<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10718
CAMCO INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3517570
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
7030 ARDMORE, HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 747-4000
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
--- ---
Number of shares of common stock ($.01 par value) outstanding at
August 11, 1998: 38,206,056.
<PAGE> 2
CAMCO INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income-
Three Months and Six Months ended June 30, 1998 and 1997 3
Consolidated Condensed Balance Sheets -
June 30, 1998 and December 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Six Months ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Comprehensive Income-
Three Months and Six Months ended June 30, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
EXHIBITS: FINANCIAL DATA SCHEDULE FOR THE THREE MONTHS ENDED JUNE 30,
1998 (included only in the copy of this report filed
electronically with the Commission).
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Sales $151,813 $156,319 $303,092 $279,751
Services 83,290 70,826 160,078 142,878
-------- -------- -------- --------
235,103 227,145 463,170 422,629
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales 76,837 82,228 151,222 144,451
Cost of services 57,651 48,804 111,722 99,819
-------- -------- -------- --------
134,488 131,032 262,944 244,270
-------- -------- -------- --------
Gross margin 100,615 96,113 200,226 178,359
Selling, general and administrative expenses 53,090 55,476 105,930 104,185
Merger expenses -- 12,500 -- 12,500
Amortization of intangible assets 2,403 2,178 4,573 4,072
-------- -------- -------- --------
Operating income 45,122 25,959 89,723 57,602
Interest expense, net 2,175 1,506 3,768 2,960
-------- -------- -------- --------
Income before provision for income taxes 42,947 24,453 85,955 54,642
Provision for income taxes 14,801 8,681 30,214 19,060
-------- -------- -------- --------
Net income $ 28,146 $ 15,772 $ 55,741 $ 35,582
======== ======== ======== ========
Earnings Per Share:
Basic-
Net Income $ .74 $ .42 $ 1.48 $ .95
Average common shares outstanding 37,887 37,320 37,780 37,300
Diluted-
Net Income $ .73 $ .41 $ 1.44 $ .93
Average common and common
equivalent shares outstanding 38,745 38,348 38,638 38,325
Cash dividends per common share $ .05 $ .05 $ .10 $ .10
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE> 4
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 69,231 $ 57,255
Accounts receivable, net 194,823 177,112
Inventories 225,808 206,471
Prepaid expenses and other 71,670 65,663
----------- -----------
Total current assets 561,532 506,501
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land 5,708 5,120
Buildings 78,275 77,279
Machinery and equipment 279,800 266,137
Service equipment 397,564 366,732
----------- -----------
761,347 715,268
Accumulated depreciation (387,850) (361,956)
----------- -----------
Property, plant and equipment, net 373,497 353,312
----------- -----------
INTANGIBLE ASSETS, net 223,058 212,749
OTHER 79,930 45,278
----------- -----------
Total assets $ 1,238,017 $ 1,117,840
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 120 $ 120
Accounts payable 60,115 57,765
Accrued liabilities 151,726 159,085
Income taxes payable 29,429 31,832
----------- -----------
Total current liabilities 241,390 248,802
----------- -----------
LONG-TERM DEBT 170,300 110,300
DEFERRED INCOME TAXES 32,213 28,690
OTHER LONG-TERM LIABILITIES 45,064 43,803
----------- -----------
Total liabilities 488,967 431,595
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock $.01 par value, 100,000,000 shares authorized,
38,763,668 and 38,583,393 shares issued 388 386
Additional paid-in capital 533,576 525,662
Retained earnings 255,875 203,911
Cumulative translation adjustment (15,966) (15,194)
Treasury stock, 799,989 and 1,046,372 shares at cost (24,823) (28,520)
----------- -----------
Total stockholders' equity 749,050 686,245
----------- -----------
Total liabilities and stockholders' equity $ 1,238,017 $ 1,117,840
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE> 5
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,741 $ 35,582
Adjustments to reconcile net income to net cash
provided by operating activities, net of
effects of acquisitions -
Gain from sale of assets (687) (139)
Depreciation and amortization 35,476 30,444
Provision for deferred and other taxes 3,539 7,102
Increase in accounts receivable (20,776) (16,402)
Increase in inventories (14,686) (24,051)
Increase in accounts payable 4,104 4,753
Increase (decrease) in accrued liabilities (7,685) 24,201
Decrease in income taxes payable (2,010) (11,776)
Decrease in other, net 3,158 2,310
--------- --------
Net cash provided by operating activities 56,174 52,024
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,954) (44,407)
Proceeds from sale of property, plant and equipment 734 223
Business acquisitions, net of cash acquired (19,496) (11,753)
Investment in joint venture (37,288) --
Change in subsidiary year-end -- (6,496)
--------- --------
Net cash used in investing activities (107,004) (62,433)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings under revolving credit facility 60,000 --
Increase in other debt -- 4,996
