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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, 1997
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: (281) 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, 1997 there were 43,513,326 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, 1997
PART I. Financial Information.
Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets
August 31, 1997 and May 31, 1997 2
Consolidated Statements of Operations
Three months ended August 31, 1997 and 1996 3
Consolidated Statements of Cash Flows
Three months ended August 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 7
PART II. Other Information.
Item 2. Changes in Securities 10
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 1997 1997
--------- --------
Current assets:
Cash and cash equivalents $ 40,895 $ 2,573
Trade account receivables, net 29,516 61,788
Trade notes receivable, net 33,956 27,800
Income taxes receivable -- 2,403
Inventories 104,717 106,337
Prepaid expenses 2,242 1,939
-------- --------
Total current assets 211,326 202,840
Long-term trade notes receivable 34,531 27,003
Deferred income tax asset 2,402 3,097
Property, plant and equipment, net 77,874 78,376
Goodwill, net 59,994 61,024
Other assets 13,386 12,318
-------- --------
$399,513 $384,658
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 930 $ 912
Accounts payable, principally trade 17,898 13,143
Accrued expenses 13,407 18,358
Income taxes payable 506 --
-------- --------
Total current liabilities 32,741 32,413
Long-term debt 10,761 11,000
Other liabilities 2,664 2,631
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none issued -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued 43,513,326 shares at August 31, 1997
and 43,280,851 shares at May 31, 1997 435 433
Additional paid-in capital 222,516 218,973
Retained earnings 132,393 121,116
Cumulative translation adjustment (1,952) (1,673)
Unamortized restricted stock compensation (45) (235)
-------- --------
Total stockholders' equity 353,347 338,614
-------- --------
$399,513 $384,658
-------- --------
-------- --------
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,
--------------------------
1997 1996
----------- -----------
Net sales and other revenues $ 82,970 $ 73,004
Cost of sales 49,656 44,370
----------- -----------
Gross profit 33,314 28,634
----------- -----------
Operating expenses:
Research and development 7,388 5,890
Marketing and sales 2,884 3,307
General and administrative 6,068 5,844
Amortization of identified intangibles 1,187 1,108
----------- -----------
Total operating expenses 17,527 16,149
----------- -----------
Earnings from operations 15,787 12,485
Interest expense (322) --
Other income 1,119 1,723
----------- -----------
Earnings before income taxes 16,584 14,208
Income taxes 5,307 4,547
----------- -----------
Net earnings $ 11,277 $9,661
----------- -----------
----------- -----------
Earnings per common share $ 0.26 $ 0.22
----------- -----------
----------- -----------
Weighted average number of common and common
equivalent shares outstanding 43,793,884 43,941,921
----------- -----------
----------- -----------
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,
--------------------
1997 1996
------- -------
Cash flows from operating activities:
Net earnings $11,277 $ 9,661
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,764 2,925
Amortization of restricted stock compensation 17 167
Deferred income taxes 695 735
Pension costs 91 107
Changes in assets and liabilities:
Receivables 18,588 (25,798)
Inventories 1,620 (7,814)
Leased equipment (272) 557
Accounts payable and accrued expenses (196) (6,578)
Income taxes 2,909 1,174
Other (653) (1,106)
------- -------
Net cash provided by (used in) operating activities 37,840 (25,970)
Cash flows from investing activities:
Purchases of property, plant, and equipment (1,764) (6,397)
Investment in other assets (1,110) (2,008)
------- -------
Net cash used in investing activities (2,874) (8,405)
Cash flows from financing activities:
Borrowings from bank -- 12,550
Payments on debt (221) --
Proceeds from exercise of stock options and
related tax benefit 3,718 1,311
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Net cash provided by financing activities 3,497 13,861
Effect of foreign currency exchange rates (141) 262
------- -------
Net increase (decrease) in cash and cash equivalents 38,322 (20,252)
Cash and cash equivalents at beginning of quarter 2,573 34,252
------- -------
Cash and cash equivalents at end of quarter $40,895 $14,000
------- -------
------- -------
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, 1997.
