1
DRAFT
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 March 31, 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 1-13086
EVI, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 04-2515019
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Post Oak Park, Houston, Texas 77027-3415
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 297-8400
--------------------------------------------------
(Registrant's telephone number, include area code)
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of Class Outstanding at May 6, 1998
- ----------------------------- --------------------------
Common Stock, par value $1.00 47,852,591
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVI, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
------------- -------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ............................... $ 25,182 $ 31,863
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $1,049,000 and $1,006,000, Respectively .. 270,320 265,307
Inventories ............................................. 316,202 286,763
Other Current Assets .................................... 63,453 47,092
----------- -----------
675,157 631,025
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST,
NET OF ACCUMULATED DEPRECIATION ......................... 327,816 301,717
GOODWILL, NET ................................................. 493,470 403,328
OTHER ASSETS .................................................. 54,015 29,996
----------- -----------
$ 1,550,458 $ 1,366,066
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings, Primarily Under Revolving
Lines of Credit ...................................... $ 133,638 $ 24,243
Current Maturities of Long-Term Debt .................... 9,858 10,355
Accounts Payable ........................................ 148,501 156,829
Accrued Salaries and Benefits ........................... 18,765 33,904
Current Tax Liabilities ................................. 25,612 13,913
Other Accrued Liabilities ............................... 84,885 74,921
----------- -----------
421,259 314,165
----------- -----------
LONG-TERM DEBT ................................................ 42,075 43,198
DEFERRED INCOME TAXES AND OTHER ............................... 95,624 78,970
5% CONVERTIBLE SUBORDINATED PREFERRED
EQUIVALENT DEBENTURES ................................... 402,500 402,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 Par Value, Authorized 80,000,000 Shares,
Issued 52,673,461 and 51,890,823, Respectively ....... 52,674 51,891
Capital in Excess of Par Value .......................... 441,767 410,442
Treasury Stock, at Cost ................................. (152,602) (152,344)
Retained Earnings ....................................... 263,220 231,943
Cumulative Foreign Currency Translation Adjustment ...... (16,059) (14,699)
----------- -----------
589,000 527,233
----------- -----------
$ 1,550,458 $ 1,366,066
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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EVI, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
------------------------------------
1998 1997
------------- -------------
(in thousands, except per share
amounts)
REVENUES ............................................. $ 316,840 $ 164,640
--------- ---------
COSTS AND EXPENSES:
Cost of Sales .................................. 214,581 122,271
Selling, General and Administrative Attributable
to Segments ................................. 44,789 17,311
Corporate General and Administrative ........... 2,148 1,721
--------- ---------
OPERATING INCOME ..................................... 55,322 23,337
--------- ---------
OTHER INCOME (EXPENSE):
Interest Income ................................ 168 2,579
Interest Expense ............................... (7,993) (4,411)
Other, Net ..................................... 621 735
--------- ---------
INCOME BEFORE INCOME TAXES ........................... 48,118 22,240
PROVISION FOR INCOME TAXES ........................... 16,841 7,895
--------- ---------
NET INCOME ........................................... $ 31,277 $ 14,345
========= =========
EARNINGS PER SHARE:
Basic .......................................... $ 0.66 $ 0.31
========= =========
Diluted ........................................ $ 0.65 $ 0.31
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .......................................... 47,732 45,672
========= =========
Diluted ........................................ 48,333 46,765
========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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EVI, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
--------------------------------
1998 1997
----------- -----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................. $ 31,277 $ 14,345
Adjustments to Reconcile Net Income to Net Cash
Used by Operating Activities:
Depreciation and Amortization ............................ 13,145 6,845
Deferred Income Tax Provision ............................ 2,540 1,826
Change in Operating Assets and Liabilities, Net of Effects
of Businesses Acquired ................................. (54,471) (45,055)
--------- ---------
Net Cash Used by Operating Activities .................. (7,509) (22,039)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Income Taxes Paid on Gain on Disposal of Discontinued
Operations ............................................... -- (62,808)
Acquisition of Businesses, Net of Cash Acquired ............ (78,056) (30,179)
Capital Expenditures for Property, Plant and
Equipment ................................................ (18,278) (7,271)
Other, Net ................................................. 418 92
--------- ---------
Net Cash Used by Investing Activities .................... (95,916) (100,166)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings Under Revolving Lines of Credit, Net ............ 109,395 3,904
Repayments on Term Debt, Net ............................... (13,231) (1,246)
Proceeds from Exercise of Stock Options .................... 838 --
Acquisitions of Treasury Stock ............................. (258) (425)
--------- ---------
Net Cash Provided by Financing Activities ................ 96,744 2,233
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................ (6,681) (119,972)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 31,863 223,966
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 25,182 $ 103,994
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid .............................................. $ 7,131 $ 7,221
Income Taxes Paid, Net of Refund ........................... $ 5,599 $ 63,379
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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EVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) General
The unaudited consolidated condensed financial statements included herein
have been prepared by EVI, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments which the Company considers necessary for the
fair presentation of such financial statements for the interim periods
presented. Although the Company believes that the disclosures in these financial
statements are adequate to make the interim information presented not
misleading, certain information relating to the Company's organization and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted in this Form 10-Q pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31, 1997. The results of
operations for the three month period ended March 31, 1998 are not necessarily
indicative of the results expected for the full year.
