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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): OCTOBER 22, 1999
WEATHERFORD INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-13086 04-2515019
(State or of Incorporation) (Commission File No.) (I.R.S. Employer Identification No.)
515 POST OAK BLVD., SUITE 600
HOUSTON, TEXAS 77027
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 693-4000
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EXHIBIT INDEX APPEARS ON PAGE 101
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ITEM 5. OTHER EVENTS.
THIRD QUARTER RESULTS
On October 25, 1999, we announced our results for the three and nine
months ended September 30, 1999. Income from continuing operations for the
three and nine months ended September 30, 1999, was $3.0 million and $8.7
million, compared to $22.2 million and $92.7 million for the three and nine
month periods ended September 30, 1998, excluding merger and other charges.
Revenues for the three and nine months ended September 30, 1999, were $323.6
million and $867.6 million, compared to $322.3 million and $1,061.9 million for
the three and nine months ended September 30, 1998.
We recorded a net loss of $11.1 million or $0.11 per share for the
quarter ended September 30, 1999, compared to net income of $42.8 million or
$0.44 per share for the quarter ended September 30, 1998. Our results for the
third quarter of 1999 include a $14.1 million loss for the discontinued
operations of our Grant Prideco drilling products division which we are
intending to spinoff to our stockholders. Results for the quarter ended
September 30, 1998, included $20.5 million net income from the operations of
Grant Prideco.
Results for 1999 reflected the downturn in the industry. Although
market conditions continued to remain depressed for most of the third quarter
of 1999, we did realize the first improvement on a quarter on quarter basis in
profitability in over a year. The improvement was primarily attributable to
our artificial lift systems segment, which is the most sensitive to oil prices.
Our compression services businesses also improved due to increased
international revenues. For a discussion of current market trends and their
impact on our businesses, please see "Restated Financial Statements --
Section A, Part 1: General and Market Trends" below.
As noted above, the results of our Grant Prideco division are
reflected in our results as a discontinued operation in light of our decision
to spinoff that division to our stockholders. The spinoff is subject to our
receipt of a favorable private letter ruling from the Internal Revenue Service
on certain aspects of the spinoff and the registration of the Grant Prideco
common stock under the Securities Exchange Act of 1934. A registration
statement for the registration of Grant Prideco's common stock under the
Exchange Act was filed on October 22, 1999. A request for the private letter
ruling was filed with the Internal Revenue Service in July 1999 and that
request is in the process of being reviewed by the Internal Revenue Service.
We currently expect that the spinoff of our Grant Prideco drilling products
division will occur during the first quarter of 2000. Restated financial
information reflecting the historical operations of Grant Prideco as
discontinued is set forth below in this report.
A press release discussing our results for the third quarter is being
filed with this report as Exhibit 99.1 and is hereby incorporated herein by
reference.
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GRANT PRIDECO SPINOFF; DISCONTINUED OPERATIONS
Our Board of Directors recently approved the spinoff by us of our
Grant Prideco drilling products division. Following that approval, a
Registration Statement on Form 10 was filed with the Securities and Exchange
Commission on October 22, 1999, by our Grant Prideco, Inc. subsidiary.
The Registration Statement includes a preliminary information statement, the
final version of which will be distributed to our stockholders. The information
statement includes information regarding the proposed spinoff, Grant Prideco and
matters regarding the relationship between Grant Prideco and us following the
spinoff.
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RESTATED FINANCIAL STATEMENTS
As a result of the recent approval by our Board of Directors of the
spinoff of our Grant Prideco drilling products division and the related filing
by Grant Prideco of its registration statement on Form 10 with the Securities
and Exchange Commission, we have reclassified the historical operations of this
division as a discontinued operation.
We have restated our historical financial statements for (1) the years
1996, 1997 and 1998, (2) the three months ended March 31, 1998, and 1999, and
(3) the three and six month periods ended June 30, 1998, and 1999, in light of
the reclassification of Grant Prideco as a discontinued operation. We have
also revised our historical Management's Discussion and Analysis of Financial
Condition and Results of Operations for each of those periods. In addition, we
have prepared restated pro forma financial information for our recent
acquisition of Dailey International Inc. to give effect to the reclassification
of our Grant Prideco drilling products division as a discontinued operation.
The restated financial information described above is presented in
this filing as follows:
Section A Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part 1: General and Market Trends
Part 2: Results of Operations for the years 1998,
1997 and 1996
Part 3: Results of Operations for the three months
ended March 31, 1999, and 1998
Part 4: Results of Operations for the three and six
months ended June 30, 1999, and 1998
Part 5: Liquidity and Capital Resources
Part 6: Exposures, New Accounting Pronouncements and
Year 2000 Matters
Part 7: Forward-Looking Statements
Section B Selected Financial Data for the years ended December
31, 1994, through 1998
Section C Quantitative and Qualitative Market Risk Disclosure
Section D Financial Statements
Part 1: Restated Audited Historical Financial
Statements and Financial Statement Schedules
for the years ended December 31, 1998, 1997
and 1996
Part 2: Restated Unaudited Historical Financial
Statements for the three months ended March
31, 1999, and 1998
Part 3: Restated Unaudited Historical Financial
Statements for the three and six months ended
June 30, 1999, and 1998
Section E Restated Unaudited Pro Forma Financial Statements for
the Dailey International Inc. Acquisition
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SECTION A MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents Weatherford's Restated Management's Discussion
and Analysis of Financial Condition and Results of Operations previously
included in Weatherford's Annual Report on Form 10-K for the year ended December
31, 1998 and Weatherford's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999.
PART 1: GENERAL AND MARKET TRENDS
GENERAL
Our business is conducted through three business segments: (1)
Completion and Oilfield Services, (2) Artificial Lift Systems and (3)
Compression Services. We have also historically operated a Drilling Products
segment that manufactured and sold drill pipe and other drill stem products and
premium tubulars and connections. In October 1999, our Board of Directors
approved the spinoff by us of our Drilling Products segment. We have
reclassified the historical operations of this segment as a discontinued
operation in light of the anticipated spinoff of the segment.
The spinoff of our Drilling Products segment is proposed to be effected
through a distribution by us to our stockholders of one share of stock of our
Grant Prideco, Inc. subsidiary for each two shares of our common stock held by
our stockholders. The spinoff is subject to our receipt of a favorable private
letter ruling from the Internal Revenue Service on certain aspects of the
spinoff. A request for the private letter ruling was filed with the Internal
Revenue Service in July 1999 and that request is in the process of being
reviewed by the Internal Revenue Service. We currently expect that the spinoff
of our Grant Prideco drilling products division will occur during the first
quarter of 2000.
The following is a discussion of our results of operations for the last three
years. This discussion should be read in conjunction with our restated financial
statements that are included with this report.
Our discussion of our results and financial condition includes various
forward-looking statements about our markets, the demand for our products and
services and our future results. These statements are based on certain
assumptions that we consider reasonable. For information about these
assumptions, you should refer to our Part 7 below entitled "Forward-Looking
Statements."
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MARKET TRENDS AND OUTLOOK
Our businesses serve the oil and gas industry. Certain of our products and
services, such as well installation services and our well completion services,
are dependent on the North American and worldwide level of exploration and
development activity. Other products and services, such as our artificial lift
systems and compression services, are dependent on oil and gas production
activity. We currently estimate that between 35% and 45% of our continuing
operations are reliant on drilling activity, with the remainder related to
production activity.
The oil and gas industry has been subject to extreme volatility in recent
years due to significant changes in the demand, supply and pricing of oil and
natural gas. In 1997 through early 1998, we experienced a strong increase in the
demand for our products and services due to a worldwide increase in the demand
for oil and shortages of equipment and people to service this demand. This
increase in demand was most strongly felt in our Completion and Oilfield
Services segment and our Artificial Lift Systems segment. Our Completion and
Oilfield Services segment experienced record sales and profits both
internationally and in the North American markets. Our Artificial Lift Systems
segment benefitted from high levels of Canadian exploration and production, in
particular in the heavy oil regions of Canada. During this period, we and our
industry operated at levels that had not been experienced since the early 1980's
and many of our businesses operated at near full capacity.
Beginning in late 1997, the price of oil began to fall. This decline in the
price was attributable to a number of factors. The most significant of the
factors were:
o A drop in demand due to the downturn in the Asian and other developing
economies;
o An excess supply of oil due to increased production by most of the oil
exporting countries;
o Concerns over future production from Iraq; and
o The impact of prior exploration efforts and large reserve discoveries.
Initially, the effects of the decline were felt only in isolated markets,
such as the Canadian and California heavy oil markets, where drilling and
production activity is more sensitive to the price of oil. Drilling and
completion activity in other North American regions then began to decline due to
the greater sensitivity of North American production to prices. By late 1998,
demand had fallen substantially as our customers' exploration, development and
production activities internationally also dropped in reaction to sharply lower
oil prices.
During 1998, the price of oil ranged from a high of $17.62 per barrel
of West Texas Intermediate crude to a low of $10.44 per barrel of West Texas
Intermediate crude. The North American rig count also fell from a high of
1,508 rigs to a low in 1998 of 854. The international rig count, which
typically trails the domestic rig count by a number of months, fell in 1998
from a high of 819 to a low of 671. In 1999, the price of oil hit a low of
$11.07 per barrel and the North American and international rig counts reached
historical lows of 534 and 556, respectively.
The downturn in the industry that began in 1998 led our customers to
substantially curtail their exploration and drilling activity during the second
half of 1998 and most of 1999. This reduction in activity resulted in
substantially lower purchases and rentals of equipment manufactured and sold by
us for the exploration and completion of wells. Our field services, such as
fishing and rental, and our sales of artificial lift and other production
equipment and services were also materially impacted by the fall in demand. We
were also impacted by an unprecedented wave of mergers and consolidations among
our customers due to the market conditions. Our customers also canceled,
delayed and rebid many projects to reduce their costs in light of market
conditions. In certain markets in the United States and Canada we believe
activity fell by more than 70%.
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Although market conditions have adversely affected our businesses and
their results in 1999, we made the strategic decision to add to our core
competencies during this downturn and take advantage of desirable acquisitions
in our markets. This decision was based on our belief that the downturn would
create unique opportunities for us to acquire on desirable terms businesses and
capabilities that could serve as the platform for growth in the future. We
also believe that because of the consolidating nature of our industry, many of
these opportunities would not be available again. The principal acquisitions
completed by us in late 1998 and 1999 include:
(1) Our acquisitions of Cardium Oil Tools and Petroline
WellSystems in the second and third quarters of
1999. These two acquisitions significantly increased
the capabilities of our completion division in the
areas of flow control, liner hangers and packers and
added state of the art sand control technology to our
completion product offering. We also acquired a 50%
interest in SubTech, a company that provides products
for intelligent completions and production
automation.
(2) Our acquisitions of Dailey International Inc. and
Williams Tool Company in the third quarter of 1999
and ECD in the second quarter of 1999. These three
acquisitions have provided us with a complete
integrated package for the provision of underbalanced
drilling services. We now have the largest
compression fleet in the industry used for
underbalanced and air drilling, our own proprietary
line of pressure control equipment, state of the art
foam and chemical technology used for underbalanced
drilling and the largest fleet of nitrogen membrane
units. The Dailey acquisition also provided us with
our own manufactured line of drilling and fishing
jars for use in our rental and fishing operations.
(3) Our joint venture with GE Capital which combined our
Weatherford Compression business with GE's Global
Compression business to create the second largest
natural gas compression fleet in the industry.
This joint venture has allowed us to expand our
compression operations into the higher margin higher
horsepower business as well as the growing
international markets.
(4) Our acquisition of various licenses, technologies and
businesses in the multi-lateral and re-entry market.
These transactions have provided us with key
technologies and a platform for growth in the growing
re-entry and multi-lateral markets.
While we believe the steps we have taken over the last year to position us
for growth in the future should benefit our results as our industry improves,
the recent downturn in our industry has materially and adversely impacted our
results over the last year and a half through substantially lower sales and
margins. Our results have also been affected by higher average fixed and
variable costs associated with the maintenance of our extensive worldwide
manufacturing, sales and service infrastructure during a period of low
activity.
Although we have sought over the past year to reduce our costs through
reductions in headcount and locations in light of this most recent industry
downturn, we believe that in order for us to effectively compete in our
industry against much larger competitors we must continue to maintain our
market shares and a strong presence in many of our markets, in particular the
higher margin, long-term growth international markets, notwithstanding the
recent downturn. In addition, we have incurred higher costs associated with
our integration and assimilation of acquisitions and new businesses and
products into our organization during the downturn. All of these
circumstances, combined with record low levels of activity, have materially
reduced our margins and operating profits since mid-1998.
Recently, the price of oil has increased due to members of the Organization
of Petroleum Exporting Countries reducing production in compliance with
production quotas. Although oil prices have been higher for a number of months,
the increased prices have not yet translated to materially higher overall
activity in our business, in particular in the higher margin international and
offshore markets and the market for higher costs deep and difficult wells.
However, activity in the United States and Canada has gradually improved during
the third quarter of 1999 and is expected to continue to improve during the
fourth quarter of 1999. We expect the improvement will be strongest in the
United States and Canada. Nevertheless, we do not expect to see any major
improvements in activity until 2000, in particular in the markets outside North
America.
Looking forward to 2000, we expect that demand for our products and services
will improve slowly during the year, absent another material decline in oil
prices, with strongest improvement expected in the second half of 2000. The
timing of improvements in our operations will be dependent upon the segment of
the industry involved. Our artificial lift group will be the first to benefit
from the improvement as production projects are reinstated in light of the
higher prices of oil, in particular heavy oil in Canada. Our completion and
oilfield services group is also expected to begin to benefit from the improved
activity, in particular in North America. This pickup is expected to be gradual
and we expect that results in this group will continue to be affected by
pricing pressures and low international activity through at least the remainder
of the year. Our compression business, which is less effected by day-to-day
market factors, is not expected to materially improve in the fourth quarter and,
in fact, our domestic compression business is seeing pricing pressure due to
excess inventory in the market.
Looking forward into the fourth quarter of 1999 and next year, the level of
market improvements for our businesses will be heavily dependent on whether oil
and natural gas prices can remain at or about their present levels and the
impact recent market improvements may have on customer spending. Although we
believe that the activity levels in our industry are at or near their bottom,
the timing and extent of a recovery is difficult to predict and will be
dependent on many external factors such as compliance with OPEC quotas, world
economic conditions and weather conditions. The extreme volatility of our
markets, however, makes predictions regarding future results difficult to make.
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The following chart sets forth certain historical statistics that are
reflective of the current market conditions in which we operate:
HENRY HUB NORTH AMERICAN INTERNATIONAL
WTI OIL (1) GAS (2) RIG COUNT (3) RIG COUNT (3)
----------- --------- -------------- -------------
September 30, 1999......... $24.51 $2.560 966 557
June 30, 1999.............. $17.89 $2.394 724 597
December 31, 1998.......... $11.28 $1.945 895 671
December 31, 1997.......... $18.32 $2.264 1,499 819
December 31, 1996.......... $25.39 $2.757 1,195 810
(1) Price per Barrel as of September 30, 1999, June 30, 1999 and December 31,
1998, 1997 and 1996 - Source: Applied Reasoning, Inc.
(2) Price per MM/BTU as of September 30, 1999, June 30, 1999 and December 31,
1998, 1997 and 1996 - Source: Oil World
(3) Average rig count for months ended September 30, 1999, June 30, 1999 and
December 31, 1998, 1997 and 1996 - Source: Baker Hughes Rig Count
PART 2 RESULTS OF OPERATIONS FOR THE YEARS 1998, 1997 AND 1996
The business environment in which we operated during 1998, 1997 and 1996
experienced extreme changes. Starting in 1996, we began to experience the
first significant improvements in our markets in a number of years. That
improvement continued through 1997 into the first part of 1998, with a material
slow down beginning near the middle of 1998. By the end of 1998, our industry
was in the midst of one of the worst downturns in its history.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following charts contain selected restated financial data comparing our
results for 1998 and 1997:
COMPARATIVE FINANCIAL DATA YEAR ENDED
------------------------------
1998 1997
------------ ------------
(in thousands)
Revenues.......................................... $ 1,363,849 $1,357,374
Gross Profit...................................... 417,098 (a) 419,781
Gross Profit %.................................... 30.6% 30.9%
Selling, General and Administrative
Attributable to Segments........................ $ 219,939 $ 169,385
Corporate General and Administrative.............. 26,020 36,896
Operating Income.................................. 36,171 (a) 216,082
Interest Income................................... 3,093 8,329
Interest Expense.................................. 42,489 30,638
Net Income (Loss) from Continuing Operations...... (883)(a) 129,745
EBITDA (b)........................................ 175,729 (a) 335,403
(a) Includes $160.0 million, $104.0 million net of tax, of merger and
other charges relating to the merger between EVI, Inc. and Weatherford Enterra
Inc., and a reorganization and rationalization of our business in light of
industry conditions. Of these charges, $22.4 million related to the write-off of
inventory and have been classified as costs of products.
(b) EBITDA is calculated by taking operating income and adding back
depreciation and amortization. We have included an EBITDA calculation here
because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be viewed as a
substitute to calculations under GAAP, in particular cash flows from
operations, operating income and net income. In additions, EBITDA calculations
by one company may not be comparable to another company.
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SALES BY GEOGRAPHIC REGION
YEAR ENDED
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1998 1997
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REGION: (a)
U.S. ............... 46% 53%
Canada ............. 17% 16%
Europe ............. 12% 11%
Latin America ...... 9% 7%
Africa ............. 7% 5%
Middle East ........ 4% 3%
Other .............. 5% 5%
------ ------
Total .......... 100% 100%
====== ======
(a) Sales are based on the region of origination and do not reflect
sales by ultimate destination.
Our results for 1998 reflected the volatile industry in which we competed
and the trends and factors affecting our businesses varied depending on the
quarter. Our results from continuing operations for 1998 and 1997 were also
affected by the following specific items:
o Results for 1998 include $160.0 million in pre-tax charges for the
merger between EVI and Weatherford Enterra and charges associated
with the downturn in our industry.
o Revenues for the second six months of 1998 declined 13.0% compared to
the same period in 1997 and 15.6% compared to the first half of 1998.
o The decrease in the 1998 operating income to $196.2 million, before
charges of $160.0 million, as compared to 1997 operating income of
$216.1 million, was primarily due to the depressed market conditions
in the second half of 1998.
o Businesses acquired in 1997 and 1998 contributed $264.6 million in
revenues and $9.0 million in operating income in 1998. Revenues and
operating income in 1997 from the businesses acquired in 1997 were
$69.7 million and $7.3 million, respectively.
o Businesses sold in 1997 contributed $76.9 million in revenues in 1997.
Net income for the disposed businesses was $8.3 million in 1997.
o Our interest charges for 1998 reflected higher levels of debt following
our issuance in November 1997 of $402.5 million principal amount of 5%
Convertible Subordinated Preferred Equivalent Debentures due 2027 and
borrowings used to fund acquisitions.
o Our corporate expenses as a percentage of revenues for 1998 were 1.9%
as compared to 2.7% for 1997. The percentage decrease from 1997 was
primarily attributable to the consolidation savings due to our merger.
o Our effective tax rate on income from continuing operations for 1998
was 85.7% as compared to 34.5% for 1997. The 1998 rate is due in part
to the mix of foreign and U.S. tax attributes.
1998 SPECIAL CHARGES
In 1998, we incurred $160.0 million in merger and other charges relating
to the merger between EVI and Weatherford Enterra and a reorganization and
rationalization of our businesses in light of industry conditions. Of these
charges, $113.0 million was incurred in the second quarter at the time of our
merger and with the initial downturn in the industry. A $47.0 million charge
was incurred in the fourth quarter in response to the previously unanticipated
extent of the decline in our industry which resulted in a need for us to make
additional reductions in our operations and align the cost structure of our
business with current demand. The net after-tax effect of these charges was
$104.0 million (or $1.07 per diluted share). Approximately $136.5 million of
these charges had been realized as of December 31, 1998, with the remainder of
the charges fully expended by the end of the second quarter of 1999 in
connection with planned activities. During 1999, no adjustments or reversals to
the remaining accrued special charges were necessary.
The following chart summarizes the special charges made by us in 1998:
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COMPLETION BALANCE
AND AS OF
OILFIELD ARTIFICIAL COMPRESSION DECEMBER 31,
SERVICES LIFT SYSTEMS SERVICES CORPORATE TOTAL UTILIZED 1998
---------- ------------ ----------- --------- -------- -------- -----------
(in thousands)
Merger Transaction Costs (1) ....... $ -- $ -- $ -- $ 62,462 $ 62,462 $ 62,462 $ --
Severance and Related Costs (2) .... 1,961 5,050 -- 600 7,611 -- 7,611
Facility Closures (3) .............. 8,969 13,817 -- -- 22,786 9,957 12,829
Corporate Related Expenses (4) ..... -- -- -- 8,297 8,297 5,177 3,120
Inventory Write-Off (5) ............ 4,830 17,573 -- -- 22,403 22,403 --
Write-Down of Assets (6) ........... 29,195 4,360 1,500 1,436 36,491 36,491 --
-------- -------- -------- -------- -------- -------- --------
Total ........................... $ 44,955 $ 40,800 $ 1,500 $ 72,795 $160,050 $136,490 $ 23,560
======== ======== ======== ======== ======== ======== ========
(1) The merger related costs were incurred in the second quarter and included
$32.6 million in severance and termination costs related to approximately
300 employees and former officers and directors, and other employee
benefits related to stock grants, in accordance with Weatherford Enterra's
employment agreements and option plans, and $29.9 million in professional
and financial advisory fees, filing and registration fees, and printing
and mailing costs.
(2) The severance and related costs included in the fourth quarter charges were
$7.6 million for approximately 940 employees specifically identified, with
terminations completed in the first half of 1999, in accordance with our
announced plan to terminate employees.
(3) The facility and plant closures costs were $10.0 million in the second
quarter, all of which have been incurred by year end. These costs related
primarily to the elimination of duplicated manufacturing, distribution and
service locations following the merger in May. The facility and plant
closures of $12.8 million were accrued in the fourth quarter for the
consolidation and closure of approximately 100 service, manufacturing and
administrative facilities in response to declining market conditions in the
fourth quarter.
(4) The corporate related expenses of $5.2 million recorded in the second
quarter and $3.1 million recorded in the fourth quarter were primarily for
the relocation of corporate offices, related lease obligations and the
consolidation of technology centers, due to the merger and to align our
corporate cost structure in light of current conditions.
(5) The write-off of inventory was $9.9 million in the second quarter and $12.5
million in the fourth quarter, which were reported as costs of products.
These charges relate to the write-off of inventory as a result of the
combination of EVI's and Weatherford Enterra's operations, the
rationalization of their product lines, the elimination of certain
products, services and locations due to the merger and as a result of the
decline in market conditions.
(6) The write-down of assets was $24.7 million in the second quarter and $11.8
million in the fourth quarter. These charges primarily relate to the
write-down of equipment and other assets as a result of the combination of
EVI's and Weatherford Enterra's operations, the rationalization of their
product lines, the elimination of certain products, services and locations
due to the merger, the industry downturn, and the specific identification
of assets which are held for sale as a result of the decline in market
conditions.
SEGMENT RESULTS
COMPLETION AND OILFIELD SERVICES
Our Completion and Oilfield Services Division began the first half of
1998 with strong revenue and income growth. By the second half of the year, this
division began to experience reductions in revenue, operating income and margins
as the rig count declined and demand for its products and services dropped. This
division's North American operations have been the most adversely affected by
the downturn. Although we are continuing to reduce our costs in this division
through reductions in personnel, the declines in revenues have occurred faster
than cost reductions. The revenue reduction has also resulted in manufacturing
and operational inefficiencies in this division due to lower operating levels.
While we believe this division is well positioned for growth as the industry
recovers, results for this division for 1999 will continue to be impacted by the
low activity levels and pricing pressures through 1999. Results in this division
are expected to improve during 2000, with the strongest improvement occurring in
the second half of 2000.
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The following chart sets forth additional data regarding the results of
our Completion and Oilfield Services Division for 1998 and 1997:
YEAR ENDED
--------------------------
1998 1997
--------- ---------
(in thousands)
Revenues..................................... $ 857,172 $ 929,001
Gross Profit................................. 275,470 (a) 314,870
Gross Profit %............................... 32.1% 33.9%
Selling, General and Administrative.......... $ 100,907 $ 102,040
Operating Income............................. 137,117 (a) 215,412
EBITDA....................................... 232,612 (a) 301,550
(a) Includes merger and other charges of $45.0 million, which consists of $9.0
million for facility closures, $29.2 million for the write-down of equipment,
$2.0 million for severance and $4.8 million for the write-off of inventory. The
write-off of inventory has been classified as cost of products.
Material items affecting the results of our Completion and Oilfield
Services Division for 1998 compared to 1997 were:
o North American revenues for 1998 declined by 22.4%, as compared to
1997, due to an average rig count reduction of 17.4%.
o International revenues increased by 12.2% in 1998 to $441.7
million. The most significant revenue increases occurred in the
African and Middle Eastern markets.
o Businesses sold by us in 1997 contributed $76.9 million in revenues
in 1997.
o Gross profit, before charges of $4.8 million, declined in 1998 by
11.0% as revenue in the second half of 1998 dropped by 10.8% as
compared to the first half of 1998.
o Selling, general and administrative expenses increased as a
percentage of revenues from 11.0% in 1997 to 11.8% in 1998. The
increase primarily reflects a reduced revenue base.
o Operating income, before charges of $45.0 million, declined in 1998
to $182.1 million from $215.4 million in 1997 primarily due to
increased costs and reduced revenues associated with industry
conditions.
ARTIFICIAL LIFT SYSTEMS
Our Artificial Lift Systems Division was the first segment of our business
to be affected by the market downturn. Beginning in late 1997 as oil prices
began to fall, demand for this division's products fell as its customers reduced
and deferred purchases of products used to produce oil, in particular heavy oil.
The decline was most pronounced in Canada, where we had just purchased various
companies that served this market. This division is the first to benefit from
higher oil prices. The division is expected to return to greater profitability
in 2000, absent another material decline in oil prices.
The following chart sets forth additional data regarding the results of
our Artificial Lift Systems Division for 1998 and 1997:
YEAR ENDED
---------------------------
1998 1997
---------- ----------
(in thousands)
Revenues.................................... $ 329,196 $ 249,476
Gross Profit................................ 101,972 (a) 69,806
Gross Profit %.............................. 31.0% 28.0%
Selling, General and Administrative......... $ 97,968 $ 47,014
Operating Income............................ (19,223)(a) 22,792
EBITDA...................................... (40)(a) 31,736
PAGE 11
12
(a) Includes merger and other charges of $40.8 million, primarily including
$13.8 million for facility closures, $17.6 million for the write-off of
inventory, $5.0 million for severance and $4.4 million related to the
write-down of equipment. The write-off of inventory has been classified as cost
of products.
Material items affecting the results of our Artificial Lift Systems
Division for 1998 compared to 1997 were:
o The second half of 1998 experienced a decline in revenues of 33.4%
compared to the first half of 1998.
o Revenues in 1998 related to 1997 acquisitions were $189.1 million.
o Gross profit, before charges of $17.6 million, increased to $119.5
million in 1998 from $69.8 million in 1997 due to improved margins
from products sold in the first half of 1998.
o Selling, general and administrative expenses as a percentage of
revenues increased significantly from 18.8% in 1997 to 29.8% in
1998 due to higher amortization of goodwill and other intangibles
relating to the 1997 and 1998 acquisitions for this segment, higher
selling costs associated with the December 1997 acquisitions of
distribution entities and system costs primarily related to Year
2000 compliance costs.
o Operating income, before charges of $40.8 million, was down from
$22.8 million in 1997 to $21.6 million in 1998 due to increased
selling, general and administrative expenses and reduced revenues
associated with industry conditions.
COMPRESSION SERVICES
Our Compression Services Division was the least affected by the
declines in market conditions in 1998 due to the fact that its business is based
on levels of natural gas development and production, which has been more stable
than oil production. Revenues for 1998 were essentially flat compared to 1997 as
we spent a large portion of the year working to position this division for
growth. Gross margins and operating income for this division increased in 1998
as we focused on improving manufacturing and operational efficiencies of this
division's operations.
The following chart sets forth additional data regarding the results
of our Compression Services Division for 1998 and 1997:
YEAR ENDED
----------------------------
1998 1997
---------- ----------
(in thousands)
Revenues................................. $ 177,481 $ 178,897
Gross Profit............................. 39,656 35,105
Gross Profit %........................... 22.3% 19.6%
Selling, General and Administrative...... $ 21,064 $ 20,331
Operating Income......................... 17,092 (a) 14,774
EBITDA................................... 40,171 (a) 36,440
(a) Includes merger and other charges of $1.5 million which relates primarily
to specific identification of excess equipment that is held for sale due to the
weakening market conditions.
Material items affecting the results of our Compression Services Division
for 1998 compared to 1997 were:
o Revenues in 1998 were down slightly from 1997. In the second half
of 1998 revenues were down approximately 3.2% from the first half
of 1998.
o Gross profit as a percentage of revenues increased from 19.6% in
1997 to 22.3% in 1998. This increase reflected an improvement in
the design of the compressor packages sold and operational
efficiencies.
PAGE 12
13
o The increase in selling, general and administrative expenses for
1998 compared to 1997 primarily reflects costs associated with the
expansion into international markets.
o Operating income before charges was $18.6 million in 1998 which
benefited from improved margins.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following charts contain selected restated financial data comparing our
results for 1997 and 1996:
COMPARATIVE FINANCIAL DATA YEAR ENDED
--------------------------
1997 1996
---------- ----------
(in thousands)
Revenues .................................. $1,357,374 $1,129,958
Gross Profit .............................. 419,781 305,306
Gross Profit % ............................ 30.9% 27.0%
Selling, General and Administrative
Attributable to Segments ................ $ 169,385 $ 141,552
Corporate General and Administrative ...... 36,896 38,424
Operating Income .......................... 216,082 127,408
Interest Income ........................... 8,329 4,145
Interest Expense .......................... 30,638 31,997
Net Income from Continuing Operations ..... 129,745 71,225
EBITDA (a) ................................ 335,403 238,192
(a) EBITDA is calculated by taking operating income and adding back
depreciation and amortization. We have included an EBITDA calculation here
because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be viewed as a
substitute to calculations under GAAP, in particular cash flow from operations,
operating income and net income. In addition, EBITDA calculations by one
company may not be comparable to another company.
SALES BY GEOGRAPHIC REGION
YEAR ENDED
------------------
1997 1996
------ ------
REGION: (a)
U.S. ............... 53% 57%
Canada ............. 16% 12%
Europe ............. 11% 10%
Latin America ...... 7% 6%
Africa ............. 5% 7%
Middle East ........ 3% 2%
Other .............. 5% 6%
------ ------
Total ............ 100% 100%
====== ======
(a) Sales are based on the region of origination and do not reflect sales by
ultimate destination.
Our results for 1997 reflected a major improvement over 1996 as we saw
improvements in both the domestic and international rig counts and drilling
activity. These improvements resulted in most of our businesses operating at
near record levels and increased prices as demand for products and services
exceeded supply. The improvements were generally seen in all of our
geographic markets, with North America realizing the greatest increases. Our
businesses also benefited from prior consolidation efforts and market
expansions.
