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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 24, 1999
NATIONAL-OILWELL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-12317 76-0475815
- --------------------- ------------------- ---------------------
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
10000 RICHMOND AVENUE
4TH FLOOR
HOUSTON, TEXAS 77042-4200
- --------------------- ---------------------
(Address of Principal (Zip Code)
Executive Offices)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (713) 346-7500
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS
Effective July 1, 1999, National-Oilwell, Inc. (the "Company") acquired all
of the outstanding capital stock of Dupre' Supply Company and Dupre'
International, Inc. ("Dupre'") for 1.92 million shares of National-Oilwell
common stock. In addition, the Company replaced approximately $11 million
in Dupre' bank debt through borrowings under its own credit facility. The
transaction is a tax-free exchange and is recorded in accordance with the
pooling-of-interests method of accounting. The Louisiana-based Dupre'
Companies are leading suppliers of pipe, fittings, valves and valve
automation services to energy-related industries, primarily in the Gulf
coast region.
The information included in this Form 8-K combines the operating results of
National-Oilwell and Dupre pursuant to pooling-of-interests accounting.
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SELECTED FINANCIAL DATA
Data is restated to combine Dupre results pursuant to pooling-of-interests
accounting. As a result of the differing year ends of National-Oilwell and Dreco
prior to the combination of the companies, the balance sheets and results of
operations for dissimilar year ends have been combined pursuant to
pooling-of-interests accounting. National-Oilwell's results of operations for
the year ended December 31, 1997 include Dreco's results of operations for the
six months ended May 31, 1997 and the six months ended December 31, 1997. Data
for the year ended December 31, 1996 includes the operations of Dreco for the
twelve months ended and as of November 30, 1996. Data for the two years ended
August 31, 1995 reflect the operations of Dreco and Dupre only, as
National-Oilwell did not exist as a corporation prior to January 1, 1996.
YEAR ENDED DECEMBER 31, YEAR ENDED AUGUST 31,(1)
--------------------------------------- -------------------------
1998 1997(2) 1996(3) 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA: (UNAUDITED) (UNAUDITED)
Revenues $ 1,271,914 $ 1,097,406 $ 822,443 $ 129,634 $ 111,726
Operating income (loss) (4) 122,512 91,786 30,534 11,203 (8,666)
Income (loss) before taxes and extraordinary loss (5) 109,356 86,145 19,428 13,045 (6,338)
Income (loss) before extraordinary loss (5) 68,954 54,827 12,695 8,493 (6,362)
Net income (loss) 68,954 54,204 8,695 8,493 (6,362)
Income (loss) per share before extraordinary loss (5)
Basic 1.26 1.03 0.30 0.60 (0.50)
Diluted 1.26 1.02 0.30 0.59 (0.50)
Net income (loss) per share
Basic 1.26 1.02 0.20 0.60 (0.50)
Diluted 1.26 1.01 0.20 0.59 (0.50)
OTHER DATA:
Depreciation and amortization 20,598 15,443 9,219 4,907 5,203
Capital expenditures 29,241 34,783 15,796 6,666 6,041
BALANCE SHEET DATA:
Working capital 364,130 255,610 171,608 35,090 19,814
Total assets 855,888 602,993 376,523 87,208 79,463
Long-term debt, less current maturities 221,198 61,719 39,302 2,183 1,580
Stockholders' equity 393,299 284,208 173,099 51,584 40,605
(1) Data for the two years ended August 31, 1995 reflect the operations of
Dreco and Dupre only, as the operations of National-Oilwell were acquired
from a predecessor partnership as of January 1, 1996 and, in accordance
with generally accepted accounting principles, cannot be combined prior to
that date. Data for Dupre are as of December 31, 1994 and December 31,
1995.
(2) In order to conform Dreco's fiscal year end to National-Oilwell's December
31 year end, the results of operations for the month of June 1997 have been
included directly in stockholders' equity. Dreco's revenues and net income
were $13.4 million and $0.9 million for the month.
(3) In order to conform Dreco's fiscal year end to National-Oilwell's December
31 year end, the results of operations for the period from September 1,
1995 through November 30, 1995 have been included directly in stockholders'
equity. Dreco's revenues and net income were $33.4 million and $3.2 million
for such period.
(4) In December 1998, National-Oilwell recorded a $16,400,000 charge related to
personnel reductions and facility closures and a $5,600,000 charge related
to the writedown to the lower of cost or market of certain tubular
inventories. In September 1997, National-Oilwell recorded a $10,660,000
charge related to merger expenses incurred in connection with the
combination with Dreco. In October 1996, National-Oilwell recorded
$16,611,000 in charges related to the cancellation of management agreements
and expenses related to special incentive plans that terminated upon the
occurrence of the initial public offering of its common stock.
(5) National-Oilwell recorded extraordinary losses in September 1997 of
$623,000 (net of $376,000 income tax benefit) and in October 1996 of
$4,000,000 (net of $2,400,000 income tax benefit) due to the write-offs of
deferred debt issuance costs.
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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, current
and near term expectations for 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. See "Risk Factors" in the 1998 Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in millions):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Products and Technology $ 668.1 $ 371.8 $ 266.5
Downhole Products 61.8 69.0 28.6
Distribution Services 608.5 722.7 579.3
Eliminations (66.5) (66.1) (52.0)
-------- -------- --------
Total $1,271.9 $1,097.4 $ 822.4
======== ======== ========
Operating Income:
Products and Technology $ 119.6 $ 53.4 $ 25.9
Downhole Products 17.0 25.6 8.9
Distribution Services 8.9 32.1 20.5
Corporate (6.6) (8.7) (8.2)
-------- -------- --------
138.9 102.4 47.1
Special Charge 16.4 10.7 16.6
-------- -------- --------
Total $ 122.5 $ 91.7 $ 30.5
======== ======== ========
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, as well as complete land drilling and
well servicing rigs and structural components such as masts, derricks and
substructures. 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 National-Oilwell's and
other manufacturers' equipment. As noted above, low oil prices are expected to
have a negative impact on operating results in 1999.
Revenues for the Products and Technology segment increased by $296.3 million
over 1997 primarily due to increased sales of major capital equipment and
drilling spares. Specifically, the sale of complete rig packages, mud pumps,
cranes and SCR equipment were substantially greater than the prior year.
Revenues generated by acquisitions completed in 1998 totaled approximately $48
million during the year.
Operating income increased by $66.2 million in 1998 compared to the prior year
due principally to the increased sales volume. Operating income as a percentage
of revenues increased due to higher prices and manufacturing and operating cost
efficiencies resulting from the higher volumes. Various acquisitions completed
in 1998 contributed $2.6 million in operating profit during the year.
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Revenues during 1997 increased $105.3 million over 1996 primarily due to
increased demand for drilling capital equipment and spare parts as well as fluid
end expendable parts. Acquisitions in 1997 other than Dreco accounted for $26.6
million of the increase. Operating income for this segment increased by $27.5
million when compared to the prior year with 1997 acquisitions other than Dreco
accounting for $5.0 million of this incremental income and the remainder due to
the higher activity levels.
Backlog of the Products and Technology capital products was $77 million at
December 31, 1998 compared to $270 million at December 31, 1997 and $38 million
at December 31, 1996. Substantially all of the current backlog is expected to be
shipped by June 30, 1999.
Downhole Products
National-Oilwell designs and manufactures drilling motors and specialized
drilling tools for rent and sale. Rentals generally involve products that are
not economical for a customer to own or maintain because of the broad range of
equipment required for the diverse hole sizes and depths encountered in drilling
for oil and gas. Sales generally involve products that require infrequent
service, are disposable or are sold in countries where National-Oilwell does not
provide repair and maintenance services.
