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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475815
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 SAN FELIPE
HOUSTON, TEXAS
77056
----------------------------------------------------
(Address of principal executive offices)
(713) 960-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of August 13, 1997, 18,161,175 common shares were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,700 $ 4,315
Receivables, less allowance of $2,463 and $2,760 112,235 102,858
Inventories 135,437 115,479
Deferred taxes 3,255 4,028
Prepaids and other current assets 3,746 6,710
-------- --------
260,373 233,390
Property, plant and equipment, net 28,041 18,680
Deferred taxes 8,159 6,847
Goodwill 12,916 6,327
Deferred financing costs 1,045 1,166
Other assets 194 333
-------- --------
$310,728 $266,743
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable $ 70,903 $ 77,935
Customer prepayments 14,309 5,126
Accrued compensation 5,827 7,839
Other accrued liabilities 21,346 12,420
-------- --------
112,385 103,320
Long-term debt 55,625 36,392
Insurance reserves 6,352 6,599
Other liabilities 10,135 11,352
-------- --------
184,497 157,663
Commitments and contingencies
Owners' equity:
Common stock - par value $.01; 18,161,175 shares issued
and outstanding at June 30, 1997 182 179
Additional paid-in capital 107,609 107,497
Cumulative translation adjustment 669 1,159
Retained earnings 17,771 245
-------- --------
126,231 109,080
-------- --------
$310,728 $266,743
======== ========
The accompanying notes are an integral part of these statements.
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NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues $ 197,866 $ 153,499 $ 374,020 $ 294,643
Cost of revenues 165,542 131,706 315,436 254,556
--------- --------- --------- ---------
Gross profit 32,324 21,793 58,584 40,087
Selling, general and administrative 18,052 13,660 33,028 26,681
--------- --------- --------- ---------
Operating income 14,272 8,133 25,556 13,406
Other income (expense):
Interest and financial costs (1,385) (3,660) (2,640) (6,738)
Interest income 38 304 119 320
Other 344 (191) 171 (321)
--------- --------- --------- ---------
Income before income taxes 13,269 4,586 23,206 6,667
Provision for income taxes 4,924 2,020 8,820 2,667
--------- --------- --------- ---------
Net income $ 8,345 $ 2,566 $ 14,386 $ 4,000
========= ========= ========= =========
Weighted average shares outstanding 18,477 13,590 18,334 13,590
========= ========= ========= =========
Net income per share $ 0.45 $ 0.19 $ 0.78 $ 0.29
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
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NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
-------------------------
1997 1996
--------- ---------
Cash flow from operating activities:
Net income $ 14,386 $ 4,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,076 1,903
Provision for losses on receivables 180 304
Provision for deferred income taxes (993) 705
Gain on sale of assets (98) (192)
Foreign currency transaction (gain) loss 252 (57)
Changes in operating assets and liabilities:
Decrease (increase) in receivables (5,657) (8,795)
Decrease (increase) in inventories (11,547) (5,804)
Decrease (increase) in prepaids and other current assets 2,985 (1,046)
Increase (decrease) in accounts payable (10,146) 582
Increase (decrease) in other assets/liabilities, net 11,451 (2,152)
--------- ---------
Net cash provided (used) by operating activities 2,889 (10,552)
--------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (1,684) (849)
Proceeds from sale of assets 157 272
Acquisition of business, net of cash acquired (19,000) --
Acquisition of predecessor company, net of cash acquired -- (106,248)
Other -- (350)
--------- ---------
Net cash provided (used) by investing activities (20,527) (107,175)
--------- ---------
Cash flow from financing activities:
Proceeds from revolving line of credit, net 19,109 --
Payments on long-term debt -- (11,318)
Proceeds from issuance of common stock -- 30,179
Acquisition debt proceeds -- 103,378
--------- ---------
Net cash provided (used) by financing activities 19,109 122,239
--------- ---------
Effect of exchange rate losses on cash (86) --
--------- ---------
Increase in cash and equivalents 1,385 4,512
Cash and cash equivalents, beginning of period 4,315 --
--------- ---------
Cash and cash equivalents, end of period $ 5,700 $ 4,512
========= =========
The accompanying notes are an integral part of these statements.
