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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8153
ENTERRA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2154837
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
organization)
13100 NORTHWEST FREEWAY, SIXTH FLOOR
HOUSTON, TEXAS
77040
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(Address of principal executive offices)
(713) 462-7300
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(Registrant's telephone number, including area code)
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 _________
As of May 8, 1995, 27,755,364 common shares were outstanding.
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ENTERRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
1995 1994
-------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 7,914 $ 13,782
Accounts receivable, less allowance of $4,234 and $3,630 127,618 128,458
Inventories 104,014 98,810
Deferred taxes and other current assets 17,923 19,408
-------- --------
Total current assets 257,469 260,458
Property, plant and equipment 550,323 546,041
Less accumulated depreciation 305,149 298,898
-------- --------
Property, plant and equipment, net 245,174 247,143
Deferred charges and other assets 6,587 5,979
Goodwill, net 185,180 186,427
-------- --------
$694,410 $700,007
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,164 $ 1,551
Accounts payable 33,161 36,951
Other current liabilities 52,521 60,117
-------- --------
Total current liabilities 86,846 98,619
Long-term debt 126,480 123,045
Deferred income taxes 24,161 23,369
Other liabilities 482 495
Minority interests 2,031 2,045
Commitments and contingencies
Stockholders' equity:
Common stock - $1.00 par value, 27,748 shares 27,748 27,748
issued and outstanding
Additional paid-in capital 288,514 288,514
Cumulative translation adjustment (9,488) (6,181)
Retained earnings 147,636 142,353
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454,410 452,434
-------- --------
$694,410 $700,007
======== ========
See accompanying notes to consolidated financial statements.
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ENTERRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1994
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REVENUES:
Rentals $ 57,043 $34,969
Sales 60,341 13,604
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117,384 48,573
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COSTS AND EXPENSES:
Cost of rentals 27,194 16,079
Cost of sales 43,352 9,453
Selling, general and administrative 24,888 12,880
Depreciation and amortization 11,865 5,903
-------- -------
107,299 44,315
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OPERATING INCOME 10,085 4,258
Other income (expense):
Interest income 153 294
Interest and debt expense (2,290) (48)
Other 546 ---
-------- -------
(1,591) 246
-------- -------
Income before income taxes and minority interests 8,494 4,504
Income tax provision 3,238 1,395
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Income before minority interests 5,256 3,109
Minority interests 27 (2)
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NET INCOME $ 5,283 $ 3,107
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Weighted average common shares outstanding 27,748 16,429
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NET INCOME PER SHARE $ 0.19 $ 0.19
======== =======
See accompanying notes to consolidated financial statements.
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ENTERRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1994
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 5,283 $ 3,107
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,865 5,903
Provision for losses on accounts receivable 328 270
Gain on sale of property, plant and equipment (1,638) (1,491)
Change in assets and liabilities, net of acquisitions:
Accounts receivable (417) (7,876)
Inventories (5,067) (3,018)
Deferred taxes and other current assets 1,263 424
Deferred charges and other assets (413) (144)
Accounts payable and other current liabilities (10,695) 1,274
Deferred income taxes 809 (1)
Other liabilities (13) (486)
Other 223 280
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Net cash provided by (used in) operating activities 1,528 (1,758)
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CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (12,919) (6,819)
Proceeds from sale of property, plant and equipment 2,683 1,804
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Net cash used in investing activities (10,236) (5,015)
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CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 18,995 --
Payments of long-term debt (15,947) --
Stock options exercised -- 110
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Net cash provided by financing activities 3,048 110
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Effect of exchange rate changes on cash and cash equivalents (208) (517)
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Net change in cash and cash equivalents (5,868) (7,180)
Cash and cash equivalents, beginning of period 13,782 48,229
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Cash and cash equivalents, end of period $ 7,914 $41,049
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See accompanying notes to consolidated financial statements.
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ENTERRA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and in accordance with generally accepted accounting
principles. In the opinion of management, the information furnished reflects
all adjustments, all of which are of a normal recurring nature, necessary for a
fair presentation of the results of the interim periods. It is recommended
that these statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1994. No significant accounting changes
have occurred during the three months ended March 31, 1995. Certain
reclassifications have been made to conform to the 1995 presentation.
2. INVENTORIES
Inventories consisted of:
MARCH 31, DECEMBER 31,
1995 1994
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Raw materials $33,404 $32,960
Work in progress 16,651 14,394
Finished goods and purchased parts 41,804 38,997
Supplies 12,155 12,459
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$104,014 $98,810
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3. INCOME TAXES
The increase in the effective tax rate to 38% at March 31, 1995 from 34% at
December 31, 1994 is primarily due to the effect of a full years nondeductible
goodwill amortization in 1995 from the acquisition of TOTAL combined with
variances in the countries of origin of the Company's taxable income.