Dividends paid to stockholders (3,777) (3,122)
Proceeds from exercise of stock options 6,752 864
Change in subsidiary year-end and other -- 6,158
--------- --------
Net cash provided by financing activities 62,975 8,896
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (169) (217)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,976 (1,730)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57,255 42,645
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,231 $ 40,915
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,930 $ 2,981
Cash paid for income taxes $ 23,779 $ 23,596
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE> 6
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 28,146 $15,772 $ 55,741 $ 35,582
Other comprehensive income:
Foreign currency translation adjustments (2,630) 1,915 (772) (3,035)
-------- -------- -------- --------
Comprehensive income $ 25,516 $17,687 $ 54,969 $ 32,547
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
<PAGE> 7
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of Camco International Inc. and subsidiaries ("Camco" or
the "Company") management, the accompanying unaudited consolidated condensed
financial statements include all adjustments necessary to present fairly the
Company's financial position as of June 30, 1998, and its results of operations
and cash flows for the three months and six months ended June 30, 1998 and 1997.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These consolidated condensed financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. The results of operations for the three months and six
months ended June 30, 1998 may not be indicative of the results for the full
year.
Merger with Production Operators Corp
On June 13, 1997, Camco acquired Production Operators Corp ("Production
Operators"), a market leader in total responsibility gas compression services.
The business combination was accounted for using the pooling-of-interests method
of accounting. Accordingly, these financial statements have been prepared as if
Camco and Production Operators were combined as of the beginning of the earliest
period presented.
Other Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of
1998. The only current difference between net income and comprehensive income is
the change in the cumulative translation adjustment for foreign currency, a
separate component of stockholders' equity in the accompanying consolidated
condensed balance sheets.
Earnings Per Share
SFAS No. 128, "Earnings Per Share," was adopted by the Company in the
fourth quarter of 1997 and all earnings per share previously reported have been
restated. Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. The computation of diluted earnings per
share includes the dilutive effects of options to purchase common stock and
restricted stock grants, which aggregated 858,000 and 1,028,000 for the three
months ended June 30, 1998 and 1997, respectively, and 858,000 and 1,025,000 for
the six months ended June 30, 1998 and 1997, respectively.
2. PROPOSED MERGER WITH SCHLUMBERGER LIMITED
On June 18, 1998, Camco entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Schlumberger Technology Corporation ("STC"), and
Schlumberger OFS, Inc., a wholly-owned subsidiary of STC ("Sub"), providing for
the merger of Sub with and into Camco, with Camco surviving as a wholly-owned
subsidiary of STC (the "Merger"). STC is a wholly-owned subsidiary of
Schlumberger Limited, a publicly traded Netherlands Antilles corporation
("Schlumberger"). Pursuant to the Merger Agreement, the stockholders of Camco
will receive 1.18 shares of common stock of Schlumberger ("Schlumberger Common
Stock") for each share of common stock of Camco ("Camco Common Stock"). In
addition, outstanding options to acquire shares of Camco Common Stock will be
converted into options to acquire 1.18 times as many shares of Schlumberger
Common Stock at an exercise price per share equal to the former exercise price
per share divided by 1.18.
7
<PAGE> 8
CAMCO INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Closing under the Merger Agreement is conditioned on, among other
things, approval by Camco's stockholders and receipt of all regulatory
approvals. It is intended that the Merger qualify as a tax-free reorganization
for federal income tax purposes and as a pooling-of-interests for accounting
purposes. Camco and STC anticipate closing the transaction on August 31, 1998.
Under the Merger Agreement, Camco must pay a termination fee of $90
million if (1) Camco receives a Superior Proposal (as defined in the Merger
Agreement) prior to approval of the Merger by the Camco stockholders and elects
to terminate the agreement, (2) the Camco Board of Directors recommends or
proposes to recommend an alternate proposal and STC exercises its right to
terminate the agreement, (3) the Camco Board of Directors withdraws, terminates
or modifies its recommendation of the agreement in an adverse manner, STC
terminates the agreement and Camco consummates an alternative transaction on or
before September 30, 1999 or (4) an alternate acquisition proposal is made and
publicly announced, the Camco stockholders do not approve the Merger and Camco
consummates an alternative proposal on or before September 30, 1999.