In addition to the general effect of substantially better market
conditions in 1997 compared to 1996, our results for 1997 and 1996 were
affected by the specific following items:
PAGE 13
14
o Revenue increases in 1997 reflected the impact of the various
acquisitions made during 1997, and higher average sales prices in
our markets for 1997.
o Acquisitions in 1997 benefited 1997 revenues by $69.7 million and
income from continuing operations by $4.4 million. Acquisitions in
1996 benefited 1997 revenues by $44.9 million and income from
continuing operations by $5.1 million.
o Businesses sold by us in 1997 contributed $76.9 million in revenues
in 1997 and $134.3 million in 1996.
o Gross profit as a percentage of revenues increased from 27.0% in
1996 to 30.9% in 1997 due to stronger prices and sales of higher
margin products and services.
o Selling, general and administrative costs attributable to segments
as a percentage of total revenues were flat between 1997 and 1996,
despite increased amortization of intangibles and costs associated
with the assimilation of acquired businesses.
o Our corporate expenses as a percentage of revenues for 1997 were
2.7% as compared to 3.4% for 1996. The percentage decrease from
1996 was primarily attributable to the growth in 1997 revenues.
o Our interest charges in 1997 reflected increased indebtedness
during 1997 and our $402.5 million principal amount of the
Debentures issued in November 1997.
o Net income for the disposed businesses was $8.3 million in 1997 and
$9.6 million in 1996.
o Our effective tax rate on income from continuing operations for
1997 was 34.5% as compared to 27.9% for 1996. The 1996 effective
rate was favorably impacted by a $4.0 million tax benefit resulting
from a $6.4 million settlement in October 1996 with the United
States Internal Revenue Service in connection with the dissolution
in October 1990 of an oil and gas joint venture.
1996 SPECIAL CHARGES
In the fourth quarter of 1996, we adopted a plan to combine our two
packer facilities through the closure of one facility in Arlington, Texas. In
connection with this decision, we incurred a charge of $1.5 million. We
incurred $1.0 million in 1996 for costs associated with these actions during
1996. We also accrued $0.5 million as part of the charge for estimated exit
costs that were incurred in 1997 relating to the closure of our Arlington
facility. These costs included $0.2 million for severance and termination
costs and $0.3 million for the termination of the Arlington lease.
Approximately 200 of our employees were affected by the closure. We had
substantially completed the closure of the Arlington facility and incurred
substantially all charges related to the closing of the facility by the end of
the second quarter of 1997.
SEGMENT RESULTS
COMPLETION AND OILFIELD SERVICES
The following chart sets forth certain data regarding the results of
our Completion and Oilfield Services Division for 1997 and 1996:
YEAR ENDED
----------------------
1997 1996
-------- --------
(in thousands)
Revenues ............................... $929,001 $824,639
Gross Profit ........................... 314,870 233,507
Gross Profit % ......................... 33.9% 28.3%
Selling, General and Administrative .... $102,040 $ 89,253
Operating Income ....................... 215,412 146,332
EBITDA ................................. 301,550 226,914
Material items affecting the results of our Completion and Oilfield
Services Division for 1997 compared to 1996 were:
o The increase in revenues primarily reflects increased volume of
activity and improved pricing resulting from a 15% increase in
worldwide drilling activity.
PAGE 14
15
o The increased use of certain drilling techniques, such as re-entry,
multi-lateral, horizontal and directional drilling, were also
important contributors to revenue growth in 1997, particularly in
North America.
o U.S. oilfield services revenues increased 33% to $317.7 million,
while the U.S. average rig count increased 21%. Oilfield services
revenues in Canada increased 31% while average Canadian rig count
increased 39%.
o International oilfield services revenues (excluding Canada)
increased 18% compared to an average rig count increase of 2%.
International revenue increases were primarily attributable to
increased volume of rental and service activity, some pricing
improvement and the introduction of downhole services into new
markets.
o Businesses sold by us in 1997 contributed $76.9 million in revenues
in 1997 and $134.3 million in 1996.
o Cementation product sales increased 32% over 1996.
o Liner hanger sales and service revenues, which included the results
of Nodeco AS and Aarbakke AS from the date they were acquired in
May 1996, increased 66% in 1997 over 1996.
o Gross profit margin, as a percentage of revenues, increased in 1997
to 33.9% from 28.3% as a result of improved pricing in certain
areas and increased volume.
o Selling, general and administrative expenses for 1997 as a
percentage of revenues were 11.0% compared to 10.8% for 1996.
o Completion products operating income increased $15.7 million, or
67%, from 1996 to 1997, primarily as a result of the increased
volume of cementation product sales, operating efficiencies and the
inclusion of the Nodeco operations for the full year of 1997.
ARTIFICIAL LIFT SYSTEMS
The following chart sets forth certain data regarding the results of our
Artificial Lift Systems Division for 1997 and 1996:
YEAR ENDED
----------------------
1997 1996
-------- --------
(in thousands)
Revenues ............................... $249,476 $150,816
Gross Profit ........................... 69,806 42,028
Gross Profit % ......................... 28.0% 27.9%
Selling, General and Administrative .... $ 47,014 $ 30,361
Operating Income ....................... 22,792 11,667
EBITDA ................................. 31,736 17,532
Material items affecting the results of our Artificial Lift Systems
Division for 1997 compared to 1996 were:
o Revenue growth in our Artificial Lift Systems Division was
primarily due to increased sales of artificial lift equipment in
the Canadian and South American markets, and the effects of
acquisitions. During 1997, we acquired Trico Industries, BMW
Monarch, BMW Pump and various small artificial lift companies.
These acquisitions benefited 1997 revenues by $64.9 million and
operating income by $6.8 million.
o Sales of our progressing cavity pump product lines were
particularly strong in Canada and South America where the heavy oil
markets improved.
o Gross profit, as a percentage of revenues, increased from 27.9% in
1996 to 28.0% in 1997 as a result of an improvement in this
division's domestic cost structure and the December 1997
acquisitions of Trico Industries, BMW Pump and BMW Monarch.
o Selling, general and administrative expenses for 1997 as a
percentage of revenues was 18.8% compared to 20.1% for 1996 in
spite of higher amortization and combination expenses related to
1997 acquisitions.
COMPRESSION SERVICES
The following chart sets forth certain data regarding the results of our
Compression Services Division for 1997 and 1996:
PAGE 15
16
YEAR ENDED
----------------------
1997 1996
-------- --------
(in thousands)
Revenues ............................... $178,897 $154,503
Gross Profit ........................... 35,105 29,771
Gross Profit % ......................... 19.6% 19.3%
Selling, General and Administrative .... $ 20,331 $ 21,938
Operating Income ....................... 14,774 7,833
EBITDA ................................. 36,440 31,387
Material items affecting the results of our Compression Services Division
for 1997 compared to 1996 were:
o Revenue increases were primarily due to an increase in
manufacturing and packaging revenues of 21% to $78.2 million and an
improvement of 12% to $100.7 million for compressor rental and
service revenues.
o Gross profit increased from 19.3% in 1996 to 19.6% in 1997 due to
improvements in manufacturing and packaging operations.
o Selling, general and administrative expenses for 1997, compared to
1996, declined due to cost reductions.
o Operating income increased due to improved sales, slightly better
margins and lower selling, general and administrative expenses.
DISCONTINUED OPERATIONS
Our discontinued operations consist of (1) our Grant Prideco Drilling
Products division that we are currently proposing to spinoff to our
stockholders and (2) our Mallard Bay contract drilling division that was sold
in 1996.
Our discontinued Drilling Products division reported income, net of
taxes, for the years ended 1998, 1997 and 1996 of $65.7 million, $67.0 million
and $20.9 million.
In 1996, we reported income from discontinued operations of $7.5
million, net of taxes, related to our Mallard Division and a gain of $66.9
million, net of taxes of $44.6 million, related to the disposition of that
division. In 1997, we benefited from a one-time pre-tax gain in continuing
operations of $3.4 million relating to the sale of Parker Drilling Company
common stock received in connection with the 1996 disposition of the Mallard
Division.
EXTRAORDINARY CHARGE
In 1997, we recorded an extraordinary charge of $9.0 million, net of
taxes, related to our acquisition of approximately $120.0 million principal
amount of our 10 1/4% Senior Notes due 2004 and 10 1/4% Senior Notes due 2004,
Series B. In 1996, we also recorded an extraordinary charge of $0.7 million, net
of taxes, for the early extinguishment of debt.
PAGE 16
17
Part 3
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO THE QUARTER ENDED MARCH 31, 1998
The following charts contain selected financial data comparing our results
for the three months ended March 31, 1999 and 1998:
COMPARATIVE FINANCIAL DATA QUARTER ENDED
MARCH 31,
---------------------
1999 1998
--------- --------
(in thousands, except
percentages)
Revenues .................................... $265,341 $380,807
Gross Profit ................................ 81,666 130,675
Gross Profit % .............................. 30.8% 34.3%
Selling, General and Administrative
Attributable to Segments .................. $ 60,918 $ 57,631
Corporate General and Administrative ........ 5,572 7,988
Operating Income ............................ 15,630 65,836
Interest Income ............................. 1,505 648
Interest Expense ............................ 10,000 8,881
Net Income .................................. 2,538 61,143
EBITDA (a) .................................. 54,679 100,212
Note (a): EBITDA is calculated by taking operating income and adding back
depreciation and amortization. We have included an EBITDA calculation here
because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be viewed as a
substitute to calculations under GAAP, in particular cash flows from
operations, operating income and net income. In addition, EBITDA calculations
by one company may not be comparable to another company.
SALES BY GEOGRAPHIC REGION
QUARTER ENDED
MARCH 31,
---------------------
1999 1998
--------- --------
REGION: (a)
U.S. ...................................... 43% 44%
Canada .................................... 16% 24%
Europe .................................... 14% 10%
Latin America............................... 9% 9%
Africa .................................... 8% 6%
Middle East................................. 4% 3%
Other ...................................... 6% 4%
--------- --------
Total................................... 100% 100%
========= ========
Note (a) Sales are based on the region of origination and do not reflect
sales by ultimate destination.
Our results for the first quarter of 1999 reflected the adverse market
conditions in which we are operating. These conditions had the following
effects on our results:
o Revenues for the first quarter of 1999 declined 30.3% compared to the
same period in 1998.
o Our first quarter 1999 revenues in North America were $102.5 million
less than they were in the first quarter of 1998. Operating income
dropped proportionately to the decline in revenues.
o A $50.2 million decline in the first quarter of 1999 operating income,
as compared to the first quarter of 1998 operating income of $65.8
million, reflected the significant decline in our industry.
PAGE 17
18
o Our corporate expenses for the first quarter of 1999 were down $2.4
million as compared to the first quarter of 1998. The decrease from
1998 was primarily attributable to consolidation savings.
o Our effective tax rate on income from continuing operations for the
first quarter of 1999 was 27.4% as compared to 36.7% for the first
quarter of 1998 due to the mix between foreign and U.S. tax attributes.
1998 SPECIAL CHARGE
We incurred a $47.0 million charge in the fourth quarter of 1998 related
to the decline in our markets. Approximately $35.6 million of the charge had
been utilized as of March 31, 1999. The remainder of the charges were fully
expended by the second quarter of 1999 in connection with planned activities
and no adjustments or reversals to the remaining accrued special charge were
necessary.
The following chart summarizes the December 31, 1998 balance of accruals
established in the fourth quarter of 1998 and the utilization of these accruals
during the first quarter of 1999:
BALANCE AS OF BALANCE AS OF
DECEMBER 31, MARCH 31,
1998 UTILIZED 1999
----------- ----------- -----------
(in thousands)
Severance and Related Costs (a) $ 7,611 $ 3,490 $ 4,121
Facility Closures (b) ......... 12,829 7,150 5,679
Corporate Related Expenses (c) 3,120 1,475 1,645
----------- ----------- -----------
Total ...................... $ 23,560 $ 12,115 $ 11,445
=========== =========== ===========
(a) The severance and related costs included in the fourth quarter charges were
$7.6 million for approximately 940 employees to be terminated in the first
half of 1999, in accordance with our announced plan. During the first
quarter of 1999, approximately 600 employees were terminated with
associated costs of $3.5 million.
(b) The facility and plant closures of $12.8 million were accrued in the fourth
quarter of 1998 for the consolidation and closure of approximately 100
service, manufacturing and administrative facilities in response to
declining market conditions in the fourth quarter. During the first quarter
of 1999, approximately 65 facilities were closed with associated costs of
$7.2 million.
(c) The corporate related expenses of $3.1 million recorded in the fourth
quarter were primarily for the consolidation of technology centers, the
relocation of corporate offices and the related lease obligations to align
our corporate cost structure in light of current conditions. During the
first quarter of 1999, $1.5 million was expended related to the relocation
of corporate offices.
SEGMENT RESULTS
COMPLETION AND OILFIELD SERVICES
Our Completion and Oilfield Services Division experienced reductions in
revenue, operating income and margins as the rig count declined and demand for
its products and services continued to fall. This division's North American
operations were most adversely affected by the downturn. Our international
markets began experiencing pricing pressures due to soft demand and a falling
international rig count.
The following chart sets forth additional data regarding the results of
our Completion and Oilfield Services Division for the first quarter of 1999 and
1998:
PAGE 18
19
QUARTER ENDED
MARCH 31,
----------------------
1999 1998
-------- ---------
(in thousands, except
percentages)
Revenues ............................... $165,287 $230,677
Gross Profit ........................... 48,242 82,668
Gross Profit % ......................... 29.2% 35.8%
Selling, General and Administrative .... $ 31,666 $ 26,253
Operating Income ....................... 17,030 57,195
EBITDA ................................. 43,313 79,885
Material items affecting the results of our Completion and Oilfield
Services Division for the first quarter of 1999 compared to 1998 were:
o Our North American revenues for the first quarter of 1999 declined
by 47.2% as compared to 1998 due to an average rig count reduction
of 41.2%.
o Our international revenues, excluding Canada, decreased by 4.6% in
the first quarter of 1999 to $97.5 million. The most significant
revenue decrease occurred in the Latin American market, which
declined 16.2% compared to the first quarter of 1998.
o Gross profit percentage declined in the first quarter of 1999 by
6.6% due to revenue and pricing declines.
o Selling, general and administrative expenses increased as a
percentage of revenues from 11.4% in the first quarter of 1998 to
19.2% in the first quarter of 1999. The increase primarily reflects
a lower revenue base and the costs associated with maintaining a
worldwide manufacturing, sales and service infrastructure.
o Operating income declined in the first quarter of 1999 to $17.0
million from $57.2 million in the first quarter of 1998 primarily
due to reduced revenues associated with industry conditions and
resulting operational inefficiencies attributable to lower
operating levels.
o Approximately $4.7 million of the special charge that was accrued
in the fourth quarter of 1998 was realized in the first quarter of
1999.
ARTIFICIAL LIFT SYSTEMS
Our Artificial Lift Systems Division results for the first quarter of
1999 compared to the first quarter of 1998 were down significantly due to a
substantial reduction in demand for our artificial lift products following the
downturn in the industry. This decline was most pronounced in North America
where our first quarter 1998 sales in the region represented approximately
82.2% of the division's total revenue.
Operating results from our Artificial Lift Systems Division are heavily
dependent on oil production activity. Late in the first quarter, our Artificial
Lift Systems Division began to see the revenue declines that were experienced
throughout 1998 reverse with the recent increases in oil prices. These
improvements have continued through 1999.
PAGE 19
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The following chart sets forth additional data regarding the results of
our Artificial Lift Systems Division for the first quarter of 1999 and 1998:
QUARTER ENDED
MARCH 31,
----------------------
1999 1998
-------- ---------
(in thousands, except
percentages)
Revenues ................................ $ 57,471 $107,129
Gross Profit ............................ 21,395 38,191
Gross Profit % .......................... 37.2% 35.6%
Selling, General and Administrative ..... $ 22,239 $ 26,235
Operating Income (Loss) ................. (844) 11,956
EBITDA .................................. 3,991 16,886
Material items affecting the results of our Artificial Lift Systems
Division as reflected above for the first quarter of 1999 compared to the first
quarter of 1998 were:
o The first quarter of 1999 experienced a decline in revenues of
46.4% compared to the first quarter of 1998 due to the industry
downturn.
o Gross profit declined to $21.4 million in the first quarter of 1999
from $38.2 million in first quarter of 1998 due to a lower revenue
base and pricing declines.
o Selling, general and administrative expenses declined by $4.0
million in the first quarter of 1999 as compared to 1998 due to the
cost reduction efforts. Selling, general and administrative
expenses increased as a percentage of revenues from 24.5% in the
first quarter of 1998 to 38.7% in the first quarter of 1999. The
increase was primarily a result of a lower revenue base.
o The operating loss of $0.8 million for the first quarter of 1999 is
a result of the sharp decline in revenues and higher average costs
associated with low industry levels.
o Cost reductions implemented in 1998 in this division benefited
operating income and EBITDA in the first quarter of 1999 compared
to the fourth quarter of 1998.
o Approximately $5.4 million of the special charge that was accrued
in the fourth quarter of 1998 was realized in the first quarter of
1999.
COMPRESSION SERVICES
Our Compression Services Division results for the first quarter of 1999
reflected improved margins, operating income and cash flow on essentially flat
revenues. The improvements were primarily attributable to a better revenue mix
and costs savings from the joint venture entered into with GE Capital in
February 1999. The joint venture has allowed this division to (1) diversify its
compression fleet and revenue base, (2) increase its gross profit, operating
income and cash flow for the division through consolidation savings and (3)
expand its geographic market presence.
Demand for our compression services in the first quarter of 1999 was down
for smaller horsepower compressor units, which are primarily dependent on North
American activity and are subject to commodity price volatility, and slightly up
for larger horsepower units. Demand for smaller units is expected to gradually
increase as natural gas prices increase, but will likely remain subject to
pricing pressures. We are actively pursuing new long-term service contracts for
many of the larger horsepower units acquired by us in the joint venture as well
as domestic and international field management opportunities.
PAGE 20
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The following chart sets forth additional data regarding the results of our
Compression Services Division for 1999 and 1998:
QUARTER ENDED
MARCH 31,
----------------------
1999 1998
-------- ---------
(in thousands, except
percentages)
Revenues ................................ $42,583 $43,001
Gross Profit ............................ 12,029 9,816
Gross Profit % .......................... 28.2% 22.8%
Selling, General and Administrative ..... $ 7,013 $ 5,143
Operating Income ........................ 5,016 4,673
EBITDA .................................. 12,584 10,765
Minority Interest Before Taxes .......... 1,494 --
Material items affecting the results of our Compression Services Division
for the three months ended March 31, 1999 compared to the three months
ended March 31, 1998 were:
o The GE Capital joint venture added approximately $8.6 million in
revenues to the division for the first quarter of 1999. Our total
owned horsepower increased to over 850,000 horsepower making our
fleet the second largest fleet in the industry.
o Gross profit as a percentage of revenues increased due to improved
product and sales mix.
o The increase in selling, general and administrative expenses for
the first quarter of 1999 compared to 1998 primarily reflects
additional staff associated with our joint venture.
o Operating income benefited from improved margins and the joint
venture with GE Capital.
DISCONTINUED OPERATIONS
Our discontinued operations consisted solely of our Grant Prideco drilling
products division. We reported a loss from discontinued operations, net of
taxes, for the three months ended March 31, 1999, of $1.2 million compared to
income from discontinued operations for the three months ended March 31, 1998,
net of taxes, of $25.5 million. Our discontinued operations were adversely
affected by low oil prices and drilling activity. These conditions resulted in a
material decline in drill pipe and drill stem sales as well as sharply lower
premium tubular and connection sales.
PAGE 21
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Part 4 RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1999, AND 1998
This section presents Weatherford's Restated Results of Operations for the
three and six months ended June 30, 1999 previously included in Weatherford's
Quarterly Report on Form 10-Q for the three months ended June 30, 1999.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
The following charts contain selected financial data comparing our results
for three months ended June 30, 1999 and three months ended June 30, 1998:
COMPARATIVE FINANCIAL DATA THREE MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
----------- -----------
(in thousands, except
percentages)
Revenues.......................................... $ 278,588 $ 358,831
Gross Profit...................................... 75,440 112,854 (a)
Gross Profit %.................................... 27.1% 31.5%
Selling, General and Administrative
Attributable to Segments........................ $ 58,797 $ 53,673
Corporate General and Administrative.............. 6,993 6,917
Operating Income (Loss)........................... 10,086 (50,148) (a)
Interest Income................................... 596 441
Interest Expense.................................. 10,898 10,728
Net Income (Loss)................................. (2,020) (14,891) (a)
EBITDA (b)........................................ 50,388 (16,201) (a)
(a) Includes $113.1 million, $73.5 million net of tax, of merger and other
charges relating to the merger between EVI, Inc. and Weatherford Enterra,
Inc. and a reorganization and rationalization of our business in light of
industry conditions. Of these charges, $9.9 million related to the
write-off of inventory has been classified as cost of products.
(b) EBITDA is calculated by taking operating income and adding back
depreciation and amortization. We have included an EBITDA calculation here
because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be viewed
as a substitute to calculations under GAAP, in particular cash flows from
operations, operating income and net income. In addition, EBITDA
calculations by one company may not be comparable to another company.
PAGE 22
23
SALES BY GEOGRAPHIC REGION
THREE MONTHS ENDED
JUNE 30,
------------------------
1999 1998
--------- ---------
REGION: (a)
U.S. .............................................. 47% 50%
Canada ............................................ 16% 15%
Europe ............................................ 12% 12%
Latin America....................................... 9% 9%
Africa ............................................ 7% 6%
Middle East......................................... 4% 3%
Other .............................................. 5% 5%
--------- ---------
Total........................................... 100% 100%
========= =========
(a) Sales are based on the region of origination.
Our results for the three months ended June 30, 1999 reflected the adverse
market conditions in which we are operating. These conditions had the following
effects on our results:
o Revenues for the three months ended June 30, 1999 declined 22.4% compared
to the same period in 1998.
o Our second quarter 1999 revenues in North America were $56.8 million less
than they were in the second quarter of 1998.
o Operating income declined $52.8 million in the second quarter of 1999, as
compared to the second quarter of 1998 operating income of $62.9 million,
excluding the effect of the one-time charge of $113.0 million relating to
the merger of EVI and Weatherford Enterra.
o We have continued our cost reduction efforts to reduce operating costs in
response to a continued decline in market conditions.
o Our corporate expenses of $7.0 million for the second quarter of 1999
were comparable to the second quarter of 1998.
o Our effective tax rate for the second quarter of 1999 was 12.4% due to
non-deductible expenses.
SEGMENT RESULTS
COMPLETION AND OILFIELD SERVICES
Our Completion and Oilfield Services Division continued to experience
reductions in revenue, operating income and margins as the rig count declined
and the demand for its products and services dropped. This division's North
American completion and downhole services operations were the most adversely
affected by the downturn. Pricing pressures continued through the quarter due to
lower demand. In our international markets, we experienced reduced volumes and
pricing pressures. Pricing pressures are expected to continue for the remainder
of the year due to soft demand.
The following chart sets forth additional data regarding the results of our
Completion and Oilfield Services Division for the second quarters of 1999 and
1998:
THREE MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------- -------------
(in thousands, except
percentages)
Revenues........................................... $ 160,411 $ 221,240
Gross Profit....................................... 39,783 78,191 (a)
Gross Profit %..................................... 24.8% 35.3%
Selling, General and Administrative................ $ 30,467 $ 23,948
Operating Income................................... 9,752 28,753 (a)
EBITDA............................................. 35,544 51,396 (a)
(a) Includes merger and other charges of $26.8 million, which consists of
$3.2 million for facility closures, $23.1 million for write-down of
assets and $0.5 million for write-off of inventory. The write-off of
inventory has been classified as cost of products.
PAGE 23
24
Material items affecting the results of our Completion and Oilfield
Services Division for the second quarter of 1999 compared to 1998 were:
o Our North American revenues for the second quarter of 1999 declined by
36.6% as compared to 1998 due in part to an average rig count
reduction of 40.3%. Contributing to the decline in North American
revenues was a 43.8% decline in Canadian revenues as compared to the
second quarter of 1998 due to a Canadian average rig count reduction
of 42.1% and the longer than usual spring break up. Our international
revenues, excluding Canada, decreased by 18.6% from the second quarter
of 1998 to $91.0 million. The most significant revenue decrease
occurred in the Latin American market which declined 27.5% compared to
the second quarter of 1998.
o Gross profit percentage declined in the second quarter of 1999 by
10.5% as compared to the second quarter of 1998, due to revenue and
pricing declines, factory under utilization and costs associated with
the maintenance of an extensive worldwide sales and services
infrastructure.
o Selling, general and administrative expenses increased as a percentage
of revenues from 10.8% in the second quarter of 1998 to 19.0% in the
second quarter of 1999. The increase primarily reflects a lower
revenue base, start up costs for new product lines and businesses and
costs associated with the assimilation of acquired businesses.
o Operating income declined $45.8 million in the second quarter of 1999
from the second quarter of 1998, before the effect of the merger and
other charges, primarily due to reduced revenues associated with
industry conditions and resulting operational inefficiencies
attributable to lower operating levels.
ARTIFICIAL LIFT SYSTEMS
Our Artificial Lift Systems Division's results for the second quarter of
1999 compared to the second quarter of 1998, were down significantly due to a
substantial reduction in demand for our artificial lift products in line with
the activity decline in the industry. This decline was most pronounced in the
United States where our second quarter 1998 U.S. sales represented approximately
55.9% of the division's total revenue.
Operating results from our Artificial Lift Systems Division are heavily
dependent on oil production activity. Oil prices gradually begun to reverse in
the second quarter of 1999, as evidenced by an 8.3% increase in revenues over
the first quarter of 1999. Results from this division are expected to continue
to improve during the year, in particular from sales in Canada.
The following chart sets forth additional data regarding the results of our
Artificial Lift Systems Division for the second quarters of 1999 and 1998:
THREE MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------ ------------
(in thousands, except
percentages)
Revenues........................................... $ 62,227 $ 90,427
Gross Profit....................................... 23,757 24,693 (a)
Gross Profit %..................................... 38.2% 27.3%
Selling, General and Administrative................ $ 21,086 $ 24,510
Operating Income (Loss)............................ 2,671 (9,064) (a)
EBITDA............................................. 7,506 (4,306) (a)
PAGE 24
25
(a) Includes merger and other charges of $18.6 million, which consists of
$7.7 million for facility closures, $9.3 million for the write-off of
inventory and $1.6 million related to the write-down of assets. The
write-off of inventory has been classified as costs of products.
Material items affecting the results of our Artificial Lift Systems
Division as reflected above for the second quarter of 1999 compared to the
second quarter of 1998 were:
o The second quarter of 1999 experienced a decline in revenues of 31.2%
compared to the second quarter of 1998 due to the industry downturn.
United States revenues declined 43.4% due to the average rig count
reduction of 40.0%. Canadian revenues were down only 4.8% as the
Canadian heavy oil market had significantly declined by the second
quarter of 1998.
o Gross profit as a percentage of revenues increased from 37.6% in the
second quarter of 1998, excluding the effect of the merger and other
charges, to 38.2% in the second quarter of 1999, due to cost
reductions implemented.
o Selling, general and administrative expenses declined due to cost
reduction efforts. Selling, general and administrative expenses
increased as a percentage of revenues from 27.1% in the second quarter
of 1998 to 33.9% in the second quarter of 1999. The increase was
primarily a result of a lower revenue base.
o The change in operating income to $2.7 million for the second quarter
of 1999 as compared to second quarter 1998 operating income of $9.5
million, before the effect of the merger and other charge, is a result
of the sharp decline in revenues. Pricing was only marginally down
during the period due to the nature of the business and our market
position.
COMPRESSION SERVICES
Our Compression Services Division's results for the second quarter of 1999
reflected increased revenues and improved cash flows as compared to the second
quarter of 1998. Contributing to the increased revenues in the second quarter of
1999 as compared to the first quarter of 1999 was the additional month of
revenues from the joint venture entered into with GE Capital in February 1999.
However, demand declined in the second quarter from the first quarter of 1999
levels for compressor unit rentals. Compressor unit sales and services revenues
were strong in the second quarter of 1999.
The Compression Services Division expanded its international presence
through the award of a seven year contract by YPF S.A. in Argentina. The
division will provide total compression services to YPF, including ownership of
the compression equipment, maintenance and daily service operations, with
estimated revenues over the seven years of $95.0 million. This project became
fully operational in the third quarter of 1999.
The following chart sets forth additional data regarding the results of our
Compression Services Division for 1999 and 1998:
THREE MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------- -------------
(in thousands, except
percentages)
Revenues........................................... $ 55,950 $ 47,164
Gross Profit....................................... 11,900 9,970
Gross Profit %..................................... 21.3% 21.1%
Selling, General and Administrative................ $ 7,244 $ 5,215
Operating Income................................... 4,656 4,755
EBITDA............................................. 13,822 10,638
Minority Interest Expense, Net of Taxes............ (915) --
Material items affecting the results of our Compression Services Division
for 1999 compared to 1998 were:
o The increase in revenues primarily reflects the impact of the joint
venture and higher equipment sales.
o Gross profit as a percentage of revenues increased slightly due to
product sales mix.
PAGE 25
26
o The increase in selling, general and administrative expenses for the
second quarter of 1999 compared to 1998 primarily reflects additional
staff associated with our joint venture.
o Pricing pressures for compressor rentals occurred during the quarter
in the United States due to excess compressor equipment in the market.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
The following charts contain selected financial data comparing our results
for the six months ended June 30, 1999 and 1998:
COMPARATIVE FINANCIAL DATA SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ -----------
(in thousands, except
percentages)
Revenues.......................................... $ 543,929 $ 739,638
Gross Profit...................................... 157,106 243,529 (a)
Gross Profit %.................................... 28.9% 32.9%
Selling, General and Administrative
Attributable to Segments........................ $ 119,715 $ 111,304
Corporate General and Administrative.............. 12,565 14,905
Operating Income.................................. 25,716 15,688 (a)
Interest Income................................... 2,101 1,089
Interest Expense.................................. 20,898 19,609
Net Income........................................ 518 46,252 (a)
EBITDA (b)........................................ 105,067 84,011 (a)
(a) Includes $113.0 million, $73.5 million net of tax, of merger and other
charges relating to the merger between EVI and Weatherford Enterra and a
reorganization and rationalization of our business in light of industry
conditions. Of these charges, $9.9 million related to the write-off of
inventory has been classified as cost of products.
(b) EBITDA is calculated by taking operating income and adding back
depreciation and amortization. We have included an EBITDA calculation
here because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be
viewed as a substitute to calculations under GAAP, in particular cash
flows from operations, operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another
company.
SALES BY GEOGRAPHIC REGION
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ ------------
REGION: (a)
U.S. .............................................. 45% 47%
Canada ............................................ 16% 20%
Europe ............................................ 13% 11%
Latin America....................................... 9% 9%
Africa ............................................ 8% 6%
Middle East......................................... 4% 3%
Other .............................................. 5% 4%
--------- --------
Total........................................... 100% 100%
========= =========
(a) Sales are based on the region of origination.
Our results for the six months ended June 30, 1999 reflected the depressed
market conditions. These conditions had the following effects on our results:
o Revenues for the six months ended June 30, 1999 declined 26.5%
compared to the same period in 1998.
PAGE 26
27
o Of the $195.7 million decline in revenues from 1998 to 1999, $159.3
million, or 81.4%, was attributable to sales in North America.
o A $103.0 million decline in the first half of 1999 operating income,
as compared to the first half of 1998 operating income of $128.7
million, excluding the effect of merger and other charges, reflected
the significant decline in our industry.
o Selling, general and administrative expenses attributable to the
segments increased as a percent of revenue due primarily to a lower
revenue base and startup costs for new product lines and businesses.
o The decrease in corporate expenses from 1998 was primarily
attributable to consolidation savings.
