- --------------------------------------------------------------------------------
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 JUNE 30,2004 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 76-0475875
- ------------------------------------ ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE
HOUSTON, TEXAS
77042-4200
-----------------------------------------------------
(Address of principal executive offices)
(713) 346-7500
-----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of July 27, 2004, 85,887,739 common shares were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 62,678 $ 74,217
Receivables, net 442,487 460,910
Inventories, net 621,739 546,690
Costs in excess of billings 104,431 107,625
Deferred income taxes 14,273 15,410
Prepaid and other current assets 20,640 41,548
----------- -----------
Total current assets 1,266,248 1,246,400
Property, plant and equipment, net 241,222 252,365
Deferred income taxes 50,544 52,391
Goodwill 592,126 587,341
Intangibles, net 78,117 79,281
Property held for sale 7,711 8,693
Other assets 20,056 16,265
----------- -----------
$ 2,256,024 $ 2,242,736
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt -- 14,910
Accounts payable 211,102 228,576
Customer prepayments 24,179 26,424
Accrued compensation 23,952 25,382
Billings in excess of costs 46,114 49,259
Accrued income taxes 19,281 24,673
Other accrued liabilities 102,134 82,991
----------- -----------
Total current liabilities 426,762 452,215
Long-term debt 579,300 593,980
Deferred income taxes 59,269 52,368
Other liabilities 40,469 37,996
----------- -----------
Total liabilities 1,105,800 1,136,559
Commitments and contingencies
Minority interest 16,210 15,748
Stockholders' equity:
Common stock - par value $.01; 85,824,674 and
85,124,979 shares issued and outstanding at
June 30, 2004 and December 31, 2003 858 851
Additional paid-in capital 688,833 674,965
Accumulated other comprehensive loss (47,015) (44,374)
Retained earnings 491,338 458,987
----------- -----------
1,134,014 1,090,429
----------- -----------
$ 2,256,024 $ 2,242,736
=========== ===========
The accompanying notes are an integral part of these statements.
2
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Restated) (Restated)
Revenues $ 533,555 $ 475,398 $ 1,029,760 $ 975,974
Cost of revenues 415,965 368,774 808,622 751,139
----------- ----------- ----------- -----------
Gross profit 117,590 106,624 221,138 224,835
Selling, general, and administrative 79,307 68,684 157,103 146,229
----------- ----------- ----------- -----------
Operating income 38,283 37,940 64,035 78,606
Interest and financial costs (9,573) (9,308) (18,869) (19,562)
Interest income 703 517 1,332 1,626
Other income (expense), net 1,045 (1,180) (282) (3,549)
----------- ----------- ----------- -----------
Income before income taxes
and minority interest 30,458 27,969 46,216 57,121
Provision for income taxes 8,833 8,590 13,403 18,475
----------- ----------- ----------- -----------
Income before minority interest 21,625 19,379 32,813 38,646
Minority interest in income of
consolidated subsidiaries (238) (1,112) (462) (3,038)
----------- ----------- ----------- -----------
Net income $ 21,387 $ 18,267 $ 32,351 $ 35,608
=========== =========== =========== ===========
Net income per share:
Basic $ 0.25 $ 0.22 $ 0.38 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.25 $ 0.21 $ 0.38 $ 0.42
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 85,795 84,440 85,595 84,072
=========== =========== =========== ===========
Diluted 86,389 84,990 86,162 84,733
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
3
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
-----------------------------
2004 2003
--------- ---------
(Restated)
Cash flow from operating activities:
Net income $ 32,351 $ 35,608
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 20,703 18,690
Provision for losses on receivables 3,581 2,221
Provision for deferred income taxes 5,385 1,681
Gain on sale of assets (2,262) (2,154)
Foreign currency transaction (gain) loss (960) 3,331