Pursuant to a related Transaction Agreement, Schlumberger agreed to
sell to STC such number of shares of Schlumberger Common Stock as are required
to be delivered to stockholders of Camco under the Merger Agreement and to
register those shares with the Securities and Exchange Commission.
3. BUSINESS ACQUISITIONS
During the first six months of 1998, the Company acquired two well
service businesses in the United States, an electric submersible pump business
in Argentina and the remaining interest in an electric submersible pump business
in Colombia for $19.5 million in cash. The results of operations of these
businesses are included in the accompanying financial statements from the dates
of acquisition.
4. INVENTORIES
Consolidated inventories, net of allowances, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 22,969 $ 19,916
Parts and components 64,185 69,656
Work-in-process 25,149 24,079
Finished goods 113,505 92,820
-------- --------
$225,808 $206,471
======== ========
</TABLE>
Work-in-process and finished goods inventories include the cost of
materials, labor and plant overhead. The excess of current costs, determined
using the first-in, first-out basis, over the carrying values of those
inventories accounted for on a last-in, first-out basis was approximately $7.8
million and $10.0 million at June 30, 1998 and December 31, 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES - LEGAL PROCEEDINGS
The Company is involved in certain lawsuits and claims arising in the
normal course of business, including claims by federal and local authorities
under various environmental protection laws. In the opinion of management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company is one of the world's leading providers of oilfield
equipment and services for numerous specialty applications in key phases of the
oil and gas drilling, completion and production sectors of the oilfield service
industry. Many of the Company's products and services have recognized names in
the industry and are associated with technological innovation and quality. Camco
operates on a worldwide basis with its equipment and services being sold or used
in over 50 countries. Demand for and pricing of Camco's equipment and services
is particularly affected by the number of oil and gas wells drilled, the depth
and condition of such wells, the number of well completions and the level of
well service activity worldwide. Drilling, completion and workover activity in
turn is largely dependent on the level and volatility of oil and natural gas
prices, worldwide economic trends, seasonal trends and political stability in
oil producing countries.
On June 18, 1998, Camco entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Schlumberger Technology Corporation ("STC"), and
Schlumberger OFS, Inc., a wholly-owned subsidiary of STC ("Sub"), providing for
the merger of Sub with and into Camco, with Camco surviving as a wholly-owned
subsidiary of STC (the "Merger"). STC is a wholly-owned subsidiary of
Schlumberger Limited, a publicly traded Netherlands Antilles corporation
("Schlumberger"). Pursuant to the Merger Agreement, the stockholders of Camco
will receive 1.18 shares of common stock of Schlumberger ("Schlumberger Common
Stock") for each share of common stock of Camco ("Camco Common Stock"). In
addition, outstanding options to acquire shares of Camco Common Stock will be
converted into options to acquire 1.18 times as many shares of Schlumberger
Common Stock at an exercise price per share equal to the former exercise price
per share divided by 1.18.
Closing under the Merger Agreement is conditioned on, among other
things, approval by Camco's stockholders and receipt of all regulatory
approvals. It is intended that the Merger qualify as a tax-free reorganization
for federal income tax purposes and as a pooling-of-interests for accounting
purposes. Camco and STC anticipate closing the transaction on August 31, 1998.
Under the Merger Agreement, Camco must pay a termination fee of $90
million if (1) Camco receives a Superior Proposal (as defined in the Merger
Agreement) prior to approval of the Merger by the Camco stockholders and elects
to terminate the agreement, (2) the Camco Board of Directors recommends or
proposes to recommend an alternate proposal and STC exercises its right to
terminate the agreement, (3) the Camco Board of Directors withdraws, terminates
or modifies its recommendation of the agreement in an adverse manner, STC
terminates the agreement and Camco consummates an alternative transaction on or
before September 30, 1999 or (4) an alternate acquisition proposal is made and
publicly announced, the Camco stockholders do not approve the Merger and Camco
consummates an alternative proposal on or before September 30, 1999.
