UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
|
|
|
For the quarterly period ended April 30, 2005 |
|
|
|
OR |
|
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the transition period from to
Commission file number 1-7427
Veritas DGC Inc.
(Exact name of registrant as specified in its charter)
Delaware |
|
76-0343152 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
10300 Town Park |
|
77072 |
(Address of principal executive offices) |
|
(Zip Code) |
(832) 351-8300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No ý
Indicate by check mark whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes ý No o
The number of shares of the Companys common stock, $.01 par value, outstanding at May 31, 2005 was 33,849,816 (including 155,370 Veritas Energy Services Inc. exchangeable shares which are identical to the companys common stock in all material respects).
TABLE OF CONTENTS
FORM 10-Q
|
|
|
||
|
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
Restated |
|
2005 |
|
Restated |
|
||||
|
|
(In thousands, except per share amounts) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
$ |
175,510 |
|
$ |
180,714 |
|
$ |
497,319 |
|
$ |
428,177 |
|
Cost of services |
|
132,957 |
|
147,911 |
|
393,898 |
|
376,625 |
|
||||
Research and development |
|
4,676 |
|
4,118 |
|
13,790 |
|
11,258 |
|
||||
General and administrative |
|
8,632 |
|
7,240 |
|
23,597 |
|
19,823 |
|
||||
Operating income |
|
29,245 |
|
21,445 |
|
66,034 |
|
20,471 |
|
||||
Interest expense |
|
1,140 |
|
8,874 |
|
2,803 |
|
17,350 |
|
||||
Other (income), net |
|
(2,454 |
) |
(562 |
) |
(4,043 |
) |
(1,067 |
) |
||||
Income before provision for income taxes |
|
30,559 |
|
13,133 |
|
67,274 |
|
4,188 |
|
||||
Provision for income taxes |
|
12,152 |
|
3,069 |
|
30,521 |
|
7,515 |
|
||||
Net income (loss) |
|
$ |
18,407 |
|
$ |
10,064 |
|
$ |
36,753 |
|
$ |
(3,327 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
Basic: |
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per common share |
|
$ |
.54 |
|
$ |
.30 |
|
$ |
1.09 |
|
$ |
(.10 |
) |
Weighted average common shares (including exchangeable shares) |
|
33,792 |
|
33,455 |
|
33,775 |
|
33,598 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted: |
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per common share |
|
.52 |
|
$ |
.29 |
|
$ |
1.05 |
|
$ |
(.10 |
) |
|
Weighted average common shares (including exchangeable shares) |
|
35,131 |
|
34,601 |
|
34,970 |
|
33,598 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
18,407 |
|
$ |
10,064 |
|
$ |
36,753 |
|
$ |
(3,327 |
) |
Other comprehensive income (loss) (net of tax, $0 in all periods): |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
(889 |
) |
(3,654 |
) |
5,699 |
|
2,373 |
|
||||
Other unrealized gain (loss) |
|
(342 |
) |
19 |
|
(116 |
) |
(585 |
) |
||||
Total other comprehensive income (loss) |
|
(1,231 |
) |
(3,635 |
) |
5,583 |
|
1,788 |
|
||||
Comprehensive income (loss) |
|
$ |
17,176 |
|
$ |
6,429 |
|
$ |
42,336 |
|
$ |
(1,539 |
) |
See Notes to Consolidated Financial Statements
1
VERITAS DGC INC. AND SUBSIDIARIES
(Dollars in thousands, except par value)
(Unaudited)
|
|
April 30, |
|
July 31, |
|
||
|
|
|
|
|
|
||
ASSETS |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
238,453 |
|
$ |
116,299 |
|
Restricted cash investments |
|
236 |
|
111 |
|
||
Accounts and notes receivable (net of allowance of $858 and $1,109 respectively) |
|
144,727 |
|
166,810 |
|
||
Materials and supplies inventory |
|
4,899 |
|
4,198 |
|
||
Prepayments and other |
|
11,493 |
|
15,599 |
|
||
Income taxes receivable |
|
|
|
12,617 |
|
||
Total current assets |
|
399,808 |
|
315,634 |
|
||
|
|
|
|
|
|
||
Property and equipment |
|
494,777 |
|
479,639 |
|
||
Less accumulated depreciation |
|
373,695 |
|
357,976 |
|
||
Property and equipment, net |
|
121,082 |
|
121,663 |
|
||
|
|
|
|
|
|
||
Multi-client data library |
|
293,228 |
|
313,153 |
|
||
Deferred tax asset |
|
1,513 |
|
1,223 |
|
||
Other assets |
|
23,311 |
|
24,573 |
|
||
Total |
|
$ |
838,942 |
|
$ |
776,246 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Trade accounts payable |
|
$ |
49,274 |
|
$ |
44,907 |
|
Accrued and deferred income taxes |
|
12,946 |
|
7,145 |
|
||
Other accrued liabilities |
|
70,909 |
|
67,650 |
|
||
Total current liabilities |
|
133,129 |
|
119,702 |
|
||
Non-current liabilities: |
|
|
|
|
|
||
Long-term debt |
|
155,000 |
|
155,000 |
|
||
Other non-current liabilities |
|
15,330 |
|
11,854 |
|
||
Total non-current liabilities |
|
170,330 |
|
166,854 |
|
||
Stockholders equity: |
|
|
|
|
|
||
Common stock, $.01 par value; issued: 35,014,376 shares and 34,821,298 shares, respectively (excluding Exchangeable Shares of 155,370 and 185,921, respectively) |
|
350 |
|
348 |
|
||
Additional paid-in capital |
|
445,470 |
|
441,982 |
|
||
Accumulated earnings |
|
99,897 |
|
63,144 |
|
||
Accumulated other comprehensive income: |
|
|
|
|
|
||
Cumulative foreign currency translation adjustment |
|
13,030 |
|
7,331 |
|
||
Other comprehensive income (loss) |
|
(999 |
) |
(883 |
) |
||
Unearned compensation |
|
(606 |
) |
(604 |
) |
||
Treasury stock, at cost; 1,319,930 shares and 1,317,532 shares, respectively |
|
(21,659 |
) |
(21,628 |
) |
||
Total stockholders equity |
|
535,483 |
|
489,690 |
|
||
Total |
|
$ |
838,942 |
|
$ |
776,246 |
|
See Notes to Consolidated Financial Statements
2
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended April 30, |
|
||||
|
|
2005 |
|
Restated |
|
||
|
|
(In thousands) |
|
||||
Cash flows from operating activities: |
|
|
|
|
|
||
Net income (loss) |
|
$ |
36,753 |
|
$ |
(3,327 |
) |
Non-cash items included in net income (loss): |
|
|
|
|
|
||
Depreciation and amortization, net (other than multi-client data library) |
|
33,164 |
|
31,871 |
|
||
Amortization of multi-client data library |
|
103,559 |
|
163,837 |
|
||
Loss (gain) on disposition of property and equipment |
|
(638 |
) |
137 |
|
||
Equity in loss of joint venture |
|
|
|
959 |
|
||
Deferred taxes |
|
(372 |
) |
782 |
|
||
Amortization of unearned compensation |
|
263 |
|
311 |
|
||
Change in operating assets and liabilities: |
|
|
|
|
|
||
Accounts and notes receivable |
|
26,870 |
|
(39,379 |
) |
||
Materials and supplies inventory |
|
(696 |
) |
1,814 |
|
||
Prepayments and other |
|
4,013 |
|
873 |
|
||
Income tax payable |
|
19,632 |
|
3,764 |
|
||
Accounts payable and other accrued liabilities |
|
6,637 |
|
(3,388 |
) |
||
Other |
|
10,625 |
|
(6,083 |
) |
||
Net cash provided by operating activities |
|
239,810 |
|
152,171 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
||
(Increase) decrease in restricted cash |
|
(125 |
) |
94 |
|
||
Investment in multi-client data library, net cash |
|
(77,558 |
) |
(97,366 |
) |
||
Purchase of property and equipment |
|
(43,533 |
) |
(20,652 |
) |
||
Sale of property and equipment |
|
1,240 |
|
1,225 |
|
||
Sale of (RC)2 software operation |
|
|
|
2,000 |
|
||
Net cash used by investing activities |
|
(119,976 |
) |
(114,699 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
||
Borrowing of long-term debt |
|
|
|
155,000 |
|
||
Payments on long-term debt |
|
|
|
(167,238 |
) |
||
Net proceeds from sale of common stock |
|
1,918 |
|
9,119 |
|
||
Purchase of treasury stock |
|
|
|
(20,000 |
) |
||
Net cash provided (used) by financing activities |
|
1,918 |
|
(23,119 |
) |
||
Currency loss on foreign cash |
|
402 |
|
68 |
|
||
Change in cash and cash equivalents |
|
122,154 |
|
14,421 |
|
||
Beginning cash and cash equivalents balance |
|
116,299 |
|
72,097 |
|
||
Ending cash and cash equivalents balance |
|
$ |
238,453 |
|
$ |