Interest rate contract (40) (60)
Tax benefit from exercise of nonqualified stock options 2,747 3,301
Changes in assets and liabilities, net of acquisitions:
Receivables 14,842 (41,939)
Inventories (75,049) (23,708)
Costs in excess of billings 3,194 1,822
Prepaid and other current assets 22,045 (19,783)
Accounts payable (17,474) 40,143
Billings in excess of cost (3,145) (40,565)
Other assets/liabilities, net 12,913 2,558
--------- ---------
Net cash provided (used) by operating activities 18,831 (18,854)
--------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (14,127) (15,641)
Proceeds from sale of assets 4,707 3,922
Businesses acquired, net of cash -- (47,113)
--------- ---------
Net cash used by investing activities (9,420) (58,832)
--------- ---------
Cash flow from financing activities:
Borrowings against lines of credit 278,764 201,484
Payments against lines of credit (308,355) (188,145)
Proceeds from stock options exercised 11,580 7,935
--------- ---------
Net cash provided (used) by financing activities (18,011) 21,274
--------- ---------
Effect of exchange rate gain (loss) on cash (2,939) 227
--------- ---------
Decrease in cash and equivalents (11,539) (56,185)
Cash and cash equivalents, beginning of period 74,217 118,338
--------- ---------
Cash and cash equivalents, end of period $ 62,678 $ 62,153
========= =========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 17,210 $ 18,007
Income taxes $ 14,207 $ 24,007
The accompanying notes are an integral part of these statements.
4
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
The accompanying unaudited consolidated financial statements present information
in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and
applicable rules of Regulation S-X. They do not include all information or
footnotes required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
our 2003 Annual Report on Form 10K. The financial statements for the three
months and six months ended June 30, 2003 have been restated as disclosed in
Note 12 to our consolidated financial statements included in our 2003 Annual
Report on Form 10K.
In our opinion, 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 and six months ended June 30, 2004 are not necessarily
indicative of the results to be expected for the full year.
2. STOCK-BASED COMPENSATION
We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for our
stock option plans. Accordingly, no compensation expense has been recognized for
stock option grants as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had
compensation expense for the stock option grants been determined on the fair
value at the grant dates consistent with the method of Statement of Financial
Accounting Standards Board (SFAS) No. 123, "Accounting for Stock-Based
Compensation", our net income and income per share would have been adjusted to
the pro forma amounts indicated below (amounts in thousands, except per share
amounts):
Quarter Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Restated) (Restated)
Net income, as reported $ 21,387 $ 18,267 $ 32,351 $ 35,608
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2,020) (2,135) (3,530) (4,377)
---------- ---------- ---------- ----------
Pro forma net income $ 19,367 $ 16,132 $ 28,821 $ 31,231
Net income per common share:
Basic, as reported $ 0.25 $ 0.22 $ 0.38 $ 0.42
Basic, pro forma 0.23 0.19 0.34 0.37
Diluted, as reported $ 0.25 $ 0.21 $ 0.38 $ 0.42
Diluted, pro forma 0.22 0.19 0.33 0.37
5
For purposes of determining compensation expense using the provisions of SFAS
No. 123, the fair value of option grants was determined using the Black-Scholes
option-valuation model. The weighted average fair value per share of stock
options granted in the first six months of 2004 and 2003 was $13.19 and $9.20,
respectively. The key input variables used in valuing the options granted in
2004 and 2003 were: risk-free interest rate of 2.7% in 2004 and 2.6% in 2003;
dividend yield of zero in each year; stock price volatility of 51% in 2004 and
48% in 2003, and expected option lives of five years for each year presented.
