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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission file number 0-10068
ICO, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 76-0566682
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11490 WESTHEIMER, SUITE 1000 77077
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER (281) 721-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, NO PAR VALUE
RIGHTS TO PURCHASE JUNIOR PARTICIPATING PREFERRED STOCK
PREFERRED STOCK, NO PAR VALUE
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 and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of December 18, 1998 was $38,503,000.
The number of shares outstanding of the registrant's Common Stock
as of December 18, 1998: Common Stock, no par value -- 22,108,153
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 1999 annual
Meeting of Shareholders are incorporated by reference in Part III of this Form
10-K. Such definitive proxy statement or the information to be so incorporated
will be filed with the Securities and Exchange Commission not later than 120
days subsequent to September 30, 1998.
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ICO, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 12
Item 3. Legal Proceedings................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders (no response required)........ -
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters....................................................... 17
Item 6. Selected Financial Data........................................................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 20
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................................................... 34
Item 8. Financial Statements and Supplementary Data....................................... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 35
Item 11. Executive Compensation............................................................ 35
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................................. 35
Item 13. Certain Relationships and Related Transactions.................................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................................... 36
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PART I
ITEM 1. BUSINESS
GENERAL
ICO, Inc. ("the Company"), provides specialized petrochemical
processing and oilfield services. In the petrochemical processing segment, the
Company provides grinding, air milling, and ancillary services for petrochemical
resins produced in pellet form (size reduction services); formulates and
manufactures concentrated products for blending with petrochemical resins to
give finished products desired characteristics such as color or protection from
ultraviolet light; and provides related distribution services. The Company's
specialty petrochemical processing customers include major chemical companies,
petrochemical production affiliates of major oil exploration and production
companies and manufacturers of plastic products. In the oilfield services
segment, ICO is a leading provider of inspection, reconditioning and coating
services for new and used tubular goods and sucker rods used in the oil and gas
industries. The Company's oilfield services segment reduces customers' drilling
and production costs by preventing faulty tubular goods from being placed
downhole (exploration services), by reclaiming and reconditioning used tubular
goods and sucker rods (production services), and by preventing the premature
failure of tubular goods and sucker rods from occurring due to the corrosive
downhole drilling environment (corrosion control services). Although
comprehensive industry statistics are not readily available, ICO believes it is
one of the two largest providers of inspection, reconditioning and coating
services for tubular goods in the United States. The Company's customers in the
oilfield services segment include many of the leading integrated oil companies
and large independent oil and gas exploration and production companies.
The Company was incorporated in 1978 under the laws of the state of
Texas. During fiscal 1998, the Company was reorganized into a holding company
structure with new ICO, Inc., a Texas corporation, serving as the holding
company. References to the "Company" include ICO, Inc., its subsidiaries and
predecessors unless the context requires otherwise.
PETROCHEMICAL PROCESSING SERVICES
The Company's petrochemical processing business segment provides both
size reduction services (grinding and related services such as blending and
screening) and compounding services (including manufacturing concentrates for
use in petrochemical products). Several of the size reduction operations also
provide compounding, blending, and mixing services. The Company conducts its
size reduction and compounding operations in the United States, Europe and
Southeast Asia. The Company's concentrate manufacturing operations are conducted
primarily through the Company's subsidiaries, Bayshore Industrial, Inc., which
operates in the United States, and Rotec Chemicals, Ltd. and Soreco S.A., both
of which operate in Europe.
The Company's size reduction and related processing services and
compounding operations are an intermediate step between the production of
petrochemical resins and the manufacture of a wide variety of end products, such
as paint, garbage bags, plastic film or other objects made of plastic. Chemical
manufacturers generally produce petrochemical resins in pellet form. Various
manufacturing processes necessary to produce finished plastic or other
petrochemical products require the pellets to be ground into smaller sizes, or
to be mixed with additives and recombined, before end products having the
desired characteristics are produced. The
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Company's size reduction services involve the grinding or air milling of pellets
into smaller sizes and, in some cases, the blending or compounding of
petrochemical pellets with other additives or fillers, such as colored pigments.
The Company's concentrates manufacturing operations involve the production of
additives which, when blended into resin, produce materials with desired
properties such as flame-retardancy, color, ultraviolet stabilization or
adhesion.
Size Reduction and Compounding Services. The Company's size reduction
services include ambient grinding, cryogenic grinding and air jet milling of
petrochemical pellets. Materials processed by the Company's size reduction
services include polyethylene, polyester, polypropylene, nylon, fluorocarbons,
cellulose acetate, vinyls, phenolics, polyurethane, acrylics, epoxies, waxes and
others. The Company is a leading provider of size reduction services in the
United States, Western Europe, New Zealand and Australia.
The majority of the Company's size reduction services involve ambient
grinding, a mechanical attrition milling process suitable for products which do
not require ultra fine particle size and are not highly heat sensitive. Using,
in general, Company-manufactured equipment, the Company grinds petrochemical
pellets into powders used in manufacturing household and automotive items (such
as household furniture, trash receptacles and plastic automobile parts),
agricultural products (such as fertilizer and water tanks), paint, metal and
fabric coatings. The powders are also used as raw material for additional
processing in which they are combined with additives or colors. Many of the
resulting final products are produced by rotational molding, and the Company
provides a substantial portion of its size reduction services to customers who
are rotational molding industry manufacturers or who supply that industry.
Rotational molding produces plastic products by melting pre-measured
plastic powder in molds which are heated in an oven while being rotated on both
the vertical and horizontal axes. The melting resin sticks to the hot mold and
evenly coats the mold's surface. This process offers design advantages over
other molding processes, such as injection molding, because assembly of multiple
parts is unnecessary, consistent thickness can be maintained, tooling is less
expensive, and molds do not need to be designed to withstand the high pressures
inherent in injection molding.
The Company provides air jet milling for brittle products requiring
very fine particle size, such as additives for printing ink, adhesives, waxes
and cosmetics. Air jet milling uses high velocity compressed air to reduce
materials to sizes between 0.5 and 50 microns. For materials with special
thermal characteristics (such as heat sensitive plastics), the Company also
provides cryogenic milling services, which use liquid nitrogen to chill pellets
to extremely low temperatures. Company-manufactured equipment is used to grind
the chilled pellets.
In addition, the Company offers its customers related polymer
processing services. These services include melt blending and mixing of plastics
and other additives, by way of extrusion, to form pellets (compounding); and
other processing, packaging, warehousing and distribution services that are
integrated with the Company's size reduction services. From time to time, the
Company also sells Company-manufactured ambient grinding equipment in the United
States and internationally.
The Company has six operating facilities in the United States, seven in
Europe, and two in Southeast Asia that provide size reduction services. The two
Southeast Asian facilities, which are located in New Zealand and Australia, were
acquired through the purchase of J.R. Courtenay (N.Z.) Ltd. (see
"Acquisitions"). The Company has over the last two fiscal years closed three of
its domestic size reduction facilities in order to reduce costs and capital
expenditure requirements.
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Until January 1998, the Company also owned 50% of WedTech, Inc.
("WedTech"), a Canadian company that provides size reduction services and
manufactures concentrates. See Item 3 - "Legal Proceedings."
Concentrates Manufacturing. The Company has three concentrates
manufacturing operations. Bayshore Industrial, Inc.'s facility, which is the
Company's primary operation, is in LaPorte, Texas. Two other operations were
acquired by the Company-Rotec Chemicals, Ltd., described below, whose Rushden,
England facility manufactures proprietary color concentrates, and of Soreco S.A.
located in Oyonnax, France, which provides high quality color matching and color
compounding services for engineering plastics. The Company's concentrate
manufacturing operations involve the formulation and production of highly
concentrated compounds of additives which are then combined (by the Company or
by others) with petrochemical resins to produce materials having specifically
desired characteristics, such as flame-retardance, color, ultraviolet
stabilization or adhesion. The Company's concentrates are produced to the
detailed specifications of customers. These customers primarily consist of
companies that produce the additive-filled resins used by others in fabricating
finished products, as well as those companies that make the finished plastic
products. The concentrate manufacturing process requires the combination of up
to 25 different additives or fillers in precise proportions. The Company is
often approved as the manufacturer of such concentrates following rigorous
qualification procedures imposed by customers on a product-by-product basis. The
Company works closely with its concentrate customers to research, develop and
test the formulations necessary to create the desired characteristics of the
concentrates to be produced. Such concentrates are produced in batches which may
range from as little as five pounds (i.e., a lab sample) to as large as 4
million pounds.
Distribution. The Company also acts as a distributor of certain
specialty petrochemicals. In this distribution activity, the Company acquires
the petrochemical products for its own account from the petrochemical producer
for resale to third parties. In almost all cases, the Company processes the raw
material using Company owned facilities before reselling the improved material.
In the second quarter of fiscal 1997, the Company began to expand the
distribution component of its specialty petrochemical production services
business. The Company acquired, effective April 1, 1997, the micropowders
business of Exxon Chemical Belgium, a division of ESSO N.V./S.A.; executed
supply agreements ("Supply Agreements") with Borealis A.S. ("Borealis") and
Exxon Chemical Holland, B.V.; and acquired Rotec and Verplast (See
"Acquisitions"). Under the Supply Agreements, the Company purchases resin at
scheduled prices, and has the right to distribute specific products of Borealis
and Exxon Chemical Holland within the European Union. In addition, during fiscal
1998, the Company acquired the worldwide rights to process and distribute the
rotational molding grades of Borealis polypropylene, and acquired J.R. Courtenay
(N.Z.) Ltd. These developments, along with the fiscal 1997 acquisitions of Rotec
Chemicals Ltd. and Verplast S.P.A., will allow ICO to sell a variety of
petrochemical products in Europe under its own name and under the Rotec,
Courtenay and Verplast brand names. ICO has established trading companies (under
the name "ICO Polymers") in the Netherlands, the United Kingdom, France and
Sweden to engage in these activities. The Company believes this enhanced
distribution capacity will provide access to new customers and enable it to
expand its relationships with existing customers. The growth in the Company's
distribution business has expanded the portion of the Company's specialty
petrochemical processing business which is performed through product-based
pricing rather than on a tolling basis. While the Company considers this change
in business practice to be desirable, the change has required the Company to
modestly increase its working capital investment. The Company's distribution
arrangements are generally on a nonexclusive basis, and are generally subject to
termination upon short term notice by either party to the contract.
