<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission file number 0-18312
------------------------------------
TUBOSCOPE INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0252850
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2835 Holmes Road, Houston, Texas 77051
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(713) 799-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [_]
The Registrant had 44,701,016 shares of common stock outstanding as of
September 30, 1998.
<PAGE>
TUBOSCOPE INC.
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997 2
Unaudited Consolidated Statements of Income -
For the Three and Nine Months Ended September 30, 1998
and 1997 3
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1998 and 1997 4
Notes to Unaudited Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-13
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Exhibit Index 16-17
Appendix A - Financial Data Schedule 18-19
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TUBOSCOPE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
(In thousands)
<S> <C> <C>
A S S E T S
-----------
Current assets:
Cash and cash equivalents............................................. $ 8,072 $ 12,593
Accounts receivable, net.............................................. 141,965 144,067
Inventory, net........................................................ 99,008 78,317
Deferred income taxes................................................. -- 984
Prepaid expenses and other............................................ 10,018 11,755
-------- --------
Total current assets............................................... 259,063 247,716
-------- --------
Property and equipment:
Land, buildings, and leasehold improvements........................... 82,534 79,581
Operating equipment and equipment leased to customers................. 247,691 208,052
Accumulated depreciation and amortization............................. (90,688) (77,072)
-------- --------
Net property and equipment......................................... 239,537 210,561
Identified intangibles, net.............................................. 21,695 23,315
Goodwill, net............................................................ 215,580 202,301
Other assets, net........................................................ 2,679 2,274
-------- --------
Total assets....................................................... $738,554 $686,167
======== ========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable...................................................... $ 36,335 $ 43,350
Accrued liabilities................................................... 55,255 76,596
Income taxes payable.................................................. 13,096 15,902
Current portion of long-term debt and short-term borrowings........... 32,631 30,574
-------- --------
Total current liabilities.......................................... 137,317 166,422
Long-term debt........................................................... 227,074 187,803
Pension liabilities...................................................... 8,998 8,916
Deferred taxes payable................................................... 23,977 22,239
Other liabilities........................................................ 2,224 754
-------- --------
Total liabilities.................................................. 399,590 386,134
-------- --------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized, 44,701,016
shares issued and outstanding (44,235,591 at December 31, 1997)...... 447 442
Paid-in capital....................................................... 307,670 294,402
Retained earnings..................................................... 48,511 10,155
Cumulative translation adjustment..................................... (7,852) (4,966)
Less: Treasury stock at cost (712,300 shares)........................ (9,812) --
-------- --------
Total common stockholders' equity.................................. 338,964 300,033
-------- --------
Total liabilities and equity....................................... $738,554 $686,167
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Revenue................................. $ 139,759 $ 141,411 $ 443,462 $ 372,907
Costs and expenses:
Costs of services and products sold.. 102,225 95,925 311,567 252,777
Goodwill amortization................ 1,682 1,424 4,816 3,738
Selling, general and administration.. 13,059 13,424 41,305 37,440
Research and engineering costs....... 3,225 2,858 9,811 7,844
---------- ---------- ---------- ----------
120,191 113,631 367,499 301,799
Operating profit........................ 19,568 27,780 75,963 71,108
Other expense (income):
Interest expense..................... 4,441 3,608 13,410 10,698
Interest income...................... (165) (75) (449) (198)
Foreign exchange..................... 198 163 515 480
Other, net........................... 317 15 1,118 1,246
---------- ---------- ---------- ----------
Income before income taxes.............. 14,777 24,069 61,369 58,882
Provision for income taxes.............. 5,541 9,032 23,013 22,299
---------- ---------- ---------- ----------
Net income.............................. $ 9,236 $ 15,037 $ 38,356 $ 36,583
========== ========== ========== ==========
Earnings per common share:
Basic earnings per common share...... $ 0.21 $ 0.34 $ 0.86 $ 0.84
========== ========== ========== ==========
Dilutive earnings per common share... $ 0.20 $ 0.32 $ 0.81 $ 0.80
========== ========== ========== ==========
Weighted average number of common shares
outstanding:
Basic................................ 44,953,390 44,041,085 44,806,215 43,366,547
========== ========== ========== ==========
Dilutive............................. 46,489,706 48,032,603 47,585,058 46,496,180
========== ========== ========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 38,356 $ 36,583
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 22,586 18,904
Compensation related to employee 401(k) plan......... 772 478
Provision for losses on accounts receivable.......... 445 1,964
Provision for inventory reserve...................... 1,082 1,750
Provision for deferred income taxes.................. 2,420 9,192
Changes in assets and liabilities, net of
effects of acquired companies:
Accounts receivable................................ 8,877 (29,537)
Inventory.......................................... (15,648) (18,767)