(2) Comprehensive Income
Comprehensive income as defined by Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, is net income plus direct
adjustments to stockholders' equity. The cumulative translation adjustment of
certain foreign entities is the only such direct adjustment recorded by the
Company.
Three Months
Ended March 31,
----------------------------
1998 1997
----------- -----------
(in thousands)
Comprehensive income:
Net income.................................... $ 31,277 $ 14,345
Cumulative translation adjustment............. (1,360) --
---------- ----------
Total comprehensive income...................... $ 29,917 $ 14,345
========== ==========
(3) Inventories
Inventories by category are as follows:
March 31, December 31,
1998 1997
---------- ------------
(in thousands)
Raw materials and components.................... $ 183,955 $ 151,743
Work in process................................. 42,372 46,498
Finished goods.................................. 89,875 88,522
---------- ----------
$ 316,202 $ 286,763
========== ==========
Work in process and finished goods inventories include the cost of
material, labor and plant overhead.
(4) Acquisitions
On February 19, 1998, the Company acquired Ampscot Equipment Ltd., an
Alberta corporation ("Ampscot") for approximately $57.1 million in cash. Ampscot
is a Canadian-based manufacturer of pumping units.
On January 15, 1998, the Company completed the acquisition of Taro
Industries Limited ("Taro"), an Alberta corporation, in which approximately 0.8
million shares of the Company's common stock, $1.00 par value ("Common Stock"),
have been issued or are reserved for issuance to the shareholders of Taro in
exchange for their shares of Taro stock. Taro is a Canadian provider of well
automation, gas compression, and drilling equipment distribution.
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EVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On January 12, 1998, the Company completed the acquisition of the Houston
Well Screen group of companies ("HWS") from Van der Horst Limited, a Singapore
company, for a net purchase price of approximately $27.6 million in cash. The
HWS acquisition includes the purchase of Van der Horst USA Inc., which is the
holding company of Houston Well Screen Company and of Houston Well Screen Asia
Pte Ltd. which has operations in Singapore and Indonesia. HWS makes wedge-wire
screen products for use in oil and gas production and other applications.
On December 3, 1997, the Company completed the acquisition of all of the
outstanding shares of BMW Monarch (Lloydminster) Ltd. ("BMW Monarch") and BMW
Pump, Inc. ("BMW Pump") for aggregate consideration of approximately $96.8
million in cash and $14.3 million in assumed debt. On December 2, 1997, the
Company completed the acquisition of all of the capital stock of Trico
Industries, Inc., ("Trico") in exchange for $105.0 million in cash and the
assumption of $8.7 million of debt.
On May 1, 1997, the Company acquired GulfMark International, Inc.
("GulfMark") pursuant to a merger in which approximately 4.4 million shares of
the Company's Common Stock were issued to the stockholders of GulfMark. Prior to
the merger, GulfMark effected a spin-off to its stockholders of its marine
transportation services business. The retained assets of GulfMark that were
acquired by the Company in this transaction consisted of approximately 4.4
million shares of the Company's Common Stock, an erosion control company and
certain other miscellaneous assets.
The acquisitions discussed above were accounted for using the purchase
method of accounting, and their results of operations are included in the
Consolidated Condensed Statements of Income from their respective dates of
acquisition.
The following presents the consolidated financial information for the
Company on a pro forma basis as if the May 1, 1997 acquisition of GulfMark and
the December 1997 acquisitions of Trico, BMW Monarch and BMW Pump had occurred
on January 1, 1997. Such acquisitions have been included in the historical
financial results for the three months ended March 31, 1998; therefore, pro
forma information for such period is not presented. All other 1997 and 1998
acquisitions are not material individually nor in the aggregate for each
applicable year; therefore, pro forma information is not presented. The pro
forma information set forth below 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.
Three Months
Ended
March 31,1997
----------------------
(in thousands,
except per share
amounts)
Revenues......................................... $ 216,091
Net income from continuing operations............ $ 15,856
Earnings per common share from continuing
operations:
Basic.......................................... $ 0.35
Diluted........................................ $ 0.34
(5) Long-Term Debt
In February 1998, the Company entered into a new credit agreement which
provides for borrowings of up to an aggregate of $250.0 million, consisting of a
$200.0 million U.S. credit facility and a $50.0 million Canadian credit facility
and terminated its prior working capital facilities. Borrowings under the new
credit facility bear interest at a variable rate based on either prime or LIBOR
and are secured by pledges of various stock of the Company's domestic and
foreign subsidiaries. In addition, certain of the Company's domestic
subsidiaries are guarantors of the facility.
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EVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year adjusted
for the dilutive effect of the incremental shares that would have been
outstanding under the Company's stock option plans. The effect of the
Company's 5% Convertible Subordinated Preferred Equivalent Debentures due 2027
(the "Debentures") on diluted earnings per share is anti-dilutive and, thus, has
no impact.