(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,
1997 1997
---------- --------
Raw materials................................... $ 56,152 $ 56,573
Work-in-process................................. 24,430 23,878
Finished goods.................................. 24,135 25,886
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$104,717 $106,337
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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, 1997 and 1996 follow (in thousands):
1997 1996
---- ------
Cash paid during the periods for:
Interest (net of amount capitalized)......... $342 $ --
---- ------
---- ------
Income taxes................................. $140 $2,218
---- ------
---- ------
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 recently-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) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128 specifies the compilation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. The requirements of this statement will be effective for interim
and annual periods ending after December 15, 1997. Management does not believe
that the implementation of SFAS 128 will have a material effect on the
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The requirements of this statement will be effective for both
interim and annual periods beginning after December 15, 1997. Management does
not believe that the implementation of SFAS 130 will have a material effect on
the financial statements.
6
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 $10.0 million, or 13.7%, to $83.0 million, compared to
the prior year's first quarter net sales and other revenues. The increase in
sales revenues was principally due to strong demand for the Company's systems
and components across substantially all of its product lines. During the first
quarter the Company sold 13 I/O SYSTEM TWO-R- MRX systems and one RSR system.
The Company also sold one I/O SYSTEM TWO MSX marine system and experienced
stronger demand for its seismic cables and geophone components and its land
vibrators (25,574 channels for the quarter) compared to six MRX and three RSR
systems (24,736 channels for the prior quarter) sold in the first quarter of
the prior fiscal year.
GROSS PROFIT MARGIN. The Company's first quarter fiscal 1998 gross profit
margin of 40.2% was comparable to the gross profit margin of 39.2% for the
first quarter of fiscal 1997. However, this year's first quarter gross profit
margin represented an improvement over the gross profit margins the Company had
experienced during the latter half of fiscal 1997; for the quarter ended May
31, 1997, the Company's gross profit margin was approximately 31%. The
principal reasons for the improvement in gross margins were the improved
environment of demand for seismic equipment and instrumentation during the
spring and summer of 1997 (which had the effect of stabilizing and firming the
Company's pricing scheme for substantially all of its products) and increased
sales of land systems, which feature higher margins than the Company's marine
and other equipment, relative to the overall sales mix.
OPERATING EXPENSES. Operating expenses increased $1.4 million, or 8.5%,
for the first quarter over the prior year's first quarter operating expenses.
Research and development expenses increased $1.5 million, or 25.4%, primarily
due to special charges for personnel expenses incurred in organizational
changes, increased depreciation and increased supplies and prototype parts
expense. Marketing and sales expenses decreased $423,000, or 12.8%, primarily
due to decreased conventions/exhibits expense and decreased advertising
expense. General and administrative expenses increased only $224,000, or 3.8%,
above the prior year. Amortization of identified intangibles increased $79,000,
or 7.1%, primarily due to goodwill resulting from an acquisition.
INTEREST EXPENSE. Interest expense for the first quarter of fiscal 1998
was $322,000, primarily attributable to the Company's long-term building
financing (see Note 4 of Notes to Consolidated Financial Statements), as
compared to nil in the first quarter of fiscal 1997.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the first quarter of fiscal 1998 and the first
quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has traditionally 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 $15.8 million for the three months ended August 31, 1997. Cash
flows from operating activities after changes in working capital items were a
positive $37.8 million for the three months ended August 31, 1997 primarily due
to a $32.3 million decrease in trade accounts receivable since the beginning of
the current fiscal year. As of August 31, 1997 the Company had no borrowings
outstanding under its revolving line of credit and has $30.0 million available
for borrowings under the revolver for working capital purposes.
7
As of August 31, 1997, total trade notes receivable had increased $13.7
million over the corresponding amount outstanding at May 31, 1997, reflecting
the increased levels of Company-financed sales during the first three months of
fiscal 1998. 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, 1997.
The Company has from time to time sold and assigned certain of its
installment sales contracts and leases for its products to third-party
financing sources (or sold equipment to leasing companies which equipment is
then leased to customers), the terms of which often obligate the Company to (i)
guarantee or repurchase all or a portion of the contracts and leases in the
event of a default by the customer or upon certain other occurrences and/or
(ii) assist the financing parties in remarketing the purchased equipment to
satisfy the obligation. As of August 31, 1997, such third party financing
sources had purchased equipment contracts and leases which, in the aggregate,
obligated the Company to guarantee or repurchase up to approximately $13.5
million. Depending upon the Company's level of exposure to these contingent
obligations from time to time, performance of the Company's obligations under a
number of these arrangements could have a material adverse effect on the
Company's financial condition and results of operations. In addition, a number
of significant payment defaults by customers could have a material adverse
effect on the Company's financial position and results of operations.
