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 March 31, 2000
----------------------------
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
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TUBOSCOPE INC.
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(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
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(Address of principal executive offices) (Zip Code)
(713) 799-5100
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed since last
report)
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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 ____________
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The Registrant had 44,824,758 shares of common stock outstanding as of May
8, 2000.
TUBOSCOPE INC.
INDEX
Page No.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 2
Unaudited Consolidated Statements of Income -
For the Three Months Ended March 31, 2000 and 1999 3
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2000 and 1999 4
Notes to Unaudited Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11-13
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Exhibit Index 16-18
Appendix A - Financial Data Schedule 19
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
1
TUBOSCOPE INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
----------- -------------
A S S E T S (In thousands)
-----------
Current assets:
Cash and cash equivalents............................................ $ 6,543 $ 5,258
Accounts receivable, net............................................. 120,933 109,908
Inventory, net....................................................... 69,314 70,890
Prepaid expenses and other........................................... 13,358 12,574
---------- ------------
Total current assets............................................. 210,148 198,630
---------- ------------
Property and equipment:
Land, buildings and leasehold improvements........................... 88,190 88,860
Operating equipment and equipment leased to customers................ 266,232 265,638
Accumulated depreciation and amortization............................ (115,722) (111,673)
---------- ------------
Net property and equipment....................................... 238,700 242,825
Identified intangibles, net............................................. 21,349 21,685
Goodwill, net........................................................... 208,240 210,114
Other assets, net....................................................... 2,984 2,785
---------- ------------
Total assets..................................................... $ 681,421 $ 676,039
========== ============
L I A B I L I T I E S A N D E Q U I T Y
-----------------------------------------
Current liabilities:....................................................
Accounts payable..................................................... $ 34,107 $ 31,818
Accrued liabilities.................................................. 42,953 42,842
Income taxes payable................................................. 4,660 3,262
Current portion of long-term debt and short-term borrowings.......... 33,150 33,886
---------- ------------
Total current liabilities........................................ 114,870 111,808
Long-term debt.......................................................... 198,325 199,449
Pension liabilities..................................................... 8,658 8,658
Deferred taxes payable.................................................. 21,848 21,848
Other liabilities....................................................... 953 779
---------- ------------
Total liabilities................................................ 344,654 342,542
---------- ------------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares authorized,
46,222,328 shares issued and 44,797,628 shares outstanding
(46,052,608 shares issued and 44,627,908 outstanding at
December 31, 1999)............................................... 462 461
Paid in capital...................................................... 315,194 314,313
Retained earnings.................................................... 47,709 44,944
Accumulated other comprehensive income............................... (11,268) (10,891)
Less: treasury stock at cost (1,424,700 shares)...................... (15,330) (15,330)
---------- ------------
Total common stockholders' equity................................ 336,767 333,497
---------- ------------
Total liabilities and equity..................................... $ 681,421 $ 676,039
========== ===========
See notes to unaudited consolidated financial statements.
2
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2000 1999
----------------- --------------------
(in thousands, except share and per share data)
Revenue............................................................ $ 108,745 $ 95,212
Costs and expenses:
Cost of services and products sold............................ 81,696 74,104
Goodwill amortization......................................... 1,875 1,784
Selling, general and administrative........................... 11,847 12,338
Research and engineering costs................................ 2,911 2,946
----------------- --------------------
98,329 91,172
----------------- --------------------
Operating profit................................................... 10,416 4,040
Other expense (income):
Interest expense.............................................. 4,721 4,492
Interest income............................................... (52) (85)
Foreign exchange.............................................. 99 (1,050)
Other, net.................................................... 376 174
----------------- --------------------
Income before income taxes......................................... 5,272 509
Provision for income taxes......................................... 2,507 204
----------------- --------------------
Net income......................................................... $ 2,765 $ 305
================= ====================
Earnings per common share:
Basic earnings per common share............................... $0.06 $0.01
================= ====================
Dilutive earnings per common share............................ $0.06 $0.01
================= ====================
Weighted average number of common shares outstanding:
Basic......................................................... 44,714,712 44,129,760
================= ====================
Dilutive...................................................... 47,180,188 44,387,315
================= ====================
See notes to unaudited consolidated financial statements.