3. INVENTORIES
Inventories consist of (in thousands):
June 30, December 31,
2004 2003
-------- ------------
Raw materials and supplies $ 54,599 $ 45,354
Work in process 115,483 107,747
Finished goods and purchased products 451,657 393,589
-------- --------
Total $621,739 $546,690
======== ========
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(Restated) (Restated)
Net income $ 21,387 $ 18,267 $ 32,351 $ 35,608
Currency translation adjustments 24 8,669 (2,114) 400
Interest rate contract (20) (30) (40) (60)
-------- -------- -------- --------
Comprehensive income $ 21,391 $ 26,906 $ 30,197 $ 35,948
======== ======== ======== ========
6
5. BUSINESS SEGMENTS
Segment information follows (in thousands):
Quarter Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- ---------
(Restated) (Restated)
Revenues from unaffiliated customers
Products and Technology $ 317,591 $ 286,785 $ 598,230 $ 603,476
Distribution Services 215,964 188,613 431,530 372,498
----------- ----------- ----------- ---------
533,555 475,398 1,029,760 975,974
Intersegment revenues
Products and Technology 30,390 24,679 54,518 43,464
Distribution Services 2,405 644 4,947 1,095
----------- ----------- ----------- ---------
32,795 25,323 59,465 44,559
Operating income
Products and Technology 34,925 37,591 58,421 78,595
Distribution Services 6,684 3,306 12,164 6,088
----------- ----------- ----------- ---------
Total profit for reportable segments 41,609 40,897 70,585 84,683
Unallocated corporate costs (3,326) (2,957) (6,550) (6,077)
----------- ----------- ----------- ---------
Operating income 38,283 37,940 64,035 78,606
Net interest expense (8,870) (8,791) (17,537) (17,936)
Other income (expense) 1,045 (1,180) (282) (3,549)
----------- ----------- ----------- ---------
Income before income taxes and
minority interest $ 30,458 $ 27,969 $ 46,216 $ 57,121
=========== =========== =========== =========
Total assets
Products and Technology $ 1,811,026 $ 1,724,436
Distribution Services 370,955 304,171
6. DEBT
Debt consists of (in thousands):
June 30, December 31,
2004 2003
-------- ------------
Credit facilities $ 79,300 $108,890
6.875% senior notes 150,000 150,000
6.50% senior notes 150,000 150,000
5.65% senior notes 200,000 200,000
-------- --------
579,300 608,890
Less current portion -- 14,910
-------- --------
$579,300 $593,980
======== ========
7
In November 2002, we sold $200 million of 5.65% unsecured senior notes due
November 15, 2012. Interest is payable on May 15 and November 15 of each year.
In March 2001, we sold $150 million of 6.50% unsecured senior notes due March
15, 2011, with interest payable on March 15 and September 15 of each year. In
June 1998, we sold $150 million of 6.875% unsecured senior notes due July 1,
2005, with interest payments due on January 1 and July 1.
At June 30, 2004, we had two committed credit facilities, a North American and a
Norwegian facility, totaling $266 million. Both facilities are available for
general corporate purposes and acquisitions, including letters of credit and
performance bonds.
Our North American facility is an unsecured $175 million revolving credit
facility that expires July 31, 2005 with availability up to $50 million for
issuance of letters of credit. At June 30, 2004, borrowings against this
facility totaled $77 million and there were $24 million in outstanding letters
of credit. Interest (1.9% @ June 30, 2004) is based upon prime or Libor plus
0.5% subject to a ratings based grid.
Our Norwegian facility, which expires in 2006, has revolving credit facilities
totaling $91 million, with $36 million available for letter of credit purposes.
At June 30, 2004, there were $19 million in outstanding letters of credit and no
borrowings against this facility. Interest is based upon a pre-agreed percentage
point spread from either the prime interest rate, NIBOR or EURIBOR.
We also have additional uncommitted credit facilities totaling $131 million that
are used primarily for letters of credit, bid bonds and performance bonds. At
June 30, 2004, borrowings against these additional credit facilities totaled $2
million and there were $34 million in outstanding letters of credit and
performance bonds.
The senior notes contain reporting covenants and the credit facilities contain
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at June 30, 2004.