Prepaid expenses and other assets.................. 1,995 (4,798)
Accounts payable and accrued liabilities........... (24,214) 15,111
Federal and foreign income taxes payable........... (3,254) 3,307
--------- --------
Net cash provided by operating activities............ 33,417 34,187
--------- --------
Cash flows used for investing activities:
Capital expenditures................................... (31,341) (21,722)
Business acquisitions, net of cash acquired............ (33,943) (28,891)
Other.................................................. 246 (2,402)
--------- --------
Net cash used for investing activities............... (65,038) (53,015)
--------- --------
Cash flows provided by financing activities:
Borrowings under financing agreements.................. 164,110 38,782
Principal payments under financing agreements.......... (129,432) (21,248)
Purchase of common stock............................... (9,812) --
Proceeds from sale of common stock, net................ 2,234 4,472
--------- --------
Net cash provided by financing activities............ 27,100 22,006
--------- --------
Net increase (decrease) in cash and cash equivalents..... (4,521) 3,178
Cash and cash equivalents:
Beginning of period.................................... 12,593 10,407
--------- --------
End of period.......................................... $ 8,072 $ 13,585
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the nine month period for:
Interest............................................. $ 13,330 $ 9,052
========= ========
Taxes................................................ $ 22,892 $ 9,834
========= ========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
TUBOSCOPE INC.
Notes to Unaudited Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 1998 and 1997
and as of December 31, 1997
1. Organization and Basis of Presentation of Interim Consolidated Financial
Statements
The accompanying unaudited consolidated financial statements of the Company and
its wholly-owned subsidiaries have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information in
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to these rules and regulations. The unaudited consolidated
financial statements included in this report reflect all the adjustments which
the Company considers necessary for a fair presentation of the results of
operations for the interim periods covered and for the financial condition of
the Company at the date of the interim balance sheet. Results for the interim
periods are not necessarily indicative of results for the year.
The financial statements included in this report should be read in conjunction
with the Company's 1997 audited consolidated financial statements and
accompanying notes included in the Company's 1997 Form 10-K, filed under the
Securities Exchange Act of 1934, as amended.
2. Inventory
At September 30, 1998 inventories consist of the following (in thousands):
<TABLE>
<S> <C>
Components, subassemblies, and expendable parts.................. $58,366
Equipment under production....................................... 40,642
-------
$99,008
=======
</TABLE>
3. Senior Credit Agreement and Dividend Restrictions
The Company's Senior Credit Agreement restricts the Company from paying
dividends on its capital stock unless the total funded debt to capital ratio
(as defined in the Senior Credit Agreement) is less than or equal to 40%. The
Company's total funded debt to capital ratio (calculated as defined under the
Senior Credit Agreement) was 43.6% at September 30, 1998.
4. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" which established new rules for the
reporting and display of comprehensive income. Comprehensive income is
defined by SFAS No. 130 as net income plus direct adjustments to shareholders'
equity. The cumulative translation adjustment of certain foreign entities is
the only such direct adjustment recorded by the Company. Comprehensive income
for the three and nine months ended September 30, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Comprehensive income:
Net income............................ $9,236 $15,037 $38,356 $36,583
Cumulative translation adjustment..... (291) (1,431) (2,886) (4,489)
------ ------- ------- -------
Total comprehensive income............ $8,945 $13,606 $35,470 $32,094
====== ======= ======= =======
</TABLE>
5
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS No. 131) which establishes
standards for the way that public companies report information about operating
segments in both annual and interim financial statements. SFAS No. 131 also
establishes standards for disclosures about products and services, geographic
areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt SFAS No. 131
retroactively in the fourth quarter of 1998. The adoption of SFAS No. 131
will not affect the Company's results of operations or financial position, but
will increase the Company's disclosure of segment information.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, the Company does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on earnings or the
financial position of the Company.
5. $100.0 Million Senior Notes and Condensed Consolidating Financial Information
On February 25, 1998, the Company issued $100.0 million of 7.5% Senior Notes
due 2008 ("Notes"). The Notes are fully and unconditionally guaranteed, on a
joint and several basis, by certain wholly-owned subsidiaries of the Company
(collectively "Guarantor Subsidiaries" and individually "Guarantor"). Each of
the guarantees is an unsecured obligation of the Guarantor and ranks pari
passu with the guarantees provided by and the obligations of such Guarantor
Subsidiaries under the Bank Credit Facility and with all existing and future
unsecured indebtedness of such Guarantor for borrowed money that is not, by
its terms, expressly subordinated in right of payment to such guarantee. A
portion of the net proceeds from the issuance of the Notes was used by the
Company to repay indebtedness outstanding under the Company's Credit
Agreement. The remaining net proceeds have been used to finance acquisitions,
working capital and general corporate purposes. The following condensed
consolidating balance sheet as of September 30, 1998 and related condensed
consolidating statements of operations and cash flows for the nine months
ended September 30, 1998 should be read in conjunction with the notes to these
consolidated financial statements.
