<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 March 31, 1999
--------------
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
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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 44,250,921 shares of common stock outstanding as of May
11, 1999.
<PAGE>
TUBOSCOPE INC.
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998........... 2
Unaudited Consolidated Statements of Income -
For the Three Months Ended March 31, 1999 and 1998......... 3
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1999 and 1998......... 4
Notes to Unaudited Consolidated Financial Statements........... 5-10
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition...................... 11-14
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
1
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
A S S E T S (Unaudited)
----------- (In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 7,477 $ 8,735
Accounts receivable, net.............................................. 110,274 123,480
Inventory, net........................................................ 83,650 86,776
Prepaid expenses and other............................................ 12,297 11,477
--------- ---------
Total current assets................................................ 213,698 230,468
--------- ---------
Property and equipment:
Land, buildings and leasehold improvements............................ 90,179 90,041
Operating equipment and equipment leased to customers................. 251,352 248,554
Accumulated depreciation and amortization............................. (100,501) (96,769)
--------- ---------
Net property and equipment.......................................... 241,030 241,826
Identified intangibles, net............................................. 22,568 22,916
Goodwill, net........................................................... 212,507 213,816
Other assets, net....................................................... 3,153 3,146
--------- ---------
Total assets....................................................... $ 692,956 $ 712,172
========= =========
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable...................................................... $ 25,706 $ 29,914
Accrued liabilities................................................... 48,984 50,719
Income taxes payable.................................................. 4,435 4,430
Current portion of long-term debt and short-term borrowings........... 32,189 31,306
--------- ---------
Total current liabilities........................................... 111,314 116,369
Long-term debt.......................................................... 207,829 219,438
Pension liabilities..................................................... 9,688 9,688
Deferred taxes payable.................................................. 25,424 26,270
Other liabilities....................................................... 1,308 1,333
--------- ---------
Total liabilities................................................... 355,563 373,098
--------- ---------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized,
45,575,621 shares issued and 44,150,921 shares outstanding
(45,516,010 shares issued and 44,091,310 outstanding at
December 31, 1998)................................................... 455 455
Paid in capital....................................................... 310,491 309,691
Retained earnings..................................................... 52,405 52,100
Accumulated other comprehensive income................................ (10,628) (7,842)
Less: treasury stock at cost (1,424,700 shares)....................... (15,330) (15,330)
--------- ---------
Total common stockholders' equity................................... 337,393 339,074
--------- ---------
Total liabilities and equity........................................ $ 692,956 $ 712,172
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
(in thousands, except share and per share data)
<S> <C> <C>
Revenue................................................................. $ 95,212 $ 150,181
Costs and expenses:
Cost of services and products sold.................................... 74,104 103,191
Goodwill amortization................................................. 1,784 1,505
Selling, general and administrative................................... 12,338 14,084
Research and engineering costs........................................ 2,946 3,413
---------- ----------
91,172 122,193
---------- ----------
Operating profit........................................................ 4,040 27,988
Other expense (income):
Interest expense...................................................... 4,492 4,353
Interest income....................................................... (85) (89)
Foreign exchange...................................................... (1,050) 148
Other, net............................................................ 174 803
---------- ----------
Income before income taxes.............................................. 509 22,773
Provision for income taxes.............................................. 204 8,540
---------- ----------
Net income.............................................................. $ 305 $ 14,233
========== ==========
Earnings per common share:
Basic earnings per common share....................................... $ 0.01 $ 0.32
========== ==========
Dilutive earnings per common share.................................... $ 0.01 $ 0.30
========== ==========
Weighted average number of common shares outstanding:
Basic................................................................. 44,129,760 44,312,198
========== ==========
Dilutive.............................................................. 44,387,315 47,861,221
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 305 $ 14,233
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................................. 8,421 7,421
Compensation related to employee 401(K) plan................................... 212 194
Provision for losses on accounts receivable.................................... 150 244
Provision for inventory reserve................................................ -- 24