7. EMPLOYEE BENEFIT PLANS
Total net benefit expense associated with the Company's defined benefit pension
and postretirement benefit plans consisted of the following (in thousands):
Pension Benefits Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 754 $ 748 $ 1,508 $ 1,496
Interest cost 1,917 1,868 3,834 3,736
Expected return on plan assets (1,985) (1,871) (3,970) (3,742)
Net amortization and deferral 326 353 652 706
------- ------- ------- -------
Total net benefit expense $ 1,012 $ 1,098 $ 2,024 $ 2,196
======= ======= ======= =======
Postretirement Benefits
Service cost $ 8 $ 10 $ 16 $ 20
Interest cost 127 124 254 248
Net amortization and deferral 53 53 106 106
------- ------- ------- -------
Total net benefit expense $ 188 $ 187 $ 376 $ 374
======= ======= ======= =======
8
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2004, the Financial Accounting Standards Board ("FASB") issued Staff
Position ("FSP") 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 , which
supercedes FSP 106-1 of the same title issued in January 2004. FSP 106-2 becomes
effective for the first interim or annual period beginning after June 15, 2004.
FSP 106-2 provides guidance on the accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") for
employers that sponsor postretirement health care plans that provide
prescription drug benefits. FSP 106-2 also requires those employers to provide
certain disclosures regarding the effect of the federal subsidy provided by the
Act. We do not expect adoption of FSP No. 106-2 to have a material effect on our
financial condition or results of operations.
During March 2004, the FASB issued an exposure draft of a new standard entitled
Share Based Payment , which would amend SFAS No. 123, Accounting for Stock-based
Compensation , and SFAS No. 95, Statement of Cash Flows . Among other items, the
new standard would require the expensing of stock options issued by the company
in the financial statements. The new standard, as proposed, would be effective
January 1, 2005, for calendar year companies. See Note 2 for pro forma
disclosures regarding the effect on income from continuing operations and
earnings per share if we had applied the fair value recognition provisions of
the exposure draft and SFAS No. 123. Depending on the model used to calculate
stock-based compensation expense in the future, the pro forma disclosure in Note
2 may not be indicative of the stock-based compensation expense to be recognized
in future financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We design, manufacture and sell drilling systems, drilling equipment and
downhole products as well as distribute maintenance, repair and operating
products to the oil and gas industry. Our revenues and operating results 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. Oil and gas prices have been and are likely to continue
to be volatile. This is a cyclical industry and, unlike most prior cycles,
sustained, relatively high oil and gas prices have not driven a corresponding
level of increased spending by our customers.
We conduct our operations through the following segments:
Products and Technology
Our Products and Technology segment designs and manufactures complete land
drilling and workover rigs, and drilling related systems for offshore rigs.
Technology has increased the desirability of one vendor assuming responsibility
for the entire suite of components used in the drilling process, as mechanical
and hydraulic components are replaced by or augmented with integrated
computerized systems. In addition to traditional components such as drawworks,
mud pumps, top drives, derricks, cranes, jacking and mooring systems, and other
structural components, we provide automated pipehandling, control and electrical
power systems. We have also developed new technology for drawworks and mud pumps
applicable to the highly demanding offshore markets. We have made strategic
acquisitions during the past several years in an effort to expand our product
offering and our global manufacturing capabilities, including new operations in
Norway, the United Kingdom and China. Product and Technology revenues are
directly dependent on the levels of worldwide drilling activity.
Distribution Services
Our Distribution Services segment provides maintenance, repair and operating
supplies and spare parts from our network of distribution service centers to
drill site and production locations throughout North America and to offshore
contractors worldwide. Products are purchased from numerous manufacturers and
vendors, including our Products and Technology segment. We have expanded this
business to locations outside North America, including Europe, the Middle East,
Southeast Asia, and South America. We have made significant investments in
systems, staffing and inventory in the international market and, using our
information technology platforms and processes, we can provide complete
procurement, inventory management, and logistics services to our customers.
