<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, 2000
[_] 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)
1441 Park Ten Boulevard, 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 10, 2000
- ----------------------------- ---------------------------
Common stock, $0.01 par value 30,698,272 shares
<PAGE>
ERC INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C>
Financial Information:
Condensed Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999.......................... 2
Condensed Consolidated Statement of Operations
Three Months Ended March 31, 2000 and 1999.................... 3
Condensed Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 2000............................. 4
Condensed Consolidated Statement of Comprehensive Income (Loss)
Three Months Ended March 31, 2000 and 1999.................... 5
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 2000 and 1999.................... 6
Notes to Condensed Consolidated Financial Statements............. 7
Management's Discussion and Analysis............................. 9
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>
March 31, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 614 $ 1,387
Trade accounts receivable, net of allowance for
doubtful accounts of $920 and $1,032, respectively 22,167 21,333
Inventory 32,196 31,970
Prepaid expenses and other current assets 2,445 1,915
Deferred tax asset 3,789 3,789
------------- -------------
Total current assets 61,211 60,394
Property, plant and equipment, net 8,867 9,528
Excess cost over net assets acquired, net 955 1,015
Deferred tax asset, non-current 284 284
------------- -------------
Total assets $ 71,317 $ 71,221
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit from banks $ 10,555 $ 9,734
Line of credit from parent 16,210 16,254
Current portion of long-term debt 1,000 1,000
Accounts payable 11,609 10,920
Other accrued liabilities 4,110 5,137
------------- -------------
Total current liabilities 43,484 43,045
Other liabilities, non-current 105 105
Long-term debt 1,486 1,511
------------- -------------
Total Liabilities 45,075 44,661
------------- -------------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, par value $1; authorized - 10,000,000 shares;
none issued and outstanding (December 31, 1999: 1,850,000) - 1,850
Common stock, par value $0.01; authorized - 40,000,000 shares;
30,698,272 issued and outstanding
(December 31, 1999: 28,848,272) 307 289
Additional paid-in capital 27,495 25,663
Accumulated deficit (1,561) (1,226)
Accumulated other comprehensive income 1 (16)
------------- -------------
Total shareholders' equity 26,242 26,560
------------- -------------
Total liabilities and stockholders' equity $ 71,317 $ 71,221
============= =============
</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)
Three Months Ended
March 31,
----------------------------
2000 1999
----------------------------
(restated)
Revenues $ 26,627 $ 22,666
Cost of goods sold 21,137 17,642
------------ ------------
Gross profit 5,490 5,024
Selling, general and administrative expenses 5,455 5,481
------------ ------------
Operating income (loss) 35 (457)
Interest expense 516 471
------------ ------------
Loss before provision for income taxes (481) (928)
(Benefit from) provision for income taxes (146) (169)
------------ ------------
Net loss $ (335) $ (759)
============ ============
Basic and diluted loss per share $ (0.01) $ (0.03)
============ ============
Weighted average number of shares
outstanding-basic and diluted 29,641 28,848
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED OTHER
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS INCOME
--------------------------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1999 1,850 289 25,663 (1,226) (16)
Net loss - - - (335) -
Conversion of preferred stock into
common stock (1,850) 18 1,832 - -
Other comprehensive income - - - - 17
-----------------------------------------------------------------------------
Balance as of March 31, 2000 - $ 307 $ 27,495 $ (1,561) $ 1
========= ============ ========== ============= ===================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE>
ERC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------------
2000 1999
------------ -----------
(restated)
Net loss $ (335) $ (759)
Other comprehensive (loss) income 17 (46)
------------ -----------
Total comprehensive loss $ (318) $ (805)
============ ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements
-5-
<PAGE>
ERC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities: (restated)
Net cash provided by (used in) operating activities $ (1,661) $ 2,308
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (59) (297)
Proceeds from sale of property, plant and equipment 195 36
------------- -------------
Net cash provided by (used in) investing activities 136 (261)
------------- -------------
Cash flows from financing activities:
Line of credit borrowings from parent company, net (44) (2,820)
Line of credit borrowings from banks, net 821 406
Principal payments on long-term debt and capital
lease obligations (25) (155)
------------- -------------
Net cash (used in) provided by financing activities 752 (2,569)
------------- -------------
Net decrease in cash and cash equivalents (773) (522)
Cash and cash equivalents, beginning of period 1,387 2,246
------------- -------------
Cash and cash equivalents, end of period $ 614 $ 1,724
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
<PAGE>
ERC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The information contained herein with respect to March 31, 2000 and the
three months ended March 31, 2000 and 1999, 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, 1999. Included are all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial
information for the three months ended March 31, 2000 and 1999. The
results of interim periods are not necessarily indicative of results to be
expected for the year.