3
TUBOSCOPE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2000 1999
---------------- ---------------
(in thousands)
Cash flows from operating activities:
Net income $ 2,765 $ 305
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,975 8,421
Compensation related to employee 401(K) plan 245 212
Provision for losses on accounts receivable 506 150
Provision for inventory reserve 290 --
Benefit for deferred income taxes -- (777)
Changes in assets and liabilities, net of effects of acquired companies:
Accounts receivable (11,531) 13,455
Inventory 1,286 3,126
Prepaid expenses and other assets (784) (889)
Accounts payable and accrued liabilities 2,155 (6,035)
Federal and foreign income taxes payable 1,398 5
---------------- ---------------
Net cash provided by operating activities 5,305 17,973
---------------- ---------------
Cash flows used for investing activities:
Capital expenditures (4,574) (2,481)
Business acquisitions, net of cash acquired -- (5,663)
Other 1,527 (251)
---------------- ---------------
Net cash used for investing activities (3,047) (8,395)
---------------- ---------------
Cash flows used for financing activities:
Borrowings under financing agreements 9,532 12,842
Principal payments under financing agreements (11,386) (24,266)
Proceeds from sale of common stock, net 881 588
---------------- ---------------
Net cash used for financing activities (973) (10,836)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,285 (1,258)
Cash and cash equivalents:
Beginning of period 5,258 8,735
---------------- ---------------
End of period $ 6,543 $ 7,477
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the three month period for:
Interest $ 7,305 $ 8,324
================ ===============
Taxes $ 917 $ 1,091
================ ===============
See notes to unaudited consolidated financial statements.
4
TUBOSCOPE INC.
Notes to Unaudited Consolidated Financial Statements
For the Three Months Ended March 31, 2000 and 1999
and as of December 31, 1999
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,
consisting of normal recurring accruals, 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 for the year.
The financial statements included in this report should be read in conjunction
with the Company's 1999 audited consolidated financial statements and
accompanying notes included in the Company's 1999 Form 10-K, filed under the
Securities Exchange Act of 1934, as amended.
2. Inventory
At March 31, 2000 inventories consisted of the following (in thousands):
Components, subassemblies, and expendable parts........... $ 48,524
Equipment under production................................ 20,790
--------
$ 69,314
========
3. Senior Credit Agreement and Dividend Restrictions
The Company's Senior Credit Agreement restricts the Company from paying
dividends on its capital stock unless the total funded debt to capital
ratio (as defined in the Senior Credit Agreement) is less than or equal to
40%. The Company's total funded debt to capital ratio (calculated as
defined under the Senior Credit Agreement) was 41.0% at March 31, 2000.
4. Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" which established new rules for
the reporting and display of comprehensive income. Comprehensive income is
defined by SFAS No. 130 as net income plus direct adjustments to
shareholders' equity. The cumulative translation adjustment of certain
foreign entities is the only such direct adjustment recorded by the
Company. Comprehensive income for the three months ended March 31, 2000 and
1999 was as follows:
Three Months
Ended March 31,
-----------------------
2000 1999
-------- --------
(in thousands)
Comprehensive income (loss):
Net income.................................... $ 2,765 $ 305
Cumulative translation adjustment............. (377) (2,786)
-------- --------
Total comprehensive income (loss)............. $ 2,388 $ (2,481)
======== ========
5
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
5. Business Segments
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company offers four product lines:
Tubular Services, Solids Control Products & Services, Coiled Tubing &
Wireline Products, and Pipeline and Other Industrial Services. Each of the
product lines qualifies as a reportable segment.
Tubular Services: This segment provides internal coating products and
services, inspection and quality assurance services for tubular goods and
fiberglass tubulars. Additionally, Tubular Services includes the sale and
leasing of proprietary equipment used to inspect tubular products at steel
mills. This segment operates in the oilfield tubular markets of North
America, Latin America, Europe, Africa, the Middle East and the Far East.
Customers include major oil and gas companies, independent producers,
national oil companies, drilling contractors, oilfield supply stores and
steel mills.