Approximately half of Distribution Services revenues are tied to worldwide
drilling activity, and the balance relates to the production of oil and gas
reserves.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in thousands):
10
Quarter Ended June 30, Six Months Ended June 30,
------------------------ -------------------------
2004 2003 2004 2003
--------- --------- ---------- ---------
Revenues:
Revenues from backlog $ 155,502 $ 154,834 $ 283,912 $ 324,684
Noncapital equipment 192,479 156,630 368,836 322,256
--------- --------- ---------- ---------
Products and Technology 347,981 311,464 652,748 646,940
Distribution Services 218,369 189,257 436,477 373,593
Eliminations (32,795) (25,323) (59,465) (44,559)
--------- --------- ---------- ---------
Total $ 533,555 $ 475,398 $1,029,760 $ 975,974
========= ========= ========== =========
Operating Income
Products and Technology $ 34,925 $ 37,591 (1) $ 58,421 $ 78,595 (1)
Distribution Services 6,684 3,306 (1) 12,164 6,088 (1)
Corporate (3,326) (2,957) (6,550) (6,077)
--------- --------- ---------- ---------
Total $ 38,283 $ 37,940 (1) $ 64,035 $ 78,606 (1)
========= ========= ========== =========
Capital equipment backlog:
Beginning of quarter $ 411,790 $ 368,150 $ 338,900 $ 363,600
Add: Orders, net 185,000 153,065 386,300 327,465
Less: Revenues 155,502 154,834 283,912 324,684
--------- --------- ---------- ---------
End of quarter $ 441,288 $ 366,381 $ 441,288 $ 366,381
========= ========= ========== =========
- ----------
(1) Restated -See Note 1 to consolidated financial statements.
Products and Technology
Q2 2004 versus Q2 2003
Revenues for the Products and Technology segment increased $37 million, or 12%,
during the second quarter of 2004 as compared to the same quarter in 2003.
Capital equipment revenues were essentially flat but the higher North American
rig count generated growth in our parts, service and rental tools businesses.
Sales of spare parts for drilling equipment increased approximately $15 million,
pumps and related expendable parts were up $10 million and downhole tools and
rentals recorded increases of approximately $5 million.
Despite the higher revenues, operating income declined by $3 million in the
second quarter of 2004 compared to the same quarter in 2003. Margin gains due to
the higher volume was offset by lower margin on certain capital equipment
orders, in part due to higher steel prices, and product mix, resulting in a
gross margin % reduction of 1.3 points. Higher selling and administrative costs,
increased property taxes and insurance coverage costs and depreciation
contributed to the reduced operating income.
Backlog of the Products and Technology capital products was $441 million at June
30, 2004, reflecting an increase of $29 million from the March 31, 2004 level.
Backlog at June 30, 2003 was $366 million. Product in current backlog will be
delivered by the end of 2005.
1st Six Month of 2004 versus 1st Six Months of 2003
Products and Technology segment revenues increased $6 million in the first six
months of 2004 as compared to the same period in 2003. We recorded a $41 million
decline in capital equipment revenues, primarily due to reduced shipments in the
first quarter of 2004. As expected, we experienced an increase in second quarter
2004 capital equipment revenues and given the current backlog, we anticipate
this higher level of activity to continue in the near term. Sales of drilling
spare parts, expendable pump parts and downhole tools and rentals increased
approximately $24 million, $10 million and $11 million, respectively, as
expected with the increase in the North American rotary rig count.
11
Operating income decreased $20 million in the first half of 2004 compared to the
same period in 2003 primarily due to a 3% reduction in gross margins. Unusually
high costs on several capital equipment orders resulted in the lower overall
margins. Selling and administrative expenses were flat during the first six
months of 2004 as compared to 2003 while property taxes, insurance coverage
costs and depreciation increased approximately $3 million.
Distribution Services
Q2 2004 versus Q2 2003
Distribution Services revenues increased $29 million, or approximately 15%,
during the second quarter of 2004 over the comparable 2003 period as all
geographic regions showed improvement. North American revenues were especially
strong due to the increase in 2004 in the number of active rigs running in the
U.S. and Canada. The fourth quarter 2003 acquisition of Corlac Equipment Ltd.
contributed approximately $9 million to our Canadian revenues in the second
quarter. From a product perspective, maintenance, repair and operating supplies
("MRO") revenues increased approximately $23 million and the sale of parts
manufactured by the Products and Technology segment increased approximately $5
million.