Petrochemical Processing Customers and Pricing. The primary customers
of the Company's petrochemical processing business segment are large producers
of petrochemicals (which include major chemical companies
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and petrochemical production affiliates of major oil production companies) and
end users such as rotational molders. In size reduction services, the Company
has many customers, and no customer or particular type of customer is dominant.
Worldwide sales to one petrochemical processing customer (Dow Chemical Company
and its subsidiaries) accounted for 10% of the Company's consolidated revenues
for the year ended September 30, 1998. The Company has long-term contract
arrangements with many petrochemical processing customers whereby it has agreed
to process or manufacture certain petrochemical products for a single or
multi-year term at an agreed-upon fee structure.
The Company provides value-added services to customers in both its size
reduction service and concentrates manufacturing businesses. Within the
concentrates manufacturing business, the Company generally purchases and takes
into inventory the raw materials necessary to manufacture concentrates, and
sells the manufactured products at a product price. This contrasts with its
pricing in its size reduction services which are often performed on a tolling
basis. The Company seeks to minimize the risk of price fluctuation in raw
materials and other supplies by maintaining relatively short order cycles. The
Company's expansion into the distribution business in Europe requires the
Company to purchase and take raw materials into inventory, exposing the Company
to increased risk of price fluctuations (see "Raw Materials and Backlog"). In
addition, the Company purchases raw materials for the manufacture and
distribution of compounded colored powder by the Company's Italian, New Zealand,
and Australian subsidiaries, as well as the concentrate manufacturing
operations.
Petrochemical Processing Sales and Marketing. The Company has
established a sales force of six full-time people dedicated to selling its size
reduction services in the United States. In addition, the Company's European
petrochemical processing operations have an established sales force in Europe
consisting of 14 full-time individuals located in The Netherlands, the United
Kingdom, Italy, France, Belgium, Germany and Scandinavia. The New Zealand and
Australian operations have a combined sales force of five individuals.
Bayshore's concentrate sales force consists of four individuals who sell the
Company's concentrates and related services throughout the United States.
Competition. The specialty petrochemical processing business is highly
competitive. Competition is based principally on price, quality of service,
manufacturing technology, proximity to markets, timely delivery and customer
service and support. The Company's size reduction competitors are generally
smaller and mid-sized companies which provide regional ambient grinding services
and larger companies which provide specialized services such as cryogenic
grinding and air jet milling. Several companies also maintain significant size
reduction facilities for their own use in connection with products produced by
rotational molding. The Company believes that it has been able to compete
effectively in its market based on competitive pricing, its network of plants,
its technical expertise and equipment manufacturing capabilities and its range
of services, such as flexible storage, packaging facilities, and product
development. The Company also believes that its knowledge of the rotational
molding industry, through activities such as participation in the Association of
Rotational Molders, enhances its competitive position with this key customer
group. The Company's competitors in the concentrates industry include a number
of large enterprises, as well as smaller and mid-sized regional companies. The
Company believes its technical expertise, high quality product, customer support
and pricing have enabled it to compete successfully in this market.
The ambient size reduction business lacks substantial barriers to
entry, but cryogenic grinding and air milling require a more significant
investment and expertise. The compounding business, including concentrates
manufacturing, requires a substantial investment in equipment, as well as
extensive technical and mechanical expertise. In general, many of the Company's
customers could perform the special petrochemical processing
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services provided by the Company for themselves if they chose to do so, and new
competitors may enter the market from time to time. A number of the Company's
competitors and potential competitors in this segment have substantially greater
financial and other resources than the Company. While there can be no assurance,
the Company believes that it will be able to continue to compete effectively in
the industry, based on the factors described above.
OILFIELD SERVICES
The Company's inspection, reconditioning and coating services for new
and used tubular goods and sucker rods include exploration services, production
services and corrosion control services. These services include a variety of
processes designed to reduce the customer's cost of drilling and production. The
Company also sells equipment and supplies used in the inspection, reconditioning
and coating of tubular goods and sucker rods.
Tubular goods include various forms of casing, tubing, drill pipe and
line pipe. Casing is used to seal off fluids and prevent collapse of the bore
holes of oil and natural gas wells. After production casing is set, a string of
tubing is suspended from the surface inside the casing to serve as a conduit for
the extraction of oil and natural gas. Drill pipe is heavy seamless pipe used to
rotate the drill bit and circulate drilling fluids. Line pipe is used for waste
disposal lines, flow lines, gathering systems and pipelines through which oil,
natural gas and liquid hydrocarbons are transported. Removal of casing or tubing
for repair or replacement is expensive and results in an interruption of
production and loss of revenues to the well owner. Sucker rods are steel rods
which are joined together in a "string" by couplings to form a mechanical link
from a downhole pump at the bottom of an oil well to the pumping unit on the
surface. Removal of a sucker rod string for repair or replacement of rods,
couplings or the downhole pump requires a well to be shut down and the entire
string of sucker rods to be removed, resulting in additional expenses and loss
of revenues to the well owner due to interruption of production.
Exploration Services. The Company provides inspection services designed
to identify new tubular goods which are defective or which do not meet American
Petroleum Institute ("API") standards or other specifications set by the
customer. The API standards require pipe to be inspected to meet specified
standards and are generally employed as a benchmark in the petroleum industry.
Customers, however, generally require pipe to meet more rigorous standards.
These inspection services are used by the mills which manufacture pipe, pipe
suppliers and end users, such as oil and gas exploration and production
companies, as a quality assurance and control measure to reduce the risk of
costs associated with defective tubular goods and to reduce the risk of downhole
failure, especially when drilling deep oil and natural gas wells with high
downhole temperatures and pressures and when drilling in environmentally
sensitive areas such as offshore waters. The Company operates its own inspection
facilities for new tubular goods which provide (in contrast to field inspection)
a controlled environment which permits more efficient and consistent inspection
procedures, facilitates supervision of personnel and electronic equipment and
avoids problems associated with inclement weather. The Company also performs,
under long-term contracts, inspection services on site at the manufacturing
plants of fifteen major producers and processors of tubular goods (including two
customers added during fiscal 1998) thereby reducing transportation and handling
costs to the customer and provides mobile inspection services in the field.
During fiscal 1998, the Company added two mill processing customers, each with a
long-term contracts of 5 years. The Company also manufactures inspection and
quality control equipment which is sold or leased from time to time to steel
producers and processors.
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The Company provides its customers a "Full-Service One-Stop Program" by
offering a complete range of tubular services, including electro-magnetic
inspection ("EMI"), ultrasonic inspection, tubular maintenance and storage,
inventory management, and associated services such as hydrostatic testing and
threading (API specification and premium threading services are offered within
the Company's Houston facility by third parties). EMI is a process which
identifies flaws through magnetic flux leakage and is generally used on pipe of
less than 500 mil. in thickness. The Company designed and uses an EMI system,
the AGS Lite system, which the Company believes is capable of identifying and
visually displaying natural and man-made flaws that are not identifiable using
conventional EMI methods. The AGS Lite system also significantly reduces the
installation costs while still offering a vast improvement in functionality over
conventional methods. The Company also designed and uses a UT system, the ICO
Scan system, which identifies flaws which are virtually undetectable by other
means, employing high frequency sound waves, and is used to inspect pipe that is
thicker than pipe which EMI can effectively inspect or which contains alloys of
metals other than steel, such as titanium. The Company's proprietary ThruSpect
2000(TM) coil tubing unit operates at the customer's location and uses
electromagnetic inspection to identify flaws in coiled tubing. During the first
quarter of fiscal 1999, the Company received and will soon install a field
tested, high speed, full length ultrasonic inspection unit in the Company's
Houston, Texas pipe inspection facility.
Production Services. The Company reconditions and inspects used tubular
goods and new and used sucker rods through the provision of a complete package
of inspection and maintenance services. These services include the testing,
cleaning, reconditioning and electronic inspection of tubular goods. These
services are performed in a controlled environment at the Company's facilities
(providing many of the advantages previously described for in-plant inspection
of new tubular goods) as well as at the well site, using mobile equipment.
Production services reduce the customer's well operating costs because
reconditioning used tubular goods is typically less expensive than purchasing
new tubular goods. Reconditioned tubular goods generally must meet the same API
or customer standards as new tubular goods. The Company performs these services
at nine Company facilities located in California, Mississippi, New Mexico, North
Dakota, Oklahoma, Texas and Wyoming.
The Company reconditions and inspects new and used sucker rods. Using
the Company's patented computerized sucker rod inspection system, reconditioning
involves a number of steps designed to clean, straighten, inspect and apply
protective coating to sucker rods to guard against corrosion. This process
reduces the customer's well operating costs because reconditioning used sucker
rods is less expensive than purchasing new sucker rods. The Company also
inspects new sucker rods before they are placed in service to reduce the risk of
downhole failure, which requires expensive pulling services and results in loss
of production. The Company's sucker rod reconditioning and inspection services
are provided at seven Company facilities located in California, Oklahoma, Texas
(three locations), Wyoming and Canada.
The Company provides a service which allows customers to acquire
reconditioned tubular goods or sucker rods at a lower cost than new tubular
goods or sucker rods, decrease their inventory carrying cost, and enhance their
inventory management. With this program, the Company purchases used tubular
goods and sucker rods from certain customers, reconditions and grades the pipe
and sucker rods for varying degrees of usage and resells the pipe and sucker
rods in the marketplace.
The Company also operates mobile inspection units utilizing a system
known as Wellhead Scanalog(TM). The Company acquired the rights to Wellhead
Scanalog for use in the United States pursuant to a non-exclusive, royalty-free
license acquired in 1992. Wellhead Scanalog units are designed to perform
tubular inspection while the tubing is being removed from the well without
interfering with the normal operation of the rig. The
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Company believes Wellhead Scanalog inspection is unique because it is not
affected by scale, mud, paraffin or water, which can inhibit the operation of
other systems.
Corrosion Control Services. The Company's corrosion control services
are designed to reduce well operating costs by extending the useful life of
downhole tubular goods and sucker rods and by improving the well's hydraulic
efficiency and pipe integrity. Corrosive conditions exist inside most wells.