86,518 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
||
Schedule of non-cash transactions: |
|
|
|
|
|
||
Capitalization of depreciation
and amortization resulting in an increase in |
|
$ |
7,015 |
|
$ |
14,380 |
|
See Notes to Consolidated Financial Statements
3
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restatement of Financial Statements
The historical financial information for the three and nine months ended April 30, 2004 have been restated due to accounting errors. In September 2004, we found various types of errors in our balance sheet related primarily to clerical and account reconciliation errors associated with the intercompany transfers of property and foreign currency items. In addition, we found errors in the accounting for certain customer contracts that contained provisions for customer payment of equipment mobilization fees, revenue sharing with customers and certain other contingencies. Correction of these errors resulted in a decrease of net income of $1.4 million relating to the first three fiscal quarters of fiscal 2004 and $2.6 million related to periods prior to fiscal 2004. Since recording the required adjustments in the fourth quarter of fiscal 2004 would have had a material impact on the financial statements of the fourth quarter and those of the full fiscal year, we determined that a restatement of our prior years financial statements was appropriate. The impact of the restatement resulted in a decrease in the net income and net income per share of $105,000 and $0.00, respectively, for the three months ended April 30, 2004 and an increase in the net loss and net loss per common share of $1,388,000 and $0.04, respectively, for the nine months ended April 30, 2004. (See Note 9 for the details of this restatement.)
The restatement has not caused us to be in default under any of our debt covenants or lease agreements. We obtained waivers from our lenders under our Credit Facility extending the due date for our delivery of our third quarter financial statements to them to July 29, 2005. Additionally, the restatement has delayed the registration of our Convertible Senior Notes resulting in liquidated damages in the amount of $2,153 per day from August 31, 2004 until the registration is completed.
Consolidation
The accompanying consolidated financial statements include our accounts and the accounts of majority-owned domestic and foreign subsidiaries. All material intercompany balances and transactions have been eliminated. All material adjustments consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. These interim financial statements should be read in conjunction with our annual audited consolidated financial statements.
In December 2003, the Financial Accounting Standards Board issued FIN 46R, a revision to FIN 46 Consolidation of Variable Interest Entities. FIN 46R replaces FIN 46 and provides additional clarification on the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We adopted FIN 46R on April 30, 2004. Adoption did not have a material effect on our financial position or results of operations; however, it required consolidation of our 80% owned Indonesian joint venture. Prior to adoption of FIN 46R this joint venture was accounted for under the equity method.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
4
Recent Accounting Pronouncements
In October 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 04-8, The Effect of Contingently Issuable Debt on Earnings per Share, which is effective for periods ending after December 15, 2004. This statement requires us to include shares of our stock issuable upon the assumed conversion of our Convertible Senior Notes in the calculation of diluted weighted average common shares. We adopted the EITF during the first quarter of fiscal 2005; however, the contingently issuable shares related to our Convertible Senior Notes had no impact on our weighted average shares calculation for the three and nine month periods ended April 30, 2005, as the calculation would have been anti-dilutive.
Effective August 1, 2003, we changed our minimum amortization policy with regard to multi-client data and recorded a charge of $22.1 million in the first quarter of fiscal 2004, included in cost of services in our Consolidated Statement of Operations. Under the prior method, capitalized costs of multi-client surveys were charged to cost of services in the period sales occurred, using the sales forecast method, over an estimated five-year useful life. However, during the last 24 months of a surveys useful life, amortization was the greater of the amount resulting from the sales forecast method or straight-line amortization of the remaining book value over the remaining portion of the original five-year estimated useful life. Under the new method, capitalized costs of multi-client surveys are charged to cost of services over an estimated five-year useful life based upon the greater of the result (higher expense) under the sales forecast method or cumulative straight-line amortization from survey completion over an estimated five-year useful life. Notwithstanding this change, the sales forecast method remains our primary method of calculating cost of services. The total amortization period that concludes sixty months after survey completion represents the minimum period over which the surveys are expected to provide economic benefits. We believe that commencing the minimum amortization upon survey completion, as opposed to our prior method of doing so only during the last twenty four months of the surveys life, better reflects the potential diminution of survey value with the passage of time.
Other (income) expense, net consists of the following:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
Restated |
|
2005 |
|
Restated |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
$ |
(1,553 |
) |
$ |
(250 |
) |
$ |
(3,080 |
) |
$ |
(734 |
) |
Net gain on foreign currency exchange |
|
(308 |
) |
(492 |
) |
(90 |
) |
(745 |
) |
||||
Loss from unconsolidated joint venture |
|
|
|
345 |
|
|
|
958 |
|
||||
Other |
|
(593 |
) |
(165 |
) |
(873 |
) |
(546 |
) |
||||
Total |
|
$ |
(2,454 |
) |
$ |
(562 |
) |
$ |
(4,043 |
) |
$ |
(1,067 |
) |
5
Basic and diluted earnings per common share are computed as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
Restated |
|
2005 |
|
Restated |
|
||||
|
|
(In thousands, except per share amounts) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
18,407 |
|
$ |
10,064 |
|
$ |
36,753 |
|
$ |
(3,327 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic: |
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares (including exchangeable shares) |
|
33,792 |
|
33,455 |
|
33,775 |
|
33,598 |
|
||||
Income (loss) per share |
|
$ |
.54 |
|
$ |
.30 |
|
$ |
1.09 |
|
$ |
(.10 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Diluted: |
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares (including exchangeable shares) |
|
33,792 |
|
33,455 |
|
33,775 |
|
33,598 |
|
||||
Shares issuable from assumed exercise of options |
|
1,295 |
|
1,146 |
|
1,149 |
|
|
|
||||
Shares issuable from assumed vesting of restricted stock |
|
44 |
|
|
|
46 |
|
|
|
||||
Total |
|
35,131 |
|
34,601 |
|
34,970 |
|
33,598 |
|
||||
Income (loss) per share |
|
$ |
.52 |
|
$ |
.29 |
|
$ |
1.05 |
|
$ |
(.10 |
) |
The Convertible Senior Notes were not convertible as of April 30, 2005 and the shares issuable from such conversion, while considered, are not included in this income per share calculation as they are anti-dilutive (See Note 5 for a description of our Convertible Senior Notes.)