Provision (benefit) for deferred income taxes.................................. (777) 192
Changes in assets and liabilities, net of effects of acquired companies:
Accounts receivable........................................................ 13,455 (7,864)
Inventory.................................................................. 3,126 (9,728)
Prepaid expenses and other assets.......................................... (889) (19)
Accounts payable and accrued liabilities................................... (6,035) (7,811)
Federal and foreign income taxes payable................................... 5 (280)
---------- ----------
Net cash provided by (used for) operating activities........................... 17,973 (3,394)
---------- ----------
Cash flows used for investing activities:
Capital expenditures............................................................. (2,481) (9,892)
Business acquisitions, net of cash acquired...................................... (5,663) (7,874)
Other............................................................................ (251) (1,075)
---------- ----------
Net cash used for investing activities......................................... (8,395) (18,841)
---------- ----------
Cash flows provided by (used for) financing activities:
Borrowings under financing agreements............................................ 12,842 123,845
Principal payments under financing agreements.................................... (24,266) (103,837)
Proceeds from sale of common stock, net.......................................... 588 1,464
---------- ----------
Net cash provided by (used for) financing activities........................... (10,836) 21,472
---------- ----------
Net decrease in cash and cash equivalents.......................................... (1,258) (763)
Cash and cash equivalents:
Beginning of period.............................................................. 8,735 12,593
---------- ----------
End of period.................................................................... $ 7,477 $ 11,830
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the three month period for:
Interest....................................................................... $ 8,324 $ 4,976
========== ==========
Taxes.......................................................................... $ 1,091 $ 8,607
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
TUBOSCOPE INC.
Notes to Unaudited Consolidated Financial Statements
For the Three Months Ended March 31, 1999 and 1998
and as of December 31, 1998
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 1998 audited consolidated financial statements and
accompanying notes included in the Company's 1998 Form 10-K, filed under the
Securities Exchange Act of 1934, as amended.
2. Inventory
At March 31, 1999 inventories consisted of the following (in thousands):
Components, subassemblies, and expendable parts.................. $55,744
Equipment under production....................................... 27,906
-------
$83,650
=======
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 41.2% at March 31, 1999. In March 1999, the
Company amended the Senior Credit Agreement with the lending group to provide
for increased flexibility by increasing the maximum debt to equity ratio and
decreasing the minimum interest coverage ratio.
4. Comprehensive Income
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 months ended March 31, 1999 and 1998 was as follows:
Three Months
Ended March 31,
1999 1998
------- -------
(in thousands)
Comprehensive income:
Net income........................................ $ 305 $14,233
Cumulative translation adjustment................. (2,786) (894)
------- -------
Total comprehensive income........................ $(2,481) $13,339
======= =======
5
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
5. Business Segments
The Company is organized based on the products and services it offers. Under
this organizational structure, the Company offers four product lines: Tubular
Services, Solids Control Products & Services, Coiled Tubing & Wireline
Products, and Pipeline and Other Industrial Services. Each of the product
lines qualifies as a reportable segment.
Tubular Services: This segment provides internal coating products and
services, inspection and quality assurance services for tubular goods and
fiberglass tubulars. Additionally, Tubular Services includes the sale and
leasing of proprietary equipment used to inspect tubular products at steel
mills. This segment operates in the oilfield tubular markets of North
America, Latin America, Europe, Africa, the Middle East and the Far East.
Customers include major oil and gas companies, independent producers,
national oil companies, drilling contractors, oilfield supply stores and
steel mills.
Solids Control Products & Services: This segment consists of the sale and
rental of technical equipment used in, and the provision of services related
to, the separation of drill cuttings (solids) from fluids used in the oil and
gas drilling processes. The Solids Control Products & Services business
serves the oilfield drilling markets of North America, Latin America, Europe,
Africa, the Middle East and the Far East. Customers include major oil and gas
companies, independent producers, national oil companies and drilling
contractors.
Coiled Tubing & Wireline Products: This segment consists of the sale of
highly-engineered coiled tubing equipment, related pressure control
equipment, pressure pumping, wireline equipment and related tools to
companies engaged in providing oil and gas well drilling, and completion and
remediation services. Customers include major oil and gas coiled tubing
service companies, as well as major oil companies and large independents.
Pipeline and Other Industrial Services: This segment provides technical
inspection services and quality assurance services for in-service pipelines
used to transport oil and gas. Additionally, the segment provides a wide
variety of technical industrial inspection, monitoring and quality assurance
services for the construction, operation and maintenance of major projects in
energy related industries. Customers include major pipeline operators and
national oil and gas companies.