On December 6, 1996, Grant Geophysical, Inc. ("Grant"), a geophysical
services company, filed for protection under Chapter 11 of the US Bankruptcy
Code. The Company's records reflect that on the filing date the Company had
outstanding current and long-term notes and accounts receivable of
approximately $10.6 million secured by certain seismic equipment sold by the
Company to Grant and an obligation to repurchase $1.1 million in Grant debt. In
addition, the Company has guaranteed, on a partial recourse basis, certain
lease obligations owed by Grant to an institutional lender/purchaser of Company
equipment for which the Company has rights to purchase the lessor's interest
under certain circumstances. A proposed plan of reorganization has been filed
in the case that provides for payment in full to holders of secured claims and
the assumption of these lease obligations. This plan was confirmed on September
15, 1997. The Company currently expects that it will be repaid all or
substantially all of the outstanding indebtedness owed to it by Grant. However,
no assurance can be given as to the amount and timing of any recovery to the
Company regarding these defaulted obligations.
In August 1996, a subsidiary of the Company borrowed $12.6 million 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 of Notes to Consolidated
Financial Statements).
The Company anticipates expenditures for the current fiscal year for
exploration and development of oil and gas properties will be approximately
$2.5 million and expects to fund these expenditures from its cash flow from
operations. However, the Company currently expects that its future level of
participation in oil and gas drilling activities will be funded primarily by
cash flows from its productive properties. The Company expects to participate
in up to five wells in fiscal 1998.
8
Capital expenditures for property, plant, and equipment totaled $1.8
million for the first quarter of 1998 and are expected to aggregate
approximately $10.0 million for fiscal 1998. 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.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q
(particularly that contained in this Part I., Item 2. "Management's Discussion
and Analysis of Results of Operation and Financial Condition") may be deemed to
be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and is subject to the "Safe Harbor" provisions
of that section., This information includes, without limitation, statements
concerning future revenues, future earnings, future costs, future margins and
future expenses; anticipated product releases and technological advances; the
future mix of business and future asset recoveries; and future demand, future
industry conditions, future capital expenditures, and future financial
condition. These statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the
statements that identify forward-looking statements. Important factors which
could affect the Company's actual results and cause actual results to differ
materially from those results which might be projected, forecast, estimated or
budgeted by the Company in such forward-looking statements include, but are not
limited to, the following: fluctuation of quarterly financial performance due
to the timing of product shipments; the effect on gross profits margins of the
product mix sold in any period; the uncertainty of conditions affecting the
worldwide energy industry and oil and gas exploration; credit risks associated
with extended-term sales arrangements made with certain customers; retention
and financial condition of major customers; effects of future costs;
collectibility of receivables; effects of governmental regulations; future
levels and timing of capital expenditures; the timing and introduction of new
products or technologies by the Company or its competitors; the risk of a
disruption in vendor supplies; the level of competition in the seismic data
acquisition industry; risks associated with foreign sales; potential challenges
to the Company's intellectual property rights; and the dependence on and
retention of key personnel.
The foregoing review of factors should not be construed as exhaustive.
Additional factors that could cause actual results to differ materially from
those contemplated by the forward-looking statements contained in this report
may be found in the Company's Annual Report on Form 10-K for the year ended May
31, 1997, under Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Cautionary Statement for Purposes of
Forward-Looking Statements," as filed with the Securities and Exchange
Commission, which sub-section of such Form 10-K Annual Report is incorporated
herein by reference in its entirety. See Part II, Item 6. "Exhibits and Reports
on Form 8-K" of this Quarterly Report on Form 10-Q.
The Company undertakes no obligation to publicly release the result of any
revisions to any such forward-looking statements which may be made to reflect
the events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
9
PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended August 31, 1997, the Company made
no sales of its equity securities that were not registered under the
Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits
10.1 - Corporate Guaranty of the Company for the
benefit of BTM Capital Corporation, dated August 29, 1997
27.1 - Financial Data Schedule (included in EDGAR copy only)
99.1 - Relevant portions of Item 7. "Management's Discussion and
Analysis of Results of Operations and Financial Condition -
Cautionary Statement for Purposes of Forward Looking
Statements," as contained in the Company's Annual Report
on Form 10-K for its fiscal year ended May 31, 1997.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by Input/Output, Inc.
during the quarter ended August 31, 1997.
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
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
Dated: September 22, 1997
11