The following options to purchase common shares have been excluded from the computation assuming dilution because the exercise prices of the options exceed the average market price of the underlying common shares or the options are anti-dilutive due to a net loss.
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Number of options |
|
397,130 |
|
1,012,682 |
|
729,496 |
|
3,503,724 |
|
Exercise price range |
|
$27.81-55.13 |
|
$19.38-55.13 |
|
$24.44-55.13 |
|
$5.25-55.13 |
|
Expiring through |
|
March 2012 |
|
March 2012 |
|
March 2012 |
|
March 2012 |
|
As of April 30, 2005, our long-term debt outstanding consisted of $155.0 million of Convertible Senior Notes due 2024. In addition, we have a Credit Facility consisting primarily of a revolving loan facility permitting borrowings of up to $55.0 million and various unsecured lines of credit totaling $8.5 million which may be used exclusively for letters of credit and bank guarantees.
The Convertible Senior Notes bear interest at a per annum rate which equals the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%. The current interest rate on the Convertible Senior Notes from March 15, 2004 through June 14, 2005 equated to 2.26% and equates to 2.66% for the subsequent three month period. The Convertible Senior Notes are our senior unsecured obligations and are convertible under certain circumstances into a combination of cash and our common stock. In general, upon conversion of a note, the holder of such note will receive cash equal to the principal amount of the note and shares of our common stock for the notes conversion
6
value in excess of such principal amount. We entered into a registration rights agreement in which we agreed to file a registration statement with the Securities and Exchange Commission within 90 days of March 3, 2004 to register resales of the notes and the associated shares of common stock. We filed a registration statement on May 28, 2004 in compliance with the registration rights agreement; however, the registration statement is not yet effective. Because our registration statement was not effective on or before August 31, 2004 as required by the indenture, we have been incurring liquidated damages in the amount of $2,153 per day since August 31, 2004. We will continue to incur these damages until our registration statement is effective.
Under certain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash and shares of our common stock. Certain of these circumstances may result in classification of the Convertible Senior Notes as current on our balance sheet. These circumstances include:
1. the closing sale price of our common stock is over 120% of the conversion price, which is currently $24.03 (with 120% being $28.84) for 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the fiscal quarter preceding the quarter in which the conversion occurs;
2. if we called the notes for redemption and the redemption has not occurred;
3. the occurrence of a five consecutive trading day period in which the trading price of the notes was less than 95% of the closing sale price of our common stock on such day multiplied by the number of shares of our common stock issuable upon conversion of the notes; or
4. the occurrence of specified corporate transactions.
Should any of these circumstances occur, the Convertible Senior Notes would be convertible at the then current stock price times the conversion ratio of 41.6146. This amount would be payable in cash equal to the principal amount of the notes, the par value adjusted for dividends or other equity transactions, with the additional amount payable in shares of our common stock. Currently, the maximum amount payable by us on conversion is $155 million in cash plus approximately 6.5 million shares. For clarity, conversion at a $40 stock price would result in our payment of $155 million in cash and 2.575 million shares of common stock. This settlement method is prescribed in the indenture and is not optional at the discretion of any party. The shares issuable from such conversion are considered in the calculation of diluted earnings per share.
As of April 30, 2005, there were no borrowings and $3.1 million in letters of credit outstanding under the Credit Facility. Borrowings under the Credit Facility, including swing-line loans, bear interest at a variable rate determined on the date of borrowing that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing. The Credit Facility expires in February 2006. Borrowings under the Credit Facility are secured by substantially all of our assets, including the accounts receivable from certain of our foreign subsidiaries.
We obtained waivers from our lenders under our Credit Facility allowing us to deliver our required reports for the second and third quarters of fiscal 2005 to the lenders by no later than July 29, 2005.
We have various unsecured lines of credit, with lending institutions that operate in geographic areas not covered by the lending institutions in our Credit Facility, totaling $8.5 million that may be used exclusively for the issuance of letters of credit and bank guarantees. As of April 30, 2005, $3.5 million in letters of credit were outstanding under these lines.
7
We maintain a contributory defined benefit pension plan for eligible participating employees in the United Kingdom. The following is the net periodic benefit cost by component:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
Restated |
|
|
|
Restated |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Service cost (benefits earned during the period) |
|
$ |
155 |
|
$ |
134 |
|
$ |
459 |
|
$ |
423 |
|
Interest cost on projected benefit obligation |
|
316 |
|
260 |
|
935 |
|
824 |
|
||||
Expected return on plan assets |
|
(225 |
) |
(194 |
) |
(666 |
) |
(615 |
) |
||||
Amortization of prior service cost |
|
(38 |
) |
(35 |
) |
(112 |
) |
(110 |
) |
||||
Amortization of net gain |
|
79 |
|
82 |
|
235 |
|
258 |
|
||||
Amortization of transition obligation |
|
2 |
|
2 |
|
6 |
|
5 |
|
||||
Net periodic benefit costs |
|
$ |
289 |
|
$ |
249 |
|
$ |
857 |
|
$ |
785 |
|
We have made contributions to this plan based on the schedule of contributions on which the above service cost was based and expect to complete these contributions, totaling approximately $1.0 million for the year, during fiscal 2005.