The Company evaluates the performance of its operating segments at the
operating profit level which consists of income before interest expense
(income), other expense (income), nonrecurring items and income taxes.
Intersegment sales and transfers are not significant.
6
<PAGE>
Summarized information for the Company's reportable segments is contained in
the following table. Other revenue and operating profit (loss) include
revenue from insignificant operations, corporate expenses and certain
goodwill and identified intangible amortization not allocated to product
lines.
<TABLE>
<CAPTION>
Solids Coiled Pipeline &
Control Tubing & Other
Tubular Products & Wireline Industrial
Services Services Products Services Other Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1999
Revenue....................................... $38,342 $28,571 $19,558 $ 8,741 $ -- $ 95,212
Operating Profit.............................. 5,198 2,710 2,002 190 (6,060) 4,040
Three Months Ended March 31, 1998
Revenue....................................... $61,296 $47,522 $29,075 $12,288 $ -- $150,181
Operating Profit.............................. 16,062 11,152 5,618 1,344 (6,188) 27,988
</TABLE>
6. $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 Credit Agreement 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. The
remaining net proceeds have been used to finance acquisitions, working
capital and general corporate purposes. The following condensed consolidating
balance sheet as of March 31, 1999 and related condensed consolidating
statements of operations and cash flows for the three months ended March 31,
1999 should be read in conjunction with the notes to these consolidated
financial statements.
7
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
6. Condensed Consolidating Financial Information (cont'd)
Balance Sheet
<TABLE>
<CAPTION>
Period Ended March 31, 1999
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents......... $ -- $ 920 $ 6,557 $ -- $ 7,477
Accounts receivable, net.......... 194,251 37,743 255,232 (376,952) 110,274
Inventory, net.................... -- 49,949 33,701 -- 83,650
Prepaid expenses and other........ 834 7,907 3,556 -- 12,297
-------- -------- -------- ----------- --------
Total current assets........... 195,085 96,519 299,046 (376,952) 213,698
Investment in subsidiaries.......... 368,296 284,360 -- (652,656) --
Property and equipment, net......... -- 163,432 77,598 -- 241,030
Identified intangibles, net......... -- 22,563 5 -- 22,568
Goodwill, net....................... -- 104,497 108,010 -- 212,507
Other assets, net................... -- 1,150 2,003 -- 3,153
-------- -------- -------- ----------- --------
Total assets................... $563,381 $672,521 $486,662 $(1,029,608) $692,956
======== ======== ======== =========== ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.................. $ -- $238,046 $164,612 $ (376,952) $ 25,706
Accrued liabilities............... 2,587 26,477 19,920 -- 48,984
Income taxes payable.............. -- 2,884 1,551 -- 4,435
Current portion of long-term debt. 25,350 4,216 2,623 -- 32,189
-------- -------- -------- ----------- --------
Total current liabilities...... 27,937 271,623 188,706 (376,952) 111,314
Long term debt...................... 198,051 7,974 1,804 -- 207,829
Pension liabilities................. -- -- 9,688 -- 9,688
Deferred taxes payable.............. -- 11,441 13,983 -- 25,424
Other liabilities................... -- -- 1,308 -- 1,308
-------- -------- -------- ----------- --------
Total liabilities.............. 225,988 291,038 215,489 (376,952) 355,563
Common stockholders' equity:
Common stock...................... 455 -- -- -- 455
Paid in capital................... 310,491 304,196 187,917 (492,113) 310,491
Retained earnings................. 52,405 77,287 93,884 (171,171) 52,405
Cumulative translation adjustment. (10,628) -- (10,628) 10,628 (10,628)
Treasury Stock.................... (15,330) -- -- -- (15,330)
-------- -------- -------- ----------- --------
Total common stockholders'
equity....................... 337,393 381,483 271,173 (652,656) 337,393
-------- -------- -------- ----------- --------
Total liabilities and equity... $563,381 $672,521 $486,662 $(1,029,608) $692,956
======== ======== ======== =========== ========
</TABLE>
8
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
6. Condensed Consolidating Financial Information (cont'd)
Statement of Operations
<TABLE>
<CAPTION>
Period Ended March 31, 1999