6
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
5. Condensed Consolidating Financial Information (Cont'd)
Balance Sheet
<TABLE>
<CAPTION>
Period Ended September 30, 1998
-----------------------------------------------------------------------
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ -- $ (181) $ 8,253 $ -- $ 8,072
Accounts receivable, net.......... 220,238 66,359 59,708 (204,340) 141,965
Inventory, net.................... -- 66,898 32,110 -- 99,008
Prepaid expenses and other........ -- 4,579 5,439 -- 10,018
--------- -------- -------- --------- --------
Total current assets........... 220,238 137,655 105,510 (204,340) 259,063
Investment in subsidiaries.......... 356,535 228,185 -- (584,720) --
Property and equipment, net......... -- 149,808 89,729 -- 239,537
Identified intangibles, net......... -- 21,681 14 -- 21,695
Goodwill, net....................... -- 104,132 111,448 -- 215,580
Other assets, net................... -- 1,283 1,396 -- 2,679
-------- -------- -------- --------- --------
Total assets................... $576,773 $642,744 $308,097 $(789,060) $738,554
======== ======== ======== ========= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.................. $ -- $209,119 $ 20,385 $(193,169) $ 36,335
Accrued liabilities............... 2,634 26,813 25,808 -- 55,255
Income taxes payable.............. (3,154) 11,047 5,203 -- 13,096
Current portion of long-term
debt........................... 24,050 6,274 2,307 -- 32,631
-------- -------- -------- --------- --------
Total current liabilities...... 23,530 253,253 53,703 (193,169) 137,317
Long term debt...................... 214,279 10,704 2,091 -- 227,074
Pension liabilities................. -- -- 8,998 -- 8,998
Deferred taxes payable.............. -- 5,463 18,514 -- 23,977
Other liabilities................... -- -- 2,224 -- 2,224
-------- -------- -------- --------- ---------
Total liabilities.............. 237,809 269,420 85,530 (193,169) 399,590
Common stockholders' equity:
Common stock...................... 447 -- -- -- 447
Paid in capital................... 297,858 304,196 170,006 (474,202) 297,858
Retained earnings................. 48,511 69,128 60,413 (129,541) 48,511
Cumulative translation
adjustment..................... (7,852) -- (7,852) 7,852 (7,852)
-------- -------- -------- --------- --------
Total common stockholders' equity... 338,964 373,324 222,567 (595,891) 338,964
-------- -------- -------- --------- --------
Total liabilities and equity... $576,773 $642,744 $308,097 $(789,060) $738,554
======== ======== ======== ========= ========
</TABLE>
7
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
5. Condensed Consolidating Financial Information (Cont'd)
Statement of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------------------------------------
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue............................. $ -- $254,066 $244,041 $(54,645) $443,462
Operating costs..................... -- 221,549 186,538 (40,588) 367,499
------- -------- -------- -------- --------
Operating profit (loss)............. -- 32,517 57,503 (14,057) 75,963
Other expense (income).............. (9,821) (3,487) 14,492 -- 1,184
Interest expense.................... 10,045 2,875 490 -- 13,410
------- -------- -------- -------- --------
Income (loss) before taxes.......... (224) 33,129 42,521 (14,057) 61,369
Provision for taxes................. -- 6,005 17,008 -- 23,013
Equity in net income of subsidiaries 38,580 25,513 -- (64,093) --
------- -------- -------- -------- --------
Net income (loss)................... $38,356 $ 52,637 $ 25,513 $(78,150) $ 38,356
======= ======== ======== ======== ========
</TABLE>
8
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
5. Condensed Consolidating Financial Information(Cont'd)
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------------------------------------
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities............................. $(192,171) $ 284,025 $ 6,836 $(65,273) $ 33,417
Net cash used for investing activities:
Capital expenditures................... -- (22,331) (10,190) 1,180 (31,341)
Business acquisitions.................. -- (33,943) -- -- (33,943)
Investment in subsidiaries............. (38,580) (25,513) -- 64,093 --
Other.................................. -- -- 246 -- 246
--------- --------- -------- -------- --------
Net cash used for investing activities (38,580) (81,787) (9,944) 65,273 (65,038)
Cash flows provided by financing
activities:
Net borrowings under financing
agreements............................ 238,329 (201,543) (2,108) -- 34,678
Purchase of common stock............... (9,812) -- -- -- (9,812)
Net proceeds from sale of common stock. 2,234 -- -- -- 2,234
--------- --------- -------- -------- --------
Net cash provided by (used for)