Downhole Products revenues decreased by $7.2 million (10%) in 1998 when compared
to 1997, due primarily to lower motor sales and rentals, particularly in Canada.
Operating income decreased $8.6 million in 1998 compared to the prior year. This
decrease in operating income was a result of reduced margins due to the volume
reduction and an increase in overhead spending caused by the addition of two
minor acquisitions.
Revenues in 1997 increased $40.4 million over 1996 due to a general increase in
market activity plus the inclusion of Vector Oil Tool revenues, a 1997
acquisition, of $24.6 million. Operating income in 1997 exceeded the prior year
by $16.7 million with Vector accounting for $14.7 million of the increase.
Distribution Services
Distribution Services revenues result primarily from the sale of maintenance,
repair and operating supplies 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 1998 fell short of the comparable 1997
period by $114.2 million. This 16% decrease reflects the reduced demand for
tubular and general rig operating supplies precipitated by the significant
decrease in oil prices. North American revenues were off approximately 16%, with
tubular revenues roughly two-thirds of the level achieved in 1997. Operating
income in 1998 was approximately $23 million below 1997, due to reduced margins
from the decline in revenues partially offset by reduced operating expenses, and
the recording of a $5.6 million charge related to the writedown to lower of cost
or market of certain tubular inventories.
Distribution Services revenues in 1997 exceeded 1996 by $143.4 million. This 25%
increase reflects the increased spending levels of the Company's alliance
partners and other customers. Incremental sales of maintenance, repair and
operating supplies ($65.4 million), tubular products ($58.0 million), drilling
spares ($8.1 million) and fluid end expendable parts and related pumps ($8.0
million) accounted for the majority of this increase. Operating income in 1997
exceeded the prior year by $11.6 million (57%) as an increase in operating
expenses offset part of the incremental margin.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. While corporate charges in 1997 were comparable to 1996, these
costs decreased substantially in 1998 due to the elimination of duplicate
corporate costs that existed prior to the actual combination with Dreco.
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Special Charges
During the fourth quarter of 1998, the Company recorded a special charge of
$16.4 million ($10.4 million after tax, or $0.20 per share) related to
operational changes resulting from the depressed market for the oil and gas
industry. The components of the special charge are as follows (in millions):
Asset impairments $ 5.4
Severance 5.6
Facility closures and exit costs 5.4
--------
$ 16.4
========
The cash and non-cash elements of the charge approximate $11.0 million and $5.4
million, respectively. Breakdown of the charge by business segment is:
Products and Technology $ 11.1
Downhole Products 1.4
Distribution Services 3.0
Corporate .9
-----------
$ 16.4
===========
The asset impairment losses of $5.4 million consists primarily of the shutdown
of four North American manufacturing facilities. Assets related to these
non-productive facilities which are not in service totaling $10.0 million have
been reclassified on the balance sheet to property held for sale and have been
written down to their estimated fair value, less cost of disposal. Severance
costs of $5.6 million relate to the involuntary termination of approximately 200
employees, most of whom are located in North America. Facility closure costs of
$5.4 million consists principally of lease cancellation and facility exit costs.
Substantially all of the actions associated with this charge will be fully
implemented before the end of the first quarter of 1999.
During 1997, National-Oilwell recorded a $10.7 million charge ($8.1 million
after tax) related to various professional fees and integration costs incurred
in connection with the combination with Dreco.
During 1996, National-Oilwell incurred certain one-time expenses in connection
with its initial public offering of common stock, as follows: (i) a management
services agreement was terminated at a cost of $4.4 million ($2.8 million after
tax) and (ii) expenses and payout under National-Oilwell's Value Appreciation
Plans, which resulted in National-Oilwell recording an expense of $12.2 million
($7.6 million after tax). The Value Appreciation Plans required the issuance of
681,852 shares of common stock and payment of $6.4 million in cash.
Interest Expense
Interest expense increased during 1998 when compared to the prior year due to
the incurrence of debt to finance the Phoenix acquisition. Interest expense in
1997 was substantially lower than in 1996 due to lower amounts of debt
outstanding and lower interest rates under the new credit facilities.
Income Taxes
National-Oilwell is subject to U.S. federal, state, and foreign taxes and
recorded a combined tax rate of 37% in 1998, 36% in 1997, and 35% in 1996.
National-Oilwell has net operating tax loss carryforwards in the United States
that could reduce future tax expense by up to $6.8 million. Additional loss
carryforwards in Europe generally would reduce goodwill if realized in the
future. Due to the uncertainty of future utilization, all of the potential
benefits described above have been fully reserved. During 1998, National-Oilwell
realized a tax benefit of $2.6 million from its U.S. carryforwards, but closure
of certain operations may significantly reduce future realization.
National-Oilwell's combined tax rate in 1998 would have been 39% if these
carryforwards were excluded.
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Extraordinary Losses
In the third quarter of 1997, National-Oilwell replaced its existing credit
facility and recorded a charge of $1.0 million ($0.6 million after tax) due to
the write-off of deferred debt costs. In the fourth quarter of 1996, the credit
facility established in connection with the acquisition of the Company was
replaced, resulting in the write-off of $6.4 million ($4.0 million after tax) in
deferred debt costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, National-Oilwell had working capital of $364.1 million, an
increase of $108.5 million from December 31, 1997. Significant components of
National-Oilwell's assets are accounts receivable and inventories. Accounts
receivable, including unbilled revenues, increased by $91.3 million and
inventories increased $5.3 million during 1998. Decreases in accounts payable of
$20.7 million and customer prepayments of $12.3 million were offset by an
increase in other accrued liabilities of $27.9 million.
Total capital expenditures were $29.2 million during 1998, $34.8 million in 1997
and $15.8 million in 1996. Additions and enhancements to the downhole rental
tool fleet and information management and inventory control systems represent a
large portion of these capital expenditures. Capital expenditures are expected
to decline to approximately $15-16 million in 1999, which will include
approximately $7 million necessary to complete the installation of a new
information system for the Distribution Services group. National-Oilwell
believes it has sufficient existing manufacturing capacity to meet currently
anticipated demand through 1999 for its products and services.
On September 25, 1997, National-Oilwell entered into a new five-year unsecured
$125 million revolving credit facility. The credit facility is available for
acquisitions and general corporate purposes. The credit facility provides for
interest at prime or LIBOR plus 0.625%, subject to adjustment based on
National-Oilwell's Capitalization Ratio, as defined. The credit facility
contains financial covenants and ratios regarding minimum tangible net worth,
maximum debt to capital and minimum interest coverage.
National-Oilwell 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. National-Oilwell 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.
National-Oilwell intends to pursue acquisition candidates, but the timing, size
or success of any acquisition effort and the related potential capital
commitments cannot be predicted. National-Oilwell expects to fund future cash
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 acquisition funds will be available at terms
acceptable to National-Oilwell.
Inflation has not had a significant impact on National-Oilwell's operating
results or financial condition in recent years.
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.
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In 1997, the Company's Distribution Services segment decided to replace its main
business system in order to significantly improve supply chain capabilities. The
new system installation is expected to be complete in the third quarter of 1999
and will be Year 2000 compliant. In addition, the Company continues to identify,
evaluate and implement modifications to its other business systems in order to
achieve Year 2000 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 has initiated formal communication 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.
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. The Company expects to
complete all critical new installations, conversions and necessary systems
modifications and conversions 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.