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue............................. $ -- $ 43,815 $ 60,377 $ (8,980) $ 95,212
Operating costs..................... -- 46,740 49,311 (4,879) 91,172
-------- -------- -------- ----------- --------
Operating profit (loss)............. -- (2,925) 11,066 (4,101) 4,040
Other expense (income).............. -- (676) 3,816 (4,101) (961)
Interest expense.................... 4,177 99 216 -- 4,492
-------- -------- -------- ----------- --------
Income (loss) before taxes.......... (4,177) (2,348) 7,034 -- 509
Provision for taxes................. -- 104 100 -- 204
Equity in net income of subsidiaries 4,482 6,934 -- (11,416) --
-------- -------- -------- ----------- --------
Net income (loss)................... $ 305 $ 4,482 $ 6,934 $ (11,416) $ 305
======== ======== ======== =========== ========
</TABLE>
9
<PAGE>
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
6. Condensed Consolidating Financial Information(cont'd)
Statement of Cash Flows
<TABLE>
<CAPTION>
Period Ended March 31, 1999
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used for)
operating activities........................ $ 9,246 $ 10,672 $ (1,945) $ -- $ 17,973
Net cash used for investing activities:
Capital expenditures........................ -- (1,278) (1,203) -- (2,481)
Business acquisitions...................... -- (5,663) -- -- (5,663)
Other...................................... -- -- (251) -- (251)
-------- -------- -------- ----------- --------
Net cash used for investing activities.... -- (6,941) (1,454) -- (8,395)
Cash flows provided by (used for)
financing activities:
Net payments under financing agreements.... (9,834) (1,714) 124 -- (11,424)
Net proceeds from sale of common stock..... 588 -- -- -- 588
-------- -------- -------- ----------- --------
Net cash provided by (used for)
financing activities................... (9,246) (1,714) 124 -- (10,836)
-------- -------- -------- ----------- --------
Net increase (decrease) in cash and
cash equivalents.......................... -- 2,017 (3,275) -- (1,258)
Cash and cash equivalents:
Beginning of period........................ -- (1,097) 9,832 -- 8,735
-------- -------- -------- ----------- --------
End of period.............................. $ -- $ 920 $ 6,557 $ -- $ 7,477
======== ======== ======== =========== ========
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General Operating Environment Overview:
The Company's financial results for the first quarter of 1999 continued to be
adversely affected by the depressed oil and gas industry as indicated by the
following factors:
. The average price of West Texas Intermediate Crude Oil declined 18% to $12.97
per barrel in the first quarter of 1999 compared to the same period of 1998.
West Texas Intermediate Crude Oil prices, which were at $22.04 per barrel in the
fourth quarter of 1997, declined throughout 1998 with the fourth quarter average
at $12.96 per barrel.
. Natural gas prices in the first quarter of 1999 were at $2.05 per mmbtu, down
13% from the average price in the first quarter of 1998.
. Worldwide rig activity declined 35% to 1,462 rigs in the first quarter of
1999 compared to the same period of 1998. The first quarter 1999 decline in
worldwide rig activity, which was at 2,280 rigs in the fourth quarter of 1997,
represented the fifth consecutive quarterly decline in worldwide rig activity.
The decline in rig activity was sharpest in the U.S. market where rig activity
in the first three months of 1999 decreased 43% from the same period of 1998.
While rig activity remained weak during April 1999, the price of West Texas
Intermediate Crude Oil began to rebound in the second quarter of 1999 and was at
$18.85 per barrel on May 3, 1999. The recent recovery in oil prices is
primarily the result of an agreement between certain major oil producers to
limit worldwide oil production. There can be no assurances that these producers
will comply with the self-imposed limitations on oil production, and that the
improvement in oil prices will stabilize or continue. The recent improvement in
West Texas Intermediate Crude Oil prices is not expected to have a significant
impact on financial results for the second quarter of 1999.
Results of Operations
Three Months Ended March 31, 1999 vs 1998
Revenue. Revenue was $95.2 million for the first quarter of 1999, a decrease of
$55.0 million, or 37%, compared to $150.2 million in the first quarter of 1998.