Beginning in fiscal 2005, we organized the company into three geographic regions: North and South America (NASA); Europe, Africa, the Middle East and CIS (EAME); and Asia Pacific (APAC). Our geographic segments offer a common suite of products and services to their customers, although each product or service may be adapted to meet the needs of the local markets. This segmentation of our company is representative of the manner in which it is viewed and managed by our senior managers and our Board of Directors. The information related to the three and nine months ended April 30, 2004 has been restated to reflect the new segment structure. A reconciliation of the reportable segments results to those of the total enterprise is given below:
|
|
For the Three Months Ended April 30, 2005 |
|
|||||||||||||
|
|
NASA |
|
EAME |
|
APAC |
|
Corporate |
|
Total |
|
|||||
|
|
(In thousands) |
|
|||||||||||||
Revenues |
|
$ |
115,478 |
|
$ |
30,636 |
|
$ |
29,396 |
|
$ |
|
|
$ |
175,510 |
|
Operating income (loss) |
|
25,635 |
|
7,498 |
|
4,336 |
|
(8,224 |
) |
29,245 |
|
|||||
Assets |
|
472,130 |
|
103,251 |
|
51,508 |
|
212,053 |
|
838,942 |
|
|||||
|
|
For the Three Months Ended April 30, 2004 |
|
|||||||||||||
|
|
Restated |
|
|||||||||||||
|
|
NASA |
|
EAME |
|
APAC |
|
Corporate |
|
Total |
|
|||||
|
|
(In thousands) |
|
|||||||||||||
Revenues |
|
$ |
143,535 |
|
$ |
17,169 |
|
$ |
20,010 |
|
$ |
|
|
$ |
180,714 |
|
Operating income (loss) |
|
28,573 |
|
790 |
|
1,405 |
|
(9,323 |
) |
21,445 |
|
|||||
Assets |
|
513,400 |
|
103,425 |
|
48,913 |
|
99,274 |
|
765,012 |
|
|||||
|
|
For the Nine Months Ended April 30, 2005 |
|
|||||||||||||
|
|
NASA |
|
EAME |
|
APAC |
|
Corporate |
|
Total |
|
|||||
|
|
(In thousands) |
|
|||||||||||||
Revenues |
|
$ |
330,335 |
|
$ |
95,487 |
|
$ |
71,497 |
|
$ |
|
|
$ |
497,319 |
|
Operating income (loss) |
|
68,692 |
|
14,998 |
|
5,453 |
|
(23,109 |
) |
66,034 |
|
|||||
Assets |
|
472,130 |
|
103,251 |
|
51,508 |
|
212,053 |
|
838,942 |
|
|||||
8
|
|
For the Nine Months Ended April 30, 2004 |
|
|||||||||||||
|
|
Restated |
|
|||||||||||||
|
|
NASA |
|
EAME |
|
APAC |
|
Corporate |
|
Total |
|
|||||
|
|
(In thousands) |
|
|||||||||||||
Revenues |
|
$ |
322,750 |
|
$ |
62,690 |
|
$ |
42,737 |
|
$ |
|
|
$ |
428,177 |
|
Operating income (loss) |
|
44,984 |
|
(1,132 |
) |
2,682 |
|
(26,063 |
) |
20,471 |
|
|||||
Assets |
|
513,400 |
|
103,425 |
|
48,913 |
|
99,274 |
|
765,012 |
|
|||||
Corporate operating income (loss) includes certain general and administrative and research and development expenses not allocated to the segments. Corporate assets consist primarily of cash and cash equivalents.
We account for stock based employee compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25 and have adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 148. As required by SFAS No. 148, we disclose the effect on net income and earnings per share of equity-based employee compensation, including stock options, that would have been recorded using the fair value based method. SFAS No. 123R, which will become effective for us beginning with our first quarter of fiscal 2006, will require us to record the cost of this equity-based compensation in our income statement based on the estimated fair value of the awards.
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2005 |
|
Restated |
|
2005 |
|
Restated |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) as reported |
|
$ |
18,407 |
|
$ |
10,064 |
|
$ |
36,753 |
|
$ |
(3,327 |
) |
Add: Compensation expense, net of related tax effects |
|
84 |
|
47 |
|
263 |
|
203 |
|
||||
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(648 |
) |
(835 |
) |
(2,002 |
) |
(4,187 |
) |
||||
Pro forma net income (loss) |
|
$ |
17,843 |
|
$ |
9,276 |
|
$ |
35,014 |
|
$ |
(7,311 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
Basic: |
|
|
|
|
|
|
|
|
|
||||
As reported |
|
$ |
.54 |
|
$ |
.30 |
|
$ |
1.09 |
|
$ |
(.10 |
) |
Pro-forma |
|
.53 |
|
.28 |
|
1.04 |
|
(.22 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted: |
|
|
|
|
|
|
|
|
|
||||
As reported |
|
$ |
.52 |
|
$ |
.29 |
|
$ |
1.05 |
|
$ |
(.10 |
) |
Pro-forma |
|
.51 |
|
.27 |
|
1.00 |
|
(.22 |
) |
9
The historical financial information in this document for the three and nine month periods ended April 30, 2004 has been restated due to accounting errors. These errors were discovered during two separate reviews, a comprehensive review of our balance sheet and a review of specific types of our customer contracts.
Balance Sheet Review
During our fiscal 2004 year-end balance sheet review, we found various types of clerical and account reconciliation errors related primarily to the intercompany transfer of property and foreign currency items. The fixed asset errors of approximately $1.9 million affected depreciation and amortization charges over the past seven years. We corrected all matters identified in the balance sheet review in our restatement, although such items were not individually material.
Contract Review
We also reviewed our accounting for our customer contracts, including those that contain provisions for customer payment of mobilization fees, revenue sharing with customers and certain date contingencies. Because our contracts vary widely in terms and conditions, we reviewed the deliverables of each type of contract and, where required, applied the guidance of EITF 00-21. We determined that our accounting treatment for certain of these customer contracts was not in accordance with generally accepted accounting principles and adjusted our accounts accordingly. We had recognized mobilization fees as revenue during the period of mobilization rather than during the period of seismic data acquisition, as required by Staff Accounting Bulletin (SAB) No. 104. In contracts with revenue sharing clauses and date contingencies, we recognized revenue before the price to be ultimately paid by the related customer was fixed or determinable under SAB No.104. In all cases, our errors related to customer contracts were related to the timing of revenue recognition.