The following reconciles basic and diluted weighted average shares:
March 31,
----------------------------
1998 1997
---------- ----------
(in thousands)
Basic weighted average number of
shares outstanding........................... 47,732 45,672
Dilutive effect of stock option plans............ 601 1,093
-------- ---------
Dilutive weighted average number of
shares outstanding........................... 48,333 46,765
======== =========
(7) Supplemental Cash Flow Information
The following summarizes investing activities relating to acquisitions:
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- -----------
(in thousands)
Fair value of assets, net of cash acquired....... $ 63,489 $ 20,477
Goodwill......................................... 94,430 20,109
Total liabilities................................ (48,968) (10,407)
Common Stock issued.............................. (30,895) --
--------- -----------
Cash consideration, net of cash acquired......... $ 78,056 $ 30,179
========= ===========
(8) Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related
Information, in the first quarter of 1998. SFAS No. 131 requires segment
information to be reported on a basis consistent with that used internally for
evaluating segment performance and deciding how to allocate resources to
segment. Quarterly disclosures are not required in the first year of adoption.
The adoption of SFAS No. 131 has not resulted in a change in the manner the
Company reports segment information and related disclosures.
In 1998 the FASB issued Statement of Accounting Standards No. 132 ("SFAS
No. 132"), Employers' Disclosures About Pensions and Other Postretirement
Benefits. SFAS No. 132 standardizes annual disclosure requirements for pensions
and other postretirement benefits. SFAS No. 132 is effective for years beginning
after December 15, 1997. SFAS No. 132 has no impact on the consolidated
condensed financial statements of the Company.
(9) Reclassifications and Restatements
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 1998 classifications.
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EVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(10) Subsequent Events
On March 4, 1998, the Company entered into an Agreement and Plan of
Merger, as amended, with Weatherford Enterra, Inc. ("Weatherford") providing for
the merger of Weatherford with and into the Company pursuant to an expected tax
free merger (the "Merger") in which the stockholders of Weatherford will receive
0.95 of a share of the Company's Common Stock in exchange for each outstanding
share of Weatherford common stock. Based on the number of shares of Weatherford
common stock outstanding as of April 22, 1998, a total of approximately 48.8
million shares of Common Stock would be issued in the Merger. In addition,
approximately 1.4 million shares of Common Stock would be reserved for issuance
by the Company for outstanding options under Weatherford's compensation and
benefit plans. The Company will be the surviving corporation and will be renamed
EVI Weatherford, Inc.
The Weatherford Merger is subject to various conditions, including the
approval by the stockholders of both the Company and Weatherford. The Company
and Weatherford have each set May 27, 1998 as the meeting date for the special
meeting of their stockholders to consider and vote on the Merger.
In December 1997, the Company entered into a merger agreement with
Christiana Companies, Inc. ("Christiana") and C2, Inc., Wisconsin corporations,
pursuant to which approximately 3.9 million shares of Common Stock will be
issued to the stockholders of Christiana in a merger of a subsidiary of the
Company with and into Christiana ("Christiana Merger"). Prior to the Christiana
Merger, Christiana is required to sell two-thirds of its interest in Total
Logistic Control ("Logistic"), a wholly owned subsidiary of Christiana, to C2,
Inc. for approximately $10.7 million. Following the Logistic sale, the remaining
assets of Christiana will consist of (i) approximately 3.9 million shares of
Common Stock, (ii) a one-third interest in Logistic, (iii) cash and other assets
with a book value of approximately $10.0 million and (iv) a contingent cash
payment of up to $10.0 million payable five years after the effective date of
the merger to the extent such funds are not required to satisfy contingent
claims against Christiana. It is anticipated that Christiana will have no
material debt as of the consummation of the Christiana Merger, but will have
various tax liabilities which will be paid with the remaining cash balance in
Christiana after the Christiana Merger. Because the number of shares of Common
Stock issuable in the proposed Christiana Merger approximates the number of
shares of Common Stock currently held by Christiana, the Christiana Merger is
expected to have no material effect on the outstanding number of shares of
Common Stock or equity of the Company.
The Christiana Merger is subject to various conditions, including approval
by the stockholders of the Company and Christiana and the receipt of required
regulatory approvals. Although there can be no assurance that the Christiana
Merger will close, the Company currently anticipates that the acquisition will
be consummated shortly after receipt of such regulatory approvals and the
approval of the Christiana Merger by the shareholders of the Company and
Christiana. The Company currently expects that a meeting of its stockholders to
consider the Christiana Merger will be held in the third quarter of 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
EVI, Inc. (the "Company") is an international manufacturer and supplier of
engineered oilfield tools and equipment. The Company's products are used both
for the drilling and production phases of oil and natural gas wells. The Company
has achieved significant growth in recent years through a consistent strategy of
synergistic acquisitions and internal development. Acquisitions have focused on
the acquisition of name brand products, the development of complete product
lines and savings through consolidation. Internal development has focused on
product development and geographic expansion.
The Company's product lines are divided into a drilling products segment
consisting of drill pipe, premium tubulars and marine connectors, and a
production equipment segment consisting of completion and artificial lift
equipment. The Company's principal products consist of drill pipe and drilling
tools, premium connectors and associated high grade tubulars, marine connectors,
packers and completion tools and artificial lift systems. The Company's growth
strategy has resulted in the Company becoming the largest manufacturer of drill
pipe in the world, the largest manufacturer of premium tubular connectors in
North America and one of the largest providers of artificial lift and completion
equipment in the world. The production equipment segment designs, manufactures
and services artificial lift and completion equipment. To the Company's
knowledge, none of its competitors has as broad a product line of rod lift and
progressing cavity pumps.