financing activities................ 230,751 (201,543) (2,108) -- 27,100
--------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ -- 695 (5,216) -- (4,521)
Cash and cash equivalents:
Beginning of period.................... -- (876) 13,469 -- 12,593
--------- --------- -------- -------- --------
End of period.......................... $ -- $ (181) $ 8,253 $ -- $ 8,072
========= ========= ======== ======== ========
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Three and Nine Months Ended September 30, 1998 and 1997
- -------------------------------------------------------
Revenue. Revenue was $139.8 million and $443.5 million for the third quarter
and first nine months of 1998, respectively, representing a decrease of $1.7
million (1%) and an increase of $70.6 million (19%) compared to the third
quarter and first nine months of 1997, respectively. The third quarter results
were negatively impacted by a 21 percent decline in worldwide rig activity in
the third quarter of 1998 compared to the same period of 1997. Adverse market
conditions resulted in lower rig activity in the U.S. (down 19%), Canada (down
48%), and Latin America (down 15%), which had a significant impact on the
Company's revenue. The impact of this adverse operating environment was
partially offset by incremental revenue from five acquisitions completed in the
first nine months of 1998 and eleven acquisitions completed in 1997. In
addition, 1998 results benefited from strong internal growth from the Company's
Coiled Tubing & Pressure Control Products. Through mid November 1998, the
decline in worldwide rig activity has continued and the Company expects fourth
quarter 1998 financial results to continue to be affected by the adverse market
conditions see discussion under Current Operating Environment below.
Revenue from the Company's Tubular Services, comprised of Inspection, Coating,
and Mill Systems and Sales was approximately $52.0 million and $175.6 million
for the three and nine months ending September 30, 1998, respectively. These
results represented a decrease of $8.2 million (14%) in the third quarter of
1998 compared to the same quarter of 1997 and an increase of $17.1 million (11%)
for the first nine months of 1998 compared to the same period in 1997. The
decline in the third quarter 1998 Tubular Services revenue was due primarily to
a drop in North America Inspection and Coating revenue, and greater Mill
equipment sales in the third quarter of 1997. The increase in Tubular Services
revenue for the first nine months of 1998 was mainly related to stronger U.S.
and Far East inspection operations and greater U.S. coating operations during
the first half of 1998, an increase in Mill equipment sales during the first
half of the year, and the acquisition of two tubular inspection operations in
both 1997 and 1998.
Solids Control revenue was $41.9 million and $133.1 million for the third
quarter and first nine months of 1998, representing increases of $1.6 million
(4%) and $25.5 million (24%), respectively, over the same periods of 1997. The
increases for the third quarter and first nine months of 1998 were primarily due
to greater solids control capital equipment and screen sales and incremental
revenue from eight acquisitions completed since the second quarter of 1997.
Lower revenue from North America rental and service operations in the second and
third quarter of 1998 offset these increases to some extent. The North American
decline was the result of lower activity levels mainly on the Gulf Coast and in
Canada due to poor market conditions.
Coiled Tubing & Pressure Control Products revenue was $32.9 million and $93.2
million for the three and nine months ending September 30, 1998, respectively.
These results represented increases of $8.5 million (35%) and $31.4 million
(51%), respectively, over the prior year periods. The increases were driven by a
continued strong market demand for coiled tubing units, wireline units, and
related well remediation and drilling equipment. The increase was due primarily
to increased sales of coiled tubing units manufactured by the Company's Hydra
Rig operation. In addition, revenue from coiled tubing blowout preventors
manufactured by the Company's Texas Oil Tools operation also increased
significantly over the prior year and quarter. Results for 1998 also benefited
from the acquisition of Tulsa Equipment Manufacturing in the fourth quarter of
1997 and Eastern Oil Tools in the second quarter of 1998. Backlog for the Coiled
Tubing & Pressure Control Products operations was at $39.4 million at September
30, 1998, a decrease of 6% from December 31, 1997. The recent drop in backlog is
related to the current industry decline which may have a negative impact on
future results for Coiled Tubing & Pressure Control Products.