The following is a summary of the effect of the restatement adjustments on our previously reported net income, earnings per share and total assets:
|
|
Increase / (Decrease) from Previously |
|
||||
|
|
Three Months |
|
Nine Months |
|
||
|
|
(In thousands, except per share amounts) |
|
||||
|
|
|
|
|
|
||
Net income (loss) as previously reported |
|
$ |
10,169 |
|
$ |
(1,939 |
) |
Pretax adjustments resulting from: |
|
|
|
|
|
||
Balance sheet review |
|
15 |
|
(886 |
) |
||
Contract review |
|
(172 |
) |
(659 |
) |
||
Total pretax adjustments |
|
(157 |
) |
(1,545 |
) |
||
Tax effect of restatement adjustments |
|
(52 |
) |
(157 |
) |
||
Total net adjustments |
|
(105 |
) |
(1,388 |
) |
||
Net Income (loss) restated |
|
$ |
10,064 |
|
$ |
(3,327 |
) |
|
|
|
|
|
|
||
Income (loss) per common share diluted: |
|
|
|
|
|
||
As reported |
|
$ |
.29 |
|
$ |
(.06 |
) |
Effect of the net adjustments |
|
.00 |
|
(.04 |
) |
||
As restated |
|
$ |
.29 |
|
$ |
(.10 |
) |
|
|
|
|
|
|
||
Total assets as reported |
|
$ |
763,316 |
|
|
|
|
Adjustments |
|
1,696 |
|
|
|
||
Total assets as adjusted |
|
$ |
765,012 |
|
|
|
The following are excerpts from the restated financial statements for the three and nine months ended April 30, 2004 compared to the previously reported amounts:
10
RESTATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
|
|
Three Months Ended April 30, 2004 |
|
Nine Months Ended April 30, 2004 |
|
|||||||||||||||||||||
|
|
As |
|
Adjustments |
|
Restated |
|
As |
|
Adjustments |
|
Restated |
|
|||||||||||||
Statement of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Revenues |
|
$ |
176,547 |
|
$ |
4,167 |
|
$ |
180,714 |
|
$ |
428,667 |
|
$ |
(490 |
) |
$ |
428,177 |
|
|||||||
Cost of services |
|
143,487 |
|
4,424 |
|
147,911 |
|
375,492 |
|
1,133 |
|
376,625 |
|
|||||||||||||
Research and development |
|
4,118 |
|
|
|
4,118 |
|
11,258 |
|
|
|
11,258 |
|
|||||||||||||
General and administrative |
|
7,217 |
|
23 |
|
7,240 |
|
19,791 |
|
32 |
|
19,823 |
|
|||||||||||||
Operating income (loss) |
|
21,725 |
|
(280 |
) |
21,445 |
|
22,126 |
|
(1,655 |
) |
20,471 |
|
|||||||||||||
Interest expense |
|
8,874 |
|
|
|
8,874 |
|
17,349 |
|
1 |
|
17,350 |
|
|||||||||||||
Other income, net |
|
(439 |
) |
(123 |
) |
(562 |
) |
(956 |
) |
(111 |
) |
(1,067 |
) |
|||||||||||||
Income (loss) before provision for income taxes |
|
13,290 |
|
(157 |
) |
13,133 |
|
5,733 |
|
(1,545 |
) |
4,188 |
|
|||||||||||||
Income taxes |
|
3,121 |
|
(52 |
) |
3,069 |
|
7,672 |
|
(157 |
) |
7,515 |
|
|||||||||||||
Net income (loss) |
|
$ |
10,169 |
|
$ |
(105 |
) |
$ |
10,064 |
|
$ |
(1,939 |
) |
$ |
(1,388 |
) |
$ |
(3,327 |
) |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss), per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) per common share |
|
$ |
.30 |
|
$ |
.00 |
|
$ |
.30 |
|
$ |
(.06 |
) |
$ |
(.04 |
) |
$ |
(.10 |
) |
|||||||
Weighted average common shares (including exchangeable shares) |
|
33,455 |
|
|
|
33,455 |
|
33,598 |
|
|
|
33,598 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) per common share |
|
$ |
.29 |
|
$ |
.00 |
|
$ |
.29 |
|
$ |
(.06 |
) |
$ |
(.04 |
) |
$ |
(.10 |
) |
|||||||
Weighted average common shares (including exchangeable shares) |
|
34,601 |
|
|
|
34,601 |
|
33,598 |
|
|
|
33,598 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
|
$ |
10,169 |
|
$ |
(105 |
) |
$ |
10,064 |
|
$ |
(1,939 |
) |
$ |
(1,388 |
) |
$ |
(3,327 |
) |
|||||||
Other comprehensive income (loss) (net of tax, $0 in all periods): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Foreign currency translation adjustments |
|
(3,541 |
) |
(113 |
) |
(3,654 |
) |
2,394 |
|
(21 |
) |
2,373 |
|
|||||||||||||
Other unrealized gain (loss) |
|
19 |
|
|
|
19 |
|
(585 |
) |
|
|
(585 |
) |
|||||||||||||
Total other comprehensive income (loss) |
|
(3,522 |
) |
(113 |
) |
(3,635 |
) |
1,809 |
|
(21 |
) |
1,788 |
|
|||||||||||||
Comprehensive income (loss) |
|
$ |
6,647 |
|
$ |
(218 |
) |
$ |
6,429 |
|
$ |
(130 |
) |
$ |
(1,409 |
) |
$ |
(1,539 |
) |
|||||||
11
RESTATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2004
(UNAUDITED)
(Dollars in thousands)
|
|
As |
|
Adjustments |
|
Restated |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|||
Net income (loss) |
|
$ |
(1,939 |
) |
$ |
(1,388 |
) |
$ |
(3,327 |
) |
Non-cash items included in net income (loss): |
|
|
|
|
|
|
|
|||
Depreciation and amortization, net (other than multi-client) |
|
31,655 |
|
216 |
|
31,871 |
|
|||
Amortization of multi-client library |
|
163,390 |
|
447 |
|
163,837 |
|
|||
(Gain) / loss on disposition of property and equipment |
|
137 |
|
|
|
137 |
|
|||
Equity in loss of joint venture |
|
958 |
|
1 |
|
959 |
|
|||
Deferred taxes |
|
782 |
|
|
|
782 |
|
|||
Amortization of unearned compensation |
|
311 |
|
|
|
311 |
|
|||
Change in operating assets/liabilities: |
|
|
|
|
|
|
|
|||
Accounts and notes receivable |
|
(39,730 |
) |
351 |
|
(39,379 |
) |
|||
Materials and supplies inventory |
|
1,802 |
|
12 |
|
1,814 |
|
|||
Prepayments and other |
|
603 |
|
270 |
|
873 |
|
|||
Income tax receivable |
|
4,328 |
|
(564 |
) |
3,764 |
|
|||
Accounts payable and other accrued liabilities |
|
(3,815 |
) |
427 |
|
(3,388 |
) |
|||
Other |
|
(6,126 |
) |
43 |
|
(6,083 |
) |
|||
Total cash provided by operating activities |
|
152,356 |
|
(185 |
) |
152,171 |
|
|||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|||
Decrease (increase) in restricted cash investments |
|
94 |
|
|
|
94 |
|
|||
Investment in multi-client library, net cash |
|
(97,333 |
) |
(33 |
) |
(97,366 |
) |
|||
Purchase of property and equipment |
|
(20,652 |
) |
|
|
(20,652 |
) |
|||
Sale of property and equipment |
|
1,225 |
|
|
|
1,225 |
|
|||
Sale of (RC) (2) software operating |
|
2,000 |
|
|
|
2,000 |
|
|||
Total cash used by investing activities |
|
(114,666 |
) |
(33 |
) |
(114,699 |
) |
|||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|||
Borrowing of long-term debt |
|
155,000 |
|
|
|
155,000 |
|
|||
Payments on long-term debt |
|
(167,238 |
) |
|
|
(167,238 |
) |
|||
Net proceeds from the sale of common stock |
|
9,119 |
|
|
|
9,119 |
|
|||
Purchase of treasury stock |
|
(20,000 |
) |
|
|
(20,000 |
) |
|||
Total cash provided by financing activities |
|
(23,119 |
) |
|
|
(23,119 |
) |
|||
Currency loss (gain) on foreign cash |
|
68 |
|
|
|
68 |
|
|||
Change in cash and cash equivalents |
|
14,639 |
|
(218 |
) |
14,421 |
|
|||
Beginning cash and cash equivalents balance |
|
72,626 |
|
(529 |
) |
72,097 |
|
|||
Ending cash and cash equivalents balance |
|
$ |
87,265 |
|
$ |
(747 |
) |
$ |
86,518 |
|
|
|
|
|
|
|
|
|
|||
Schedule of non-cash transactions: |
|
|
|
|
|
|
|
|||
Capitalization of depreciation and amortization resulting in an increase in multi-client data library |
|
$ |
14,380 |
|
$ |
|
|
$ |
14,380 |
|
12
This report on Form 10-Q and the documents incorporated by reference contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements incorporated by reference to other documents we file with the SEC. Forward-looking statements include, among other things, business strategy and expectations concerning industry conditions, market position, future operations, margins, profitability, liquidity and capital resources. Forward-looking statements generally can be identified by the use of terminology such as may, will, expect, intend, estimate, anticipate or believe or similar expressions or the negatives thereof. These expectations are based on managements assumptions and current beliefs based on currently available information. Although we believe that the expectations reflected in such statements are reasonable, we can give no assurance that such expectation will be correct. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report on Form 10-Q. Our operations are subject to a number of uncertainties, risks and other influences, many of which are outside our control, and any one of which, or a combination of which, could cause our actual results of operations to differ materially from the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are disclosed in Risk Factors and elsewhere in our Annual Report on Form 10-K.
