-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FMtCDLMzxfHo44uLC+aS9B9St/KuvPr977Abd70ICreK8KnznFAMOLi74o20HMM7 Lo7+NW04MeXdDxh/N2zFRg== 0000950129-98-004696.txt : 19981118 0000950129-98-004696.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950129-98-004696 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRI INTERNATIONAL CORP CENTRAL INDEX KEY: 0001044979 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 752044681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13593 FILM NUMBER: 98749781 BUSINESS ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA STE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136518002 MAIL ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA SUITE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 IRI INTERNATIONAL CORPORATION - 09/30/98 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 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 001-13593 IRI INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 75-2044681 ----------------------------------- ---------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1000 Louisiana, Suite 5900, Houston, Texas 77002 ------------------------------------- ---------------------------- (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code (713) 651-8002 ---------------------- 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 12, 1998 ---------------------------- ----------------------------------- Common stock, 39,900,000 $0.01 par value per share 2 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) September 30, December 31, Assets 1998 1997 ------ ------------- ------------ (Unaudited) Current assets: Cash and cash equivalents $ 37,770 $ 49,473 Marketable securities, at fair value (cost of $409 at September 30, 1998 and $7,448 at December 31, 1997) 34 8,218 Accounts receivable, less allowance for doubtful accounts of $412 at September 30, 1998 and $455 at December 31, 1997 28,695 33,130 Inventories 118,714 100,901 Costs and estimated earnings in excess of billings on uncompleted contracts 6,985 8,853 Other current assets 1,869 1,444 --------- --------- Total current assets 194,067 202,019 Property, plant and equipment, net 50,569 43,219 Other assets 4,700 5,836 --------- --------- $ 249,336 $ 251,074 ========= ========= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued liabilities $ 18,194 $ 27,797 Customer advances 8,236 7,546 Other liabilities 3,808 4,786 --------- --------- Total current liabilities 30,238 40,129 Negative goodwill, less accumulated amortization 5,368 9,393 Accrued postretirement benefits 2,192 2,420 Other long-term liabilities 458 726 --------- --------- Total liabilities 38,256 52,668 Shareholders' equity: Preferred stock, $1 par value, 25,000,000 shares authorized, none issued - - Common stock, $0.01 par value, 100,000,000 shares authorized, 39,900,000 shares issued and outstanding 399 399 Additional paid-in capital 168,514 168,538 Retained earnings 43,622 30,926 Accumulated other comprehensive loss (1,455) (1,457) --------- --------- Total shareholders' equity 211,080 198,406 Commitments and contingencies --------- --------- $ 249,336 $ 251,074 ========= =========
See accompanying notes to condensed consolidated financial statements. 2 3 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1998 1997 1998 1997 ---------- --------- ----------- ---------- Revenues $ 40,650 $ 54,345 $ 139,281 $ 112,130 Cost of goods sold 29,586 41,690 99,900 86,816 -------- --------- ---------- --------- Gross profit 11,064 12,655 39,381 25,314 Administrative and selling expense 6,991 6,943 21,170 15,871 Restructuring charge 429 - 429 _ -------- --------- ---------- --------- Operating income 3,644 5,712 17,782 9,443 -------- --------- ---------- --------- Other income (expense): Interest income 455 49 1,766 128 Interest expense (24) (3,393) (253) (6,540) Losses on trading securities (399) - (2,375) _ Special charge - - (631) _ Other, net (437) 333 (807) 259 -------- --------- ---------- --------- (405) (3,011) (2,300) (6,153) -------- --------- ---------- --------- Income before income taxes 3,239 2,701 15,482 3,290 Income taxes 440 171 2,786 339 -------- --------- ---------- --------- Net income $ 2,799 $ 2,530 $ 12,696 $ 2,951 ======== ========= ========== ========= Basic and diluted net income per common share $ 0.07 $ 0.08 $ 0.32 $ 0.10 ======== ========= ========== ========= Weighted average shares outstanding 39,900 30,000 39,900 30,000 ======== ========= ========== =========
See accompanying notes to condensed consolidated financial statements. 