MARKET RISK DISCLOSURE
The Company is subject to market risk exposure related to changes in interest
rates on its credit facility which is comprised of revolving credit notes in the
United States and Canada. A portion of the borrowings are denominated in
Canadian funds which could expose the Company to market risk with exchange rate
movements, although such is mitigated by the Company's substantial operations in
Canada. These instruments carry interest at a pre-agreed upon percentage point
spread from either the prime interest rate or LIBOR. Under its credit facility,
the Company may, at its option, fix the interest rate for certain borrowings
based on a spread over LIBOR for 30 days to 6 months. At December 31, 1998, the
Company had $55.6 million outstanding under its credit facility. Based on this
balance, an immediate change of one percent in the interest rate would cause a
change in interest expense of approximately $0.6 million on an annual basis. The
Company's objective in maintaining variable rate borrowings is the flexibility
obtained regarding early repayment without penalties and lower overall cost as
compared with fixed-rate borrowings.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
expects to adopt the new Statement effective January 1, 2001. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this Statement will
have a significant effect on its results of operations or financial position.
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In April 1998, the AICPA issued SOP 98-5, Reporting the Costs of Start-up
Activities. The SOP is effective for fiscal years beginning after December 15,
1998, which requires that the costs associated with such activities be expensed
as incurred. The adoption of the new statement will not have a significant
effect on earnings or the financial position of the Company.
FORWARD-LOOKING STATEMENTS
This document, other than historical financial information, contains
forward-looking statements that involve risks and uncertainties. Such statements
relate to National-Oilwell's sales of capital equipment, backlog, capacity,
liquidity and capital resources, plans for acquisitions and any related
financings and the impact of Year 2000. Given these uncertainties, current or
prospective investors are cautioned not to place undue reliance on any such
forward-looking statements. National-Oilwell disclaims any obligation or intent
to update any such factors or forward-looking statements to reflect future
events or developments.
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REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
National-Oilwell, Inc.
We have audited the supplemental consolidated balance sheets of
National-Oilwell, Inc. formed as a result of the consolidation of
National-Oilwell, Inc., Dupre' Supply Company and Dupre' International, Inc.
(The Dupre' Companies) as of December 31, 1998 and 1997 and the related
supplemental consolidated statements of income, shareholders' equity, and cash
flows for each of the years then ended. The supplemental consolidated financial
statements give retroactive effect to the merger of National-Oilwell, Inc. and
The Dupre' Companies on July 1, 1999, which has been accounted for using the
pooling-of-interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the management of National-Oilwell, Inc. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit in 1996 the financial
statements of Dreco Energy Services, Ltd., a wholly-owned subsidiary, which
statements reflect total revenues of $113,195,000 for the year ended November
30, 1996. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Dreco Energy Services, Ltd., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of National-Oilwell, Inc.
at December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the years then, after giving retroactive effect
to the merger of The Dupre' Companies, as described in the notes to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Houston, Texas
August 19, 1999
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To the Directors of
Dreco Energy Services Ltd.
We have audited the consolidated balance sheet of Dreco Energy Services
Ltd. as at November 30, 1996 and the consolidated statements of operations,
shareholders' equity and cash flows for the twelve months ended November 30,
1996. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the company
as at November 30, 1996 and the consolidated results of its operations and its
cash flows for the twelve months then ended in accordance with generally
accepted accounting principles in the United States.
/s/ COOPERS & LYBRAND
Chartered Accountants
Edmonton, Alberta
October 21, 1997
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NATIONAL-OILWELL, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,963 $ 20,391
Receivables, less allowance of $4,963 and $4,162 301,405 210,062
Unbilled revenues -- 31,521
Inventories 253,385 216,578
Deferred taxes 16,489 9,839
Prepaid and other current assets 7,677 6,988
------------ ------------
Total current assets 590,919 495,379
Property, plant and equipment, net 96,174 77,921
Deferred taxes 6,757 4,919
Goodwill 145,696 24,233
Property held for sale 9,981 --
Other assets 6,361 541
------------ ------------
$ 855,888 $ 602,993
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,427 $ 10,543
Accounts payable 131,575 152,296
Customer prepayments 25,392 37,688
Accrued compensation 7,237 12,957
Other accrued liabilities 54,158 26,285
------------ ------------
Total current liabilities 226,789 239,769
Long-term debt 221,198 61,719
Deferred taxes 4,097 2,675
Other liabilities 10,505 14,622
------------ ------------
Total liabilities 462,589 318,785
Commitments and contingencies
Stockholders' equity:
Common stock - par value $.01; 57,916,785 and 53,575,782 shares
issued and outstanding at December 31, 1998 and December 31, 1997 579 536
Additional paid-in capital 248,194 207,950
Accumulated other comprehensive income (13,821) (7,018)
Retained earnings 158,347 82,740
------------ ------------
393,299 284,208
------------ ------------
$ 855,888 $ 602,993
============ ============
The accompanying notes are an integral part of these statements.
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NATIONAL-OILWELL, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues $ 1,271,914 $ 1,097,406 $ 822,443
Cost of revenues 990,341 880,708 693,253
----------- ----------- -----------
Gross profit 281,573 216,698 129,190
Selling, general, and administrative 142,628 114,252 82,045
Special charge 16,433 10,660 16,611
----------- ----------- -----------
Operating income 122,512 91,786 30,534
Interest and financial costs (13,901) (7,088) (12,710)
Interest income 1,025 1,524 1,301
Other income (expense), net (280) (77) 303
----------- ----------- -----------
Income before income taxes and extraordinary loss 109,356 86,145 19,428
Provision for income taxes 40,402 31,318 6,733
----------- ----------- -----------
Net income before extraordinary loss 68,954 54,827 12,695
Extraordinary loss, net of tax benefit -- 623 4,000
----------- ----------- -----------
Net income $ 68,954 $ 54,204 $ 8,695
=========== =========== ===========
Net income per share:
Basic
Net income before extraordinary loss $ 1.26 $ 1.03 $ 0.30
Extraordinary loss -- (0.01) (0.10)
----------- ----------- -----------
Net income $ 1.26 $ 1.02 $ 0.20
=========== =========== ===========
Net income per share:
Diluted
Net income before extraordinary loss $ 1.26 $ 1.02 $ 0.30
Extraordinary loss -- (0.01) (0.10)
----------- ----------- -----------
Net income $ 1.26 $ 1.01 $ 0.20
=========== =========== ===========
Weighted average shares outstanding:
Basic 54,700 53,044 41,938
=========== =========== ===========
Diluted 54,882 53,876 42,473
=========== =========== ===========
The accompanying notes are an integral part of these statements.