We believe that, overall, global exploration for oil and gas is increasing, even in mature areas such as the North Sea and Nigeria. While seismic has traditionally been used purely as an exploration tool, we are seeing increasing interest in new seismic reservoir imaging techniques, such as multi- or wide-azimuth acquisition, which offer better delineation of complex structures and may advance the use of seismic in hydrocarbon production. We believe all of this is promising for our business, although seismic spending will undoubtedly continue to fluctuate.
Our overall performance during the fiscal 2005 period is the result of being well positioned to take advantage of the increased exploration spending. This positioning includes having quality multi-client data in areas of current customer interest, data processing abilities that enable us to produce the best possible seismic images in difficult areas, and field operations that are capable of providing technical as well as health, safety and environmental excellence.
Due to our selling and operational efforts and the robust seismic market, we have seen our backlog increase $117 million from $147 million at July 31, 2004 to $264 million at May 31, 2005. We expect to complete most of the work in backlog over the next twelve months. It appears that our traditional pattern of revenue generation will occur again during fiscal 2005, with revenues in our second and third fiscal quarters being higher than in our first and fourth quarters. This pattern is driven by end-of-year spending, which results in high library revenue in our second fiscal quarter, and high land acquisition activity during our second and third fiscal quarters, corresponding with the winter seismic season in Alaska and Canada.
During the first quarter of fiscal 2005, we reorganized our company into three geographic regions: North and South America (NASA), Europe, Africa, Middle East and CIS (EAME), and Asia Pacific (APAC). The managers of these regions are responsible for all facets of sales and operations and represent our customer interface. Centrally managed processing, acquisition, and reservoir professionals support these managers from locations around the globe. We feel this new organization allows our front-line managers to focus exclusively on their customers while allowing our company to develop and deploy technology consistently across our markets. We have put processes in place that will allow for the free movement of our seismic equipment across the three regions so that we may maximize our return on investment.
The historical financial information in this document has been restated for the three and nine months ended April 30, 2004 due to accounting errors. The impact of the restatement resulted in a decrease in the net income and net income per share of $105,000 and $0.00, respectively, for the three months ended April 30, 2004 and an increase in the net loss and net loss per common share of $1,388,000 and $0.04, respectively, for the nine months ended April 30, 2004. (See Note 9 of the Notes to Consolidated Financial Statements for the details of this restatement.)
13
Revenues. Our revenues decreased by 3% from $180.7 million in the third quarter of fiscal 2004 to $175.5 million in the third quarter of fiscal 2005. This decrease is the result of lower land and marine multi-client data library license sales in the NASA, offset partially by an increase in contract marine work. Sales of completed multi-client data typically fluctuate during the year and we do not believe this to be indicative of a trend. NASAs contract marine increase came from the Gulf of Mexico, where the Veritas Vantage and two source boats acquired a large, wide-azimuth survey. The APAC revenue increase came from both marine contract acquisition and processing. In marine contract acquisition, the Veritas Viking II, the Pacific Sword and Veritas Searcher operated in Australia, India, Myanmar and New Zealand during the period. In processing, increased pricing and higher throughput due to increased processing speed led to higher revenue. EAME also generated increased marine contract revenue, with its most notable acquisition project being an acquisition job in Ghana.
Revenues from our operating segments were as follows:
|
|
Three Months Ended April 30, |
|
|||||||||
|
|
|
|
Restated |
|
Change |
|
|||||
|
|
2005 |
|
2004 |
|
$ |
|
% |
|
|||
|
|
(Dollars in thousands) |
|
|||||||||
NASA |
|
$ |
115,478 |
|
$ |
143,535 |
|
$ |
(28,057 |
) |
(20 |
)% |
EAME |
|
30,636 |
|
17,169 |
|
13,467 |
|
78 |
% |
|||
APAC |
|
29,396 |
|
20,010 |
|
9,386 |
|
47 |
% |
|||
Total Revenue |
|
$ |
175,510 |
|
$ |
180,714 |
|
$ |
(5,204 |
) |
(3 |
)% |
Revenues by contract type were as follows:
|
|
Three Months Ended April 30, |
|
|||||||||
|
|
|
|
Restated |
|
Change |
|
|||||
|
|
2005 |
|
2004 |
|
$ |
|
% |
|
|||
|
|
(Dollars in thousands) |
|
|||||||||
Multi-Client: |
|
|
|
|
|
|
|
|
|
|||
Land |
|
$ |
10,291 |
|
$ |
24,327 |
|
$ |
(14,036 |
) |
(58 |
)% |
Marine |
|
37,359 |
|
58,118 |
|
(20,759 |
) |
(36 |
)% |
|||
Total Multi-Client |
|
47,650 |
|
82,445 |
|
(34,795 |
) |
(42 |
)% |
|||
Contract: |
|
|
|
|
|
|
|
|
|
|||
Land |
|
56,981 |
|
60,532 |
|
(3,551 |
) |
(6 |
)% |
|||
Marine |
|
70,879 |
|
37,737 |
|
33,142 |
|
88 |
% |
|||
Total Contract |
|
127,860 |
|
98,269 |
|
29,591 |
|
30 |
% |
|||
Total Revenue |
|
$ |
175,510 |
|
$ |
180,714 |
|
$ |
(5,204 |
) |
(3 |
)% |
Operating income (loss). Operating income increased from $21.4 in the third quarter of fiscal 2004 to $29.2 million in the third quarter of fiscal 2005. Cost of services as a percent of revenue fell from 82% to 76% in the comparative periods as a result of increased productivity, favorable mix of jobs and higher pricing. Therefore, despite the decrease in revenue, our margin (revenue less cost of services) increased $9.8 million. Increased research and development costs of $0.6 million and increased general and administrative expense of $1.4 million reduced the operating income increase to $7.8 million. We continued to dedicate most of our research and development spending to advanced processing techniques. General and administrative costs increased in the third quarter of fiscal 2005 due primarily to costs related to the restatement of our financial statements and increased efforts in the area of financial controls.