3 4 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) (Unaudited) Accumulated Additional other Total Common paid-in Retained comprehensive shareholders' stock capital earnings loss equity -------- ------------ ---------- --------------- --------------- Balances at December 31, 1997 $ 399 $ 168,538 $ 30,926 $ (1,457) $ 198,406 Net income (unaudited) - - 12,696 - 12,696 Other (unaudited) - (24) - - (24) Translation adjustment (unaudited) - - - 2 2 ----- --------- --------- --------- --------- Balances at September 30, 1998 (unaudited) $ 399 $ 168,514 $ 43,622 $ (1,455) $ 211,080 ===== ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 5 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, -------------------------- 1998 1997 -------- --------- Cash flows from operating activities: Net income $ 12,696 $ 2,951 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 4,159 2,115 Gain on sale of assets - (371) Amortization of negative goodwill (4,026) (4,026) Change in employee benefit accounts (228) (273) Changes in assets and liabilities, exclusion of effects of acquisitions: Marketable securities 8,184 - Accounts receivable 4,435 (3,508) Inventories (17,813) (16,464) Other current assets 1,443 (5,076) Other non current assets 185 - Accounts payable and accrued liabilities, Customer advances and other liabilities (9,928) 10,464 Change in cumulative translation adjustment 2 - -------- -------- Net cash flows used in operations (891) (14,188) -------- -------- Cash flows from investing activities: Capital expenditures (10,558) (2,368) Acquisition of Bowen assets, net of liabilities assumed - (77,264) Acquisition costs of Cardwell, net of liabilities assumed - (12,574) -------- -------- Net cash flows used in investing activities (10,558) (92,206) -------- -------- Cash flows from financing activities: Proceeds from sale of assets - 523 Proceeds from notes payable - 113,482 Payments on notes payable (72) (6,653) Debt issuance costs - (3,852) Payments on capital lease obligation (158) (157) Other (24) - -------- -------- Net cash flows provided by (used in) financing activities (254) 103,343 -------- -------- Decrease in cash and cash equivalents (11,703) (3,051) Cash and cash equivalents at beginning of period 49,473 8,635 -------- -------- Cash and cash equivalents at end of period $ 37,770 $ 5,584 ======== ======== Supplemental cash flow information: Interest paid $ 253 $ 5,846 ======== ======== Income taxes paid $ 5,219 $ - ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) General The accompanying condensed consolidated financial statements of IRI International Corporation and subsidiaries (the "Company") as of September 30, 1998 and for the three and nine months ended September 30, 1998 and 1997 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation for such periods. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted herein. The interim information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income in a full set of general-purpose financial statements. Comprehensive income includes net income and other comprehensive income which is generally comprised of changes in the fair value of available-for-sale marketable securities, foreign currency translation adjustments and adjustments to recognize additional minimum pension liabilities. The Company had accumulated other comprehensive loss at December 31, 1997 of $1,457,000 consisting entirely of an adjustment to recognize additional minimum pension liability. The Company had other comprehensive income for the three and nine months ended September 30, 1998 of $201,000 and $2,000, respectively, consisting of foreign currency translation adjustments. (2) Inventories Inventories consist of the following at September 30, 1998 and December 31, 1997 (in thousands): 1998 1997 ---- ---- Raw materials $46,178 $ 39,087 Work-in-process 32,619 28,771 Finished goods 39,917 33,043 -------- --------- Total $118,714 $ 100,901 ======== ========= 6 7 (3) Commitments and Contingencies The Company has contract commitments aggregating $32.3 million at September 30, 1998 for the manufacture and delivery of drilling rigs during the remainder of fiscal 1998. At September 30, 1998, the Company was contingently liable for approximately $4.6 million in letters of credit which guarantee the Company's performance for payment to third parties in accordance with specified contractual terms and conditions. These letters of credit are primarily secured by the Company's cash, accounts receivable and inventory. Management does not expect any material losses to result from these off-balance-sheet instruments as it anticipates full performance on the related contracts. (4) Net Income per Common Share Stock options outstanding at September 30, 1998 of 3,866,000 million shares were not considered in the computation of net income per common share because the exercise price exceeded the average market price for the period and are therefore antidilutive. (5) Acquisitions On March 31, 1997, the Company acquired certain assets and assumed certain liabilities of Bowen Tools, Inc. ("Bowen"), a wholly-owned subsidiary of the French chemical concern L'Air Liquide, for a total cash consideration of $75.1 million. On April 17, 1997, the Company also acquired the stock of Cardwell International Ltd. ("Cardwell"), a privately owned company, as well as certain assets held by affiliates of Cardwell for approximately $12 million in cash at closing and partial payment ($3 million) of a note payable to bank. In addition, the Company incurred approximately $3.2 million ($2.6 million for Bowen and $.6 million for Cardwell) of transaction costs in connection with the acquisitions. The following sets forth selected consolidated financial information for the Company on a pro forma basis for the nine months ended September 30, 1997, assuming the Bowen and Cardwell acquisitions had occurred on January 1, 1997 (in thousands, except per share amounts): Revenues $ 134,450 ========== Gross profit $ 34,603 ========== Operating income $ 10,440 ========== Net income $ 1,228 ========== Net income per common share $ 0.04 ========== Pro forma adjustments primarily relate to additional interest expense resulting from debt to finance the acquisitions, additional depreciation and amortization expenses as a result of the purchase price allocations to property, plant and equipment and excess of cost over net tangible assets purchased and the related tax effects of these adjustments. The pro forma information is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of January 1, 1997, or that may be achieved in the future. 