(2) Acquisitions:
On May 14, 1999, the Company, in a privately-negotiated transaction (the
"Pressure Control Acquisition"), completed its acquisition from John Wood
Group PLC ("Wood Group") of all of the outstanding capital stock of Wood
Group Pressure Control Holdings Limited, a company incorporated in Scotland
under the Companies Act of the United Kingdom ("WGPCHL"). Prior to the
Pressure Control Acquisition, WGPCHL was a wholly-owned subsidiary of Wood
Group. The sole assets of WGPCHL consist of all of the issued and
outstanding capital stock of each of Wood Group Engineering Services
(Peterhead) Limited and Wood Group Engineering (Middle East) Limited, which
in turn beneficially owns Arabian Oil Equipment Services LLC (collectively,
the "Group Companies"). The Group Companies market, manufacture and
service products used in the drilling and production segment of the Oil and
Gas Industry, primarily consisting of the repair and overhaul of valves and
wellheads.
In connection with the transaction and in exchange for all of the shares of
the capital stock of WGPCHL, the Company issued to Wood Group 1,350,000
shares of its common stock, par value $0.01 per share (the "Common Stock"),
representing approximately 0.5% of the currently issued and outstanding
shares of Common Stock. In addition, the Company issued 1,850,000 shares
of its Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock"), which was converted into an aggregate of 1,850,000
shares of Common Stock in February 2000.
With the Company and the Group Companies all being under the common control
of the Wood Group, the above transaction has been accounted for similar to
a pooling of interests. The historical financial statements of the Company
for periods prior to the consummation of the acquisition have been restated
as though the Companies had been combined from the period when they first
were under common control of the Wood Group.
-7-
<PAGE>
(3) Segment and Related Information
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information.
Summarized financial information of the Company's reportable segments for
the quarters ended March 31, 2000 and 1999 is shown in the following table:
<TABLE>
<CAPTION>
U.S. Eastern
Operations Hemisphere Other Total
----------- ----------- ----- -----
<S> <C> <C> <C> <C>
2000
----
Revenues from external customers $18,879 $ 6,074 $1,674 $26,627
EBIT /(1)/ 775 (763) 23 35
Total Assets $47,210 $17,634 $6,473 $71,317
1999 (restated)
---------------
Revenues from external customers $14,002 $ 7,749 $ 915 $22,666
EBIT /(1)/ (622) 257 (92) (457)
Total Assets $48,020 $18,069 $5,606 $71,695
</TABLE>
(1) EBIT represents earnings before interest expense and taxes.
The following table is a reconciliation of reportable segment EBIT to the
Company's consolidated totals:
2000 1999
----- -----
(restated)
Total EBIT for reportable segments $ 35 $(457)
Interest expense (516) (471)
----- -----
Total consolidated loss
before taxes $(481) $(928)
===== =====
-8-
<PAGE>
ERC INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement for Purposes of Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-Q regarding
the Company's financial position, business strategy, prospects in its industry,
and plans and objectives of management for future operations are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be given that
actual results may not differ materially from those in the forward-looking
statements herein for reasons including the effects of competition, the level of
petroleum industry exploration and production expenditures, world economic
conditions, the effect of and risks associated with acquisitions, prices of, and
the demand for crude oil and natural gas, drilling activity, weather, increased
pressure on the Company's prices for its products and the margins thereon, the
legislative environment in the United States and other countries, the condition
of the capital and equity markets, and other risk factors identified herein.
Results of Operations
Industry wide, the average active domestic rig count as reported by Baker Hughes
Incorporated, a leading industry observer, was up 32.2% to 711 for the three
months ended March 31, 2000, compared with 538 for the three months ended March
31, 1999. The average active rig count is an important indicator of activity
levels in the U.S. market.
The Company's revenues increased by $3.9 million to $26.6 million for the three
months ended March 31, 2000 from $22.7 million for the three months ended March
31, 1999. The increase in revenues is principally due to the increase in the
number of domestic rigs utilized which has had a favorable impact on the level
of demand in the U.S. for the Company's products, offset partially by a decline
in the level of activity in overseas markets.
