UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
--------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- ---------------------
Commission file number 0-18312
---------------------------
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 76-0252850
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2835 Holmes Road, Houston, Texas 77051
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(713) 799-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13, or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ------
The Registrant had 41,570,616 shares of common stock outstanding
as of September 30, 1996.
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
INDEX
Page No.
---------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 (unaudited) and December 31, 1995 2
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 1996 and 1995 3
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1996 and 1995 4
Notes to Unaudited Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-11
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
Exhibit Index 14-18
Appendix A - Financial Data Schedule 19
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
1
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
(UNAUDITED)
(IN THOUSANDS)
A S S E T S
-----------
Current assets:
Cash and cash equivalents.................................................. $ 13,127 $ 9,394
Accounts receivable, net................................................... 96,391 52,071
Inventory, net............................................................. 49,240 14,364
Deferred federal income taxes.............................................. 3,925 2,521
Prepaid expenses and other................................................. 11,586 6,403
-------------- -------------
Total current assets.................................................... 174,269 84,753
-------------- -------------
Property and equipment:
Land, buildings and leasehold improvements................................ 77,987 81,557
Operating equipment and equipment leased to customers...................... 138,134 105,187
Accumulated depreciation and amortization.................................. (52,450) (46,706)
-------------- -------------
Net property and equipment.............................................. 163,671 140,038
Identified intangibles, net.................................................. 21,153 29,379
Goodwill, net................................................................ 129,520 47,751
Other assets, net............................................................ 4,627 4,758
-------------- -------------
Total assets............................................................ $ 493,240 $ 306,679
-------------- -------------
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:
Accounts payable........................................................... $ 35,004 $ 14,306
Accrued liabilities........................................................ 40,231 18,705
Federal and foreign income taxes payable................................... 6,447 2,557
Current portion of long-term debt and short-term borrowings................ 8,600 4,562
-------------- -------------
Total current liabilities............................................... 90,282 40,130
Long-term debt............................................................... 163,472 107,055
Pension liabilities.......................................................... 9,242 9,869
Deferred taxes payable....................................................... 13,456 16,411
Other liabilities............................................................ 802 1,598
Commitments and contingencies................................................ -------------- -------------
Total liabilities....................................................... 277,254 175,063
-------------- -------------
Redeemable Series A Convertible Preferred Stock.............................. -- 10,175
-------------- -------------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized,
41,570,616 shares issued and outstanding (18,546,075
at December 31, 1995)................................................... 412 185
Paid-in capital............................................................ 261,270 116,379
Retained earnings (deficit)................................................ (43,330) 6,650
Cumulative translation adjustment.......................................... (2,366) (1,773)
Total common stockholders' equity....................................... 215,986 121,441
-------------- -------------
Total liabilities and equity............................................ $ 493,240 $ 306,679
============== =============
See notes to unaudited consolidated financial statements.
2
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenue $ 94,672 $ 47,067 $ 236,333 $ 136,405
Costs and expenses:
Costs of services and products sold................. 66,537 33,480 167,852 99,595
Goodwill amortization............................... 828 330 1,691 981
Selling, general, and administration............... 10,807 5,376 26,592 15,713
Research and engineering costs...................... 995 869 2,760 2,659
Write-off of long-term assets....................... -- -- 63,061 --
Drexel transaction costs............................ 100 -- 11,306 --
----------- ----------- ----------- ------------
79,267 40,055 273,262 118,948
----------- ----------- ----------- ------------
Operating profit....................................... 15,405 7,012 (36,929) 17,457
Other expense (income):
Interest expense.................................... 3,574 3,007 9,584 9,374
Interest income..................................... (38) (22) (169) (126)
Foreign exchange.................................... 284 184 (61) (761)
Other, net.......................................... 377 224 1,201 494
----------- ----------- ----------- ------------
Income (loss) before income taxes...................... 11,208 3,619 (47,484) 8,476
Provision for income taxes............................. 4,412 1,617 2,496 3,560
----------- ----------- ----------- ------------
Net income (loss)...................................... 6,796 2,002 (49,980) 4,916
Dividends applicable to redeemable preferred stock..... -- 175 -- 525
----------- ----------- ----------- ------------
Net income (loss) applicable to common stock........... $ 6,796 $ 1,827 $ (49,980) $ 4,391
=========== =========== =========== ============
Earnings (loss) per common share:
Net income (loss)................................... $ 0.16 $ 0.10 $ (1.44) $ 0.24
=========== =========== =========== ============
Weighted average number of common shares outstanding.. 42,799,896 18,540,994 34,630,042 18,531,481
=========== =========== =========== =============
See notes to unaudited consolidated financial statements.