SEGMENT RESULTS
COMPLETION AND OILFIELD SERVICES
Our Completion and Oilfield Services Division experienced reductions in
revenue, operating income and margins as the North American and international
rig counts declined to near historical lows and demand for its products and
services dropped. This division's North American operations were the most
adversely affected by the downturn. In most of our international markets, this
division experienced pricing pressures due to soft demand.
The following chart sets forth additional data regarding the results of our
Completion and Oilfield Services Division for the first half of 1999 and 1998:
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1999 1998
------------- -------------
(in thousands, except
percentages)
Revenues........................................... $ 325,698 $ 451,917
Gross Profit....................................... 88,025 160,859 (a)
Gross Profit %..................................... 27.0% 35.6%
Selling, General and Administrative................ $ 62,133 $ 50,201
Operating Income................................... 26,782 85,948 (a)
EBITDA............................................. 78,857 131,281 (a)
(a) Includes merger and other charges of $26.8 million, which consists of
$3.2 million for facility closures, $23.1 million for write-down of
assets and $0.5 million for write-off of inventory. The write-off of
inventory has been classified as cost of products.
Material items affecting the results of our Completion and Oilfield
Services Division for the first half of 1999 compared to 1998 were:
o Our North American revenues for the first six months of 1999 declined
by 42.3% as compared to 1998 due in part to an average rig count
reduction of 41.0%.
o Our international revenues, excluding Canada, decreased by 11.9% in
the first six months of 1999 to $188.5 million, as compared to the six
months ended June 30, 1998. The most significant revenue decrease
occurred in the Latin American market which declined 22.2%.
o Gross profit percentage declined in the first six months of 1999 by
8.6%, excluding the effect of the merger and other charges, due to
revenue, pricing declines, plant under absorption and costs
associated with the maintenance of our worldwide sales and services
infrastructure.
o Selling, general and administrative expenses increased as a percentage
of revenues from 11.1% in the second half of 1998 to 19.1% in the
first half of 1999. The increase primarily reflects a lower revenue
base, start up costs relating to new product lines and businesses and
costs associated with the assimilation of acquired businesses.
o Operating income declined in the first six months of 1999 to $26.8
million from $112.8 million in the six months ended June 30, 1998,
excluding the effect of merger and other charges, primarily due to
reduced revenues associated with industry conditions and resulting
operational inefficiencies attributable to lower operating levels.
ARTIFICIAL LIFT SYSTEMS
Our Artificial Lift Systems Division's results for the first half of 1999
compared to the first half of 1998, were down significantly due to a substantial
reduction in demand for our artificial lift products following the downturn in
the industry. This decline was most pronounced in North America where our sales
for the six months ended June 30, 1998, represented approximately 83.9% of the
division's total revenue.
Operating results from our Artificial Lift Systems Division are heavily
dependent on oil production activity. Oil prices gradually began to improve, as
evidenced by an 8.3% increase in revenues in the quarter ended June 30, 1999
over the first quarter of 1999.
PAGE 27
28
The following chart sets forth additional data regarding the results of our
Artificial Lift Systems Division for the first half of 1999 and 1998:
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1999 1998
------------- -------------
(in thousands, except
percentages)
Revenues........................................... $ 119,698 $ 197,556
Gross Profit....................................... 45,152 62,884 (a)
Gross Profit %..................................... 37.7% 31.8%
Selling, General and Administrative................ $ 43,325 $ 50,745
Operating Income................................... 1,827 2,892 (a)
EBITDA............................................. 11,497 12,580 (a)
(a) Includes merger and other charges of $18.6 million, which consists of
$7.7 million for facility closures, $9.3 million for the write-off of
inventory and $1.6 million related to the write-down of assets. The
write-off of inventory has been classified as cost of products.
Material items affecting the results of our Artificial Lift Systems
Division as reflected above for the first half of 1999 compared to the first
half of 1998 were:
o The first half of 1999 experienced a decline in revenues of 39.4%
compared to the first half of 1998 due to the industry downturn which
began to impact this division in the second quarter of 1998.
o Gross profit declined to $45.2 million in the first half of 1999 from
$72.2 million in first half of 1998, excluding the effect of merger
and other charges, due primarily to a lower revenue base and pricing
declines. Gross profit as a percent of revenue increased to 37.7% from
36.5% for the six months of 1999 as compared to 1998, excluding the
effect of the merger and other charges, due to cost reduction efforts.
o Selling, general and administrative expenses declined due to the cost
reductions implemented in response to the depressed industry
conditions. Selling, general and administrative expenses increased
10.5% as a percent of revenue due to lower revenue levels.
o The decline in operating income of $19.6 million for the first six
months of 1999, as compared to 1998, excluding the effect of the
merger and other charges, is a result of the sharp decline in revenues
and pricing pressures.
COMPRESSION SERVICES
Our Compression Services Division's results for the first six months of
1999 reflected improved margins, operating income and cash flow on essentially
flat revenues. The improvements were primarily attributable to a better revenue
mix and the impact of the joint venture entered into with GE Capital in February
1999.
The Compression Services Division expanded its international presence
through the award of a seven year contract by YPF S.A. in Argentina. The joint
venture will provide total compression services to YPF, including ownership of
the compression equipment, maintenance and daily service operations, with
estimated revenues over the seven years of $95.0 million.
Demand, and as a result pricing, for our compression services in the first
half of 1999 was down for rental compressor units due to high inventory levels.
PAGE 28
29
The following chart sets forth additional data regarding the results of our
Compression Services Division for 1999 and 1998:
SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------- -------------
(in thousands, except
percentages)
Revenues........................................... $ 98,533 $ 90,165
Gross Profit....................................... 23,929 19,786
Gross Profit %..................................... 24.3% 21.9%
Selling, General and Administrative................ $ 14,257 $ 10,358
Operating Income................................... 9,672 9,428
EBITDA............................................. 26,406 21,403
Minority Interest Expense, Net of Taxes............ (1,886) --
Material items affecting the results of our Compression Services Division
for the first six months of 1999 compared to the first six months of 1998 were:
o Gross profit as a percentage of revenues increased due to improved
product and sales mix.
o The increase in selling, general and administrative expenses for the
first half of 1999 compared to 1998 primarily reflects additional
staff associated with our joint venture.
1998 SPECIAL CHARGES
In the second quarter of 1998, we incurred $113.0 million in merger and
other charges relating to the merger between EVI and Weatherford Enterra and a
reorganization and rationalization of our businesses in light of the initial
downturn in the industry. These charges had been fully realized as of December
31, 1998.
We incurred a $47.0 million charge in the fourth quarter of 1998 related to
the decline in our markets. As of December 31, 1998, $23.4 million of these
charges had been utilized. The remaining $23.6 million of these charges were
fully utilized in the first half of 1999 as follows:
o The severance and related costs included in the fourth quarter charges
were $7.6 million for approximately 940 employees whose employment was
terminated in the first half of 1999, in accordance with the announced
plan. These employees had all been terminated by June 30, 1999.
o The facility and plant closures of $12.8 million were accrued in the
fourth quarter of 1998 for the consolidation and closure of 100 service,
manufacturing and administrative facilities in response to declining market
conditions in the fourth quarter. These facilities had all been closed as
of June 30, 1999.
o The corporate related expenses of $3.1 million recorded in the fourth
quarter were primarily for the consolidation of technology centers, the
relocation of corporate offices and the related lease obligations to align
the corporate cost structure in light of current conditions.
o In the second quarter of 1999, $3.1 million, $6.6 million and $1.7
million were utilized by the Completion and Oilfield Services Division, the
Artificial Lift Systems Division, and Corporate, respectively.
o In the first half of 1999, $7.7 million of the 1998 fourth quarter charge
was utilized by the Completion and Oilfield Services Division, $12.1
million by the Artificial Lift Systems Division and $3.7 million by
Corporate.
DISCONTINUED OPERATIONS
Our discontinued operations consist of our Grant Prideco drilling products
division. Results from discontinued operations were as follows:
o We had a loss from discontinued operations, net of taxes, for the
three months ended June 30, 1999, of $4.0 million and income from
discontinued operations, net of taxes, for the three months ended
June 30, 1998 of $23.8 million.
o We had a loss from discontinued operations, net of taxes, for the
six months ended June 30, 1999 and 1998 of $5.2 million and
income from discontinued operations, net of taxes, for the six
months ended June 30, 1998, of $49.3 million.
Our discontinued operations results reflect the extreme adverse market
conditions that have existed in the oilfield equipment market since 1998. These
conditions have resulted in substantially lower purchases of drill pipe and
other drill stem products as well as sharply lower purchases of premium
tubulars and connections.
PAGE 29
30
Part 5
LIQUIDITY AND CAPITAL RESOURCES
Our current sources of capital are current cash, cash generated from
operations and borrowings under bank lines of credit. We believe that the
current reserves of cash, access to our existing credit line and internally
generated cash from operations are sufficient to finance the projected cash
requirements of our current and future operations. We are continually reviewing
acquisitions in our markets. Depending upon the size, nature and timing of an
acquisition, we may need additional capital in the form of either debt, equity
or a combination of both.
The following chart contains restated information regarding our capital
resources and borrowings and exposures as of December 31, 1998 and 1997 and
June 30, 1999:
DECEMBER 31,
JUNE 30, ----------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Cash and Cash Equivalents ................................ $ 28,751 $ 34,131 $ 66,008
Short-Term Borrowings .................................... 236,348 137,279 24,243
Letters of Credit Outstanding ............................ 22,236 23,222 22,880
Cumulative Foreign Currency Translation
Adjustment ............................................. (81,700) (76,389) (38,494)
International Assets Hedged (U.S. Dollar Equivalent) ..... 28,914 33,365 36,802
PAGE 30
31
The reduction in our cash and cash equivalents for continuing operations
since December 31, 1997, through December 31, 1998 was primarily attributable
to the acquisition of new businesses for approximately $128.3 million in cash
and capital expenditures for property, plant and equipment of $167.8 million,
offset by net borrowings under debt arrangements of $100.5 million, cash of
$100.0 million from a sale and leaseback that was consummated in the fourth
quarter of 1998, and cash flow from continuing operations of $114.1 million.
Additionally, we acquired new businesses and made capital expenditures for our
discontinued operations for $48.7 million.
The reduction in our cash and cash equivalents since December 31, 1998, was
primarily attributable to the following:
o Cash inflow of $13.9 million from continuing operating activities.
o Borrowings, net of repayments, on term debt and other short-term
facilities of $99.1 million.
o Proceeds from the sale and leaseback of Compression units of $83.5
million. Of these proceeds, $65.4 million were subsequently paid to GE
Capital under terms of the joint venture agreement.
o Capital expenditures for continuing operations of property, plant and
equipment of $77.1 million.
o Acquisition of new businesses for approximately $40.3 million in cash,
net of cash required.
o Acquisitions and capital expenditures for discontinued operations of
$13.9 million.
BANKING FACILITIES
In May 1998, we put in place a five-year unsecured revolving credit
facility that allows us to borrow up to $250.0 million at any time. The facility
consists of a $200.0 million U.S. credit facility and a $50.0 million Canadian
credit facility. Borrowings under this facility bear interest at a variable rate
based on the U.S. prime rate or LIBOR. Our credit facility contains customary
affirmative and negative covenants, including a maximum debt to capitalization
ratio, a minimum interest coverage ratio, a limitation on liens and a limitation
on asset dispositions. We expect to amend this credit facility prior to our
proposed spinoff of our Grant Prideco division to reflect the elimination of
Grant Prideco from the facility and to adjust the terms of the facility to
reflect the spinoff.
CONVERTIBLE SUBORDINATED DEBENTURES
In November 1997, we completed a private placement of $402.5 million
principal amount of our 5% Convertible Subordinated Preferred Equivalent
Debentures due 2027. The net proceeds from the Debentures were $390.9 million.
The Debentures bear interest at an annual rate of 5% and are convertible into
Common Stock at a price of $80 per share. We have the right to redeem the
Debentures at any time on or after November 4, 2000, at redemption prices
provided for in the indenture agreement, and are subordinated in right of
payment of principal and interest to the prior payment in full of certain
existing and future senior indebtedness. We also have 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 any time
when we are not in default in the payment of interest. Under the terms of the
Debentures, the conversion rate for the Debentures will be adjusted following
our spinoff of Grant Prideco. The following sets forth the formula for the
adjustment to the conversion rights of the Debentures for the proposed spinoff.
Conversion Price x A - B
($80 per share) -----
A
A = The current market price per share of our common stock on the
payment date for the distribution. The current market price
of our common stock for purposes of the adjustment is defined
in Section 6.3(g) of the First Supplemental Indenture and is
generally defined as the average of the daily closing price of
our common stock for the ten trading days ending on the day of
the distribution of the Grant Prideco common stock to our
stockholders.
B = Fair market value of the Grant Prideco common stock to be
distributed as determined by our Board of Directors.
7 1/4% SENIOR NOTES DUE 2006
We have outstanding $200.0 million of publicly traded 7 1/4% Senior Notes
due May 15, 2006. Interest on the 7 1/4% Senior Notes is payable semi-annually
on May 15 and November 15 of each year.
COMPRESSION FINANCING
Our compression services division entered into a sale and leaseback
arrangement in December 1998 where it was provided with the right to sell up to
$200.0 million of compression units through December 1999 and lease them back
over a five year period under an operating lease. As of December 31, 1998, our
compression services division had sold compressors under this arrangement,
having an appraised value of $119.6 million, and received cash of $100.0 million
and a receivable of $19.6 million. The obligations under this arrangement were
assumed by the joint venture with GE Capital. The joint venture received cash
for the $19.6 million receivable in the six months ended June 30, 1999.
In April 1999, the joint venture sold additional compressors under this
arrangement having an appraised value of approximately $80.0 million. Upon
receipt of the $80.0 million in cash, the joint venture remitted approximately
$56.0 million of the proceeds to GE Capital as part of the terms of the joint
venture.
Our Compression Services Division entered into a second sale
and leaseback arrangement in July 1999 where it was provided with the right to
sell up to $150.0 million of compression units during the next eighteen months
and lease them back over a five year period under an operating lease.
Our Compression Services Division continues to review potential
projects for expansion of its operations both domestically and internationally.
Depending on the size of these projects, we expect that the financing of the
projects will be funded with the joint venture's cash flow from operations,
proceeds from its sale and leaseback arrangements or new project or similar
type financings.
GRANT PRIDECO NOTE
In connection with the Spinoff, Grant Prideco will issue an unsecured
subordinated note to us in the amount of $100.0 million. The $100.0 million
obligation to us will bear interest at an annual rate equal to 10.0%. Interest
payments will be due quarterly, and principal and all unpaid interest will be
due no later than December 31, 2001. Under the terms of the note, Grant Prideco
is required to repay this note with the proceeds of any debt or equity
financing, excluding financing under a credit facility or any equity issued in
connection with a business
PAGE 31
32
combination. The indebtedness of Grant Prideco to us will be subordinated to
the working capital obligations of Grant Prideco to its banks. Grant Prideco
currently intends to repay the obligations within 12 months from the completion
of the Spinoff, pursuant to an anticipated public debt financing. Grant
Prideco's ability to repay this indebtedness, however, will be dependent upon
market conditions.
DISPOSITION OF DAILEY DIRECTIONAL
We are currently reviewing and discussing with potential purchasers a
disposition of the directional drilling business acquired by us in our
acquisition of Dailey International. We would expect to utilize the net
proceeds that would be received by us in a disposition of this operation to
fund future growth opportunities for our remaining businesses.
CAPITAL EXPENDITURES
Capital expenditures for property, plant and equipment in our continuing
operations during 1998 were $167.8 million and primarily related to drill pipe
and tubing, fishing tools, tubular service equipment, compression rental
equipment and the completion of plant expansions in Canada. Much of the 1998
capital expenditures related to projects initiated at the end of 1997 and early
1998. Capital expenditures for the nine months ended September 30, 1999 in our
continuing operations were $134.7 million. Capital expenditures for the fourth
quarter of 1999 are expected to be approximately $15.0 million to $20.0 million
and will be primarily maintenance related, excluding our compression operations.
Capital expenditures for our compression operations will be based on contract
needs and the timing of new projects entered into by our compression joint
venture.
Our compression operations are, by their nature, capital intensive and in
the event of growth require substantial investments in compressor units. These
capital investments have historically been financed through existing cash and
internally generated cash flow. We expect that future capital investments by our
compression division will be financed by our compression joint venture through
debt, sale and leaseback arrangements and other similar financing structures
that are repaid from the cash flows generated from the compressor units over the
projected term of rental of the equipment.
ACQUISITIONS AND DISPOSITIONS
Our company has grown substantially over the years through selective
acquisitions and combinations. The following table summarizes our 1998 and 1997
acquisitions by operating segment:
1998 1997
--------------------------------------- ---------------------------------------
CASH/ASSUMED TOTAL CASH/ASSUMED TOTAL
SEGMENT STOCK ($) LIABILITIES CONSIDERATION STOCK ($) LIABILITIES CONSIDERATION
- ----------------------------- --------- ------------ ------------- --------- ------------ -------------
(in thousands)
Completion and Oilfield
Services................... $ -- $ 83,706 $ 83,706 $ -- $ 44,505 $ 44,505
Artificial Lift Systems...... 30,753 72,234 102,987 -- 250,128 250,128
Compression Services......... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total...................... $ 30,753 $ 155,940 $ 186,693 $ -- $ 294,633 $ 294,633
========= ========= ========= ========= ========= =========
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In February 1999, we completed a joint venture with GE Capital Corporation
in which we combined our compression services operations with GE Capital's
Global Compression's services operations. The joint venture, which is known as
Weatherford Global Compression, is the world's second largest provider of
natural gas contract compression services and owns or manages over 4,000
compression units worldwide having more than one million horsepower. We own 64%
of the joint venture and GE Capital owns 36%. We have the right to acquire GE
Capital's interest at anytime at a price equal to a third party market
determined value that is not less than book value. GE Capital also has the right
to require us to purchase its interest at any time after February 2001 at a
third party market determined value as well as request a public offering of its
interest after that date, if we have not purchased its interest by that time.
In February, 1999, we completed our acquisition of Christiana Companies,
Inc. for approximately 4.4 million shares of Common Stock and $20.6 million
cash. In the acquisition we acquired through Christiana (1) 4.4 million shares
of our Common Stock, (2) cash, after distribution to the Christiana
shareholders, equal to the amount of Christiana's outstanding tax and other
liabilities and (3) a one-third interest in Total Logistic Control, a
refrigerated warehouse, trucking and logistics company. We acquired
Christiana because it gave us a unique opportunity to own an interest in Total
Logistic for essentially no consideration. Our investment in Total Logistic is
held by us as a passive investment.
On August 31, 1999, we completed our acquisition of Dailey International
Inc. pursuant to a pre-negotiated plan of reorganization in bankruptcy. Under
the terms of the acquisition, we issued a total of approximately 4,267,640
shares of Common Stock to the Dailey noteholders and stockholders. Of the total
number shares issued, we issued approximately 3,985,900 shares to the Dailey
noteholders and approximately
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281,740 shares to the Dailey common stockholders. At the time of our acquisition
of Dailey, we held approximately 24% of Dailey's Senior Notes. In the
reorganization, we contributed those notes to Dailey and received approximately
1,226,285 shares of our own Common Stock which we hold as treasury shares.
Because we held Senior Notes of Dailey, which we acquired prior to the
bankruptcy at a discount, the total purchase price for Dailey, excluding assumed
liabilities of Dailey that were not impaired in the bankruptcy, was
approximately $185.0 million.
Dailey International is a leading provider of specialty drilling equipment
and services to the oil and gas industry and designs, manufactures and rents
proprietary downhole tools for oil and gas drilling and workover applications
worldwide.
In September 1999, we acquired Petroline WellSystems Limited for a total
consideration of approximately $165.0 million, consisting of $32.2 million in
cash and 3.8 million shares of our Common Stock. We also agreed to pay to the
sellers additional funds in the event they resell the shares of our stock
received by them in the acquisition in certain market transactions at a price
less than $35.175 per share. This obligation continues until October 2000.
Petroline, based in Aberdeen, Scotland, is a provider of premium completion
products and services to the international oil and gas industry. Petroline is
the leading provider of flow control equipment in the North Sea and was the
first company to successfully introduce completion products using new expandable
tube technology.
On September 15, 1999, we acquired Williams Tool Co. for 1.8 million shares
of our common stock. Williams, based in Fort Smith, Arkansas, offers a full
range of rotating control heads for horizontal, underbalanced and low
hydrostatic head drilling operations. Williams products are used to control flow
from the wellbore to reduce the risk of blowouts when oil, gas, geothermal and
coal gas methane wells are being drilled with light fluids.
We also completed acquisitions subsequent to year end that will be
integrated into Grant Prideco for total consideration of $11.3 million cash,
0.5 million shares of Common Stock and assumed debt of $24.2 million.
Some of our acquisitions have resulted in substantial goodwill associated
with their operations, including goodwill of approximately $372.1 million
relating to our acquisitions in 1997 and 1998. The amortization expense for
goodwill and other intangibles during 1998 was $17.6 million.
During 1997, we sold certain non-core businesses. Cash proceeds from
these transactions totaled $68.8 million in 1997.
PART 6 EXPOSURES, NEW ACCOUNTING PRONOUNCEMENTS AND YEAR 2000 MATTERS
EXPOSURES
INDUSTRY EXPOSURE
Substantially all of our customers are engaged in the energy industry.
This concentration of customers may impact our overall exposure to credit risk,
either positively or negatively, in that customers may be similarly affected by
changes in economic and industry conditions. Many of our customers have slowed
the payment of their accounts in light of current industry conditions and others
have experienced greater financial difficulties in meeting their payment terms.
We perform ongoing credit evaluations of our customers and do not generally
require collateral in support of our trade receivables. We maintain
reserves for potential credit losses, and, generally, actual losses have
historically been within our expectations.
LITIGATION AND ENVIRONMENTAL EXPOSURE
In the ordinary course of business, we become the subject of various
claims and litigation. We maintain insurance to cover many of our potential
losses and we are subject to various self-retentions and deductibles with
respect to our insurance. Although we are subject to various ongoing items of
litigation, we do not believe that any of the items of litigation that we are
currently subject to will result in any material uninsured losses to us. It is,
however, possible that an unexpected judgment could be rendered against us in
cases in which we could be uninsured and beyond the amounts that we currently
have reserved or anticipate incurring for that matter.
We are also subject to various federal, state and local laws and
regulations relating to the energy industry in general and the environment in
particular. Environmental laws have in recent years become more stringent and
have generally sought to impose greater liability on a larger number of
potentially responsible parties. While we are not currently aware of any
situation involving an environmental claim that would likely have a material
adverse effect on our business, it is always possible that an environmental
claim with respect to one or more of our current businesses or a business or
property that one of our predecessors owned or used could arise that could
involve the expenditure of a material amount of funds.
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INTERNATIONAL EXPOSURE
Like most multinational oilfield service companies, we have operations in
certain international areas, including parts of the Middle East, North and West
Africa, Latin America, the Asia-Pacific region and the Commonwealth of
Independent States, that are inherently subject to risks of war, political
disruption, civil disturbance and policies that may:
o disrupt oil and gas exploration and production activities;
o restrict the movement of funds;
o lead to U.S. government or international sanctions; and
o limit access to markets for periods of time.
Historically, the economic impact of such disruptions has been temporary,
and oil and gas exploration and production activities have resumed eventually
in relation to market forces. Certain areas, including the CIS, Algeria,
Nigeria, parts of the Middle East, the Asia-Pacific region and Latin America,
have been subjected to political disruption which has negatively impacted
results of operations following such events.
CURRENCY EXPOSURE
A single European currency (the "Euro") was introduced on January 1,
1999, at which time the conversion rates between legacy currencies and the Euro
were set for 11 participating member countries. However, the legacy currencies
in those countries will continue to be used as legal tender through January 1,
2002. Thereafter, the legacy currencies will be canceled, and the Euro bills
and coins will be used in the 11 participating countries. We are currently
evaluating the effect of the Euro on our consolidated financial statements and
our business operations; however, we do not foresee that the transition to the
Euro will have a significant impact.
Approximately 71.0% of our net assets from continuing operations are
located outside the United States and are carried on our books in local
currencies. Changes in those currencies in relation to the U.S. dollar result in
translation adjustments which are reflected as accumulated other comprehensive
loss in the stockholders' equity on our balance sheet. We recorded a $37.9
million and $5.3 million adjustment to our equity account for the year ended
December 31, 1998 and the six months ended June 30, 1999, respectively, to
reflect the net impact of the decline in various foreign currencies against the
U.S. dollar.
A discussion of our market risk exposures in financial instruments and
additional currency exposures appears below under the heading "Section C:
Quantitative and Qualitative Market Risk Disclosure."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for years beginning after December 15,
1997. We adopted SFAS No. 130 in the first quarter of 1998.
In June 1998, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131, effective for years
beginning after December 15, 1997, 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 segments. We adopted
SFAS No. 131 and restated our segment information and related disclosures in
accordance with its requirements.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes
disclosure requirements for pensions and other postretirement benefits. SFAS
No. 132 is effective for years beginning after December 15, 1997. We adopted
SFAS No. 132 in 1998.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
our use. We adopted SOP 98-1 in 1998. It did not have a significant effect on
our consolidated results of operations or financial position.
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In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. The adoption of SOP 98-5 is not expected to have a
significant effect on our consolidated results of operations or financial
position.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999 the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133, amending the effective date of SFAS No. 133 to years beginning
after June 15, 2000. We are currently evaluating the impact of SFAS No. 133 on
our consolidated financial statements.
YEAR 2000 MATTERS
The Year 2000 issue is the risk that information systems, computers,
equipment and products using date-sensitive software or containing computer
chips with two-digit date fields will be unable to correctly process the Year
2000 date change. If not identified and corrected prior to the Year 2000,
failures could occur in our software, hardware, equipment and products and
those of our suppliers, vendors and customers that could result in
interruptions in our business. Any failure could have a material impact on us.
In response to the Year 2000 issue, we have prepared and implemented a
plan ("Year 2000 Plan") to assess and remediate significant Year 2000 issues in
our:
o information technology systems ("IT"), including computer software
and hardware
o non-information technology systems utilizing date-sensitive
software or computer chips ("Non-IT"), including products,
facilities, equipment and other infrastructures.
Our management information systems department ("MIS Department"), together
with our technical and engineering employees and outside consultants, are
responsible for the implementation and execution of the Year 2000 Plan. Our Year
2000 Plan is a comprehensive, multi-step process covering our IT and Non-IT
systems. The primary phases of the Year 2000 Plan are:
(1) assessing and analyzing our systems to identify those that are not
Year 2000 ready
(2) preparing cost and resource estimates to repair, remediate or
replace all systems that are not Year 2000 ready
(3) developing a Company-wide, detailed strategy to coordinate the
repair or replacement of all systems that are not Year 2000 ready
(4) implementing the strategy to make all systems Year 2000 ready
(5) verifying, testing and auditing the Year 2000 readiness of all
systems.
As of September 30, 1999 the first, second, third and fourth phases of the
Year 2000 Plan have been completed. The fifth phase will be completed during the
fourth quarter of 1999. Any unexpected delays or problems that prevent us from
completing all phases of the Year 2000 Plan in a timely manner could have a
material adverse impact on us.
We retained outside consultants to assist us with the installation of new
software and with the assessment of the Year 2000 readiness of our information
technology systems. We expect to retain additional consultants to assist us in
the testing phase of the Year 2000 Plan.
In addition to our assessment and review of our own systems, we are in
communications with our third-party contractors, such as vendors, service
providers and customers, for the purpose of evaluating their readiness for the
Year 2000 and determining the extent to which we may be affected by the
remediation of their systems, software, applications and products. We expect to
further review and evaluate the Year 2000 programs of our significant
third-party contractors. However, there can be no guarantee that our IT and
Non-IT systems of third-party contractors will be Year 2000 ready or that the
failure of any such party to have Year 2000 ready systems would not result in
interruptions in our business which could have a material adverse impact on us.
In connection with the implementation and completion of the Year 2000 Plan,
we currently expect to incur pretax expenditures of approximately $9.5 million.
We have incurred approximately $8.0 million of such expenditures from January
1998 through June 30, 1999, of which, approximately $6.4 million has been
incurred in connection
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with the replacement of our business application software and approximately
$1.6 million has been incurred in connection with the replacement of certain
information technology hardware systems. We intend to continue to fund the Year
2000 Plan expenditures with working capital and third-party lease financing.
Based upon information currently available, we believe that expenditures
associated with achieving Year 2000 compliance will not have a material impact
on operating results. However, any unanticipated problems relating to the Year
2000 issue that result in materially increased expenditures could have a
material adverse impact on us.
The expenditures associated with the Year 2000 Plan represent approximately
15% of our MIS Department's budget for 1999. Various other IT projects that are
not related to the Year 2000 issue have been deferred due to the Year 2000
efforts. The effects of these delays are not expected to have a material impact
on the Company.
We have not completed the evaluation of the most likely worst case Year 2000
scenario. We are preparing a contingency plan in response to Year 2000 worst
case scenario and we estimate no lost revenues due to Year 2000 issues. However,
there can be no assurance that any contingency plan developed by us will be
sufficient to alleviate or remediate any significant Year 2000 problems that we
may experience.
The above discussion of our efforts and expectations relating to the risks
and uncertainties associated with the Year 2000 issues and our Year 2000 Plan
contain forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. These statements involve predictions and
expectations concerning our ability to achieve Year 2000 compliance, the amount
of costs and expenses related to the Year 2000 issue and the effect the Year
2000 issue may have on business and results of operations. Certain risks and
uncertainties may cause actual results to be materially different from the
projected or expected results, the overall effect of which may have a materially
adverse impact on us. These risks and uncertainties include, but are not limited
to, unanticipated problems and costs identified in all phases of the Year 2000
Plan, our ability to successfully implement the Year 2000 Plan in a timely
manner and the ability of our suppliers, vendors and customers to make their
systems and products Year 2000 compliant.
PART 7 FORWARD-LOOKING STATEMENTS
This report and our other filings with the Securities and Exchange
Commission and public releases contain statements relating to our future
results, including certain projections and business trends. We believe these
statements constitute "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995.
Certain risks and uncertainties may cause actual results to be materially
different from projected results contained in forward-looking statements in this
report and in our other disclosures. These risks and uncertainties include, but
are not limited to, the following:
A Further Downturn in Market Conditions Could Affect Projected Results.
Any unexpected material changes in oil and gas prices or other market
trends would likely affect the forward-looking information contained in
this report. Our estimates as to future results and industry trends make
assumptions regarding the future prices of oil and gas and their effect on
the demand and pricing of our products and services. In analyzing the
market and its impact on us for the remainder of 1999 and into 2000, we
have made the following assumptions:
o The recent increase in the price of oil will result in modest
improvements on our businesses in the fourth quarter of 1999 and
continue to improve through 2000, with the strongest improvements
expected to incur in the second half of 2000.
o Oil prices will average around $20 per barrel for 2000.
o Average natural gas prices for 2000 will remain at or near their current
levels.
o World demand for oil will be up only marginally or flat.
o Drilling activity will increase slightly beyond normal demand as oil
companies seek to replace and produce reserves that were not replaced or
produced in 1999.
o North American and international rig counts will improve, with increases
in the international rig count following the North American rig count
increase by around six months. In 2000, we expect the average rig count
for North America to be around 1,040 and the international rig count to
average around 629.
o Pricing for many of our products and services will continue to be
subject to pricing pressures due to industry consolidations and
competition as the industry recovers.
o Our completion and downhole services business will begin to experience
slight improvements in the fourth quarter.
o Demand for compression services will remain relatively flat for the
remainder of the year with some pricing pressure.
o Future growth in the industry will be dependent on technological
advances that can reduce the costs of exploration and production, and
technological improvements in tools used for re-entry, thru-tubing and
extended reach drilling as well as artificial lift technologies will be
important to our future.