Pipeline and Other Industrial Inspection revenue was $12.9 million and $41.4
million for the third quarter and first nine months of 1998, respectively,
representing decreases of $3.5 million and $3.4 million, respectively, compared
to the third quarter and first nine months of 1997. The decreases were primarily
due to lower revenue in the Middle East and Far East operations, and continued
delays in Latin America pipeline inspection projects.
Gross Profit. Gross profit was $35.8 million (26% of revenue) and $127.1
million (29% of revenue) for the third quarter and first nine months of 1998
compared to $44.1 million (31% of revenue) and $116.4 million (31% of revenue)
for the
10
<PAGE>
same periods of 1997. The third quarter 1998 decrease in gross profit dollars
and percentages was primarily due to the lower revenue discussed above and a
change in revenue mix, as a greater percentage of the Company's 1998 revenue
originated from product lines that have lower margins.
Selling, General, and Administrative Costs. Selling, general and administrative
costs were $13.1 million and $41.3 million in the third quarter and first nine
months of 1998, down $0.4 million (3%) compared to the third quarter of 1997 and
up $3.9 million compared to the first nine months of 1997. The increase for the
first nine months of 1998 was due mainly to the eleven 1997 acquisitions and
five 1998 acquisitions. Selling, general and administrative costs as a
percentage of revenue were 9.3% for the third quarter and first nine months of
1998, respectively, compared to 9.5% and 10.0% in the same periods of 1997.
Selling, general, and administrative costs declined 7% in the third quarter of
1998 compared to the first quarter of 1998, due to some extent to the
implementation of cost controls in response to market conditions.
Research and Engineering Costs. Research and engineering costs were $3.2
million and $9.8 million for the three and nine months ended September 30, 1998
compared to $2.9 million and $7.8 million in the third quarter and first nine
months of 1997. The increase was due mainly to greater engineering costs in the
Company's Pipeline operations associated with the continued commercial
development and enhancement of the Company's TruRes(R) "High-Resolution"
pipeline tools. In addition, research and engineering costs were up in the
Company's Solids Control and Coiled Tubing product lines.
Operating Profit. Operating profit was $19.6 million and $76.0 million in the
third quarter and first nine months of 1998 compared to operating profit of
$27.8 million and $71.1 million in the same periods of 1997. The decrease for
third quarter of 1998 was due to the revenue decline and the change in revenue
product mix discussed above. The increase for the first nine months of 1998 was
primarily due to the internal growth due to increased equipment sales in the
first half of 1998 in the Coiled Tubing & Pressure Control Products, Solids
Control, and Mill Systems and Sales product lines, as well as the 1997 and 1998
acquisitions.
Interest Expense. Interest expense was $4.4 million and $13.4 million in the
three and nine months ended September 30, 1998, respectively, increases of $0.8
million and $2.7 million over the same periods of 1997. The increases were due
to an increase in debt resulting primarily from the 1997 and 1998 acquisitions.
Other Expense (Income). Other expense, which includes interest income, foreign
exchange, minority interest, and other expense (income), resulted in a net
expense of $1.2 million in the first nine months of 1998 down slightly from $1.5
million in the same period of 1997.
Provision for Income Taxes. The Company's effective tax rate for the third
quarter and first nine months of 1998 was 37.5% compared to 37.5% and 37.9% for
the same periods of 1997. These rates are higher than the domestic rate of 35%
due to charges not allowed under domestic and foreign jurisdictions related to
goodwill amortization and foreign earnings subject to tax rates differing from
domestic rates.
Net income. The third quarter and first nine months of 1998 net income was $9.2
million and $38.4 million, respectively, compared to the third quarter and first
nine months of 1997 net income of $15.0 million and $36.6 million, respectively.
The decline in the third quarter and improvement in the first nine months is due
to the factors discussed above.
Financial Condition and Liquidity
September 30, 1998
- ------------------
For the nine months ended September 30, 1998, cash provided by operating
activities was $33.4 million compared to cash provided by operating activities
of $34.2 million in the first nine months of 1997. Cash was provided by
operations through net earnings of $38.4 million plus non-cash charges of $3.4
million, a decrease in accounts receivable of $8.9 million, and a decrease in
prepaid expenses of $2.0 million. These items were offset to some extent during
the first nine months of 1998 by a $15.6 million increase in inventory, a net
reduction in accounts payable and accrued liabilities of $24.2 million, and a
reduction in federal income taxes payable of $3.3 million. Accounts receivable
decreased due to an 8% decline in revenue for the third quarter of 1998 compared
to the fourth quarter of 1997. Prepaid expenses declined due to a reduction in
prepaid insurance. The increase in inventory was due mainly to greater work in
process associated with anticipated future Mill equipment sales, the
construction of the new TruRes(R) "High-Resolution" pipeline tools, and the
11
<PAGE>
construction of new TruScope(R) units. The decrease in accounts payable and
accrued liabilities was due to 1998 payments made on acquisitions which were
completed in 1997 and bonus payments made in 1998 related to 1997 compensation.