Operating income of $6.7 million in the second quarter of 2004 doubles the prior
year results due to the increased revenue as well as a margin % improvement
resulting from recent price increases on certain products. Operating increases
to run our expanded network amounted to $3 million, and selling and
administrative expenses increased approximately $2 million. The addition of
Corlac contributed $1 million to the second quarter 2004 operating income.
1st Six Month of 2004 versus 1st Six Months of 2003
Revenues for the Distribution Services segment increased $63 million in the
first half of 2004 when compared to the prior year. Revenue in the international
market was up 17%, Canada increased 32% and the U.S. operations reflected an 11%
improvement. The Canadian results include revenues from the Corlac acquisition
of $16 million (representing 60% of the increase). Revenues from the sale of
parts manufactured by the Products & Technology segment increased $9 million
(20%) while the maintenance, repair and operating supplies revenues reflected a
15% improvement from the first six months of 2003. Tubular revenues were higher
by approximately $5 million.
Operating income in the first half of 2004 of $12 million doubled the comparable
period in 2003. Gross margin improvement resulting from the revenue volume
increase and price increases on certain products was offset by higher
administrative expenses to support the global market expansion, and higher
taxes, insurance and bad debt costs. Corlac operating profit for the first six
months of 2004 totaled approximately $1.4 million.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. These costs have been slightly above the $3 million level
since our last major acquisition in the fourth quarter of 2002 and we expect
spending to approximate this level in the near term.
Interest Expense
12
Interest expense for the three months and six months ended June 30, 2004 was
essentially flat, as slightly lower interest rates offset slightly higher
average debt outstanding.
Income Taxes
The effective tax rate for the six months ended June 30, 2004 was 29%
compared to 32% for the same period in 2003, reflecting a higher
percentage of earnings in foreign jurisdictions with lower tax rates and the
benefit associated with export sales, which is currently the subject of
legislation to repeal these benefits. If repealed and not replaced with similar
benefits, we expect our effective tax rate to increase to 32%.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004 we had working capital of $839 million, an increase of $45
million from December 31, 2003. Reduction in the current portion of long-term
debt accounted for $15 million of this increase, as we repaid all of the
Norwegian term loans, and inventory increased $75 million as we position
ourselves for the market upturn and related capital projects. A reduction of $19
million in accounts receivable was offset by a similar reduction in accounts
payable. Cash decreased approximately $12 million during the first six months
ended June 30, 2004.
Total capital expenditures were $14 million during the first six months of 2004
compared to $16 million in the same period of the prior year. The majority of
these capital expenditures represent additions to the downhole rental tool fleet
and enhancements to information management systems. We expect our capital
expenditures in 2004 to total approximately $30 million. We believe we have
sufficient existing manufacturing capacity to meet currently anticipated demand
for our products and services.
In November 2002, we sold $200 million of 5.65% unsecured senior notes due
November 15, 2012. Interest is payable on May 15 and November 15 of each year.
In March 2001, we sold $150 million of 6.50% unsecured senior notes due March
15, 2011, with interest payable on March 15 and September 15 of each year. In
June 1998, we sold $150 million of 6.875% unsecured senior notes due July 1,
2005, with interest payments due on January 1 and July 1.
At June 30, 2004, we had two committed credit facilities, a North American and a
Norwegian facility, totaling $266 million. Both facilities are available for
general corporate purposes and acquisitions, including letters of credit and
performance bonds.
Our North American facility is an unsecured $175 million revolving credit
facility that expires July 31, 2005 with availability up to $50 million for
issuance of letters of credit. At June 30, 2004, borrowings against this
facility totaled $77 million and there were $24 million in outstanding letters
of credit. Interest (1.9% @ June 30, 2004) is based upon prime or Libor plus
0.5% subject to a ratings based grid.