Such conditions are particularly extreme in high temperature gas wells and in
oil producing regions where secondary and tertiary recovery techniques are
utilized. Secondary and tertiary recovery techniques are methods by which
natural forces in an oil reservoir are supplemented by means such as water
flooding to increase ultimate oil recovery. The Company offers a variety of
corrosion control services to its customers, using several of the Company's
patented processes.
The Company internally coats new and used tubular goods with a variety
of powder and liquid coatings. In the coating process, tubular goods are placed
in large burnout ovens to remove foreign substances. The tubular goods are then
grit blasted, primed with phenolic, preheated, coated internally and subjected
to a final baking process. The tubular goods are then inspected visually and
electronically to make certain the coating uniformly covers the entire interior
of the pipe and meets the Company's quality assurance specifications. A similar
process is utilized for cleaning, priming and coating tubular couplings. The
selection of the proper coating for downhole tubular goods requires specialized
knowledge and considerable effort by the Company's experienced coating managers
and technicians. The key to the process is gathering facts concerning the well,
its environment, test procedures and related conditions planned for the life of
the well. The Company has four coating facilities located in Louisiana and
Texas.
The Company's patented sucker rod coating process involves applying a
special formula stainless steel to the sucker rods and then coating them with a
phenolic primer and fusion bonded modified epoxy. Sucker rods used in less
corrosive conditions may be coated only with phenolic primer and fusion bonded
modified epoxy. The Company's sucker rod coating services are provided at its
facility in Odessa, Texas.
The Company also provides internal cement lining for pipe ranging in
size from small diameter tubing to 24-foot line pipe. Cement provides an
increased barrier between corrosive fluids and the tubular product which allows
the customer to use a larger portion of its used pipe with a welded connection,
when weight and torsion strength are not a primary issue. For critical line
pipe, the Company also applies an external fusion bonded tape which forms a
tough protective corrosion barrier.
In late fiscal 1995, the Company introduced several new corrosion
control products, including powder coatings for drill pipe and high temperature
production tubing. These powder coatings have better mechanical and protective
capabilities as compared to liquid coatings without the environmental control
expenses normally associated with their liquid counterparts. These products have
gained market acceptance at the expense of competing products and have
contributed to the increase of corrosion control revenues.
Oilfield Services Customers. The Company's customers include leading
integrated oil companies, large independent oil and gas exploration and
production companies, drilling contractors, steel producers and processors, and
oilfield supply companies. No single customer of the oilfield services business
segment accounted for over 10% of the Company's revenues in fiscal 1996, 1997 or
1998. Sales are generally on an order-by-order basis or under short-term
contracts (i.e., one year or less). The Company does enter into contracts in
connection with the placement of Company owned equipment in tubular goods
manufacturing or processing facilities. These contracts are generally for three
or more years and in some instances provide for
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fixed prices, volume discounts and indemnification of customers for certain
liabilities.
Oilfield Services Sales and Marketing. The Company's oilfield services
are marketed by 26 individuals who are responsible for in-depth customer contact
and service knowledge. Oilfield service sales representatives are required to be
technically knowledgeable in reclamation, inspection and corrosion control
services, and to stay abreast of regional and industry-wide trends in oil and
gas exploration, completion and production.
Competition. The principal competitive factors in the Company's
oilfield services business are price, availability and quality of service.
Although the consolidation in the tubular inspection, reconditioning and coating
industry has resulted in the elimination of many of the Company's competitors,
the Company's ability to compete effectively is dependent upon timely, reliable
performance and quality of its services at competitive rates. The Company
believes that it has been able to compete effectively because of its efficient
and cost-effective processes, the strong relationships which it maintains with
its customers, and its ability to add value through integration of services such
as tubular inspection, maintenance, storage and inventory control.
The Company believes few competitors within the United States provide
as wide a variety of tubular services as those offered by the Company. The
Company and Tuboscope, Inc. compete with each other and a number of smaller
companies in most domestic markets. Unlike the Company's corrosion control
business, capital and other requirements for entry into the tubular inspection
business are relatively low and new competition may enter the market from time
to time. Potential entrants may have substantially greater financial or other
resources than the Company. While there can be no assurance, the Company
believes it will be able to compete effectively in the industry, based on the
factors described above.
ACQUISITIONS
From the beginning of fiscal 1994 through the end of fiscal 1998, the
Company completed and integrated ten acquisitions in the oilfield services
segment which increased its market share and expanded its service capabilities.
In April 1996, the Company entered the petrochemical processing industry through
the acquisition of Wedco Technology, Inc. ("Wedco") to take advantage of
opportunities in that market. Since the Wedco acquisition, the Company has
completed nine additional acquisitions in the petrochemical processing industry.
The Company actively seeks strategic acquisitions. For additional information,
see the unaudited pro forma information regarding these acquisitions contained
in Note 2 of the Company's Consolidated Financial Statements. The acquisitions
below were accounted for using the purchase method of accounting and, as such,
the results of operations of the acquired entities are included in the Company's
consolidated results of operations only from the date of each acquisition
forward.
During June 1998, the Company acquired Soreco S.A. ("Soreco") and its
wholly owned subsidiary for approximately $1,600,000 in cash and the assumption
of approximately $236,000 in debt. Soreco, which is strategically located in the
French "Plastics Valley", provides high quality color matching and color
compounding services for engineering plastics. Soreco's customer base includes
manufacturers of consumer products such as appliances, electronics, cosmetics
and other products which require colors with high consistency. Soreco uses
sophisticated single pigment coloration techniques to provide rapid turnaround
for color matching and compounding services and has an extensive library of
proprietary color formulations.
During March 1998, the Company acquired J.R. Courtenay (N.Z.) Ltd.
("JRC") and its wholly-owned subsidiary, Courtenay Polymers Pty. Ltd. ("CPPL"),
for $14,124,000 in cash and the assumption of approximately $500,000 in debt.
JRC and CPPL are located in Auckland, New Zealand and Melbourne,
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Australia, respectively, and are leading providers of polymer powders to the
rotational molding and metal coating industries in New Zealand and Australia.
These companies sell an extensive line of materials using proprietary
formulations under the Cotene(TM) brand name and also provide a complete range
of size reduction and compounding services.
During December 1997, the Company acquired the operating assets of
Curley's Inspection Service, Inc. ("Curley's"). The consideration consisted of
$2,000,000 in cash and is subject to adjustment based upon future operating
revenues. Curley's provides drill pipe and casing inspection services from
locations in Texas and New Mexico.
During September 1997, the Company acquired the operating assets of
NSpection Systems, Inc. ("NSpection") for $600,000 in cash and future payments
based on sales. Nspection provides electromagnetic inspection and related
services for new and used tubing, casing and drill pipe utilizing two locations
in Houston, Texas.
During July 1997, the Company acquired Verplast S.p.A. ("Verplast"),
which included Tec-Ma Srl, a wholly-owned subsidiary of Verplast, for a total
consideration of approximately $35,100,000, consisting of approximately
$18,700,000 in cash and the effective assumption of $16,400,000 in total
liabilities. Verplast, located in northern Italy, is a supplier of petrochemical
processing services and value-added plastic materials for the rotational molding
market and for other plastic powder applications.
During May 1997, the Company acquired the remaining 50% ownership of
Micronyl-Wedco S.A. ("Micronyl") not already owned by the Company for a total
consideration of approximately $7,600,000, consisting of approximately
$2,600,000 in cash and the effective assumption of $5,000,000 in total
liabilities. Wedco France, as this entity is now known, operates two size
reduction facilities in France which perform services similar to those performed
by the Company's other petrochemical size reduction facilities.
During April 1997, the Company acquired Rotec Chemicals, Ltd. ("Rotec")
for a total consideration of approximately $7,800,000, consisting of
approximately $2,500,000 in cash, 427,353 shares of Company common stock valued
at approximately $2,100,000 and the effective assumption of $3,200,000 in total
liabilities. In addition, Rotec shareholders may be entitled to additional
consideration in cash and Company common stock based on future earnings of
Rotec. Rotec serves the United Kingdom, Ireland and Continental Europe markets
and is a producer of high quality concentrates for a variety of plastics
processes.
During April 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business"). The consideration
consisted of an initial payment of $500,000 and five additional payments of
Dutch Guilders ("Dfl") 674,000 ($358,000 at September 30, 1998 exchange rates)
payable for each of five years beginning one year after the acquisition date. As
of September 30, 1998, Dfl 2,698,000 ($1,432,000 at September 30, 1998 exchange
rates) remains outstanding. The Company also purchased inventory from Exxon
Chemical Belgium and entered into a supply agreement with Exxon Chemical Holland
to acquire inventories in the future at contracted prices.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") for a total consideration of approximately $18,500,000, consisting
of approximately $6,900,000 in cash, 1,285,012 shares of Company common stock
valued at approximately $5,900,000 and the effective assumption of $5,700,000 in
total liabilities. Bayshore is a provider of concentrates and compounds to resin
producers in the United States.
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During July 1996, the Company acquired Polymer Service, Inc. located in
Beaumont, Texas and Polymer Service of Indiana, Inc. located in East Chicago,
Indiana (collectively referred to as "Polymer Service"). The Company paid a
total consideration of approximately $5,800,000, consisting of approximately
$2,000,000 in cash, 431,826 shares of Company common stock valued at
approximately $1,700,000 and the effective assumption of $2,100,000 in total
liabilities. These companies provide size reduction, compounding and related
processing services for the petrochemical industry.
During April 1996, the Company acquired Wedco Technology, Inc.
("Wedco"). Wedco serves the petrochemical industry by providing plastics
grinding services and related machinery. The Company paid a total consideration
of approximately $84,200,000, consisting of approximately $4,600,000 in cash
(including transaction fees and expenses), 10,232,609 shares of Company common
stock valued at approximately $49,700,000 and the effective assumption of
$29,900,000 in total liabilities.
During March 1996, the Company acquired the operating assets, excluding
real estate, of Rainbow Inspection Company of Mississippi, Inc. ("Rainbow") for
a total consideration of approximately $328,000, consisting of approximately
$203,000 in cash and the effective assumption of $125,000 in total liabilities.
