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UNITED STATES
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: AUGUST 31, 1996
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: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 933-3339
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 [ ]
At August 31, 1996 there were 43,049,801 shares of common stock, par value
$0.01 per share, outstanding.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1996
PART I. Financial Information. PAGE
----
Item 1. Financial Statements.
Consolidated Balance Sheets
August 31, 1996 and May 31, 1996............................... 2
Consolidated Statements of Operations
Three months ended August 31, 1996 and 1995................... 3
Consolidated Statements of Cash Flows
Three months ended August 31, 1996 and 1995................... 4
Notes to Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition....................... 8
PART II. Other Information.
Item 6. Exhibits and Reports on Form 8-K.......................... 10
1
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
AUGUST 31, MAY 31,
ASSETS 1996 1996
---------- --------
Current assets:
Cash and cash equivalents..................... $ 14,000 $ 34,252
Trade account receivables, net................ 45,900 42,989
Trade notes receivable, net................... 46,193 28,424
Inventories................................... 100,601 92,787
Prepaid expenses.............................. 2,210 2,004
-------- --------
Total current assets........................ 208,904 200,456
Long-term trade notes receivable................ 21,718 16,678
Deferred income tax asset....................... 327 1,062
Property, plant and equipment, net.............. 60,101 56,035
Identified intangibles, net..................... 63,417 64,200
Other assets.................................... 19,460 17,034
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$373,927 $355,465
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt........ $ 860 $ --
Accounts payable, principally trade........... 15,733 19,518
Accrued expenses.............................. 10,958 13,751
Income taxes payable.......................... 3,136 1,962
-------- --------
Total current liabilities................... 30,687 35,231
Long-term debt, excluding current installments.. 11,690 --
Other liabilities............................... 3,110 3,030
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none issued................ -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued 43,049,801 shares
at August 31, 1996 and 42,969,676 shares at
May 31, 1996................................. 430 430
Additional paid-in capital.................... 215,570 214,259
Retained earnings............................. 113,806 104,145
Cumulative translation adjustment............. (665) (762)
Unamortized restricted stock compensation..... (701) (868)
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Total stockholders' equity.................. 328,440 317,204
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$373,927 $355,465
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-------- --------
See accompanying notes to consolidated financial statements.
2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED AUGUST 31,
-----------------------
1996 1995
---------- ----------
Net sales and other revenues................... $ 73,004 $ 54,758
Cost of sales.................................. 44,370 32,853
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Gross profit................................. 28,634 21,905
---------- ----------
Operating expenses:
Research and development..................... 5,890 4,567
Marketing and sales.......................... 3,307 3,102
General and administrative................... 5,844 4,138
Amortization of identified intangibles....... 1,108 694
---------- ----------
Total operating expenses................... 16,149 12,501
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Earnings from operations....................... 12,485 9,404
Interest expense............................... -- (868)
Other income................................... 1,723 880
---------- ----------
Earnings before income taxes................... 14,208 9,416
Income taxes................................... 4,547 3,013
---------- ----------
Net earnings................................... $ 9,661 $ 6,403
---------- ----------
---------- ----------
Earnings per common share...................... $ 0.22 $ 0.17
---------- ----------
---------- ----------
Weighted average number of common shares
outstanding................................... 43,941,921 37,837,228
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
--------------------
1996 1995
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Cash flows from operating activities:
Net earnings....................................... $ 9,661 $ 6,403
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization.................... 2,925 2,132
Amortization of restricted stock compensation.... 167 446
Deferred income taxes............................ 735 (1,533)
Pension costs.................................... 107 75
Changes in assets and liabilities:
Receivables.................................... (25,798) (23,127)
Inventories.................................... (7,814) (6,481)
Leased equipment............................... 557 428
Accounts payable and accrued expenses.......... (6,578) 14,313
Income taxes payable........................... 1,174 2,416
Other.......................................... (1,106) (1,276)
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Net cash used in operating activities.......... (25,970) (6,204)
Cash flows from investing activities:
Purchases of property, plant, and equipment........ (6,397) (2,255)
Acquisition of net assets and business............. -- (121,296)
Investment in other assets......................... (2,008) (248)
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Net cash used in investing activities.............. (8,405) (123,799)
Cash flows from financing activities:
Borrowing from bank................................ 12,550 70,000
Exercise of stock options.......................... 1,311 2,818
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Net cash provided by financing activities...... 13,861 72,818
Effect of foreign currency fluctuations.............. 262 --
-------- ---------
Net decrease in cash and cash equivalents............ (20,252) (57,185)
Cash and cash equivalents at beginning of quarter.... 34,252 57,392
-------- ---------
Cash and cash equivalents at end of quarter.......... $ 14,000 $ 207
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-------- ---------
See accompanying notes to consolidated financial statements.
