SEC Filing

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, 2000 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. As of May 12, 2000, 66,351,790 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, 2000 1999 ---------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 13,822 $ 12,403 Receivables, less allowance of $5,913 and $5,506 232,854 185,920 Inventories 254,155 254,052 Deferred taxes 7,513 9,296 Income taxes receivable 10,171 10,171 Prepaid and other current assets 5,644 6,534 --------- --------- Total current assets 524,159 478,376 Property, plant and equipment, net 114,766 109,147 Deferred taxes 8,301 7,781 Goodwill, net 310,400 174,498 Property held for sale 7,424 7,424 Other assets 5,099 5,085 --------- --------- $ 970,149 $ 782,311 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ -- $ -- Accounts payable 122,088 100,963 Customer prepayments 11,291 16,838 Accrued compensation 3,178 4,232 Other accrued liabilities 44,641 54,177 --------- --------- Total current liabilities 181,198 176,210 Long-term debt 227,425 196,007 Deferred taxes 2,844 6,138 Other liabilities 8,114 8,881 --------- --------- Total liabilities 419,581 387,236 Commitments and contingencies Stockholders' equity: Common stock - par value $.01; 66,340,591 shares and 58,223,971 shares issued and outstanding at March 31, 2000 and December 31, 1999 663 582 Additional paid-in capital 402,723 246,553 Accumulated other comprehensive income (15,237) (11,537) Retained earnings 162,419 159,477 --------- --------- 550,568 395,075 --------- --------- $ 970,149 $ 782,311 ========= ========= 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, ----------------------------- 2000 1999 --------- --------- Revenues $ 229,386 $ 203,923 Cost of revenues 186,967 162,459 --------- --------- Gross profit 42,419 41,464 Selling, general and administrative 33,188 31,187 --------- --------- Operating income 9,231 10,277 Other income (expense): Interest and financial costs (4,590) (4,210) Interest income 288 166 Other (184) (614) --------- --------- Income before income taxes 4,745 5,619 Provision for income taxes 1,803 2,284 --------- --------- Net income $ 2,942 $ 3,335 ========= ========= Net income per share: Basic $ 0.05 $ 0.06 ========= ========= Diluted $ 0.05 $ 0.06 ========= ========= Weighted average shares outstanding: Basic 63,557 58,198 ========= ========= Diluted 64,303 58,267 ========= ========= 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, ---------------------------- 2000 1999 --------- --------- Cash flow from operating activities: Net income $ 2,942 $ 3,335 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 6,919 5,784 Provision for losses on receivables 853 547 Provision (benefit) for deferred income taxes (2,031) 228 Gain on sale of assets (823) (341) Foreign currency transaction loss 163 558 Changes in assets and liabilities, net of acquisitions: Receivables (23,218) 70,314 Inventories 4,168 19,187 Prepaid and other current assets 890 (1,027) Accounts payable 7,780 (28,792) Other assets/liabilities, net (15,257) (31,869) -------- -------- Net cash provided/(used) by operating activities (17,614) 37,924 -------- -------- Cash flow from investing activities: Purchases of property, plant and equipment (5,281) (4,198) Proceeds from sale of assets 2,199 880 Business acquired, net of cash (4,526) -- -------- -------- Net cash used by investing activities (7,608) (3,318) -------- -------- Cash flow from financing activities: Borrowings/(payments) on line of credit 24,418 (32,950) Proceeds from stock options exercised 2,224 -- Other -- (390) -------- -------- Net cash provided/(used) by financing activities 26,642 (33,340) -------- -------- Effect of exchange rate (gain) loss on cash (1) (24) -------- -------- Increase in cash and equivalents 1,419 1,242 Cash and cash equivalents, beginning of period 12,403 11,963 -------- -------- Cash and cash equivalents, end of period $ 13,822 $ 13,205 ======== ======== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest $ 6,468 $ 6,351 Income taxes 884 6,253 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 Company employs accounting policies that are in accordance with generally accepted accounting principles in the United States which requires Company management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying unaudited consolidated financial statements present information in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's 1999 Annual Report on Form 10-K. In the opinion of the Company, the consolidated financial statements include all adjustments, all of which are of a normal, recurring nature, necessary for a fair presentation of the results for the interim periods. The results of operations for the three months ended March 31, 2000 and 1999 may not be indicative of results for the full year. No significant accounting changes have occurred during the three months ended March 31, 2000. During February 2000, the Company completed its merger with Hitec ASA, a leading supplier of highly advanced systems and solutions, including leading-edge automation and remote control technologies, for the oil and gas industry. The Company issued approximately 7.9 million shares of common stock at $19.50 per share for all of the outstanding shares of Hitec with goodwill related to the transaction approximating $136 million. Hitec's financial results are included in National Oilwell's consolidated results effective February 1, 2000. Pro forma results of operations are not presented since they are not considered material. 2. INVENTORIES Inventories consist of (in thousands): March 31, December 31, 2000 1999 --------- ------------ Raw materials and supplies $ 19,992 $ 19,434 Work in process 37,900 32,793 Finished goods and purchased products 196,263 201,825 --------- --------- Total $ 254,155 $ 254,052 ========== ========= 3. 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 has not completed its evaluation but currently does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. 4

