<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, 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 November 12, 1997
- ----------------------------- --------------------------------
Common stock, $0.01 par value 27,498,272 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
PAGE
PART I
<TABLE>
<CAPTION>
FINANCIAL INFORMATION:
<S> <C>
Condensed Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996................. 2
Condensed Consolidated Statement of Operations
Three and Nine Months Ended September 30, 1997 and 1996.. 3
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1997 and 1996............ 4
Notes to Condensed Consolidated Financial Statements........ 5
Management's Discussion and Analysis........................ 8
PART II
OTHER INFORMATION............................................. 11
Signature Page.............................................. 12
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except for share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 912 $ 1
Trade accounts receivable, net of allowance for
doubtful accounts of $577 and $534, respectively 17,041 11,738
Inventory 21,334 15,314
Prepaid expenses and other current assets 355 257
Deferred tax asset 618 651
------- -------
Total current assets 40,260 27,961
Property, plant and equipment, net 6,151 4,932
Other assets 838 532
Deferred tax asset-noncurrent 170 170
Excess cost over net assets acquired, net 4,443 1,714
------- -------
Total assets $51,862 $35,309
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt and capital leases due within one year $ 6,468 $ 3,295
Accounts payable 8,009 9,655
Other accrued liabilities 3,575 2,912
------- -------
Total current liabilities 18,052 15,862
------- -------
Long-term debt 5,105 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;
27,498,272 and 21,248,272 issued and outstanding as of
September 30, 1997 and December 31, 1996, respectively 275 212
Additional paid-in capital 21,821 11,792
Retained earnings from January 10, 1989 6,641 5,552
Translation adjustment (32) 65
------- -------
Total shareholders' equity 28,705 17,621
------- -------
Total liabilities and stockholders' equity $51,862 $35,309
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
-2-
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 22,208 $ 13,304 $ 56,263 $ 34,949
Cost of goods sold 16,724 10,244 42,806 26,924
-------- -------- --------- ---------
Gross profit 5,484 3,060 13,457 8,025
Selling, general and administrative
expenses 4,088 2,397 10,940 6,906
-------- -------- --------- ---------
Operating income 1,396 663 2,517 1,119
-------- -------- --------- ---------
Other (income) expense:
Interest expense 320 19 653 211
Other, net 17 (20) 44 (34)
-------- -------- --------- ---------
337 (1) 697 177
-------- -------- --------- ---------
Income before provision for income taxes 1,059 664 1,820 942
Provision for income taxes 438 272 731 370
-------- -------- --------- ---------
Net income $ 621 $ 392 $ 1,089 $ 572
======== ======== ========= =========
Net income per share $ 0.03 $ 0.02 $ 0.05 $ 0.03
======== ======== ========= =========
Weighted average number of shares
outstanding 22,811 21,248 21,775 16,990
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
-3-
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (9,594) $ (2,049)
----------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired of $1,152 in 1997
and $0 in 1996 152 (1,580)
Purchases of property, plant and equipment (726) (524)
Proceeds from sale of property, plant and equipment 6 -
----------- -----------
Net cash used in investing activities (568) (2,104)
----------- -----------
Cash flows from financing activities:
Line of credit borrowings (repayments), net 3,239 (1,925)
Principal borrowings (repayments) on long-term debt
and capital lease obligations (1,994) 221
Net proceeds from issuance of common stock 9,926 5,857
----------- -----------
Net cash provided by financing activities 11,171 4,153
----------- -----------
Effect of exchange rate changes on cash (98) -
----------- -----------
Net increase in cash and cash equivalents 911 -
Cash and cash equivalents, beginning of period 1 -
----------- -----------
Cash and cash equivalents, end of period $ 912 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
-4-
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The information contained herein with respect to September 30, 1997 and the
three and nine months ended September 30, 1997 and September 30, 1996, has
not been audited but was prepared in conformity with the accounting
principles and policies described in the ERC Industries, Inc. (the
"Company") 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 nine months ended September 30, 1997 and September 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.
In addition, the acquisition of Church Oil Tools, Inc. (see Note 3) was
partially financed through $4,000,000 of promissory notes to the sellers.
(3) Acquisitions:
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.
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 produces and 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. Church operates in substantially the same manner as it
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 is now being conducted through a new
business unit of the Company called Wood Group Drilling Products.
-5-
<PAGE>
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 of the earnings in 1999 and 2000 exceeded
certain thresholds. The purchase price was allocated as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash $1,152
Accounts Receivable 939
Inventory 566
Property, plant and equipment 772
Excess cost over net assets acquired 2,934
Accounts Payable (809)
Long-term debt (502)
Accrued Expenses (52)
------
$5,000
======
</TABLE>
The operating results of Seaboard and Church are included in operations from
their respective dates of acquisition. The following represents the pro-
forma results of operations as if the acquisitions of Seaboard and Church
had occurred on January 1, 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues $ 60,958 $ 44,746
Net income (loss) 2,252 (1,159)
Net income (loss) per share .10 (.07)
</TABLE>
(4) Common Stock Issuance:
On September 7, 1997, John Wood Group PLC invested $10,000,000 in the
Company through the purchase of 6,250,000 shares of common stock at a price
of $1.60 per share. This money was used to pay down the line of credit, and
will allow the Company to pursue growth opportunities.