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NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Effective January 1, 1996, National-Oilwell, Inc. acquired
National-Oilwell, a general partnership between National Supply
Company, Inc., a subsidiary of Armco Inc., and Oilwell, Inc., a
subsidiary of USX Corporation, and subsidiaries (the "Acquisition").
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally
accepted accounting principles. In the opinion of management, the
information furnished reflects all adjustments, all of which are of a
normal, recurring nature, necessary for a fair presentation of the
results of the interim periods. It is recommended that these
statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1996. No significant
accounting changes have occurred during the six months ended June 30,
1997.
2. INVENTORIES
Inventories consist of (in thousands):
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials $ 11,053 $ 9,510
Work in process 11,665 6,141
Finished goods 112,719 99,828
---------- --------
$ 135,437 $115,479
========== ========
3. STATEMENTS OF CASH FLOWS
The following information is provided to supplement the Statements of
Cash Flows (in thousands):
Six Months Ended June 30,
--------------------------
Cash paid during the period for: 1997 1996
----------- ------------
Interest $ 1,059 $ 4,251
Income taxes 5,150 1,509
4. ACQUISITIONS
On April 25, 1997, the Company purchased the drilling business of Ross
Hill Controls and its affiliate, Hill Graham Controls Limited for $19
million in cash. This business involves the manufacture, sale and
service of electrical control systems used in conjunction with drilling
operations. The transaction was accounted for under the purchase
method of accounting and did not have a material effect on the
Company's financial statements.
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On May 15, 1997, the Company purchased 100% of the common stock of PEP,
Inc., a manufacturer of petroleum expendable products, in exchange for
400,000 shares of National-Oilwell common stock. The transaction was
accounted for under the pooling of interests method of accounting and
did not have a material effect on the Company's historical financial
statements, and financial statements prior to April 1, 1997 have not
been restated.
On May 14, 1997, the Company announced the signing of a definitive
agreement to acquire Dreco Energy Services Ltd., a publicly traded
Canadian company. The terms of the agreement provide for the exchange
of 100% of the Dreco common stock for Dreco exchangeable shares, which
can be converted into National-Oilwell common stock, in a pooling of
interests transaction that is expected to be tax free to both
companies. The exchange ratio is subject to a collar and will provide
Dreco's shareholders with 1.2 shares of National-Oilwell common stock
if, during the 20 consecutive trading days ending 5 days before
closing, National-Oilwell's average stock price is between $36.00 and
$47.25. As a general matter, if the average stock price is above
$47.25, the exchange ratio adjusts to provide Dreco holders with $56.70
of National-Oilwell common stock, and, if the average stock price is
below $36.00, the exchange ratio adjusts to provide Dreco holders with
$43.20 of National-Oilwell common stock.
The transaction, which is structured as a plan of arrangement under
Alberta law, is subject to various conditions, including stockholder
approvals of both companies, the approval of the Alberta Court and
other regulatory approvals in both the U.S. and Canada. It is
anticipated that stockholder meetings and the closing of the
transaction will occur during the third quarter of 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company is a worldwide leader in the design, manufacture and sale
of machinery and equipment and in the distribution of maintenance,
repair and operating ("MRO") products used in oil and gas drilling and
production. The Company's revenues are directly related to the level
of worldwide oil and gas drilling and production activities and the
profitability and cash flow of oil and gas companies and drilling
contractors, which in turn are affected by current and anticipated
prices of oil and gas.
During 1996, the Company completed two significant capital
transactions. First, in January 1996, the Company acquired the
operations of National-Oilwell (the "Acquisition"), resulting in the
incurrence of significant amounts of debt and related interest expense.
Second, on October 29, 1996, the Company sold 4.6 million shares of
its common stock through an initial public offering (the "IPO"). Net
proceeds from the IPO of approximately $72 million were used to repay
debt incurred in connection with the Acquisition.