Interest expense. Interest expense decreased from $8.9 million in the third quarter of fiscal 2004 to $1.1 million in the third quarter of fiscal 2005. This decrease is due primarily to the issuance of our Convertible Senior Notes and the repayment of our term notes with the proceeds in the third quarter of fiscal 2004. This refinancing resulted in a significantly lower interest rate. Our Convertible Senior Notes accrue interest at a rate of LIBOR less 0.75%, which equated to 2.26% for the three months ended June 15, 2005 and is much lower than the various tranches of debt in place in fiscal 2004. In addition, approximately $6.4 million of debt issuance costs were expensed in the third
14
quarter of fiscal 2004 in connection with the retirement of the term notes.
Income taxes. Income taxes in the third quarter of fiscal 2005 were 40% of income before provision for income taxes due primarily to our inability to record deferred tax assets arising in certain jurisdictions because of losses in prior years. This treatment is consistent with fiscal 2004; however, income earned by jurisdiction was different in fiscal 2004 resulting in a lower overall tax rate.
Revenues. Our revenues increased by 16% from $428.2 million for the first nine months of fiscal 2004 to $497.3 million for the first nine months of fiscal 2005. This increase was driven by increased contract work, primarily marine, in all regions and increased sales of licenses to multi-client data in EAME partially offset by lower sales of licenses to multi-client data primarily in the U.S. and Canada. NASAs increase in contract marine work was in the Gulf of Mexico, where the Veritas Vantage and two source boats acquired a wide-azimuth survey. APACs revenue increase was also generated by marine contract work, as we operated the Veritas Viking II, the Pacific Sword and Veritas Searcher in Australia, India, Myanmar and New Zealand during the period. EAME generated most of its increased revenue through sales of licenses to multi-client data for offshore Africa and the North Sea.
Revenues from our operating segments were as follows:
|
|
Nine Months Ended April 30, |
|
|||||||||
|
|
|
|
Restated |
|
Change |
|
|||||
|
|
2005 |
|
2004 |
|
$ |
|
% |
|
|||
|
|
(Dollars in thousands) |
|
|||||||||
NASA |
|
$ |
330,335 |
|
$ |
322,750 |
|
$ |
7,585 |
|
2 |
% |
EAME |
|
95,487 |
|
62,690 |
|
32,797 |
|
52 |
% |
|||
APAC |
|
71,497 |
|
42,737 |
|
28,760 |
|
67 |
% |
|||
Total Revenue |
|
$ |
497,319 |
|
$ |
428,177 |
|
$ |
69,142 |
|
16 |
% |
Revenues by contract type were as follows:
|
|
Nine Months Ended April 30, |
|
|||||||||
|
|
|
|
Restated |
|
Change |
|
|||||
|
|
2005 |
|
2004 |
|
$ |
|
% |
|
|||
|
|
(Dollars in thousands) |
|
|||||||||
Multi-Client: |
|
|
|
|
|
|
|
|
|
|||
Land |
|
$ |
36,303 |
|
$ |
53,333 |
|
$ |
(17,030 |
) |
(32 |
)% |
Marine |
|
144,110 |
|
150,491 |
|
(6,381 |
) |
(4 |
)% |
|||
Total Multi-Client |
|
180,413 |
|
203,824 |
|
(23,411 |
) |
(11 |
)% |
|||
Contract: |
|
|
|
|
|
|
|
|
|
|||
Land |
|
133,965 |
|
126,542 |
|
7,423 |
|
6 |
% |
|||
Marine |
|
182,941 |
|
97,811 |
|
85,130 |
|
87 |
% |
|||
Total Contract |
|
316,906 |
|
224,353 |
|
92,553 |
|
41 |
% |
|||
Total Revenue |
|
$ |
497,319 |
|
$ |
428,177 |
|
$ |
69,142 |
|
16 |
% |
Operating income (loss). Operating income increased from $20.5 million for the first nine months of fiscal 2004 to $66.0 million for the first nine months of fiscal 2005. During the first quarter of fiscal 2004, we changed our multi-client amortization accounting policy to include a minimum amortization from the date of survey completion, instead of only during the last 24 months of the surveys book life. As a result of this change, we recorded a charge of $22.1 million in cost of services in the first quarter of fiscal 2004.
Excluding the charge for the change in our accounting method, our operating income for the nine months of fiscal 2005 would have been $23.4 million greater than the comparable period last year. Our margin (revenues less cost of services) would have increased by $29.7 million due to our revenue increase and a decrease in cost of services as a percent of revenue of approximately 4%. Increased productivity, favorable mix of jobs and higher pricing contributed to the margin increase.
15
Research and development costs have increased by $2.5 million from the comparable period in the prior year primarily due to our development of multi component (pressure and shear wave) acquisition and processing and general increases in research spending.
General and administrative expense increased by $3.8 million due to the expenses associated with the restatement of our historical financial statements and those associated with our increased efforts in the area of financial controls. Research and development expense and general and administrative expense both grew due to increased incentive compensation related to our improved financial performance.
Interest expense. Interest expense decreased from $17.4 million for the first nine months of fiscal 2004 to $2.8 million for the first nine months of fiscal 2005. This decrease is due primarily to the issuance of our Convertible Senior Notes and the repayment of our term notes with the proceeds from the issuance of our Convertible Senior Notes in the third quarter of fiscal 2004. The refinancing resulted in a significantly lower interest rate. Our Convertible Senior Notes accrue interest at a rate of LIBOR less 0.75%, which currently equated to 2.26% for the three months ended June 15, 2005 and is much lower than the various tranches of debt in place in the comparable period in fiscal 2004. In addition, approximately $6.4 million of debt issuance costs were expensed in the third quarter of fiscal 2004 in connection with the retirement of the term notes.
Income taxes. Income taxes for the first nine months of fiscal 2005 were 45% of income before provision for income taxes due primarily to our inability to record deferred tax assets arising in certain jurisdictions because of losses in prior years. This treatment is consistent with fiscal 2004.
Our internal sources of liquidity are cash on hand and cash flow from operations. External sources include public financing, equity sales, equipment financing, our Credit Facility and trade credit. We believe that our current cash balance and cash flow from operations will be adequate to meet our liquidity needs over the next twelve months.
Net cash provided by operating activities increased from $152.2 million for the first nine months of fiscal 2004 to $239.8 million for the first nine months of fiscal 2005 primarily due to improved profitability and improvements in working capital. Net cash used by investing activities increased slightly from $114.7 million for the first nine months of fiscal 2004 to $120.0 million for the first nine months of fiscal 2005. Our cash investment for fiscal 2005 is projected to be approximately $218 million and includes capital expenditures to replace and upgrade our existing equipment of approximately $79 million and investment in our data library of approximately $139 million. We expect to continue to fund these investments from our current cash and cash equivalents on hand and from internally generated funds.
While we believe that we have adequate sources of funds to meet our liquidity needs, our ability to meet our obligations depends on our future performance, which is subject to many factors beyond our control. Key factors affecting future results include utilization levels of acquisition and processing assets and demand for multi-client library surveys, all of which are driven by exploration spending and, ultimately, the underlying commodity prices.