3
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
----------- ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss).......................................... $ (49,980) $ 4,916
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................... 12,095 11,580
Provision (recoveries) for losses on accounts receivable 336 (137)
Provision for deferred income taxes..................... (7,742) 657
Employee savings plan expense funded by issuance
of common stock........................................ 182 191
Write-off of long-term assets........................... 63,061 --
Changes in assets and liabilities, net of effects
of acquired companies:
Accounts receivable................................. (5,681) 4,384
Inventory........................................... (3,513) (521)
Prepaid expenses and other assets................... (3,437) (2,728)
Accounts payable, accrued liabilities and other..... (2,196) (4,652)
Federal and foreign income taxes payable............ 2,408 (175)
Pension liabilities................................. (627) 706
----------- ----------
Net cash provided by operating activities............... 4,906 14,221
----------- ----------
Cash flows used in investing activities:
Capital expenditures....................................... (13,482) (4,727)
Proceeds from sale/leaseback transaction................... 2,973 --
Net assets of acquired companies, net of cash acquired..... (35,500) (2,500)
Other...................................................... (1,082) (1,063)
----------- ----------
Net cash used in investing activities................... (47,091) (8,290)
----------- ----------
Cash flows provided by financing activities:
Borrowings under financing agreements...................... 83,367 500
Principal payments under financing agreements.............. (70,289) (5,969)
Foreign currency options................................... -- (258)
Cash received in Drexel Merger............................. 2,101 --
Proceeds from sale of common stock and warrants............ 30,914 157
Dividends paid on Redeemable Series A Convertible
Preferred Stock........................................... (175) (525)
----------- ----------
Net cash provided by (used in) financing activities..... 45,918 (6,095)
----------- ----------
Net increase (decrease) in cash and cash equivalents........ 3,733 (164)
Cash and cash equivalents:
Beginning of period........................................ 9,394 8,531
----------- ----------
End of period.............................................. $ 13,127 $ 8,367
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the nine month period for:
Interest................................................ $ 6,924 $ 7,576
=========== ==========
Taxes................................................... $ 8,029 $ 2,580
=========== ==========
Supplemental disclosure of non-cash financing and
investing activities:
Acquisitions:
Fair market value of net assets acquired................ $ 101,976 $ --
=========== ==========
Fair market value of common stock,
stock options, and warrants issued..................... $ (101,976) $ --
=========== ==========
See notes to unaudited consolidated financial statements.
4
TUBOSCOPE VETCO INTERNATIONAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AND AS OF DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
and its wholly-owned subsidiaries have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations. The unaudited consolidated financial statements included in
this report reflect all the adjustments which the Company considers
necessary for a fair presentation of the results of operations for the
interim periods covered and for the financial condition of the Company at
the date of the interim balance sheet. Results for the interim periods are
not necessarily indicative of results of the year.
The financial statements included in this report should be read in
conjunction with the audited financial statements and accompanying notes
included in the Company's 1995 Form 10-K, filed under the Securities
Exchange Act of 1934 (Commission File No. 0-18312).
2. INVENTORY
At September 30, 1996 inventories consist of the following (in thousands):
Components, subassemblies, and expendable parts........ $ 40,865
Equipment under production............................. 8,375
--------
$ 49,240
========
3. DIVIDEND RESTRICTIONS
In certain situations, Tuboscope Vetco International Inc.'s (TVI's) $75
million Senior Subordinated 10.75% Notes restrict the ability of TVI to
dividend or otherwise make distributions to the Company and prohibit the
Company from paying dividends on its Common Stock.
4. SUMMARIZED FINANCIAL INFORMATION OF REGISTRANT (TVI)
The following is summarized balance sheet information for TVI as of
September 30, 1996 and December 31, 1995 and summarized statements of
operations for the nine months ended September 30, 1996 and 1995 (in
thousands).
SUMMARIZED BALANCE SHEETS
September 30, December 31,
ASSETS 1996 1995
------ ------------- ------------
Current assets.......................... $ 102,763 $ 98,502
Noncurrent assets....................... 251,297 202,833
------------- ------------
Total assets........................... $ 354,060 $ 301,335
============= ============
LIABILITIES AND EQUITY
----------------------
Current liabilities..................... $ 50,088 $ 38,463
Noncurrent liabilities.................. 176,868 130,617
Stockholders' equity.................... 127,104 132,255
------------- ------------
Total liabilities and equity........... $ 354,060 $ 301,335
============= ============
5
4. SUMMARIZED FINANCIAL INFORMATION OF REGISTRANT (TVI) (CONT'D)
Nine Months Ended
September 30,
-----------------------
1996 1995
---------- ----------
SUMMARIZED STATEMENTS OF OPERATIONS
Revenue..................................... $ 163,120 $ 134,801
========== ==========
Operating profit (loss)..................... $ (48,588) $ 17,315
========== ==========
Income (loss) before income taxes........... $ (41,782) $ 8,610
========== ==========
Net income (loss)........................... $ (42,983) $ 4,972
========== ==========
5. MERGER WITH D.O.S LTD.
On April 24, 1996, pursuant to that certain Agreement and Plan of Merger
dated as of January 3, 1996 by and among the Company, Grow Acquisition
Limited, a Bermuda corporation and wholly owned subsidiary of the Company
("Grow"), and D.O.S. Ltd., a Bermuda corporation (Drexel), Grow was merged
with and into Drexel (the "Drexel Merger"). Upon consummation of the Drexel
Merger, all of the outstanding ordinary shares of Drexel were converted into
the right to receive approximately 16.7 million shares of Company Common
Stock.
In connection with the Drexel Merger, on April 24, 1996 the Company sold
to SCF-III, L.P., a Delaware limited partnership ("SCF"), 4,200,000 shares
of Company Common Stock and warrants to purchase 2,533,000 shares of Company
Common Stock at an exercise price of $10 per share expiring on December 31,
2000, for an aggregate purchase price of $31 million pursuant to a certain
Subscription Agreement dated as of January 3, 1996 between the Company and
SCF.