Solids Control Products & Services: This segment consists of the sale and
rental of technical equipment used in, and the provision of services
related to, the separation of drill cuttings (solids) from fluids used in
the oil and gas drilling processes. The Solids Control Products & Services
business serves the oilfield drilling markets of North America, Latin
America, Europe, Africa, the Middle East and the Far East. Customers
include major oil and gas companies, independent producers, national oil
companies and drilling contractors.
Coiled Tubing & Wireline Products: This segment consists of the sale of
highly-engineered coiled tubing equipment, related pressure control
equipment, pressure pumping, wireline equipment and related tools to
companies engaged in providing oil and gas well drilling, and completion
and remediation services. Customers include major oil and gas coiled tubing
service companies, as well as major oil companies and large independents.
Pipeline and Other Industrial Services: This segment provides technical
inspection services and quality assurance services for in-service pipelines
used to transport oil and gas. Additionally, the segment provides a wide
variety of technical industrial inspection, monitoring and quality
assurance services for the construction, operation and maintenance of major
projects in energy related industries. Customers include major pipeline
operators and national oil and gas companies.
The Company evaluates the performance of its operating segments at the
operating profit level which consists of income before interest expense
(income), other expense (income), nonrecurring items and income taxes.
Intersegment sales and transfers are not significant.
6
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
Summarized information for the Company's reportable segments is contained in
the following table. Other revenue and operating profit (loss) include
revenue from insignificant operations, corporate expenses and certain
goodwill and identified intangible amortization not allocated to product
lines.
Solids Coiled Pipeline &
Control Tubing & Other
Tubular Products & Wireline Industrial
Services Services Products Services Other Total
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Three Months Ended March 31, 2000
Revenue.................................... $46,941 $37,133 $16,635 $8,036 $ -- $108,745
Operating Profit (Loss).................... 7,530 7,299 1,886 (314) (5,985) 10,416
Three Months Ended March 31, 1999
Revenue.................................... $38,342 $28,571 $19,558 $8,741 $ -- $ 95,212
Operating Profit (Loss).................... 5,198 2,710 2,002 190 (6,060) 4,040
6. Proposed Merger with Varco International, Inc.
In the first quarter of 2000, the Company entered into a merger agreement
with Varco International, Inc. (Varco), a leading provider of drilling
equipment and machinery and rig instrumentation for oil and gas well
drilling worldwide. The proposed merger is subject to stockholder approval
and is expected to be accounted for as a pooling-of-interest. If the merger
is completed, 0.7125 shares of the Company's common stock will be exchanged
for each share of Varco common stock. The shares of the Company's common
stock to be issued to Varco common stockholders are expected to represent
approximately 51% of the outstanding stock of the Company after the merger.
7. $100.0 Million Senior Notes and Condensed Consolidating Financial
Information
On February 25, 1998, the Company issued $100.0 million of 7 1/2% Senior
Notes due 2008 ("Notes"). The Notes are fully and unconditionally
guaranteed, on a joint and several basis, by certain wholly-owned
subsidiaries of the Company (collectively "Guarantor Subsidiaries" and
individually "Guarantor"). Each of the guarantees is an unsecured obligation
of the Guarantor and ranks pari passu with the guarantees provided by and
the obligations of such Guarantor Subsidiaries under the Credit Agreement
and with all existing and future unsecured indebtedness of such Guarantor
for borrowed money that is not, by its terms, expressly subordinated in
right of payment to such guarantee. The remaining net proceeds have been
used to finance acquisitions, working capital and general corporate
purposes. The following condensed consolidating balance sheet as of March
31, 2000 and related condensed consolidating statements of operations and
cash flows for the three months ended March 31, 2000 should be read in
conjunction with the notes to these consolidated financial statements.