12
14
NATIONAL-OILWELL, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flow from operating activities:
Net income $ 68,954 $ 54,204 $ 8,695
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 20,598 15,443 9,219
Provision for losses on receivables 610 730 526
Provision for deferred income taxes (4,092) (3,121) (2,433)
Gain on sale of assets (2,315) (2,954) (2,708)
Foreign currency transaction (gain) loss (103) 602 (157)
Special charge 16,433 10,660 16,611
Extraordinary loss -- 999 6,400
Changes in assets and liabilities, net of acquisitions: -- -- --
Receivables (49,524) (64,290) (30,142)
Unbilled revenues 31,521 (17,641) (8,151)
Inventories 17,327 (71,359) (5,805)
Prepaid and other current assets 3,985 1,886 (837)
Accounts payable (46,986) 51,252 9,128
Other assets/liabilities, net (23,379) 23,332 (8,331)
------------ ------------ ------------
Net cash provided (used) by operating activities 33,029 (257) (7,985)
------------ ------------ ------------
Cash flow from investing activities:
Purchases of property, plant and equipment (29,241) (34,783) (15,796)
Proceeds from sale of assets 10,001 4,525 4,058
Businesses acquired, net of cash (130,963) (19,253) --
Partnership acquired, net of cash -- -- (106,248)
Other -- 248 (350)
------------ ------------ ------------
Net cash used by investing activities (150,203) (49,263) (118,336)
------------ ------------ ------------
Cash flow from financing activities:
Borrowings (payments) on line of credit 1,317 61,267 (86,040)
Retirement of long-term debt (40,855) (41,359) --
Net proceeds from issuance of long-term debt 148,937 -- --
Proceeds from issuance of common stock -- 37,240 107,947
Proceeds from stock options exercised 1,002 6,546 341
Proceeds from debt related to acquisition of Company -- -- 103,378
Other (1,434) (2,134) 4,382
------------ ------------ ------------
Net cash provided (used) by financing activities 108,967 61,560 130,008
------------ ------------ ------------
Effect of exchange rate losses on cash (221) (4,097) (180)
------------ ------------ ------------
Increase (decrease) in cash and equivalents (8,428) 7,943 3,507
Cash and cash equivalents, beginning of year 20,391 14,198 16,317
Change in cash to conform fiscal year end -- (1,750) (5,626)
------------ ------------ ------------
Cash and cash equivalents, end of year $ 11,963 $ 20,391 $ 14,198
============ ============ ============
The accompanying notes are an integral part of these statements.
13
15
NATIONAL-OILWELL, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS TOTAL
------------- ------------- ------------- ------------- -------------
Beginning Balance $ 75 $ 40,134 $ (3,706) $ 18,027 $ 54,530
Net income 8,695 8,695
Currency translation adjustments 1,419 1,419
-------------
Comprehensive income 10,114
Stock options exercised 341 341
Issuance of 17,857,698 shares 179 107,497 107,676
Tax benefit of options exercised 1,521 1,521
Premerger dividends to Dupre shareholders (1,083) (1,083)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 254 149,493 (2,287) 25,639 173,099
Net income 54,204 54,204
Currency translation adjustments (4,731) (4,731)
-------------
Comprehensive income 49,473
Stock options exercised 5 6,546 6,551
Issuance of 1,053,000 shares 10 37,225 37,235
Stock issued for acquisitions 8 10,984 3,130 14,122
Two-for-one stock split 259 (259)
Change in subsidiary's year end 917 917
Premerger dividends to Dupre shareholders (1,150) (1,150)
Tax benefit of options exercised 3,961 3,961
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 536 207,950 (7,018) 82,740 284,208
Net income 68,954 68,954
Currency translation adjustments (6,979) (6,979)
Unrealized losses on available-for-sale
securities (473) (473)
-------------
Comprehensive income 61,502
Stock options exercised 1,002 1,002
Stock issued for acquisitions 43 39,138 649 6,653 46,483
Tax benefit of options exercised 104 104
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1998 $ 579 $ 248,194 $ (13,821) $ 158,347 $ 393,299
============= ============= ============= ============= =============
The accompanying notes are an integral part of these statements.
14
16
NATIONAL-OILWELL, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
On July 1, 1999, National-Oilwell acquired all the outstanding stock of Dupre'
Supply Company and Dupre' International Inc., a Louisiana based distribution and
valve automation business for 1.92 million shares of National-Oilwell common
stock. The transaction was a tax-free exchange and was recorded in accordance
with the pooling-of-interests method of accounting. Theses supplemental
financial statements restate the previously reported results of National-Oilwell
to combine the historical financial statements of Dupre' in accordance with the
pooling-of-interests method of accounting.
Effective September 25, 1997, National-Oilwell completed a combination with
Dreco Energy Services Ltd. The combination was accounted for as a
pooling-of-interests and the consolidated financial statements of
National-Oilwell and Dreco have been combined with all prior periods restated.
As a result of the combination, each Dreco Class "A" common share outstanding
was converted into .9159 of a Dreco Exchangeable Share and approximately 14.4
million Exchangeable Shares were issued. Each Exchangeable Share is intended to
have substantially identical economic and legal rights as, and will ultimately
be exchanged on a one-for-one basis for, a share of National-Oilwell common
stock. As of December 31, 1998, approximately 82% of the Exchangeable Shares had
been converted into National-Oilwell common stock.
Effective January 1, 1996, National-Oilwell, Inc. acquired National-Oilwell, a
general partnership. The transaction was accounted for under the purchase method
of accounting.
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., as
described below. 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.
Other Acquisitions
On December 2, 1996, Dreco acquired 100% of the issued and outstanding shares of
Vector Oil Tool Ltd. for consideration of 778,000 Dreco common shares and cash
consideration of $1.5 million. This business involves the manufacture, sale,
rental and service of downhole motors and other products. The transaction was
accounted for using the purchase method, is reflected in the 1997 financial
statements due to the combination of differing balance sheet dates as discussed
above and did not have a material effect on National-Oilwell's consolidated
financial statements.
On April 25, 1997, National-Oilwell purchased the drilling controls business of
Ross Hill Controls and its affiliate, Hill Graham Controls Limited, for $19.2
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 National-Oilwell's consolidated financial
statements.
On May 15, 1997, National-Oilwell acquired by merger 100% of the common stock of
PEP, Inc., a manufacturer of petroleum expendable pump products. The Company
issued 800,000 shares of common stock pursuant to the transaction which was
recorded in accordance with the pooling-of-interests method of accounting. The
transaction did not have a material effect on National-Oilwell's historical
consolidated financial statements and financial statements prior to April 1,
1997 were not restated.
15
17
On May 29, 1998, National-Oilwell acquired all of the capital stock of Phoenix
Energy Products Holdings, Inc. for approximately $115 million in a business
combination which was accounted for under the purchase method of accounting.
Phoenix manufactures and sells multiple product lines that are complementary to
those of National-Oilwell. The acquisition of the stock and the repayment of
approximately $41 million in Phoenix debt were financed primarily through the
issuance of $150 million in unsecured seven year senior notes. The excess of the
purchase price over the book value of the net assets was approximately $106
million. Assuming the acquisition had occurred at the beginning of each period
presented, pro forma summary results of operations would have been as follows:
1998 1997
--------------- ---------------
Revenues $ 1,305,373 $ 1,179,837
Income before extraordinary item 68,213 59,272
Net income 68,197 58,532
Net income per share:
Basic
Income before
extraordinary item $ 1.25 $ 1.16
Net income 1.25 1.14
Diluted
Income before
extraordinary item $ 1.24 $ 1.14
Net income 1.24 1.13
The unaudited pro forma summary is not necessarily indicative of results of
operations that would have occurred had the purchase been made at the beginning
of the year or of future results of operations of the combined businesses.
The seller of Phoenix is an affiliate of First Reserve Corporation, which is the
beneficial owner of 22.9% of National-Oilwell's common stock. Two directors of
National-Oilwell are affiliated with First Reserve.
On July 21, 1998, National-Oilwell purchased 100% of the capital stock of
Roberds-Johnson Industries, Inc., a manufacturer of a broad range of drilling
equipment, in exchange for 1.35 million shares of National-Oilwell common stock.
This transaction was accounted for under the pooling-of-interests method of
accounting. The Company's financial statements prior to July 1, 1998 have not
been restated since the transaction did not have a material effect on
National-Oilwell's consolidated historical financial statements.
On December 16, 1998, National-Oilwell purchased the business of DOSCO, a major
Canadian oilfield distribution business, for 3 million shares of
National-Oilwell common stock and a note for approximately US $6.5 million. This
transaction was accounted for under the purchase method of accounting. DOSCO has
been combined with the National-Oilwell's existing Canadian distribution
business. Pro-forma information has not been provided as such amounts are not
material.