Recent Developments
On March 4, 1998, the Company entered into an Agreement and Plan of Merger
with Weatherford Enterra, Inc. ("Weatherford") providing for the merger of
Weatherford with and into the Company pursuant to an expected tax free merger
(the "Merger") in which the stockholders of Weatherford will receive 0.95 of a
share of the Company's common stock, $1.00 par value ("Common Stock"), in
exchange for each outstanding share of Weatherford common stock. Based on the
number of shares of Weatherford common stock outstanding as of April 22, 1998, a
total of approximately 48.8 million shares of Common Stock would be issued in
the Merger. In addition, approximately 1.4 million shares of Common Stock would
be reserved for issuance by the Company for outstanding options under
Weatherford's compensation and benefit plans. The Company will be the surviving
corporation and will be renamed EVI Weatherford, Inc.
Weatherford is a diversified international energy service and manufacturing
company that provides a variety of services and equipment to the exploration,
production and transmission sectors of the oil and gas industry. Weatherford
operates in three industry segments consisting of oilfield services, oilfield
products and gas compression. The Merger with Weatherford is being proposed to
further the Company's strategy of taking advantage of opportunities in the
oilfield service industry, more particularly its well construction and
production life cycle segments. The Company believes that the combination of the
Company's broad range of completion and artificial lift products with
Weatherford's international oilfield service infrastructure and reputation
should provide the combined entity with a firm foundation for growth. The Merger
also is being pursued by the Company to (i) provide the Company with a greater
and more diversified line of products and services to serve its customers'
needs, (ii) expand the Company's international presence and (iii) provide the
Company with benefits through product leveraging and consolidation savings.
The Merger is subject to various conditions, including the approval by the
stockholders of both the Company and Weatherford. The Company and Weatherford
have each set May 27, 1998 as the meeting date for the special meeting of their
stockholders to consider and vote on the Merger.
Recent Acquisitions
In the first quarter of 1998, the Company completed three acquisitions of
operating businesses within its production equipment segment: (i) Houston Well
Screen, a leading provider of downhole sand control screens for approximately
$27.6 million cash; (ii) Taro Industries, Limited ("Taro"), a Canadian provider
of well monitoring, gas compression and drilling equipment distribution for
approximately 0.8 million shares of Common Stock; and (iii) Ampscot Equipment
Ltd. ("Ampscot"), a Canadian manufacturer of conventional pumping units for
approximately $57.1 million cash. The Company also acquired a business relating
to its tubular products operations that expanded the Company's manufacturing
capacity for cash
9
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consideration of $9 million plus liabilities of approximately $21 million. The
1998 acquisitions were accounted for using the purchase method of accounting.
The results of operations of all 1998 acquisitions have been included in the
Company's operating results since their respective dates of acquisitions. These
acquisitions substantially increased the Company's market share in the
traditional pumpjack market, expanded the Company's production equipment product
line, added gas compression to the Company's product offerings, expanded the
Company's presence in Canada and expanded the Company's tubular manufacturing
capacity.
Market Trends
The demand for the Company's drilling products is particularly affected by
the price of natural gas and the level of oil and gas exploration activity,
while the demand for the Company's production equipment is directly dependent on
oil production activity. Exploration and production activities are also affected
by worldwide economic conditions, supply and demand for oil and natural gas,
seasonal trends and the political stability of oil producing countries.
In recent months, the worldwide price of oil has declined, with prices
having dropped as much as 40% to under $13 per barrel for spot deliveries and
prices for natural gas have weakened slightly on a year to year basis. These
declines have been attributed to, among other things, an excess supply of oil in
the world markets, reduced domestic demand associated with an unseasonably warm
winter and the potential for lower worldwide demand due to the impact of the
economic downturn in Southeast Asia. Lower oil prices have resulted in a
reduction in the rig count and related drilling activity in the United States
and Canada, reductions in the exploration and development budgets of producers
and a substantial decline in the development of heavy and marginal oil reserves
in the United States and Canada. As prices for oil have continued to decline,
the Company and others in the industry have begun to experience a softening in
demand for their products and services, in particular products associated with
exploration activity and oil production. This reduction in demand has
particularly affected the demand for many of the Company's artificial lift
products, in particular progressing cavity pumps and other rod lift products
used for the production of heavy oil and oil from marginal wells. Although the
Company's backlog for drill pipe remains strong and the softening of the market
has mainly impacted demand for products associated with the production of oil, a
prolonged period of low price oil can be expected to adversely affect the demand
throughout the industry, including those products manufactured by the Company.
In such a case, the Company's revenues and income could be expected to be
similarly affected.
Although the short-term outlook in the industry remains uncertain and is
expected to be characterized by a softening in demand for certain products,
absent a significant downturn in the U.S. and world economies, the Company
believes that market conditions in the industry should improve over the long
term as the demand and supply balance becomes more in balance. The timing of
such recovery, however, cannot be predicted with certainty.