7
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
7. Condensed Consolidating Financial Information (cont'd)
Balance Sheet
March 31, 2000
(In thousands)
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------- --------------- ------------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents.......... $ -- $ 82 $ 6,461 $ -- $ 6,543
Accounts receivable, net........... 222,759 68,668 307,763 (478,257) 120,933
Inventory, net..................... -- 39,307 30,007 -- 69,314
Prepaid expenses and other......... 1,490 8,415 3,453 -- 13,358
------------ ------------- --------------- ------------- ------------
Total current assets............. 224,249 116,472 347,684 (478,257) 210,148
Investment in subsidiaries.............. 353,637 309,169 -- (662,806) --
Property and equipment, net............. -- 164,504 74,196 -- 238,700
Identified intangibles, net............. -- 21,349 -- -- 21,349
Goodwill, net........................... -- 101,777 106,463 -- 208,240
Other assets, net....................... -- 390 2,594 -- 2,984
------------ ------------- --------------- ------------- ------------
Total assets..................... $ 577,886 $ 713,661 $ 530,937 $(1,141,063) $ 681,421
============ ============= =============== ============= ============
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable................... $ 23,583 $ 295,912 $ 192,869 $ (478,257) $ 34,107
Accrued liabilities................ 2,640 19,127 21,186 -- 42,953
Income taxes payable............... -- 381 4,279 -- 4,660
Current portion of long-term
debt............................ 27,950 4,464 736 -- 33,150
------------ ------------- --------------- ------------- ------------
Total current liabilities........ 54,173 319,884 219,070 (478,257) 114,870
Long term debt.......................... 186,946 10,775 604 -- 198,325
Pension liabilities..................... -- -- 8,658 -- 8,658
Deferred taxes payable.................. -- 12,861 8,987 -- 21,848
Other liabilities....................... -- -- 953 -- 953
------------ ------------- --------------- ------------- ------------
Total liabilities................ 241,119 343,520 238,272 (478,257) 344,654
Common stockholders' equity:
Common stock....................... 462 -- -- -- 462
Paid in capital.................... 315,194 281,385 187,102 (468,487) 315,194
Retained earnings.................. 47,709 88,756 116,831 (205,587) 47,709
Cumulative translation
adjustment....................... (11,268) -- (11,268) 11,268 (11,268)
Treasury Stock..................... (15,330) -- -- -- (15,330)
------------ ------------- --------------- ------------- ------------
Total common stockholders'
equity......................... 336,767 370,141 292,665 (662,806) 336,767
------------ ------------- --------------- ------------- ------------
Total liabilities and equity..... $ 577,886 $ 713,661 $ 530,937 $(1,141,063) $ 681,421
============ ============= =============== ============= ============
8
TUBOSCOPE INC.
Notes to Consolidated Financial Statements (cont'd)
7. Condensed Consolidating Financial Information (cont'd)
Statement of Operations
Three Months Ended March 31, 2000
(In thousands)
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------- ----------------
Revenue................................ $ -- $49,578 $69,769 $(10,602) $108,745
Operating costs........................ -- 49,706 54,725 (6,102) 98,329
------------ ------------ ------------- ------------- ----------------
Operating profit (loss)................ -- (128) 15,044 (4,500) 10,416
Other expense (income)................. 158 6,087 (157) (5,665) 423
Interest expense....................... 4,090 522 109 -- 4,721
------------ ------------ ------------- ------------- ----------------
Income (loss) before taxes............. (4,248) (6,737) 15,092 1,165 5,272
Provision (benefit) for taxes.......... -- (464) 2,971 -- 2,507
Equity in net income of subsidiaries... 5,848 12,121 -- (17,969) --
------------ ------------ ------------- ------------- ----------------
Net income (loss)...................... $ 1,600 $ 5,848 $12,121 $(16,804) $ 2,765
============ ============ ============= ============= ================
9
TUBOSCOPE INC,
Notes to Consolidated Financial Statements (cont'd)
7. Condensed Consolidating Financial Information (cont'd)
Statement of Cash Flows
Three Months Ended March 31, 2000
(In thousands)
Non-
Tuboscope Guarantor Guarantor
Inc Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
Net cash provided by (used for) operating
activities..................................... $(1,917) $ 3,825 $ 3,397 $ -- $ 5,305
Net cash used for investing activities:
Capital expenditures........................ -- (2,374) (2,200) -- (4,574)
Business acquisitions....................... -- -- -- -- --
Other....................................... -- -- 1,527 -- 1,527
------------- ------------ ------------ ------------ ------------
Net cash used for investing activities..... -- (2,374) (673) -- (3,047)