Effective July 7, 1999, National-Oilwell, Inc. (the "Company") acquired the
assets and certain operating liabilities of CE Drilling Products, Inc., a
privately held company, in a cash transaction valued at approximately $65
million. Continental Emsco Drilling Products consists of Emsco drilling
machinery and Wilson mobile rigs. The transaction was accounted for under the
purchase method of accounting and did not have a material effect on
National-Oilwell's consolidated financial statements.
16
18
Divestitures
On June 17, 1999 the Company sold its tubular product line within its
Distribution Services segment for approximately $15 million, generating a
pre-tax loss of $0.9 million ($0.5 million after-tax). The sale of this product
line did not have a material effect on National-Oilwell's consolidated
financial statements.
On June 24, 1999 the Company sold its drill bit product line within its Products
& Technology segment for approximately $12 million, recording a pre-tax loss of
$1.0 million ($0.6 million after-tax). The sale of this product line did not
have a material effect on National-Oilwell's consolidated financial statements.
17
19
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of National-Oilwell
and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments
Financial instruments consist primarily of cash and cash equivalents,
receivables, payables and debt instruments. Cash equivalents include only those
investments having a maturity of three months or less at the time of purchase.
The carrying values of these financial instruments approximate their respective
fair values.
Inventories
Inventories consist of oilfield products and oil country tubular goods,
manufactured equipment, manufactured specialized drilling products and downhole
motors and spare parts for manufactured equipment and drilling products.
Inventories are stated at the lower of cost or market using the first-in,
first-out or average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
improvements which extend the lives of property and equipment are capitalized
while minor replacements, maintenance and repairs are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations. Depreciation is provided using
the straight-line method or declining balance method over the estimated useful
lives of individual items.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the life of
the related debt security and accumulated amortization was $205,000 and $24,000
at December 31, 1998 and 1997, respectively. Goodwill is amortized on a
straight-line basis over its estimated life of 10-40 years. Accumulated
amortization at December 31, 1998 and 1997 was $4,061,000 and $1,214,000.
Foreign Currency
The functional currency for National-Oilwell's Canadian, United Kingdom, German
and Australian operations is the local currency. The cumulative effects of
translating the balance sheet accounts from the functional currency into the
U.S. dollar at current exchange rates are included in cumulative foreign
currency translation adjustments. The U.S. dollar is used as the functional
currency for the Singapore and Venezuelan operations. Accordingly, certain
assets are translated at historical exchange rates and all translation
adjustments are included in income. For all operations, gains or losses from
remeasuring foreign currency transactions into the functional currency are
included in income.
Revenue Recognition
Revenue from the sale and rental of products and delivery of services is
recognized upon passage of title, incurrance of rental charges or delivery of
services to the customer. Revenue is recognized on certain significant contracts
in the Products and Technology segment using the percentage of completion method
based on the percentage of total costs incurred to total costs expected.
Provision for estimated losses, if any, is made in the period such losses are
estimable.
Income Taxes
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board Statement No. 109, Accounting for Income
Taxes.
18
20
Concentration of Credit Risk
National-Oilwell grants credit to its customers, which operate primarily in the
oil and gas industry. National-Oilwell performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral,
but may require letters of credit for certain international sales. Reserves are
maintained for potential credit losses and such credit losses have historically
been within management's expectations.
Stock-Based Compensation
National-Oilwell uses the intrinsic value method in accounting for its
stock-based employee compensation plans. Compensation costs for stock options
would be recognized over the vesting period if options were granted with an
exercise price below market on the date of grant.
Net Income Per Share
The following table sets forth the computation of weighted average basic and
diluted shares outstanding (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------ ------ ------
Denominator for basic earnings per
share--weighted average shares 54,700 53,044 41,938
Effect of dilutive securities:
Employee stock options 182 832 535
------ ------ ------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 54,882 53,876 42,473
====== ====== ======
3. INVENTORIES
Inventories consist of (in thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Raw materials and supplies $ 24,304 $ 19,970
Work in process 39,991 34,849
Finished goods and purchased products 189,090 161,759
-------- --------
Total $253,385 $216,578
======== ========
4. STATEMENTS OF CASH FLOWS
The following information supplements the Consolidated Statements of Cash
Flows (in thousands):
DECEMBER 31,
-----------------------------------------
1998 1997 1996
------- ------- -------
Cash paid during the period for:
Interest $ 6,989 $ 7,648 $ 9,205
Income taxes 48,003 24,405 4,538
19
21
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
DECEMBER 31, DECEMBER 31,
USEFUL LIVES 1998 1997
-------------------- --------------- ---------------
Land and improvements 2-20 Years $ 6,421 $ 6,823
Buildings and improvements 5-31 Years 27,080 23,254
Machinery and equipment 5-12 Years 52,774 34,550
Computer and office equipment 3-10 Years 36,810 16,541
Rental equipment 1-7 Years 29,217 36,982
-------------- ---------------
152,302 118,150
Less accumulated depreciation (56,128) (40,229)
-------------- ---------------
$ 96,174 $ 77,921
============== ===============
6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- ---------------
Revolving credit facilities $ 55,637 $ 60,560
6 7/8% senior notes 150,000 --
Other 23,988 11,702
-------------- ---------------
229,625 72,262
Less current portion 8,427 10,543
-------------- ---------------
$ 221,198 $ 61,719
============== ===============
On September 25, 1997, National-Oilwell entered into a new five-year unsecured
$125 million revolving credit facility that was used in part to repay amounts
outstanding under the previous revolving credit facilities and other
indebtedness. The credit facility is available for acquisitions and general
corporate purposes and provides up to $50 million for letters of credit, of
which $16 million were outstanding at December 31, 1998. The credit facility
provides for interest at prime or LIBOR plus 0.625% (7.75% and 6.25% at December
31, 1998) subject to adjustment based on National-Oilwell's Capitalization
Ratio, as defined. The credit facility contains financial covenants and ratios
regarding minimum tangible net worth, maximum debt to capital and minimum
interest coverage.
National-Oilwell also has additional credit facilities totaling $22.5 million
used primarily for letters of credit, of which $3.1 million were outstanding at
December 31, 1998.
In June 1998, National-Oilwell sold $150 million of 6.875% unsecured senior
notes due July 1, 2005. Interest is payable on January 1 and July 1 of each
year.
7. PENSION PLANS
National-Oilwell and its consolidated subsidiaries have several pension plans
covering substantially all of its employees. Defined-contribution pension plans
cover most of the U.S. and Canadian employees and are based on years of service,
a percentage of current earnings and matching of employee contributions. For the
years ended December 31, 1998, 1997 and 1996, pension expense for
defined-contribution plans was $3.7 million, $3.5 million and $2.3 million, and
all funding is current.