7 8 (6) Special Charges On April 28, 1998, the Company terminated a proposed merger with Hitec ASA, a Norwegian Corporation. External expenses incurred in connection with the merger have been reported as a special charge of $631,000 in the quarter ended June 30, 1998. On October 8, 1998, the Company announced a restructuring program in which the workforce would be reduced by up to 315 employees. Expenses incurred in connection with the restructuring program have been reported as a restructuring charge of $429,000 for the three and nine months ended September 30, 1998. (7) New Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), Reporting of the Costs of Start-up Activities, which is effective for financial statements issued for periods beginning after December 15, 1998. The Company believes SOP 98-5 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SOP 98-5 in the first quarter of 1999. The Company is assessing the reporting and disclosure requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement requires a public business enterprise to report financial and descriptive information about its reportable operating segments. The statement is effective for financial statements for periods beginning after December 15, 1997, but is not required for interim financial statements in the initial year of its application. The Company will adopt the provisions of SFAS No. 131 in its December 31, 1998 consolidated financial statements. The Company is also assessing the reporting and disclosure requirements of SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits. This statement standardizes the disclosure requirements for pensions and other postretirement benefits. It does not address measurement or recognition. The statement is effective for fiscal years beginning after December 31, 1997. The Company has not determined the effect of adoption of this statement on its financial statements. The Company is also assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2000. 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. OVERVIEW The Company manufactures land-based drilling and well-servicing rigs, rig component parts, and downhole tools and related equipment for use in the domestic and international markets. The Company's revenues are substantially dependent upon the condition of the oil and gas industry and worldwide levels of exploration, development and production activity, including the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity. Exploration, development and production activity is largely dependent on the prevailing view of future oil and natural gas prices, which have been characterized by significant volatility over the last 20 years. Oil and natural gas prices are influenced by numerous factors affecting the supply of and demand for oil and gas, including the level of drilling activity, worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by OPEC and the cost of producing oil and gas. Demand for the Company's products in certain emerging market countries may depend somewhat less on the prevailing view of future oil and natural gas prices, as such countries may generally place greater emphasis on their need for internal development, energy self-sufficiency or hard currency earnings. Steadily declining oil prices, the financial crisis in Russia and unsettled economic conditions in emerging markets have resulted in a consequent decline in the worldwide level of exploration, development and production activity in the oil and gas industry. This has materially adversely affected the Company's revenues and operating income in the current quarter, as described below, as well as the level of its dependable backlog. Management believes these industry conditions will continue and may worsen, further affecting adversely the Company's financial results of operations. Accordingly, management has assessed and begun to implement a variety of measures to minimize the adverse effects of industry conditions on the Company's business and financial performance, including its announced restructuring program that will reduce its workforce by up to 315 employees. The Company is considering other cost reduction measures, including plant closings, in response to these conditions. No assurance can be given, however, that this or any measure will be sufficient to offset the negative effects of prevailing industry conditions on the Company's business and financial performance. RESULTS OF OPERATIONS Sales of new rigs manufactured by the Company can produce large fluctuations in revenues depending on the size and the timing of the construction of rig orders. Individual orders of rig packages range from $1 million to $25 million and cycle times for the design, engineering and manufacturing of rig packages range from six to nine months. These fluctuations may affect the Company's quarterly revenues and operating income. Results