Cash flows provided by (used for) financing
activities:
Net payments under financing agreements..... 1,036 (1,677) (1,213) -- (1,854)
Net proceeds from sale of common stock...... 881 -- -- -- 881
------------- ------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities .................. 1,917 (1,677) (1,213) -- (973)
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................. -- (226) 1,511 -- 1,285
Cash and cash equivalents:
Beginning of period......................... -- 308 4,950 -- 5,258
------------- ------------ ------------ ------------ ------------
End of period............................... $ -- $ 82 $ 6,461 $ -- $ 6,543
============= ============ ============ ============ ============
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General Operating Environment Overview:
The Company's financial results for the first quarter of 2000 improved over 1999
results as a result of increased demand for products and services directly
related to stronger rig activity in North America. The U.S. and Canada rig
activity were up 39.5% and 65.5%, respectively, in the first quarter of 2000
compared to the same period of 1999. These improvements were slightly offset by
a decline in international rig activity which fell 7.1% in the first quarter of
2000 compared to the first quarter of 1999. Sequentially, rig activity was down
less than 1% in the U.S. in the first quarter of 2000 compared to the fourth
quarter of 1999. Canada rig activity was up 42.4% for the first quarter of 2000
compared to the final quarter of 1999. International activity remained flat, up
less than 1%, in the first quarter of 2000 compared to the last quarter of 1999.
The increase in North America rig activity for the first quarter of 2000
compared to 1999 activity was precipitated by an increase in oil and gas prices.
The price of West Texas Intermediate Oil, which was as high as $22.04 per barrel
in the fourth quarter of 1997, declined throughout 1998 and into the first
quarter of 1999 (reaching decade lows of $12.95 per barrel and $12.97 per
barrel in the fourth quarter of 1998 and first quarter of 1999, respectively).
Beginning in the second quarter of 1999, West Texas Intermediate Oil prices
began to recover. West Texas Intermediate Oil prices strengthened throughout the
remainder of 1999 and into 2000, finishing with an average price of $28.82 per
barrel in the first quarter of 2000. This recovery in oil prices is primarily
the result of an agreement between certain major oil producers to limit
worldwide oil production. There can be no assurances that these producers will
comply with the self-imposed limitations on oil production, or continue their
agreement, or that the improvement in oil prices will stabilize or continue.
Results of Operations
Three Months Ended March 31, 2000 and 1999
Revenue. Revenue was $108.7 million for the first quarter of 2000, an increase
of $13.5 million (or 14%) compared to the first quarter of 1999. The increase
was due mainly to greater revenue from Western Hemisphere operations, especially
in the Tubular Services and Solids Control product lines as a result of the
increase in rig activity discussed above.
Revenue from the Company's Tubular Services product line, comprised of
Inspection, Coating, and Mill Systems and Sales, was $46.9 million for the first
three months of 2000. This represented an increase of $8.6 million (or 22%)
compared to the prior year period. The majority of the increase was due to
greater revenue in North America Inspection and Coating operations. The
Company's fiberglass tubular operation, part of North America Coating, was
especially strong with a revenue increase of 76% over the first three months of
1999. European inspection and coating operations remained slow in the first
quarter of 2000 and offset some of the gains in North America.
Solids Control revenue was $37.1 million in the first quarter of 2000, an
increase of $8.6 million (or 30%) compared to the same period of 1999. The
increase was due mainly to strong rental and service operations in North
America. Canada's Solids Control operation increased 105%. In addition, Latin
America operations also reported strong increases. Revenue from Solids Control
equipment sales was down, slightly offsetting the increases in North America and
Latin America rental and services business.
Coiled Tubing & Wireline Products revenue was $16.6 million for the three months
ended March 31, 2000, representing a decrease of $2.9 million (or 15%) compared
to the same period of 1999. The decrease was due to the lag effect the most
recent decline in oilfield activity has had on spending by the Company's
customers on new coiled tubing and wireline units. The improving market
environment began to have an impact on the Company's backlog for Coiled Tubing &
Wireline Products, as backlog increased 34% to $24.0 million at March 31, 2000
from $17.9 million at December 31, 1999.