The first quarter 1999 results were adversely impacted by weak oil and gas
prices which led to a 35% decline in worldwide rig activity. The drop in rig
activity was especially heavy in some of the Company's strongest markets
including the U.S. (43%), Canada (37%), and Latin America (34%).
Revenue from the Company's Tubular Services, comprised of Inspection, Coating,
and Mill Systems and Sales was $38.3 million for the first three months of 1999,
a decrease of $23.0 million, or 37%, compared to the same period of 1998. The
majority of the decline was related to lower revenue in North America operations
due to the significant decline in U.S. and Canadian rig activity. Tubular
Services operations were also adversely impacted by weak markets in the Far East
and Latin America.
Solids Control revenue was $28.6 million for the first quarter of 1999, down
$19.0 million, or 39.9%, compared to the first quarter of 1998. Lower drilling
activity, pricing erosion, and lower levels of capital equipment sales caused
the decline, which affected operations worldwide especially in North America,
Latin America, and Europe.
Coiled Tubing & Wireline Products revenue was $19.6 million for the quarter
ending March 31, 1999, down $9.5 million, or 33%, compared to the quarter ending
March 31, 1998. The decrease was due to the decline in spending by the
Company's customers on new coiled tubing and wireline units in response to the
depressed oilfield market. The decline in Coiled Tubing & Wireline Products
revenue was partially offset by the acquisition of Eastern Oil Tools Pte. Ltd.
in June 1998 and Weston Oilfield Engineering Limited in December 1998. As of
March 31, 1999, the Company's backlog of Coiled Tubing & Wireline Products was
$31.7 million, a decline of 19% from $39.1 million at December 31, 1998.
11
<PAGE>
Pipeline & Other Industrial Services revenue was $8.7 million for the first
quarter of 1999, $3.5 million lower than the first quarter of 1998. This
decrease in revenue was due to lower industrial inspection revenue in Saudi
Arabia and lower Pipeline inspection revenue in Latin America.
Gross Profit. Gross profit was $19.3 million (20.3% of revenue) for the first
quarter of 1999 compared to $45.5 million (30.3% of revenue) for the first
quarter of 1998. The first quarter 1999 decrease in gross profit dollars and
percentages was due to the lower revenue discussed above.
Selling, General, and Administrative Costs. Selling, general, and
administrative costs were $12.3 million in the quarter ending March 31, 1999, a
decline of 12.4% from the same period of 1998. Lower selling, general, and
administrative costs were due to cost controls and reductions, which were
implemented in 1998 and continued in 1999 in response to market conditions.
Research and Engineering Costs. Research and engineering costs were $2.9
million for the three months ended March 31, 1999 compared to $3.4 million for
the first three months of 1998. The decline was due to the completion of
certain engineering products in 1998 and cost control measures implemented in
1998 and continued in 1999.
Operating Profit. Operating profit was $4.0 million in the first quarter of
1999 compared to $28.0 million in the first quarter of 1998. The first quarter
1999 decrease in operating profit was due to the factors discussed above.
Interest Expense. Interest expense was $4.5 million for the first three months
of 1999 compared to $4.4 million in the same period of 1998. The increase was
due to greater outstanding debt balances in the first quarter of 1999 compared
to 1998 as a result of 1998 and 1999 acquisitions.
Other Expense (Income). Other expense, which includes interest income, foreign
exchange, minority interest, and other expense (income), resulted in net other
income of $961,000 in the first quarter of 1999 compared to other expense of
$862,000 in the first quarter of 1998. The first quarter other income of
$961,000 was primarily the result of foreign exchange gains of $1.1 million
which were due to the stronger U.S. dollar and related collection of U.S. dollar
receivables on the books of foreign subsidiaries.
Provision for Income Taxes. The Company's effective tax rate for the first
quarter of 1999 was 40.0%. 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. Net income for the first quarter of 1999 was $305,000 compared to
$14.2 million for the first quarter of 1998. The decline in the first quarter
1999 net income was due to the factors discussed above.