20
22
One of National-Oilwell's subsidiaries in the United Kingdom has a
defined-benefit pension plan whose participants are primarily retired and
terminated employees who are no longer accruing benefits. The pension plan
assets are invested primarily in equity securities, United Kingdom government
securities, overseas bonds and cash deposits. At December 31, 1998, the plan
assets at fair market value were $43.5 million and the projected benefit
obligation was $27.3 million.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
CURRENCY UNREALIZED GAINS
TRANSLATION ON AVAILABLE-
ADJUSTMENTS FOR-SALE SECURITIES TOTAL
----------- ------------------- --------
Beginning Balance $ (3,706) $ -- $ (3,706)
Currency translation adjustments 1,419 -- 1,419
-------- -------- --------
Balance at December 31, 1996 (2,287) -- (2,287)
Currency translation adjustments (4,731) -- (4,731)
-------- -------- --------
Balance at December 31, 1997 (7,018) -- (7,018)
Currency translation adjustments (6,979) -- (6,979)
Unrealized gains on available-
for-sale securities -- 244 244
Deferred taxes relating to unrealized
gains on available-for-sale securities -- (68) (68)
-------- -------- --------
Balance at December 31, 1998 $(13,997) $ 176 $(13,821)
======== ======== ========
9. COMMITMENTS AND CONTINGENCIES
National-Oilwell leases land, buildings and storage facilities, vehicles and
data processing equipment under operating leases extending through various dates
up to the year 2004. Rent expense for the years ended December 31, 1998, 1997
and 1996 was $10.3 million, $9.0 million and $10.5 million. National-Oilwell's
minimum rental commitments for operating leases at December 31, 1998, excluding
future payments applicable to facilities to be closed as part of the 1998
Special Charge, were as follows: 1999 - $5.7 million; 2000 - $3.4 million; 2001
- - $1.1 million; 2002 - $0.3 million; 2003 - $0.3 million; thereafter - $0.3
million
National-Oilwell is involved in various claims, regulatory agency audits and
pending or threatened legal actions involving a variety of matters. The total
liability on these matters at December 31, 1998 cannot be determined; however,
in the opinion of management, any ultimate liability, to the extent not
otherwise provided for, should not materially affect the financial position,
liquidity or results of operations of National-Oilwell.
National-Oilwell's business is affected both directly and indirectly by
governmental laws and regulations relating to the oilfield service industry in
general, as well as by environmental and safety regulations that specifically
apply to National-Oilwell's business. Laws and regulations protecting the
environment have generally become more expansive and stringent in recent years
and National-Oilwell believes the trend will continue. Although National-Oilwell
has not incurred material costs in connection with its compliance with such
laws, there can be no assurance that other developments, such as stricter
environmental laws, regulations and enforcement policies thereunder could not
result in additional, presently unquantifiable costs or liabilities to
National-Oilwell.
21
23
10. COMMON STOCK
National-Oilwell has authorized 75 million shares of $.01 par value common
stock. National-Oilwell also has authorized 10 million shares of $.01 par value
preferred stock, none of which is issued or outstanding.
National-Oilwell's stock plans collectively authorize the grant of restricted
stock or options to purchase up to 5,832,606 shares of National-Oilwell's common
stock to officers, key employees, non-employee directors and other persons.
Options granted generally vest over a 3-year period starting one year from the
date of grant and generally expire 5 years from the date of grant. During 1996,
prior to National-Oilwell becoming a public company, 1,882,606 shares of
restricted common stock were purchased by executive officers. These shares are
subject to restrictions on transferability and are not entitled to receive cash
dividends or distributions until such restrictions lapse. Restrictions lapse
annually on 20% of these shares beginning on January 17, 1997 or in their
entirety upon the occurrence of (i) a merger or consolidation of
National-Oilwell into another company, (ii) a sale of all or substantially all
the assets of National-Oilwell, or (iii) a sale of all the common stock of
National-Oilwell. Restrictions also lapse in their entirety upon a participant's
disability, death or involuntary termination of employment without cause. During
1998 and 1997, 112,954 and 225,906 shares of restricted stock were repurchased
by the Company pursuant to the original terms of the issuance. In accordance
with the plan, these forfeited shares may be reawarded in the future.
Options outstanding at December 31, 1998 under the stock option plans have
exercise prices between $5.62 and $28.81 per share, and expire at various dates
from March 21, 2002 to January 13, 2007. The weighted average exercise price on
the 904,511 outstanding options at December 31, 1998 is $21.74.
The following summarizes option activity:
WEIGHTED AVERAGE SHARE PRICE
----------------------------
INCENTIVE PRIVATE INCENTIVE PRIVATE TOTAL
PLANS AGREEMENTS PLANS AGREEMENTS OPTIONS
----------- ----------- --------- ---------- -------
OPTIONS OUTSTANDING:
Balance at December 31, 1996 $ 6.01 $ 7.03 663,114 201,498 864,612
Granted 17.95 21.84 447,142 119,062 566,204
Cancelled 14.90 -- (132,456) -- (132,456)
Exercised 5.77 12.53 (439,208) (320,560) (759,768)
-------- -------- -------
Balance at December 31, 1997 13.94 -- 538,592 -- 538,592
Granted 27.46 513,896 -- 513,896
Cancelled 22.82 (44,020) -- (44,020)
Exercised 9.60 (103,957) -- 103,957)
-------- -------- -------
Balance at December 31, 1998 21.74 -- 904,511 -- 904,511
======== ======== =======
22
24
OPTIONS EXERCISABLE:
Balance at December 31, 1996 $ 5.72 $ 7.03 328,260 201,498 529,758
Became exercisable 5.96 21.84 167,055 119,062 286,117
Exercisable cancelled 5.62 -- (9,159) -- (9,159)
Exercised 5.77 12.53 (439,208) (320,560) (759,768)
-------- -------- --------
Balance at December 31, 1997 6.16 -- 46,948 -- 46,948
Became exercisable 13.74 178,249 178,249
Exercisable cancelled 22.32 (7,034) (7,034)
Exercised 9.60 (103,957) (103,957)
-------- -------- --------
Balance at December 31, 1998 13.97 -- 114,206 -- 114,206
======== ======== ========
The weighted average fair value of options granted during 1998 was approximately
$10.23 per share as determined using the Black-Scholes option-pricing model.
Assuming that National-Oilwell had accounted for its stock-based compensation
using the alternative fair value method of accounting under FAS No. 123 and
amortized the fair value to expense over the option's vesting period, net income
and earnings per share would have been affected by $0.02 from the amounts
reported. These pro forma results may not be indicative of future effects.
The Company evaluates annually the grant of options to eligible participants and
on February 9, 1999, 1,233,889 options to purchase shares of common stock were
granted at an exercise price of $10.13, the fair value of the common stock at
that date.
In January 1996, National-Oilwell established Value Appreciation Plans intended
to reward participants for enhancing the value of National-Oilwell's common
stock. The company's initial public offering represented a triggering event
under these plans, resulting in a one-time charge before taxes of $12.2 million
($7.6 million after tax). National-Oilwell paid $2.9 million of this amount in
cash at the time of the initial public offering and became obligated to pay an
additional $3.5 million in cash in five annual installments beginning January
17, 1997. The balance of the obligation was payable by the issuance of common
stock. As of December 31, 1997, 365,588 shares of common stock had been issued
and another 316,264 shares of common stock were issued on or about January 17,
1999.