Pursuant to a related Transaction Agreement, Schlumberger agreed to
sell to STC such number of shares of Schlumberger Common Stock as are required
to be delivered to stockholders of Camco under the Merger Agreement and to
register those shares with the Securities and Exchange Commission.
On June 13, 1997, Camco acquired Production Operators, a market leader
in total responsibility gas compression services. The business combination was
accounted for using the pooling-of-interests method of accounting. Accordingly,
the financial information reflected in this document has been prepared as if
Camco and Production Operators were combined as of the beginning of the earliest
period presented.
Current Industry Conditions
While the Company's long-term outlook for drilling, completion and production
activity remains positive based on the supply and demand fundamentals for crude
oil and natural gas, short-term uncertainty exists with respect to the outlook
for the industry, particularly in North America, given the volatility in the
price of crude oil and the more recent decline in natural gas prices. The price
of West Texas Intermediate ("WTI") crude oil averaged below $15 per barrel
during the second quarter of 1998, and declined to below $12 per barrel during
June of 1998. The Company has observed a decline in drilling, well service and
workover activity in the United States, particularly on land, as a
9
<PAGE> 10
result of the decline in crude oil prices. Drilling activity in Canada has also
declined from first quarter levels, primarily as a result of the normal spring
thaw, which limits rig mobility and increases the cost of moving drilling rigs
to new locations. Additionally, the Canadian rig count was lower compared to
last year when relatively higher crude oil prices and a shortage of drilling
rigs provided incentive for some producers to continue drilling through the
spring thaw. The decline in crude oil prices have caused Canadian drilling
activity to remain lower subsequent to the spring thaw. Despite a recent
decline, U.S. natural gas prices and gas drilling activity has remained
relatively high this year, somewhat mitigating the impact of lower crude oil
prices. The Company believes that if WTI crude oil prices remain low for a
prolonged period or if U.S. natural gas prices were to continue to decline,
drilling, completion and production activity in North America, particularly in
land-based markets, could decline further. While international drilling,
completion and production activities during the first six months of 1998 have
not been significantly impacted by the decline in crude oil prices, the Company
believes that if prices remain low for a prolonged period, such activities,
particularly in land-based markets, could decline.
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Consolidated revenues for the second quarter 1998 increased $8.0
million, or 3.5%, to $235.1 million from $227.1 million in the same quarter of
1997. Product revenues declined $4.5 million, to $151.8 million for the second
quarter of 1998, from $156.3 million for the same period in 1997, primarily due
to lower sales of electric submersible pumps ("ESPs"), drill bits and completion
products in North America. Service revenues increased $12.5 million to $83.3
million in the second quarter of 1998, with improvements in compression and ESP
service revenues offset by a decline in completion and well service revenues in
South America and Nigeria.
Revenues in the United States and Canada decreased $5.8 million, or
6.0%, to $90.4 million in the second quarter of 1998 from $96.3 million in the
second quarter of 1997. The decrease is principally due to decreases in sales of
drill bits and ESPs and was partially offset by an increase in completion and
well service revenues. On the strength of higher sales of ESPs, drill bits,
completion products and contract gas compression services, Mexico and Central
and South American revenues for the second quarter of 1998 were $41.7 million,
15.1% higher than in the same period in 1997. Revenues were up 15.2%, in Europe
to $42.9 million for the 1998 quarter, reflecting increased sales of ESPs in the
Former Soviet Union and improved sales of completion products and services.
Revenues in the Middle East and Africa improved by 6.9% over 1997 levels to
$38.4 million, due to increased ESP sales and related services, partially offset
by a decline in completion products and well service revenues in Nigeria, where
market activity has decreased significantly due to continued political and
economic instability. Far East revenues improved slightly to $21.6 million in
the second quarter of 1998, reflecting higher sales of drill bits and ESPs
offset by a decline in completion product sales.
Gross margins increased $4.5 million to $100.6 million, or 42.8% of
revenues in the second quarter of 1998, from $96.1 million, or 42.3% of revenues
in the same period of 1997. This margin increase in 1998 reflects higher volume
and favorable shifts in geographic and product sales mix.
Selling, general and administrative expenses ("SG&A") decreased $2.4
million to $53.1 million in the second quarter of 1998 from $55.5 million in the
1997 period, reflecting currency translation gains in the current period as
compared with losses recorded in the prior year period. SG&A as a percentage of
revenues declined to 22.6% in the second quarter of 1998 from 24.4% in the same
period in 1997, as a result of the favorable movement in currency translation
and continued maintenance of these costs.