The gross profit for the three months ended March 31, 2000 increased by $0.5
million to $5.5 million from $5.0 million for the same period last year. Gross
profit as a percentage of revenues was 20.6% for the three months ended March
31, 2000 as compared with 22.2% for the three months ended March 31, 1999. The
decrease in gross profit percentage was primarily due to the need to lower
margins in order to retain business during a period of increased competition to
maintain market share.
Selling, general and administrative expenses were $5.5 million for both the
three months ended March 31, 2000 and 1999. The decrease in selling, general and
administrative expenses, as a percentage of sales to 20.4% in the first three
months of 2000 compared with 24.2% for the first three months of 1999 is due to
an increase in revenues in the period while SG&A expense has remained constant.
-9-
<PAGE>
The Company generated an operating income of $35,000 for the three months ended
March 31, 2000 compared with an operating loss of $0.5 million for the three
months ended March 31, 1999. The increase in operating income was due to
increased sales volume.
Interest expense at $0.5 million for the three months ended March 31, 2000 was
unchanged compared to the same period in 1999.
The benefit for income taxes for the three months ended March 31, 2000 was
$146,000 compared to a benefit of $169,000 for the equivalent period in 1999.
The effective tax rate moved from 18% in 1999 to 30% in 2000 primarily because
management believed the losses incurred by its U.K. and Venezuelan operations
during the period to March 1999 may not provide future tax benefits to the
Company.
Numerous companies, some of which have substantially greater resources than the
Company, are engaged primarily in the manufacturing, installation and
maintenance of wellheads, valves and drilling equipment as well as other types
of oilfield equipment. In addition, some foreign manufacturers make only valves.
Over the past several years, severe price competition has continued to have a
substantial impact on profit margins. The Company believes that the reduction in
demand in the latter part of 1998 and during 1999 for its services was largely
attributable to depressed oil prices. While the increase in oil and gas prices
so far in 2000 has seen an increase in demand for its products, the Company
cannot predict the future level of demand for its services or future conditions
in the oil and gas service industry, management believes a complete recovery in
the Company's market will require sustained recovery in the oil and gas industry
as a whole.
Liquidity and Capital Resources
On January 20, 1999, the Company obtained a $2 million unsecured line of credit
with a U.S. bank, which is guaranteed by the Company's principal stockholder,
John Wood Group PLC. The line of credit is used for the purpose of general
working capital requirements, and $0.6 million was available for additional
borrowings on the line of credit at March 31, 2000.
On September 2, 1998, the Company obtained a $22 million line of credit with
John Wood Group PLC. At March 31, 2000, $9.6 million was available for
additional borrowings under this line of credit.
The Company's United Kingdom subsidiaries have lines of credit with a bank in
Scotland provided as part of a group banking arrangement with John Wood Group
PLC. The line of credit is issued for the purpose of general working capital
requirements and provides overdraft and documentary credit facilities. The
amount outstanding under this agreement at March 31, 2000 was $8.5 million.
Wood Group Pressure Control U.K. Limited also has a loan from John Wood Group
PLC amounting to $3.2 million, which is repayable on demand. The loan is used
for the purpose of general working requirements.
The Company's Abu Dhabi subsidiary has a line of credit of up to $0.5 million
with a bank in Scotland provided as part of a group banking arrangement with
Wood Group. The amount outstanding under this agreement at March 31, 2000 was
$0.1 million. In addition, the subsidiary has a loan of $0.7 million from Wood
Group.
The Company believes it will be able to renew the line of credit and loan with
John Wood Group PLC so as to ensure that the Company will have sufficient
financial resources to fund its working capital requirements through 2000.
Working capital at March 31, 2000 was $17.6 million compared to $17.4 million at
December 31, 1999. The Company currently anticipates incurring capital
expenditures of $1.3 million through the fiscal year ending December 31, 2000.
The Company expects to fund these expenditures from amounts available under the
line of credit facilities, cash provided by operations and/or capital lease
transactions.
Pending Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
items; effects of certain changes in fair value are recorded in Other
Comprehensive Income pending recognition in earnings. SFAS 133 is effective for
the Company in 2001. The impact of SFAS 133 on our financial statements will
depend on a variety of factors, including future interpretive guidance from the
FASB, the future level of actual foreign currency transactions, the extent of
our hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. However, the Company does not believe the
effect of adoption will have a material effect on the Company's results of
operations, cash flows or financial conditions.