Also in connection with the Drexel Merger, on April 24, 1996 Baker Hughes
Incorporated ("Baker Hughes") exchanged all of its 100,000 shares of Series
A Convertible Preferred Stock, par value $.01 per share, of the Company for
1,500,000 shares of Company Common Stock and warrants to purchase 1,250,000
shares of Company Common Stock at an exercise price of $10 per share
expiring on December 31, 2000, pursuant to that certain Exchange Agreement
dated as of January 3, 1996 between the Company and Baker Hughes.
6. ACQUISITIONS OF WADECO OILFIELD SERVICES, LTD., VETCO PIPELINE SERVICES,
INC., AND S.S.R. (INTERNATIONAL) LTD./PRESSURE CONTROL ENGINEERING LTD.
On May 31, 1996, pursuant to that certain Share Purchase Agreement dated as
of May 31, 1996, the Company acquired all of the outstanding shares of
capital stock of Wadeco Oilfield Services Ltd. ("Wadeco"), a Canadian based
company in the Solids Control business, for $16.4 million (provided from the
Company's cash reserves and its existing revolving credit facility). In
addition, the Company assumed $5.2 million of Wadeco debt.
On June 1, 1996, the Company acquired substantially all of the assets of
Western Service & Supply, S.A., a Venezuela-based company in the Solids
Control business, for an aggregate purchase price of $2.6 million in cash.
On September 12, 1996, the Company acquired all of the outstanding shares of
S.S.R. (International) Ltd., and Pressure Control Engineering Ltd., two
Scotland based companies in the Coiled Tubing and Pressure Control Products
business, for total consideration of $12.1 million. The consideration
included cash of $7.8 million, 129,967 shares of Company Common Stock valued
at $1.9 million, and total notes payable of $2.3 million. In addition, the
Company assumed $1.8 million of outstanding debt.
On September 20, 1996, the Company acquired all of the outstanding shares of
capital stock of Vetco Pipeline Services, Inc. ("Vetco Pipeline"), a U.S.
based company in the Pipeline Inspection business, for an aggregate purchase
price of $8.5 million in cash plus additional earnout consideration
contingent upon the realization of gross profit from certain contracts.
6
7. NEW SENIOR CREDIT AGREEMENT
On August 6 1996, TVI and Drexel Holdings Inc., a wholly owned subsidiary of
the Company, executed a new Senior Credit Agreement (the "Credit Agreement")
which consisted of a $100 million revolving credit facility ("revolving
loans") due in five years and a $130 million advance/term loan facility
("term loans") due over six years. The Credit Agreement is expected to be
used to refinance existing indebtedness and to finance growth and
acquisitions. The initial draws were $9 million and $50 million related to
the revolving loans and term loans, respectively, and were used to retire
$59 million of outstanding debt of TVI and Drexel.
The revolving loans may be repaid, in whole or in part, at any time prior to
August 6, 2001. The outstanding principal balance on the term loans becomes
fixed on June 30, 1997, and is thereafter amortized and repaid on a
quarterly basis between September 30, 1997 and August 6, 2002.
Interest rates for the revolving and term loans, at the option of the
Company, are stated in either the lenders announced fluctuating commercial
base rate or a Eurodollar rate plus an applicable margin (determined by
total funded debt to total capital ratio). Commitment fees on the unused
revolving and term loan balances range from 0.175% to 0.375% (determined by
total funded debt to total capital ratio).
The indebtedness under the Credit Agreement is collateralized by the stock
of TVI and Drexel Holdings and a significant portion of the stock of several
foreign subsidiaries, and is guaranteed by the Company. The Credit Agreement
contains financial covenants with respect to interest coverage ratio, total
funded debt to total capital ratio, and a minimum tangible net worth.
8. PRO FORMA FINANCIAL RESULTS
The following table presents unaudited pro forma results of operations as if
the Drexel Merger and Vetco Pipeline and Wadeco acquisitions had occurred at
the beginning of each period presented. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the Drexel Merger occurred, or the
acquisitions been made, at the beginning of each year presented or of
results which may occur in the future. Furthermore, no effect has been given
in the pro forma information for operating and synergistic benefits that are
expected to be realized through the combination of the entities because
precise estimates of such benefits cannot be guaranteed.
Nine Months Ending September 30,
-------------------------------------------
1996 1995
---------- ----------
(in thousands, except per share data)
(unaudited)
Revenue $287,338 $246,938
======== ========
Net Income $ 18,915 $ 8,757
======== ========
Earnings per common share $ 0.45 $ 0.21
======== ========
7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
- ---------------------
REVENUE. Revenue was approximately $94.7 million and $236.3 million for the
third quarter and first nine months of 1996, respectively, representing
increases of $47.6 million and $99.9 million from the same periods in 1995,
respectively. The recent Drexel Merger, which was completed effective
April 1, 1996, accounted for $35.8 million and $72.3 million of the increases
for the third quarter and first nine months of 1996, respectively. On a pro
forma basis for the effects of the Drexel Merger and for the full year of
Drexel's acquisition of SWECO/(R)/ Oilfield Services, revenue was up $14.5
million and $43.8 million for the third quarter and first nine months of 1996,
respectively, compared to the third quarter and first nine months of 1995.
