1
================================================================================
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999 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.)
10000 RICHMOND AVENUE
4TH FLOOR
HOUSTON, TEXAS
77042-4200
-------------------------------------------------
(Address of principal executive offices)
(713) 346-7500
----------------------------------------------------
(Registrant's 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 [X] NO [ ]
As of May 12, 1999, 56,326,602 common shares were outstanding, assuming the
exchange on a one-for-one basis of all Exchangeable Shares of Dreco Energy
Services Ltd. into shares of National-Oilwell, Inc. common stock.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,790 $ 11,440
Receivables, less allowance of $5,213 and $4,718 212,546 281,312
Inventories 225,700 241,987
Deferred income taxes 7,205 16,489
Prepaids and other current assets 7,581 6,533
--------- ---------
465,822 557,761
Property, plant and equipment, net 91,840 91,756
Deferred income taxes 14,147 6,757
Goodwill 144,968 145,696
Property held for sale 9,981 9,981
Other assets 5,790 6,042
--------- ---------
$ 732,548 $ 817,993
========= =========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,949 $ 7,447
Accounts payable 90,883 118,579
Customer prepayments 10,375 25,392
Accrued compensation 4,059 7,237
Other accrued liabilities 44,991 52,696
--------- ---------
154,257 211,351
Long-term debt 178,204 205,637
Deferred income taxes 2,539 4,097
Other liabilities 10,651 10,105
--------- ---------
345,651 431,190
Commitments and contingencies
Stockholders' equity:
Common stock - par value $.01; 56,315,979 shares
and 55,996,785 shares issued and outstanding
at March 31, 1999 and December 31, 1998 563 561
Additional paid-in capital 246,676 248,198
Accumulated other comprehensive income (15,925) (13,827)
Retained earnings 155,583 151,871
--------- ---------
386,897 386,803
--------- ---------
$ 732,548 $ 817,993
========= =========
The accompanying notes are an integral part of these statements.
1
3
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
---------------------------
1999 1998
--------- ---------
Revenues $ 185,241 $ 301,852
Cost of revenues 145,129 237,060
--------- ---------
Gross profit 40,112 64,792
Selling, general and administrative 29,825 29,493
--------- ---------
Operating income 10,287 35,299
Other income (expense):
Interest and financial costs (3,874) (1,248)
Interest income 166 221
Other (583) (726)
--------- ---------
Income before income taxes 5,996 33,546
Provision for income taxes 2,284 12,409
--------- ---------
Net income $ 3,712 $ 21,137
========= =========
Net income per share:
Basic $ 0.07 $ 0.41
========= =========
Diluted $ 0.07 $ 0.40
========= =========
Weighted average shares outstanding:
Basic 56,313 51,982
========= =========
Diluted 56,382 52,257
========= =========
The accompanying notes are an integral part of these statements.
2
4
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
Cash flow from operating activities:
Net income $ 3,712 $ 21,137
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 5,414 4,258
Provision for losses on receivables 547 212
Provision (benefit) for deferred income taxes 228 (404)
Gain on sale of assets (341) (647)
Foreign currency transaction loss 558 635
Changes in assets and liabilities, net of acquisitions:
Receivables 68,181 1,065
Inventories 17,407 (22,309)
Prepaid and other current assets (1,027) 1,458
Accounts payable (27,267) (10,071)
Other assets/liabilities, net (31,903) 10,963
-------- --------
Net cash provided by operating activities 35,509 6,297
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment (4,084) (4,925)
Proceeds from sale of assets 880 1,103
-------- --------
Net cash used by investing activities (3,204) (3,822)
-------- --------
Cash flow from financing activities:
Payments on line of credit (30,931) (4,393)
Proceeds from stock options exercised -- 388
-------- --------
Net cash used by financing activities (30,931) (4,005)
-------- --------
Effect of exchange rate (gain) loss on cash (24) 2,958
-------- --------
Increase in cash and equivalents 1,350 1,428
Cash and cash equivalents, beginning of period 11,440 19,824
-------- --------
Cash and cash equivalents, end of period $ 12,790 $ 21,252
======== ========
Supplemental disclosures of cash flow information: Cash payments during the
period for:
Interest $ 6,351 $ 1,363
Income taxes 6,253 10,156
The accompanying notes are an integral part of these statements.
3
5
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Information concerning common stock and per share data has been restated on an
equivalent share basis and assumes the exchange of all Exchangeable Shares
issued in connection with the combination with Dreco Energy Services Ltd. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported and contingent amounts of assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. 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, 1998. No significant accounting
changes have occurred during the three months ended March 31, 1999.