4. CONTINGENCIES
During 1993, 1992 and 1991, the Company generated substantial revenues in
Kuwait while providing well control and post-capping assistance in the
aftermath of the Gulf War. Work in 1991 was performed in accordance with a
contract with the Government of Kuwait. In January 1992, the Company was asked
by Kuwait Oil Company (KOC) to continue its work in Kuwait and, while work was
in process under an interim agreement, the parties commenced discussions to
replace the Company's 1991 contract. After extended negotiations, the Company
believed that the parties had agreed upon new terms, including lower rates on
personnel and equipment, based upon which KOC owes the Company $15.1 million.
In September 1993, the Company became aware that KOC had taken the position
that the Company had agreed to drastically lower rates on personnel, under
which KOC would owe the Company approximately $4.5 million. The
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Company has recorded operating results in accordance with its own
understanding, and the $15.1 million balance owed is reflected in accounts
receivable at March 31, 1995 and December 31, 1994.
As agreed in January 1992, the interim agreement covering this period of
negotiation provided that if the parties were unable to reach a mutual
understanding for a new agreement, then the major contract provisions of the
1991 contract, including the charges for services and expenses, would remain in
place during the term of the interim agreement. Based upon advice of counsel
in Kuwait, the Company believes that there was no subsequent binding agreement
and has commenced an arbitration proceeding in London in accordance with the
provisions of the 1991 contract. London counsel has advised that, assuming the
arbitrators accept the opinion of the Company's counsel in Kuwait, the Company
is more likely than not to prevail in the arbitration. The final outcome of
the action is uncertain; arbitration hearings were completed in April, but no
decision has yet been rendered by the arbitrators. No provision for loss has
been made in the accompanying financial statements as the amount ultimately to
be recovered by the Company cannot be reasonably estimated at this time.
5. STATEMENTS OF CASH FLOWS
The following information is provided to supplement the Statements of Cash
Flows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1994
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Cash paid during the period for:
Interest $ 2,089 $ 48
Income taxes 3,895 770
Noncash increase in paid-in capital from exercise of stock options --- 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Enterra Corporation provides specialized services and products to the oil and
gas industry through its oilfield services and equipment business, consisting
principally of equipment rentals and well control assistance, fishing services
and product sales, pipeline services and equipment business and compression
services and equipment business. On August 12, 1994, Enterra expanded its
business by acquiring Total Energy Services Company ("TOTAL"), a privately
owned company that designs, manufactures, sells and rents compression and
oilfield equipment.
Oilfield rental equipment provided by the Company is used in deep well
exploratory and development drilling, generally below 7,500 feet, and in
completion, production and workover activities. Well control assistance
consists of providing personnel and equipment needed to control critical wells.
Fishing services consist of locating and removing obstructions created by
objects broken off, stuck or dropped into the well. The Company manufactures
and sells oil and gas well production and completion equipment and surface and
downhole drilling equipment and tools. Specialized pipeline equipment
designed, manufactured, serviced and sold or rented by the Company is used in
the construction and rehabilitation of pipelines. Compression equipment
designed, manufactured, serviced and sold or rented by the Company is used in
the production and transportation of natural gas.
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RESULTS OF OPERATIONS
The Company's oilfield services and equipment business revenues are directly
related to the levels of oil and gas drilling (particularly deep well
drilling), completion and workover activity in the United States, Canada, the
Middle East, Latin America, Southeast Asia and the North Sea, which in turn are
affected by the current and anticipated price of oil and gas. While a majority
of the Company's current revenues come from the relatively stable production
and workover sector of the industry, an increase in exploration for gas would
have a significant impact on revenues since such work typically involves
drilling at increased depths and often requires increased rentals of equipment
owned by the Company. In addition, any significant change in the level of oil
and gas production within the industry could impact product sales.
While the pipeline services and equipment business also is affected by the
price of oil and gas, the impact is recognized over longer periods due to the
extended lead times inherent in large pipeline projects. In addition, this
segment is also affected by other factors, including the need for pipelines to
transport oil and gas to areas of high demand, the age and condition of
existing pipelines, political and economic influences, environmental factors
and governmental regulation.
The Company's compression services and equipment business revenues are
influenced by natural gas production and consumption, construction of gathering
and storage systems, the age and operating pressures of natural gas wells and
the price of natural gas, principally in the United States and Canada.
None of the Company's segments have experienced any significant warranty or
product liability claims. Any warranty accruals necessary for specialized
equipment sales are generally insignificant.
During 1991, the Company's WELLCAT(Registered Trademark) (Well Control Assist
Team) division contracted with the Government of Kuwait to provide blowout
preventer equipment and certain services to assist in significant well control
efforts in the aftermath of the Gulf War. The Company's Middle East operation
continued to provide substantial assistance to Kuwait throughout 1992 and 1993
to help repair damage to that country's oil production capabilities. The
Company recorded revenues from Kuwait of $9.8 million and $8.0 million during
the years ended December 31, 1993 and 1992, respectively. Since most of the
damaged wells were repaired, the Company did not recognize revenues from
Kuwait in 1994.