In connection with the June 13, 1997 merger of Camco and Production
Operators, $12.5 million in merger related costs were expensed during the second
quarter of 1997.
Operating income (excluding 1997 merger related expenses) increased
$6.7 million, or 17.4%, in the second quarter of 1998 to $45.1 million, or 19.2%
of revenues, from $38.5 million, or 16.9% of revenues in the second quarter of
1997, as a result of the increase in revenues combined with improved gross
margins and lower SG&A as a percentage of revenues.
Net interest expense increased $700 thousand to $2.2 million for the
second quarter of 1998 reflecting an increase in outstanding debt.
10
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Consolidated revenues for the first six months of 1998 increased $40.5
million, or 9.6%, to $463.2 million from $422.6 million in the same period in
1997. This increase reflects higher sales of ESPs and drill bits. Product
revenues increased $23.3 million, to $303.1 million for the first six months of
1998, from $279.8 million for the same period in 1997, primarily due to higher
sales of ESPs and drill bits in most geographic regions of the world during the
first three months of 1998. Service revenues increased $17.2 million to $160.1
million in the first six months of 1998, with improvements in ESP and drilling
related services offset by a decline in completion and well service revenues in
South America and Nigeria.
Revenues in the United States and Canada decreased $1.2 million, to
$180.7 million in the first half of 1998 from $181.9 million in the first half
of 1997. The decrease is principally due to a decrease in sales of ESPs and
completion products, partially offset by increases in drill bit sales and well
service revenues. On the strength of higher sales of ESPs, drill bits,
completion products and contract gas compression services, Mexico and Central
and South American revenues for the first half of 1998 were $85.8 million, or
27.1% higher than the same period in 1997. Revenues were up 17.3%, in Europe to
$81.9 million for the 1998 period, reflecting increased sales of ESPs in the
Former Soviet Union and improved sales of drill bits and completion products and
services. Revenues in the Middle East and Africa improved by 9.9% over 1997
levels to $72.7 million, due to higher sales of drill bits and increased ESP
sales and related services, partially offset by a decline in completion products
and well service revenues in Nigeria. Far East revenues improved to $42.2
million in the first half of 1998, 12.2% higher than the first half 1997,
reflecting significantly higher sales of ESPs and drill bits.
Gross margins increased $21.9 million to $200.2 million, or 43.2% of
revenues in the first six months of 1998, from $178.4 million, or 42.2% of
revenues in the same period of 1997. This margin increase in 1998 reflects
higher volume and favorable shifts in geographic and product sales mix along
with modest pricing improvement in drill bits and ESPs.
Selling, general and administrative expenses increased $1.7 million to
$105.9 million in the first six months of 1998 from $104.2 million in the 1997
period, in line with the revenue increase and partially offset by a $1.7 million
decline in currency translation losses. SG&A as a percentage of revenues
declined to 22.9% in the first six months of 1998 from 24.7% in the same period
in 1997, as a result of favorable movement in translation expense and continued
cost control based on activity changes.
In connection with the June 13, 1997 merger of Camco and Production
Operators, $12.5 million in merger related costs were expensed during the second
quarter of 1997.
Operating income (excluding 1997 merger related expenses) increased
$19.6 million, or 28.0%, in the first six months of 1998 to $89.7 million, or
19.4% of revenues, from $70.1 million, or 16.6% of revenues in the first half of
1997, as a result of the significant increase in revenues combined with improved
gross margin and lower SG&A as a percentage of revenues.
Net interest expense increased $800 thousand to $3.8 million for the
first six months of 1998 reflecting an increase in outstanding debt this year.
FINANCIAL CONDITION
Capital Resources and Liquidity
Cash provided by operating activities was $56.2 million during the six
months ended June 30, 1998, an increase of $4.2 million from the prior year
comparable period. This increase in cash flows from operating activities is
primarily a result of the improvement in operating results offset by an increase
in working capital requirements due to increased activity levels. During the
first six months of 1998, cash was used to fund $51.0 million in capital
expenditures, pay $19.5 million for business acquisitions, invest an additional
$37.3 million in its 33 1/3%-owned Venezuelan joint venture and pay dividends to
stockholders of $3.8 million. Financing activities provided $63.0 million of
cash during the first six months of 1998, of which $60.0 million was
attributable to borrowings under the Company's revolving credit facility.