2. INVENTORIES
Inventories consist of (in thousands):
March 31, December 31,
1999 1998
--------- -------------
Raw materials and supplies $ 22,757 $ 24,304
Work in process 33,205 39,991
Finished goods and purchased products 169,738 177,692
--------- ---------
Total $ 225,700 $ 241,987
========= =========
3. SPECIAL CHARGES
During the fourth quarter of 1998, the Company recorded a special charge of
$16.4 million related to operational changes resulting from the depressed market
for the oil and gas industry. This charge was comprised of $11.0 million in
estimated cash expenditures related to employee severance and facility exit
costs and $5.4 million in the write-down of certain assets. As of March 31,
1999, approximately $10.6 million has been spent or formally committed.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which requires the
recognition of all derivatives on the balance sheet at fair value. The Company
will adopt the new Statement effective January 1, 2000 and anticipates it will
have no significant effect on its results of operations or financial position.
5. COMPREHENSIVE INCOME
During the first quarter of 1999 and 1998, total comprehensive income was $1,614
and $24,314.
4
6
6. BUSINESS SEGMENTS
Effective January 1, 1999 the Company changed the structure of its internal
organization and now includes the former Downhole Products segment as a
component of the Products and Technology segment. Prior year segment information
has been restated to reflect this change.
Segment information (unaudited) follows (in thousands):
Quarter Ended March 31,
------------------------
1999 1998
--------- ---------
Revenues from unaffiliated customers
Products and Technology $ 99,163 $ 145,663
Distribution Services 86,170 156,189
Intersegment revenues
Products and Technology 8,516 20,181
Distribution Services -- --
Operating income (loss)
Products and Technology 13,542 31,391
Distribution Services (2,110) 5,238
--------- ---------
Total profit for reportable segments 11,432 36,629
Unallocated corporate costs (1,145) (1,330)
Net interest expense (3,708) (1,027)
Other expense (583) (726)
--------- ---------
Income before income taxes $ 5,996 $ 33,546
========= =========
5
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
National-Oilwell is a worldwide leader in the design, manufacture and sale of
machinery and equipment and in the distribution of maintenance, repair and
operating products used in oil and gas drilling and production.
National-Oilwell'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. Beginning in late 1997, oil
prices declined due to concerns about excess production, less demand from Asia
due to an economic slowdown and warmer than average weather in many parts of the
United States. The resulting lower demand for products and services is expected
to have a negative impact on National-Oilwell's 1999 operating results.
Beginning in March 1999, oil prices have recovered to approximately $18 per
barrel. National-Oilwell expects its revenues to increase if its customers gain
confidence in sustained commodity prices at this level.
RESULTS OF OPERATIONS
Operating results (unaudited) by segment are as follows (in thousands):
Quarter Ended March 31,
------------------------
1999 1998
--------- ---------
Revenues
Products and Technology $ 107,679 $ 165,844
Distribution Services 86,170 156,189
Eliminations (8,608) (20,181)
--------- ---------
Total $ 185,241 $ 301,852
========= =========
Operating Income
Products and Technology 13,542 31,391
Distribution Services (2,110) 5,238
Corporate (1,145) (1,330)
--------- ---------
Total $ 10,287 $ 35,299
========= =========
Products and Technology
Effective January 1, 1999 the Company changed the structure of its internal
organization and now includes the former Downhole Products segment as a
component of the Products and Technology segment. Prior year segment information
has been restated to reflect this change.
The Products and Technology segment designs and manufactures a large line of
proprietary products, including drawworks, mud pumps, power swivels, electrical
control systems and downhole motors and tools, as well as complete land drilling
and well servicing rigs and structural components such as cranes, masts,
derricks and substructures for offshore rigs. A substantial installed base of
these products result 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
National-Oilwell's and other manufacturers' equipment.
6
8
Revenues for the Products and Technology segment decreased by $58.2 million
(35%) in the first quarter of 1999 as compared to the same quarter in 1998 due
primarily to a decline of $46 million in the sale of major capital equipment and
rig packages and reduced volume in the rental and sale of downhole motors,
expendable pumps and related parts. Capital equipment sales were significantly
lower in the derricks and masts, cranes and power swivel product categories.
Operating income decreased by $17.8 million (57%) in the first quarter compared
to the same quarter in 1998 resulting primarily from the lower revenue volume.
Higher fixed costs resulting from acquisitions completed during 1998 also had an
unfavorable impact, as operating income as a percentage of revenue fell from 19%
to 13%.
Backlog of the Products and Technology group declined $27 million during the
first quarter of 1999 and was $50 million at March 31, 1999, as receipt of new
orders have slowed substantially. At March 31, 1998, backlog stood at $273
million. Substantially all of the current backlog will be shipped by the end of
1999.
Distribution Services
Distribution Services revenues result primarily from the sale of maintenance,
repair and operating supplies ("MRO") from the Company's network of 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.
Distribution Services revenues during the first quarter of 1999 were below the
comparable 1998 period by $70 million. This 45% decline is a direct result of
reduced spending by customers due to low oil prices. Tubular revenues accounted
for $45 million of this decline while the sale of MRO products in the United
States was responsible for the rest of the decline. Operating income in the
first quarter of 1999 was $7.3 million lower than the first quarter of 1998 due
primarily to the reduced sales volume. Selling, general and administrative
spending was $1.2 million lower than the first quarter of the prior year due to
initiatives completed in 1998 to adjust to current market activity levels.