Financial Condition and Liquidity
For the three months ended March 31, 1999, cash provided by operating activities
was $18.0 million compared to cash used in operating activities of $3.4 million
for the three months ended March 31, 1998. Cash was provided by operations
through net earnings of $305,000 plus non-cash charges of $8.8 million, a
decrease in accounts receivable of $13.5 million, and a decrease in inventory of
$3.1 million. These items were offset to some extent during the first three
months of 1999 by a reduction in accounts payable and accrued liabilities of
$6.0 million. The decrease in accounts receivable was due to lower revenue in
the first quarter of 1999 compared to the fourth quarter of 1998 revenue down
$29.0 million, or 23%. Inventory declined $3.1 million due to lower activity
and concentrated efforts to reduce inventory levels. Accounts payable and
accrued liabilities were down due to lower activity, 1999 severance payments,
and 1999 interest payments.
For the three months ended March 31, 1999, the Company used $8.4 million of cash
for investing activities compared to $18.8 million for the same period of 1998.
Capital expenditures of $2.5 million for the first three months of 1999 were
primarily related to the Company's new thermal drill-cuttings desorption unit in
Colombia and additional "high resolution" Pipeline inspection tools. Business
acquisitions of $5.7 million were related to the acquisition of Geo-Ray Oilfield
Inspection Ltd. (a Canadian based inspection company) and Manufacturas Rowi,
C.A. (a Venezuelan based solids control company), and investments in Energy
Environmental LLC (a U.S. Gulf Coast based oilfield waste management operator).
12
<PAGE>
For the three months ended March 31, 1999, the Company used $10.8 million of
cash for financing activities compared to cash generated from financing
activities of $21.5 million in the same period of 1998. The main use of cash
for financing activities was for the reduction of outstanding debt.
Current and long-term debt was $240.0 million at March 31, 1999, a decrease of
$10.7 million from December 31, 1998. The decrease in debt was due to cash flow
from operations plus the collection of accounts receivable exceeding capital
spending, acquisitions, and the reduction in accounts payable and accrued
liabilities. The Company's outstanding debt at March 31, 1999 consisted of
$100.0 million of Notes, $88.0 million of term loans due under the Company's
Senior Credit Agreement, $36.7 million due under the Company's $100.0 million
revolving credit facility, and $15.3 million of other debt.
At March 31, 1999, the Company had outstanding letters of credit of $4.5
million. The available facility on the Company's $100.0 million revolving
credit facility and $5 million swingline facility was $59.8 million and $4.0
million, respectively, at March 31, 1999.
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, 1998 under the caption "Factors Affecting
Future Operating Results."
Year 2000
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 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 prior to December 31, 1999, the Company is
expected to have addressed all material internal issues concerning the Y2K issue
before January 1, 2000.
13
<PAGE>
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 in effect for 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 $325,000 has been incurred
through March 31, 1999. 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" in the Management's Discussion
and Analysis section.
Quantitative & Qualitative Disclosure About Market Risk
The Company does not believe it has a material exposure to market risk. The
Company manages the exposure to interest rate changes by using a combination of
fixed rate debt and interest rate swap agreements for almost all variable rate
debt. At March 31, 1999, the Company had $240.0 million of outstanding debt.
Fixed rate debt included $100.0 million of Senior Notes at a fixed interest rate
of 7 1/2%. An additional $90.0 million of outstanding variable rate debt was
effectively converted to fixed rate debt through the use of interest rate swap
agreements and $40.0 million of variable rate debt was protected through the use
of a collar agreement. With respect to foreign currency fluctuations, the
Company uses natural hedges to minimize the effect of rate fluctuations. When
natural hedges are not sufficient, generally it is the Company's policy to enter
into forward foreign exchange contracts to hedge significant transactions for
periods consistent with the underlying risk. The Company had no forward foreign
exchange contracts outstanding at March 31, 1999. The Company does not enter
into foreign currency or interest rate transactions for speculative purposes.
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
March 31, 1999.
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: May 14, 1999 /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
<TABLE>
<CAPTION>
Exhibit No. Description Note No.
----------- ----------- --------
<C> <S> <C>
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, (Note 8)
1992.
3.4 Certificate of Amendment to Restated Certificate of Incorporation dated May 10, (Note 10)
1994.
3.5 Certificate of Amendment to Restated Certificate of Incorporation dated April 24, (Note 17)
1996.
3.6 Certificate of Amendment to Restated Certificate of Incorporation dated June 3, (Note 18)
1997.