In September 1993, the Company announced that it was engaged in a contractual
disagreement with Kuwait Oil Company (KOC) regarding certain billings for work
in Kuwait during 1992 and 1993. At March 31, 1995, the Company's accounts
receivable included approximately $15.1 million owed by KOC, of which the
Company believes that approximately $10 million is involved in the contractual
dispute. As more fully described in Note 4 of the Notes to Consolidated
Financial Statements, in December 1993 the Company commenced an arbitration
proceeding in London to attempt to resolve this matter. The Company is
vigorously pursuing the arbitration process. The amount to be ultimately
recovered by the Company cannot be reasonably estimated at this time and no
provision for loss has been made in the accompanying financial statements. Any
final outcome that results in an amount other than $15.1 million being paid to
the Company would result in a future gain or loss.
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Operations
Operating results by business segment are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
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1995 1994
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REVENUES
Oilfield services and equipment $ 70,430 $33,429
Pipeline services and equipment 17,807 15,144
Compression services and equipment 29,147 ---
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$117,384 $48,573
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OPERATING INCOME BEFORE DEPRECIATION
Oilfield services and equipment $ 11,337 $ 9,060
Pipeline services and equipment 4,971 2,076
Compression services and equipment 7,018 ---
Corporate (1,376) (975)
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$ 21,950 $10,161
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OPERATING INCOME
Oilfield services and equipment $ 4,340 $ 4,451
Pipeline services and equipment 3,605 829
Compression services and equipment 3,567 ---
Corporate (1,427) (1,022)
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$ 10,085 $ 4,258
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Oilfield Services and Equipment Segment. Revenues of the oilfield services
and equipment segment are generated by the following principal services and
products (in thousands):
THREE MONTHS ENDED
MARCH 31,
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1995 1994
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OILFIELD SERVICES AND EQUIPMENT REVENUES
Equipment rental and well control assistance $ 25,763 $20,241
Fishing services 10,987 9,170
Product sales 33,680 4,018
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$ 70,430 $33,429
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Oilfield services and equipment revenues increased $37.0 million (110.7%) in
the first quarter of 1995 as compared to 1994. North American rental and
fishing operations increased by $5.4 million (26.6%) due to acquisitions and a
broadened offering of services. International rental and fishing revenues
increased by $1.9 million (21.2%) primarily due to expansion into Latin
America. The increase in product sales of $29.7 million between the two
quarters is primarily due to the acquisition of TOTAL.
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Operating income decreased $0.1 million in the first quarter of 1995 as
compared to the prior year and decreased as a percentage of revenues from 13.3%
to 6.2%. This decline is primarily due to lower operating margins generated by
TOTAL product sales as compared to rental and fishing activity margins and
decreased activity in the Former Soviet Union.
Pipeline Services and Equipment Segment.
Revenues of the pipeline services and equipment segment are generated from
rentals and sales of equipment as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1994
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PIPELINE SERVICES AND EQUIPMENT REVENUES
Rentals $ 11,243 $ 7,275
Sales 6,564 7,869
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$ 17,807 $15,144
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Pipeline services and equipment revenues increased $2.7 million (17.6%) in the
first quarter of 1995 as compared to 1994, due to an increase in Canadian
equipment rentals offset by a decrease in international sales revenues.
Canadian revenues will decline substantially in the second quarter of 1995 due
to a seasonal slow down that generally accompanies the Spring thaw period, then
are expected to increase again in the second half of the year.
The pipeline services and equipment segment is volume sensitive due to the
fixed nature of many costs associated with operating specialized manufacturing
facilities and a worldwide sales effort. Operating results in the pipeline
services and equipment segment can vary significantly from period to period due
to the timing of large pipeline projects. Operating income as a percentage of
revenues increased to 20.2% in 1995 from 5.5% in 1994 due to an increase in
revenues in the first quarter of 1995 along with a greater percentage of
revenues being generated by rental activities which have higher operating
margins than sales.
Compression Services and Equipment. The compression services and equipment
segment was acquired in connection with the acquisition of TOTAL on August 12,
1994. Revenues of $29.1 million for the quarter ended March 31, 1995,
consisted of compressor equipment rental revenue of $9.1 million and compressor
system sales revenue of $20 million. The compression segment's Canadian
operations provided $16.6 million of its revenues.
Interest Income and Expense
Interest income decreased and interest expense increased in 1995 as compared to
1994 primarily due to the acquisition of TOTAL which resulted in the
expenditure of excess cash balances and the incurrence of debt.