These assumptions are based on various macroeconomic factors, and actual
market conditions could vary materially from those assumed.
A Continuation of the Low Rig Count Could Adversely Affect the Demand for
Our Products and Services. Our operations were materially affected by the
decline in the rig count during 1998 and 1999 to date. Although the North
American rig count has improved slightly from its historical low earlier
this year, a further decline in the North American and international rig
counts would adversely affect our results. Our forward-looking statements
regarding our drilling products assume an improvement in the rig count in
2000 and that there will not be any further material declines in the
worldwide rig count, in particular the domestic rig count.
Projected Cost Savings Could Be Insufficient. During 1998 and 1999 to
date, we implemented a number of programs intended to reduce costs and
align our cost structure with the current market environment. Our
forward-looking statements regarding cost savings and their impact on our
business assume these measures will generate the savings expected. However,
if the markets continue to decline, additional actions may be necessary to
achieve the desired savings.
Grant Spinoff. As discussed above, we are currently proposing a spinoff
of Our Grant Prideco drilling products business. The spinoff of this
business is subject to the receipt of a favorable private letter ruling
from the Internal Revenue Service confirming that the spinoff will be
generally tax free to us and our shareholders. Accordingly, there can be no
assurance that a spinoff of the business will occur or the specific timing
thereof.
Integration of Acquisitions. During the last year, we have consummated
various acquisitions of product lines and businesses. The success of these
acquisitions will be dependent on our ability to integrate these product
lines and businesses with our existing businesses and eliminate duplicative
costs. Our forward-looking statements assume the successful integration of
the acquired businesses during 2000. Integration of acquisitions is
something that cannot occur overnight and is something that requires
constant effort at the local level to be successful. Accordingly, there can
be no assurance as to the ultimate success of our integration efforts.
Weatherford's Success is Dependent upon Technological Advances. Our
ability to succeed with our long-term growth strategy is dependent on the
technological competitiveness of our product and service offerings. A
central aspect of our growth strategy is to enhance the technology of our
products and services, to expand the markets for many of our products
through the leverage of our worldwide infrastructure and to enter new
markets and expand in existing markets with technologically advanced
value-added products. Our forward-looking statements have assumed gradual
growth from these new products and services during 2000.
Unexpected Year 2000 Problems Could Have an Adverse Financial Impact. We
have not fully determined the impact of Year 2000 on our systems and
products. It is possible that unexpected problems associated with the Year
2000 could arise during the implementation of our Year 2000 program that
could have a material adverse effect on our business, financial condition
and results of operations. We are currently in the testing phase of our
Year 2000 program and expect it to be completed by the end of
November 1999.
Economic downturn in Asia and South America could adversely affect
demand for products and services. The economic downturn that began in Asia
in 1997 affected the economies in other regions of the world, including
South America and the former Soviet Union, and contributed to the decline
in the price of oil and the level of drilling activity. Although the
economy in the United States also has experienced one of its longest
periods of growth in recent history, the continued strength of the United
States economy cannot be assured. If the United States or European
economies were to begin to decline or if the economies of South America or
Asia were to experience further material problems, the demand and price for
oil and gas and our products and services could again adversely affect our
revenues and income. We have assumed that a worldwide recession or a
material downturn in the United States economy will not occur.
Currency Fluctuations Could Have a Material Adverse Financial Impact. A
material decline in currency rates in our markets could affect our future
results as well as affect the carrying values of our assets. World
currencies have been subject to much volatility. Our forward-looking
statements assume no material impact from changes in currencies because our
financial position is generally dollar based or hedged. For those revenues
denominated in local currency the effect of foreign currency fluctuations
is largely mitigated because local expenses are denominated in the same
currency.
Changes in Global Trade Policies Could Adversely Impact Operations.
Changes in global trade policies in our markets could impact our operations
in these markets. We have assumed that there will be no material changes in
global trading policies.
Unexpected Litigation and Legal Disputes Could Have a Material Adverse
Financial Impact. If we experience unexpected litigation or unexpected
results in our existing litigation having a material effect on results, the
accuracy of the forward-looking statements would be affected. Our
forward-looking statements assume that there will be no such unexpected
litigation or results.
Finally, our future results will depend upon various other risks and
uncertainties, including, but not limited to, those detailed in our other
filings with the Securities and Exchange Commission. For additional information
regarding risks and uncertainties, see our other current year filings with the
Commission under the Securities Exchange Act of 1934, as amended, and the
Securities Act of 1933, as amended. We will generally update our assumptions in
our filings as circumstances require.
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SECTION B SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data of our Company restated to give effect to the reclassification of
our drilling products segment as discontinued operations. The information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Restated Consolidated Financial
Statements and Notes thereto included in this report. The following information
may not be considered indicative of our future operating results.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Revenues ............................... $ 1,363,849 $ 1,357,374 $ 1,129,958 $ 976,341 $ 767,093
Operating Income (Loss) ................ 36,171 (a) 216,082 127,408 (1,629) 69,010
Income (Loss) From Continuing
Operations ......................... (883)(a) 129,745 71,225 (10,799) 39,630
Basic Earnings (Loss) Per Share
From Continuing Operations ......... (0.01) 1.35 0.79 (0.13) 0.59
Diluted Earnings (Loss) Per Share
From Continuing Operations ......... (0.01) 1.33 0.78 (0.13) 0.58
Total Assets ........................... 2,638,612 2,508,034 2,121,415 1,636,535 1,410,812
Long-Term Debt ......................... 220,398 224,935 415,095 414,894 300,685
5% Convertible Subordinated
Preferred Equivalent Debentures .... 402,500 402,500 -- -- --
Stockholders' Equity ................... 1,493,880 1,458,549 1,292,704 958,337 845,287
Cash Dividends Per Share ............... -- -- -- -- --
(a) Includes $160.0 million, $104.0 million net of tax, of merger and
other charges relating to the merger between EVI and Weatherford Enterra and a
reorganization and rationalization of our business in light of our industry
conditions.
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SECTION C QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
We are currently exposed to market risk from changes in foreign currency and
changes in interest rates. A discussion of our market risk exposure in financial
instruments follows.
FOREIGN CURRENCY EXCHANGE RATES
Because we operate in virtually every oil and gas exploration and production
region in the world we conduct a portion of our business in currencies other
than the U.S. dollar. Although most of our international revenues are
denominated in the local currency, the effects of foreign currency fluctuations
are largely mitigated because local expenses of such foreign operations also
generally are denominated in the same currency. The impact of exchange rate
fluctuations during the years ended 1998, 1997 and 1996 did not have a material
effect on reported amounts of revenues or net income.
We enter into forward exchange contracts only as a hedge against certain
existing economic exposures, and not for speculative or trading purposes. These
contracts reduce exposure to currency movements affecting existing assets and
liabilities denominated in foreign currencies, such exposure resulting primarily
from trade receivables and payables and intercompany loans. The future value of
these contracts and the related currency positions are subject to offsetting
market risk resulting from foreign currency exchange rate volatility. The
counterparties to these foreign exchange contracts are creditworthy
multinational commercial banks. We believe that the risk of counterparty
nonperformance is immaterial.
At December 31, 1998 and 1997, we had contracts maturing within the next 60
days to sell $33.4 million and $36.8 million, respectively, in Norwegian kroner,
U.K. pounds sterling, Canadian dollars and Dutch guilders. Our largest contracts
are in Norwegian kroner, $28.8 million and $25.4 million as of December 31, 1998
and 1997, respectively. Had such respective contracts matured on December 31,
1998 and 1997, our required cash outlay would have been minimal.
Settlement of forward exchange contracts resulted in net cash inflows
totaling $0.4 million, $5.2 million and $1.1 million during the years ended
December 31, 1998, 1997, and 1996, respectively. The net cash inflows vary from
year to year due to differences in the forward rate and the spot rate on the
date of settlement. This difference may result in material net inflows and
outflows if the currency is volatile. For instance, we experienced a $5.2
million net cash inflow in 1997, $4.2 million of which related to the Norwegian
kroner, when the difference between the spot rate at the settlement date and the
forward rate related to the kroner was as much as 8%. Although currencies could
fluctuate in the future and result in either a net inflow or outflow, we believe
that this risk is mitigated because we enter into contracts with terms of 30 to
60 days. However, there can be no assurance that volatility similar to or
greater than that experienced in 1997 could not occur in the future.
INTEREST RATES
We are subject to interest rate risk on our long-term fixed interest rate
debt and, to a lesser extent, variable interest rate borrowings. Our long-term
borrowings primarily consist of the $200.0 million principal of the 7 1/4%
Senior Notes due 2006 and the $402.5 million principal of the 5% Convertible
Subordinated Preferred Equivalent Debentures due 2027. Changes in interest rates
would, assuming all other things being equal, cause the fair market value of
debt with a fixed interest rate to increase or decrease, and thus increase or
decrease the amount required to refinance the debt. As of December 31, 1998 and
1997, the fair value of the Senior Notes approximated the carrying value and the
fair market value of the Debentures was $249.6 million and $368.8 million,
respectively. The fair value of the Senior Notes is solely dependent on changes
in prevailing interest rates, whereas the fair value of the Debentures is
dependent on prevailing interest rates and our current stock price as it relates
to the conversion price of $80 per share of our Common Stock.
We have various other debt instruments but believe that the impact of changes
in interest rates in the near term will not be material to these instruments.
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SECTION D FINANCIAL STATEMENTS
PART 1: RESTATED AUDITED HISTORICAL FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
This section presents Weatherford's Restated Audited Historical Financial
Statements and Financial Statement Schedules previously included in
Weatherford's Annual Report on Form 10-K for the three years ended
December 1998, 1997 and 1996.
INDEX TO RESTATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
----
Report of Independent Public Accountants.................................. 41
Restated Consolidated Balance Sheets as of December 31, 1998 and 1997..... 42
Restated Consolidated Statements of Income for each of the three years
in the period ended December 31, 1998................................... 43
Restated Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998................... 44
Restated Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............................. 45
Notes to Restated Consolidated Financial Statements....................... 46
Financial Statement Schedule:
II. Valuation and Qualifying Accounts and Allowances.................... 71
All other schedules are omitted because they are not required or because the
required information is included in the restated financial statements or notes
thereto.
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Report of Independent Public Accountants
To Weatherford International, Inc.:
We have audited the accompanying restated consolidated balance sheets of
Weatherford International, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related restated consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Weatherford International, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule II relating to
Weatherford International, Inc. and subsidiaries is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The supplemental schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
of Weatherford International, Inc. and subsidiaries.
ARTHUR ANDERSEN LLP
Houston, Texas
February 17, 1999
(except with respect to the matter
discussed in Note 2, as to
which the date is October 22, 1999)
PAGE 41
42
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ............................................ $ 34,131 $ 66,008
Accounts Receivable, Net of Allowance for Uncollectible Accounts
of $19,398 in 1998 and $23,077 in 1997 ............................. 271,867 381,474
Inventories .......................................................... 298,555 269,563
Current Deferred Tax Asset ........................................... 44,218 35,860
Other Current Assets ................................................. 83,325 29,926
----------- -----------
732,096 782,831
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land, Buildings and Other Property ................................... 162,466 146,624
Rental and Service Equipment ......................................... 902,939 1,010,065
Machinery and Equipment .............................................. 312,611 220,389
----------- -----------
1,378,016 1,377,078
Less: Accumulated Depreciation ...................................... 748,740 703,105
----------- -----------
629,276 673,973
----------- -----------
GOODWILL, NET ............................................................. 648,570 560,877
NET ASSETS OF DISCONTINUED OPERATIONS ..................................... 545,211 432,722
OTHER ASSETS .............................................................. 83,459 57,631
----------- -----------
$ 2,638,612 $ 2,508,034
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings ................................................ $ 137,279 $ 24,243
Current Portion of Long-Term Debt .................................... 14,915 6,541
Accounts Payable ..................................................... 92,274 117,563
Accrued Salaries and Benefits ........................................ 40,127 55,570
Current Tax Liability ................................................ 21,839 44,317
Other Accrued Liabilities ............................................ 106,139 98,736
----------- -----------
412,573 346,970
----------- -----------
LONG-TERM DEBT ............................................................ 220,398 224,935
DEFERRED INCOME TAXES AND OTHER ........................................... 109,261 75,080
5% CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES ............... 402,500 402,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 Par Value, Authorized 250,000 Shares, Issued
103,513 Shares in 1998 and 101,958 Shares in 1997 .................. 103,513 101,958
Capital in Excess of Par Value ....................................... 1,052,899 1,018,024
Treasury Stock, at Cost .............................................. (193,328) (165,287)
Retained Earnings .................................................... 607,185 542,348
Accumulated Other Comprehensive Loss ................................. (76,389) (38,494)
----------- -----------
1,493,880 1,458,549
----------- -----------
$ 2,638,612 $ 2,508,034
=========== ===========
The accompanying notes are an integral part of these
restated consolidated financial statements.
PAGE 42
43
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
REVENUES:
Products ................................................ $ 603,765 $ 486,108 $ 367,038
Services and Rentals .................................... 760,084 871,266 762,920
----------- ----------- -----------
1,363,849 1,357,374 1,129,958
COSTS AND EXPENSES:
Cost of Products ........................................ 444,099 356,779 276,019
Cost of Services and Rentals ............................ 502,652 580,814 548,633
Selling, General and Administrative Attributable to
Segments .............................................. 219,939 169,385 141,552
Corporate General and Administrative .................... 26,020 36,896 38,424
Equity in Earnings of Unconsolidated Affiliates ......... (2,679) (2,582) (2,078)
Merger Costs and Other Charges .......................... 137,647 -- --
----------- ----------- -----------
1,327,678 1,141,292 1,002,550
----------- ----------- -----------
OPERATING INCOME ............................................. 36,171 216,082 127,408
OTHER INCOME (EXPENSE):
Interest Income ......................................... 3,093 8,329 4,145
Interest Expense ........................................ (42,489) (30,638) (31,997)
Gain on Sale of Marketable Securities ................... -- 3,352 --
Other, Net .............................................. (2,955) 931 (802)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ............................ (6,180) 198,056 98,754
(PROVISION) BENEFIT FOR INCOME TAXES ......................... 5,297 (68,311) (27,529)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS ..................... (883) 129,745 71,225
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES ............ 65,720 67,028 28,404
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAXES .... -- -- 66,924
EXTRAORDINARY CHARGE, NET OF TAXES ........................... -- (9,010) (731)
----------- ----------- -----------
NET INCOME ................................................... $ 64,837 $ 187,763 $ 165,822
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income (Loss) From Continuing Operations ................ $ (0.01) $ 1.35 $ 0.79
Income From Discontinued Operations ..................... 0.68 0.69 0.32
Gain on Disposal of Discontinued Operations ............. -- -- 0.75
Extraordinary Charge .................................... -- (0.09) (0.01)
----------- ----------- -----------
Net Income Per Share .................................... $ 0.67 $ 1.95 $ 1.85
=========== =========== ===========
Basic Weighted Average Shares Outstanding ............... 97,065 96,052 89,842
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) From Continuing Operations ................ $ (0.01) $ 1.33 $ 0.78
Income From Discontinued Operations ..................... 0.68 0.68 0.31
Gain on Disposal of Discontinued Operations ............. -- -- 0.74
Extraordinary Charge .................................... -- (0.09) (0.01)
----------- ----------- -----------
Net Income Per Share .................................... $ 0.67 $ 1.92 $ 1.82
=========== =========== ===========
Diluted Weighted Average Shares Outstanding ............. 97,065 97,562 90,981
=========== =========== ===========
The accompanying notes are an integral part of these
restated consolidated financial statements.
PAGE 43
44
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE
INCOME
(LOSS)
--------------------------
CUMULATIVE
FOREIGN UNREALIZED
COMMON STOCK CAPITAL IN CURRENCY GAIN ON
------------------------ EXCESS OF RETAINED TRANSLATION MARKETABLE
SHARES $1 PAR PAR VALUE EARNINGS ADJUSTMENT SECURITIES
--------- ----------- ----------- ----------- ------------ -----------
Balance at December 31, 1995 ................. 85,485 $ 85,485 $ 698,320 $ 189,838 $ (12,784) $ --
Total Comprehensive Income ................... -- -- -- 165,822 1,304 2,381
Shares Issued in Acquisitions ................ 2,339 2,339 48,395 -- -- --
Shares Issued Under Employee
Benefit Plans .............................. 29 29 1,342 -- -- --
Stock Grants and Options Exercised ........... 740 740 12,038 -- -- --
Issuance of Common Stock ..................... 6,900 6,900 93,960 -- -- --
Purchase of Treasury Stock for Executive
Deferred Compensation Plan ................. -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 ................. 95,493 95,493 854,055 355,660 (11,480) 2,381
Total Comprehensive Income (Loss) ............ -- -- -- 187,763 (27,014) (2,381)
Effect of Immaterial Pooling ................. 946 946 (717) (1,075) -- --
Replacement Shares (Shares Acquired)
from GulfMark Merger ....................... 4,471 4,471 142,788 -- -- --
Shares Issued Under Employee
Benefit Plans .............................. 11 11 464 -- -- --
Stock Grants and Options Exercised ........... 1,037 1,037 12,635 -- -- --
Tax Benefit of Options Exercised ............. -- -- 8,799 -- -- --
Purchase of Treasury Stock Under
Stock Repurchase Plan ...................... -- -- -- -- -- --
Purchase of Treasury Stock for Executive
Deferred Compensation Plan ................. -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 ................. 101,958 101,958 1,018,024 542,348 (38,494) --
Total Comprehensive Income (Loss) ............ -- -- -- 64,837 (37,895) --
Shares Issued in an Acquisition .............. 727 727 30,026 -- -- --
Shares Issued Under Employee
Benefit Plans .............................. 12 12 312 -- -- --
Stock Grants and Options Exercised ........... 2,115 2,115 40,627 -- -- --
Tax Benefit of Options Exercised ............. -- -- 7,760 -- -- --
Purchase of Treasury Stock Under
Stock Repurchase Plan ...................... -- -- -- -- -- --
Purchase of Treasury Stock for Executive
Deferred Compensation Plan ................. -- -- -- -- -- --
Retirement of Treasury Stock ................. (1,299) (1,299) (49,229) -- -- --
Recognition of Deferred Compensation
Due to Merger .............................. -- -- 5,379 -- -- --
--------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 ................. 103,513 $ 103,513 $ 1,052,899 $ 607,185 $ (76,389) $ --
========= =========== =========== =========== =========== ===========
TREASURY STOCK TOTAL
------------------------ STOCKHOLDERS'
SHARES AMOUNT EQUITY
--------- ----------- -------------
Balance at December 31, 1995 ................. (265) $ (2,522) $ 958,337
Total Comprehensive Income ................... -- -- 169,507
Shares Issued in Acquisitions ................ -- -- 50,734
Shares Issued Under Employee
Benefit Plans .............................. 20 419 1,790
Stock Grants and Options Exercised ........... (8) (394) 12,384
Issuance of Common Stock ..................... -- -- 100,860
Purchase of Treasury Stock for Executive
Deferred Compensation Plan ................. (44) (908) (908)
--------- ----------- -----------
Balance at December 31, 1996 ................. (297) (3,405) 1,292,704
Total Comprehensive Income (Loss) ............ -- -- 158,368
Effect of Immaterial Pooling ................. -- -- (846)
Replacement Shares (Shares Acquired)
from GulfMark Merger ....................... (4,471) (147,259) --
Shares Issued Under Employee
Benefit Plans .............................. -- -- 475
Stock Grants and Options Exercised ........... (5) (247) 13,425
Tax Benefit of Options Exercised ............. -- -- 8,799
Purchase of Treasury Stock Under
Stock Repurchase Plan ...................... (275) (11,860) (11,860)
Purchase of Treasury Stock for Executive
Deferred Compensation Plan ................. (48) (2,516) (2,516)
--------- ----------- -----------
Balance at December 31, 1997 ................. (5,096) (165,287) 1,458,549
Total Comprehensive Income (Loss) ............ -- -- 26,942
Shares Issued in an Acquisition .............. -- -- 30,753
Shares Issued Under Employee
Benefit Plans .............................. -- -- 324
Stock Grants and Options Exercised ........... (1,240) (38,215) 4,527
Tax Benefit of Options Exercised ............. -- -- 7,760
Purchase of Treasury Stock Under
Stock Repurchase Plan ...................... (993) (37,585) (37,585)
Purchase of Treasury Stock for Executive
Deferred Compensation Plan ................. (79) (2,769) (2,769)
Retirement of Treasury Stock ................. 1,299 50,528 --
Recognition of Deferred Compensation
Due to Merger .............................. -- -- 5,379
--------- ----------- -----------
Balance at December 31, 1998 ................. (6,109) $ (193,328) $ 1,493,880
========= =========== ===========
The accompanying notes are an integral part of
these restated consolidated financial statements.
PAGE 44
45
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................................ $ 64,837 $ 187,763 $ 165,822
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Non-Cash Portion of Merger Costs and Other Charges ...................... 94,095 -- --
Depreciation and Amortization ........................................... 139,558 119,321 110,784
Net Income from Discontinued Operations ................................. (65,720) (67,028) (28,404)
Gain on Disposal of Discontinued Operations, Net ........................ -- -- (66,924)
Gain on Sale of Assets, Net ............................................. (35,315) (20,056) (13,946)
Extraordinary Charge on Prepayment of Debt, Net ......................... -- 9,010 731
Deferred Income Tax Provision (Benefit) from Continuing Operations ...... (15,560) 17,416 (11,187)
Provision for Uncollectible Accounts Receivable ......................... 2,189 13,088 4,608
Change in Assets and Liabilities, Net of Effects of Businesses
Acquired:
Accounts Receivable ................................................... 110,038 (74,422) (46,239)
Inventories ........................................................... (50,677) (54,543) (3,141)
Other Current Assets .................................................. (26,025) (1,378) 2,380
Accounts Payable ...................................................... (30,876) 9,208 11,758
Accrued Current Liabilities ........................................... (78,052) 20,446 (3)
Other Assets .......................................................... 9,097 (2,640) (2,266)
Other, Net ............................................................ (3,524) 4,372 (11,302)
--------- --------- ---------
Net Cash Provided by Continuing Operations .......................... 114,065 160,557 112,671
Net Cash Provided (Used) by Discontinued Operations ................. 7,787 (38,513) 5,878
--------- --------- ---------
Net Cash Provided by Operating Activities ........................... 121,852 122,044 118,549
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of Cash Acquired ........................... (128,288) (272,448) (41,958)
Capital Expenditures for Property, Plant and Equipment .................... (167,777) (180,310) (158,393)
Proceeds from Sales of Businesses ......................................... -- 68,798 326,016
Proceeds from Sales of Property, Plant and Equipment ...................... 47,953 30,431 19,983
Purchase of Short-Term Investment ......................................... (20,742) -- --
Proceeds from Sale and Leaseback of Equipment ............................. 100,000 -- --
Acquisitions and Capital Expenditures of Discontinued Operations .......... (48,654) (81,711) (115,587)
Income Taxes Paid on Disposal of Discontinued Operations .................. -- (62,808) --
Proceeds From Sale of Marketable Securities ............................... -- 23,352 --
Other, Net ................................................................ 589 (6,384) (15,388)
--------- --------- ---------
Net Cash Provided (Used) by Investing Activities ...................... (216,919) (481,080) 14,673
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Long-Term Debt, Net ........................................... -- 390,911 197,824
Issuance of Common Stock, Net ............................................. -- -- 100,860
Purchases of Treasury Stock ............................................... (40,356) (14,376) (908)
Tender of Senior Notes .................................................... -- (119,980) --
Proceeds from Stock Option Exercises ...................................... 3,932 16,352 14,148
Termination Costs on Retirement of Debt ................................... -- (10,752) (1,125)
Borrowings (Repayments) Under Short-Term Borrowings, Net .................. 113,036 21,319 (121,656)
Repayments on Long-Term Debt, Net ......................................... (12,571) (103,237) (105,240)
Other Financing Activities, Net ........................................... 324 (10,111) 4,978
--------- --------- ---------
Net Cash Provided by Financing Activities ............................. 64,365 170,126 88,881
--------- --------- ---------
Effect of Exchange Rate on Cash ........................................... (1,175) (784) (220)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (31,877) (189,694) 221,883
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 66,008 255,702 33,819
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................................... $ 34,131 $ 66,008 $ 255,702
========= ========= =========
The accompanying notes are an integral part of
these restated consolidated financial statements.
PAGE 45
46
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The restated consolidated financial statements include the accounts of
Weatherford International, Inc. and all majority-owned subsidiaries (the
"Company"). All material intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for its 50% or less-owned
affiliates using the equity method.
BASIS OF PRESENTATION
In October 1999, the Board of Directors of the Company approved a plan to
distribute all of the outstanding shares of common stock of its wholly owned
subsidiary, Grant Prideco, Inc. (the "Spinoff") to holders of the Company's
common stock, $1.00 par value ("Common Stock"). In connection with the Spinoff,
the Company will transfer its drilling products businesses to Grant Prideco,
Inc. ("Grant Prideco"). As a result the Company has restated its financial
statements reflecting the historical operations of Grant Prideco as discontinued
operations (See Note 2).
NAME CHANGE
At the Company's annual stockholders meeting on September 21, 1998, the
stockholders of the Company approved a name change from EVI Weatherford, Inc.
to Weatherford International, Inc. The Company's Common Stock, is listed on the
New York Stock Exchange with a new stock symbol of "WFT".
NATURE OF OPERATIONS
The Company is one of the world's largest providers of oilfield services
and equipment for the oil and gas industry.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories are valued using the first-in, first-out ("FIFO") method and
are stated at the lower of cost or market.
OTHER CURRENT ASSETS
Other current assets are comprised of non-trade receivables, prepaid
expenses, and short-term investments. The net increase from December 31, 1997
to December 31, 1998 primarily reflects the receivable of $19.6 million related
to the December 1998 sale and leaseback of compression equipment (See Note 15)
and the fourth quarter purchase of short-term investments in debt securities
for $20.7 million.
DEBT AND EQUITY SECURITIES
Investments in debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
Accounting for Debt and Equity Securities, and accordingly, these investments
are recorded at their fair market value with unrealized gains or losses
recorded as a separate component of stockholders' equity. The Company has
classified these investments in other current assets as available for sale,
with any other than temporary decline in fair value of securities charged to
earnings. In April 1997, the Company sold equity securities, comprised of
approximately 3.1 million shares of Parker Drilling Company ("Parker") common
stock, pursuant to a public offering effected by Parker. As a result, the
Company
PAGE 46
47
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
received net proceeds of approximately $23.4 million and recognized a pre-tax
gain of approximately $3.4 million. (See Note 2).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost. Maintenance and repairs
are expensed as incurred. The costs of renewals, replacements and betterments
are capitalized. Depreciation on fixed assets is computed using the
straight-line method over the estimated useful lives for the respective
categories. The Company evaluates potential impairment of property, plant and
equipment and other long-lived assets on an ongoing basis whenever events or
circumstances indicate that carrying amounts may not be recoverable. The useful
lives of the major classes of property, plant and equipment are as follows:
LIFE
--------------
Buildings and other property............... 5 - 45 years
Rental and service equipment............... 3 - 15 years
Machinery and equipment.................... 3 - 20 years
INTANGIBLE ASSETS AND AMORTIZATION
The Company's intangible assets are comprised primarily of goodwill and
identifiable intangible assets, principally patents and technology licenses.
The Company periodically evaluates goodwill and other intangible assets, net of
accumulated amortization, for impairment based on the undiscounted cash flows
associated with the asset compared to the carrying amount of that asset.
Management believes that there have been no events or circumstances which
warrant revision to the remaining useful life or which affect the
recoverability of any intangible assets. Goodwill is being amortized on a
straight-line basis over the lesser of the estimated useful life up to 40
years. Other identifiable intangible assets, included as a component of other
assets, are amortized on a straight-line basis over the years expected to be
benefited, ranging from 5 to 15 years.
Amortization expense for goodwill and other intangible assets was
approximately $17.6 million, $11.6 million and $9.6 million for 1998, 1997 and
1996, respectively. Accumulated amortization for goodwill at December 31, 1998
and 1997 was $41.4 million and $26.3 million, respectively.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to the remediation of an existing
condition caused by past operations, and which do not contribute to current or
future revenues, are expensed. Liabilities for these expenditures are recorded
when it is probable that obligations have been incurred and the costs can be
reasonably estimated. Estimates are based on currently available facts and
technology, presently enacted laws and regulations and the Company's prior
experience in remediation of contaminated sites. Liabilities included $3.6
million and $8.5 million of accrued environmental expenditures at December 31,
1998 and 1997, respectively.
STOCK-BASED COMPENSATION
In 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 123, ("SFAS No. 123"),
Accounting for Stock Based Compensation. The Company has elected not to adopt
the accounting recognition provisions of SFAS No. 123 and, as permitted, has
continued to use the intrinsic value method of accounting established by
Accounting Principles Board Opinion No. 25 ("APB No. 25") Accounting for Stock
Issued to Employees to account for its stock-based compensation programs. Under
APB No. 25 no compensation expense is recognized when the exercise price of an
employee stock option is equal to the market price of Common Stock on the grant
date. The Company has adopted SFAS No. 123 by making the required pro forma
disclosures of net earnings and earnings per share as if the fair value method
of accounting under SFAS No. 123 had been applied. (See Note 11).
PAGE 47
48
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION
The functional currency for most of the Company's international operations
is the applicable local currency. Results of operations for foreign
subsidiaries with functional currencies other than the U.S. dollar are
translated using average exchange rates during the period. Assets and
liabilities of these foreign subsidiaries are translated using the exchange
rates in effect at the balance sheet date, and the resulting translation
adjustments are included as accumulated other comprehensive loss, a component
of stockholders' equity. Currency transaction gains and losses are reflected in
income for the period.
The net decline in the cumulative foreign currency translation adjustment,
as reported in the Restated Consolidated Statements of Stockholders' Equity,
from December 31, 1997 to December 31, 1998 was $37.9 million which primarily
reflects the financial impact of the devaluation of the Canadian and Latin
American currencies as compared to the U.S. dollar.
FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange contracts only as a hedge against
certain existing economic exposures, and not for speculative or trading
purposes. These contracts reduce exposure to currency movements affecting
specific existing assets and liabilities denominated in foreign currencies,
such exposure resulting primarily from trade receivables and payables and
intercompany loans. The future value of these contracts and the related
currency positions are subject to offsetting market risks resulting from
foreign currency exchange rate volatility. The counterparties to the Company's
foreign exchange contracts are creditworthy multinational commercial banks.
Management believes that the risk of counterparty nonperformance is immaterial.
At December 31, 1998 and 1997, the Company had contracts maturing within the
next 60 days to sell $33.4 million and $36.8 million, respectively, in
Norwegian kroner, U.K. pounds sterling, Canadian dollars and Dutch guilders.
Had such respective contracts matured on December 31, 1998 and 1997, the
Company's required cash outlay would have been insignificant.
ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS
The Company's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating levels, and to centrally manage
various cash functions. Consequently, a portion of the Company's historical
interest expense has been allocated to discontinued operations. The amount
allocated reflects interest expense associated with the Grant Prideco Note (See
Note 2) calculated using the Company's average long-term debt interest rates for
the applicable periods. The amounts allocated using this methodology result in
amounts consistent with the allocation of interest expense based on a ratio of
the net assets of discontinued operations to the Company's consolidated net
assets plus debt.
ACCOUNTING FOR INCOME TAXES
Under Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), Accounting for Income Taxes, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped or accepted by the
customer and when service and rentals are provided. Proceeds from customers for
the cost of oilfield rental equipment that is involuntarily damaged or lost
downhole are reflected as revenues.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income by the weighted
average number of shares of Common Stock outstanding during the year. Diluted
earnings per common share is computed by dividing 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 and restricted stock plans (See Note 11). The effect
of stock options and restricted stock are not included in the computation for
periods in which a loss from continuing operations occurs because to do so would
have been anti-dilutive. The effect of the 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:
DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(in thousands)
Basic weighted average number of shares outstanding ............ 97,065 96,052 89,842
Dilutive effect of stock option and restricted stock plans ..... - 1,510 1,139
------ ------ ------
Diluted weighted average number of shares outstanding .......... 97,065 97,562 90,981
====== ====== ======
PAGE 48
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
NEW REPORTING REQUIREMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
adopted SFAS No. 130 in 1998 and presents comprehensive income in the
accompanying Restated Consolidated Statements of Stockholders' Equity. The
primary adjustments and reclassifications to reflect net income on a
comprehensive income basis for the years presented were foreign currency
translation adjustments and the effect of unrealized and realized gains on
marketable securities.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS No. 132"), Employers' Disclosures About Pensions and
Other Postretirement Benefits. SFAS No. 132 standardizes disclosure requirements
for pensions and other postretirement benefits. The Company adopted SFAS No. 132
in 1998 (See Note 12).
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
the Company's use. The Company has adopted SOP 98-1. The adoption did not have
a significant effect on the restated consolidated results of operations or
financial position.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. The Company does not capitalize start-up cost; thus, the
adoption will not have a significant effect on the restated consolidated
results of operations or financial position of the Company.
In June 1998, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS No. 133, amending the
effective date of SFAS No. 133 to years beginning after June 15, 2000. The
Company is currently evaluating the impact that SFAS No. 133 will have on its
consolidated financial statements.
2. DISCONTINUED OPERATIONS AND DISPOSITIONS
GRANT PRIDECO
In October 1999, the Board of Directors of the Company approved a plan to
Spinoff Grant Prideco. The Spinoff is conditioned upon the receipt of a revenue
ruling from the United States Internal Revenue Service (the "IRS") to the effect
that receipt of shares of Grant Prideco common stock should be tax free for
federal income tax purposes to our stockholders and that the Company should not
recognize income, gain or loss as a result of the Spinoff.
The results of operations for Grant Prideco are reflected in the
accompanying Restated Consolidated Statements of Income as "Discontinued
Operations, Net of Taxes." Condensed results of Grant Prideco were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
(in thousands)
Revenues.......................................... $ 646,805 $ 611,715 $ 337,312
----------- ----------- ----------
Income before interest allocation and income taxes 112,818 114,155 39,907
Interest allocation .............................. (7,250) (7,250) (5,987)
Provision for income taxes........................ (39,848) (39,877) (12,984)
----------- ----------- ----------
Net income........................................ $ 65,720 $ 67,028 $ 20,936
=========== =========== ==========
In connection with the Spinoff, Grant Prideco will issue an unsecured
subordinated note to the Company in the amount of $100.0 million. The $100.0
million obligation will bear interest at an annual rate equal to 10.0%. Interest
payments will be due quarterly, and principal and all unpaid interest will be
due no later than December 31, 2001. Under the terms of the note, Grant Prideco
is required to repay this note with the proceeds of any debt or equity
financing, excluding financing under a credit facility or any equity issued in
connection with a business combination. The indebtedness of Grant Prideco to the
Company will be subordinated to the working capital obligations of Grant Prideco
to its banks. Grant Prideco currently intends to repay the obligations within 12
months from the completion of the Spinoff, pursuant to an anticipated public
debt financing. Grant Prideco's ability to repay this indebtedness, however,
will be dependent upon market conditions.
The Company purchases drill pipe and other related products from Grant
Prideco. The amounts purchased by the Company for the years ended
December 31, 1998, 1997 and 1996 were $9.6 million, $7.7 million and
$5.7 million, respectively. Such purchases represent Grant Prideco's cost
and have been eliminated in the accompanying restated consolidated
financial statements.
The Company charged Grant Prideco a management fee of $1.0 million, $0.9
million and $0.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The fee is based on the time devoted to Grant Prideco for
accounting, tax, treasury and risk management services.
Grant Prideco was charged $5.6 million, $3.5 million and $1.1 million of
costs related to the Company's information systems function in the years ended
December 31, 1998, 1997 and 1996, respectively. Information systems charges were
based on direct support provided, equipment usage and number of system users.
The Company intends to enter into a transition services agreement with
Grant Prideco for a period of one year from the Spinoff date. Under the
agreement, the Company will provide certain services requested by Grant
Prideco. The fee for these services will be based on a cost-plus 10% basis.
The transition services to be provided under this agreement may include
accounting, tax, finance and legal services, employee benefit services,
information services, management information systems and may include any
other similar services.
The Company intends to enter into a preferred customer agreement with
Grant Prideco pursuant to which the Company will agree for at least a three
year period to purchase at least 70% of its requirements of drill stem
product from Grant Prideco. The price for those products will be at a price
not greater than that which Grant Prideco sells to its best similarly
situated customers. The Company will be entitled to apply against its purchases
a drill stem credit granted to it in the amount of $15 million, subject to a
limitation of the application of the credit to no more than 20% of any purchase.
MALLARD BAY
On November 11, 1996, the Company completed the sale of its contract
drilling segment which was comprised of the Mallard Bay contract drilling
division ("Mallard Division") to Parker, in exchange for cash of approximately
$306.9 million and approximately 3.1 million shares of Parker common stock
valued by the Company at approximately $20.0 million. The Company reported a net
gain on the disposal of the Mallard Division of $66.9 million, net of taxes of
$44.6 million.
The results of operations for the Mallard Division are reflected in the
accompanying Restated Consolidated Statements of Income as "Discontinued
Operations, Net of Taxes." Condensed results of the Mallard Division
discontinued operations were as follows:
ELEVEN
MONTHS ENDED
NOVEMBER 11,
1996
-------------
(in thousands)
Revenues................................................................... $ 81,310
-------------
Income before income taxes................................................. 11,490
Provision for income taxes................................................. (4,022)
-------------
Net income................................................................. $ 7,468
=============
OTHER BUSINESSES
During 1997 and 1996, the Company also sold certain non-core businesses.
Cash proceeds from these transactions totaled $68.8 million and $19.2 million in
1997 and 1996, respectively.
3. MERGERS AND ACQUISITIONS
On May 27, 1998, EVI, Inc. ("EVI") completed a merger with Weatherford
Enterra, Inc. ("WII"), merging WII with and into EVI pursuant to a tax free
merger (the "Merger") in which the stockholders of WII received 0.95 of a share
of the Company's Common Stock in exchange for each outstanding share of WII
common stock, approximately 48.9 million shares. In addition, approximately 1.4
million shares of Common Stock have been reserved for issuance by the Company
for outstanding options under WII's compensation and benefit plans. The Merger
was accounted for as a pooling of interests.
PAGE 49
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
The separate results of EVI and WII and the combined company were as
follows:
January 1 to
May 27, Year Ended December 31,
----------- --------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
Revenues:
EVI ....................................... $ 505,549 $ 892,264 $ 478,020
WII ....................................... 426,422 1,083,965 994,468
Merger adjustments ........................ (4,963) (7,140) (5,218)
----------- ----------- -----------
Combined .................................. 927,008 1,969,089 1,467,270
Discontinued Operations ................... (311,367) (611,715) (337,312)
----------- ----------- -----------
Restated ................................ $ 615,641 $ 1,357,374 $ 1,129,958
=========== =========== ===========
Extraordinary Charge, Net of Taxes:
EVI ....................................... $ -- $ (9,010) $ (731)
WII ....................................... -- -- --
----------- ----------- -----------
Combined .................................. $ -- $ (9,010) $ (731)
=========== =========== ===========
Net Income (Loss):
EVI ....................................... $ 54,045 $ 74,685 $ 98,166
WII ....................................... 48,481 112,900 70,073
Merger adjustments ........................ (1,033) 178 (2,417)
----------- ----------- -----------
Combined .................................. $ 101,493 $ 187,763 $ 165,822
=========== =========== ===========
Merger adjustments include the elimination of intercompany revenues of $5.0
million, $7.1 million and $5.2 million and cost of sales of $3.4 million, $5.7
million and $4.2 million for the five months ended May 27, 1998 and years ended
December 31, 1997 and 1996, respectively. Merger adjustments for the years ended
December 31, 1997 and 1996 also include the elimination of expenses of $1.7
million and a gain of $2.7 million, respectively, recorded by WII on the sale of
Arrow Completion Systems, Inc. to EVI in December 1996.
On February 19, 1998, the Company completed the acquisition of Ampscot
Equipment Ltd. ("Ampscot"), an Alberta corporation, 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 Common Stock have been issued 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.
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 U.S.A., 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 $98.8
million in cash, including a final working capital adjustment, and $14.3 million
in assumed debt. BMW Pump is a Canadian-based manufacturer of progressing cavity
pumps, and BMW Monarch is a Canadian supplier of progressing cavity pumps, as
well as, other production related oilfield products.
PAGE 50
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
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. Trico is a
Texas-based manufacturer and distributor of sub-surface reciprocating pumps,
sucker rods, accessories and hydraulic lift systems.
On May 1, 1997, the Company acquired GulfMark International, Inc.
("GulfMark") pursuant to a merger in which approximately 4.4 million shares of
Common Stock were issued to the stockholders of GulfMark. Prior to the merger,
GulfMark effected a spinoff 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
Common Stock, an erosion control company and certain other miscellaneous assets.
The 4.4 million shares of Common Stock acquired are classified as "Treasury
Stock, at Cost" on the accompanying Restated Consolidated Balance Sheets.
Because the number of shares of Common Stock issued in the GulfMark acquisition
approximated the number of shares of Common Stock held by GulfMark prior to the
acquisition, the GulfMark acquisition had no material effect on the outstanding
number of shares of Common Stock or net equity of the Company.
On May 23, 1996, the Company acquired the business and assets of Nodeco AS,
a Norwegian company, and its wholly-owned subsidiary, Aarbakke AS (collectively,
"Nodeco"). Nodeco designs, manufactures, sells, and rents oil and gas well
completion products primarily consisting of liner hanger equipment and related
services, as well as pump packers. The Company paid cash of approximately $14.4
million and issued 0.7 million shares of its Common Stock.
The Company has also effected various other 1998, 1997, and 1996
acquisitions integrated into the Company's continuing operations for a total
consideration of approximately $65.9 million, $75.6 million and $30.9 million,
respectively.
The Company also acquired various other companies that were integrated into
Grant Prideco. Total consideration was $9.2 million in cash for 1998, $6.6
million in cash for 1997 and $30.7 million in cash and $14.2 million in
Common Stock for 1996.
The acquisitions, with the exception of WII, were accounted for using the
purchase method of accounting. The results of operations of all such
acquisitions are included in the Restated Consolidated Statements of Income from
their respective dates of acquisition. The 1998 and 1997 acquisitions are not
material individually or in the aggregate for each applicable year.
4. MERGER AND OTHER CHARGES
In 1998, the Company incurred $160.0 million in merger and other charges
relating to the merger between EVI and WII and a reorganization and
rationalization of its businesses in light of industry conditions. Of these
charges, $113.0 million was incurred in the second quarter at the time of our
merger and with the initial downturn in the industry. A $47.0 million charge was
incurred in the fourth quarter in response to the previously unanticipated
extent of the decline in the industry which resulted in a need to make
additional reductions in operations and align the cost structure with current
demand. The net after tax effect of these charges was $104.0 million.
Approximately $136.5 million of these charges had been realized as of December
31, 1998, with the remainder of the charges fully realized by the end of the
second quarter of 1999 in connection with planned activities. During 1999, no
adjustments or reversals to the remaining accrued special charges were
necessary.
PAGE 51
52
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
The following chart summarizes the special charges made in 1998 (in thousands):
COMPLETION BALANCE
AND ARTIFICIAL AS OF
OILFIELD LIFT COMPRESSION DECEMBER 31,
SERVICES SYSTEMS SERVICES CORPORATE TOTAL UTILIZED 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
Merger Transaction Costs (1) ........... $ -- $ -- $ -- $ 62,462 $ 62,462 $ 62,462 $ --
Severance and Related Costs (2) ........ 1,961 5,050 -- 600 7,611 -- 7,611
Facility Closures (3) .................. 8,969 13,817 -- -- 22,786 9,957 12,829
Corporate Related Expenses (4) ......... -- -- -- 8,297 8,297 5,177 3,120
Inventory Write-Off (5) ................ 4,830 17,573 -- -- 22,403 22,403 --
Write-Down of Assets (6) ............... 29,195 4,360 1,500 1,436 36,491 36,491 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............................... $ 44,955 $ 40,800 $ 1,500 $ 72,795 $ 160,050 $ 136,490 $ 23,560
========== ========== ========== ========== ========== ========== ==========
1) The merger related costs were incurred in the second quarter and
included $32.6 million in severance and termination costs related to
approximately 300 employees and former officers, and directors, and
other employee benefits related to stock grants, in accordance with
WII's employment agreements and option plans, and $29.9 million in
professional and financial advisory fees, filing and registration
fees, and printing and mailing costs.
2) The severance and related costs included in the fourth quarter charges
were $7.6 million for approximately 940 employees specifically
identified, with terminations completed in the first half of 1999, in
accordance with our announced plan to terminate employees.
3) The facility and plant closures costs were $10.0 million in the second
quarter, all of which have been incurred by year end. These costs
related primarily to the elimination of duplicated manufacturing,
distribution and service locations following the Merger in May. The
facility and plant closures of $12.8 million were accrued in the
fourth quarter for the consolidation and closure of approximately 100
service, manufacturing and administrative facilities in response to
declining market conditions in the fourth quarter.
4) The corporate related expenses of $5.2 million recorded in the second
quarter and $3.1 million recorded in the fourth quarter were primarily
for the consolidation of corporate offices, related lease obligations
and the consolidation of technology centers due to the Merger and to
align our corporate cost structure in light of current conditions.
5) The write-off of inventory was $9.9 million in the second quarter and
$12.5 million in the fourth quarter, which were reported as cost of
products. These charges relate to the write-off of inventory as a
result of the combination of EVI's and WII's operations, the
rationalization of their product lines, the elimination of certain
products, services and locations due to the Merger and as a result of
the decline in market conditions.
6) The write-down of assets was $24.7 million in the second quarter and
$11.8 million in the fourth quarter. These charges primarily relate to
the write-down of equipment and other assets as a result of the
combination of EVI's and WII's operations, the rationalization of
their product lines, the elimination of certain products, services and
locations due to the Merger, the industry downturn, and the specific
identification of assets which are held for sale as a result of the
decline in market conditions.
In the fourth quarter of 1996, the Company adopted a plan to combine its
two packer facilities through the closure of one facility in Arlington, Texas.
In connection with this decision, the Company incurred a charge of $1.5 million.
The Company incurred $1.0 million in 1996 for costs associated with this action
during 1996 and accrued $0.5 million for exit costs that it expected to be
incurred in 1997 relating to the closure of the facility. Such costs included
$0.2 million for severance and termination costs and $0.3 million for the
termination of the Arlington lease. Approximately 200 employees were affected by
this closure. The closure of the Arlington facility had been substantially
completed by June 1997.
PAGE 52
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
5. CASH FLOW INFORMATION
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Other current assets
at December 31, 1998 and 1997 included cash of approximately $3.2 million and
$3.4 million, respectively, which was restricted as a result of exchange
controls in certain foreign countries or cash collateral requirements for
performance bonds, letters of credit, and customs bonds.
Cash paid during the years ended December 31, 1998, 1997, and 1996 for
interest and income taxes (net of refunds) was as follows:
1998 1997 1996
------------- ------------- -------------
(in thousands)
Interest paid........................................... $ 47,671 $ 38,040 $ 26,914
Income taxes paid, net of refunds....................... 72,580 120,828 21,281
During the years ended December 31, 1998, 1997, and 1996 there were noncash
investing activities of $2.4 million, $3.2 million, and $1.7 million,
respectively, relating to capital leases.
The following summarizes investing activities relating to acquisitions
integrated into the Company's continuing operations:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands)
Fair value of assets, net of cash acquired............. $ 93,495 $ 136,302 $ 24,462
Goodwill............................................... 121,657 250,450 62,765
Total liabilities...................................... (56,111) (114,304) (19,029)
Common Stock issued.................................... (30,753) -- (26,240)
------------ ------------ ------------
Cash consideration, net of cash acquired............... $ 128,288 $ 272,448 $ 41,958
============ ============ ============
During the years ended December 31, 1998 and 1997, there were noncash
financing activities of $7.8 million and $8.8 million, respectively, relating to
tax benefits received from the exercise of nonqualified stock options. These
benefits were recorded as a reduction of income taxes payable and an increase to
capital in excess of par value.
6. INVENTORIES
Inventories by category are as follows:
DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
(in thousands)
Raw materials, components and supplies.................................. $ 86,304 $ 117,009
Work in process......................................................... 25,590 30,850
Finished goods.......................................................... 186,661 121,704
----------- -----------
$ 298,555 $ 269,563
=========== ===========
Work in process and finished goods inventories include the cost of
materials, labor, and plant overhead.
PAGE 53
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT-TERM BORROWINGS
DECEMBER 31,
-----------------------------
1998 1997
------------ ------------
(in thousands)
Revolving credit facilities with an effective interest rate of 5.6%
at December 31, 1998.................................................. $ 117,279 $ 24,243
Short-term bank loans with effective interest rates
between 5.73% and 6.10%............................................... 20,000 --
------------ ------------
$ 137,279 $ 24,243
============ ============
Weighted average interest rate on short-term borrowings
outstanding during the year........................................... 5.75% 6.57%
In June 1996, the Company entered into a new working capital facility and
terminated the Company's prior U.S. working capital facility. This resulted in
an extraordinary charge of approximately $0.7 million, net of taxes of $0.4
million.
In May 1998, the Company entered into a new five year unsecured 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 existing working capital facilities. Amounts
outstanding under the facility accrue interest at a variable rate based on
either the U.S. prime rate or LIBOR. A commitment fee ranging from 0.09% to
0.20% per annum, depending on the credit ratings assigned to the 7 1/4% Senior
Notes due May 15, 2006 (the "7 1/4% Senior Notes"), is payable quarterly on the
unused portion of the facility. The facility contains customary affirmative and
negative covenants, including a maximum debt to capitalization ratio, a minimum
interest coverage ratio, a limitation on liens, and a limitation on asset
dispositions. As of December 31, 1998, approximately $117.3 million was
outstanding and approximately $0.9 million had been used to support outstanding
letters of credit. The Company expects to amend this credit facility prior to
the proposed Spinoff to reflect the elimination of Grant Prideco from the
facility and to adjust the terms of the facility to reflect the Spinoff.
The Company also has various credit facilities available only for stand-by
letters of credit and bid and performance bonds, pursuant to which funds are
available to the Company to secure performance obligations and certain
retrospective premium adjustments under insurance policies. The Company had a
total of $16.8 million of such letters of credit and bid and performance bonds
outstanding at December 31, 1998.
PAGE 54
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
(in thousands)
Senior Notes with an effective interest rate of 7.25% , due 2006........... $ 200,000 $ 200,000
Industrial Revenue Bonds with variable interest rates, between 3.7%
and 4.1% at December 31, 1998, due 2002.................................. 11,325 10,840
Foreign bank debt, denominated in foreign currencies....................... 9,069 8,152
Capital lease obligations under various agreements......................... 4,752 6,759
Other...................................................................... 10,167 5,725
------------ ------------
235,313 231,476
Less: amounts due in one year............................................. 14,915 6,541
============ ============
Long-term debt............................................................. $ 220,398 $ 224,935
============ ============
PAGE 55
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of scheduled long-term debt maturities by year
(in thousands):
1999.......................................... $ 14,915
2000.......................................... 3,162
2001.......................................... 2,492
2002.......................................... 10,558
2003.......................................... 3,149
Thereafter.................................... 201,037
------------
$ 235,313
============
The Company has outstanding $200.0 million of 7 1/4% Senior Notes. The 7
1/4% Senior Notes are unsecured obligations of the Company. Interest on the 7
1/4% Senior Notes is payable semi-annually on May 15 and November 15 of each
year. Based on the borrowing rates available to the Company, the fair value of
the 7 1/4% Senior Notes approximates the carrying value at December 31, 1998 and
1997.
In December 1997, the Company completed a cash tender offer and consent
solicitation (the "Tender Offer") relating to the Company's outstanding $120.0
million 10 1/4% Senior Notes due 2004 (the "Senior Notes"). An aggregate of
$119.98 million principal amount of the Senior Notes were validly tendered by
the Company pursuant to the Tender Offer. The prepayment of the Senior Notes
resulted in an extraordinary charge of $9.0 million, net of taxes of $5.6
million, or $0.09 per basic share, for the year ended December 31, 1997. The
extraordinary charge consists of prepayment fees, other professional fees and
the write off of unamortized debt issuance costs.
The contract terms of the Industrial Revenue Bonds require principal and
interest payments to maturity, occurring in December 2002. In connection with
the Industrial Revenue Bonds, the Company has letters of credit of $11.3
million.
9. 5% CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
In November 1997, the Company completed a private placement of $402.5
million principal amount of 5% Convertible Subordinated Preferred Equivalent
Debentures due 2027. The net proceeds from the Debentures were $390.9 million.
The Debentures are convertible at a price of $80 per share of Common Stock. The
Debentures are redeemable by the Company at any time on or after November 4,
2000, at redemption prices described therein, 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. As
evidenced by market transactions, the estimated fair value of the Debentures was
$249.6 million and $368.8 million as of December 31, 1998 and December 31, 1997,
respectively.
Under the terms of the Debentures, the conversion rate for the Debentures
will be adjusted following the Spinoff of Grant Prideco.
10. STOCKHOLDERS' EQUITY
AUTHORIZED SHARES
In May 1998, the Company's Restated Certificate of Incorporation was
amended and restated to increase the authorized number of shares of Common Stock
from 80.0 million to 250.0 million.
PREFERRED STOCK
The Company is authorized to issue up to 3.0 million shares of $1.00 par
value preferred stock. As of December 31, 1998, none had been issued.
PAGE 56
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
PUBLIC STOCK OFFERINGS
On July 25, 1996, the Company completed a public offering of 6.9 million
shares of Common Stock. The net proceeds of this offering were approximately
$100.9 million.
STOCK REPURCHASE PLAN
In December 1997, the WII Board of Directors instituted a stock repurchase
program under which up to $100.0 million of WII common stock could be purchased
in open market transactions or in privately negotiated transactions. Pursuant to
this program, WII purchased approximately 0.3 million shares of its common stock
in December 1997. During 1998, WII purchased approximately 1.0 million shares of
its common stock. In connection with the Merger, the stock repurchase program
has been discontinued and the repurchased shares retired.
11. STOCK-BASED COMPENSATION
STOCK OPTION PLANS
The Company has a number of stock option plans pursuant to which directors,
officers and other key employees may be granted options to purchase shares of
Common Stock at the fair market value on the date of grant.
The Company has in effect a 1991 Employee Stock Option Plan ("1991 ESO
Plan"), 1992 Employee Stock Option Plan ("1992 ESO Plan") and a 1998 Employee
Stock Option Plan ("1998 ESO Plan"). Under these plans, options to purchase up
to an aggregate of 8.2 million shares of Common Stock may be granted to officers
and key employees of the Company (including directors who are also key
employees). At December 31, 1998, approximately 2.2 million options were
available for granting under such plans.
The Company maintained a Non-Employee Director Stock Option Plan ("Director
Plan"), a non-qualified stock option plan. In 1998, the Director Plan was
terminated to the extent that no additional options will be granted.
PAGE 57
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
Stock options vest after one to three years and expire after ten to
thirteen years from the date of grant. Information about the above stock option
plans and predecessor plans, for the three years ended December 31, 1998, is set
forth below:
WEIGHTED
AVERAGE
NUMBER RANGE OF EXERCISE
OF EXERCISE PRICE
SHARES PRICES PER SHARE
----------- --------------------- ----------
Options outstanding, December 31, 1995................ 2,739,170 $ 4.69 - $ 24.70 $ 12.39
Granted ........................................ 882,218 13.07 - 33.73 19.19
Exercised........................................ (597,121) 5.75 - 21.92 12.41
Terminated....................................... (358,128) 17.58 - 29.98 20.83
-----------
Options outstanding, December 31, 1996................ 2,666,139 4.69 - 33.73 13.61
Granted ........................................ 741,613 27.81 - 32.19 29.05
Exercised........................................ (936,008) 4.69 - 33.73 11.36
Terminated....................................... (47,908) 11.49 - 29.98 24.72
-----------
Options outstanding, December 31, 1997................ 2,423,836 4.69 - 32.19 19.08
Granted ........................................ 4,855,423 18.13 - 50.50 20.33
Exercised........................................ (1,195,584) 7.11 - 40.76 31.40
Terminated....................................... (24,971) 12.67 - 40.76 35.70
-----------
Options outstanding, December 31, 1998................ 6,058,704 4.69 - 50.50 18.96
-----------
Options exercisable as of December 31, 1998........... 1,327,446 4.69 - 44.01 16.02
===========
The 6.1 million options outstanding at December 31, 1998, have a weighted
average remaining contractual life of 10.5 years. The 1.3 million options
exercisable at December 31, 1998, have a weighted average remaining contractual
life of 6.4 years.
PRO FORMA COMPENSATION EXPENSE
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock options under the fair value method as provided therein. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.0% to 7.0%, expected lives of four to
seven years, expected volatility of 38% to 52% and no expected dividends. The
weighted average fair value of the options granted in 1998, 1997 and 1996 is
$11.97, $14.42 and $10.61, respectively.
Set forth below is a summary of the Company's net income and earnings per
share as reported and pro forma as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. The pro forma information for the year ended December
31, 1998, reflects the pro forma expense associated with the accelerated vesting
of options in connection with the Merger. The pro forma information is not meant
to be representative of the effects on reported net income for future years,
because as provided by SFAS No. 123, only the effects of awards granted after
January 1, 1995, are considered in the pro forma calculation.
1998 1997 1996
-------------------------- -------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net income (in thousands)...... $ 64,837 $ 55,107 $ 187,763 $ 183,281 $ 165,822 $ 162,933
Basic earnings per share....... 0.67 0.57 1.95 1.91 1.85 1.81
Diluted earnings per share..... 0.67 0.57 1.92 1.88 1.82 1.79
PAGE 58
59
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTED STOCK PLANS
WII had a restricted stock plan for certain officers of WII (the
"Restricted Plan") and a restricted stock plan for non-employee directors of WII
(the "Director Restricted Plan"; collectively, the "Restricted Stock Plans"),
pursuant to which shares of Common Stock were granted. Shares granted under the
Restricted Stock Plans are subject to certain restrictions on ownership and
transferability when granted. Restrictions applicable to shares granted under
the Restricted Plan lapse in part based on continued employment and in part
based on Company performance. Restrictions applicable to shares granted under
the Director Restricted Plan were removed in connection with the Merger and
subsequently the plan was terminated. Restrictions related to certain shares
granted under the Restricted Plan were also removed as a result of the Merger
and subsequently the plan was frozen. In 1998, the Company granted 110,150
shares of restricted stock to directors and officers of the Company. Of these,
75,000 shares were granted pursuant to a separate agreement and are not covered
under the Restricted Stock Plans.
The compensation related to the restricted stock grants is deferred and
amortized to expense on a straight-line basis over the period of time the
restrictions are in place. The unamortized portion is classified as a reduction
of capital in excess of par value in the accompanying Restated Consolidated
Balance Sheets.
The following table provides a summary of restricted stock activity:
NON-EMPLOYEE
EMPLOYEE DIRECTOR
SHARES SHARES
------------- -------------
Restricted shares outstanding, December 31, 1995.......... 34,332 --
Granted................................................. 29,450 --
Restrictions removed.................................... (35,848) --
------------- -------------
Restricted shares outstanding, December 31, 1996.......... 27,934 --
Granted................................................. 86,489 10,296
Restrictions removed.................................... (25,679) --
------------- -------------
Restricted shares outstanding, December 31, 1997.......... 88,744 10,296
Granted................................................. 110,150 --
Restrictions removed.................................... (116,294) (10,296)
------------- -------------
Restricted shares outstanding, December 31, 1998.......... 82,600 --
============= =============
Shares available for future grant as of December 31, 1998. -- --
============= =============
Compensation expense (in thousands):
1998.................................................... $ 4,700 $ 352
1997.................................................... 1,146 120
1996.................................................... 418 --
Deferred compensation at December 31 (in thousands):
1998.................................................... $ 1,563 $ --
1997.................................................... 3,095 352
EXECUTIVE DEFERRED COMPENSATION PLAN
In May 1992, the Company's stockholders approved the Executive Deferred
Compensation Stock Ownership Plan (the "EDC Plan"). Under the EDC Plan, a
portion of the compensation for certain key employees of the Company and its
subsidiaries, including officers and employee directors, can be deferred for
payment after retirement or termination of employment.
The Company has established a grantor trust to fund the benefits under the
EDC Plan. The funds provided to such trust are invested by a trustee independent
of the Company primarily in Common Stock of the Company which is purchased by
the trustee on the open market. The assets of the trust are available to satisfy
the claims of all general creditors of the Company in the event of bankruptcy or
insolvency. Accordingly, the Common Stock held by the trust is included in the
accompanying Restated Consolidated Statements of Stockholders' Equity as
"Treasury Stock, at Cost" and reflected as such on the Restated Consolidated
Balance Sheets.
PAGE 59
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
12. RETIREMENT AND EMPLOYEE BENEFIT PLANS
The Company has defined contribution plans covering certain of its
employees. Expenses related to these plans totaled $3.8 million, $2.8 million
and $3.4 million in 1998, 1997 and 1996, respectively.
The Company has defined benefit pension plans covering certain U.S. and
international employees. The Company has two United States plans, one of which
was terminated in 1998. The other United States plan was acquired as part of the
Trico acquisition in December 1997. This plan was frozen on December 31, 1998.
With respect to certain international plans, the Company has purchased
irrevocable annuity contracts to settle certain benefit obligations. During
1998, the Company terminated one of its international plans. Plan benefits are
generally based on years of service and average compensation levels. The
Company's funding policy is to contribute, at a minimum, the annual amount
required under applicable governmental regulations. Plan assets are invested
primarily in equity and fixed income mutual funds.