6 4. COMPREHENSIVE INCOME The components of comprehensive income are as follows (in thousands): Quarter Ended March 31, ---------------------------------- 2000 1999 ------- ------- Net income $ 2,942 $ 3,335 Currency translation adjustments (4,019) (2,287) Unrealized gains on securities 319 189 -------- ------- Comprehensive income/(loss) $ (758) $ 1,237 ======== ======= 5. BUSINESS SEGMENTS Segment information (unaudited) follows (in thousands): Quarter Ended March 31, ----------------------------------- 2000 1999 ---------- -------- Revenues from unaffiliated customers Products and Technology $ 106,519 $ 99,163 Distribution Services 122,867 104,852 Intersegment revenues Products and Technology 9,404 8,516 Distribution Services 110 - Operating income (loss) Products and Technology 10,012 13,542 Distribution Services 950 (2,120) --------- -------- Total profit for reportable segments 10,962 11,422 Unallocated corporate costs (1,731) (1,145) Net interest expense (4,302) (4,044) Other expense (184) (614) --------- -------- Income before income taxes $ 4,745 $ 5,619 ========= ======== March 31, ------------------------------------ 2000 1999 ---------- --------- Total assets Products & Technology $ 764,495 $ 606,826 Distribution Services $ 218,202 $ 208,765 5

7 6. ANNOUNCED MERGER TRANSACTION On March 15, 2000, National Oilwell signed a definitive merger agreement with IRI International Corporation (NYSE: IIR) whereby National Oilwell would issue approximately 13.5 million shares of common stock in exchange for all of the outstanding common stock of IRI. The transaction is subject to stockholder approval of both companies and regulatory approval with closing anticipated in the second quarter of 2000. The transaction is expected to be accounted for under the pooling-of-interests method of accounting. 6

8 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 drilling systems, drilling equipment and downhole products as well as the distribution of maintenance, repair and operating products to the oil and gas industry. 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 to less than $15 per barrel 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 had an increasingly negative effect on both business segments in 1999. Oil prices have recovered since late July 1999 to a range of $25-$31 per barrel. National Oilwell expects its revenues to increase if its customers gain confidence in sustained commodity prices at this level and as their cash flows from operations improve, allowing them to purchase products sold by National Oilwell. RESULTS OF OPERATIONS Operating results (unaudited) by segment are as follows (in thousands): Quarter Ended March 31, ------------------------------ 2000 1999 -------- --------- Revenues Products and Technology $115,923 $ 107,679 Distribution Services 122,977 104,852 Eliminations (9,514) (8,608) -------- --------- Total $229,386 $ 203,923 ======== ========= Operating Income Products and Technology 10,012 13,542 Distribution Services 950 (2,120) Corporate (1,731) (1,145) ------- -------- Total $ 9,231 $ 10,277 ======= ======== Products and Technology The Products and Technology segment designs and manufactures a wide range 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 fluctuate between periods depending on the size and timing of order shipments. In addition, the segment provides pump expendable products for maintenance of National-Oilwell's and other manufacturers' equipment. 7