Recent Developments
In November 1999, the Company received a proposal from Wood Group to acquire all
outstanding shares of Common Stock not currently owned by it at a price of $1.50
per share. In response to the Wood Group proposal, the Company's Board of
Directors appointed a special committee comprised of its independent directors
to review and analyze the proposal. The special committee appointed its own
legal and financial advisors and negotiated a per share cash price of $1.60 for
each outstanding share of Common Stock not currently owned by the Wood Group. On
March 29, 2000, the Company, Wood Group and ERC Acquisition, Inc., a Delaware
corporation and a wholly owned subsidiary of the Reporting Person ("Merger
Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement")
providing for the merger (the "Merger") of Merger Sub with and into the Company.
In the Merger, each share of Common Stock of the Company outstanding immediately
prior to the effective time the Merger (other than shares held by the Wood
Group, Merger Sub or any subsidiary of the Wood Group or the Company, or held in
the Company's treasury, which will be canceled, or shares held by stockholders
who have exercised their statutory right under the laws of the state of Delaware
to have such shares appraised and be paid the fair value thereof ("Dissenting
Shares")) will be converted into the right to receive $1.60 in cash, without any
interest thereon (such cash paid for the shares of Common Stock is hereinafter
referred to as the "Merger Consideration"), and each outstanding share of common
stock of Merger Sub will be converted into one share of the common stock of the
Company, as the surviving corporation in the Merger (the "Surviving
Corporation").
The Merger Agreement specifies certain conditions that must be satisfied prior
to the closing of the Merger, including, among other things, (a) the approval
and adoption of the Merger Agreement and the Merger by the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock not owned by
the Reporting Person that are voting for or against the matter at the meeting of
stockholders called for such purpose, and (b) the absence of any court order,
decree or injunction that prohibits the consummation of the Merger.
As a result of the Merger, (a) all the outstanding shares of Common Stock (other
than Dissenting Shares and shares held by the Wood Group, Merger Sub or any
subsidiary of the Wood Group or the Company, or held in the Company's treasury,
which will be canceled) will be converted into the right to receive the Merger
Consideration, and the shares of Merger Sub will become the shares of the
Surviving Corporation, (b) the Reporting Person will own 100% of the outstanding
shares of the Surviving Corporation, (c) the Common Stock of the Company will
cease to be authorized to be quoted on the OTC Bulletin Board or on any other
interdealer quotation system of a registered national securities association,
(d) the Common Stock will be removed from registration under the 1934 Act, (e)
the directors of Merger Sub will become the directors of the Surviving
Corporation and (f) the officers of the Company will become the officers of the
Surviving Corporation.
On May 1, 2000, Alan Senn resigned as Company President (while retaining his
position on the Board) to become President of Wood Corp. ESP, a fellow affiliate
of Wood Corp. Also on May 1, 2000, Scott Bender joined the Company's Board and
was elected as President, and Joel Bender joined the Company as Senior Vice
President, Operations.
-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.
During the three months ended March 31, 2000, the Company made no
unregistered sales of its equity securities.
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:
27.1 Financial Data Schedule/(1)/.
(b) Reports on Form 8-K:
During the first quarter of the fiscal year ended December 31,
2000, the Company filed no reports on Form 8-K.
______________________
/(1)/ Filed herewith.
-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: May 11, 2000 ERC INDUSTRIES, INC.
------------------------------------------
/s/ Scott J. Bender
------------------------------------------
Scott J. Bender
President and Chief Operating Officer
/s/ James E. Klima
------------------------------------------
James E. Klima
Vice President and Chief Financial Officer
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 614
<SECURITIES> 0
<RECEIVABLES> 23,087
<ALLOWANCES> 920
<INVENTORY> 32,196
<CURRENT-ASSETS> 61,211
<PP&E> 28,393
<DEPRECIATION> 19,526
<TOTAL-ASSETS> 71,317
<CURRENT-LIABILITIES> 43,484
<BONDS> 0
0
0
<COMMON> 307
<OTHER-SE> 25,934
<TOTAL-LIABILITY-AND-EQUITY> 71,317
<SALES> 26,627
<TOTAL-REVENUES> 26,627
<CGS> 21,137
<TOTAL-COSTS> 5,455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516
<INCOME-PRETAX> (481)
<INCOME-TAX> 146
<INCOME-CONTINUING> (335)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (335)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