PAGE 60
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
Pension expense related to the Company's defined benefit pension plans
included the following components:
1998 1997 1996
---------- ---------- ----------
(in thousands)
Service cost--benefits earned during the period............... $ 822 $ 267 $ 651
Interest cost on projected benefit obligation................ 1,388 386 427
Expected return on plan assets............................... (1,213) (391) (466)
Net amortization and deferral................................ (19) 48 213
---------- ---------- ----------
$ 978 $ 310 $ 825
========== ========== ==========
The following table sets forth summaries of the changes in the benefit
obligations and plan assets, the funded status of the Company's defined benefit
pension plans and the assumptions used in computing such information:
U.S. PLANS NON-U.S. PLANS
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands, except percentages)
Change in benefit obligation:
Projected benefit obligations at beginning of year .............. $ 17,601 $ 1,647 $ 4,261 $ 3,468
Service cost .................................................... 634 -- 188 267
Interest cost ................................................... 1,244 109 144 277
Plan participants' contributions ................................ -- -- -- 104
Actuarial (gain) loss ........................................... 2,189 (49) 680 285
Settlement/curtailment due to plan termination .................. (503) -- -- --
Acquisition ..................................................... (341) 16,002 -- --
Benefits paid ................................................... (3,155) (108) (2,559) (129)
Currency translation adjustment ................................. -- -- 81 (11)
--------- --------- --------- ---------
Projected benefit obligation at end of year ..................... $ 17,669 $ 17,601 $ 2,795 $ 4,261
========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at beginning of year .................. $ 17,875 $ 1,383 $ 2,553 $ 2,405
Actual return on plan assets .................................... 2,432 70 (103) 3
Employer contribution ........................................... 1,577 142 -- 112
Plan participants' contributions ................................ -- -- -- 104
Acquisition ..................................................... -- 16,388 -- --
Benefits paid ................................................... (3,155) (108) (2,204) (71)
Currency translation adjustment ................................. -- -- (246) --
--------- --------- --------- ---------
Fair value of plan assets at end of year ........................ $ 18,729 $ 17,875 $ -- $ 2,553
========= ========= ========= =========
Funded status:
Accumulated benefit obligation less plan assets ................. $ (1,060) $ (274) $ 2,034 $ 978
Provision for future salary increases ........................... -- -- 761 730
--------- --------- --------- ---------
(Excess) deficit of plan assets over projected
benefit obligation ............................................ (1,060) (274) 2,795 1,708
Unrecognized net actuarial gain (loss) .......................... 234 (457) 267 758
Unrecognized transition obligation .............................. -- -- (148) (81)
Unrecognized prior year service cost ............................ -- 620 (122) (124)
--------- --------- --------- ---------
Accrued (prepaid) benefit costs ................................. $ (826) $ (111) $ 2,792 $ 2,261
========= ========= ========= =========
Balance sheet liabilities (assets):
Prepaid benefit costs ........................................... $ (1,663) $ (386) $ -- $ --
Accrued benefit liabilities ..................................... 837 275 2,792 2,261
--------- --------- --------- ---------
Accrued (prepaid) benefit costs ................................. $ (826) $ (111) $ 2,792 $ 2,261
========= ========= ========= =========
Assumed discount rates .......................................... 5.1%-6.8% 7.3% 5.8% 6.0%-8.0%
Assumed rates of increase in compensation rates ................. 4.8% 4.0%-4.8% 3.3% 3.7%-5.0%
Assumed expected long-term rate of return
on plan assets ................................................ 5.5%-8.0% 8.0% -- 8.0%
PAGE 61
62
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
The components of income (loss) before income taxes were as follows:
1998 1997 1996
---------- ---------- ----------
(in thousands)
Domestic........................................................ $ (76,995) $ 131,435 $ 42,386
Foreign......................................................... 70,815 66,621 56,368
---------- ---------- ----------
$ (6,180) $ 198,056 $ 98,754
========== ========== ==========
The Company's income tax provision (benefit) from continuing operations
consisted of the following:
1998 1997 1996
---------- ---------- ----------
(in thousands)
Current
U.S. federal and state income taxes........................... $ (15,506) $ 17,658 $ 10,590
Foreign....................................................... 26,198 30,138 23,314
---------- ---------- ----------
Total Current............................................... $ 10,692 $ 47,796 $ 33,904
---------- ---------- ----------
Deferred
U.S. federal.................................................. $ (12,017) $ 19,300 $ (3,931)
Foreign....................................................... (3,972) 1,215 (2,444)
---------- ---------- ----------
Total Deferred.............................................. $ (15,989) $ 20,515 $ (6,375)
---------- ---------- ----------
$ (5,297) $ 68,311 $ 27,529
========== ========== ==========
Total income tax provision (benefit) was recorded as follows:
1998 1997 1996
---------- ---------- ----------
(in thousands)
Income (loss) from continuing operations........................ $ (5,297) $ 68,311 $ 27,529
Income from discontinued operations............................. 39,848 39,877 17,006
Gain on disposal of discontinued operations..................... -- -- 44,600
Extraordinary charge............................................ -- (5,640) (394)
---------- ---------- ----------
$ 34,551 $ 102,548 $ 88,741
========== ========== ==========
The difference between the tax provision at the statutory federal income
tax rate and the tax provision attributable to income (loss) from continuing
operations before income taxes for the three years ended December 31, 1998 is
analyzed below:
1998 1997 1996
---------- ---------- ---------
(in thousands)
Statutory federal income tax rate............................... $ (2,163) $ 69,319 $ 34,563
Effect of state income tax (net) and Alternative Minimum Tax.... 866 66 4,077
Effect of non-deductible expenses............................... 8,040 1,160 1,723
Change in valuation allowance................................... -- (8,214) (9,957)
Effect of foreign income tax, net............................... (6,086) 7,023 (699)
Foreign losses benefited........................................ -- -- (546)
Foreign Sales Corporation benefit............................... (104) (605) 509
Benefit of tax dispute settlement............................... -- -- (3,955)
Effect of acquisitions and dispositions........................ (4,548) -- --
Other........................................................... (1,302) (438) 1,814
---------- ---------- ---------
$ (5,297) $ 68,311 $ 27,529
========== ========== =========
PAGE 62
63
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities are recognized for the estimated future
tax effects of temporary differences between the tax basis of an asset or
liability and its reported amount in the restated financial statements. The
measurement of deferred tax assets and liabilities is based on enacted tax laws
and rates currently in effect in each of the jurisdictions in which the Company
has operations.
The change in the valuation allowance in 1997 and 1996 primarily relates to
the utilization of U.S. net operating losses ("NOL") and tax credit
carryforwards and management's assessment that future taxable income will be
sufficient to enable the Company to utilize remaining NOL and tax credit
carryforwards.
Deferred tax assets and liabilities are classified as current or noncurrent
according to the classification of the related asset or liability for financial
reporting. The components of the net deferred tax asset (liability) attributable
to continuing operations were as follows:
DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
(in thousands)
Deferred tax assets:
Domestic and foreign operating losses................................ $ 6,649 $ 11,433
Accrued liabilities and reserves..................................... 68,995 54,366
Tax credits.......................................................... 5,568 --
Tax benefit transfer leases acquired................................. 2,776 3,991
Other differences between financial and tax basis.................... -- 1,126
Valuation allowance.................................................. (4,716) (4,716)
------------ ------------
Total deferred tax assets.............................................. $ 79,272 $ 66,200
------------ ------------
Deferred tax liabilities:
Property and equipment............................................... $ (23,017) $ (19,815)
Unremitted foreign earnings.......................................... (10,883) (6,532)
Differences between financial and tax basis of inventory............. (2,284) (6,290)
Goodwill............................................................. (18,424) (13,451)
Other differences between financial and tax basis.................... -- (4,593)
------------ ------------
Total deferred tax liability........................................... (54,608) (50,681)
------------ ------------
Net deferred tax asset................................................. $ 24,664 $ 15,519
============ ============
At December 31, 1998, the Company had $10.1 million of U.S. net operating
losses which were generated by certain subsidiaries prior to their acquisition.
The use of these pre-acquisition operating losses is subject to limitations
imposed by the Internal Revenue Code and is also restricted to the taxable
income of the subsidiaries generating the losses. These U.S. carryforwards, if
not utilized, will expire between 1999 and 2009.
On October 11, 1996, the Company entered into a $3.9 million tax settlement
plus accrued interest of $2.5 million with the United States Internal Revenue
Service ("I.R.S.") relating to a dispute regarding the tax impact to the Company
upon the dissolution of an oil and gas joint venture in 1990. The tax liability
with respect to the dissolution had been previously provided for as a deferred
tax liability in the Company's consolidated financial statements. This
settlement resulted in the Company recognizing a $4.0 million tax benefit in
1996 due to the elimination of certain previously accrued deferred taxes that
will no longer be required to be paid as a result of this settlement.
In connection with the Spinoff, Grant Prideco and the Company will enter
into a tax allocation agreement (the "Tax Allocation Agreement"). Under the
terms of the Tax Allocation Agreement, Grant Prideco is responsible for all
taxes and associated liabilities relating to the historical businesses of Grant
Prideco. The Tax Allocation Agreement also provides that any tax liabilities
associated with the Spinoff shall be assumed and paid by Grant Prideco subject
to certain exceptions relating to changes in control of the Company. The Tax
Allocation Agreement further provides that in the event there is a tax
liability associated with the historical operations of Grant Prideco that is
offset by a tax benefit of the Company, the Company will apply the tax benefit
against such tax liability and will be reimbursed for the value of such tax
benefit when and as the Company would have been able to otherwise utilize that
tax benefit for its own businesses.
14. DISPUTES, LITIGATION AND CONTINGENCIES
LITIGATION AND OTHER DISPUTES
The Company is aware of various disputes and potential claims and is a
party in various litigation involving claims against the Company, some of which
are covered by insurance. Based on facts currently known, the Company believes
that the ultimate liability, if any, which may result from known claims,
disputes and pending litigation, would not have a material adverse effect on the
Company's consolidated financial position or its results of operations with or
without consideration of insurance coverage.
PAGE 63
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
INSURANCE
The Company is self-insured for employee health insurance claims and for
workers' compensation claims for certain of its employees. The amounts in excess
of the self-insured levels are fully insured. Self-insurance accruals are based
on claims filed and an estimate for significant claims incurred but not
reported. Although the Company believes that adequate reserves have been
provided for expected liabilities arising from its self-insured obligations, it
is reasonably possible that management's estimates of these liabilities will
change over the near term as circumstances develop.
15. COMMITMENTS
SALE AND LEASEBACK OF EQUIPMENT
The Company entered into a sale and leaseback arrangement in December 1998
where it was provided with the right to sell up to $200.0 million of compression
units through December 1999 and lease them back over a five year period under an
operating lease. Payments under the lease are calculated based on a rate of
return on the purchase price and an agreed valuation of the leased compressors.
Under the terms of the lease, the Company may repurchase the equipment at any
time. The Company has provided for a residual value guarantee at the end of the
term of the lease equal to approximately 85.5% of the appraised value of the
compression units under lease.
As of December 31, 1998, the Company had sold compressors under this
arrangement, having an appraised value of $119.6 million, and received cash of
$100.0 million and a receivable of $19.6 million. The receivable is classified
in other current assets on the accompanying Restated Consolidated Balance Sheets
as the balance is due on demand. The net book value of the equipment sold was
approximately $77.4 million, resulting in a pre-tax gain of $42.2 million, which
may be deferred until the end of the lease.
The lease agreement calls for quarterly payments. The following table
provides future minimum lease payments (in thousands) under the aforementioned
lease exclusive of any guarantee payments:
1999 ............................................ $ 7,491
2000 ............................................ 7,491
2001 ............................................ 7,491
2002 ............................................ 7,491
2003 ............................................ 6,867
------------
$ 36,831
============
OTHER OPERATING LEASES
The Company is committed under various other noncancelable operating leases
which primarily relate to office space and equipment.
Future minimum rental commitments attributable to continuing operations
under these noncancelable operating leases are as follows (in thousands):
1999 ........................................... $ 17,403
2000 ........................................... 13,346
2001 ........................................... 9,712
2002 ........................................... 6,986
2003 ........................................... 5,261
Thereafter...................................... 31,202
------------
$ 83,910
============
Total rent expense incurred under operating leases attributable to
continuing operations was approximately $26.4 million, $26.1 million and $23.9
million for the years ended December 31, 1998, 1997, and 1996, respectively.
PAGE 64
65
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
OTHER COMMITMENTS
In January 1996, Grant Prideco entered into a long-term manufacturing and
sales agreement with Oil Country Tubular, Ltd. ("OCTL") pursuant to which OCTL
manufactures drill pipe and premium tubulars for Grant Prideco on an exclusive
basis at OCTL's plant in India.
PAGE 65
66
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS
The Company incurred legal fees of $3.1 million, $2.7 million and $2.2
million during 1998, 1997 and 1996, respectively, with a law firm in which a
former director and a current executive officer of the Company were partners.
In 1998, the Company paid Lehman Brothers Inc., an affiliate of Lehman
Brothers Holding Inc., a major stockholder of the Company, approximately $3.0
million for fees associated with the Merger. In 1997, the Company paid
approximately $2.0 million for dealer management fees associated with the Tender
Offer of the Senior Notes and the Debenture offering. The Company incurred fees
of approximately $6.7 million associated with the Company's public offering and
the disposition of the Mallard Division in 1996. The fee arrangements associated
with these transactions were on terms standard in the industry.
17. SUBSEQUENT EVENTS (UNAUDITED)
JOINT VENTURE
In February 1999, the Company completed a joint venture with GE Capital
Corporation ("GE Capital") in which the Company's compression services
operations were combined with GE Capital's Global Compression Services
operations. The joint venture is known as Weatherford Global Compression. The
Company owns 64% of the joint venture and GE Capital owns 36%. The Company has
the right to acquire GE Capital's interest at anytime at a price
PAGE 66
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
equal to the greater of market determined third party valuation or book value.
GE Capital also has the right to require the Company to purchase its interest at
anytime after February 2001 at a market determined third party valuation as well
as request a public offering of its interest after that date, if we have not
purchased its interest by that time.
ACQUISITIONS
On February 8, 1999, the Company completed the acquisition of Christiana
Companies, Inc. for approximately 4.4 million shares of Common Stock and $20.6
million cash. In the acquisition, the Company acquired through Christiana (1)
4.4 million shares of the Company's Common Stock, (2) cash, after distribution
to the Christiana shareholders, equal to the amount of Christiana's outstanding
tax and other liabilities and (3) a one-third interest in Total Logistic
Control, a refrigerated warehouse, trucking and logistics company. The 4.4
million shares of Common Stock acquired will be classified as treasury stock.
Because the number of shares of Common Stock issued in the Christiana
acquisition approximated the number of shares of Common Stock held by Christiana
prior to the acquisition, the Christiana acquisition had no material effect on
the outstanding number of shares of Common Stock or net equity of the Company.
In July 1999, the Company acquired a 50.01% interest in Voest-Alpine
Stahlrohr Kindberg GmbH & Co KG ("VA") for approximately $30.0 million, of which
approximately $7.5 million was paid in cash and the remainder is to be paid over
a period of 7 years. VA will be integrated into Grant Prideco.
On August 31, 1999, the Company completed its acquisition of Dailey
International Inc. ("Dailey") pursuant to a pre-negotiated plan of
reorganization in bankruptcy. Under the terms of the acquisition, Weatherford
issued a total of approximately 4,267,640 shares of Common Stock to the Dailey
noteholders and stockholders. Of the total number shares issued, the Company
issued approximately 3,985,900 shares to the Dailey noteholders and
approximately 281,740 shares to the Dailey common stockholders. In addition, the
Company, which held approximately 24 percent of the outstanding Dailey notes,
received approximately 1,226,285 shares of its Common Stock to be retained as
treasury shares.
Dailey is a leading provider of specialty drilling equipment and services
to the oil and gas industry and designs, manufactures and rents proprietary
downhole tools for oil and gas drilling and workover applications worldwide.
In September 1999, the Company acquired Petroline WellSystems Limited
("Petroline") for a total consideration of approximately $165.0 million,
consisting of $32.2 million in cash and 3.8 million shares of Common Stock. The
Company also agreed to pay to the sellers additional funds in the event they
resell the shares of Common Stock received by them in certain market
transactions at a price less than $35.175 per share. This obligation continues
until October 2000. Petroline, based in Aberdeen, Scotland, is a provider of
premium completion products and services to the international oil and gas
industry. It is the leading provider of flow control equipment in the North Sea
and it was the first company to successfully introduce completion products using
new expandable tube technology.
On September 15, 1999, the Company acquired Williams Tool Co. ("Williams")
for 1.8 million shares of Common Stock. Williams, based in Fort Smith, Arkansas
offers a full range of rotating control heads for horizontal, underbalanced and
low hydrostatic head drilling operations. Its principal purpose is to control
flow from the wellbore to reduce the risk of blowouts when oil, gas, geothermal
and coal gas methane wells are being drilled with light fluids.
COMPRESSION SERVICES CONTRACT
The Company's Compression Services Division was awarded a seven year
contract by YPF S.A. in Argentina. The division will provide total compression
services to YPF, including ownership of the compression equipment, maintenance
and daily service operations, with estimated revenues over the seven years of
$95.0 million. This project became fully operational in the third quarter of
1999.
18. SEGMENT INFORMATION
BUSINESS SEGMENTS
The Company 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. The Company
operates in virtually every oil and gas exploration and production region in the
world. In 1998, the Company redefined its business segments into three separate
groups: completion and oilfield services, artificial lift systems and
compression services. The following information has been restated to reflect
this regrouping.
The Company's completion and oilfield services segment provides fishing and
downhole services, well installation services, well completion systems and
equipment rental.
The Company's artificial lift systems segment designs, manufactures, sells
and services a complete line of artificial lift equipment, including progressing
cavity pumps, reciprocating rod lift equipment, gas lift equipment, electrical
submersible pumps and hydraulic lift equipment.
The Company's compression services segment manufactures, packages, rents
and sells parts and services for gas compressor units over a broad horsepower
range.
PAGE 67
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
Financial information by industry segment for each of the three years ended
December 31, 1998, is summarized below. The total assets do not include the
net assets of discontinued operations.
COMPLETION
AND OILFIELD ARTIFICIAL COMPRESSION
SERVICES LIFT SYSTEMS SERVICES CORPORATE TOTAL
------------- ------------ ------------ ---------- ----------
(in thousands)
1998
Revenues from unaffiliated
customers .............................. $ 857,172 $ 329,196 $ 177,481 $ -- $1,363,849
EBITDA, before merger costs
and other charges (a) .................. 277,567 40,760 41,671 (24,219) 335,779
Merger costs and other
charges (b) ............................ 44,955 40,800 1,500 72,795 160,050
Depreciation and amortization ............ 95,495 19,183 23,079 1,801 139,558
Operating income (loss) .................. 137,117 (19,223) 17,092 (98,815) 36,171
Total assets ............................. 1,022,147 592,370 388,220 90,664 2,093,401
Capital expenditures for
property, plant, and
equipment ............................ 111,611 20,946 32,465 2,755 167,777
Non-cash portion of merger
costs and other charges ................ 39,481 30,367 1,500 22,747 94,095
1997
Revenues from unaffiliated
customers .............................. $ 929,001 $ 249,476 $ 178,897 $ -- $1,357,374
EBITDA (a) ............................... 301,550 31,736 36,440 (34,323) 335,403
Depreciation and amortization ............ 86,138 8,944 21,666 2,573 119,321
Operating income (loss) .................. 215,412 22,792 14,774 (36,896) 216,082
Total assets ............................. 914,942 622,853 441,759 95,758 2,075,312
Capital expenditures for
property, plant, and
equipment ............................ 121,422 20,213 35,705 2,970 180,310
1996
Revenues from unaffiliated
customers .............................. $ 824,639 $ 150,816 $ 154,503 $ -- $1,129,958
EBITDA (a) (c) ........................... 226,914 17,532 31,387 (37,641) 238,192
Depreciation and amortization ............ 80,582 5,865 23,554 783 110,784
Operating income (loss) (c) .............. 146,332 11,667 7,833 (38,424) 127,408
Total assets ............................. 952,445 199,615 414,969 294,919 1,861,948
Capital expenditures for
property, plant, and
equipment ............................ 119,201 8,732 30,392 68 158,393
(a) The Company evaluates performance and allocates resources based on
EBITDA, which is calculated as operating income adding back depreciation and
amortization, excluding the impact of merger costs and other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition, EBITDA
calculations by one company may not be comparable to another company.
(b) Includes inventory write-downs of $22.4 million which have been
classified as cost of products in the accompanying Restated Consolidated
Statements of Income.
PAGE 68
69
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(c) During 1996, the Company incurred a charge of $1.5 million associated
with the closure of a packer facility within the completion and oilfield
services segment. EBITDA and operating income for 1996 for completion and
oilfield services segment include accruals included within the $1.5 million
charge of $0.5 million for plant closure.
FOREIGN OPERATIONS AND EXPORT SALES
Financial information by geographic segment for each of the three years
ended December 31, 1998, is summarized below. Revenues are attributable to
countries based on the location of the entity selling products. Long-lived
assets are long-term assets excluding deferred tax assets of $16.7 million,
$12.8 million, and $17.8 million for 1998, 1997, and 1996, respectively, and net
assets of discontinued operations.
UNITED LATIN MIDDLE
STATES CANADA AMERICA EUROPE AFRICA EAST OTHER TOTAL
--------- --------- --------- --------- --------- --------- --------- ----------
(in thousands)
1998
Revenues from
unaffiliated customers ....... $ 634,222 $ 233,304 $ 124,434 $ 162,738 $ 91,307 $ 51,849 $ 65,995 $1,363,849
Long-lived assets .............. 674,243 288,091 128,141 149,231 37,758 21,389 45,714 1,344,567
1997
Revenues from
unaffiliated customers ....... $ 714,488 $ 212,398 $ 103,046 $ 147,809 $ 70,037 $ 39,076 $ 70,520 $1,357,374
Long-lived assets .............. 832,116 113,596 130,446 141,253 15,341 21,299 25,666 1,279,717
1996
Revenues from
unaffiliated customers ....... $ 645,091 $ 133,349 $ 64,971 $ 117,014 $ 72,457 $ 26,422 $ 70,654 $1,129,958
Long-lived assets .............. 640,561 47,147 93,978 144,399 14,037 19,363 22,849 982,334
MAJOR CUSTOMERS AND CREDIT RISK
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. Foreign sales also present
various risks, including risks of war, civil disturbances and governmental
activities that may limit or disrupt markets, restrict the movement of funds
result in the deprivation of contract rights or the taking of property without
fair consideration. Most of the Company's foreign sales, however, are to large
international companies or are secured by letters of credit or similar
arrangements.
In 1998, 1997, and 1996 there was no individual customer who accounted for
10% of consolidated revenues.
PAGE 69
70
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tabulation sets forth unaudited quarterly financial data for
1998 and 1997.
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
--------- ---------- ----------- ----------- ------------
(in thousands, except per share amounts)
1998
Revenues......................... $ 380,807 $ 358,831 $ 322,258 $ 301,953 $ 1,363,849
Gross Profit..................... 130,675 112,854(1) 100,287 73,282 (1) 417,098
Selling, General and
Administrative................. 65,619 60,590 57,218 62,532 (1) 245,959
Merger Costs and Other Charges... -- 103,197(1) -- 34,450 137,647
Operating Income (Loss).......... 65,836 (50,148) 43,745 (23,262) 36,171
Income (Loss) from Continuing
Operations..................... 35,647 (38,723) 22,239 (20,046) (883)
Income (Loss) from Discontinued
Operations..................... 25,496 23,832 20,515 (4,123) 65,720
Net Income (Loss)................ 61,143 (14,891)(1) 42,754 (24,169)(1) 64,837
Basic Earnings Per Share:
Continuing Operations........... $ 0.37 $ (0.40) $ 0.23 $ (0.21) $ (0.01)
Discontinued Operations......... 0.26 0.25 0.21 (0.04) 0.68
--------- ---------- ----------- ----------- ------------
Net Income(Loss)................ $ 0.63 $ (0.15) $ 0.44 $ (0.25) $ 0.67
========= ========== =========== =========== ============
Diluted Earnings Per Share:
Continuing Operations........... $ 0.37 $ (0.40) $ 0.23 $ (0.21) $ (0.01)
Discontinued Operations......... 0.26 0.25 0.21 (0.04) 0.68
--------- ---------- ----------- ----------- ------------
Net Income(Loss)................. $ 0.63 $ (0.15) $ 0.44 $ (0.25) $ 0.67
========= ========== =========== =========== ============
1997
Revenues......................... $ 313,950 $ 326,220 $ 341,627 $ 375,577 $ 1,357,374
Gross Profit..................... 93,586 99,321 108,261 118,613 419,781
Selling, General and
Administrative................. 48,168 50,600 51,026 56,487 206,281
Operating Income................. 45,927 49,264 57,937 62,954 216,082
Income from Continuing
Operations..................... 27,106 29,418 35,598 37,623 129,745
Income from Discontinued
Operations..................... 10,797 16,323 18,128 21,780 67,028
Extraordinary Charge............. -- -- -- (9,010) (9,010)
Net Income....................... 37,903 45,741 53,726 50,393 187,763
Basic Earnings Per Share:
Continuing Operations........... $ 0.29 $ 0.31 $ 0.37 $ 0.39 $ 1.35
Discontinued Operations......... 0.11 0.17 0.19 0.22 0.69
Extraordinary Charge............ -- -- -- (0.09) (0.09)
--------- ---------- ----------- ----------- ------------
Net Income...................... $ 0.40 $ 0.48 $ 0.56 $ 0.52 $ 1.95
========= ========== =========== =========== ============
Diluted Earnings Per Share:
Continuing Operations........... $ 0.28 $ 0.30 $ 0.36 $ 0.38 $ 1.33
Discontinued Operations......... 0.11 0.17 0.19 0.22 0.68
Extraordinary Charge............ -- -- -- (0.09) (0.09)
--------- ---------- ----------- ----------- ------------
Net Income....................... $ 0.39 $ 0.47 $ 0.55 $ 0.51 $ 1.92
========= ========== =========== =========== ============
(1) The Company incurred $113.0 million and $47.0 million of pre-tax merger and
other costs in the second and fourth quarters of 1998, respectively. The
effect of these charges, net of tax, in the second and fourth quarters was
$73.5 and $30.5 million, respectively. Of these charges, $9.9 million and
$12.5 million related to the write-off of inventory and have been
classified as cost of products in the accompanying Restated Consolidated
Statements of Income.
PAGE 70
71
SCHEDULE II
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
ADDITIONS
---------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES COLLECTIONS DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
YEAR ENDED DECEMBER 31, 1998:
Allowance for uncollectible accounts
receivable.......................... $ 23,077 $ 2,189 $ 910 $ (6,778) $ 19,398
YEAR ENDED DECEMBER 31, 1997:
Allowance for uncollectible accounts
receivable.......................... $ 16,635 $ 13,088 $ 180 $ (6,826) $ 23,077
YEAR ENDED DECEMBER 31, 1996:
Allowance for uncollectible accounts
receivable.......................... $ 16,232 $ 4,391 $ 104 $ (4,092) $ 16,635
All other schedules are omitted because they are not required or because the
information is included in the financial statements or notes thereto.
PAGE 71
72
PART 2 RESTATED UNAUDITED HISTORICAL FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 1998
This section presents Weatherford's Restated Financial Statements and
related Notes previously included in Weatherford's Quarterly Report on Form 10-Q
for the three months ended March 31, 1999.
PAGE 72
73
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ........................................... $ 29,941 $ 34,131
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $19,507 and $19,398, Respectively .................... 269,933 271,867
Inventories ......................................................... 338,456 298,555
Other Current Assets ................................................ 127,666 127,543
----------- -----------
765,996 732,096
PROPERTY, PLANT AND EQUIPMENT, AT COST,
NET OF ACCUMULATED DEPRECIATION ..................................... 798,903 629,276
GOODWILL, NET ............................................................. 675,193 648,570
NET ASSETS OF DISCONTINUED OPERATIONS ..................................... 581,778 545,211
OTHER ASSETS .............................................................. 105,250 83,459
----------- -----------
$ 2,927,120 $ 2,638,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings ............................................... $ 204,923 $ 137,279
Current Portion of Long-Term Debt ................................... 16,138 14,915
Accounts Payable .................................................... 77,477 92,274
Accrued Salaries and Benefits ....................................... 47,765 40,127
Current Tax Liability ............................................... 18,315 21,839
Other Accrued Liabilities ........................................... 85,565 106,139
----------- -----------
450,183 412,573
----------- -----------
LONG-TERM DEBT ............................................................ 221,823 220,398
MINORITY INTERESTS ........................................................ 268,840 2,888
DEFERRED INCOME TAXES AND OTHER ........................................... 102,531 106,373
5% CONVERTIBLE SUBORDINATED PREFERRED
EQUIVALENT DEBENTURES ............................................... 402,500 402,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 Par Value, Authorized 250,000 Shares,
Issued 107,949 Shares and 103,513 Shares, Respectively ........... 107,949 103,513
Capital in Excess of Par Value ...................................... 1,122,694 1,052,899
Treasury Stock, at Cost ............................................. (268,460) (193,328)
Retained Earnings ................................................... 609,723 607,185
Accumulated Other Comprehensive Loss ................................ (90,663) (76,389)
----------- -----------
1,481,243 1,493,880
----------- -----------
$ 2,927,120 $ 2,638,612
=========== ===========
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 73
74
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
REVENUES:
Products ............................................. $ 116,891 $ 170,743
Services and Rentals ................................. 148,450 210,064
--------- ---------
265,341 380,807
COSTS AND EXPENSES:
Cost of Products ..................................... 81,122 117,026
Cost of Services and Rentals ......................... 102,553 133,106
Selling, General and Administrative Attributable
to Segments ........................................ 60,918 57,631
Corporate General and Administrative ................. 5,572 7,988
Equity in Earnings of Unconsolidated Affiliates ...... (454) (780)
--------- ---------
249,711 314,971
--------- ---------
OPERATING INCOME .......................................... 15,630 65,836
OTHER INCOME (EXPENSE):
Interest Income ...................................... 1,505 648
Interest Expense ..................................... (10,000) (8,881)
Other, Net ........................................... (936) (1,296)
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST .......... 6,199 56,307
PROVISION FOR INCOME TAXES ................................ (1,699) (20,650)
--------- ---------
INCOME BEFORE MINORITY INTEREST ........................... 4,500 35,657
MINORITY INTEREST EXPENSE, NET OF TAXES ................... (738) (10)
--------- ---------
INCOME FROM CONTINUING OPERATIONS ......................... 3,762 35,647
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF TAXES ......................................... (1,224) 25,496
--------- ---------
NET INCOME ................................................ $ 2,538 $ 61,143
========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Income from Continuing Operations .................... $ 0.04 $ 0.37
Income (Loss) from Discontinued Operations ........... (0.01) 0.26
--------- ---------
Net Income Per Share ................................. $ 0.03 $ 0.63
========= =========
Basic Weighted Average Shares Outstanding ............ 97,315 96,761
========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Income from Continuing Operations .................... $ 0.04 $ 0.37
Income (Loss) from Discontinued Operations ........... (0.01) 0.26
--------- ---------
Net Income Per Share ................................. $ 0.03 $ 0.63
========= =========
Diluted Weighted Average Shares Outstanding .......... 98,007 97,625
========= =========
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 74
75
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .......................................................... $ 2,538 $ 61,143
Adjustments to Reconcile Net Income to Net Cash Provided
(Used) by Operating Activities:
Depreciation and Amortization ..................................... 39,049 34,376
Net (Income) Loss from Discontinued Operations, Net of Taxes ...... 1,224 (25,496)
Minority Interest Expense, Net of Taxes ........................... 738 10
Deferred Income Tax Provision ..................................... 3,363 2,627
Gain on Sales of Property, Plant and Equipment .................... (2,270) (3,525)
Change in Operating Assets and Liabilities, Net of Effects
of Businesses Acquired .......................................... (27,775) (49,397)
--------- ---------
Net Cash Provided by Continuing Operations ...................... 16,867 19,738
Net Cash Used by Discontinued Operations ........................ (33,685) (3,763)
--------- ---------
Net Cash Provided (Used) by Operating Activities ................ (16,818) 15,975
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Short-Term Investment ................................... (11,924) --
Acquisition of Businesses, Net of Cash Acquired ..................... (15,125) (69,054)
Capital Expenditures for Property, Plant and
Equipment ......................................................... (28,666) (41,882)
Acquisitions and Capital Expenditures of
Discontinued Operations ........................................... (4,106) (16,523)
Proceeds from Sales of Property, Plant and Equipment ................ 5,810 4,642
Other, Net .......................................................... -- 3,928
--------- ---------
Net Cash Used by Investing Activities ............................. (54,011) (118,889)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Short-Term Debt, Net .................................. 68,218 109,395
Repayments on Long-Term Debt, Net ................................... (521) (7,561)
Proceeds from Exercise of Stock Options ............................. -- 2,208
Acquisition of Treasury Stock ....................................... (1,170) (37,686)
Other, Net .......................................................... 112 --
--------- ---------
Net Cash Provided by Financing Activities ......................... 66,639 66,356
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (4,190) (36,558)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 34,131 66,008
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 29,941 $ 29,450
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid ....................................................... $ 6,715 $ 6,023
Income Taxes Paid, Net of Refunds ................................... 10,638 12,920
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 75
76
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
-------- --------
Comprehensive Income (Loss):
Net Income ............................................. $ 2,538 $ 61,143
Cumulative Foreign Currency Translation Adjustment ..... (14,274) (3,141)
-------- --------
Total Comprehensive Income (Loss) ........................... $(11,736) $ 58,002
======== ========
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 76
77
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The unaudited restated consolidated condensed financial statements
included herein have been prepared by Weatherford International, Inc. (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. These restated 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 restated 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. These restated financial
statements should be read in conjunction with the restated audited consolidated
financial statements and notes thereto included herein for the year ended
December 31, 1998. The results of operations for the three month period ended
March 31, 1999 are not necessarily indicative of the results expected for the
full year.