Current federal and foreign income taxes payable decreased due to tax payments
in the first nine months of 1998.
For the nine months ending September 30, 1998, the Company used $65.0 million of
cash for investing activities compared to a usage of $53.0 million in the same
period of 1997. Capital expenditures of $31.3 million for the first nine months
of 1998 were primarily related to the Company's new Navasota coating plant,
thermal desorption units in Latin America, new TruRes(R) "high resolution"
pipeline inspection units, new Truscope(R) units (high speed ultrasonic
inspection system) in the U.S., and additional solids control equipment
(centrifuges and shakers) for certain growing markets in Latin America. Business
acquisitions of $33.9 million were primarily related to the following
acquisitions: Baytron, Inc. (a provider of drilling instrumentation systems and
related equipment to operators and drilling contractors throughout the Gulf of
Mexico), Pacific Inspection Company (the leading provider of oilfield tubular
inspection services in California), Eastern Oil Tools (a worldwide provider of
wireline units and pressure control equipment), and MSD, Inc. (a worldwide
provider of disposal services of drill cuttings generated by oil and gas
drilling operations).
For the nine months ended September 30, 1998, the Company generated $27.1
million of cash from financing activities. Net borrowings associated with the
$100.0 million issue of 7.5% Senior Notes due 2008 ("Notes") offset to some
extent by the partial repayment of indebtedness outstanding under the Company's
Credit Agreement represented the main source of cash flow.
Current and long-term debt was $259.7 million at September 30, 1998, an increase
of $41.3 million from the $218.4 million outstanding at December 31, 1997. The
increase was mainly due to the 1998 acquisitions discussed above and 1998
payments on acquisitions completed late in 1997. The Company's outstanding debt
at September 30, 1998 consisted of $100.0 million of Notes, $99.7 million of
term loans due under the Company's Senior Credit Agreement, $40.0 million due
under the Company's $100.0 million revolving credit facility, $4.0 million
associated with the December 1996 acquisition of Gauthier Brothers, $4.1 million
associated with the acquisition of Eastern Oil Tools, $2.8 million associated
with the acquisition of MSD, and other debt of $9.1 million
At September 30, 1998, the Company had outstanding letters of credit of $5.5
million. The available facility on the Company's $100.0 million revolving credit
facility and $5 million swingline facility was $55.8 million and $3.8 million,
respectively, at September 30, 1998.
Current Operating Environment
Commencing in the fourth quarter of 1997 and continuing through the first nine
months of 1998 the average price of West Texas Intermediate Crude (WTI) has
declined significantly. The decline was caused by several factors including
rising reported world oil inventories, the financial crisis in Asia, an increase
in worldwide production, uncertainties regarding compliance with worldwide
quotas, and temperate weather conditions. The average price of WTI was $14.18
and $14.87 for the third quarter and first nine months of 1998, respectively,
representing declines of 28% and 29% from the same periods of 1997. In addition,
natural gas prices declined by 19% in the third quarter of 1998 compared to the
third quarter of 1997. Rig activity, an historical benchmark of the Company's
activity level, was down worldwide in the third quarter of 1998; U.S. (19%),
Canada (48%), and International (10%) all experienced lower rig activity
compared to the third quarter of 1997. The average rig activity in October 1998
dropped even further as the U.S. and Canadian rig counts were down 5% and 18%,
respectively, from the average rig activity in September 1998. While the decline
in oil and gas prices began in the fourth quarter of 1997 and the resulting drop
in rig activity began in the first quarter of 1998, the declining market
conditions did not have a significant impact on the Company's results of
operations until the third quarter of 1998. It is expected this decline in
market activity will continue to have a negative impact on the Company's results
of operations in the fourth quarter of 1998.
Year 2000 Issue
- ---------------
General
The Year 2000 (Y2K) issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failure or miscalculations causing disruptions
12
<PAGE>
to various activities and operations.
The Company has assessed how it may be impacted by the Y2K issue and has
formulated and commenced implementation of a comprehensive plan to address all
known aspects of the issue.