4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary to fairly present such information. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes thereto,
as well as Item 7. - "Management's Discussion and Analysis of Results of
Operations and Financial Condition," included in the Company's annual report
on Form 10-K filed for the year ended May 31, 1996.
(2) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in, first-out)
or market. A summary of inventories follows (in thousands):
AUGUST 31, MAY 31,
1996 1996
---------- -------
Raw materials........................... $ 66,406 $47,280
Work-in-process......................... 32,035 29,016
Finished goods.......................... 2,160 16,491
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$100,601 $92,787
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(3) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company does not invest or intend to invest in derivative securities.
Similar investments with original maturities beyond three months are
considered short-term investments available for sale or carried at market.
Exchange rate fluctuations have not had a material effect on the Company's
Statements of Cash Flows.
Supplemental disclosures of cash flow information for the three months
ended August 31, 1996 and 1995 follow (in thousands):
1996 1995
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Cash paid during the periods for:
Interest (net of amount capitalized)......... $ -- $ --
------ -----
Income taxes................................. $2,218 $ 399
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5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(4) LONG TERM DEBT
In August 1996, the Company, through one of its wholly-owned
subsidiaries, obtained a $12.6 million, ten-year term loan secured by certain
of its land and buildings located in Stafford, Texas which includes the
Company's executive offices, research and development headquarters, and
newly-constructed electronics manufacturing building. The term loan, which
the Company has guaranteed under a Limited Guaranty, bears interest at a
fixed rate of 7.875% per annum. The Company leases all of the property from
its subsidiary under a master lease, which lease has been collaterally
assigned to the lender as security for the term loan. The term loan provides
for penalties for prepayment prior to maturity.
(5) INCOME TAXES
Components of income tax expense for the three months ended August 31,
1996 and 1995 follow (in thousands):
1996 1995
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Current:
Federal................................. $2,968 $ 3,408
Foreign................................. 568 956
State and local......................... 276 182
Deferred - federal........................ 735 (1,533)
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$4,547 $ 3,013
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6
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
A reconciliation of the expected income tax expense on earnings using the
statutory Federal income tax rate of 35% to the income tax reported herein
for the three months ended August 31, 1996 and 1995 follows (in thousands):
1996 1995
------ ------
Expected income tax expenses......................... $4,973 $3,296
Tax benefit from use of foreign sales corporation.... (600) (432)
Foreign tax credit................................... 31 58
Foreign taxes........................................ (151) 42
State and local taxes................................ 179 118
Research and development credit...................... (168) --
Other................................................ 283 (69)
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$4,547 $3,013
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------ ------
The tax effects of the cumulative temporary differences resulting in the
net deferred income tax asset follow (in thousands):
AUGUST 31, MAY 31,
1996 1996
---------- -------
Accrued expenses.............................. $(1,545) $(1,351)
Allowance accounts............................ (859) (1,053)
Unamortized restricted stock compensation..... (955) (1,711)
Uniform capitalization........................ (536) (409)
Total deferred income tax assets........... (3,895) (4,524)
Valuation allowance........................ -- --
Total deferred income tax asset, net....... (3,895) (4,524)
Basis in identified intangibles............... 2,157 2,075
Basis in property, plant and equipment........ 328 150
Other......................................... 1,083 1,237
Total deferred income tax liabilities...... 3,568 3,462
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Total deferred income tax (asset), net........ $ (327) $(1,062)
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7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES AND OTHER REVENUES. The Company's first quarter net sales and
other revenues increased by $18.2 million, or 33.3%, to $73.0 million
compared to the prior year's first quarter. The increase in sales revenue was
primarily due to the sale of six I/O SYSTEM TWO MRX and three RSR systems to
geophysical contractors in Canada, Russia, Ukraine, Venezuela and the United
States. In addition, there were sales of over 400 marine I/O SYSTEM TWO MSX
streamers and energy sources during the first quarter. The prior year's first
quarter net sales and other revenues principally consisted of six system
sales to geophysical contractors in Russia and the first I/O SYSTEM TWO RSR
system, as well as the contribution of $20.1 million in sales of products
from the Western Exploration Products Group (WGEP) product lines acquired by
the Company in June 1995 from Western Atlas, Inc. (the "WGEP Acquisition").
The Company's results for the three-month period ended August 31, 1996
reflect a full quarter's operations giving effect to the WGEP Acquisition,
while the results for the quarter ended August 31, 1995 reflect only two
months of such combined operations.
GROSS PROFIT MARGIN. The Company's first quarter gross profit margins
were adversely affected by changes in the sales mix and sales of lower margin
products from product lines acquired in the WGEP Acquisition. First quarter
profit margins declined from 40.0% for the prior fiscal year's first quarter
to 39.2%.