9 During February 2000, the Company completed its merger with Hitec ASA, a leading supplier of highly advanced systems and solutions, including leading-edge automation and remote control technologies, for the oil and gas industry. Hitec's financial results are included in National Oilwell's consolidated results effective February 1, 2000. This transaction has been accounted for as a purchase for financial reporting purposes with goodwill related to this transaction approximating $136 million. With the addition of Hitec, the Company intends to expand its emphasis on technology, especially in the areas of automation and remotely controlled equipment. Revenues for the Products and Technology segment increased by $8.2 million (8%) in the first quarter of 2000 as compared to the same quarter in 1999 due primarily to the inclusion of two months of Hitec revenues. Downhole motor sales were up almost 50% and capital equipment sales increased 10% due to the shipment of three rigs, offset in part by reduced shipments of pumps and cranes. Operating income decreased by $3.5 million (26%) in the first quarter compared to the same quarter in 1999 resulting primarily from lower margins due to product mix, increased goodwill amortization due to recent acquisitions and increased fixed costs associated with the Hitec acquisition. . Backlog of the Products and Technology group was $82 million at March 31, 2000, an increase of $5 million from December 31, 1999. At March 31, 1999, backlog stood at $50 million. Substantially all of the current backlog will be shipped by the end of September 2000. Distribution Services Distribution Services revenues result primarily from the sale of maintenance, repair and operating supplies ("MRO") from National Oilwell's network of distribution service centers and, prior to July 1999, from the sale of well casing and production tubing. These products are purchased from numerous manufacturers and vendors, including National Oilwell's Products and Technology segment. The Company sold its tubular product line in June 1999 for approximately $15 million, generating a pre-tax loss of $0.9 million ($0.5 million after-tax). Revenues and operating loss recorded in 1999 for the tubular operations were $23.6 million and $0.6 million, respectively. Distribution Services revenues during the first quarter of 2000 exceeded the comparable 1999 period by $18 million. This 17% increase, despite the loss of $14 million of tubular revenue resulting from the sale of the product line, reflects increased sales of maintenance, repair and normal operating supplies in the recovering North American markets. Canadian revenues were 55% higher than the same period in 1999 and the US operations recorded a 10% increase. Operating income in the first quarter of 2000 was $3.1 million higher than the first quarter of 1999 due to revenue volume, offset in part by product mix as Canada shipped a significant amount of lower margin line pipe and tubular products during the quarter. Corporate Corporate costs during the first quarter of 2000 increased $0.6 million from the comparable 1999 quarter primarily as a result of expenses related to National Oilwell's e-strategy initiatives. Interest Expense Interest expense increased during the three months ended March 31, 2000 when compared to the prior year due to the higher debt level, including debt associated with the Hitec acquisition of $7 million. 8

10 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had working capital of $343 million, a $41 million increase from December 31, 1999. While inventory remained unchanged during the quarter, accounts receivable increased $47 million due in part to the revenue increase and the acquisition of Hitec. Accounts payable and other current liabilities increased $5 million. Total capital expenditures were $5.3 million during the first three months of 2000. Enhancements to information and inventory control systems, including costs related to an aggressive e-strategy initiative, represent a significant portion of these capital expenditures. The Company believes it has sufficient existing manufacturing capacity to meet currently anticipated demand 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% (9.00% and 6.625% at March 31, 2000), 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. National Oilwell also has additional credit facilities totaling $22.6 million used primarily for letters of credit, of which $4.8 million were outstanding at March 31, 2000. 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. ANNOUNCED MERGER TRANSACTION On March 15, 2000, National Oilwell signed a definitive merger agreement with IRI International Corporation (NYSE: IIR) whereby National Oilwell would issue approximately 13.5 million shares of common stock in exchange for all of the outstanding common stock of IRI. The transaction is subject to stockholder approval of both companies and regulatory approval with closing anticipated in the second quarter of 2000. The transaction is expected to be accounted for under the pooling-of-interests method of accounting. 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, 2000 /s/ Steven W. Krablin ------------------- -------------------------------------------- Steven W. Krablin Principal Financial and Accounting Officer and Duly Authorized Signatory 10

12 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial Data Schedule

5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 13,822 0 238,767 5,913 254,155 524,159 184,959 70,193 970,149 181,198 227,425 0 0 663 549,905 970,149 229,386 229,386 186,967 186,967 0 853 4,590 4,745 1,803 2,942 0 0 0 2,942 0.05 0.05