The Plan
The Company has completed an evaluation of the effects the Y2K problem could
have on the products and services the Company provides, the processing
capabilities of the Company's computers and other internal information systems,
as well as non-informational systems which affect the Company's operational
capabilities. Based on the hardware and software changes made to date, and the
planned changes expected to be made over the next 15 months, the Company is
expected to have addressed all material internal issues concerning the Y2K issue
before January 1, 2000.
In addition, the Company is in the process of evaluating the Y2K compliance
capabilities of major customers and suppliers. The majority of the Company's
major customers and suppliers have been contacted regarding the Y2K issue. The
Company anticipates this evaluation process will be on going for the remainder
of 1998 and all of 1999 and will include follow-up telephone interviews and on-
site meetings as considered necessary in the circumstances. The Company is not
currently aware of any customer or supplier circumstances that may have a
material adverse impact on the Company. The Company will be looking for
alternative suppliers where circumstances warrant.
Cost
The Company's preliminary estimate of the total cost for Y2K compliance is
approximately $750,000, of which approximately $250,000 has been incurred
through September 30, 1998. The majority of these costs are being expensed as
incurred and are not expected to have a material impact on the Company's results
of operations or financial position.
Risks
The Company believes that the Y2K issue will not pose significant operational
problems for the Company. However, if all Y2K problems are not identified or
corrected in a timely manner, there can be no assurance that the Y2K issue will
not have a material adverse impact on the Company's results of operations or
adversely affect the Company's relationships with customers, suppliers, or other
parties. In addition, there can be no assurance that outside third parties
including customers, suppliers, utility and governmental entities will be in
compliance with all Y2K issues. The Company believes that the most likely worst
case Y2K scenario, if one were to occur, would be the inability of third party
suppliers such as utility providers, telecommunication companies, and other
critical suppliers to continue providing their products and services. The
failure of these third party suppliers to provide on going services could have a
material adverse impact on the Company's results of operations.
Contingency Plan
The Company is considering contingency plans relating to key third parties.
These include identifying alternative suppliers and working with major customers
that may be affected by Year 2000 issues.
The foregoing analysis contains forward-looking information. See cautionary
statement regarding "Forward Looking Statements" at the end of the Management's
Discussion and Analysis section.
Forward Looking Statements
This Quarterly Report on Form 10Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are those that
do not state historical facts and are inherently subject to risk and
uncertainties. The forward-looking statements contained herein are based on
current expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others, the cyclical
nature of the oilfield services industry, risks associated with growth through
acquisitions and other factors discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 under the caption "Factors Affecting
Future Operating Results."
13
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -- Reference is hereby made to the Exhibit Index
commencing on page 16.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
14
<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.
TUBOSCOPE INC.
--------------
(Registrant)
Date: November 13, 1998 /s/ Joseph C. Winkler
- ------------------------------- ---------------------------------------
Joseph C. Winkler
Executive Vice President, Chief
Financial Officer and Treasurer (Duly
Authorized Officer, Principal Financial
and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Note No.
- ----------- ----------- --------
3.1 Amended and Restated Bylaws. (Note 2)
3.2 Restated Certificate of Incorporation, dated
March 12, 1990. (Note 7)
3.3 Certificate of Amendment to Restated Certificate
of Incorporation dated May 12, 1992. (Note 8)
3.4 Certificate of Amendment to Restated Certificate
of Incorporation dated May 10, 1994. (Note 10)
3.5 Certificate of Amendment to Restated Certificate
of Incorporation dated April 24, 1996. (Note 17)
3.6 Certificate of Amendment to Restated Certificate
of Incorporation dated June 3, 1997. (Note 18)
4.1 Registration Rights Agreement dated May 13, 1998
among the Company, Brentwood Associates, Hub
Associates IV, L.P., and the investors listed
therein. (Note 1)
4.2 Purchase Agreement dated as of October 1, 1991
between the Company and Baker Hughes Incorporated
regarding certain registration rights. (Note 3)
4.3 Exchange Agreement, dated as of January 3, 1996,
among the Company and Baker Hughes Incorporated. (Note 11)
4.4 Registration Rights Agreement dated April 24, 1996