Results of Operations
General
Net income for the first quarter 1998 was $31.3 million, or $0.65 per
diluted share, on revenues of $316.8 million, as compared to net income for the
first quarter 1997 of $14.3 million, or $0.31 per diluted share, on revenues of
$164.6 million. The increases in revenues and net income reflect continued
revenue and margin improvement in the Company's drilling products segment as
well as the beneficial effect of the Company's 1997 and 1998 acquisitions. The
net effect of these acquisitions on revenues and net income for the quarter
ended March 31, 1998, compared to the first quarter of 1997 was an increase in
revenues of $122.0 million and an increase in net income of $10.4 million.
Cost of goods sold as a percentage of revenues declined from 74% of total
revenues in the first quarter of 1997 to 68% in the first quarter of 1998
primarily due to stronger prices and sales of higher margin products. Selling,
general and administrative costs attributable to segments as a percentage of
total revenues increased from 11% in the first quarter of 1997 to 14% in the
first quarter 1998 due to the incurrence of costs associated with the
assimilation of acquired businesses and amortization of goodwill and other
intangibles. Goodwill associated with the Company's 1997 and first quarter 1998
acquisitions was approximately $399.4 million and the charge associated with the
amortization of this goodwill and other intangibles was $2.9 million in the
first quarter of 1998 as compared to $0.9 million in the first quarter of 1997.
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Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Drilling Products Segment
The Company's drilling products segment reported revenues and operating
income of $192.9 million and $46.3 million, respectively, for the first quarter
1998, up from $117.8 million and $21.5 million, respectively, for the first
quarter 1997. These improvements were primarily due to continued strong demand
and backlog for drill pipe and other drilling tools, increased sales of premium
tubular products and the effects of the Company's acquisition of TA Industries,
Inc. ("TA"), a premium tubular couplings and accessories manufacturer in April
1997, and the third quarter acquisition of XLS Holdings, Inc. ("XL"), a
manufacturer of subsea equipment. Premium tubular revenues increased to
approximately $80.1 million in the first quarter of 1998 up from approximately
$58.9 million for 1997. The net effect of the acquisitions of TA and XL on
revenues and net income in this segment for the quarter ended March 31, 1998,
compared to the first quarter of 1997 was an increase in revenues of $30.4
million and an increase in operating income of $4.7 million. The increase in
premium tubular and subsea equipment revenues also reflects continued strong
demand for these products in offshore production.
Cost of goods sold declined as a percentage of revenues from 76.0% in 1997
to 70.3% in 1998, due to increased pricing on the Company's products and reduced
costs resulting from the expansion of the Company's Mexico tool joint facility,
which provided savings of at least $1.2 million in the first quarter of 1998.
Selling, general and administrative expenses as a percentage of revenues
represented 5.8% for the first quarter 1998 and 1997.
Of the Company's 1998 first quarter sales of drill pipe and other tubular
products, 73%, 8% and 8% were attributable to sales originating in the United
States, Canada and Latin America, respectively, compared to 67%, 8% and 10%,
respectively, for the first quarter of 1997. United States sales include export
sales and sales to distributors and other United States companies for ultimate
use outside the United States.
Backlog for tubular products at March 31, 1998, was approximately $352.1
million compared to $360.0 million at December 31, 1997. The Company currently
expects that over $264.0 million of this backlog will be shipped by December 31,
1998, with the remainder to be shipped within the first six months of 1999.
There can be no assurance that this level of backlog will continue and any
material changes in demand for drilling products and rig utilization could
affect the demand for the Company's drill pipe.
Production Equipment Segment
The Company's production equipment segment reported revenues and operating
income of $123.9 million and $11.2 million, respectively, for the first quarter
1998, up from $46.8 million and $3.6 million, respectively, for the first
quarter 1997. These improvements were due to the Company's 1997 and 1998
acquisitions and growth in the Latin American markets. The 1997 and 1998
acquisitions generated revenues and operating income for this segment of $85.9
million and $11.9 million in the first quarter of 1998. The improvements
attributable to the businesses acquired in these acquisitions were partially
offset by substantial declines in demand for the Company's progressing cavity
pump line of artificial lift products due to lower oil prices and an associated
drop in heavy oil drilling activity in Canada and California and other marginal
oil production activity. Although the Company believes that demand for these
products should increase with any material increases in the price of oil from
their current low levels, there can be no assurance as to the timing or extent
of such improvements.
Cost of goods sold declined as a percentage of revenues from 69.9% in the
first quarter 1997 to 63.8% in the first quarter 1998, as a result of an
improvement in the segment's domestic cost structure and from the December 1997
acquisitions of Trico Industries, Inc. and the 1998 acquisitions of Taro and
Ampscot. Selling, general and administrative expenses for the first quarter 1998
as a percentage of revenues was 27.1% compared to 22.4% for the first quarter
1997. The increase in selling, general and administrative expenses for this
segment reflects higher costs associated with overlapping operations at various
acquired companies pending the consolidation of those operations and increased
amortization of goodwill and other intangibles relating to the Company's 1997
and first quarter 1998 acquisitions in this segment. The Company intends to
continue to focus on reducing selling, general and administrative expenses in
this segment through the integration of acquired operations.