Corporate
Corporate costs during the first quarter of 1999 were comparable to the same
period in the prior year.
Special Charges
During the fourth quarter of 1998, the Company recorded a special charge of
$16.4 million related to operational changes resulting from the depressed market
for the oil and gas industry. This charge was comprised of $11.0 million in
estimated cash expenditures related to employee severance and facility exit
costs and $5.4 million in the write-down of certain assets. As of March 31,
1999, approximately $10.6 million has been spent or formally committed.
Interest Expense
Interest expense increased during the three months ended March 31, 1999 when
compared to the prior year due to the incurrence of debt to finance the May 1998
acquisition of Phoenix Energy Products Holdings, Inc.
7
9
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $312 million, a $35
million decrease from December 31, 1998. Most of the cash generated from the
working capital reduction has been used to repay outstanding debt under the
Company's revolving credit facility. Additional decreases in debt are expected
in the second quarter from further reductions in working capital.
Total capital expenditures were $4.1 million during the first three months of
1999. Enhancements to information and inventory control systems represent a
large portion of these capital expenditures. The Company believes it has
sufficient existing manufacturing capacity to meet currently anticipated demand
through 1999 for its products and services.
The Company has a five-year unsecured $125 million revolving credit facility
that is available for acquisitions and general corporate purposes. The credit
facility provides for interest at prime or LIBOR plus 0.625% (7.75% and 5.625%
at March 31,1999), subject to adjustment based on the Company's Capitalization
Ratio, as defined therein. The credit facility contains financial covenants and
ratios regarding minimum tangible net worth, maximum debt to capital and minimum
interest coverage.
The Company believes that cash generated from operations and amounts available
under the credit facility will be sufficient to fund operations, working capital
needs, capital expenditure requirements and financing obligations.
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
with cash flow from operations and borrowings, including the unborrowed portion
of the credit facility or new debt issuances, but may also issue additional
equity either directly or in connection with acquisitions. There can be no
assurance that additional financing for acquisitions will be available at terms
acceptable to the Company.
YEAR 2000
The year 2000 issue is the result of computer programs having been written using
two digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The new system installation for the Company's Distribution Services segment
remains on target for completion in the third quarter of 1999 and will be Year
2000 compliant. In addition, the Company continues to implement modifications to
its other business systems in order to achieve year 2000 date conversion
compliance. The total cost of the year 2000 readiness is estimated at $1.0
million, of which approximately half has been spent. The Year 2000 review covers
internal computer systems and process control systems, as well as embedded
systems in products delivered. In addition, the Company continues to communicate
with its significant suppliers, customers and business partners to determine the
extent to which we are vulnerable to any failure of these third parties' to
remedy their own Year 2000 issues. Third party vendors of hardware and packaged
software have also been contacted about their products' compliance status. While
the ability of third parties with whom the Company transacts business to address
adequately their year 2000 issue is outside its control, the Company will
evaluate the need to change sources as necessary.
8
10
Management believes that with installation of new systems, conversion to new
software and modifications to existing software, the year 2000 issue will pose
no significant operational problems for National-Oilwell. Completion of all new
installations, conversions and necessary systems modifications and conversions
is expected by September 30, 1999. Accordingly, the Company does not have a
contingency plan with respect to the year 2000 issue. There can be no assurance,
however, that the Company will be able to install and maintain year 2000
compliant software and should this occur, operational difficulties could result.
In such circumstances, delays in financial processes could occur, but neither
these nor any product-related problems are expected to have an adverse effect on
the Company's financial position.
The costs of the project and the dates on which the Company believes it will
complete its Year 2000 project are based on management's best estimates. These
estimates were derived using numerous assumptions of future events, including
continued availability of resources, third party's Year 2000 status and plans
and other factors. However, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include the
availability and cost of personnel, the ability to identify and correct all Year
2000 impacted areas, timely and effective action by third parties, the ability
to implement interfaces between Year 2000-ready systems and those systems not
being replaced, and other similar uncertainties.
FORWARD-LOOKING STATEMENTS
This document, other than historical financial information, contains
forward-looking statements that involve risks and uncertainties. Such statements
relate to the Company's revenues, sales of capital equipment, backlog, capacity,
liquidity and capital resources and plans for acquisitions and any related
financings. 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. Given these uncertainties, current or prospective investors are cautioned
not to place undue reliance on any such forward-looking statements. The Company
disclaims any obligation or intent to update any such factors or forward-looking
statements to reflect future events or developments.
9
11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any report on Form 8-K during the quarter for
which this report is filed.
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: May 12, 1999 /s/ Steven W. Krablin
------------------------------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
10
12
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
5
1,000
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
12,790
0
217,759
5,213
225,700
465,822
148,619
56,779
732,548
154,257
178,204
0
0
563
386,334
732,548
185,241
185,241
145,129
145,129
0
547
3,874
5,996
2,284
3,712
0
0
0
3,712
0.07
0.07