11. INCOME TAXES
The domestic and foreign components of income before income taxes were as
follows (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Domestic $ 58,788 $ 50,996 $ 3,879
Foreign 50,568 35,149 15,549
-------- -------- --------
$109,356 $ 86,145 $ 19,428
======== ======== ========
23
25
The components of the provision for income taxes consisted of (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Current:
Federal $ 24,357 $ 17,508 $ 4,620
State 2,074 1,496 561
Foreign 18,063 15,435 3,985
-------- -------- --------
44,494 34,439 9,166
-------- -------- --------
Deferred:
Federal (4,151) (287) (3,898)
State (845) (64) (864)
Foreign 904 (2,770) 2,329
-------- -------- --------
(4,092) (3,121) (2,433)
-------- -------- --------
$ 40,402 $ 31,318 $ 6,733
======== ======== ========
24
26
The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Federal income tax at statutory rate $ 38,282 $ 30,115 $ 6,825
Foreign income tax rate differential 237 495 176
State income tax net of federal benefit 1,151 919 --
Tax benefit of foreign sales corporation (2,547) (990) --
Nondeductible expenses 1,223 2,837 1,170
Incremental U.S. tax on foreign earnings 2,517 -- --
Unbenefited losses 2,903 209 --
Change in deferred tax valuation allowance (2,765) (1,617) (462)
Other (599) (650) (976)
-------- -------- --------
$ 40,402 $ 31,318 $ 6,733
======== ======== ========
Significant components of National-Oilwell's deferred tax assets and liabilities
were as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
Deferred tax assets:
Accrued liabilities $ 18,641 $ 14,055
Net operating loss carryforwards 13,521 16,096
Other 9,625 5,913
-------- --------
Total deferred tax assets 41,787 36,064
Valuation allowance for deferred tax assets (18,541) (21,306)
-------- --------
23,246 14,758
-------- --------
Deferred tax liabilities:
Tax over book depreciation 1,743 2,226
Other 2,354 449
-------- --------
Total deferred tax liabilities 4,097 2,675
-------- --------
Net deferred tax assets $ 19,149 $ 12,083
======== ========
In the United States, the Company has $19.9 million of net operating loss
carryforwards as of December 31, 1998, which expire at various dates through
2009. These operating losses were acquired in the combination with Dreco and are
associated with Dreco's US subsidiary. As a result of share exchanges occurring
since the combination resulting in a more than 50% aggregate change in the
beneficial ownership of Dreco, the availability of these loss carryforwards to
reduce future United States federal taxable income may have become subject to
various limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. In addition, these net operating losses can only be used to offset
separate company taxable income of Dreco's US subsidiary. Since the ultimate
realization of these net operating losses is uncertain, the related potential
benefit of $6.8 million has been recorded with a full valuation allowance.
Future income tax expense will be reduced if the Company ultimately realizes the
benefit of these net operating losses.
Outside the United States, the Company has $19.8 million of net operating loss
carryforwards as of December 31, 1998 that are available indefinitely. The
related potential benefit available of $6.7 million has been recorded with a
full valuation allowance. If the Company ultimately realizes the benefit of
these net operating losses, $4.7 million would reduce goodwill and other
intangible assets and $2.0 million would reduce income tax expense.
25
27
The deferred tax valuation allowance decreased $2.8 million and $1.6 million for
the period ending December 31, 1998 and December 31, 1997, respectively,
resulting from the realization of foreign net operating losses and investment
tax credits that were previously deferred. National-Oilwell's deferred tax
assets are expected to be realized principally through future earnings.
Undistributed earnings of the Company's foreign subsidiaries amounted to $59.1
million and $44.4 million at December 31, 1998 and December 31, 1997. Those
earnings are considered to be permanently reinvested and no provision for U.S.
federal and state income taxes has been made. Distribution of these earnings in
the form of dividends or otherwise would result in both U.S. federal taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
in various foreign countries. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practical; however, unrecognized
foreign tax credit carryforwards would be available to reduce some portion of
the U.S. liability. Withholding taxes of approximately $6.1 million would be
payable upon remittance of all previously unremitted earnings at December 31,
1998.
12. SPECIAL CHARGES
During the fourth quarter of 1998, the Company recorded a special charge of
$16.4 million ($10.4 million after tax, or $0.20 per share) related to
operational changes resulting from the depressed market for the oil and gas
industry. The components of the special charge are as follows (in millions):
Asset impairments $ 5.4
Severance 5.6
Facility closures and exit costs 5.4
--------
$ 16.4
========
The cash and non-cash elements of the charge approximate $11.0 million and $5.4
million, respectively. Breakdown of the charge by business segment is:
Products and Technology $ 11.1
Downhole Products 1.4
Distribution Services 3.0
Corporate .9
-------
$ 16.4
=======
The asset impairment losses of $5.4 million consist primarily of the shutdown of
four North American manufacturing facilities. Assets related to these
non-productive facilities which are not in service totaling $10.0 million have
been reclassified on the balance sheet to property held for sale and have been
written down to their estimated fair value, less cost of disposal. Severance
costs of $5.6 million relate to the involuntary termination of approximately 200
employees, most of which are located in North America. Facility closure costs of
$5.4 million consists principally of lease cancellation and facility exit costs.
Substantially all of the actions associated with this charge will be fully
implemented before the end of the first quarter of 1999.
During 1997, National-Oilwell recorded a $10.7 million charge ($8.1 million
after tax) related to various professional fees and integration costs incurred
in connection with the combination with Dreco.
During 1996, National-Oilwell incurred certain one-time expenses in connection
with its initial public offering of common stock, as follows: (i) a management
services agreement was terminated at a cost of $4.4 million ($2.8 million after
tax) and (ii) expenses and payout under National-Oilwell's Value Appreciation
Plans, which resulted in National-Oilwell recording an expense of $12.2 million
($7.6 million after tax). The Value Appreciation Plans required the issuance of
681,852 shares of common stock and payment of $6.4 million in cash.
26
28
13. EXTRAORDINARY LOSSES
In the third quarter of 1997, the replacement of the previous credit facility
resulted in the write-off of $1.0 million ($0.6 million after tax) in deferred
financing costs related to the replaced agreement. In the fourth quarter of
1996, another credit facility was replaced, resulting in the write-off of $6.4
million ($4.0 million after tax) in deferred financing costs related to the
replaced agreement.
14. RELATED PARTY TRANSACTIONS
Prior to becoming a public company, National-Oilwell entered into a five-year
Management Services Agreement with National-Oilwell's then largest stockholders,
whereby National-Oilwell would pay for senior management assistance and other
services as agreed and pay fees in connection with each acquisition or
disposition completed during a five-year period. After becoming a public
company, this agreement was terminated pursuant to a Deferred Fee Agreement,
which provides for cash payments of up to $4.4 million. As of December 31, 1998,
cash payments aggregating $3.5 million have been made to Inverness/Phoenix LLC
and First Reserve Corporation in connection with the Deferred Fee Agreement.
Future payments totaling $900,000 will be made to Inverness/Phoenix LLC during
1999. In addition, National-Oilwell paid transaction and management fees of $2.6
million to the Inverness/Phoenix LLC and $1.2 million to First Reserve
Corporation in connection with the purchase of the company from a previous
owner.
On May 29, 1998, National-Oilwell acquired Phoenix Energy Products Holdings,
Inc., an affiliate of First Reserve Corporation, as more fully described in
footnote 1.
15. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
National-Oilwell's operations consist of three segments: Products and
Technology, Downhole Products and Distribution Services. The Products and
Technology segment designs and manufactures a variety of oilfield equipment for
use in oil and gas drilling, completion and production activities. The Downhole
Products segment designs and manufactures drilling motors and specialized
drilling tools for rent and sale. The Distribution Services segment distributes
an extensive line of oilfield supplies, oilfield equipment and tubular products.
Intersegment sales and transfers are accounted for at commercial prices and are
eliminated in consolidation. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies of the Company. The Company evaluates performance of each reportable
segment based upon its operating income, excluding non-recurring items.
No single customer accounted for 10% or more of consolidated revenues during the
three years ended December 31, 1998.