Pipeline & Other Industrial Services revenue was $8.0 million for the three
months ended March 31, 2000, representing a decrease of $0.7 million (or 8%)
compared to the same period of 1999. The decline was mainly due to lower revenue
in the Eastern Hemisphere for Pipeline Services operations.
11
Gross Profit. Gross profit was $25.2 million (23% of revenue) in the first
quarter of 2000, a $5.9 million (or 30%) increase over the first quarter 1999
gross profit of $19.3 million (20% of revenue). The improvement in the 2000
gross profit dollars and percentages was due to the higher revenue discussed
above.
Selling, General, and Administrative Costs. Selling, general and administrative
costs were $11.8 million in the first quarter of 2000, a decrease of $0.5
million (4%) from the same period of 1999. The decrease was due to cost
constraints implemented throughout 1999 and maintained in the first quarter of
2000.
Research and Engineering Costs. Research and engineering costs were $2.9 million
in both the first quarters of 2000 and 1999. The majority of the research and
engineering costs related to the development of new Pipeline tools, and new
product development and existing product improvement in the Solids Control,
Coating, Inspection, and Coiled Tubing product lines.
Operating Profit. Operating profit was $10.4 million for the first quarter of
2000 compared to operating profit of $4.0 million in the same period of 1999.
The increase in operating profit in 2000 was due to the factors discussed above.
Interest Expense. Interest expense was $4.7 million and $4.5 million in the
three months ended March 31, 2000 and 1999, respectively. The slight increase
was due to higher interest rates on the Company's term and revolving debt.
Other Expense (Income). Other expense, which includes interest income, foreign
exchange, minority interest, and other expense (income), resulted in net other
expense of $0.4 million in the first quarter of 2000 and other income of $1.0
million in the first quarter of 1999. The first quarter 1999 other income
included foreign exchange gains of $1.1 million related to a strong U.S. dollar
and the collection of U.S. dollar receivables on the books of foreign entities.
Provision for Income Taxes. The Company had tax provisions of $2.5 million and
$0.2 million in the three months ended March 31, 2000 and 1999, respectively.
These provisions represented effective tax rates of 48% and 40% for the
respective periods. The provisions were higher than the expected U.S. tax rate
of 35% mainly due to charges not allowed under domestic and foreign
jurisdictions related to goodwill amortization and foreign earnings subject to
tax rates differing from domestic rates.
Net Income. Net income for the first quarter of 2000 and 1999 was $2.8 million
and $0.3 million, respectively. The improvement in the first quarter of 2000
was due to the factors discussed above.
Financial Condition and Liquidity
March 31, 2000
For the three months ended March 31, 2000, cash provided by operating activities
was $5.3 million compared to $18.0 million for the three months ended March 31,
1999. Cash was provided by operations through net income of $2.8 million plus
non-cash charges of $9.0 million, a decrease in inventory of $1.3 million, an
increase in accounts payable and accrued liabilities of $2.2 million, and an
increase in federal and foreign income taxes payable of $1.4 million. Inventory
declined due to equipment sales and concentrated efforts to reduce inventory
levels. Accounts payable, accrued liabilities, and federal and foreign income
taxes payable increased due to greater activity. These items were offset to
some extent during the first three months of 2000 by an increase in accounts
receivable of $11.5 million. The increase in accounts receivable was due to a 7%
increase in revenue in the first quarter of 2000 compared to the fourth quarter
of 1999.
For the three months ended March 31, 2000, the Company used $3.0 million of cash
for investing activities compared to $8.4 million for the same period of 1999.
Capital expenditures of $4.6 million for the first three months of 2000 were
primarily related to the Company's new Truscope Inspection unit, Solids Control
equipment in the strong Canadian market, and Fiber Glass liner equipment for the
Company's Fiberglass operation.
12
For the three months ended March 31, 2000, the Company used $1.0 million of cash
for financing activities compared to cash used of $10.8 million in the same
period of 1999. The main use of cash for financing activities was for the
reduction of outstanding debt.