Rainbow provides inspection and reclamation services for oil country tubular
goods in the Gulf Coast area.
ENVIRONMENTAL REGULATION
The Company is subject to numerous and changing local, state, federal and
foreign laws and regulations concerning the use, storage, treatment, disposal
and general handling of hazardous materials, some of which may be considered to
be hazardous wastes, and restrictions concerning the release of pollutants and
contaminants into the environment. These laws and regulations may require the
Company to obtain and maintain certain permits and other authorizations
mandating procedures under which the Company must operate and restrict
emissions. Many of these laws and regulations provide for strict joint and
several liability for the costs of cleaning up contamination resulting from
releases of regulated materials into the environment. Violation of mandatory
procedures under operating permits may result in fines, remedial actions or, in
more serious situations, shutdowns or revocation of permits or authorizations.
The Company believes that future compliance with existing laws and regulations
will not have a material adverse effect on the Company. The Company further
believes that future capital expenditures for environmental remediation will not
be material.
The Company regularly monitors and reviews its operations, procedures and
policies for compliance with environmental laws and regulations and the
Company's operating permits. The Company believes that its current procedures
and practices in its operations, including those for handling hazardous
materials, are substantially in compliance with all material environmental laws
and regulations and its material operating permits. There can be no assurance,
however, that a review of the Company's past, present or future operations by
courts or federal, state, local or foreign regulatory authorities will not
result in determinations that could have a material adverse effect on the
Company. In addition, the revocation of any of the Company's material operating
permits, the denial of any material permit application or the failure to renew
any interim permit, could have a material adverse effect on the Company. While
the Company cannot predict what environmental laws and regulations will be
enacted or adopted in the future or how such future law or regulations will be
administered or interpreted, it believes the impact of any such laws or
regulations is not likely to be more burdensome to the Company than to other
similarly situated companies involved in oilfield services or petrochemical
processing. Compliance with more stringent environmental laws and regulations,
more vigorous enforcement policies, or stricter interpretations of current laws
and regulations, or the occurrence of an industrial accident, could have a
material adverse effect on the Company.
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INSURANCE AND RISK
Except for warranties implied by law, the Company does not generally
warrant the tubular goods or sucker rods it inspects or the specialty
petrochemical processing services it provides. Nonetheless, if the Company were
found to have been negligent, or to have breached its obligations to its
customers, the Company could be exposed to significant liabilities and its
reputation could be adversely affected. Likewise, the Company's activities as a
vendor of inspection equipment, a reseller of tubular goods and a manufacturer
of specialty petrochemical products, may result in liability on account of
defective products. The Company believes these risks of its business are
adequately covered by its insurance program. However, such coverage is subject
to applicable deductibles, exclusions, limitations on coverage and policy
limits. In addition, the occurrence of a significant adverse event, the risks of
which are not fully covered by insurance, could have a material adverse effect
on the Company's financial condition, results of operations or net cash flows.
Moreover, no assurance can be given that the Company will be able to maintain
adequate insurance in the future at rates it considers reasonable. The Company
believes it operates in substantial compliance with applicable laws and
government regulations and in accordance with safety standards which meet or
exceed industry standards.
RAW MATERIALS AND BACKLOG
The Company purchases and takes into inventory the resins, additives and
other materials used in its concentrates manufacturing, distribution and a
portion of its specialty petrochemical distribution business. These materials
are subject to fluctuating availability and prices. The Company believes that
other materials used in its operations are available from numerous sources and
are available to meet its needs. The Company believes that backlogs are not
meaningful to the Company's operations.
PATENTS AND LICENSES
The Company holds seven United States patents, one United Kingdom patent,
one Australia/New Zealand patent, and has eleven patent applications pending
covering the proprietary technology utilized in its reconditioning, inspecting,
spraymetal and epoxy coating of sucker rods and its services for used tubular
goods. The expiration dates on these patents range from June 2000 to May 2016.
The Company has one patent application pending covering proprietary technology
utilized by its plastics compounding business in the petrochemical processing
operations. The Company's petrochemical processing operations are not materially
dependent upon any patents or trademarks. The Company believes that its patents
and licenses are valid and that the duration of its existing patents is
satisfactory. However, no assurance can be given that one or more of the
Company's competitors may not be able to develop or produce a process or system
of comparable or greater quality to those covered by the Company's patents or
licenses, that patents will issue in respect to filed patent applications, that
the Company's patents will be found to be invalid or that others will not claim
that the Company's operations infringe upon or use the intellectual property of
others. In addition, issued patents may be modified or revoked by the United
States Patent and Trademark Office or in legal proceedings. The Company does not
believe any single patent is essential to the overall successful operation of
the Company's business.
In connection with the acquisition of Baker Hughes Tubular Services
during fiscal 1992, the Company acquired royalty-free exclusive licenses to use
Wellhead Scanalog(TM), PipeImage(TM) and other proprietary technology in the
United States. Pursuant to the terms of such licenses, the Company generally is
prohibited from using such proprietary technology in foreign markets.
11
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EMPLOYEES
As of November 30, 1998, the Company had approximately 1,605 full-time
employees, and approximately 266 full-time contract employees. The Company's
employees working in the Netherlands, Italy, New Zealand and Australia are
parties to collective bargaining agreements. None of the other employees are
represented by a union. The Company has experienced no strikes or work stoppages
during the past fiscal year and considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES
The location and approximate acreage of the Company's operating
facilities at December 15, 1998, together with an indication of the services
performed at such facilities are set forth below.
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
Oilfield Services
Bakersfield, California.................. Sucker rod reconditioning and inspecting 29 Owned
Amelia, Louisiana........................ Internal coating and inspection of new and used
tubular goods 78 2001
Broussard, Louisiana..................... Drill pipe inspection 17 Owned
Brookhaven, Mississippi.................. Inspection of tubular goods 15 2001
Farmington, New Mexico................... Inspection of new and used tubular goods 14 2002
Williston, North Dakota.................. Used tubular goods services 2 1999
Oklahoma City, Oklahoma.................. Sucker rod reconditioning and inspecting 8 Owned
Oklahoma City, Oklahoma.................. Inspection of new and used tubular goods 17 Owned
Corpus Christi, Texas.................... Inspection of new and used tubular goods 10 Owned
Denver City, Texas....................... Sucker rod reconditioning and inspecting 10 Owned
Houston, Texas........................... Corporate headquarters N/A 2001
Houston, Texas........................... Inspection of new tubular goods 192 Owned
Houston, Texas........................... Internal coating of tubular goods 49 Owned
Houston, Texas........................... Internal research and development 3 2002
Lone Star, Texas......................... Inspection of new tubular goods 80 Owned
Lone Star, Texas......................... Inspection of new tubular goods N/A Mo.-to-mo.
Monahans, Texas.......................... Inspection of new and used tubular goods 17 2002
Odessa, Texas............................ Sucker rod reconditioning and inspecting 13 (1)
Odessa, Texas............................ Sucker rod storage 7 Owned
Odessa, Texas............................ Spraymetal and epoxy coating of sucker rods 3 Owned
Odessa, Texas............................ Used tubular goods services 13 Owned
Odessa, Texas............................ Internal coating of tubular goods 15 Owned
Odessa, Texas............................ Trucking yard 14 Owned
Odessa, Texas............................ Used tubular goods services 22 Owned
Odessa, Texas............................ Storage facility 22 Owned
Odessa, Texas............................ Cement lining/external coating 20 (2)
Odessa, Texas............................ Equipment manufacturing and repair 9 Owned
Casper, Wyoming.......................... Sucker rod reconditioning and inspecting;
inspection of new and used tubular goods 29 (3)
Edmonton, Alberta, Canada................ Inspection of new and used sucker rods
Sales and service of new and used oilwell engines 10 2005
PETROCHEMICAL PROCESSING SERVICES
Fontana, California...................... Size reduction 7 Owned
Maywood, Illinois........................ Idle facility 3 Owned
East Chicago, Indiana.................... Size reduction 4 Owned
Bloomsbury, New Jersey................... Size reduction 15 Owned
Grand Junction, Tennessee................ Size reduction 5 Owned
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Ownership
or Lease
LOCATION Services Acres Expiration
-------- -------- ----- ----------
China, Texas............................. Size reduction 13 Owned
LaPorte, Texas........................... Concentrate manufacturing and compounding
facility 39 Owned
Lovelady, Texas.......................... Size reduction 24 Owned
Melbourne, Australia..................... Size reduction, compounding and distributing 1 2004
Gainsborough, England.................... Size reduction 5 Owned
Rushden, England......................... Concentrate and compounding facility 1 2008
Beaucaire, France........................ Size reduction 1 Owned
Montereau, France........................ Size reduction 1 Owned
Oyonnax, France.......................... Compounding 1 Owned
Verdellino, Italy........................ Size reduction, compounding and distributing 1 2001
Verolanuova, Italy....................... Size reduction, compounding and distributing 2 (4)
Rotterdam, The Netherlands............... European headquarters N/A 2001
's-Gravendeel, The Netherlands........... Size reduction 5 Owned
Auckland, New Zealand.................... Size reduction, compounding and distributing 1 2004
Stenungsund, Sweden...................... Size reduction 1 2007
(1) Three acres are leased on a month-to-month basis; the remaining ten
acres are owned by the Company.
(2) Eighteen acres are owned; the remaining two acres are leased on a
month-to-month basis.
(3) Seventeen acres are owned; ten acres are leased through 2003; remaining
two acres are leased on a month-to-month basis.
(4) The facility is owned with the exception of one building which is
leased through 2000.