11
<PAGE> 12
Borrowing availability under the revolving credit facility was $50.0
million as of June 30, 1998. The Company believes that cash flow from operations
combined with the unused portion of the revolving credit facility should provide
it with sufficient capital resources and liquidity to meet its debt service
requirements and manage its business needs.
YEAR 2000
The Company is continuing to evaluate its information technology
infrastructure for the Year 2000 compliance and does not expect that the cost of
required modifications will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance.
12
<PAGE> 13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain lawsuits and claims arising in the
normal course of business, including claims by federal and local authorities
under various environmental protection laws. In the opinion of management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998 the Company held its regular Annual Meeting of
Stockholders for 1998 ("the Annual Meeting"). At the Annual Meeting, William J.
Johnson, T. Don Stacy and Gilbert H. Tausch were reelected to three-year terms.
The following table sets forth the number of shares that voted for, and for
which votes were withheld for the election of each such person:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
William J. Johnson 32,731,117 190,564
T. Don Stacy 32,730,846 190,835
Gilbert H. Tausch 32,726,287 195,394
</TABLE>
Robert L. Howard, William A. Krause, Charles P. Siess, Jr. and Lester
Varn, Jr. continue their terms as directors of the Company.
The stockholders of the Company ratified the appointment of Arthur
Andersen LLP as the Company's independent public accountants for the year ending
December 31, 1998. The ratification of Arthur Andersen LLP as the Company's
independent public accountants was approved with 32,785,567 votes cast for
approval, 123,730 votes cast against and 12,384 shares abstaining.
There were no broker nonvotes with respect to either the election of
Directors or the ratification of Arthur Andersen LLP as the Company's
independent public accountants.
ITEM 5. OTHER INFORMATION
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the Company's prospects, developments and business strategies for its
operations, all of which are subject to certain risks, uncertainties and
assumptions. These forward-looking statements are identified by their use of
terms and phrases such as "expect," "estimate," "project," "believe" and similar
terms and phrases. These risks include changes in market conditions in the oil
and gas industry, declines in prices of oil and gas, political instability in
foreign countries in which the Company operates, currency fluctuations and
contracts, in particular those in Nigeria, South America and Southeast Asia,
increased competition in the Company's markets, governmental restrictions
affecting oil and gas exploration, the ability of the Company to integrate and
realize anticipated synergies for its acquisitions, including that of Production
Operators, the ability of the Company to achieve and execute internal business
plans, and the impact of any economic downturns and inflation and other market
factors affecting the demand and supply of oil and gas and the products and
services relating thereto. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those expected, estimated or projected.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated May 11, 1998,
reporting the sudden death of Mr. Gary D. Nicholson, its Chairman of the Board
of Directors, President and Chief Executive Officer and appointment of Mr.
Gilbert H. Tausch as interim Chairman of the Board of Directors and Chief
Executive Officer.
The Company filed a current report on Form 8-K dated June 18, 1998,
reporting the proposed merger between Schlumberger Technology Corporation, a
wholly-owned subsidiary of Schlumberger Limited, and the Company.
14
<PAGE> 15
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.
By: /s/ GILBERT H. TAUSCH
---------------------
Gilbert H. Tausch
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
August 12, 1998
By: /s/ BRUCE F. LONGAKER, JR.
--------------------------
Bruce F. Longaker, Jr.
Vice-President Finance and
Corporate Controller
(Principal Accounting Officer)
August 12, 1998
15
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
Number Description
-------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 69,231
<SECURITIES> 0
<RECEIVABLES> 194,823
<ALLOWANCES> 0
<INVENTORY> 225,808
<CURRENT-ASSETS> 561,532
<PP&E> 761,347
<DEPRECIATION> (387,850)
<TOTAL-ASSETS> 1,238,017
<CURRENT-LIABILITIES> 241,390
<BONDS> 0
0
0
<COMMON> 388
<OTHER-SE> 748,662
<TOTAL-LIABILITY-AND-EQUITY> 1,238,017
<SALES> 235,103
<TOTAL-REVENUES> 235,103
<CGS> 134,488
<TOTAL-COSTS> 134,488
<OTHER-EXPENSES> 55,493
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,175
<INCOME-PRETAX> 42,947
<INCOME-TAX> 14,801
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,146
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
</TABLE>