In October 1999, the Board of Directors of the Company approved a plan to
distribute all of the outstanding shares of common stock of its wholly owned
subsidiary, Grant Prideco, Inc. (the "Spinoff") to holders of the Company's
common stock, $1.00 par value ("Common Stock"). In connection with the Spinoff,
the Company will transfer its drilling products businesses to Grant Prideco,
Inc. ("Grant Prideco"). As a result the Company has restated its financial
statements reflecting the historical operations of Grant Prideco as
discontinued operations (See Note 4).
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 1999 classifications.
2. INVENTORIES
Inventories by category are as follows:
MARCH 31, DECEMBER 31,
1999 1998
-------- ------------
(in thousands)
Raw materials, components and supplies ..... $134,565 $ 86,304
Work in process ............................ 32,479 25,590
Finished goods ............................. 171,412 186,661
-------- --------
$338,456 $298,555
======== ========
Work in process and finished goods inventories include the cost of
material, labor and plant overhead.
3. BUSINESS COMBINATIONS
In February 1999, the Company completed a joint venture with GE Capital
Corporation ("GE Capital") in which the Company's compression services
operations were combined with GE Capital's Global Compression Services
operations. The joint venture is known as Weatherford Global Compression. The
Company owns 64% of the joint venture and GE Capital owns 36%. The Company has
the right to acquire GE Capital's interest at anytime at a price equal to a
third party market-determined value that is not less than book value. GE
Capital also has the right to require the Company to purchase its interest at
anytime after February 2001 at a market-determined third party valuation as
well as request a public offering of its interest after that date, if the
Company has not purchased its interest by that time.
On February 8, 1999, the Company completed the acquisition of Christiana
Companies, Inc. ("Christiana") for approximately 4.4 million shares of the
Company's Common Stock and $20.6 million cash. In the acquisition, the Company
acquired through Christiana (1) 4.4 million shares of the Company's Common
Stock, (2) cash, after distribution to the Christiana shareholders, equal to the
amount of Christiana's outstanding tax and other liabilities and (3) a one-third
interest in Total Logistic Control, a refrigerated warehouse, trucking and
logistics company. The 4.4 million shares of Common Stock acquired are
classified as treasury stock. Because the number of shares of Common Stock
issued in the Christiana acquisition approximated the number of shares of Common
Stock held by Christiana prior to the acquisition, the Christiana acquisition
had no material effect on the outstanding number of shares of Common Stock or
net equity of the Company.
PAGE 77
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company has also effected various other acquisitions related to its
continuing operations during the three months ended March 31, 1999 for total
consideration of approximately $15.1 million.
The acquisitions discussed above were accounted for using the purchase
method of accounting. Results of operations for acquisitions accounted for as
purchases are included in the accompanying restated consolidated condensed
financial statements since the date of acquisition. Acquisitions accounted for
as purchases are not material individually or in the aggregate with same year
acquisitions; therefore, pro forma information is not provided.
4. DISCONTINUED OPERATIONS
In October 1999, the Board of Directors of the Company approved a plan to
Spinoff Grant Prideco. The Spinoff is conditioned upon the receipt of a revenue
ruling from the United States Internal Revenue Service to the effect that
receipt of shares of Grant Prideco common stock should be tax free for federal
income tax purposes to our stockholders and that the Company should not
recognize income, gain or loss as a result of the Spinoff.
The results of operations for Grant Prideco are reflected in the
accompanying Restated Consolidated Condensed Statements of Income as
"Discontinued Operations, Net of Taxes". Condensed results of Grant Prideco were
as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
-------- --------
(in thousands)
Revenues .............................. $ 88,493 $189,713
-------- --------
Income before interest allocation and
income taxes ........................ 653 43,477
Interest allocation ................... (1,812) (1,812)
Provision for income taxes ............ (65) (16,169)
-------- --------
Net income (loss)...................... $(1,224) $ 25,496
======== ========
In connection with the Spinoff, Grant Prideco will issue an unsecured
subordinated note to the Company in the amount of $100.0 million. The $100.0
million obligation will bear interest at an annual rate equal to 10.0%. Interest
payments will be due quarterly, and principal and all unpaid interest will be
due no later than December 31, 2001. Under the terms of the note, Grant Prideco
is required to repay this note with the proceeds of any debt or equity
financing, excluding financing under a credit facility or any equity issued in
connection with a business combination. The indebtedness of Grant Prideco to the
Company will be subordinated to the working capital obligations of Grant Prideco
to its banks. Grant Prideco currently intends to repay the obligations within 12
months from the completion of the Spinoff, pursuant to an anticipated public
debt financing. Grant Prideco's ability to repay this indebtedness, however,
will be dependent upon market conditions.
The Company purchases drill pipe and other related products from Grant
Prideco. These purchases have been eliminated in the accompanying restated
consolidated condensed financial statements. The amounts purchased by the
Company for the three months ended March 31, 1999 and 1998 were $6.0 million and
$2.4 million, respectively. Such purchases represent Grant Prideco's cost.
The Company charged Grant Prideco a management fee of $0.2 million and $0.2
million for the three months ended March 31, 1999 and 1998, respectively. The
fee is based on the time devoted to Grant Prideco for accounting, tax, treasury
and risk management services.
Grant Prideco was charged $1.5 million and $1.4 million of costs related to
the Company's information systems function in the three months ended March 31,
1999 and 1998, respectively. Information systems charges were based on direct
support provided, equipment usage and number of system users.
In connection with the Spinoff, Grant Prideco and the Company will enter
into a tax allocation agreement (the "Tax Allocation Agreement"). Under the
terms of the Tax Allocation Agreement, Grant Prideco, is responsible for all
taxes and associated liabilities relating to the historical businesses of Grant
Prideco. The Tax Allocation Agreement also provides that any tax liabilities
associated with the Spinoff shall be assumed and paid by Grant Prideco subject
to certain exceptions relating to changes in control of the Company. The Tax
Allocation Agreement further provides that in the event there is a tax liability
associated with the historical operations of Grant Prideco that is offset by a
tax benefit of the Company, the Company will apply the tax benefit against such
tax liability and will be reimbursed for the value of such tax benefit when and
as the Company would have been able to otherwise utilize that tax benefit for
its own businesses.
The Company intends to enter into a transition services agreement with
Grant Prideco for a period of one year from the Spinoff date. Under the
agreement, the Company will provide certain services requested by Grant Prideco.
The fee for these services will be based on a cost-plus 10% basis. The
transition services to be provided under this agreement may include accounting,
tax, and finance services, employee benefit services, information services,
management information systems and may include any other similar services.
The Company intends to enter into a preferred customer agreement with
Grant Prideco pursuant to which the Company will agree for at least a three year
period to purchase at least 70% of its requirements of drill stem product from
Grant Prideco. The price for those products will be at a price not greater than
that which Grant Prideco sells to its best similarly situated customers. The
Company will be entitled to apply against its purchases a drill stem credit
granted to it in the amount of $15 million, subject to a limitation of the
application of the credit to no more than 20% of any purchase.
5. ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS
The Company's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating levels, and to centrally manage
various cash functions. Consequently, a portion of the Company's historical
interest expense has been allocated to discontinued operations. The amount
allocated reflects interest expense associated with the Grant Prideco Note (See
Note 4) calculated using the Company's average long-term debt interest rates for
the applicable periods. The amount allocated using this methodology results in
amounts consistent with the allocation of interest expense based on a ratio of
the net assets of discontinued operations to the Company's consolidated net
assets plus debt.
6. SHORT-TERM DEBT
The Company's unsecured credit agreement 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. Amounts outstanding under
the facility accrue interest at a variable rate based on either LIBOR or the
U.S. prime rate. A commitment fee ranging from 0.09% to 0.20% per annum,
depending on the senior unsecured credit ratings assigned by Standard and Poor's
and Moody's Investor Service to the Company, is payable quarterly on the unused
portion of the facility. The facility contains customary affirmative and
negative covenants, including a maximum debt to capitalization ratio, a minimum
interest coverage ratio, a limitation on liens, and a limitation on asset
dispositions. The Company expects to amend this credit facility prior to our
proposed Spinoff to reflect the elimination of Grant Prideco from the facility
and to adjust the terms of the facility to reflect the Spinoff.
7. CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The functional currency for certain of the Company's international
operations is the applicable local currency. Results of operations for foreign
subsidiaries with functional currencies other than the U.S. dollar are
translated using average exchange rates during the period. Assets and
liabilities of these foreign subsidiaries are translated using the exchange
rates in effect at the balance sheet date and the resulting translation
adjustments are included as accumulated other comprehensive loss, a separate
component of stockholders' equity. Currency transaction gains and losses are
reflected in income for the period.
The net decline in the cumulative foreign currency translation adjustment
from December 31, 1998 to March 31, 1999 was $14.3 million which primarily
reflects the financial impact of the devaluation of Latin American currencies
as compared to the U.S. dollar.
PAGE 78
79
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8. 1998 SPECIAL CHARGE
The Company incurred a $47.0 million charge in the fourth quarter of 1998
related to the decline in the Company's markets. Approximately $35.6 million of
these charges had been utilized as of March 31, 1999. The remainder of the
charges will be expended by the second quarter of 1999 in connection with
planned activities and that no adjustments or reversals to the remaining
accrued special charges are necessary.
The following chart summarizes the December 31, 1998 balance of accruals
established in the fourth quarter of 1998 and the utilization of these accruals
during the first quarter of 1999.
BALANCE AS OF BALANCE AS OF
DECEMBER 31, MARCH 31,
1998 UTILIZED 1999
----------- ----------- -----------
(in thousands)
Severance and Related Costs (a) ...... $ 7,611 $ 3,490 $ 4,121
Facility Closures (b) ................ 12,829 7,150 5,679
Corporate Related Expenses (c) ....... 3,120 1,475 1,645
----------- ----------- -----------
Total ............................. $ 23,560 $ 12,115 $ 11,445
=========== =========== ===========
(a) The severance and related costs included in the fourth quarter charges
were $7.6 million for approximately 940 employees to be terminated in the
first half of 1999, in accordance with the announced plan. During the first
quarter of 1999, approximately 600 employees were terminated with
associated costs of $3.5 million.
(b) The facility and plant closures of $12.8 million were accrued in the
fourth quarter of 1998 for the consolidation and closure of approximately
100 service, manufacturing and administrative facilities in response to
declining market conditions in the fourth quarter. During the first quarter
of 1999, approximately 65 facilities were closed with associated costs of
$7.2 million.
(c) The corporate related expenses of $3.1 million recorded in the fourth
quarter were primarily for the consolidation of technology centers, the
consolidation of corporate offices and the related lease obligations to
align the corporate cost structure in light of current conditions. During
the first quarter of 1999, $1.5 million was expended related to the
consolidation of corporate offices.
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share is computed by dividing 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 and restricted stock 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 is
not included in the calculation.
The following reconciles basic and diluted weighted average shares
outstanding:
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
(in thousands)
Basic weighted average shares outstanding ....................... 97,315 96,761
Dilutive effect of stock option and restricted stock plans ...... 692 864
--------- ---------
Diluted weighted average shares outstanding ..................... 98,007 97,625
========= =========
10. SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes investing activities relating to acquisitions
integrated into the Company's continuing operations and the joint venture:
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
--------- ---------
(in thousands)
Fair value of assets, net of cash acquired .... $ 262,622 $ 55,396
Goodwill ...................................... 30,386 72,317
Total liabilities ............................. (277,883) (27,764)
Common stock issued ........................... -- (30,895)
--------- ---------
Cash consideration, net of cash acquired ...... $ 15,125 $ 69,054
========= =========
PAGE 79
80
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
11. SEGMENT INFORMATION
Business Segments
The Company 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. The Company
operates in virtually every oil and gas exploration and production region in the
world. The Company defines its business segments into three separate groups:
completion and oilfield services, artificial lift systems, and compression
services.
The Company's completion and oilfield services segment provides fishing
and downhole services, well installation services, well completion systems and
equipment rental.
The Company's artificial lift systems segment designs, manufactures, sells
and services a complete line of artificial lift equipment, including
progressing cavity pumps, reciprocating rod lift equipment, gas lift equipment,
electrical submersible pumps and hydraulic lift equipment.
The Company's compression services segment manufactures, packages, rents
and sells parts and services for gas compressor units over a broad horsepower
range.
Restated financial information by industry segment for each of the three
months ended March 31, 1999 and 1998, is summarized below.
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
--------- ---------
(in thousands)
Revenues from unaffiliated customers
Completion and Oilfield Services ..... $ 165,287 $ 230,677
Artificial Lift Systems .............. 57,471 107,129
Compression Services ................. 42,583 43,001
--------- ---------
$ 265,341 $ 380,807
========= =========
EBITDA (a)
Completion and Oilfield Services ..... $ 43,313 $ 79,885
Artificial Lift Systems .............. 3,991 16,886
Compression Services ................. 12,584 10,765
Corporate ............................ (5,209) (7,324)
--------- ---------
$ 54,679 $ 100,212
========= =========
Depreciation and amortization
Completion and Oilfield Services ..... $ 26,283 $ 22,690
Artificial Lift Systems .............. 4,835 4,930
Compression Services ................. 7,568 6,092
Corporate ............................ 363 664
--------- ---------
$ 39,049 $ 34,376
========= =========
Operating income (loss)
Completion and Oilfield Services ..... $ 17,030 $ 57,195
Artificial Lift Systems .............. (844) 11,956
Compression Services ................. 5,016 4,673
Corporate ............................ (5,572) (7,988)
--------- ---------
$ 15,630 $ 65,836
========= =========
(a) The Company evaluates performance and allocates resources based on EBITDA,
which is calculated as operating income adding back depreciation and
amortization. Calculations of EBITDA should not be viewed as a substitute
to calculations under GAAP, in particular operating income and net income.
In addition, EBITDA calculations by one company may not be comparable to
another company.
As of March 31, 1999, total assets, excluding net assets of discontinued
operations, were $998.9 million for Completion and Oilfield Services, $585.8
million for Artificial Lift Systems, $665.7 million for Compression Services,
and $95.0 million for Corporate.
As of December 31, 1998 total assets, excluding net assets of discontinued
operations, were $1,022.1 million for Completion and Oilfield Services, $592.4
million for Artificial Lift Systems, $388.2 million for Compression Services,
and $90.7 million for Corporate.
PAGE 80
81
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999 the FASB issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of SFAS No. 133, amending the effective date of SFAS No. 133
to years beginning after June 15, 2000. We are currently evaluating the impact
of SFAS No. 133 on our consolidated financial statements.
13. SUBSEQUENT EVENTS
Sale and Leaseback of Equipment
The Company entered into a sale and leaseback arrangement in December 1998
where it was provided with the right to sell up to $200.0 million of
compression units through December 1999 and lease them back over a five year
period under an operating lease. As of December 31, 1998, the Company had sold
compressors under this arrangement, having an appraised value of $119.6
million, and received cash of $100.0 million and a receivable of $19.6 million.
The obligations under this arrangement were assumed by the joint venture with
GE Capital. As of March 31, 1999, the joint venture had received an additional
$10.0 million in cash from this receivable. The receivable is classified in
other current assets on the accompanying Restated Consolidated Condensed
Balance Sheets as the balance is due on demand.
In April 1999, the joint venture sold additional compressors under this
arrangement having an appraised value of approximately $80.0 million. Upon
receipt of the $80.0 million in cash, the joint venture will remitted
approximately $56.0 million of the proceeds to GE Capital as part of the terms
of the joint venture (See Note 3).
The Company's Compression Services Division entered into a second sale and
leaseback arrangement in July 1999 where it was provided with the right to sell
up to $150.0 million of compression units during the next eighteen months and
lease them back over a five year period under an operating lease.
Acquisitions
In July 1999, the Company acquired a 50.01% interest in Voest-Alpine
Stahlrohr Kindberg GmbH & Co KG ("VA") for approximately $30.0 million, of which
approximately $7.5 million was paid in cash and the remainder is to be paid over
a period of 7 years. VA will be integrated into Grant Prideco.
On August 31, 1999, the Company completed its acquisition of Dailey
International Inc. ("Dailey") pursuant to a pre-negotiated plan of
reorganization in bankruptcy. Under the terms of the acquisition, Weatherford
issued a total of approximately 4,267,640 shares of Common Stock to the Dailey
noteholders and stockholders. Of the total number shares issued, the Company
issued approximately 3,985,900 shares to the Dailey noteholders and
approximately 281,740 shares to the Dailey common stockholders. In addition, the
Company, which held approximately 24 percent of the outstanding Dailey notes,
received approximately 1,226,285 shares of its Common Stock to be retained as
treasury shares.
Dailey is a leading provider of specialty drilling equipment and services
to the oil and gas industry and designs, manufactures and rents proprietary
downhole tools for oil and gas drilling and workover applications worldwide.
In September 1999, the Company acquired Petroline WellSystems Limited
("Petroline") for a total consideration of approximately $165.0 million,
consisting of $32.2 million in cash and 3.8 million shares of Common Stock. The
Company also agreed to pay to the sellers additional funds in the event they
resell their shares of Common Stock received by them in certain market
transactions at a price less than $35.175 per share. This obligation continues
until October 2000. Petroline, based in Aberdeen, Scotland, is a provider of
premium completion products and services to the international oil and gas
industry. It is the leading provider of flow control equipment in the North Sea
and it was the first company to successfully introduce completion products using
new expandable tube technology.
On September 15, 1999, the Company acquired Williams Tool Co. ("Williams")
for 1.8 million shares of Common Stock. Williams, based in Fort Smith, Arkansas
offers a full range of rotating control heads for horizontal, underbalanced and
low hydrostatic head drilling operations. Its principal purpose is to control
flow from the wellbore to reduce the risk of blowouts when oil, gas, geothermal
and coal gas methane wells are being drilled with light fluids.
Compression Services Contract
The Company's Compression Services Division was awarded a seven year
contract by YPF S.A. in Argentina. The division will provide total compression
services to YPF, including ownership of the compression equipment, maintenance
and daily service operations, with estimated revenues over the seven years of
$95.0 million. This project became fully operational in the third quarter
of 1999.
PAGE 81
82
PART 3. Restated Unaudited Condensed Financial Statements for the Three and Six
Months Ended June 30, 1999 and 1998.
This section presents Weatherford's Restated Financial Statements and
Notes previously included in Weatherford's Quarterly Report on Form 10-Q for the
three months and six months ended June 30, 1999.
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ...................................... $ 28,751 $ 34,131
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $18,749 and $19,398, Respectively ............... 289,018 271,867
Inventories .................................................... 330,488 298,555
Other Current Assets ........................................... 130,163 127,543
----------- -----------
778,420 732,096
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST,
NET OF ACCUMULATED DEPRECIATION ................................ 809,800 629,276
GOODWILL, NET ........................................................ 701,359 648,570
NET ASSETS OF DISCONTINUED OPERATIONS................................. 558,766 545,211
OTHER ASSETS ......................................................... 88,334 83,459
----------- -----------
$ 2,936,679 $ 2,638,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings .......................................... $ 236,348 $ 137,279
Current Portion of Long-Term Debt .............................. 15,331 14,915
Accounts Payable ............................................... 84,065 92,274
Accrued Salaries and Benefits .................................. 40,283 40,127
Current Tax Liabilities ........................................ 17,093 21,839
Other Accrued Liabilities ...................................... 95,758 106,139
----------- -----------
488,878 412,573
----------- -----------
LONG-TERM DEBT ....................................................... 221,393 220,398
MINORITY INTERESTS ................................................... 194,042 2,888
DEFERRED INCOME TAXES AND OTHER ...................................... 127,303 106,373
5% CONVERTIBLE SUBORDINATED PREFERRED
EQUIVALENT DEBENTURES .......................................... 402,500 402,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 Par Value, Authorized 250,000 Shares,
Issued 108,484 and 103,513, Respectively .................... 108,484 103,513
Capital in Excess of Par Value ................................. 1,137,333 1,052,899
Treasury Stock, at Cost ........................................ (269,257) (193,328)
Retained Earnings .............................................. 607,703 607,185
Accumulated Other Comprehensive Loss ........................... (81,700) (76,389)
----------- -----------
1,502,563 1,493,880
----------- -----------
$ 2,936,679 $ 2,638,612
=========== ===========
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 82
83
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
REVENUES:
Products ................................................... $ 107,991 $ 142,459 $ 224,882 $ 313,202
Services and Rentals ....................................... 170,597 216,372 319,047 426,436
--------- --------- --------- ---------
278,588 358,831 543,929 739,638
COSTS AND EXPENSES:
Cost of Products ........................................... 70,720 98,469 151,842 215,495
Cost of Services and Rentals ............................... 132,428 147,508 234,981 280,614
Selling, General and Administrative Attributable
to Segments .............................................. 58,797 53,673 119,715 111,304
Corporate General and Administrative ....................... 6,993 6,917 12,565 14,905
Merger Costs and Other Charges ............................. -- 103,197 -- 103,197
Equity in Earnings of Unconsolidated Affiliates ............ (436) (785) (890) (1,565)
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ......................................... 10,086 (50,148) 25,716 15,688
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest Income ............................................ 596 441 2,101 1,089
Interest Expense ........................................... (10,898) (10,728) (20,898) (19,609)
Other, Net ................................................. 3,093 (1,232) 2,157 (2,528)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST ..................................... 2,877 (61,667) 9,076 (5,360)
(PROVISION) BENEFIT FOR INCOME TAXES ............................ (356) 23,043 (2,055) 2,393
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST .......................... 2,521 (38,624) 7,021 (2,967)
MINORITY INTEREST EXPENSE, NET OF TAX ........................... (588) (99) (1,326) (109)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ................................................ 1,933 (38,723) 5,695 (3,076)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAXES .................................. (3,953) 23,832 (5,177) 49,328
--------- --------- --------- ---------
NET INCOME (LOSS) ............................................... $ (2,020) $ (14,891) $ 518 $ 46,252
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations ................. $ 0.02 $ (0.40) $ 0.06 $ (0.03)
Income (Loss) from Discontinued Operations ............... (0.04) 0.25 (0.05) 0.51
--------- --------- --------- ---------
Net Income Per Share...................................... $ (0.02) $ (0.15) $ 0.01 $ 0.48
========= ========= ========= =========
Basic Weighted Average Shares Outstanding ................ 97,586 96,771 97,451 96,766
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations ................. $ 0.02 $ (0.40) $ 0.06 $ (0.03)
Income (Loss) from Discontinued Operations ............... (0.04) 0.25 (0.05) 0.51
--------- --------- --------- ---------
Net Income Per Share...................................... $ (0.02) $ (0.15) $ 0.01 $ 0.48
========= ========= ========= =========
Diluted Weighted Average Shares Outstanding .............. 99,430 96,771 98,718 96,766
========= ========= ========= =========
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 83
84
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .......................................................... $ 518 $ 46,252
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization ..................................... 79,351 68,323
Net (Income) Loss of Discontinued Operations ...................... 5,177 (49,328)
Non-Cash Portion of Merger Costs and Other Charges ................ -- 48,039
Minority Interest Expense, Net of Tax ............................. 1,326 109
Deferred Income Tax Provision ..................................... 685 11,696
Gain on Sales of Property, Plant and Equipment .................... (5,364) (10,244)
Change in Operating Assets and Liabilities, Net of Effects
of Businesses Acquired .......................................... (67,813) (87,113)
--------- ---------
Net Cash Provided by Continuing Operations ...................... 13,880 27,734
Net Cash Used by Discontinued Operations ........................ (3,150) (22,819)
--------- ---------
Net Cash Provided by Operating Activities ....................... 10,730 4,915
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Short-Term Investment ................................... (14,591) --
Acquisition of Businesses, Net of Cash Acquired ..................... (40,262) (71,596)
Capital Expenditures for Property, Plant and Equipment .............. (77,065) (79,493)
Acquisitions and Capital Expenditures of
Discontinued Operations ......................................... (13,865) (25,408)
Proceeds from Sales of Property, Plant and Equipment ................ 13,727 31,400
Proceeds from Sale and Leaseback of Equipment ....................... 83,503 --
--------- ---------
Net Cash Used by Investing Activities ............................. (48,553) (145,097)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Short-Term Debt, Net .................................. 99,069 176,274
Repayments of Long-Term Debt, Net ................................... (1,042) (9,414)
Distribution to Minority Interest Holder ............................ (65,350) --
Proceeds from Exercise of Stock Options ............................. 1,329 3,681
Acquisition of Treasury Stock ....................................... (1,971) (39,536)
Other, Net .......................................................... 408 1,233
--------- ---------
Net Cash Provided by Financing Activities ......................... 32,443 132,238
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (5,380) (7,944)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 34,131 66,008
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 28,751 $ 58,064
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid ....................................................... $ 22,839 $ 21,735
Income Taxes Paid, Net of Refunds ................................... 7,907 46,837
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 84
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Income (Loss) .......................................... $ (2,020) $(14,891) $ 518 $ 46,252
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment ............... 8,963 (11,181) (5,311) (14,322)
-------- -------- -------- --------
Comprehensive Income (Loss) ................................ $ 6,943 $(26,072) $ (4,793) $ 31,930
======== ======== ======== ========
The accompanying notes are an integral part of these
restated consolidated condensed financial statements.
PAGE 85
86
WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The unaudited restated consolidated condensed financial statements included
herein have been prepared by Weatherford International, Inc. (the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission.
These restated 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 restated 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. These restated financial statements
should be read in conjunction with the restated audited consolidated financial
statements and notes thereto included herein for the year ended December 31,
1998. The results of operations for the six month period ended June 30, 1999 are
not necessarily indicative of the results expected for the full year.
In October 1999, the Board of Directors of the Company approved a plan to
distribute all of the outstanding shares of common stock of its wholly owned
subsidiary, Grant Prideco, Inc. (the "Spinoff") to holders of the Company's
common stock, $1.00 par value ("Common Stock"). In connection with the Spinoff,
the Company will transfer its drilling products businesses to Grant Prideco,
Inc. ("Grant Prideco"). As a result the Company has restated its financial
statements reflecting the historical operations of Grant Prideco as
discontinued operations (See Note 5).
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 1999 classifications.
2. INVENTORIES
Inventories by category are as follows:
JUNE 30, DECEMBER 31,
1999 1998
------------ -----------
(in thousands)
Raw materials, components and supplies............ $ 135,615 $ 86,304
Work in process................................... 40,595 25,590
Finished goods.................................... 154,278 186,661
------------ -----------
$ 330,488 $ 298,555
============ ===========
Work in process and finished goods inventories include the cost of
material, labor and plant overhead.
3. BUSINESS COMBINATIONS
In February 1999, the Company completed a joint venture with GE Capital
Corporation ("GE Capital") in which the Company's compression services
operations were combined with GE Capital's Global Compression Services
operations. The joint venture is known as Weatherford Global Compression
Services. The Company owns 64% of the joint venture and GE Capital owns 36%. The
Company has the right to acquire GE Capital's interest at anytime at a price
equal to a third party market-determined value that is not less than book value.
GE Capital also has the right to require the Company to purchase its interest at
anytime after February 2001 at a market-determined third party
PAGE 86
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
valuation as well as request a public offering of its interest after that date,
if the Company has not purchased its interest by that time.
On February 8, 1999, the Company completed the acquisition of Christiana
Companies, Inc. ("Christiana") for approximately 4.4 million shares of Common
Stock and $20.6 million cash. In the acquisition, the Company acquired through
Christiana (1) 4.4 million shares of the Company's Common Stock, (2) cash, after
distribution to the Christiana shareholders, equal to the amount of Christiana's
outstanding tax and other liabilities and (3) a one-third interest in Total
Logistic Control, a refrigerated warehouse, trucking and logistics company. The
4.4 million shares of Common Stock acquired are classified as Treasury Stock, at
cost on the accompanying Consolidated Condensed Balance Sheet. Because the
number of shares of Common Stock issued in the Christiana acquisition
approximated the number of shares of Common Stock held by Christiana prior to
the acquisition, the Christiana acquisition had no material effect on the
outstanding number of shares of Common Stock or net equity of the Company.
The Company has also effected various other acquisitions during the six
months ended June 30, 1999 for total consideration of approximately $54.6
million, of which $42.2 million was paid in cash and $12.4 million was paid in
the form of shares of Common Stock.
The acquisitions discussed above, were accounted for using the purchase
method of accounting. Results of operations for acquisitions accounted for as
purchases are included in the accompanying restated consolidated condensed
financial statements since the date of acquisition. Completed acquisitions are
not material individually or in the aggregate with same year acquisitions.
Therefore, pro forma information is not provided.
4. 1998 SPECIAL CHARGES
In the second quarter of 1998, the Company incurred $113.0 million in
merger and other charges relating to the merger between EVI, Inc. and
Weatherford Enterra, Inc. and a reorganization and rationalization of the
Company's businesses in light of the initial downturn in the industry. These
charges had been fully realized as of December 31, 1998.