among the Company, SCF III, L.P., D.O.S. Partners
L.P., Panmell (Holdings), Ltd. and Zink Industries
Limited. (Note 15)
4.5 Registration Rights Agreement dated March 7, 1997
among the Company and certain stockholders of Fiber
Glass Systems, Inc. (Note 16)
4.6 Warrant for the Purchase of Shares of Common Stock
Expiring December 31, 2000 between the Company and
SCF III, L.P. regarding 2,533,000 shares, dated
January 3, 1996. (Note 15)
4.7 Warrant for the Purchase of Shares of Common stock
expiring December 31, 2000 between the Company and
Baker Hughes Incorporated regarding 1,250,000 shares,
dated January 3, 1996. (Note 11)
4.8 Indenture, dated as of February 25, 1998, between
the Company, the Guarantors named therein and The
Bank of New York Trust Company of Florida as trustee,
relating to $100,000,000 aggregate principal amount
of 7 1/2% Senior Notes due 2008 Specimen Certificate
of 7 1/2% Senior Notes due 2008 (the "Private Notes");
and Specimen Certificate at 7 1/2% Senior Notes due
2008 (the "Exchange Notes"). (Note 19)
4.9 Registration Rights Agreement, dated as of February
25, 1998, between the Company Credit Suisse First
Boston Corporation, ABN AMRO Incorporated, Chase
Securities and Solomon Brothers Inc. (Note 19)
10.1 Purchase Agreement, dated as of February 19, 1998,
between Tuboscope Inc., Credit Suisse First Boston
Corporation, ABN AMRO Incorporated, Chase Securities
Inc. and Solomon Brothers Inc. (Note 19)
10.2 401(k) Thrift Savings Plan (As Amended and Restated
Effective January 1, 1993); First Amendment thereto
dated February 15, 1996; Second Amendment thereto
dated October 25, 1996; Third Amendment thereto
dated December 31, 1996; and the Fourth Amendment
thereto dated February 19, 1998. (Note 20)
10.3 Deferred Compensation Plan dated November 14, 1994;
Amendment thereto dated May 11, 1998. (Note 20)
10.4 Employee Qualified Stock Purchase Plan; and First
Amendment to Employee Qualified Stock Purchase Plan
dated March 10, 1994. (Note 6)
10.5 1996 Equity Participation Plan; Form of Non-
qualified Stock Option Agreement for Employees and
Consultants; Form of Non-qualified Stock Option
Agreement for Independent Directors. (Note 13)
16
<PAGE>
Exhibit No. Description Note No.
- ----------- ----------- --------
10.6 DOS Ltd. 1993 Stock Option Plan; Form of D.O.S.
Ltd. Non-Statuary Stock Option Agreement. (Note 14)
10.7 Amended and Restated Stock Option Plan for Key
Employees of Tuboscope Vetco International
Corporation; Form of Revised Incentive Stock Option
Agreement; and Form of Revised Non-Qualified Stock
Option Agreement. (Note 4)
10.8 Stock Option Plan for Non-Employee Directors;
Amendment to Stock Option Plan for Non-Employee
Directors; and Form of Stock Option Agreement. (Note 5)
10.9 Master Leasing Agreement, dated December 18, 1995
between the Company and Heller Financial Leasing,
Inc. (Note 11)
21 Subsidiaries (Note 12)
27 Financial Data Exhibit 27
- ----------------------
Note 1 Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-31102).
Note 2 Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-33248).
Note 3 Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-43525).
Note 4 Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 33-72150).
Note 5 Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 33-72072).
Note 6 Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 33-54337).
Note 7 Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
Note 8 Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992.
Note 9 Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
Note 10 Incorporated by reference to the Company's Proxy Statement for
the 1994 Annual Meeting of Stockholders.
Note 11 Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
Note 12 Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
Note 13 Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-05233).
Note 14 Incorporated by reference to the Company's Registration
Statement on Form S-8 (No. 333-05237).
Note 15 Incorporated by reference to the Company's Current Report on
Form 8-K filed on January 16, 1996.
Note 16 Incorporated by reference to the Company's Current Report on
Form 8-K filed on March 19, 1997, as amended by Amendment No. 1
filed on May 7, 1997.
Note 17 Incorporated by reference to Appendix E in the Company's
Registration Statement on Form S-4 (No. 333-01869).
Note 18 Incorporated by reference to the Company's Proxy Statement for
the 1997 Annual Meeting of Stockholders.
Note 19 Incorporated by reference to the Company's Registration
Statement on Form S-4 (No. 333-51115).
Note 20 Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 141,965
<ALLOWANCES> 4,187
<INVENTORY> 99,008
<CURRENT-ASSETS> 259,063
<PP&E> 330,225
<DEPRECIATION> 90,688
<TOTAL-ASSETS> 738,554
<CURRENT-LIABILITIES> 137,317
<BONDS> 227,074
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<COMMON> 447
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<TOTAL-LIABILITY-AND-EQUITY> 738,554
<SALES> 185,446
<TOTAL-REVENUES> 443,462
<CGS> 109,257
<TOTAL-COSTS> 311,567
<OTHER-EXPENSES> 4,816
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<INTEREST-EXPENSE> 13,410
<INCOME-PRETAX> 61,369
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