Revenue from the Company's Tubular Services, comprised of Inspection, Coating,
and Mill Systems and Sales was approximately $42.5 million and $129.1 million
for the third quarter and nine months ending September 30, 1996, respectively,
representing increases of $5.1 million and $18.4 million over the same periods
of 1995, respectively. Inspection revenue was up in the third quarter of 1996
compared to the third quarter of 1995 due to an increase in Latin America
Inspection operations which benefited from the acquisition of an Argentina
operation in September 1995 and a large contract in Colombia awarded in the
fourth quarter of 1995. In addition, Europe and North America Inspection
operations increased as rig activity increased slightly in both areas. Coating
revenue also increased as a result of improved volume at all of the Company's
North America Coating plants and stronger operations at the Scotland and
Singapore Coating plants. Mill Systems and Sales revenue was down due to lower
international Mill equipment sales.
The Drexel Merger added the rental and sale of Solids Control equipment to
the Company's operations. In addition, the Company completed the acquisition of
Wadeco, a Canadian Solids Control Company, effective as of May 1, 1996. Solids
Control operations, which includes the rental and sale of equipment used in the
removal of rock cuttings and other solid contaminants from the mud used in
drilling operations, earned revenue of $25.5 million in the third quarter of
1996 and $48.6 million since the effective date (April 1, 1996) of the Drexel
Merger. On a pro forma basis for the Drexel Merger, Solids Control revenue was
up $5.6 million in the third quarter of 1996, primarily as a result of increased
activity in Latin America, specifically Venezuela and Argentina, and revenue
earned in Wadeco's and Western Service & Supply, S.A.'s operations.
Coiled Tubing and Pressure Control Products, which were also acquired as part of
the Drexel Merger, contributed revenue of $15.1 million in the third quarter of
1996 and $30.1 million since the effective date of the Drexel Merger. During
September 1996, the Company enhanced its Coiled Tubing and Pressure Control
Products operations through the purchase of S.S.R. (International) Ltd. and
Pressure Control Engineering (SSR/PCE). Coiled tubing products include the sale
of coiled tubing units, wire line units, downhole tools and blowout preventors
used in oilfield workover, drilling and production operations. On a pro forma
basis, Coiled Tubing revenue was up $1.9 million due mainly to an increase in
Coiled Tubing and Pressure Control Products sales in the North Sea and Norway
and to one month's contribution of SSR/PCE.
Pipeline and Other Industrial Services revenue was $11.6 million and $28.4
million for the third quarter and first nine months of 1996, respectively,
representing increases of $1.9 million and $2.8 million over the third quarter
and first nine months of 1995, respectively. The improvement was primarily in
international pipeline operations as a result of greater revenue in Saudi Arabia
and Nigeria, and the acquisition of Vetco Pipeline Services, Inc. (completed
effective as of September 1, 1996), offset to some extent by lower Industrial
Inspection revenue in the Middle East and the sale of the Company's CTI Tank
Inspection operation.
8
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and administrative
costs were $10.8 million and $26.6 million in the third quarter and first nine
months of 1996, respectively, increases of $5.4 million and $10.9 million over
the same periods of 1995, respectively. The increase was due to overhead costs
of $5.3 million and $10.7 million associated with Drexel, Wadeco, SSR/PCE, and
Vetco Pipeline operations in the third quarter and first nine months of 1996,
respectively.
RESEARCH AND ENGINEERING COSTS. Research and engineering costs were $1.0
million and $2.8 million for the third quarter and first nine months of 1996,
respectively, similar to the amounts recorded in 1995. The major portion of
costs currently being incurred is related to the Company's TruRes(TM) "High
Resolution" pipeline tools.
WRITE-OFF OF LONG-TERM ASSETS. The first quarter 1996 write-off of long-term
assets of $63.1 million included a writedown of approximately $50.8 million
associated with the Company's adoption of SFAS No. 121 Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of and
a decision by management to sell certain assets, primarily as a result of the
Drexel Merger, which resulted in additional write-downs of approximately $12.3
million.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 established "accounting standards for
the impairment of the long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of." The new statement
requires the value of long-lived assets, certain identifiable intangibles, and
goodwill to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If this change in circumstances or other initial indication has
occurred, the next step in determining whether an asset has been impaired is
performed using the expected future undiscounted cash flows of assets, grouped
at the lowest level for which there are identifiable cash flows, compared to the
carrying value of those assets. If the undiscounted cash flow value is less
than the net carrying value, the amount of impairment is then measured by
comparing the discounted cash flows with the corresponding carrying values of
the assets evaluated. The Company's previous policy was to evaluate the
realizability of long-term assets on an aggregate basis based on undiscounted
cash flows. Management accumulated cash flow information at the lowest asset
grouping levels for which there were identifiable cash flows. These levels were
represented by separate product line operations at individual operating
locations. Based on the data, the Company's adoption of SFAS No. 121 resulted
in a write-down of long-lived assets of approximately $50.8 million in the first
quarter of 1996.
The majority of the SFAS No.121 write-down was in international locations such
as Italy, Saudi Arabia, Japan, and Germany which have experienced significant
reductions in rig activity and other business declines since the Company's
acquisition of substantially all the foreign operations of Baker Hughes Tubular
Services, Inc. (Vetco Services) in October 1991. In addition, the analysis of
U.S. locations by identifiable cash flows for individual asset locations
resulted in additional write-downs.