Current and long-term debt was $231.5 million at March 31, 2000, a decrease of
$1.9 million from the $233.3 million outstanding at December 31, 1999. The
decrease in debt was due to cash flow from operations. The Company's
outstanding debt at March 31, 2000 consisted of $98.9 million of Notes (net of
discounts), $62.6 million of term loans due under the Company's Senior Credit
Agreement, $53.4 million due under the Company's $100.0 million revolving credit
facility, and $16.6 million of other debt.
At March 31, 2000 the Company had outstanding letters of credit of $5.1 million.
The available facility on the Company's $100.0 million revolving credit facility
and $5 million swingline facility was $43.1 million and $3.5 million,
respectively, at March 31, 2000.
Forward Looking Statements
This Quarterly Report on Form 10Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are those that
do not state historical facts and are inherently subject to risk and
uncertainties. The forward-looking statements contained herein are based on
current expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others, the cyclical
nature of the oilfield services industry, risks associated with growth through
acquisitions and other factors discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 under the caption "Factors Affecting
Future Operating Results."
Quantitative & Qualitative Disclosure About Market Risk
The Company does not believe it has a material exposure to market risk. The
Company manages its exposure to interest rate changes by using a combination of
fixed rate debt, variable rate debt, interest swap and collar agreements in its
total debt portfolio. At March 31, 2000, the Company had $231.5 million of
outstanding debt. Fixed rate debt included $98.9 million of Senior Notes (net
of discounts) at a fixed interest rate of 7 1/2%. The Company had
approximately $40.0 million of variable rate debt protected through the use of a
collar agreement. The interest rate for the majority of the Company's variable
rate debt is reset every six months. With respect to foreign currency
fluctuations, the Company uses natural hedges to minimize the effect of rate
fluctuations. When natural hedges are not sufficient, generally it is the
Company's policy to enter into forward foreign exchange contracts to hedge
significant transactions for periods consistent with the underlying risk. The
Company had no forward foreign exchange contracts outstanding at March 31, 2000.
The Company does not enter into foreign currency or interest rate transactions
for speculative purposes.
13
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -- Reference is hereby made to the Exhibit Index
commencing on page 16.
(b) A report on Form 8-K was filed on March 23, 2000 regarding the
proposed merger of Tuboscope Inc. and Varco International, Inc.
14
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 INC.
--------------
(Registrant)
Date: May 9, 2000 /s/ Joseph C. Winkler
- -------------------- -----------------------------------------
Joseph C. Winkler
Executive Vice President, Chief Financial
Officer and Treasurer (Duly Authorized
Officer, Principal Financial and Accounting
Officer)
15
EXHIBIT INDEX
Exhibit No. Description Note No.
- ------------ ------------------------------------------------------------------------------------------------ --------------
2.1 Agreement and Plan of Merger dated as of March 22, 2000 between Varco (Note 16)
International, Inc. and the Company
3.1 Second Amended and Restated Bylaws. (Note 15)
3.2 Second Restated Certificate of Incorporation, dated May 13, 1999. (Note 15)
4.1 Registration Rights Agreement dated May 13, 1988 among the Company, Brentwood (Note 1)
Associates, Hub Associates IV, L.P. and the investors listed therein.
4.2 Purchase Agreement dated as of October 1, 1991 between the Company and Baker (Note 2)
Hughes Incorporated regarding certain registration rights.
4.3 Exchange Agreement, dated as of January 3, 1996, among the Company and Baker (Note 6)
Hughes Incorporated.
4.4 Registration Rights Agreement dated April 24, 1996 among the Company, SCF III, (Note 9)
L.P., D.O.S. Partners L.P., Panmell (Holdings), Ltd. and Zink Industries Limited.
4.5 Registration Rights Agreement dated March 7, 1997 among the Company and certain (Note 10)
stockholders of Fiber Glass Systems, Inc.
4.6 Warrant for the Purchase of Shares of Common Stock Expiring December 31, 2000 (Note 9)
between the Company and SCF III, L.P. regarding 2,533,000 shares, dated January 3,
1996.