During the second quarter of 1997, the Company completed the
acquisition of the drilling controls business of Ross Hill Controls and
its affiliate for $19 million in cash, and purchased 100% of the common
stock of PEP, Inc. in exchange for 400,000 shares of National-Oilwell
common stock. These transactions did not have a material effect on the
Company's historical financial statements.
On May 14, 1997, the Company signed a definitive agreement to acquire
100% of the common stock of Dreco Energy Services Ltd. in a pooling of
interests transaction. The transaction is subject to various
conditions, including shareholder approvals of both companies. The
number of shares of National-Oilwell common stock to be issued is
subject to an exchange ratio adjustment as more fully described in
footnote 4 of the Notes to Consolidated Financial Statements included
herein, and the total value is expected to approximate $440 million.
It is anticipated that the closing of the transaction will occur in the
third quarter of 1997.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues
Products and Technology $ 59,011 $ 42,261 $ 109,538 $ 80,941
Distribution Services 154,870 123,171 294,428 237,320
Eliminations (16,015) (11,933) (29,946) (23,618)
--------- --------- --------- ---------
Total $ 197,866 $ 153,499 $ 374,020 $ 294,643
========= ========= ========= =========
Operating Income
Products and Technology $ 9,016 $ 5,131 $ 16,477 $ 8,064
Distribution Services 6,569 3,988 11,399 7,298
Corporate (1,313) (986) (2,320) (1,956)
--------- --------- --------- ---------
Total $ 14,272 $ 8,133 $ 25,556 $ 13,406
========= ========= ========= =========
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Products and Technology
The Products and Technology segment designs and manufactures a large
line of proprietary products, including drawworks, mud pumps, power
swivels, electrical control systems and reciprocating pumps. A
substantial installed base of these products results in a recurring
replacement parts and maintenance business. Sales of new capital
equipment can result in large fluctuations in volume between periods
depending on the size and timing of the shipment of orders. This
segment also provides drilling pump expendable products for maintenance
of the Company's and other manufacturers' equipment.
Revenues for the Products and Technology segment increased by $16.8
million (40%) in the second quarter of 1997 as compared to the same
quarter in 1996 due to the inclusion of $6.8 million of revenues
generated by acquisitions completed during such quarter and due to
increased revenues from the sale of drilling capital equipment and
spare parts. Operating income increased by $3.9 million in the second
quarter compared to the same quarter in 1996, with $1.2 million of the
increase due to the acquired businesses and the balance due to higher
activity levels.
Products and Technology revenues increased $28.6 million (35%) in the
first half of 1997 as compared to 1996 due primarily to an increase in
demand for drilling capital equipment and spare parts, fluid end
expendable parts, and reciprocating pumps and associated parts, as well
as the acquisitions noted above. Operating income for the Products and
Technology segment increased $8.4 million, or 104%, in the first half
of 1997 as compared to the prior year period, representing 29% of the
revenue increase.
Distribution Services
Distribution Services revenues result primarily from the sale of MRO
products from the Company's network of approximately 120 distribution
service centers and from the sale of well casing and production tubing.
These products are purchased from numerous manufacturers and vendors,
including the Company's Products and Technology segment. While the
Company has increased revenues and improved its operating income by
entering into alliances and outsourcing arrangements, improvements in
operating results remain primarily dependent on attaining increased
volumes of activity through its distribution service centers while
controlling the fixed costs associated with numerous points of sale.
Distribution Services revenues during the second quarter 1997 exceeded
the comparable 1996 period by $31.7 million. This 26% increase
reflects the increased spending levels of the Company's alliance
partners and other customers. Sales of MRO products, tubular products,
drilling spares and fluid end expendable parts accounted for all of
this increase. Operating income in the second quarter of 1997 was $2.6
million (65%) greater than the second quarter of 1996. An increase in
operating expenses offset part of the margin recorded due to the volume
improvement, netting an 8% flow through of the revenue increase.
Revenues during the first six months of 1997 increased $57.1 million
(24%) over the comparable 1996 period. Significant increases in the
sales of MRO products ($25 million), tubular goods ($15 million),
drilling spares ($4 million), fluid end expendable parts ($3 million)
and production products ($5 million) generated the majority of this
gain. Operating income increased $4.1 million during the first six
months of 1997 compared to the same period in 1996. A portion of the
increased margin from the higher revenue levels was offset by higher
operating costs associated with the addition in the second half of 1996
of operating and administrative personnel in order to better manage
assets and in anticipation of the revenue growth that was achieved in
the first half of 1997.