The Company's facilities and equipment, owned and leased, are
considered by ICO to be well maintained and adequate for the Company's
operations. The Company also leases various sales and administrative offices
with various lease expiration dates through 2002. Utilization of the Company's
oilfield service facilities is subject to fluctuations based in part on oil and
gas exploration and production levels. The Company is currently operating most
of its facilities, in both the oilfield services and petrochemical processing
businesses, below full capacity. Most facilities are operating no more than one
shift per day and the Company considers its properties to be suitable for its
present needs.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in eight cases involving eight
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. (The cases, all of which are pending in Texas state
courts, were initiated on May 13, 1991; November 21, 1991; August 26, 1992;
August 24, 1994; June 29, 1995; June 29, 1995; August 15, 1995; and July 23,
1997). The Company is generally protected under worker's compensation law from
claims under these suits except to the extent a judgment is awarded against the
Company for intentional tort. The standard of liability applicable to all of the
Company's pending cases is intentional tort, a stricter standard than the gross
negligence standard applicable to wrongful death cases. The Company currently
has no pending cases in which wrongful death is alleged. In fiscal 1993, the
Company settled two other suits, both of which alleged wrongful death caused by
silicosis-related diseases, which resulted in a total charge of $605,000. In
1994, the Company was dismissed without liability from two suits alleging
intentional tort against the Company for silicosis-related disease. In 1996, the
Company obtained a non-suit in two other intentional tort cases and in early
1997 was non-suited in an additional tort case. During the second quarter of
fiscal 1998, three cases involving alleged silicosis-related deaths were
settled. The Company was fully insured for all three cases and, as a result, did
not incur any settlement costs. Also, during the second quarter of fiscal 1998,
the Company was non-suited in one intentional tort case, and during the fourth
quarter of fiscal 1998, the Company was non-suited in two additional tort cases.
The Company and its counsel cannot at this time predict with any reasonable
certainty the outcome of any of the remaining suits or whether or in what
circumstances additional suits may be filed. Except as described below, the
Company does not believe, however, that such suits will have a material adverse
effect on its financial condition, results of operations or cash flows. The
Company has in effect in some instances general liability and employer's
liability insurance policies applicable to the referenced suits; however, the
extent and amount of coverage is limited and the Company has been advised by
certain insurance carriers of a reservation of rights with regard to policy
obligations pertaining to the suits because of various exclusions in the
policies. If an adverse judgment is obtained against the Company in any of the
referenced suits which is ultimately determined not to be covered by insurance,
the amount of such judgment could have a material adverse effect on the
financial condition, results of operations and/or cash flows of the Company.
The Company's agreement with Baker Hughes, Incorporated ("Baker
Hughes"), pursuant to which Baker Hughes Tubular Services ("BHTS") was acquired
by the Company, provides that Baker Hughes will reimburse the Company for 50% of
the BHTS environmental remediation costs in excess of $318,000, with Baker
Hughes' total reimbursement obligation being limited to $2,000,000 (current BHTS
obligation is $1,650,000). BHTS is a responsible party at two hazardous waste
disposal sites that are currently undergoing remediation pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). Under CERCLA, persons who were responsible for generating the
hazardous waste disposed of at a site where hazardous substances are being
released into the environment are jointly and severally liable for the costs of
cleaning up environmental contamination, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injuries and
property damage allegedly caused by hazardous substances released into the
environment. The two sites where BHTS is a responsible party are the French
Limited site northeast of Houston, Texas, and the Sheridan site near Hempstead,
Texas. Remediation of the French Limited site has been completed, with only
natural attenuation of contaminants in groundwater occurring at this time.
Remediation has not yet commenced at the Sheridan site. Current plans for
cleanup of this site, as set forth in the federal Record of Decision, call for
on-site bioremediation of the soils in tanks and natural attenuation of
contaminants in the groundwater. However, treatability studies to evaluate
possible new remedies for the soils, such as in-place bioremediation, are being
conducted as part of a Remedial Technology Review Program. Based on the
completed status of the remediation at the French Limited site and BHTS's
14
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minimal contribution of wastes at both of the sites, the Company believes that
its future liability under the agreement with Baker Hughes with respect to these
two sites will not be material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500,000 for each claim and a maximum contingent liability of $4,500,000 (net
of current accruals) in the aggregate, for all claims.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13 million in
the trial of its case against John Wood Group PLC relating to the 1994 contract
for the purchase of the operating assets of NDT Systems, Inc. and certain
related entities. The court subsequently entered a judgment for $15,750,000 in
the Company's favor, which includes prejudgment interest on the jury award. The
Company may also be entitled to post-judgment interest. The Wood Group is
currently appealing the judgment and has posted a bond for the entire amount of
the judgment. This award has not been reflected in the Company's balance sheet
or operating results. The Company was represented on a contingency fee basis,
and its attorneys will receive a portion of the amount awarded to the Company.
Wedco is a plaintiff and a counterclaim defendant and the Company is a
third party defendant in a lawsuit filed on February 16, 1996 by Wedco against
Polyvector Corporation ("Polyvector"), John Lefas ("Lefas"), the principal
shareholder of Polyvector, and Fred Feder ("Feder"), a former director of Wedco,
which is pending in the federal district court for the District of New Jersey.
Wedco alleges, among other things, that Lefas and Polyvector have breached
certain terms of the shareholders' agreement among Wedco and the defendants and
seeks damages for such breaches. Wedco also alleges, among other things, that
Feder has breached his fiduciary duty to Wedco. WedTech (which had been 50%
owned by each Wedco and Polyvector), Polyvector and Lefas have asserted various
counterclaims and third party claims against the Company allegedly arising out
of the Company's merger with Wedco and the conduct of WedTech's affairs under
the shareholders' agreement. The defendants are seeking, among other things,
reimbursement for alleged damages. On January 16, 1998, Polyvector finalized its
purchase of Wedco's 50% ownership interest in WedTech for CDN $20.8 million.
Discovery is scheduled to end in the New Jersey action in early March, 1999, and
a jury trial is expected in late spring, 1999. The outcome of this litigation
cannot be predicted, but the Company believes it has meritorious defenses to the
counterclaims and third party claims. A proceeding initiated on June 25, 1998
has been brought in the Ontario Court (General Division) by WedTech Inc. and
Polyvector against the Company and others for damages and other relief. The
proceeding is at a very early stage, but it would appear that the factual
complaints raised in the Canadian litigation duplicate the claims raised in the
New Jersey litigation. It is the intention of the Company to seek an order
staying the Canadian litigation.
Permian Enterprises, Inc. ("Permian"), a wholly-owned subsidiary of the
Company, was a defendant in a case filed on June 16, 1995 by Tidelands Oil
Production Company ("Tidelands") in the Superior Court of Los Angeles,
California (Long Beach division) which alleged that Permian was liable for
damages exceeding $1.1 million, plus interest, and other costs, suffered by
Tidelands and third parties resulting from the failure of an elbow fitting
allegedly lined by Permian. On September 24, 1998, following a jury trial on all
issues, the court entered a judgment in favor of Permian. The time period for
Tidelands to file a notice of intent to appeal has lapsed. Thus, the judgment in
favor of Permian is now final and this matter is at a conclusion. The Company is
seeking reimbursement for certain of its fees and expenses related to this
litigation.
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ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made with the
International Court of Arbitration of the International Chamber of Commerce on
August 7, 1998, by Oil Country Tubular Limited ("OCTL"), a company based in
India. OCTL alleges that its claim, which it has brought in the Court of
Arbitration of the International Chamber of Commerce, arises in connection with
a Foreign Collaboration Agreement entered into between it and BHTS, whose name
was changed to ICO Tubular Services, Inc. after acquisition by the Company in
1992. OCTL claims, among other items, that it did not receive technical
assistance, spare parts, and certain raw materials necessary for its oilfield
tubular services plant in India. OCTL seeks damages in excess of $96 million,
calculated in part based on lost profit projections over a number of years, from
ICO Tubular Services, Inc. and its co- respondent, Baker Hughes Incorporated.
The Company had only peripheral knowledge of the dispute between OCTL and Baker
Hughes Incorporated prior to the filing of OCTL's claim. The arbitration
proceeding, which is being conducted in London, England, is at an early stage,
with answers to OCTL's claim having been filed in November 1998. While the
outcome of this arbitration matter cannot be predicted, the Company plans to
contest the claims vigorously.
The Company is also named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the NASDAQ Stock Market under the
symbol ICOC. There were approximately 940 shareholders of record of the
Company's common stock at December 18, 1998.
During fiscal year 1997, the Company declared and paid a common dividend of
$.05 the first quarter and $.055 for the remaining three quarters for a total of
$.215 per share during the year. During fiscal year 1998, the Company declared
and paid common dividends of $.055 per share, per quarter for a total of $.22
per share during the year. During the first quarter of fiscal year 1999, the
Company declared a $.055 per common share dividend.
The Company's agreement relating to the Senior Notes due 2007 restricts the
Company's ability to pay dividends on preferred and common stock. The terms of
the Senior Notes, however, do allow for dividend payments on currently
outstanding preferred stock, in accordance with the terms of the preferred
stock, and up to $.22 per share, per annum on common stock, in the absence of
any default or event of default on the Senior Notes. The above limitations may
not be decreased, but may be increased based upon the Company's results of
operations and other factors (see Note 7 to the Company's Consolidated Financial
Statements).
The following table sets forth the high and low sales prices for the common
stock as reported on the NASDAQ Stock Market.
HIGH LOW
---- ---
1997 First Quarter 6 7/8 5 7/8
Second Quarter 6 9/16 5 7/16
Third Quarter 5 15/16 4 5/8
Fourth Quarter 7 13/16 4 15/16
1998 First Quarter 8 3/16 5 15/16
Second Quarter 6 1/8 4 9/16
Third Quarter 5 1/8 3 15/16
Fourth Quarter 4 7/16 2 5/16
During fiscal 1998, the Company issued the following unregistered common
shares which were exempt pursuant to Section 4(2) of the Securities Act of 1933:
Number of Shares
Date of Common Stock Transaction
---- --------------- -----------
October 27, 1997 180,000 Issued upon exercise of Series A Warrants
March 12, 1998 114,917 Issued in exchange for $562,000 of debt
which was payable upon demand
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ITEM 6. SELECTED FINANCIAL DATA (1)
The following table sets forth selected financial data of the Company which
has been derived from consolidated financial statements that have been audited
by PRICEWATERHOUSECOOPERS LLP, independent accountants. The selected financial
data should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto, included elsewhere in this report.