In addition to the write-down of $50.8 million associated with the adoption of
SFAS No. 121, the Company recognized $12.3 million of write-downs associated
with the decision to sell certain assets. A decision was made to sell the
Company's corporate headquarters on Holmes Road in Houston, Texas in the first
quarter of 1996. The decision was made in connection with the Drexel Merger and
the Company recognized a significant write-down represented by the difference
between the facility's net book value and estimated fair value less costs to
sell. A decision was also made in the first quarter of 1996 to sell certain
tank inspection equipment and related operations which were performing below
acceptable levels. The sale of this operation was completed in the third
quarter of 1996.
DREXEL TRANSACTION COSTS. The $11.3 million of Drexel transaction costs
incurred in the first nine months of 1996 include executive severance costs of
$6.5 million associated with former officers of the Company and consolidation
costs of $4.8 million related to Tuboscope personnel and facilities. The
consolidation costs of $4.8 million were related mainly to the consolidation of
overhead facilities and personnel in Europe and the consolidation of certain
operating locations in North America.
OPERATING PROFIT. Operating profit was $15.4 million and operating loss was
$36.9 million for the third quarter and first nine months of 1996, respectively.
Excluding the write-off of long term assets and the Drexel transaction costs,
operating profit would have been $15.5 million and $37.4 million, respectively,
for the third quarter and first nine months of 1996. These results represented
a $8.5 million and $20.0 million improvement over the third quarter and first
nine months of 1995, respectively. The stronger operating profit was due
mainly to operating profit contributions from Drexel and Wadeco, and stronger
operations in Inspection, Coating, and Pipeline Services.
9
INTEREST EXPENSE. Interest expense was $3.6 million and $9.6 million in the
three and nine months ended September 30, 1996, respectively, an increase of
$567,000 and $210,000 compared to the third quarter and first nine months of
1995, respectively. The increase in interest expense was due mainly to debt
associated with the Drexel and Wadeco operations.
OTHER EXPENSE (INCOME). Other expense (income), which includes interest income,
foreign exchange, and other expense (net), resulted in a net expense of
$623,000 in the third quarter of 1996 compared to net expense of $386,000 in
the third quarter of 1995. Net expense for the first nine months of 1996 was
$1.0 million compared to a net gain of $393,000 in 1995. The first nine
months of 1995 included a net gain of $1.7 million from an arbitration award
related to the Company's acquisition of Vetco Services in 1991 and the accrual
of $1.0 million of legal and other nonoperating costs associated with the
Company's Italian subsidiary.
PROVISION FOR INCOME TAXES. The effective tax rate on operating profits,
excluding the write-off of long-term assets and the Drexel transaction costs for
the nine months ended September 30, 1996 was 39% compared to 42% for the first
nine months of 1995. The rate improvement is due in part to the elimination
of non deductible goodwill amortization through the SFAS No. 121 writeoff. The
effective tax rate of the write-off of long term assets and the resulting tax
consequences was 9%. Included therein is an increase in the valuation allowance
against foreign tax credits and a provision for tax contingencies in foreign
jurisdictions. The effective tax rate on the Drexel transaction costs was
20.5%. The low effective tax rate benefit on the Drexel transaction costs was
due to $5.4 million of non-deductible executive severance costs.
NET INCOME. The third quarter 1996 net income was $6.8 million compared to
third quarter 1995 net income of $2.0 million. The improvement is due to the
factors discussed above.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
For the nine months ended September 30, 1996, the Company provided $4.9 million
of cash from operations compared to $14.2 million in 1995. Cash was used in
operations during the first nine months of 1996 principally as a result of a
$5.7 million increase in accounts receivable, a $3.5 million increase in
inventory, a $3.4 million increase in prepaid expenses, and a $2.2 million
decrease in accounts payable and accrued liabilities. These changes in accounts
receivable, inventory, prepaid expenses, accounts payable and accrued
liabilities were all net of the effect of acquisitions for Drexel, Wadeco,
SSR/PCE, and Vetco Pipeline. The increase in accounts receivable was mainly due
to greater revenue on a pro forma basis for the third quarter of 1996 compared
to the fourth quarter of 1995, as revenue increased in several product lines,
especially Pipeline and Pressure Control. Inventory increased principally as a
result of a greater screen manufacturing operation in Solids Control. Prepaid
expenses were up due to the prepayment of insurance and an increase in rebills
and Pipeline work in progress. In addition, accounts payable and accrued
liabilities were down $2.2 million mainly as a result of cash payments
associated with the merger. These items were partially offset by an increase
in current taxes payable which was due to an increase in earnings from
continuing operations.
For the nine months ended September 30, 1996, the Company used $47.3 million for
investing activities compared to $8.3 million in the same period of 1995. The
increase was due to $13.5 million in capital spending (compared to $4.7 million
in 1995) and acquisitions of $35.5 million. Capital spending was up in 1996 due
to the addition of the Drexel and Wadeco operations. The cash acquisition costs
of $35.5 million consisted of $16.5 million for Wadeco, $2.6 million for a
Solids Control operation in Venezuela, $8.5 million for Vetco Pipeline, and $7.9
million for SSR/PCE.
For the nine months ended September 30, 1996, the Company generated $46.1
million of cash from financing activities compared to a usage of $6.1 million in
1995. The cash was generated through the sale of $30.9 million of Common Stock,
$2.1 million of cash received in the Drexel Merger, and borrowings (net of debt
payments) of $13.1 million mainly related to the 1996 acquisitions.