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Corporate
Corporate costs increased during the second quarter of 1997 primarily
due to the incurrence of merger and acquisition costs.
Interest Expense
Interest expense decreased substantially during the first six months of
1997 due to substantially lower levels of debt that resulted from the
reductions made using cash proceeds from the IPO.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $148 million, an
increase of $18 million from December 31, 1996. Accounts receivable
increased by $5.7 million, net of acquisitions, during the first six
months of 1997 as revenues increased in the second quarter of 1997.
Inventories increased by $11.5 million, net of acquisitions, during
this period due to specific build programs and in response to
increasing demand for oilfield equipment and supplies.
The Company's business has not required large expenditures for capital
equipment in recent years. Total capital expenditures were $1.7
million during the first six months of 1997 and have averaged $3.8
million per year over the last three years. Enhancements to
information and inventory control systems represent a large portion of
these capital expenditures. Total capital expenditures of as much as
$6 million are anticipated in 1997 to meet the Company's operating
needs, including further enhancements to the Company's information
systems. The Company believes it has sufficient existing manufacturing
capacity to meet current and anticipated demand over the next twelve
months for its products and services. Any significantly greater
increases in demand for oilfield equipment products, to the extent
qualified subcontracting and outsourcing are not available, could
result in additional increases in capital expenditures.
The Company believes that cash generated from operations and amounts
available under its revolving credit facility will be sufficient to
fund operations, working capital needs, capital expenditure
requirements and financing obligations. The Company also believes any
significant increase in capital expenditures caused by any need to
increase manufacturing capacity can be funded from operations or
through debt financing.
The Company intends to pursue acquisition candidates, but the timing,
size or success of any acquisition effort and the related potential
capital commitments cannot be predicted. The Company expects to fund
future acquisitions primarily through cash flow from operations and
borrowings, including the unborrowed portion of the revolving credit
facility, and/or issuances of additional equity. There can be no
assurance that additional financing for acquisitions will be available
at terms acceptable to the Company.
In connection with the proposed transaction to acquire 100% of the
common shares of Dreco Energy Services Ltd., the Company has entered
into negotiations relative to a $125 million senior credit facility for
the United States and Canada. This new unsecured facility will replace
the existing credit facility upon successful completion of the
transaction.
FORWARD-LOOKING STATEMENTS
This document, other than historical financial information, may contain
forward-looking statements that involve risks and uncertainties.
Readers are referred to documents filed by the Company with the
Securities and Exchange Commission which identify significant risk
factors which could cause actual results to differ from those contained
in the forward-looking statements, including "Risk Factors" at Item 1
of the Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 14, 1997.
Stockholders elected two directors nominated by the board of directors
for terms expiring in 2000 by the following votes: James T. Dresher -
16,389,892 votes for and 18,970 votes withheld and Bruce M. Rothstein -
16,389,892 votes for and 18,970 votes withheld. There were no nominees
to office other than the directors elected.
Stockholders also adopted, approved and ratified the adoption by the
board of directors of the amended and restated National-Oilwell, Inc.
Stock Award and Long-Term Incentive Plan (the "Stock Plan") by the
following votes: for - 14,986,223; against - 514,087; abstained -
4,148. Broker non-votes totaled 904,404.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the second quarter, the Company filed a report on Form 8-K dated
May 14, 1997, pertaining to a Combination Agreement with Dreco Energy
Services Ltd., an Alberta Corporation.
SIGNATURE
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.
Date: August 14, 1997 / s / Steven W. Krablin
---------------------- ------------------------------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
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EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27.1 Financial Data Schedule
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
5,700
0
114,698
2,463
135,437
260,373
35,294
7,253
310,728
112,385
55,625
0
0
182
126,049
310,728
374,020
374,020
315,436
315,436
0
180
2,640
23,206
8,820
14,386
0
0
0
14,386
.78
.78