Sales of production equipment originating in North America approximated 81%
of this segment's sales in this first quarter of 1998 compared to 79% in the
first quarter of 1997, while sales originating in Latin America decreased to 16%
of total sales during the first quarter of 1998 from 21% of total sales during
the first quarter of 1997. Canadian
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sales were $69.1 million for the first quarter of 1998 compared to $16.7 million
for the first quarter of 1997. The increase is sales was attributable to the
Company's 1997 and 1998 acquisitions in Canada in this segment.
Other
Corporate expenses as a percentage of revenues for the first quarter 1998
were 0.7% as compared to 1.0% for the first quarter 1997. The percentage
decrease from 1997 was primarily attributable to the growth in 1998 revenues.
Interest expense for the first quarter 1998 was $8.0 million compared to
$4.4 million for the first quarter 1997. The increase in interest expense in the
first quarter 1998, as compared to the first quarter 1997, reflects the issuance
by the Company of $402.5 million principal amount of its 5% Convertible
Subordinated Preferred Equivalent Debentures due 2027 (the "Debentures") issued
in November 1997, a portion of which was utilized to purchase substantially all
of the $120.0 million principal amount of the Company's then outstanding 10 1/4
% Senior Notes due 2004. The remaining proceeds from the issuance of the
Debentures were used to fund acquisitions and reduce bank debt.
The Company's effective tax rate on net income the first quarter 1998 was
35% as compared to 35.5% for the first quarter 1997.
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of $25.2
million compared to $31.9 million at December 31, 1997. At March 31, 1998, the
Company had outstanding $133.6 million in borrowings under its working capital
facilities compared to $24.2 million at December 31, 1997. In addition, the
Company had outstanding approximately $12.3 million and $14.9 million in letters
of credit at March 31, 1998 and December 31, 1997, respectively.
In November 1997, the Company completed a private placement of $402.5
million principal amount of the Debentures. The Debentures bear interest at an
annual rate of 5% and are convertible at a price of $80 per share of Common
Stock of the Company. The Debentures are redeemable by the Company at any time
on or after November 4, 2000, at redemption prices described in the indenture
relating to the Debentures, and are subordinated in right of payment of
principal and interest to the prior payment in full of certain existing and
future senior indebtedness of the Company. The Company also has the right to
defer payments of interest on the Debentures by extending the quarterly interest
payment period on the Debentures for up to 20 consecutive quarters at anytime
when the Company is not in default in the payment of interest.
The Company currently has a credit facility with a group of financial
institutions that provides for borrowings of up to an aggregate of $250.0
million. Borrowings under this facility bear interest at a variable rate based
on prime or LIBOR and are currently secured by pledges of various stock of the
Company's domestic and foreign subsidiaries. In addition, certain of the
Company's domestic subsidiaries are guarantors of the facility. The credit
facility contains customary affirmative and negative covenants, including debt
incurrence tests, interest coverage ratio, negative pledges, acquisitions over
certain levels and certain dispositions of assets. In addition, the facility
requires the Company to maintain a minimum tangible net worth of $469.6 million
as of March 31, 1998 (as defined in the credit agreement). The Company is
currently negotiating an amendment to this credit facility that would, upon the
closing of the Company's proposed merger with Weatherford, consolidate
Weatherford's current credit facility with the Company's facility.
The Company's current sources of capital are its current cash, cash
generated from operations and borrowings under its credit facility. The Company
believes that current reserves of cash and short-term investments, access to its
existing credit line and internally generated cash from operations are
sufficient to finance the projected cash requirements of its current and future
operations. The Company, however, is continually reviewing acquisitions in its
markets. Depending upon the size, nature and timing of an acquisition, the
Company could require additional capital in the form of either debt, equity or a
combination of both.
Substantially all of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers and does not
generally require collateral in support of its trade receivables. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations.
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Acquisitions and Capital Expenditures and Other
In the first quarter of 1998, the Company completed three acquisitions in
its production equipment segment consisting of (i) Houston Well Screen for cash
of approximately $27.6 million, (ii) Taro for 0.8 million shares of Common Stock
and (iii) Ampscot for cash of approximately $57.1 million. The Company also
acquired a business relating to its tubular products operations that expanded
the Company's manufacturing capacity for cash consideration of $9 million plus
liabilities of approximately $21 million.
Capital expenditures for property, plant and equipment by the Company
during the quarter ended March 31, 1998, totaled approximately $18.3 million and
was primarily related to ongoing routine capital expenditures for 1998. Ongoing
routine capital expenditures for 1998, excluding any capital expenditures
relating to the pending merger of Weatherford, are estimated to be approximately
$45 million. Capital expenditures are expected to be funded with available cash,
cash flow from operations and, if desirable, borrowings under its existing line
of credit and other facilities.
In 1997, the Company began modifying its computer system programming to
process transactions in the year 2000. Anticipated spending for this
modification will be expensed as incurred and is not expected to be material.