OPERATING EXPENSES. Operating expenses increased $3.6 million or 29.2%,
for the first quarter over the prior year's first quarter operating expenses.
Research and development expenses increased $1.3 million, or 29.0%, primarily
due to increased personnel and related costs resulting from the WGEP
Acquisition. Marketing and sales expenses increased $205,000, or 6.6%
primarily due to increased personnel and related costs resulting from the
WGEP Acquisition, and increased advertising expenses offset by decreased
third party commissions. General and administrative expenses increased $1.7
million, or 41.2%, primarily due to increased non-recurring professional
fees, increases in state and local taxes derived from increased levels of
property and assets resulting from the WGEP Acquisition, increased data
processing expenses, and increased depreciation expense. Amortization of
identified intangibles increased $414,000 or 59.7%, primarily due to goodwill
resulting from the WGEP Acquisition.
INTEREST EXPENSE. Interest expense for the first quarter of fiscal 1997
was nil and $868,000 for the first quarter of fiscal 1996 primarily due to
interest on the $70 million term indebtedness incurred in June 1995 in
connection with the WGEP Acquisition. These borrowings were repaid in
November 1995.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the first quarter of fiscal 1997 and the first
quarter of fiscal 1996.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash
flow, its credit facilities, and funds from equity financings. Cash flows
from operating activities before changes in working capital items were a
positive $13.6 million for the three months ended August 31, 1996. However,
cash flows from operating activities after changes in working capital items
were a negative $26.0 million for the three months ended August 31, 1996
primarily due to increases in trade accounts, notes receivable and inventory
required to support increased sales levels, along with a decrease in accounts
payable. The Company believes that it has sufficient credit facilities in
place to finance these increases in its working capital requirements. As of
August 31, 1996 the Company has no borrowings outstanding under its revolving
line of credit.
As of August 31, 1996, total trade notes receivable had increased $22.8
million over the corresponding amount outstanding at May 31, 1996, reflecting
the increased levels of Company-financed sales during the first three months
of fiscal 1997. The Company expects that these increased levels of
Company-financed sales will continue for the foreseeable future. For
information concerning the Company's sales finance activities, see "Item 1. -
Business-Markets and Customers" of the Company's Annual Report on Form 10-K
for the year ended May 31, 1996.
In August 1996, a subsidiary of the Company borrowed $12,550,000 in
long-term financing secured by the land, buildings and improvements housing
the Company's executive offices, research and development headquarters and
new manufacturing facility in Stafford, Texas. The loan bears interest at
the rate of 7.875% per annum and is repayable in equal monthly installments
of principal and interest of $151,439. The promissory note, which matures on
September 1, 2006, contains prepayment penalties. See Note (4) - Long-Term
Debt of the Notes to Consolidated Financial Statements.
The Company anticipates expenditures for the current fiscal year for
exploration and development of oil and gas properties to be approximately $6
million and expects to fund this level of expenditures through cash flows
from operations. Actual levels of exploration and development expenditures
may vary significantly due to many factors, including oil and gas prices,
industry conditions, and the success of the Company's exploration and
development projects. The Company's exploration and development projects are
operated by third parties which control the timing and amount of expenditures
required to exploit the participant's interests in these prospects. The
Company expects to participate in the drilling and completion of six wells in
fiscal 1997. The Company's participation in oil and gas activities is
accounted for on a full cost basis.
Capital expenditures for property, plant, and equipment totaled $10.2
million for fiscal 1996 and $6.4 million for the first three months of fiscal
1997, and are expected to aggregate $26.5 million for fiscal 1997. As noted
above, the Company concluded in August 1996 a long-term credit facility of
$12.6 million to assist in financing the costs of land and improvements in
Stafford, Texas. The Company believes that the combination of its existing
working capital, unused credit available under its working capital credit
facility, internally generated cash flow and access to other financing
sources will be adequate to meet its anticipated capital and liquidity
requirements for the foreseeable future.
9
PART II - OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits
10.1 - Promissory Note dated August 29, 1996 executed by
IPOP Management, Inc. to the order of The Variable
Annuity Life Insurance Company.
10.2 - Master Commerical Lease Agreement dated August 29,
1996, by and between IPOP Management, Inc. and The
Variable Annuity Life Insurance Company.
10.3 - Limited Guaranty dated August 29, 1996, executed
by Input/Output, Inc.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Input/Output, Inc.
during the quarter ended August 31, 1996.
10
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.
INPUT/OUTPUT, INC.
By: /s/ Robert P. Brindley
----------------------------------
Robert P. Brindley
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
Dated: September 27, 1996
11