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ----------- ----------
(In thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Net revenues ................................................ $ 281,343 $ 198,042 $ 108,350 $ 87,887 $ 75,970
Cost of sales and services .................................. 211,856 141,302 74,704 59,989 54,191
------------ ------------ ------------ ----------- ----------
Gross profit ................................................ 69,487 56,740 33,646 27,898 21,779
Selling, general and administrative expenses ................ 45,022 31,981 21,108 17,736 15,202
Depreciation and amortization ............................... 15,389 11,349 7,230 5,112 4,357
Impairment of long-term assets .............................. -- -- 5,025 -- --
Non-recurring compensation arrangements ..................... -- -- 1,812 -- --
Writedown of inventories .................................... -- -- 868 -- --
------------ ------------ ------------ ----------- ----------
Operating income (loss) ..................................... 9,076 13,410 (2,397) 5,050 2,220
Interest income ............................................. 3,771 2,001 1,277 1,424 902
Interest expense ............................................ 13,819 5,765 669 117 471
Gain on sale of equity investment ........................... 11,773 -- -- -- --
Other income (expense) ...................................... (20) 602 97 -- --
------------ ------------ ------------ ----------- ----------
Income (loss) before income taxes and extraordinary item .... 10,781 10,248 (1,692) 6,357 2,651
Income taxes (benefit) ...................................... 4,775 4,150 (632) 567 55
Extraordinary item -- loss on repayment of debt ............. -- -- -- -- 1,371
------------ ------------ ------------ ----------- ----------
Net income (loss) ........................................... 6,006 6,098 (1,060) 5,790 1,225
Preferred dividends ......................................... 2,176 2,176 2,178 2,176 1,826
------------ ------------ ------------ ----------- ----------
Net income (loss) available for Common Shareholders ......... $ 3,830 $ 3,922 $ (3,238) $ 3,614 $ (601)
============ ============ ============ =========== ==========
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share before
extraordinary item ........................................ $ .18 $ .19 $ (.24) $ .41 $ .09
Basic earnings (loss) per share ............................. $ .18 $ .19 $ (.24) $ .41 $ (.07)
Diluted earnings (loss) per share before
extraordinary item ........................................ $ .17 $ .19 $ (.24) $ .41 $ .09
Diluted earnings (loss) per share ........................... $ .17 $ .19 $ (.24) $ .41 $ (.07)
Cash dividends declared on Common Stock ..................... $ .22 $ .22 $ .20 -- --
Weighted average shares outstanding (basic) ................. 21,877,000 20,918,000 13,328,000 8,709,000 8,300,000
Weighted average shares outstanding (diluted) ............... 22,004,000 21,144,000 13,493,000 8,770,000 8,576,000
OTHER FINANCIAL DATA:
EBITDA(2) ................................................... $ 24,465 $ 24,759 $ 12,538 $ 10,162 $ 6,577
Ratio of EBITDA to interest expense(3) ...................... 1.8x 4.3x 18.7x 86.9x 14.0x
Ratio of EBITDA to interest expense net of
interest income(3)(5) ..................................... 2.4x 6.6x -- -- --
Capital expenditures(4) ..................................... 26,143 15,747 8,712 5,838 4,782
Common stock dividends ...................................... 4,823 4,559 2,830 -- --
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AS OF SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
BALANCE SHEET DATA:
Cash and equivalents ............................. $ 51,135 $ 83,892 $ 13,414 $ 24,991 $ 24,763
Working capital .................................. 89,220 110,289 29,882 37,284 37,656
Property, plant & equipment, net ................. 117,299 97,779 72,585 29,824 27,513
Total assets ..................................... 328,677 321,753 162,172 88,183 78,969
Long-term debt, net of current portion ........... 132,631 133,034 15,422 1,047 456
Shareholders' equity ............................. 128,316 127,138 120,594 74,471 69,204
(1) The Statement of Operations, Balance Sheet and Other Financial Data
include the results of operations and financial position of the Company
and each of the companies acquired since their respective dates of
acquisition. See discussion of fiscal year acquisitions in Item 1.
(2) "EBITDA" equals gross profit less selling, general and administrative
expenses and should not be considered as an alternative to net income
or any other generally accepted accounting principles measure of
performance as an indicator of the Company's operating performance or
as a measure of liquidity. The Company believes EBITDA is a widely
accepted financial indicator of a company's ability to service debt.
Because EBITDA excludes some, but not all items that affect net income,
such measure varies among companies and may not be comparable to EBITDA
as used by other companies.
(3) Ratios of EBITDA to interest expense and interest expense net of
interest income represent ratios which provide investors with
information as to the Company's current ability to meet its interest
costs.
(4) Consists of cash used for capital expenditures, excluding property,
plant and equipment obtained in acquisitions.
(5) The ratio has not been presented for 1996, 1995 and 1994 as the
Company incurred net interest income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's net revenues in recent years have increased due to a
variety of factors, including acquisitions and, in many cases, increased sales
volumes in both existing and acquired business lines.
The Company's revenue is classified within two operating segments:
oilfield services and petrochemical processing. Oilfield services revenues
include revenues derived from (i) exploration sales and services (new tubular
goods inspection), (ii) production sales and services (reclamation,
reconditioning and inspection of used tubular goods and sucker rods), (iii)
corrosion control services (coating of tubular goods and sucker rods), and (iv)
other sales and services (oilfield engine sales and services in Canada).
Petrochemical processing revenues include revenues derived from (i) grinding
petrochemicals into powders (size reduction), including other ancillary services
and the sale of grinding equipment manufactured by the Company, (ii) compounding
sales and services, which includes the manufacture and sale of concentrates, and
(iii) distributing plastic powders. Distribution revenues include the operating
results of the ICO Polymers companies and the distribution operations of Rotec
and Verplast, all of which are wholly-owned subsidiaries of the Company and
operate in Europe. Distribution revenues also include a majority of the revenues
generated by J.R. Courtenay (NZ) Ltd. which operates in New Zealand and
Australia and a small portion of the revenues generated by Wedco in the United
States. The Company's distribution operations utilize the Company's size
reduction and compounding facilities to process petrochemical products prior to
sale. Service revenues in both of the Company's business segments are recorded
as the services are performed or, in the case of product sales, upon shipment to
third parties.
Many of the petrochemical acquisitions since fiscal 1996, particularly
the acquisition of Bayshore in December 1996, and the expansion of the Company's
distribution business within the petrochemical processing segment, had the
effect of reducing overall petrochemical processing margins as a percentage of
revenues. The gross margin percentages for the distribution business and
Bayshore's business are, generally, significantly lower than those generated by
the Company's size reduction services. Bayshore and several of the acquired
companies, as well as the Company's distribution operations, typically buy raw
materials, improve the material and then sell the finished product. The
distribution operations utilize the Company's processing facilities to improve
the raw materials. In contrast, many of the Company's size reduction operations
typically involve processing customer- owned material (referred to as "toll"
processing).
Cost of sales and services is primarily comprised of compensation and
benefits to non-administrative employees, occupancy costs, repair and
maintenance, electricity and equipment costs and supplies, and, in the case of
Bayshore and the Company's distribution business, purchased raw materials.
Selling, general and administrative expenses consist primarily of compensation
and related benefits to the sales and marketing, executive management,
accounting, human resources and other administrative employees of the Company,
other sales and marketing expenses, communications costs, systems costs,
insurance costs and legal and accounting professional fees.
The demand for the Company's oilfield products services is dependent
upon oil and natural gas prices and the level of oil and natural gas production
and exploration activity. In addition to changes in commodity prices,
exploration and production activities are affected by worldwide economic
conditions, supply and demand for oil and natural gas, seasonal trends and the
political stability of oil-producing countries. The oil and gas industry has
been very volatile over the past several years, due in large part to the
volatility of oil and natural gas prices. During fiscal 1996 and 1997, the oil
and gas service industry generally experienced increased demand and improved
product and service pricing as a result of improved commodity prices and greater
levels of oil
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and gas exploration and production activity, due in large part, to a strong
world economy. In fiscal 1998 oil prices declined significantly versus fiscal
1997 levels. Gas prices declined to a lesser extent during the period. Among
other reasons, these trends have been attributed to an excess worldwide oil
supply, lower domestic energy demand due to an unseasonably warm winter and
declining demand due to the economic downturn in Southeast Asia. As oil and, to
a lesser extent, natural gas prices have declined, demand for oilfield products
and services, including those provided by the Company, has softened. A
significant decline in oil and, to a lesser extent, gas prices has occurred
since the end of fiscal 1998, which has increased these effects. If the current
low level of oil and gas prices persists, the Company's oilfield service
revenues and income can be expected to be adversely impacted. Although the
Company is optimistic that market conditions will improve long-term, the timing
of such a recovery cannot be predicted with certainty.
LIQUIDITY AND CAPITAL RESOURCES
The following are considered by management as key measures of liquidity
applicable to the Company:
1998 1997
-------------- -------------
Cash and cash equivalents $ 51,135,000 $ 83,892,000
Working capital 89,220,000 110,289,000
Current ratio 2.6 3.1
Debt-to-capitalization .53 to 1 .53 to 1
Year Ended September 30, 1998 compared to Year Ended September 30, 1997
Cash and cash equivalents decreased $32,757,000 during fiscal year 1998
due to the factors described below.
The Company's working capital decreased during fiscal year 1998 from
$110,289,000 at September 30, 1997 to $89,220,000 at September 30, 1998 as a
result of the factors described below.
For the fiscal year 1998, cash provided by operating activities
decreased to $181,000 compared to $13,805,000 for the year ended September 30,
1997. Despite comparable net income and increased depreciation and amortization
expenses, the decrease was primarily due to the gain on sale of the WedTech
equity investment (classified as an investing activity) and various changes in
working capital accounts (particularly changes in accounts receivable and
inventory).
Capital expenditures totaled $26,143,000 during fiscal 1998, of which
$7,752,000 related to the oilfield services segment and $18,018,000 related to
the petrochemical processing segment. The remaining $373,000 were general
corporate expenditures. Specifically, $4,214,000 of the expenditures incurred
during fiscal year 1998 were used to expand the Company's LaPorte, Texas
compounding facility which was completed in May 1998. Most of the capital
expenditures made during fiscal year 1998 were intended to expand or increase
the efficiency of the Company's existing base of operations, as opposed to
maintaining current operating facilities. The Company anticipates that fiscal
1999 capital expenditures will be significantly lower than fiscal 1998
expenditures. Fiscal 1999 capital expenditure requirements are expected to be
financed using existing cash and/or funds available under domestic and foreign
credit facilities. Also, see Item 7 - "Year 2000 Issue".