Current and long term debt was $172.1 million at September 30, 1996, an
increase of $60.5 million from the $111.6 million outstanding at December 31,
1995. Debt assumed in the Drexel merger and Wadeco acquisition resulted in
$38.1 million and $5.2 million of the increase, respectively. Debt incurred and
assumed in the acquisition of Vetco Pipeline and SSR/PCE accounted for the
remaining increase. The Company's outstanding debt at September 30, 1996
consisted of $75 million of 10.75% Senior Subordinated Notes due 2003, $50
million of term loans due under the Company's Senior Credit Agreement (see
discussion below), $24.8 million due under the Company's $100 million revolving
credit facility, $4.6 million related to Wadeco operations, $4.1 million related
to the construction of the Aberdeen, Scotland Coating facility, $3.8 million of
debt related to former owners of Sweco Oilfield Services (which was acquired by
Drexel in November 1995), $4.1 million of debt related to the acquisition of
SSR/PCE, $2.0 million of revenue bonds, and $3.7 million of other outstanding
debt.
10
NEW SENIOR CREDIT AGREEMENT
- ---------------------------
As discussed in Note 7 of Notes to the Unaudited Consolidated Financial
Statements, on August 2, 1996 the Company refinanced the existing senior debt
for Tuboscope and Drexel with a new Senior Credit Agreement which allows the
Company to borrow up to $100 million on the revolving credit facility and up to
$130 million on an advance/term loan facility. The initial borrowing was $9
million on the revolving credit facility and $50 million on the term loan
facility, with the proceeds being used to retire $59 million of existing senior
debt of Tuboscope and Drexel.
The revolving loans may be repaid, in whole or in part, at any time prior to
August 2, 2001. The outstanding principal balance on the term loans becomes
fixed on June 30, 1997, and is thereafter amortized and repaid on a quarterly
basis between September 30, 1997 and August 2, 2002.
11
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -- Reference is hereby made to the Exhibit Index
commencing on page 14.
(b) A Report on Form 8-K was filed on June 14, 1996 regarding the
acquisition of Wadeco, which report was amended by Amendment No. 1
on Form 8-K/A filed on August 2, 1996.
A Report on Form 8-K was filed on October 7, 1996 regarding the
acquisition of Vetco Pipeline, which report was amended on Form 8-
K/A Amendment No. 1 filed on November 12, 1996.
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUBOSCOPE VETCO
INTERNATIONAL CORPORATION
------------------------------------
(Registrant)
Date: November 14, 1996 /s/ JOSEPH C. WINKLER
- ------------------------ ------------------------------------
Joseph C. Winkler
Executive Vice President, Chief
Financial Officer and Treasurer
(Duly Authorized Officer,
Principal Financial and Accounting
Officer)
13
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION NOTE NO.
---------- ----------- --------
2(a) Agreement and Plan of Merger, (Note 12)
dated as of January 3, 1996,
among Tuboscope Vetco
International Corporation, Grow
Acquisition Limited and D.O.S.
Ltd.
3(a) Restated Certificate of (Note 7)
Incorporation, dated March 12,
1990.
3(b) Amended and Restated Bylaws. (Note 2)
3(c) Certificate of Designation of (Note 3)
Series A Convertible Preferred
Stock, dated October 22, 1991.
3(d) Certificate of Amendment to (Note 10)
Restated Certificate of
Incorporation dated May 12, 1992.
3(e) Certificate of Amendment to (Note 11)
Restated Certificate of
Incorporation dated May 10, 1994.
4(a) Stockholders' Agreement, dated (Note 1)
May 13, 1988, between the
Company, Brentwood, Hub, the
Management Investors, the Other
Investors, and the Institutional
Investors, including the Common
Stock Registration Rights
Agreement attached thereto as
Exhibit A.
4(b) Purchase Agreement, dated May 13, (Note 1)
1988, between the Company,
Tuboscope Acquisition Corporation
and the purchasers named on the
execution pages thereto.
4(c) Indenture (including the form of (Note 4)
Note), dated as of April 1, 1993,
among Tuboscope Vetco
International Inc., the Company
and Norwest Bank Minnesota,
National Association, as Trustee,
regarding the 10 3/4% Senior
Subordinated Notes due 2003 of
Tuboscope Vetco International Inc.
4(e) Various documentation relating to
$1,000,000 Alaska Industrial
Revenue Bond financing. (Not
filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K.
The Company hereby agrees to
furnish copies of relevant
documentation to the Securities
and Exchange Commission upon
request).
4(f) Various documentation relating to
$1,000,000 Wyoming Industrial
Revenue Bond financing. (Not
filed herewith pursuant to Item
601(b)(4)(iii) of Regulation S-K.
The Company hereby agrees to
furnish copies of relevant
documentation to the Securities
and Exchange Commission upon
request).
4(g) Plan of Recapitalization. (Note 2)
4(h) Various promissory notes in the
aggregate principal amount of
$4,000,000 relating to the
acquisition of Sound Optics
Systems, Inc., dba South Optical
Systems, Inc. (Not filed herewith
pursuant to Item 601(b)(4)(iii)
of Regulation S-K. The Company
hereby agrees to furnish copies
of the relevant documentation to
the Securities and Exchange
Commission upon request).
4(i) Purchase Agreement, dated as of (Note 3)
September 30, 1991, between the
Company and BHI Hughes
Incorporated relating to Vetco
Services Acquisition.
14
EXHIBIT NO. DESCRIPTION NOTE NO.