Christiana Merger
In December 1997, the Company entered into a merger agreement with
Christiana Companies, Inc. ("Christiana") and C2, Inc., Wisconsin corporations,
pursuant to which approximately 3.9 million shares of Common Stock will be
issued to the stockholders of Christiana in a merger of a subsidiary of the
Company with and into Christiana ("Christiana Merger"). Prior to the Christiana
Merger, Christiana is required to sell two-thirds of its interest in Total
Logistic Control ("Logistic"), a wholly owned subsidiary of Christiana, to C2,
Inc. for approximately $10.7 million. Following the Logistic sale, the remaining
assets of Christiana will consist of (i) approximately 3.9 million shares of
Common Stock, (ii) a one-third interest in Logistic and (iii) cash and other
assets with a book value of approximately $10.0 million and (iv) a contingent
cash payment of up to $10.0 million payable five years after the effective date
of the merger to the extent such funds are not required to satisfy contingent
claims against Christiana. It is anticipated that Christiana will have no
material debt as of the consummation of the Christiana Merger, but will have
various tax liabilities which will be paid with the remaining cash balance in
Christiana after the Christiana Merger. Because the number of shares of Common
Stock issuable in the proposed Christiana Merger approximates the number of
shares of Common Stock currently held by Christiana, the Christiana Merger is
expected to have no material effect on the outstanding number of shares of
Common Stock or equity of the Company.
The Christiana Merger is subject to various conditions, including approval
by the stockholders of the Company and Christiana and the receipt of required
regulatory approvals. Although there can be no assurance that the Christiana
Merger will close, the Company currently anticipates that the acquisition will
be consummated shortly after receipt of such regulatory approval and the
approval of the Christiana Merger by the shareholders of the Company and
Christiana. The Company currently expects that a meeting of its stockholders to
consider the Christiana Merger will be held in the third quarter of 1998.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), Reporting Comprehensive Income, in the first quarter of 1998.
SFAS No. 130 establishes standards for the reporting of comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements.
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related
Information, in the first quarter of 1998. SFAS No. 131 requires segment
information to be reported on a basis consistent with that used internally for
evaluating segment performance and deciding how to allocate resources to
segment. Quarterly disclosures are not required in the first year of adoption.
The adoption of SFAS No. 131 has not resulted in a change in the manner the
Company reports segment information and related disclosures.
In 1998 the FASB issued Statement of Accounting Standards No. 132 ("SFAS
No. 132"), Employers' Disclosures About Pensions and Other Postretirement
Benefits. SFAS No. 132 standardizes annual disclosure
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requirements for pensions and other postretirement benefits. SFAS No. 132 is
effective for years beginning after December 15, 1997. SFAS No. 132 has no
impact on the consolidated condensed financial statements of the Company.
Forward-Looking Statements
Certain statements made herein and in other public filings and releases by
the Company contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These forward-looking statements may include, but are not limited to, future
sales, earnings, margins, production levels and costs, expected savings from
acquisitions and the proposed merger with Weatherford, the effects of the
proposed merger with Weatherford on sales, business, expenses, cash flow and
products, demand for products, product deliveries, market trends in the oil and
gas industry and the oilfield service sector thereof, research and development,
environmental and other expenditures, currency fluctuations and various business
trends. Forward-looking statements may be made by management orally or in
writing including, but not limited to, this Management's Discussion and Analysis
of Financial Condition and Results of Operations section and other sections of
the Company's filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 and the Securities Act of 1933.
Actual results and trends in the future may differ materially depending on
a variety of factors including, but not limited to, changes in the price of oil
and gas, the impact of recent declines in the price of oil on the demand for the
Company's products, the impact and duration of the declines in drilling for
heavy oil in Canada and California and the impact of reduced activity with
respect to the production of marginal oil reserves, changes in the domestic and
international rig count, global trade policies, domestic and international
drilling activities, world-wide political stability and economic growth,
including currency fluctuations, government export and import policies,
technological advances involving the Company's products and services, the
Company's successful execution of internal operating plans and manufacturing
consolidations and restructurings, changes in the market for the Company's
drilling tools and other products, performance issues with key suppliers and
subcontractors, the ability of the Company to maintain price increases and
market shares, raw material costs changes, collective bargaining labor disputes,
regulatory uncertainties and legal proceedings. Future results will also be
dependent upon the ability of the Company to continue to identify and complete
successful acquisitions at acceptable prices, integrate those acquisitions with
the Company's other operations and penetrate existing and new markets. Many of
these factors are described in greater detail in the Company's Form 10-K, as
amended, for the year ended December 31, 1997, and Current Reports on Form 8-K
dated January 28, 1998, February 3, 1998, February 19, 1998, as amended, March
5, 1998, as amended, April 20, 1998 and April 22, 1998, as amended.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Dividend Restrictions
In February 1998, the Company entered into a new credit agreement which
provides for borrowings of up to an aggregate of $250.0 million, consisting of a
$200.0 million U.S. credit facility and a $50.0 million Canadian credit facility
("New Credit Facilities"), and terminated both of the Company's prior working
capital facilities. Under the Prior Credit Facilities, the Company and the
Company's principal operating subsidiaries were subject to certain prohibitions
and restrictions on the declaration, payment and amount of dividends,
distributions and other restricted payments that the Company and its principal
operating subsidiaries could make to stockholders. The Company's New Credit
Facilities do not contain such prohibitions and restrictions, however, it does
contain customary affirmative and negative covenants, including debt incurrence
tests, interest coverage ratio, negative pledges, acquisitions over certain
levels, certain dispositions of assets and minimum tangible net worth test.
