company negotiated a new domestic $10,000,000 line of credit with its
bank in June, 1997. The line has substantially the same terms as the
Company's previous line of credit and expires in June, 1998.
(6) Subsequent Event:
On July 14, 1997, the Company acquired 100% of the issued and outstanding
capital stock of Church Oil Tools, Inc. ("Church").
Church is a Houston, Texas based manufacturer serving the drilling
equipment market. Church sells blow out preventers, high pressure valves
and specialized engineering services. Its customers include drilling
contractors, rental tool companies and other related oilfield service
companies. The Company plans to continue to operate Church in
substantially the same manner as it was operated prior to the acquisition,
and the two principal stockholders of Church entered into employment
agreements with the Company in connection with the transaction. Church's
business will be conducted through a new business unit of the Company to
be called Wood Group Drilling Products.
In connection with the transaction, the Company paid the Church
stockholders a purchase price consisting of $1,000,000 borrowed under the
Company's existing domestic credit facility and $4,000,000 in promissory
notes bearing interest at 8% per annum until maturity in July 2001. In
addition, the Company agreed to pay the stockholders up to an additional
$1,000,000 in the event that Church's average earnings in 1999 or 2000
exceeded certain thresholds. The Company intends to account for the
transaction as a purchase.
6
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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 up 22.3% to 893 for the six months
ended June 30, 1997, compared with 730 for the six months ended June 30, 1996.
The average active rig count is an important indicator of activity levels in the
market in which the Company operates.
The Company's revenues increased by $5,704,000 for the three months ended June
30, 1997 from $11,817,000 for the three months ended June 30, 1996. In
addition, the Company's six month revenues increased by $12,410,000 (57.3%) to
$34,055,000 for the six months ended June 30, 1997, from $21,645,000 for the six
months ended June 30, 1996. The increase in revenues is principally due to
increased activity with existing customers as a result of higher drilling
activity and increased international sales volume, including sales of Seaboard.
The gross profit for the three months ended June 30, 1997 increased by
$1,091,000 to $4,017,000 from the same period last year. The gross profit for
the six months ended June 30, 1997 increased by $3,008,000 to $7,973,000, from
$4,965,000 for the same period in 1996. The gross profit percentage was 23.4%
for the six months ended June 30, 1997 compared with 22.9% for the six months
ended June 30, 1996. The increase was primarily due to outsourcing of
manufacturing at lower costs and change in product mix largely arising from the
acquisition of Seaboard.
Selling, general and administrative expenses increased by $937,000 for the three
months ended June 30, 1997. The same expenses increased by $2,343,000 to
$6,852,000 for the six months ended June 30, 1997 from $4,509,000 for the six
months ended June 30, 1996. The primary reasons for the increase is the
addition of Seaboard, costs associated with international marketing efforts and
additional sales personnel. The selling, general and administrative expense, as
a percentage of sales, was 20.1% in the first six months of 1997, compared with
20.8% for the first six months of 1996.
The Company generated operating income of $601,000 and $1,121,000 for the three
and six months ended June 30, 1997 compared with operating income of $447,000
and $456,000 for the three and six months ended June 30, 1996. The increase in
operating income was due to increased sales volume which was partially offset by
increases in selling, general and administrative expenses.
Other (income) expense increased by $97,000 for the three months ended June 30,
1997 over the same period in 1996. Likewise, there was a $182,000 increase for
the six month period. This was principally due to an increase in interest
expense as a result of higher inventory and receivables levels since December,
1995 and March, 1996, which required an increase in borrowing from the company's
line of credit.
The provision for income taxes for the six months ended June 30, 1997 and 1996
resulted in an expense of $293,000 and $98,000, respectively, and an expense of
$174,000 and $115,000, respectively, for the three months ended June 30, 1997
and 1996.
7
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Liquidity and Capital Resources
Working capital increased by $340,000 to $12,439,000 at June 30, 1997 compared
with $12,099,000 at December 31, 1996. The increase was due primarily to higher
inventory and receivables levels which were partially offset by higher current
liabilities.
Pursuant to the Company's long-term debt agreements, approximately $10,314,000
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 $3,400,000 through 1997, principally for vehicles, computer
purchases and acquisitions, including Church Oil Tools discussed below. The
Company expects to fund these expenditures from cash provided by operations,
notes payable, and from the Company's line of credit facility. The Company
negotiated a new $10,000,000 line of credit in June, 1997 that expires in June,
1998.
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. Management believes that the adoption of this standard will
not have a significant impact on the financial statements.
Acquisition
On July 14, 1997, the Company acquired 100% of the issued and outstanding
capital stock of Church Oil Tools, Inc. ("Church").
Church is a Houston, Texas based manufacturer serving the drilling equipment
market. Church sells blow out preventers, high pressure valves and specialized
engineering services. Its customers include drilling contractors, rental tool
companies and other related oilfield service companies. The Company plans to
continue to operate Church in substantially the same manner as it was operated
prior to the acquisition, and the two principal stockholders of Church entered
into employment agreements with the Company in connection with the transaction.
Church's business will be conducted through a new business unit of the Company
to be called Wood Group Drilling Products.
In connection with the transaction, the Company paid the Church stockholders a
purchase price consisting of $1,000,000 in cash borrowed under the Company's
existing credit facility and $4,000,000 in promissory notes bearing interest at
8% per annum until maturity in July 2001. In addition, the Company agreed to pay
the stockholders up to an additional $1,000,000 in the event that Church's
average earnings in 1999 or 2000 exceeded certain thresholds. The Company
intends to account for the transaction as a purchase.
8
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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:
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
During the third quarter of the fiscal year ended December 31, 1997,
the Company filed the following Form 8-K:
On July 30, 1997, the Company filed a Current Report on Form 8-K under
Item 5, - disclosing the acquisition of Church Oil Tools, Inc.
9
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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: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,208
<ALLOWANCES> 534
<INVENTORY> 19,635
<CURRENT-ASSETS> 34,239
<PP&E> 19,589
<DEPRECIATION> 14,012
<TOTAL-ASSETS> 42,461
<CURRENT-LIABILITIES> 21,800
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 18,030
<TOTAL-LIABILITY-AND-EQUITY> 42,461
<SALES> 34,055
<TOTAL-REVENUES> 34,055
<CGS> 26,082
<TOTAL-COSTS> 6,852
<OTHER-EXPENSES> 27
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333
<INCOME-PRETAX> 761
<INCOME-TAX> (293)
<INCOME-CONTINUING> 468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 468
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