4.1 Registration Rights Agreement dated May 13, 1988 among the Company, (Note 1)
Brentwood Associates, Hub Associates IV, L.P. and the investors listed therein.
4.2 Purchase Agreement dated as of October 1, 1991 between the Company (Note 3)
and Baker Hughes Incorporated regarding certain registration rights.
4.3 Exchange Agreement, dated as of January 3, 1996, among the Company (Note 11)
and Baker Hughes Incorporated.
4.4 Registration Rights Agreement dated April 24, 1996 among the Company, (Note 15)
SCF III, L.P., D.O.S. Partners L.P., Panmell (Holdings), Ltd. and Zink
Industries Limited.
4.5 Registration Rights Agreement dated March 7, 1997 among the Company and (Note 16)
certain stockholders of Fiber Glass Systems, Inc.
4.6 Warrant for the Purchase of Shares of Common Stock Expiring December 31, 2000 (Note 15)
between the Company and SCF III, L.P. regarding 2,533,000 shares, dated
January 3, 1996.
4.7 Warrant for the Purchase of Shares of Common stock expiring December 31, 2000 (Note 11)
between the Company and Baker Hughes Incorporated regarding 1,250,000 shares,
dated January 3, 1996.
4.8 Indenture, dated as February 25, 1998, between the Company, the Guarantors (Note 19)
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").
10.1 Amended and Restated Secured Credit Agreement, dated as of February 9, 1998, (Note 19)
between Tuboscope Inc., and Chase Bank of Texas, National Association, ABN
Amro Bank N.V., Houston Agency, and the other Lenders Party Thereto, and ABN
Amro Bank N.V., Houston Agency as Administrative Agent (includes form of Guarantee).
10.1.1 Form of Amendment No. 1 to Amended and Restated Secured Credit Agreement (Note 21)
dated as of March 29, 1999.
10.1.2 Form of Reaffirmation of Guarantee relating to Amended and Restated Secured
Credit Agreement dated as of March 29, 1999.
10.3 Deferred Compensation Plan dated November 14, 1994; Amendment thereto dated (Note 20)
May 11, 1998.
10.4 Employee Qualified Stock Purchase Plan; and First Amendment to Employee (Note 6)
Qualified Stock Purchase Plan dated March 10, 1994.
10.5 1996 Equity Participation Plan; Form of Non-qualified Stock Option Agreement (Note 13)
for Employees and Consultants; Form of Non-qualified Stock Option Agreement
for Independent Directors.
10.6 DOS Ltd. 1993 Stock Option Plan; Form of D.O.S. Ltd. Non Statutory Stock (Note 14)
Option Agreement.
10.7 Amended and Restated Stock Option Plan for Key Employees of Tuboscope (Note 4)
Vetco International Corporation; Form of Revised Incentive Stock Option
Agreement; and Form of Revised Non-Qualified Stock Option Agreement.
10.8 Stock Option Plan for Non-Employee Directors; Amendment to Stock Option (Note 5)
Plan for Non-Employee Directors; and Form of Stock Option Agreement.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Note No.
----------- ----------- --------
<C> <S> <C>
10.9 Master Leasing Agreement, dated December 18, 1995 between the Company and (Note 11)
Heller Financial Leasing, Inc.
21 Subsidiaries (Note 21)
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 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.
Note 21 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE EXTRACTED FROM FORM 10-Q FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 7,477
<SECURITIES> 0
<RECEIVABLES> 110,274
<ALLOWANCES> 4,260
<INVENTORY> 83,650
<CURRENT-ASSETS> 213,698
<PP&E> 341,531
<DEPRECIATION> (100,501)
<TOTAL-ASSETS> 692,956
<CURRENT-LIABILITIES> 111,314
<BONDS> 207,829
0
0
<COMMON> 455
<OTHER-SE> 336,938
<TOTAL-LIABILITY-AND-EQUITY> 692,956
<SALES> 31,611
<TOTAL-REVENUES> 95,212
<CGS> 20,268
<TOTAL-COSTS> 74,104
<OTHER-EXPENSES> 1,784
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 4,492
<INCOME-PRETAX> 509
<INCOME-TAX> 204
<INCOME-CONTINUING> 305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