Acquisition of Taro Industries
On January 15, 1998, the Company completed the acquisition of Taro
Industries Limited, an Alberta corporation ("Taro"), pursuant to a plan of
arrangement (the "Plan of Arrangement"), under which a Canadian subsidiary of
the Company was amalgamated with Taro. Under the Plan of Arrangement,
approximately 765,000 shares of the Company's common stock, $1.00 par value (the
"Taro Shares"), were issued or reserved for issuance by the Company to the
securityholders of Taro in exchange for their Taro common shares. The issuance
of the Taro Shares was exempt from registration under the Securities Act of 1933
(the "Act") in reliance upon Section 3(a)(10) of the Act as the Plan of
Arrangement was approved pursuant to Section 186 of the Business Corporations
Act, S.A. 1981, by the Court of Queen's Bench of Alberta, Judicial District of
Calgary, following a hearing upon the fairness of the terms and conditions of
the Plan of Arrangement at which all persons to whom the Taro Shares were
proposed to be issued had a right to appear. A copy of the Plan of Arrangement
is filed as Exhibit 2.1 hereto and is incorporated herein by reference.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Amended and Restated Arrangement Agreement by and between Taro
Industries Limited, and EVI, Inc. and 756745 Alberta Ltd. and
759572 Alberta Ltd. dated as of December 5, 1997 (incorporated
by reference to Exhibit No. 2.4 to Form 8-K, File 1-13086, filed
December 31, 1997).
2.2 Amendment No. 1 dated as of April 17, 1998, to the Agreement and Plan
of Merger dated as of March 4, 1998, by and between EVI, Inc. and
Weatherford Enterra, Inc. (incorporated by reference to Exhibit No.
2.2 to Form 8-K, File 1-13086, filed April 21, 1998).
2.3 Amendment No. 2 dated as of April 22, 1998, to the Agreement and Plan
of Merger dated as of March 4, 1998, as amended, by and between EVI,
Inc. and Weatherford Enterra, Inc. (incorporated by reference to
Exhibit No. 2.3 to Form 8-K, File 1-13086, filed April 23, 1998).
10.1 Employment Agreement dated March 16, 1998, by and between the Company
and Curtis W. Huff.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1) Current Report on Form 8-K/A dated January 14, 1998, amending Current
Report on Form 8-K dated May 1, 1997, relating to the audited
financial statements of GulfMark Retained Assets and certain pro forma
financial information of the Company.
2) Current Report on Form 8-K dated January 28, 1998, announcing the
acquisitions of SBS Drilling and Production Systems on October 31,
1997; San Eloy on November 21, 1997; Houston Well Screen on January
12, 1998; and Taro Industries Limited on January 15, 1998.
3) Current Report on Form 8-K dated February 3, 1998, announcing the
Company's earnings for the quarterly period ended December 31, 1997.
4) Current Report on Form 8-K/A dated February 13, 1998, amending the
Current Report on Form 8-K dated December 2, 1997, containing (i) the
audited consolidated financial statements of Trico Industries, Inc.
and the combined financial statements of BMW Monarch (Lloydminster)
Ltd. and BMW Pump Inc. and (ii) certain pro forma financial
information of the Company.
5) Current Report on Form 8-K dated February 19, 1998, announcing the
completion of the Company's acquisition of Ampscot Equipment Ltd. on
February 19, 1998.
6) Current Report on Form 8-K dated March 5, 1998, as amended by Current
Report on Form 8-K/A dated March 9, 1998, announcing the Company's
proposed merger with Weatherford Enterra, Inc. and the signing by the
Company of an Agreement and Plan of Merger with Weatherford Enterra,
Inc. on March 4, 1998.
7) Current Report on Form 8-K/A dated March 26, 1998, amending Current
Report on Form 8-K dated November 5, 1997, relating to the terms of
the issuance of the Company's 5% Convertible Subordinated Preferred
Equivalent Debentures.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVI, Inc.
By: /s/ James G. Kiley
----------------------------------------------
James G. Kiley
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Frances R. Powell
----------------------------------------------
Frances R. Powell
Vice President, Accounting and Controller
(Principal Accounting Officer)
Date: May 14, 1998
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EXHIBIT INDEX
2.1 Amended and Restated Arrangement Agreement by and between Taro
Industries Limited, and EVI, Inc. and 756745 Alberta Ltd. and 759572
Alberta Ltd. dated as of December 5, 1997 (incorporated by reference
to Exhibit No. 2.4 to Form 8-K, File 1-13086, filed December 31,
1997).
2.2 Amendment No. 1 dated as of April 17, 1998, to the Agreement and Plan
of Merger dated as of March 4, 1998, by and between EVI, Inc. and
Weatherford Enterra, Inc. (incorporated by reference to Exhibit No.
2.2 to Form 8-K, File 1-13086, filed April 21, 1998).
2.3 Amendment No. 2 dated as of April 22, 1998, to the Agreement and Plan
of Merger dated as of March 4, 1998, as amended, by and between EVI,
Inc. and Weatherford Enterra, Inc. (incorporated by reference to
Exhibit No. 2.3 to Form 8-K, File 1-13086, filed April 23, 1998).
10.1 Employment Agreement dated March 16, 1998, by and between the Company
and Curtis W. Huff.
27.1 Financial Data Schedule