---------- ----------- --------
4(j) Secured Credit Agreement, dated (Note 9)
June 30, 1994, between Tuboscope
Vetco International Inc., CTI
Inspection Services Inc.,
Tuboscope Vetco Capital Corp,
Tuboscope Vetco International
Corporation and ABN AMRO Bank,
N.V., as Agent.
4(k) Secured Credit Agreement, dated (Note 14)
August 2, 1996, between Tuboscope
Vetco International Inc., and
Drexel Holdings, Inc., and The
Chase Manhattan Bank, N.A., ABN
Amro Bank N.V., Houston Agency,
and the other Lenders Party
Hereto, and ABN Amro Bank N.V.,
Houston Agency as Administrative
Agent.
10(a) Form of Employment Agreement, (Note 1)
dated May 13, 1988, between
Tuboscope Inc., the Company and
William V. Larkin and E. Wayne
Overman.
10(b) Savings Investment Plan, dated (Note 1)
May 13, 1988, as amended by First
Amendment to Savings Investment
Plan.
10(c) Second, Third and Fourth (Note 4)
Amendments to Savings Investment
Plan.
10(d) Fifth, Sixth and Seventh (Note 8)
Amendments to Savings Investment
Plan.
10(e) Lease Agreement, dated July 1, (Note 1)
1981, between C.M. Thibodaux
Company, Ltd. and AMF Tuboscope,
Inc.
10(f) Lease Agreement between Sam J. (Note 1)
Siracusa, John Siracusa, Jr.,
Elizabeth Ann Siracusa, Louis
Anthony Siracusa, Philomena
Siracusa Archer, Catherine Agnes
Siracusa, Maria Josette Siracusa,
Julie Ann Siracusa, the
Succession of Joseph C. Siracusa
and AMF Tuboscope, Inc., as
amended by letter agreement among
the same parties, dated June 14,
1989.
10(g) Agreement to Purchase, Sell and (Note 1)
Sublease, dated June 9, 1980,
between Alaska International
Construction, Inc. and AMF
Tuboscope, Inc., as amended by
letter agreement, dated June 12,
1980 between the same parties.
10(h) Lease Agreement, dated June 10, (Note 1)
1977, between Batinorest and
A.M.F. France.
10(i) Supplementary Agreement Fixed (Note 1)
Rental Scheme, dated May 19,
1989, between Jurong Town
Corporation and AMF Far East Pte.
Ltd.
10(j) Lease, dated December 13, 1984, (Note 1)
between Barclays Nominees (KWS)
Limited and AMF International
Limited, as amended by Transfer
of Whole Agreement, dated
November 20, 1987, between AMF
International Limited and
Tuboscope Limited.
10(k) Description of Life Insurance (Note 1)
Plan.
10(l) Amended and Restated Stock Option (Note 5)
Plan for Key Employees of
Tuboscope Vetco International
Corporation.
10(m) Form of Revised Incentive Stock (Note 5)
Option Agreement.
10(n) Form of Revised Non-Qualified (Note 5)
Stock Option Agreement.
10(o) Stock Option Plan for (Note 6)
Non-Employee Directors of
Tuboscope Vetco International
Corporation.
15
EXHIBIT NO. DESCRIPTION NOTE NO.
---------- ----------- --------
10(p) Amendment to Stock Option Plan (Note 6)
for Non-Employee Directors of
Tuboscope Vetco International
Corporation.
10(q) Form of Non-Qualified Stock (Note 6)
Option Agreement.
10(r) Employee Qualified Stock Purchase (Note 8)
Plan.
10(s) Purchase Agreement, dated as of (Note 7)
July 20, 1990, by and among Oil
and Gas Manufacturing Company,
Inc., F.T. Glascock, Thomas C.
Glascock, J. David Glascock,
Hutchison-Hayes International,
Inc., John F. Joplin, William F.
Joplin, Sound Optics Systems,
Inc. dba Sound Optical Systems,
Inc. and Tuboscope Inc.
10(t) Form of Employment Agreement, (Note 7)
dated July 23, 1990, between
Tuboscope Inc. and Thomas
Glascock and William Glascock.
10(u) Purchase Agreement, dated as of (Note 3)
September 30, 1991, between the
Company and BHI relating to the
Vetco Services Acquisition.
10(v) Amended and Restated Employment (Note 8)
Agreement dated June 23, 1993,
between the Company, Tuboscope
Vetco International Inc., and
Martin R. Reid.
10(w) Technology Transfer Agreement, (Note 3)
dated as of October 29, 1991,
between Tuboscope Inc. and BHI.
10(x) Sublease, dated December 1, 1987, (Note 3)
between McDermott Incorporated
and AMF Tuboscope, Inc. as
amended by letter agreement,
dated November 10, 1989, between
Tuboscope Inc. and McDermott
Incorporated.
10(y) Letter agreement, dated March 5, (Note 3)
1990 amending the Agreement to
Purchase, Sell and Sublease dated
June 9, 1980 between AMF
Tuboscope Inc. and Alaska
International Construction, Inc.
as amended June 12, 1980.
10(z) Employment Agreement, between (Note 3)
Vetco Inspection GmbH and Gerhard
H. Hage.
10(aa) Lease Agreement with respect to (Note 3)
Celle, Germany facility.
10(bb) Building Agreement for Land at (Note 3)
Jurong, dated May 5, 1983,
between Jurong Town Corporation
and Vetco International, Inc.