Other Income
Other income in 1995 primarily consists of a $0.2 million gain on the sale of
certain assets of the pipeline services and equipment segment and foreign
currency transaction gains of $0.3 million.
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Income Taxes
Income tax expense as a percentage of taxable income was 38% in the first
quarter of 1995 and 31% during the same period in 1994. The increase in the
effective tax rate is due to variances in the countries of origin of the
Company's taxable income and nondeductible goodwill amortization arising from
the acquisition of TOTAL.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had cash and cash equivalents of $7.9 million,
down $5.9 million from year end. Cash provided by operating activities was
$1.5 million during the first quarter of 1995 as compared to $1.8 million used
in operating activities in 1994. Depreciation and amortization expense
increased $6.0 million in the first quarter of 1995 as compared to 1994 as a
result of capital expenditures and the acquisition of TOTAL. Inventories
increased by $5.1 million in the first quarter of 1995 primarily due to
purchases of materials to manufacture oilfield and compression equipment.
Inventories increased $3.0 million in the first quarter of 1994 primarily due
to a large job under construction in the pipeline segment. Accounts payable
and other current liabilities decreased $10.7 million in 1995 due to payments
for the acquisition of a smaller oilfield segment business acquired in late
1994 and payables related to the shipment of an unusually large pipeline
segment order in December.
The Company continues to replenish and increase its inventory of rental
equipment utilized in the oilfield services and equipment segment and develop
and manufacture new equipment and systems to improve or expand the pipeline and
compression businesses. Capital expenditures were $12.9 million in the first
quarter of 1995 as compared to $6.9 million in 1994. During the first quarter
of 1995, $7.9 million or 61% of the capital expenditures were made in the
oilfield services and equipment segment, primarily directed towards the
expansion of North American rental and fishing operations and international
expansion in Latin America. Capital expenditures of $1.5 million in the
pipeline services equipment segment were primarily directed towards the
addition of rental equipment. Capital expenditures in the compression services
and equipment segment consisted of $3.5 million primarily for the expansion of
the domestic compressor rental fleet. Capital spending is expected to increase
in 1995 as a result of inclusion of the compression business for a full year.
Almost all of the $6.8 million spent on capital expenditures during the first
quarter of 1994 went to the oilfield services and equipment segment, primarily
for fishing tools and drill pipe. Sources for the equipment purchased,
assembled or manufactured by the Company are readily available and long-term
capital commitments are not required.
On August 12, 1994, Enterra completed the acquisition of all the outstanding
common shares of TOTAL in exchange for 11.3 million common shares of Enterra
valued at $18.90 per share. Minority interests in two of TOTAL's subsidiaries
were acquired for approximately $23 million in cash, and the termination of
option and employment obligations and the costs of the transaction resulted in
further cash expenditures of approximately $15 million. At closing, TOTAL had
outstanding long-term indebtedness of approximately $75 million.
At December 31, 1993, Enterra had a $40 million line of credit. No borrowings
were outstanding under the line of credit at any time during 1993 or the first
quarter of 1994. In connection with the TOTAL acquisition and three smaller
acquisitions, the Company increased its line of credit to $140 million and
borrowed funds to retire TOTAL's existing bank indebtedness, fund a portion of
the cash required to consummate the transaction and retain credit availability
for future needs. Borrowings under the revolving line of credit at March 31,
1995, were $122 million. The term of the credit agreement is through March
1998. Borrowings bear interest at the prime rate or, at the Company's
election, at .75% over a specified Eurodollar rate. The credit agreement
contains a number of covenants, including limitations on the amount of
dividends paid and repurchases of common stock, the amount and type of
permitted indebtedness and investments, the pledge or disposition of assets and
requirements that the Company meet certain financial tests.
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The Company currently believes that its cash flow from operations, working
capital and borrowing capabilities will be sufficient to fund its projected
capital expenditures, working capital needs and debt service requirements.
Enterra is affected by fluctuations in foreign currency exchange rates.
Although most of Enterra's foreign operations revenues are denominated in the
local currency, the effects of foreign currency fluctuations are mitigated as
local expenses of foreign entities are generally in the same currency. The
reported operating results of foreign operations are affected by changes in the
exchange rates of foreign currencies against the U.S. dollar. The significance
of the effect on the operating results of Enterra will depend on the magnitude
of the rate change and the level of operations in the local currency. Enterra
recorded net foreign currency transaction gains of $0.3 million during the
three months ended March 31, 1995. Enterra did not incur any material foreign
currency transaction gains or losses during the three months ended March 31,
1994.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any report on Form 8-K during the quarter for
which this report is filed.
SIGNATURE
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.
/s/ Steven W. Krablin
Date May 12, 1995 ------------------------------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
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EXHIBIT INDEX
Exhibit No. Description
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27.1 Financial Data Schedule