27
29
Summarized financial information is as follows (in thousands):
Business Segments
PRODUCTS AND DOWNHOLE DISTRIBUTION CORPORATE/
TECHNOLOGY PRODUCTS SERVICES ELIMINATIONS(1) TOTAL
--------------- --------------- --------------- --------------- ---------------
DECEMBER 31, 1998
Revenues from:
Unaffiliated customers $ 603,766 $ 59,636 $ 608,512 $ -- $ 1,271,914
Intersegment sales 64,301 2,119 -- (66,420) --
--------------- --------------- --------------- --------------- ---------------
Total revenues 668,067 61,755 608,512 (66,420) 1,271,914
Operating income (loss) 119,573 17,021 8,911(2) (22,993) 122,512(2)
Capital expenditures 5,030 9,112 14,220 879 29,241
Depreciation and amortization 7,173 9,338 3,047 1,040 20,598
Identifiable assets 510,380 88,183 226,893 30,432 855,888
DECEMBER 31, 1997
Revenues from:
Unaffiliated customers $ 306,481 $ 68,192 $ 722,733 $ -- $ 1,097,406
Intersegment sales 65,360 820 -- (66,180) --
--------------- --------------- --------------- --------------- ---------------
Total revenues 371,841 69,012 722,733 (66,180) 1,097,406
Operating income (loss) 53,453 25,551 32,128 (19,346) 91,786
Capital expenditures 13,812 16,724 3,612 635 34,783
Depreciation and amortization 3,448 8,950 1,830 1,215 15,443
Identifiable assets 274,336 78,036 213,056 37,565 602,993
DECEMBER 31, 1996
Revenues from:
Unaffiliated customers $ 214,802 $ 28,329 $ 579,312 $ -- $ 822,443
Intersegment sales 51,732 275 -- (52,007) --
--------------- --------------- --------------- --------------- ---------------
Total revenues 266,534 28,604 579,312 (52,007) 822,443
Operating income (loss) 25,902 8,858 20,518 (24,744) 30,534
Capital expenditures 3,126 10,959 1,680 31 15,796
Depreciation and amortization 2,766 4,304 2,094 55 9,219
Identifiable assets 123,680 43,338 178,990 30,515 376,523
- --------------------
(1) Operating loss of Corporate includes a special charge of $16,433 for 1998,
$10,660 for 1997 and $16,611 for 1996.
(2) Includes a $5,600 charge related to the writedown to the lower of cost or
market of certain tubular inventories.
28
30
Geographic Areas:
UNITED UNITED
STATES CANADA KINGDOM OTHER ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
DECEMBER 31, 1998
Revenues from:
Unaffiliated customers $ 988,112 $ 196,493 $ 54,625 $ 32,684 $ -- $ 1,271,914
Interarea sales 58,112 34,912 4,056 1,044 (98,124) --
------------ ------------ ------------ ------------ ------------ ------------
Total revenues 1,046,224 231,405 58,681 33,728 (98,124) 1,271,914
Long-lived assets 489,112 306,847 36,321 23,608 -- 855,888
DECEMBER 31, 1997
Revenues from:
Unaffiliated customers $ 825,739 $ 201,360 $ 38,223 $ 32,084 $ -- $ 1,097,406
Interarea sales 42,273 11,858 2,383 703 (57,217) --
------------ ------------ ------------ ------------ ------------ ------------
Total revenues 868,012 213,218 40,606 32,787 (57,217) 1,097,406
Long-lived assets 409,026 131,078 27,240 35,649 -- 602,993
DECEMBER 31, 1996
Revenues from:
Unaffiliated customers $ 615,313 $ 146,067 $ 29,152 $ 31,911 $ -- $ 822,443
Interarea sales 34,252 10,028 1,912 504 (46,696) --
------------ ------------ ------------ ------------ ------------ ------------
Total revenues 649,565 156,095 31,064 32,415 (46,696) 822,443
Long-lived assets 252,886 66,129 21,632 35,876 -- 376,523
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results as restated to reflect the combination with Dupre
were as follows (in thousands, except per share data which have been restated to
comply with FAS 128):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1998
Revenues $ 327,108 $ 320,398 $ 330,204 $ 294,204 $ 1,271,914
Gross Profit (1) 67,204 74,911 77,300 62,158 281,573
Special Charge -- -- -- 16,433 16,433
Income (loss) before taxes 34,278 38,127 33,317 3,634 109,356
Net income 21,869 23,841 20,891 2,353 68,954
Net income per diluted share 0.40 0.44 0.38 0.04 1.26
YEAR ENDED DECEMBER 31, 1997
Revenues $ 224,619 $ 256,233 $ 291,525 $ 325,029 $ 1,097,406
Gross Profit 40,647 46,219 58,697 71,135 216,698
Special Charge -- -- 10,660 -- 10,660
Income (loss) before taxes 15,853 18,995 18,408 32,889 86,145
Net income before extraordinary loss 10,462 12,890 11,140 20,335 54,827
Net income 10,462 12,890 10,517 20,335 54,204
Net income per diluted share, before extraordinary loss 0.20 0.24 0.21 0.38 1.02
Net income per diluted share 0.20 0.24 0.19 0.38 1.01
- -----------------
(1) The 4th quarter includes a $5,600 charges related to the writedown to the
lower of cost or market of certain tubular inventories.
29
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
By: /s/ Steven W. Krablin
----------------------------------
Steven W. Krablin
Vice President and
Chief Financial Officer
Dated: August 24, 1999
32
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young, LLC
1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
National-Oilwell, L.P.
NOW International, Inc.
National-Oilwell Canada Ltd.
National Oilwell (U.K.) Limited
National-Oilwell de Venezuela
National-Oilwell Pte. Ltd.
National-Oilwell Pty Ltd.
Dreco Energy Services, Ltd.
Dreco Inc.
Vector Oil Tool Ltd.
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of National-Oilwell, Inc. of our report dated August 19, 1999 with
respect to the supplemental consolidated financial statements of
National-Oilwell, Inc. included in this Current Report (Form 8-K) dated August
24, 1999.
Form Description
- ---- -----------
S-8 Stock Award and Long Term Incentive Plan, Value Appreciation and
Incentive Plan A and Value Appreciation and Incentive Plan B (No.
333-15859)
S-8 National-Oilwell Retirement and Thrift Plan (No. 333-36359)
S-8 Post Effective Amendment No. 3 to the Registration Statement on Form
S-4 filed on Form S-8 pertaining to the Dreco Energy Services Ltd.
Amended and Restated 1989 Employee Incentive Stock Option Plan, as
amended, and Employment and Compensation Arrangements Pursuant to
Private Stock Option Agreements (No. 333-21191)
S-3 Post Effective Amendment No. 3 to Form S-4 filed on Form S-3
pertaining to the offer to exchange $150,000,000 of 6 7/8% senior
notes due 2005 for $150,000,000 of 6 7/8% senior notes due 2005,
Series B. (No. 333-53717)
S-3 Registration of 3,000,000 shares of common stock issued to Westburne
Inc. (No. 333-72509)
/s/ ERNST & YOUNG LLP
Houston, Texas
August 19, 1999
5
1,000
YEAR YEAR
DEC-31-1998 DEC-31-1997
JAN-01-1998 JAN-01-1997
DEC-31-1998 DEC-31-1997
11,963 20,391
0 0
306,368 214,224
4,963 4,162
253,385 216,578
590,919 495,379
152,302 118,150
56,128 40,229
855,888 602,993
226,789 239,769
221,198 61,719
0 0
0 0
579 536
392,720 283,672
855,888 602,993
1,271,914 1,097,406
1,271,914 1,097,406
990,341 880,708
990,341 880,708
0 0
610 730
13,901 7,088
109,356 86,145
40,402 31,318
68,957 54,827
0 0
0 623
0 0
68,957 54,204
1.26 1.02
1.26 1.01