10(cc) Lease Agreement, dated January 1, (Note 3)
1988, between Mohamed Alhajri
Est. and Vetco Saudi Company.
10(dd) Lease Agreement, dated November (Note 3)
26, 1989, between Mohammed F.
Al-Hajri Est. and Vetco Saudi
Arabia Ltd.
10(ee) Lease between J.G.B. Properties (Note 3)
Limited and Vetco Inspection GmbH.
10(ff) Eighth and Ninth Amendment to (Note 9)
Savings Investment Plan.
10(gg) Subscription Agreement, dated as (Note 12)
of January 3, 1996, by and
between Tuboscope Vetco
International Corporation and
SCF-III, L.P.
10(hh) Exchange Agreement, dated as of (Note 13)
January 3, 1996, among Tuboscope
Vetco International Corporation
and Baker Hughes Incorporated.
16
EXHIBIT NO. DESCRIPTION NOTE NO.
---------- ----------- --------
10(ii) Voting Agreement, dated as of (Note 12)
January 3, 1996, among Tuboscope
Vetco International Corporation,
D.O.S. Ltd., D.O.S. Partners,
L.P., Panmell (Holdings), Ltd.
And Zink Industries Limited.
10(jj) Voting Agreement, dated as of (Note 12)
January 3, 1996, among D.O.S.
Ltd., Brentwood Associates IV,
L.P. and Baker Hughes
Incorporated.
10(kk) Form of Amended and Restated (Note 13)
Executive Agreement.
10(ll) First Amendment to Amended and (Note 13)
Restated Employment Agreement
between the Company, Tuboscope
Vetco International Inc. and
Martin Reid.
10(mm) Third Amendment to General (Note 13)
Manager Employment Agreement
between the Company, Tuboscope
Vetco International Inc. and
Gerhard H. Hage.
10(nn) Third Amendment to Employment (Note 13)
Agreement between the Company,
Tuboscope Vetco International
Inc. and William V. Larkin.
10(oo) Master Lease Agreement, dated (Note 13)
December 18, 1995, between the
Company and Heller Financial
Leasing, Inc.
10(pp) Share Purchase Agreement dated as (Note 15)
of May 31, 1996 between TVI
Wadeco Inc., J & S Hokanson
Investments Ltd., John Hokanson,
Douglass Bell, Robert Russell,
Richard Rutherford and Wadeco
Oilfield Services Ltd.
10(qq) Stock Purchase and Sale Agreement (Note 16)
dated as of September 6, 1996 by
and among Tuboscope Pipeline
Services, Inc., Vetco Pipeline
Services, Inc., Rauma USA, Inc.
and Rauma Corporation
10(rr) Addendum No. 1 to Stock Purchase (Note 16)
and Sale Agreement dated as of
September 20, 1996 by and among
Tuboscope Pipeline Services,
Inc., Vetco Pipeline Services,
Inc., Rauma USA, Inc. and Rauma
Corporation
10(ss) Addendum No. 2 to Stock Purchase (Note 16)
and Sale Agreement dated as of
September 20, 1996 by and among
Tuboscope Pipeline Services,
Inc., Vetco Pipeline Services,
Inc., Rauma USA, Inc. and Rauma
Corporation
27 Financial Data. Exhibit 27
Note 1 Previously filed by the Registrant in Registration No. 33-31102 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 2 Previously filed by the Registrant in Registration No. 33-33248 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 3 Previously filed by the Registrant in File No. 33-43525 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 4 Previously filed by the Registrant in Registration No. 33-56182 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
Note 5 Previously filed by the Registrant in Registration No. 33-72150 and
incorporated by reference herein pursuant to Rule 12b-32 of the
Exchange Act.
17
Note 6 Previously filed by the Registrant in Registration No. 33-72072 and
incorporated by reference herein pursuant to Rule 12b-32 of the Exchange
Act.
Note 7 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated by reference herein
pursuant to Rule 12b-32 of the Exchange Act.
Note 8 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated by reference herein
pursuant to Rule 12b-32 of the Exchange Act.
Note 9 Previously filed in the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 and incorporated by reference herein pursuant to
Rule 12b-32 of the Exchange Act.
Note 10 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and incorporated by reference herein
pursuant to Rule 12b-32 of the Exchange Act.
Note 11 Previously filed in the Company's Proxy Statement for the 1994 Annual
Meeting of Stockholders and incorporated by reference herein pursuant to
Rule 12b-32 of the Exchange Act.
Note 12 Previously filed in the Company's Current Report on Form 8-K filed on
January 16, 1996 and incorporated by reference herein pursuant to Rule
12b-32 of the Exchange Act.
Note 13 Previously filed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated by reference herein
pursant to Rule 12b-32 of the Exchange Act.
Note 14 Previously filed in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated by reference herein
pursuant to Rule 12b-32 of the Exchange Act.
Note 15 Previously filed in the Company's Current Report on Form 8-K filed on
June 14, 1996, as amended by Amendment No. 1 on Form 8-K/A filed on
August 2, 1996, and incorporated by reference herein pursuant to Rule
12b-32 of the Exchange Act.
Note 16 Previously filed in the Company's Current Report on Form 8-K filed on
October 7, 1996, as amended by Amendment No. 1 filed on November 12,
1996, and incorporated by reference herein pursuant to Rule 12b-32 of
the Exchange Act.
18