of Segment Operations The following discussion of the results of operations of the Company's oilfield equipment, downhole products and specialty steel segments does not reflect the allocation of corporate and unallocated administrative expenses, amortization of negative goodwill and amortization of goodwill on an individual segment basis. Certain information that reconciles the discussion of the results of operations of the individual segments to the Company's Condensed Consolidated Financial Statements is as follows: 9 10 Three Months Nine Months Ended Ended September 30, September 30, ----------------------- --------------------- 1998 1997 1998 1997 ------- -------- -------- ---------- Revenues Oilfield equipment $19,677 $29,310 $69,857 $60,640 Downhole products 17,568 22,339 60,744 42,015 Specialty steel 3,427 3,024 9,027 9,803 Eliminations (22) (328) (347) (328) ------- ------- -------- -------- Total $40,650 $54,345 $139,281 $112,130 ======= ======= ======== ======== Segment operating income Oilfield equipment $ 3,008 $ 3,190 $ 12,821 $ 5,834 Downhole products 3,062 4,040 11,855 6,022 Specialty steel 1,092 1,114 2,347 2,880 ------- ------- -------- -------- Total 7,162 8,344 27,023 14,736 Corporate overhead and unallocated administrative expenses (4,117) (3,675) (11,886) (8,766) Amortization of negative goodwill 1,341 1,342 4,025 4,026 Amortization of goodwill (313) (299) (951) (553) Restructuring charge (429) - (429) - ------- ------- -------- -------- Operating income $ 3,644 $ 5,712 $ 17,782 $ 9,443 ======= ======= ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Oilfield Equipment Revenues and operating income for the oilfield equipment unit were $19.7 million and $3.0 million, respectively, for the three months ended September 30, 1998, as compared to $29.3 million and $3.2 million, respectively, for the three months ended September 30, 1997. The decrease in revenues was due primarily to the effects of lower oil prices and the destabilization of the Russian economy. The decrease in operating income was due to reduced revenues, partially offset by a reduction in the cost structure. Gross margin for the three months ended September 30, 1998 was 19.9%, as compared to 14.1% for the three months period ended September 30, 1997. The increase in gross margin was due primarily to increased productivity and a favorable mix between manufactured equipment and buyouts. Downhole Products Revenues and operating income for the downhole products unit were $17.6 million and $3.1 million, respectively, for the three months ended September 30, 1998, as compared to $22.3 million and $4.0 million, respectively, for the three months ended September 30, 1997. Revenues decreased primarily due to lower rig activity, resulting in decreased demand for fishing tools and wireline equipment, and a reduction in rental revenues. Gross margin for the three months ended September 30, 1998 was 28.4%, flat compared to 28.5% for the three months ended September 30, 1997. 10 11 Specialty Steel Revenues and operating income for the specialty steel unit were $3.4 million and $1.1 million, respectively, for the three months ended September 30, 1998, as compared to $3.0 and $1.1 million, respectively, for the three months ended September 30, 1997. The increase in revenues was due primarily to increased military sales, partially offset by reduced demand from a major customer. Gross margin for the three months ended September 30, 1998 was 33.0%, as compared to 38.1% for the three months ended September 30, 1997. The decrease in gross margin was primarily due to an unfavorable mix as lower margin military sales increased and higher margin commercial sales decreased. Corporate and Administrative Expenses Corporate and administrative expenses were $4.1 million for the three months ended September 30, 1998, as compared to $3.7 million for the three months ended September 30, 1997. Restructuring Charge The Company incurred a restructuring charge of $429,000 in the third quarter of 1998 in connection with a restructuring program which will result in the reduction of 315 employees. Other Income (Expense) Interest income increased $406,000 for the three months ended September 30, 1998 over the comparable period in 1997 due to higher average cash balances in the current year. Interest expense decreased $3.4 million for the three months ended September 30, 1998, as compared to the prior year quarter, as a result of the repayment of debt in November 1997 with the proceeds from the Company's initial public offering. Income Taxes The Company's effective income tax rate for financial reporting purposes for the three months ended September 30, 1998 of approximately 14 percent was significantly lower than the U.S. federal statutory rate of 35 percent. The lower effective rate was primarily the result of the tax benefits from the use by the Company of its Foreign Sales Corporation subsidiary, non-taxable income arising from the amortization of negative goodwill, and a reduction in the valuation allowance of approximately $0.9 million against deferred tax assets which are more likely than not of being realized. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Oilfield Equipment Revenues and operating income for the oilfield equipment unit were $69.9 million and $12.8 million, respectively, for the nine months ended September 30, 1998, as compared to $60.6 million and $5.8 million, respectively, for the nine months ended September 30, 1997. The increase in revenues resulted from increased sales of rig packages by the IRI Division, an increase in spare parts and refurbishment activity, and the inclusion of the operating results of the Company's subsidiary, Cardwell International, Ltd., for the full nine months period in 1998, compared to six months in 1997. Increased operating income resulted from increased sales volume and a favorable mix between manufactured equipment and buyouts in the period. Gross margin for the nine months ended September 30, 1998 was 22.7%, as compared to 14.0% for the nine months period ended September 30, 1997. The increase in gross margin was due primarily to improved pricing, increased productivity and a favorable mix between manufactured equipment and buyouts. 11 12 Downhole Products Revenues and operating income for the downhole products unit were $60.7 million and $11.9 million, respectively, for the nine months ended September 30, 1998, as compared to $42.0 million and $6.0 million, respectively, for the nine months ended September 30, 1997. Increased revenues and operating income for the downhole products unit were primarily attributable to improved pricing and the inclusion of the operating results of the Bowen Tools Division for the full nine months period in 1998, compared to six months in 1997. Gross margin for the nine months ended September 30, 1998 was 29.8%, as compared to 24.8% for the nine months ended September 30, 1997. The increase in gross margin was primarily due to improved pricing. Specialty Steel Revenues and operating income for the specialty steel unit were $9.0 million and $2.3 million, respectively, for the nine months ended September 30, 1998, as compared to $9.8 and $2.9 million, respectively, for the nine months ended September 30, 1997. The decrease in revenues was primarily the result of reduced demand from a major customer. Gross margin for the nine months ended September 30, 1998 was 27.3%, as compared to 30.6% for the nine months ended September 30, 1997. The decrease in gross margin was primarily due to the reduction of high margin business from a major customer. Corporate and Administrative Expenses Corporate and administrative expenses were $11.9 million for the nine months ended September 30, 1998, as compared to $8.8 million for the nine months ended September 30, 1997. The increase was due primarily to the inclusion of Bowen and Cardwell for the full nine months period in 1998, compared to six months in 1997. Other Income (Expense) Interest income increased $1.6 million for the nine months ended September 30, 1998 over the comparable period in 1997 due to higher average cash balances in the current year. Interest expense decreased $6.3 million for the nine months ended September 30, 1998 as compared to the prior year period, as a result of the repayment of debt in November 1997. The Company incurred a special charge of $631,000 in the first six months of 1998 relating to expenses incurred in connection with the Company's proposed acquisition of Hitec ASA, which was terminated on April 28, 1998. Income Taxes The Company's effective income tax rate for financial reporting purposes for the nine months ended September 30, 1998 of approximately 18 percent was significantly lower than the U.S. federal statutory rate of 35 percent. The lower effective rate was primarily the result of result of the tax benefits from the use by the Company of its Foreign Sales Corporation subsidiary, non-taxable income arising from the amortization of negative goodwill, and a reduction in the valuation allowance of approximately $2.1 million against deferred tax assets which are more likely than not of being realized. 12 13 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had cash, cash equivalents and marketable securities of $37.8 million, compared to $57.7 million at December 31, 1997. At September 30, 1998, the Company's working capital was $163.8 million, compared to $161.9 million at December 31, 1997. Net cash flows used in operations of $891,000 for the nine months ended September 30, 1998 was primarily attributable to a temporary build-up in inventory resulting from increased sales and problems associated with the introduction of a new management information system. Capital expenditures of $10.6 million consist primarily of expenditures for rental tools and equipment and new machinery at the Company's downhole products unit. Management believes that current working capital, in conjunction with borrowings under its current credit facility, will be sufficient to meet the Company's short-term (i.e., less than one year) and long-term liquidity needs. YEAR 2000 The Company has initiated a three-phase Year 2000 compliance program: (1) During the first phase, the Company will identify all non-Year 2000 compliant hardware and software systems and other technology, and contact all key suppliers and customers; (2) during the second phase, the Company will ascertain the extent to which its systems and technologies and those of its key suppliers and customers are non-Year 2000 compliant and will prioritize its Year 2000 response accordingly; and (3) during the third phase, the Company will replace or remediate its non-Year 2000 compliant systems