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24
Cash flows provided by (used for) financing activities declined to
$(4,992,000) during fiscal year 1998 compared to $100,909,000 during fiscal
1997. The decline was primarily due to the issuance in June 1997 of the
$120,000,000 10 3/8% Senior Notes. The debt matures June 1, 2007, without prior
principle amortization, and interest is payable on June 1 and December 1 of each
year beginning December 1, 1997.
During fiscal years 1995 through 1998, the Company acquired fifteen
businesses. During fiscal 1998, the Company used $17,492,000 of cash to acquire
three businesses. These 15 acquisitions were made primarily using available
cash, the issuance of the Company's Common Stock and the assumption of
outstanding debt of the acquired business. The Company anticipates it will
continue to seek acquisitions in the future.
As of November 30, 1998, the Company had approximately $24,000,000 of
additional borrowing capacity available under various credit arrangements.
$15,000,000 is available under the Company's domestic credit facility and the
remaining amount is available under various foreign facilities. Currently, the
Company has no outstanding indebtedness under the domestic credit facility.
The terms of the Company's domestic credit facility and the Senior
Notes limit the amount of liens and additional indebtedness incurred by the
Company. The domestic credit facility is secured by certain receivables and
inventories and requires maintenance of certain financial ratios including
minimum tangible net worth, profitability and maximum total debt to
capitalization. The Company's foreign facilities are generally secured by
various Company-owned assets and also carry various financial covenants.
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RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
(IN THOUSANDS)
% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
--------- ----- -------- ----- -------- -----
NET REVENUES
Exploration sales and services........... $ 39,781 38 $ 37,557 38 $ 34,588 39
Production sales and services............ 35,810 35 33,136 34 31,130 35
Corrosion control services............... 24,985 24 23,210 24 21,589 24
Other sales and services................. 3,535 3 4,121 4 1,748 2
--------- ----- -------- ----- -------- -----
Total oilfield sales and services revenues 104,111 100 98,024 100 89,055 100
--------- -------- --------
Size reduction services and other sales and services 52,515 29 46,011 46 17,589 91
Compounding sales and services........... 52,666 30 36,566 37 1,706 9
Distribution of material................. 72,051 41 17,441 17 -- --
--------- ----- -------- ----- -------- -----
Total petrochemical processing........... 177,232 100 100,018 100 19,295 100
--------- -------- --------
Total............................... $ 281,343 $198,042 $108,350
========= ======== ========
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
(IN THOUSANDS)
% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
--------- ----- -------- ----- -------- -----
OPERATING INCOME (LOSS)
Oilfield sales and services.............. $ 13,025 55 $ 14,447 64 $ 11,562 154
Petrochemical processing sales and services 10,526 45 8,180 36 (4,068) (54)
--------- ---- -------- ---- -------- ----
Total operations......................... 23,551 100 22,627 100 7,494 100
General corporate expenses............... (14,475) (9,217) (9,891)
--------- -------- --------
Total............................... $ 9,076 $ 13,410 $ (2,397)
========= ======== ========
- ---------------------------
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues. Consolidated revenues increased $83,301,000 (42%) during
fiscal 1998 compared to fiscal 1997. The revenue growth resulted primarily from
the business acquisitions made by the Company during fiscal 1997 and 1998 and,
to a lesser extent, internal growth within both of the Company's business
segments.
Oilfield service revenues increased $6,087,000 or 6% to $104,111,000
during fiscal 1998. The revenue growth was driven primarily by the fiscal 1998
oilfield service acquisitions and the increased demand for the Company's
services during the first half of fiscal 1998. During the third quarter, the
revenue growth rate declined, and revenues contracted during the fourth quarter
of fiscal 1998, compared to fiscal 1997. Exploration services revenues increased
$2,224,000 or 6% during fiscal 1998 compared to fiscal 1997, primarily a result
of the effects of an acquisition. The Company's Exploration services are driven,
in large part, by the domestic rig count which declined significantly over the
course of fiscal 1998; however, the average fiscal 1998 domestic rig count was
down only slightly versus the fiscal 1997 average. Exploration service revenues
were consistent with the change of the average rig count, down less than 0.5%,
absent the effect of an acquisition. Production service revenues increased
$2,674,000 (8%) during fiscal 1998 compared to 1997, mostly due to an
acquisition, rather than internal growth. Production service revenues are driven
by the level of production activity, which in turn, is dependent upon oil and
gas prices and the level of rig workover activity. During fiscal 1998, average
oil and gas prices and the workover rig count were down compared to fiscal 1997.
Despite this fact, production service
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26
revenues increased modestly during fiscal 1998, excluding the effect of the
Curley's acquisition. Corrosion control revenues improved $1,775,000 (8%) during
1998 compared to fiscal 1997. This revenue growth resulted from relatively
strong Gulf of Mexico activity compared to other oil and gas production and
exploration geographical areas. Other oilfield sales and services consist of the
Company's Canadian oilfield engine sales and reconditioning business. These
revenues declined primarily as a result of declining oil prices during fiscal
1998 compared to fiscal 1997.
Petrochemical processing revenues increased $77,214,000 or 77% during
fiscal 1998 compared to fiscal 1997. Of this growth, 85% resulted from the
fiscal 1998 and 1997 acquisitions, all of which were accounted for using the
purchase method of accounting. Under the purchase method of accounting, the
results of each acquired entity is included in the Company's consolidated
results only from the date of the acquisition forward. Size reduction services
and other sales and services revenues improved to $52,515,000 during fiscal 1998
compared to $46,011,000 during fiscal 1997, representing an increase of
$6,504,000 (14%). In addition to the effect of the business acquisitions, these
revenues increased due to internal growth in the Company's domestic and European
operations. Compounding sales and services revenues increased $16,100,000 or 44%
almost entirely due to the fiscal 1997 and 1998 acquisitions, particularly the
acquisition of Bayshore. Distribution revenues rose $54,610,000 or 313%,
primarily due to the acquisitions and the growth of the Company's European
distribution operations. Worldwide revenues of one petrochemical processing
customer comprised approximately 10% of the Company's consolidated revenues.
Costs and Expenses. Gross margins (calculated as total revenues minus
total costs of sales and services), as a percentage of revenues in fiscal 1998
declined to 24.7% compared to 28.7% in fiscal 1997. The declines resulted
primarily from the revenue growth in the petrochemical business segment and,
particularly in the distribution business, which, in the aggregate, generates
lower gross margins as a percentage of revenues. Within the Company's oilfield
service business, gross margins as a percentage of revenues declined
approximately 1% to 30.1%. The decline resulted primarily from a change in the
relative mixture of various product sales and service revenues rather than a
significant change in average prices. Petrochemical processing gross margins
declined from 26.5%, of revenues in fiscal 1997 to 21.5% in fiscal 1998. The
decline is primarily due to the significant increases in lower margin
compounding and distribution revenues as a percentage of total petrochemical
processing revenues in fiscal 1998 compared to fiscal 1997. Generally, gross
margins as a percentage of revenues of the Company's size reduction operations,
performed on a toll basis, are higher than the gross margins of the oilfield
service operations. Conversely, the gross margins of the Company's concentrate
and ground petrochemical powder manufacturing and distribution businesses are
generally lower than oilfield service gross margins, as a percentage of
revenues, due to the higher raw material cost component included in these
revenues.
Selling, general and administrative expenses increased $13,041,000
(41%) from $31,981,000 during fiscal 1997 to $45,022,000 during fiscal 1998. The
increase resulted from the timing of the fiscal 1998 and 1997 acquisitions, and
an increase in corporate administration and oilfield service expenses. Corporate
expenses rose primarily due to an increase in legal and bonus expenses. A
majority of fiscal 1998 legal expenses related to legal matters discussed in
Item 3 - "Legal Proceedings" included in this Form 10-K. Two of the legal
matters, which comprised a significant portion of fiscal 1998 legal expenses,
have been concluded favorably. The bonus expense increase was due to bonuses of
$1,300,000 paid by the Company to over 300 employees during the first quarter of
fiscal 1998 and was classified as a general corporate expense. During the fourth
quarter of fiscal 1998, the Company began to reduce oilfield service selling,
general and administrative expenses based upon the reduced levels of activity in
this business and has continued to reduce such expenses. As a percentage of
revenues, selling, general and administrative expenses decreased slightly from
16.1% in fiscal 1997 to 16.0% in fiscal 1998. The change was primarily the
result of the increases in expenses, described above, offset by the
24
27
effect of increased distribution and compounding revenues. Generally, the
Company's distribution and compounding operations incur lower selling, general
and administrative expenses, as a percentage of revenues, than the Company's
other sales and services.
Depreciation and amortization expense increased from $11,349,000 in
fiscal 1997 to $15,389,000 in fiscal 1998. The increase resulted from additions
of property, plant and equipment and goodwill primarily due to the acquisitions
made during fiscal 1998 and the timing of 1997 acquisitions, as well as
increased amortization of debt issuance costs related to the June 1997 Senior
Notes placement.
Operating Income. Operating income declined from $13,410,000 for fiscal
1997 to $9,076,000 for fiscal 1998. The decrease was due to the changes in
revenues and costs and expenses discussed above.
Gain on Sale of Equity Investment. During the first quarter of fiscal
1998, the Company recognized a pre-tax gain of $11,773,000 on the sale of the
Company's 50% equity ownership in WedTech Inc. The Company received cash of
$14,484,000 and recorded an after-tax gain of $6,799,000 on the sale.
Interest Income/Expense. Net interest expense was $10,048,000 during
fiscal 1998. For fiscal 1997, the Company incurred net interest expense of
$3,764,000. This change was primarily the result of the June 1997 issuance of
$120,000,000 10 3/8% Senior Notes and, to a lesser extent, debt assumed in
connection with the fiscal 1998 and 1997 acquisitions.
Income Taxes. The Company's effective income tax rate increased to 44%
during fiscal 1998, compared to 41% during fiscal 1997. The increase was
primarily the result of the sale of the Company's equity investment in WedTech
which created tax expense equal to 43% of the pre-tax gain, an increase in
permanent book to tax differences relative to pre-tax income, offset by the
effect of a decline in the Company's Italian operations' income tax rates. As
non-deductible goodwill amortization continues to increase, due to future
acquisitions, the Company would anticipate that future effective tax rates,
likewise, would increase. Additionally, the Company's overall tax rate varies
depending upon the mixture of pre-tax income generated by the Company's
operations in various taxing jurisdictions. See Note 17 - "Segment and Foreign
Operations Information" to the Company's Consolidated Financial Statements.