As of April 30, 2005, our long-term debt outstanding consisted of $155.0 million of Convertible Senior Notes due 2024. In addition, we have a Credit Facility consisting primarily of a revolving loan facility permitting borrowings of up to $55.0 million and various unsecured lines of credit totaling $8.5 million which may be used exclusively for letters of credit and bank guarantees.
The Convertible Senior Notes bear interest at a per annum rate which equals the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%. The interest rate on the Convertible Senior Notes from March 15, 2005 through June 14, 2005 equated to 2.26% and equates to 2.66% for the subsequent three month period. The Convertible Senior Notes are our senior unsecured obligations and are convertible under certain circumstances into a
16
combination of cash and our common stock. In general, upon conversion of a note, the holder of such note will receive cash equal to the principal amount of the note and shares of our common stock for the notes conversion value in excess of such principal amount. We entered into a registration rights agreement in which we agreed to file a registration statement with the Securities and Exchange Commission within 90 days of March 3, 2004 to register resales of the notes and associated shares of common stock. We filed a registration statement on May 28, 2004 in compliance with the registration rights agreement; however, the registration statement is not yet effective. Because our registration statement was not effective on August 31, 2004 as required by the indenture, we have been incurring liquidated damages in the amount of $2,153 per day since August 31, 2004. We will continue to incur these damages until registration is effective.
Under certain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash and shares of our common stock. Certain of these circumstances may result in classification of the Convertible Senior Notes as current on our balance sheet. These circumstances include:
1. the closing sale price of our common stock is over 120% of the conversion price, which is currently $24.03 (with 120% being $28.84) for 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the fiscal quarter preceding the quarter in which the conversion occurs;
2. if we called the notes for redemption and the redemption has not occurred;
3. the occurrence of a five consecutive trading day period in which the trading price of the notes was less than 95% of the closing sale price of our common stock on such day multiplied by the number of shares of our common stock issuable upon conversion of the notes; or
4. the occurrence of specified corporate transactions.
Should any of these circumstances occur, the Convertible Senior Notes would be convertible at the then current stock price times the conversion ratio of 41.6146. This amount would be payable in cash equal to the principal amount of the notes, the par value adjusted for dividends or other equity transactions, and the additional amount payable in shares of our common stock. Currently, the maximum amount payable by us on conversion is $155 million in cash plus approximately 6.5 million shares. For clarity, conversion at a $40 stock price would result in our payment of $155 million in cash and 2.575 million shares of common stock. This settlement method is prescribed in the indenture and is not optional at the discretion of any party. The shares issuable from such conversion are considered in the calculation of diluted earnings per share.
As of April 30,2005, there were no borrowings and $3.1 million in letters of credit outstanding under the revolving loan facility. Borrowings under the Credit Facility, including swing-line loans, bear interest at a variable rate determined on the date of borrowing that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing. The Credit Facility expires in February 2006. Borrowings under the Credit Agreement are secured by substantially all of our assets, including the accounts receivable from certain of our foreign subsidiaries.
We obtained waivers from our lenders under the Credit Facility allowing us to deliver our required reports for the second and third quarters of fiscal 2005 to the lenders by no later than July 29, 2005.
We have various unsecured lines of credit, with lending institutions that operate in geographic areas not covered by the lending institutions in our Credit Facility, totaling $8.5 million that may be used exclusively for the issuance of letters of credit and bank guarantees. As of April 30, 2005, $3.5 million in letters of credit were outstanding under these lines.
While all of our accounting policies are important in assuring that we adhere to current accounting standards, certain policies are particularly important due to their impact on our financial statements. These are described in detail in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Significant Accounting Policies included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2004
17
which description is incorporated herein by reference.
From time to time we enter into contracts with customers whereby payment is not in our functional currency. To protect us against exposure to exchange rate risk, we entered into currency exchange contracts with financial institutions. During the quarter ended April 30, 2005, we did not enter into any such contracts and, as of April 30, 2005, had no such contracts outstanding.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined as a process designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
We carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as to the effectiveness, design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of April 30, 2005. The evaluation considered our various procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer concluded, as a result of our failure to file this quarterly report by its due date of June 9, 2005 and our untested remediation of previously disclosed material weaknesses, that our disclosure controls and procedures were not effective as of April 30, 2005.
We have previously disclosed several weaknesses and deficiencies related to reconciliations and revenue recognition. As of June 17, 2005, we believe that we have substantially remediated those weaknesses and deficiencies as they affect our financial reporting for the period ended April 30, 2005. However, we have not completed our evaluation and testing of the remediated controls and, at this time, cannot conclude that we do not still have material weaknesses in these areas.
Changes in Internal Controls Over Financial Reporting
During the third quarter of fiscal 2005, in connection with our efforts to remediate the deficiencies and weaknesses previously disclosed relating to account reconciliation and revenue recognition, we made the following changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
required, on a quarterly basis, completion of a general inquiry form by accountants in each of our operating areas related to accounts and accounting controls within their particular operation;
established a formal evaluation and implementation process regarding changes in accounting rules;
formalized the accounting guidelines and review process for recognition of revenue on certain customer contracts; and
made various minor adjustments to our internal control processes as a result of our detailed documentation and evaluation process in preparation for compliance with Section 404 of the Sarbanes Oxley Act of 2002.
As our control changes have not been fully tested and we cannot conclude that we have eliminated our control weaknesses, in preparing our financial statements for the quarter ended April 30, 2005, we performed additional procedures to ensure that those financial statements are fairly stated in all material respects in conformity with generally accepted accounting principles.
Section 404
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we document and test the internal controls over
18
financial reporting and to assert in our Annual Report on Form 10-K for the fiscal year ended July 31, 2005, whether the internal controls over financial reporting at July 31, 2005 are effective. Any material weakness in internal controls over financial reporting existing at that date will preclude us from making a positive assertion. We are currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act.
In response to the requirements of the Sarbanes-Oxley Act and our previously reported material weaknesses in certain areas, we are formalizing our entire control framework and all of our control procedures. We have done significant work in evaluating, documenting, testing and remediating this framework and processes in a concerted effort to be in compliance with Section 404 by our required deadline for fiscal 2005. During the course of these activities and in addition to the material weakness in our disclosure controls described above, we have identified certain internal control issues and deficiencies which we believe should be improved and corrected. We have a remediation plan for these issues and expect to have completed our remediation and testing prior to the end of fiscal 2005 in order to make a positive assertion as to the effectiveness of internal controls over financial reporting, however, there can be no assurance that all the identified issues and deficiencies or any other issues that may arise from continued testing will be resolved in time to do so.
19
Exhibits filed with this report:
Exhibit |
|
Description |
*23.1 |
|
Consent of Independent Registered Public Accounting Firm |
*31.1 |
|
Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 by Chief Executive Officer. |
*31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
*32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. |
*32.2 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. |
* filed herewith
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of June 2005.
|
Veritas DGC Inc. |
|
|
|
|
|
By: |
/s/ Mark E. Baldwin |
|
|
mark E. Baldwin |
|
|
Executive
Vice President, Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
/s/ Vincent M. Thielen |
|
|
vincent m. thielen |
|
|
Vice
President, Corporate Controller |
21