and technologies and develop a contingency plan with respect to systems and other technology that cannot be replaced or remediated in time and with respect to key suppliers and customers that have not become Year 2000 compliant. The Company expects to complete the first phase of its Year 2000 compliance program by the end of the first quarter of 1999. The Company has begun to contact its key suppliers, but has not yet begun to assess the extent and content of any responses received. The Company has not yet begun to assess the Year 2000 compliance of its "non-IT" systems such as embedded technology. The Company expects that it will complete its entire Year 2000 compliance program well in advance of the year 2000. To date, the costs incurred by the Company's Year 2000 compliance program have been minimal. The replacement and upgrade of several of the Company's software and hardware systems in the ordinary course of business have had the added benefit of resolving Year 2000 issues with respect to those systems. Management believes that the costs to complete the Company's Year 2000 compliance program will not have a material effect on its financial position, results of operations or cash flows, though there can be no assurance in this regard. 13 14 NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), Reporting of the Costs of Start-up Activities, which is effective for financial statements issued for periods beginning after December 15, 1998. The Company believes SOP 98-5 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SOP 98-5 in the first quarter of 1999. The Company is assessing the reporting and disclosure requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement requires a public business enterprise to report financial and descriptive information about its reportable operating segments. The statement is effective for financial statements for periods beginning after December 15, 1997, but is not required for interim financial statements in the initial year of its application. The Company will adopt the provisions of SFAS No. 131 in its December 31, 1998 consolidated financial statements. The Company is also assessing the reporting and disclosure requirements of SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits. This statement standardizes the disclosure requirements for pensions and other postretirement benefits. It does not address measurement or recognition. The statement is effective for fiscal years beginning after December 31, 1997. The Company has not determined the effect of adoption of this statement on its financial statements. The Company is also assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2000. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties including, but not limited to, economic and competitive factors outside of the control of the Company. These factors more specifically include: dependence on the oil and gas industry, competition from various entities, the impact of government regulations, the instability of certain foreign economies, currency fluctuations, risks of expropriation and changes in law affecting international trade and investment. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. 14 15 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION The Securities and Exchange Commission (the "SEC") recently amended Rules 14a-4 and 14a-5 of the Securities Exchange Act of 1934, as amended. As so amended, Rule 14a-5 requires that if the date of the annual meeting will change more than 30 days from the prior year, then the Company must give notice to shareholders as to the dates after which shareholder proposals are considered untimely. As the Company expects to have its 1999 Annual Meeting of Stockholders at least 30 days earlier than the 1998 Annual Meeting (which was held on June 25, 1998), for purposes of the Company's 1999 Annual Meeting of Stockholders, management may exclude any shareholder proposals received after December 26, 1998 and management may use its discretionary voting authority to vote on any proposal with respect to which the Company receives notice after March 1, 1999, even if such proposal is not discussed in the proxy statement for the 1999 Annual Meeting of Stockholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this item. (b) Reports on Form 8-K None. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly consented this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 13, 1998 IRI INTERNATIONAL CORPORATION /s/ JEFFREY M. JOHANSON ----------------------------- Jeffrey M. Johanson Executive Vice President and Chief Financial Officer 16 17 INDEX TO EXHIBITS Exhibit No. Description - ----------- ----------- * 3.1 -- Form of Restated Certificate of Incorporation of IRI International Corporation * 3.2 -- Amended and Restated Bylaws of the Company 27.1 -- Financial Data Schedule (submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission). - ----------- * Exhibit incorporated herein by reference to the Registrant's registration statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997, as amended. 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 37,770 34 28,695 412 118,714 194,067 50,569 6,624 249,336 30,238 0 0 0 399 210,681 249,336 139,281 139,281 99,900 121,070 0 0 253 15,482 2,786 12,696 0 0 0 12,696 0.32 0.32
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