The Company has, for tax return purposes, $5,387,000 in net operating
loss carryforwards, which expire between 2000 and 2008, and $965,000 in
investment, alternative minimum and other tax credit carryforwards. All of the
tax credits are expected to expire unused, except for $248,000 in alternative
minimum tax credits, which have no expiration.
Net Income. For fiscal 1998, the Company had net income of $6,006,000,
as compared to net income of $6,098,000 for fiscal 1997, due to the factors
described above.
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28
Foreign Currency Translation. The fluctuations of the U.S. dollar
against the Dutch guilder, Swedish krona, British pound, Italian lira, Canadian
dollar, and the French franc have impacted the translation of revenues and
income of the Company's European petrochemical processing operations and
Canadian oilfield services operations over the past two years. The table below
summarizes the impact of the above currencies during the twelve months ended
September 30, 1998 compared to the exchange rates used to translate the twelve
months ended September 30, 1997.
Net revenues $(1,401,000)
Operating income (133,000)
Pre-tax income (120,000)
Net income (52,000)
Gains and losses from the translation of certain balance sheet accounts
are not included in determining net income, but are accumulated as a separate
component of shareholders' equity. As a result of the dollar's fluctuation
against applicable foreign currencies, shareholders' equity increased by $63,000
during fiscal 1998.
During April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that companies expense as incurred costs of
start-up activities and organization costs. The Company is required to adopt SOP
98-5 in its financial statements for the fiscal year ending September 30, 2000.
Upon adoption, the Company will be required to expense approximately $460,000 of
organization costs and will account for the adoption of SOP 98-5 as the
cumulative effect of an accounting change under APB Opinion No. 20, "Accounting
Changes."
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues. Consolidated revenues increased $89,692,000 or 83% during
fiscal 1997 compared to fiscal 1996. This increase resulted from an increase in
both oilfield services revenues and petrochemical processing revenues.
Oilfield service revenues increased $8,969,000 or 10.1% during fiscal
1997 versus 1996. Revenues improved within all oilfield service business lines
and such growth, rather than being due to acquisitions, was primarily driven
internally. As a result of an increasing domestic rig count which increased
demand for the Company's services, exploration sales and services revenues
increased $2,969,000 or 8.6% in fiscal 1997 compared to 1996. A majority of this
increase resulted from an increase in revenues for the Company's Houston, Texas
facility, which benefitted from increased drilling activity in the Gulf of
Mexico. Production sales and services revenues increased $2,006,000, or 6.4%,
driven by modestly higher average oil and gas prices in fiscal 1997 versus 1996.
Much of these revenue gains were due to increased demand for the Company's
services in the West Texas and Canadian markets. Corrosion control sales and
services revenues increased $1,621,000 or 7.5% in fiscal 1997 compared to 1996.
This improvement resulted from increased drilling activity, the success of the
Company's new product lines and, to a lesser extent, higher average sales
prices. Other sales and services consisted of revenues generated by the
Company's Canadian subsidiary, Shearer, relating to the reconditioning and
selling of engines used in connection with oil well pumping equipment.
Petrochemical processing sales and services revenues increased
$80,723,000 or 418% in fiscal 1997 compared to 1996. This increase was almost
entirely due to the timing of the fiscal 1996 and 1997 petrochemical processing
acquisitions. Since all of these acquisitions were accounted for using the
purchase method of accounting, the Company included, in its consolidated
statement of operations the acquired companies' results of operations only from
the date of acquisition. During the year ended September 30, 1997,
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29
sales to a single customer within the petrochemical processing segment accounted
for approximately 8% of the Company's consolidated revenues.
Costs and Expenses. Gross profit (calculated as total revenues minus
total costs of sales and services), as a percentage of revenues in fiscal 1997
declined to 28.7% from 31.1% in 1996. Within the oilfield service business,
gross profits as a percentage of revenues improved 1.2% due to increased sales
volumes (which resulted in increased utilization of operating facilities) and,
to a lesser extent, modest average price improvements within some of the
Company's oilfield services markets, without a proportionate increase in costs
and expenses. The overall decline in gross profits, as a percentage of revenues,
in fiscal 1997 as compared to 1996 was attributable to the increase in
compounding sales and distribution of material revenues which generate lower
gross profits as a percentage of revenues. Generally, gross profits as a
percentage of revenues are higher within the Company's size reduction
operations, which are typically performed on a toll basis, as compared to the
Company's oilfield service operations. Conversely, the gross profits as a
percentage of sales of the Company's concentrate manufacturing (included in
compounding sales and services revenues) and distribution of material revenues
tend to be significantly lower, due to the significant raw material cost
component included in these revenues.
Selling, general and administrative costs increased $10,873,000, from
$21,108,000 in fiscal 1996 to $31,981,000 in fiscal 1997. The increase was due
to the timing of the fiscal 1996 and 1997 acquisitions and to a lesser extent,
higher legal expenses and higher corporate administrative expenses, offset by
lower bonus expenses and lower litigation settlement charges. Also, fiscal 1997
selling, general and administrative expenses included capital-based state
franchise taxes which were not included in fiscal 1996. Selling, general and
administrative costs as a percentage of revenues improved to 16.1% in fiscal
1997 compared to 19.5% in fiscal 1996. This decrease was also the result of the
fiscal 1996 and 1997 acquisitions and the increase in distribution revenues
resulting from the establishment of the ICO Polymers companies in Europe. These
factors have resulted in the Company's corporate expenses being spread across a
greater revenue base.
Depreciation and amortization expense increased to $11,349,000 in
fiscal 1997 from $7,230,000 in fiscal 1996. The increase resulted from additions
of property, plant and equipment and goodwill due primarily to the acquisitions
made during fiscal 1996 and 1997.
Operating Income. Operating income improved to $13,410,000 in fiscal
1997 from an operating loss of $2,397,000 in fiscal 1996. Oilfield services
operating income increased $2,885,000 or 25.0% in fiscal 1997 compared to fiscal
1996. Improvement within the oilfield service business was driven by the
increase in revenues and gross profit margins and the $868,000 charge for
inventory writedowns in fiscal 1996. A similar inventory charge was not required
in fiscal 1997. Petrochemical processing sales and services operating income
improved to $8,180,000 in fiscal 1997 from a loss of $4,068,000 in 1996. This
increase in petrochemical processing operating income resulted from the timing
of the fiscal 1996 and 1997 petrochemical processing acquisitions, the 1996
charges relating to SFAS 121 impairment ($5,025,000) and non-recurring
compensation arrangements ($1,567,000) which were unnecessary in fiscal 1997.
General corporate expenses declined from $9,891,000 in fiscal 1996 to
$9,217,000 in fiscal 1997. The decline resulted primarily from non-recurring and
other litigation charges ($1,572,000) and non-recurring compensation
arrangements ($245,000) in fiscal 1996, neither of which was required in fiscal
1997. Additionally, legal expenses and corporate administrative expenses were
higher and bonus expenses were lower in fiscal 1997 compared to fiscal 1996.
Interest Income/Expense. Net interest expense was $3,764,000 in fiscal
1997 compared to net interest income of $608,000 in fiscal 1996. The change was
due to the issuance of the $120,000,000 Senior Notes, the
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30
utilization of cash balances and the assumption of debt in connection with the
fiscal 1996 and 1997 acquisitions.
Income Taxes. The Company's effective tax rate increased to 40.5%
during fiscal 1997 compared to 37.4% in fiscal 1996. This change was the result
of an increase in non-deductible goodwill amortization which, unlike fiscal
1996, was not offset by a reversal of the Company's valuation allowance against
net deferred tax assets. The Company's effective tax rate also varied as a
result of the mixture of domestic and foreign pre-tax income since, during
fiscal 1997, the Company's domestic effective tax rate is higher than the
average effective tax rate of foreign operations.
Foreign Currency Translation. The fluctuations of the U.S. dollar
against the Dutch guilder, Swedish krona, British pound, Italian lira, Canadian
dollar, and the French franc have impacted the translation of revenues and
income of the Company's European petrochemical processing operations and
Canadian oilfield services operations over the past two years. The table below
summarizes the impact of the above currencies during the twelve months ended
September 30, 1997 compared to the exchange rates used to translate the five
months ended September 30, 1996.
Net revenues (1,113,000)
Operating income (141,000)
Pre-tax income (128,000)
Net income (88,000)
Gains and losses from the translation of certain balance sheet accounts
are not included in determining net income, but are accumulated as a separate
component of shareholders' equity. As a result of the dollar's fluctuation
against applicable foreign currencies, shareholders' equity decreased by
$1,985,000 in fiscal 1997.
Seasonality. The oilfield services business is substantially seasonal,
reflecting the pattern of oil field drilling and workovers, with the first and
fourth quarters of the fiscal years having generally higher levels of activity.
Seasonal trends, however, may be masked by other market forces such as a decline
in oil and gas prices.
YEAR 2000 ISSUE
The Securities and Exchange Commission has published guidance regarding
the effect of "Year 2000" issues on companies. The Year 2000 problem arose
because some computer programs use only the last two digits of a year as a
reference date, causing the program to improperly recognize a year that does not
begin with "19".
The Company has been working toward Year 2000 readiness since 1997 and
is proceeding on schedule. Completion of the project is scheduled for the fourth
fiscal quarter of 1999. To improve access to business information through
common, integrated computing systems within business operations, the Company has
begun a business systems replacement project. The new systems ("Business
Replacement Systems"), which are expected to make the Company's business
computer systems Year 2000 compliant, are scheduled for completion by September
1999. Implementation of these programs is approximately 40 percent complete. The
Company has developed a contingency plan to make the programs that are scheduled
to be replaced by these systems Year 2000 compliant. A decision to implement the
contingency plan will be made by the end of the fourth fiscal quarter of 1999.
Remaining business software programs, including those supplied by vendors, are
expected to be made Year 2000 compliant