4.7 Warrant for the Purchase of Shares of Common stock expiring December 31, 2000 (Note 6)
between the Company and Baker Hughes Incorporated regarding 1,250,000 shares,
dated January 3, 1996.
4.8 Indenture, dated as February 25, 1998, between the Company, the Guarantors named (Note 11)
therein and The Bank of New York Trust Company of Florida as trustee, relating to
$100,000,000 aggregate principal amount of 7 1/2 Senior Notes due 2008 Specimen
Certificate of 7 1/2% Senior Notes due 2008 (the "Private Notes"); and Specimen
Certificate at 7 1/2% Senior Notes due 2008 (the "Exchange Notes").
10.1 Amended and Restated Secured Credit Agreement, dated as of February 9, 1998, (Note 11)
between Tuboscope Inc., and Chase Bank of Texas, National Association, ABN
Amro Bank N.V., Houston Agency, and the other Lenders Party Thereto, and ABN
Amro Bank N.V., Houston Agency as Administrative Agent (includes form of
Guarantee).
10.1.1 Form of Amendment No. 1 to Amended and Restated Secured Credit Agreement dated (Note 13)
as of March 29, 1999.
10.1.2 Form of Reaffirmation of Guarantee relating to Amended and Restated Secured Credit
Agreement dated as of March 29, 1999.
10.2 Deferred Compensation Plan dated November 14, 1994; Amendment thereto dated (Note 12)
May 11, 1998.
10.3 Employee Qualified Stock Purchase Plan; and First Amendment to Employee Qualified (Note 5)
Stock Purchase Plan dated March 10, 1994.
10.4 Amended 1996 Equity Participation Plan (Note 14)
10.4.1 Form of Non-qualified Stock Option Agreement for Employees and Consultants; (Note 7)
Form of Non-qualified Stock Option Agreement for Independent Directors.
10.5 DOS Ltd. 1993 Stock Option Plan; Form of D.O.S. Ltd. Non Statutory Stock Option (Note 8)
Agreement.
Exhibit Description Note No.
------- ----------- --------
No.
---
16
10.6 Amended and Restated Stock Option Plan for Key Employees of Tuboscope Vetco (Note 3)
International Corporation; Form of Revised Incentive Stock Option Agreement; and
Form of Revised Non-Qualified Stock Option Agreement.
10.7 Stock Option Plan for Non-Employee Directors; Amendment to Stock Option Plan for (Note 4)
Non-Employee Directors; and Form of Stock Option Agreement.
10.8 Master Leasing Agreement, dated December 18, 1995 between the Company and Heller (Note 6)
Financial Leasing, Inc.
10.9 Tuboscope Stock Option Agreement dated as of March 22, 2000 between the Company (Note 16)
and Varco International, Inc.
10.10 Varco Stock Option Agreement dated as of March 22, 2000 between Varco (Note 16)
International Inc. and the Company
10.11 Form of Executive Agreement of certain members of senior management (Note 17)
10.11.1 Form of First Amendment to Executive Agreements (Note 17)
10.12 Executive Agreement of John F. Lauletta (Note 17)
10.13 Executive Agreement of Joseph C. Winkler (Note 17)
10.14 Form of Indemnity Agreement (Note 17)
21 Subsidiaries (Note 13)
27 Financial Data
Note 1 Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-31102).
Note 2 Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-43525).
Note 3 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-72150).
Note 4 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-72072).
Note 5 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-54337).
Note 6 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
Note 7 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-05233).
Note 8 Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-05237).
Note 9 Incorporated by reference to the Company's Current Report on Form 8-K filed on January 16, 1996.
Note 10 Incorporated by reference to the Company's Current Report on 8-K Filed on March 19, 1997, as
amended by Amendment No. 1 filed on May 7, 1997.
Note 11 Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-51115).
Note 12 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
Note 13 Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
17
Note 14 Incorporated by reference to the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
Note 15 Incorporated by reference to Tuboscope's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
Note 16 Incorporated by reference to the Company's Current Report on Form 8-K filed on March 23, 2000.
Note 17 Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-34582).
18