The Company incurred a $47.0 million charge in the fourth quarter of 1998
related to the decline in our markets. As of December 31, 1998, $23.4 million of
these charges had been utilized. The remaining $23.6 million of these charges
were fully utilized in the first half of 1999 as follows:
o The severance and related costs included in the fourth quarter charges
were $7.6 million for approximately 940 employees to be terminated in the
first half of 1999, in accordance with the announced plan. These employees
had all been terminated by June 30, 1999.
o The facility and plant closures of $12.8 million were accrued in the
fourth quarter of 1998 for the consolidation and closure of approximately
100 service, manufacturing and administrative facilities in response to
declining market conditions in the fourth quarter. These facilities had all
been closed as of June 30, 1999.
o The corporate related expenses of $3.1 million recorded in the fourth
quarter were primarily for the consolidation of technology centers, the
relocation of corporate offices and the related lease obligations to align
the corporate cost structure in light of current conditions.
o In the second quarter of 1999, $3.1 million, $6.6 million and $1.7
million were utilized by the Completion and Oilfield Services Division, the
Artificial Lift Systems Division, and Corporate, respectively.
o In the first half of 1999, $7.7 million of the 1998 fourth quarter charge
was utilized by the Completion and Oilfield Services Division, $12.1
million by the Artificial Lift Systems Division and $3.7 million by
Corporate.
PAGE 87
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
In October 1999, the Board of Directors of the Company approved a plan to
spinoff Grant Prideco. The Spinoff is conditioned upon the receipt of a revenue
ruling from the United States Internal Revenue Service (the "IRS") to the effect
that receipt of shares of Grant Prideco common stock should be tax free for
federal income tax purposes to our stockholders and that the Company should not
recognize income, gain or loss as a result of the Spinoff.
The results of operations for Grant Prideco are reflected in the
accompanying Consolidated Condensed Statements of Income as "Discontinued
Operations, Net of Taxes". Condensed results of Grant Prideco were as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
------------------ ------------------ ---------------- ----------------
(in thousands)
Revenues................................ $ 64,507 $ 172,002 $ 153,000 $ 361,715
------------ ------------- ------------- -------------
Income (loss) before interest
allocation and income taxes.......... (3,464) 40,669 (2,811) 84,146
Interest allocation..................... (1,813) (1,813) (3,625) (3,625)
(Provision) benefit for income taxes.... 1,324 (15,024) 1,259 (31,193)
------------ ------------- ------------- -------------
Net income (loss)....................... $ (3,953) $ 23,832 $ (5,177) $49,328
============ ============= ============= =============
In connection with the Spinoff, Grant Prideco will issue an unsecured
subordinated note to the Company in the amount of $100.0 million. The $100.0
million obligation will bear interest at an annual rate equal to 10.0%. Interest
payments will be due quarterly, and principal and all unpaid interest will be
due no later than December 31, 2001. Under the terms of the note, Grant Prideco
is required to repay this note with the proceeds of any debt or equity
financing, excluding financing under a credit facility or any equity issued in
connection with a business combination. The indebtedness of Grant Prideco to the
Company will be subordinated to the working capital obligations of Grant Prideco
to its banks. Grant Prideco currently intends to repay the obligations within 12
months from the completion of the Spinoff, pursuant to an anticipated public
debt financing. Grant Prideco's ability to repay this indebtedness, however,
will be dependent upon market conditions.
The Company purchases drill pipe and other related products from Grant
Prideco. These purchases have been eliminated in the accompanying restated
consolidated condensed financial statements. The amounts purchased by the
Company for the three and six months ended June 30, 1999 were $1.5 million and
$7.5 million, respectively, and for the three and six months ended June 30, 1998
were $2.1 million and $4.5 million, respectively. Such purchases represent Grant
Prideco's cost.
The Company charged Grant Prideco a management fee of $0.2 million and $0.5
million for the three and six months ended June 30, 1999, respectively and $0.2
million and $0.5 million for the three and six months ended June 30, 1988,
respectively. The fee is based on the time devoted to Grant Prideco for legal,
accounting and tax, treasury and risk management services.
Grant Prideco was charged $1.5 million and $2.9 million of costs related to
the Company's information systems function in the three and six months ended
June 30, 1999, respectively and $1.4 million and $2.8 million in the three and
six months ended June 30, 1998, respectively. Information systems charges were
based on direct support provided, equipment usage and number of system users.
In connection with the Spinoff, Grant Prideco and the Company will enter
into a tax allocation agreement (the "Tax Allocation Agreement"). Under the
terms of the Tax Allocation Agreement, Grant Prideco, is responsible for all
taxes and associated liabilities relating to the historical businesses of Grant
Prideco. The Tax Allocation Agreement also provides that any tax liabilities
associated with the Spinoff shall be assumed and paid by Grant Prideco subject
to certain exceptions relating to changes in control of the Company. The Tax
Allocation Agreement further provides that in the event there is a tax liability
associated with the historical operations of Grant Prideco that is offset by a
tax benefit of the Company, the Company will apply the tax benefit against such
tax liability and will be reimbursed for the value of such tax benefit when and
as the Company would have been able to otherwise utilize that tax benefit for
its own businesses.
The Company intends to enter into a transition services agreement with
Grant Prideco for a period of one year from the Spinoff date. Under the
agreement, the Company will provide certain services requested by Grant Prideco.
The fee for these services will be based on a cost-plus 10% basis. The
transition services to be provided under this agreement may include accounting,
tax, finance services, employee benefit services, information services,
management information systems and may include any other similar services.
The Company intends to enter into a preferred customer agreement with
Grant Prideco pursuant to which the Company will agree for at least a three year
period to purchase at least 70% of its requirements of drill stem product from
Grant Prideco. The price for those products will be at a price not greater than
that which Grant Prideco sells to its best similarly situated customers. The
Company will be entitled to apply against its purchases a drill stem credit
granted to it in the amount of $15 million, subject to a limitation of the
application of the credit to no more than 20% of any purchase.
6. ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS
The Company's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating levels, and to centrally manage
various cash functions. Consequently, a portion of the Company's historical
interest expense has been allocated to discontinued operations. The amount
allocated reflects interest expense associated with the Grant Prideco Note (see
Note 5) calculated using the Company's average long-term debt interest rates for
the applicable periods. The amount allocated using this methodology results in
amounts consistent with the allocation of interest expense based on a ratio of
the net assets of discontinued operations to the Company's consolidated net
assets plus debt.
7. SHORT-TERM DEBT
The Company's unsecured credit agreement 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. Amounts outstanding under
the facility accrue interest at the U.S. prime rate or a variable rate based on
LIBOR. A commitment fee
PAGE 88
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ranging from 0.09% to 0.20% per annum, depending on the senior unsecured credit
ratings assigned by Standard and Poor's and Moody's Investor Service to the
Company, is payable quarterly on the unused portion of the facility. The
facility contains customary affirmative and negative covenants, including a
maximum debt to capitalization ratio, a minimum interest coverage ratio, a
limitation on liens, and a limitation on asset dispositions. In addition, as of
June 30, 1999 the Company had $130.0 million drawn on other uncommitted lines
which are due on demand. The Company expects to amend this credit facility prior
to the proposed Spinoff to reflect the elimination of Grant Prideco from the
facility and to adjust the terms of the facility to reflect the Spinoff.
8. SALE AND LEASEBACK OF EQUIPMENT
The Company's Compression Services Division entered into a sale and
leaseback arrangement in December 1998 where it was provided with the right to
sell up to $200.0 million of compression units and lease the assets back over a
five year period under an operating lease. As of December 31, 1998, the
Company's Compression Services Division had sold compressors under this
arrangement, having an appraised value of $119.6 million, and received cash of
$100.0 million and a receivable of $19.6 million. The obligations under this
arrangement were assumed by the joint venture with GE Capital. As of June 30,
1999, the joint venture had a receivable of $4.6 million under this arrangement.
In the second quarter of 1999, the Compression Services Division sold
additional compressors under this arrangement having an appraised value of
approximately $68.5 million. Subsequent to the sale, the joint venture received
approximately $68.5 million in cash, of which $65.4 million was distributed to
GE Capital under terms of the joint venture agreement. The sale resulted in an
additional pre-tax deferred gain of approximately $22.3 million, classified as
Deferred Income Taxes and Other on the accompanying Restated Consolidated
Condensed Balance Sheets, which may be deferred until the end of the lease.
The following table provides future minimum lease payments (in thousands)
under the aforementioned lease as of June 30, 1999:
Remainder of 1999.......................... $ 5,681
2000 ...................................... 11,361
2001 ...................................... 11,361
2002 ...................................... 11,361
2003 ...................................... 10,737
2004 ...................................... 1,516
-------------
$ 52,017
=============
9. CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The functional currency for certain of the Company's international
operations is the applicable local currency. Results of operations for foreign
subsidiaries with functional currencies other than the U.S. dollar are
translated using average exchange rates during the period. Assets and
liabilities of these foreign subsidiaries are translated using the exchange
rates in effect at the balance sheet date and the resulting translation
adjustments are included as accumulated other comprehensive loss, a separate
component of stockholders' equity. Currency transaction gains and losses are
reflected in income for the period.
The net decline in the cumulative foreign currency translation adjustment
from December 31, 1998 to June 30, 1999 was $5.3 million. This decline primarily
reflects the financial impact of the devaluation of Latin American currencies,
partially offset by the strengthening Canadian dollar, as compared to the U.S.
dollar.
10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share is computed by dividing 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 and restricted stock plans. The effect of stock
options and restricted stock are not included in the diluted computation for
periods in which a loss from continuing operations occurs because to do so would
have been anti-dilutive. 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 is not included in the calculation.
PAGE 89
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following reconciles basic and diluted weighted average shares
outstanding:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
(in thousands)
Basic weighted average shares outstanding ....................... 97,586 96,771 97,451 96,766
Dilutive effect of stock option and restricted stock plans ...... 1,844 -- 1,267 --
------ ------ ------ ------
Diluted weighted average shares outstanding ..................... 99,430 96,771 98,718 96,766
====== ====== ====== ======
11. SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes investing activities relating to acquisitions
integrated into the Company's continuing operations and the GE joint venture for
the periods shown:
SIX MONTHS
ENDED JUNE 30,
------------------------------
1999 1998
------------- -------------
(in thousands)
Fair value of assets, net of cash acquired........................... $ 275,340 $ 61,290
Goodwill............................................................. 59,348 76,864
Total liabilities.................................................... (280,334) (35,663)
Common stock issued.................................................. (14,092) (30,895)
------------- -------------
Cash consideration, net of cash acquired............................. $ 40,262 $ 71,596
============= =============
12. SEGMENT INFORMATION
Business Segments
The Company 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. The Company
operates in virtually every oil and gas exploration and production region in the
world. The Company currently divides its business segments into three separate
groups: completion and oilfield services, artificial lift systems, and
compression services.
The Company's completion and oilfield services segment provides downhole
services, well installation services, well completion systems, equipment rental
and underbalanced drilling products and services.
The Company's artificial lift systems segment designs, manufactures, sells
and services a complete line of artificial lift equipment, including progressing
cavity pumps, reciprocating rod lift equipment, gas lift equipment and hydraulic
lift equipment. The Company has a long-term alliance with Electrical Submersible
Pumps, Inc. to supply a line of electrical submersible pumps and to distribute
the line in selected markets.
The Company's compression services segment manufactures, packages, rents
and sells parts and services for gas compressor units over a broad horsepower
range.
PAGE 90
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Financial information by industry segment for each of the three and six
months ended June 30, 1999 and 1998, is summarized below.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
(IN THOUSANDS)
Revenues from unaffiliated customers
Completion and Oilfield Services............... $ 160,411 $ 221,240 $ 325,698 $ 451,917
Artificial Lift Systems........................ 62,227 90,427 119,698 197,556
Compression Services........................... 55,950 47,164 98,533 90,165
----------- ---------- ----------- -----------
$ 278,588 $ 358,831 $ 543,929 $ 739,638
=========== ========== =========== ===========
EBITDA, before merger costs and other charges (a)
Completion and Oilfield Services............... $ 35,544 $ 78,201 $ 78,857 $ 158,086
Artificial Lift Systems........................ 7,506 14,264 11,497 31,150
Compression Services........................... 13,822 10,638 26,406 21,403
Corporate...................................... (6,484) (6,254) (11,693) (13,578)
----------- ---------- ----------- -----------
$ 50,388 $ 96,849 $ 105,067 $ 197,061
=========== ========== =========== ===========
Merger costs and other charges (b)
Completion and Oilfield Services............... $ -- $ 26,805 $ -- $ 26,805
Artificial Lift Systems........................ -- 18,570 -- 18,570
Corporate...................................... -- 67,675 -- 67,675
----------- ---------- ----------- -----------
$ -- $ 113,050 $ -- $ 113,050
=========== ========== =========== ===========
Depreciation and amortization
Completion and Oilfield Services............... $ 25,792 $ 22,643 $ 52,075 $ 45,333
Artificial Lift Systems........................ 4,835 4,758 9,670 9,688
Compression Services........................... 9,166 5,883 16,734 11,975
Corporate...................................... 509 663 872 1,327
----------- ---------- ----------- -----------
$ 40,302 $ 33,947 $ 79,351 $ 68,323
=========== ========== =========== ===========
Operating income (loss)
Completion and Oilfield Services............... $ 9,752 $ 28,753 $ 26,782 $ 85,948
Artificial Lift Systems........................ 2,671 (9,064) 1,827 2,892
Compression Services........................... 4,656 4,755 9,672 9,428
Corporate...................................... (6,993) (74,592) (12,565) (82,580)
----------- ---------- ----------- -----------
$ 10,086 $ (50,148) $ 25,716 $ 15,688
=========== ========== =========== ===========
(a) The Company evaluates performance and allocates resources based on
EBITDA, which is calculated as operating income adding back depreciation
and amortization, excluding the impact of merger costs and other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another
company.
(b) Includes inventory write-downs of $9.9 million which have been
classified as Cost of Products on the accompanying Restated Consolidated
Condensed Statements of Income.
As of June 30, 1999, total assets, excluding net assets from discontinued
operations, were $1,021.8 million for Completion and Oilfield Services, $584.4
million for Artificial Lift Systems, $647.0 million for Compression Services,
and $124.7 million for Corporate.
PAGE 91
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WEATHERFORD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO RESTATED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
As of December 31, 1998, total assets, excluding net assets from
discontinued operations, were $1,022.1 million for Completion and Oilfield
Services, $592.4 million for Artificial Lift Systems, $388.2 million for
Compression Services, and $90.7 million for Corporate.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999 the FASB issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of SFAS No. 133, amending the effective date of SFAS No. 133
to years beginning after June 15, 2000. We are currently evaluating the impact
of SFAS No. 133 on our consolidated financial statements.
14. SUBSEQUENT EVENTS
SALE AND LEASEBACK OF EQUIPMENT
The Company's Compression Services Division entered into a second sale and
leaseback arrangement in July 1999 where it was provided with the right to sell
up to $150.0 million of compression units during the next eighteen months and
lease them back over a five year period under an operating lease.
ACQUISITIONS
In July 1999, the Company acquired a 50.01% interest in Voest-Alpine
Stahlrohr Kindberg GmbH & Co KG ("VA") for approximately $30.0 million, of which
approximately $7.5 million was paid in cash and the remainder is to be paid over
a period of 7 years. VA will be integrated into Grant Prideco.
On August 31, 1999, the Company completed its acquisition of Dailey
International Inc. ("Dailey") pursuant to a pre-negotiated plan of
reorganization in bankruptcy . Under the terms of the acquisition, Weatherford
issued a total of approximately 4,267,640 shares of Common Stock to the Dailey
noteholders and stockholders. Of the total number shares issued, the Company
issued approximately 3,985,900 shares to the Dailey noteholders and
approximately 281,740 shares to the Dailey common stockholders. In addition, the
Company, which held approximately 24 percent of the outstanding Dailey notes,
received approximately 1,226,285 shares of its Common Stock to be retained as
treasury shares.
Dailey is a leading provider of specialty drilling equipment and services
to the oil and gas industry and designs, manufactures and rents proprietary
downhole tools for oil and gas drilling and workover applications worldwide.
In September 1999, the Company acquired Petroline WellSystems Limited
("Petroline") for a total consideration of approximately $165.0 million,
consisting of $32.2 million in cash and 3.8 million shares of Common Stock. The
Company also agreed to pay to the sellers additional funds in the event they
resell their shares of Common Stock received by them in certain market
transactions at a price less than $35.175 per share. This obligation continues
until October 2000. Petroline, based in Aberdeen, Scotland, is a provider of
premium completion products and services to the international oil and gas
industry. It is the leading provider of flow control equipment in the North Sea
and it was the first company to successfully introduce completion products using
new expandable tube technology.
On September 15, 1999, the Company acquired Williams Tool Co. ("Williams")
for 1.8 million shares of Common Stock. Williams, based in Fort Smith, Arkansas
offers a full range of rotating control heads horizontal, underbalanced and low
hydrostatic head drilling operations. Its principal purpose is to control flow
from the wellbore to reduce the risk of blowouts when oil, gas, geothermal and
coal gas methane wells are being drilled with light fluids.
COMPRESSION SERVICES CONTRACT
The Company's Compression Services Division was awarded a seven year
contract by YPF S.A. in Argentina. The division will provide total compression
services to YPF, including ownership of the compression equipment, maintenance
and daily service operations, with estimated revenues over the seven years of
$95.0 million. This project became fully operational in the third quarter of
1999.
PAGE 92
93
SECTION E RESTATED UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following summary restated unaudited pro forma condensed consolidated
financial data gives effect to the acquisition of Dailey International Inc.
("Dailey") by Weatherford International, Inc. ("Weatherford"). The financial
data is based on the restated historical financial data of Weatherford and the
historical financial data of Dailey. The Restated Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the year ended December 31, 1998 and
the six months ended June 30, 1999, gives effect to Weatherford's acquisition of
Dailey as if the transaction had occurred on January 1, 1998. The Restated
Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the
acquisition as if this transaction had occurred on June 30, 1999.
The pro forma information set forth below is not necessarily indicative of
the results that actually would have been achieved had such transaction been
consummated as of the aforementioned dates, or that may be achieved in the
future. In particular, the pro forma financial statements do not give effect to
any cost savings or additional synergies that may be realized by us as a result
of the acquisition. We currently expect to realize around $20 million in annual
cost savings and $8 million in additional annual margins from the acquisition.
These benefits are not reflected in the pro forma adjustments and are subject to
various uncertainties described below under "Forward Looking Statements". As a
result, while we currently expect to realize these benefits from the
acquisition, there can be no assurance that these benefits will be fully
realized.
All other acquisitions by Weatherford are not material individually or in
the aggregate; therefore, pro forma information is not reflected. Because this
pro forma information is a summary, it does not contain all information that may
be important to you. You should also read the following:
o Weatherford's Restated Management's Discussion and Analysis of
Financial Condition and Results of Operations and its restated
financial statements and related notes thereto for 1) the years ended
1998, 1997, and 1996, 2) the three months ended March 31, 1999 and
1998 and 3) the three and six months ended June 30, 1999 and 1998
contained in Sections A and D of this filing.
o Weatherford's Current Reports on Form 8-K dated May 21, 1999,
August 16, 1999 and August 31, 1999.
o Dailey's Management's Discussion and Analysis of Financial Condition
and Results of Operations and its financial statements and related
notes thereto contained in its Annual Report on Form 10-K for the year
ended December 31, 1998.
o Dailey's Quarterly Report on Form 10-Q for the period ended March 31,
1999.
o Dailey's Quarterly Report on Form 10-Q for the period ended June 30,
1999.
PAGE 93
94
WEATHERFORD INTERNATIONAL, INC.
RESTATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS)
WEATHERFORD
RESTATED DAILEY PRO FORMA WEATHERFORD
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 28,751 $ 12,599 $ (11,042)(a) $ 30,308
Accounts receivable, net ......................... 289,018 27,718 -- 316,736
Inventories , net ................................ 330,488 -- -- 330,488
Other current assets ............................. 130,163 7,369 (37,652)(b) 99,880
----------- ----------- ----------- -----------
Total current assets ..................... 778,420 47,686 (48,694) 777,412
----------- ----------- ----------- -----------
Property, plant and equipment, net ................. 809,800 144,719 (11,376)(c) 943,143
Goodwill, net ...................................... 701,359 21,693 11,174 (d) 734,226
Net assets of discontinued operations .............. 558,766 -- -- 558,766
Other assets ....................................... 88,334 23,481 (7,425)(e) 104,390
----------- ----------- ----------- -----------
$ 2,936,679 $ 237,579 $ (56,321) $ 3,117,937
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt ..................... $ 251,679 $ 443 $ -- $ 252,122
Accounts payable ................................. 84,065 10,442 -- 94,507
Other accrued liabilities ........................ 153,134 4,081 7,893 (f)(g) 165,108
----------- ----------- ----------- -----------
Total current liabilities ................ 488,878 14,966 7,893 511,737
----------- ----------- ----------- -----------
Long-term debt ..................................... 221,393 275,068 (275,000)(e) 221,461
Minority interests ................................. 194,042 -- -- 194,042
Deferred income taxes and other .................... 127,303 14,265 (7,409)(f) 134,159
5% Convertible Subordinated
Preferred Equivalent Debentures ............... 402,500 -- -- 402,500
Shareholders' equity:
Common stock ..................................... 108,484 106 5,388 (h)(i) 113,978
Capital in excess of par ......................... 1,137,333 53,117 126,558 (h)(i) 1,317,008
Treasury stock, at cost .......................... (269,257) (4,061) (29,633)(h)(i) (302,951)
Retained earnings (deficit) ..................... 607,703 (114,000) 114,000 (i) 607,703
Accumulated other comprehensive
loss .......................................... (81,700) (1,882) 1,882 (i) (81,700)
----------- ----------- ----------- -----------
Total stockholders' equity ............... 1,502,563 (66,720) 218,195 1,654,038
----------- ----------- ----------- -----------
$ 2,936,679 $ 237,579 $ (56,321) $ 3,117,937
=========== =========== =========== ===========
PAGE 94
95
WEATHERFORD INTERNATIONAL, INC.
RESTATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
WEATHERFORD
RESTATED DAILEY PRO FORMA WEATHERFORD
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ----------- -----------
Revenues.............................................. $ 1,363,849 $ 132,317 $ (1,046)(j) $ 1,495,120
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales.................................... 946,751 108,896 (2,432)(j)(k) 1,053,215
Selling, general and administrative.............. 245,959 39,058 558 (l) 285,575
Merger costs and other charges................... 137,647 56,450 -- 194,097
Equity in earnings of unconsolidated affiliates.. (2,679) -- -- (2,679)
----------- ----------- ----------- -----------
1,327,678 204,404 (1,874) 1,530,208
----------- ----------- ----------- -----------
Operating income (loss)............................... 36,171 (72,087) 828 (35,088)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense................................. (42,489) (24,429) 23,750 (m) (43,168)
Interest income.................................. 3,093 3,425 (521)(n) 5,997
Other, net....................................... (2,955) (42) -- (2,997)
----------- ----------- ----------- -----------
(42,351) (21,046) 23,229 (40,168)
----------- ----------- ----------- -----------
Income (loss) before income taxes..................... (6,180) (93,133) 24,057 (75,256)
Provision (benefit) for income taxes.................. (5,297) 2,115 8,420 (o) 5,238
----------- ----------- ----------- -----------
Income (loss) from continuing operations.............. $ (883) $ (95,248) $ 15,637 $ (80,494)
=========== =========== =========== ===========
Loss from continuing operations per share:
Basic............................................ $ (0.01) $ (0.79)
=========== ===========
Diluted.......................................... $ (0.01) $ (0.79)
=========== ===========
Weighted average shares outstanding:
Basic............................................ 97,065 101,664 (p)
=========== ===========
Diluted.......................................... 97,065 101,664
=========== ===========
PAGE 95
96
WEATHERFORD INTERNATIONAL, INC.
RESTATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
WEATHERFORD
RESTATED DAILEY PRO FORMA WEATHERFORD
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
--------- ---------- ------------ ---------
Revenues............................................. $ 543,929 $ 51,380 $ (704)(j) $ 594,605
--------- --------- --------- ---------
Costs and expenses:
Cost of sales.................................... 386,823 47,189 (1,314)(j)(k) 432,698
Selling, general and administrative.............. 132,280 16,726 279 (l) 149,285
Reorganization costs............................. -- 2,891 -- 2,891
Equity in earnings of unconsolidated affiliates.. (890) (634) -- (1,524)
--------- --------- --------- ---------
518,213 66,172 (1,035) 583,350
--------- --------- --------- ---------
Operating income..................................... 25,716 (14,792) 331 11,255
--------- --------- --------- ---------
Other income (expense):
Interest expense................................. (20,898) (11,388) 11,105 (m) (21,181)
Interest income.................................. 2,101 902 (1,122)(n) 1,881
Other, net....................................... 2,157 (195) -- 1,962
--------- --------- --------- ---------
(16,640) (10,681) 9,983 (17,338)
--------- --------- --------- ---------
Income (loss) before income taxes.................... 9,076 (25,473) 10,314 (6,083)
Provision for income taxes........................... 2,055 873 3,610 (o) 6,538
--------- --------- --------- ---------
Income (loss) before minority interests.............. 7,021 (26,346) 6,704 (12,621)
Minority interest expense, net of taxes.............. 1,326 -- -- 1,326
--------- --------- --------- ---------
Income (loss) from continuing operations............. $ 5,695 $ (26,346) $ 6,704 $ (13,947)
========= ========= ========= =========
Income (loss) from continuing operations per share:
Basic............................................ $ 0.06 $ (0.14)
========= =========
Diluted.......................................... $ 0.06 $ (0.14)
========= =========
Weighted average shares outstanding:
Basic............................................ 97,451 101,802 (p)
========= =========
Diluted.......................................... 98,718 101,802
========= =========
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NOTES TO RESTATED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The following notes set forth the assumptions used in preparing the
restated unaudited pro forma financial statements. The pro forma adjustments
are based on estimates made by Weatherford's management using information
currently available.
PRO FORMA ADJUSTMENTS
The adjustments to the accompanying Restated Unaudited Pro Forma Condensed
Consolidated Balance Sheet are described below:
(a) To record the cash payment of $11.0 million for transaction and
severance costs.
(b) To reverse Weatherford's $33.7 million net investment (face value
$64.7 million) in Dailey's 9 1/2% Senior Notes due 2008 (the "Senior
Notes") and to write-off approximately $4.0 million of Dailey's
prepaid transaction costs.
(c) To reflect the initial estimate of the write-down of Dailey's
property, plant, and equipment to fair market value.
(d) To record the excess purchase price over the fair value of the net
assets acquired.
(e) To reflect the retirement of the Senior Notes and the write-off of
related debt issuance costs.
(f) To reverse $7.4 million in accrued interest and the $2.6 million
income tax receivable related to the Senior Notes.
(g) To accrue $5.3 million for litigation and other contingencies relating
to Dailey.
(h) To reflect the issuance of approximately 5.5 million shares of
Weatherford common stock, $1.00 par value ("Common Stock") to the
Dailey noteholders and stockholders. Of the total number of shares
issued, approximately 4.0 million were issued to the Dailey
noteholders, excluding Weatherford, and approximately 0.3 million were
issued to the Dailey stockholders. As of June 30, 1999 Weatherford
held approximately 24% of the Senior Notes. In the reorganization,
Weatherford contributed the Senior Notes held by Weatherford to Dailey
and received approximately 1.2 million shares of its own Common Stock,
which are reflected as treasury stock at cost. Because Weatherford
held Senior Notes which were acquired prior to the bankruptcy at a
discount, the total purchase price for Dailey, excluding assumed
liabilities of Dailey that were not impaired in the bankruptcy, was
approximately $185.0 million.
(i) To eliminate Dailey's equity, which consists of $0.1 million common
stock, $53.1 million capital in excess of par, $4.1 million of
treasury stock, $114.0 million of retained deficit, and $1.9 million
of accumulated other comprehensive loss.
The adjustments to the accompanying Restated Unaudited Pro Forma Condensed
Consolidated Statements of Operations are described below:
(j) To eliminate revenues of $1.0 million and $0.7 million and related
costs of $0.2 million and $0.2 million for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively, associated
with transactions between Dailey and Weatherford.
(k) To reverse depreciation expense of $2.2 million and $1.1 million for
the year ended December 31, 1998 and the six months ended June 30,
1999, respectively, to reflect the write-down of property, plant,
and equipment to fair market value. Such property, plant and
equipment is being depreciated over five years.
(l) To record amortization of $0.6 million and $0.3 million for the year
ended December 31, 1998 and the six months ended June 30, 1999,
respectively, for goodwill related to acquisition of Dailey. Such
goodwill is being amortized over 20 years.
(m) To eliminate interest expense to reflect the retirement of the Senior
Notes.
(n) To eliminate Weatherford's interest income related to its investment
in the Senior Notes.
(o) To record the income tax provision related to the effect of the pro
forma adjustments at the statutory rate.
(p) Weatherford's historical shares outstanding and basic weighted average
pro forma shares outstanding as of December 31, 1998, were 97,328,462
and 101,663,578 respectively. Weatherford's historical shares
outstanding and basic weighted average pro forma shares outstanding
as of June 30, 1999, were 97,796,122 and 101,801,882, respectively.
PAGE 97
98
The financial statements of Dailey referred to in the above pro formas
have been previously filed by us as follows:
o Consolidated financial statements of Dailey as of December 31,
1998 and 1997 and for the year December 31, 1998, the eight month
period ended December 31, 1997 and for each of the two years in
the period ended April 30, 1997 were filed as Exhibit 99.2 to our
Current Report on Form 8-K dated May 21, 1999.
o Consolidated financial statements of Dailey for the quarterly
period ended March 31, 1999 were filed as Exhibit 99.3 to our
Current Report on Form 8-K dated May 21, 1999.
o Consolidated financial statements of Dailey for the quarterly
period ended June 30, 1999 were filed as Exhibit 99.1 to our
Current Report on Form 8-K dated August 16, 1999.
FORWARD-LOOKING STATEMENTS
This Section E contains forward-looking statements relating to our
acquisition of Dailey. We believe these statements constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Certain risks and uncertainties may cause actual results to be materially
different from projected results contained in forward-looking statements in this
report. In addition to the general market risks described in Section A, Part 6
and Part 7 included above, which we encourage you to read, there exist risks and
uncertainties relating to the Dailey acquisition, including, but not limited to,
the following:
o COST SAVINGS. We currently expect that our acquisition of Dailey will
allow us to realize around $20 million in annual cost savings through
the elimination and reduction of overlapping costs. Our ability to
achieve these savings will be dependent on our ability to integrate
the operations of the acquired business, including personnel, systems
and facilities.
o SYNERGIES. We currently expect to realize around $8 million annually
in additional margins from the manufacture of our own drilling and
fishing jars. These savings will be dependent on the ultimate amount
of jar business conducted by us, which in turn will be dependent on
market conditions. Our ability to realize these benefits will also be
dependent on the timing of the conversion of our current jar lines to
the Dailey jar line.
PAGE 98
99
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
Not applicable.
(b) Pro Forma Financial Information.
The pro forma financial information required by Article II of
Regulation S-X for our Dailey acquisition is incorporated herein
from "Section E - Restated Unaudited Pro Forma Financial
Statements" included under Item 5 above.
(c) Exhibits
12.1 Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP with respect to the restated
financial statements of Weatherford International, Inc.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
99.1 Press release dated October 25, 1999, announcing Weatherford's
results for the quarter ended September 30, 1999.
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100
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 hereunto duly authorized.
WEATHERFORD INTERNATIONAL, INC.
Dated: October 25, 1999 By: /s/ Bruce F. Longaker, Jr.
------------------------------
Bruce F. Longaker, Jr.
Senior Vice President
and Chief Financial Officer
PAGE 100
101
\ INDEX TO EXHIBITS
Number Exhibit
- ------ -------
12.1 Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP with respect to the restated
financial statements of Weatherford International, Inc.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
99.1 Press release dated October 25, 1999, announcing Weatherford's
results for the quarter ended September 30, 1999.
PAGE 101