(5) Recent Accounting Pronouncements:
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 requires restatement of all
prior-period EPS data presented. Management believes that the adoption of
this standard will have no impact on the financial statements.
-6-
<PAGE>
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", was issued. This statement, which is
required to be adopted in the first quarter of 1998, established standards
for reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources and includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. Management has not yet determined the impact of
this standard on the financial statements.
(6) 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.
-7-
<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 up 22.4% to 925 for the nine
months ended September 30, 1997, compared with 756 for the nine months ended
September 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 $8,904,000 to $22,208,000 for the three
months ended September 30, 1997 from $13,304,000 for the three months ended
September 30, 1996. In addition, the Company's nine month revenues increased by
$21,314,000 (61.0%) to $56,263,000 for the nine months ended September 30, 1997,
from $34,949,000 for the nine months ended September 30, 1996. The increase in
revenues is principally due to increased activity with existing customers as a
result of higher drilling activity, additional sales attributable to the
acquisition of Church and increased international sales volume, including sales
by Seaboard.
The gross profit for the three months ended September 30, 1997 increased by
$2,424,000 to $5,484,000 from $3,060,000 for the same period last year. The
gross profit for the nine months ended September 30, 1997 increased by
$5,432,000 to $13,457,000 from $8,025,000 for the same period in 1996. The
gross profit percentage was 23.9% for the nine months ended September 30, 1997
compared with 23.0% for the nine months ended September 30, 1996. The increase
was primarily due to outsourcing of manufacturing at lower costs and change in
product mix largely arising from the acquisitions of Seaboard and Church.
Selling, general and administrative expenses increased by $1,691,000 for the
three months ended September 30, 1997. The same expenses increased by
$4,034,000 to $10,940,000 for the nine months ended September 30, 1997 from
$6,906,000 for the nine months ended September 30, 1996. The primary reasons
for the increase is the addition of Seaboard and Church, costs associated with
international marketing efforts and additional sales personnel. The selling,
general and administrative expense as a percentage of sales was 19.4% in the
first nine months of 1997, compared with 19.8% for the first nine months of
1996.
The Company generated operating income of $1,396,000 and $2,517,000 for the
three and nine months ended September 30, 1997 compared with operating income of
$663,000 and $1,119,000 for the three and nine months ended September 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 $338,000 for the three months ended
September 30, 1997 over the same period in 1996. Likewise, there was a $520,000
increase for the nine month period. This was principally due to an increase in
interest expense as a result of higher inventory and receivables levels which
required an increase in borrowing from the company's line of credit through most
of 1997.
-8-
<PAGE>
The provision for income taxes for the nine months ended September 30, 1997 and
1996 resulted in an expense of $731,000 and $370,000, respectively, and an
expense of $438,000 and $272,000 respectively, for the three months ended
September 30, 1997 and 1996.
Liquidity and Capital Resources
On September 7, 1997, John Wood Group PLC invested $10,000,000 in the Company
through the purchase of 6,250,000 shares of common stock at a price of $1.60 per
share. This money was used to pay down the line of credit, and will be used for
future acquisitions.
Working capital increased by $10,109,000 to $22,208,000 at September 30, 1997
compared with $12,099,000 at December 31, 1996. The increase was due primarily
to increased accounts receivables and inventory resulting from increased sales
and sales demand. This increase was partially offset by a $2,190,000 increase
in current liabilities. This relatively small growth in current liabilities was
achieved through utilization of the net proceeds of the common stock issuance
for retirement of debt outstanding on the line of credit.
Pursuant to the Company's long-term debt agreements, approximately $6,468,000 in
principal payments are due over the next twelve months. The Company believes
its line of credit facility, combined with anticipated cash flow 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 $3,500,000 through 1997, principally for machine tools, the
purchase of its building and equipment in Shawnee, Oklahoma, which is currently
being leased, vehicles, and computer equipment. The Company expects to fund
these expenditures from future 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 Pronouncements
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 requires restatement of all prior-period EPS data
presented. Management believes that the adoption of this standard will not have
a material impact on the financial statements.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", was issued. This statement, which is required to be
adopted in the first quarter of 1998, established standards for reporting and
display of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources and
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Management has not yet
determined the impact of this standard on the financial statements.
-9-
<PAGE>
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 produces and 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. Church
operates in substantially the same manner as it 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 has been conducted through a new business unit of the Company
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 and 2000 exceed certain thresholds.
-10-
<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:
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.
On September 8, 1997, the Company filed a Current Report on Form
8-K under Item 5, disclosing an investment from John Wood Group
PLC.
-11-
<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 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
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 912
<SECURITIES> 0
<RECEIVABLES> 17,618
<ALLOWANCES> 577
<INVENTORY> 21,334
<CURRENT-ASSETS> 40,260
<PP&E> 20,332
<DEPRECIATION> 14,181
<TOTAL-ASSETS> 51,862
<CURRENT-LIABILITIES> 18,052
<BONDS> 0
0
0
<COMMON> 275
<OTHER-SE> 28,430
<TOTAL-LIABILITY-AND-EQUITY> 51,862
<SALES> 56,263
<TOTAL-REVENUES> 56,263
<CGS> 42,806
<TOTAL-COSTS> 10,940
<OTHER-EXPENSES> 44
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 653
<INCOME-PRETAX> 1,820
<INCOME-TAX> (731)
<INCOME-CONTINUING> 1,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,089
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