Our Norwegian facility, which expires in 2006, has revolving credit facilities
totaling $91 million, with $36 million available for letter of credit purposes.
At June 30, 2004, there were $19 million in outstanding letters of credit and no
borrowings against this facility. Interest is based upon a pre-agreed percentage
point spread from either the prime interest rate, NIBOR or EURIBOR.
We also have additional uncommitted credit facilities totaling $131 million that
are used primarily for letters of credit, bid bonds and performance bonds. At
June 30, 2004, borrowings against these additional credit facilities totaled $2
million and there were $34 million in outstanding letters of credit and
performance bonds.
The senior notes contain reporting covenants and the credit facilities contain
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at June 30, 2004.
We believe cash generated from operations and amounts available under the credit
facilities and from other sources of debt will be sufficient to fund operations,
working capital needs, capital expenditure requirements
13
and financing obligations. We also believe any significant increase in capital
expenditures caused by any need to increase manufacturing capacity can be funded
from operations or through debt financing.
During the six months ended June 30, 2004, we did not enter into any
transactions, arrangements, or relationships with unconsolidated entities or
other persons which would materially affect liquidity, or the availability of or
requirements for capital resources, from the amounts disclosed in our Form 10-K
for the year ending December 31, 2003.
We intend to pursue additional acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. We expect 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 additional financing for acquisitions will be available at terms acceptable
to us.
Inflation has not had a significant impact on our operating results or financial
condition in recent years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our estimation process generally relates to
potential bad debts, obsolete and slow moving inventory, revenue recognition on
long term contracts, pension plan accounting, value of goodwill and intangible
assets, and deferred income tax accounting. Our estimates are based on
historical experience and on our future expectations that we believe to be
reasonable under the circumstances. The combination of these factors result in
the amounts shown as carrying values of assets and liabilities in the financial
statements and accompanying notes. Actual results could differ from our current
estimates and those differences may be material.
These estimates may change as new events occur, as more experience is acquired,
as additional information is obtained and as our operating environment changes.
There have been no material changes or developments in our evaluation of the
accounting estimates and the underlying assumptions or methodologies that we
believe to be material to the Critical Accounting Policies and Estimates as
disclosed in our Form 10-K for the year ending December 31, 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2004, the Financial Accounting Standards Board ("FASB") issued Staff
Position ("FSP") 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 , which
supercedes FSP 106-1 of the same title issued in January 2004. FSP 106-2 becomes
effective for the first interim or annual period beginning after June 15, 2004.
FSP 106-2 provides guidance on the accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") for
employers that sponsor postretirement health care plans that provide
prescription drug benefits. FSP 106-2 also requires those employers to provide
certain disclosures regarding the effect of the federal subsidy provided by the
Act. We do not expect adoption of FSP No. 106-2 to have a material effect on our
financial condition or results of operations.
During March 2004, the FASB issued an exposure draft of a new standard entitled
Share Based Payment , which would amend SFAS No. 123, Accounting for Stock-based
Compensation , and SFAS No. 95, Statement of Cash Flows . Among other items, the
new standard would require the expensing of stock options issued by the company
in the financial statements. The new standard, as proposed, would be effective
January 1, 2005, for calendar year companies. See Note 2 for pro forma
disclosures regarding the effect on income from continuing operations and
earnings per share if we had applied the fair value recognition provisions of
the exposure draft and SFAS No. 123. Depending on the model used to calculate
stock-based compensation expense in the future, the pro forma disclosure in Note
2 may not be indicative of the stock-based compensation expense to be recognized
in future financial statements.
14
FORWARD-LOOKING STATEMENTS
Some of the information in this document contains, or has incorporated by
reference, forward-looking statements. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements typically are identified by use of terms
such as "may," "will," "expect," "anticipate," "estimate," and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from results
anticipated in the forward-looking statements due to a number of factors,
including but not limited to changes in oil and gas prices, customer demand for
our products and worldwide economic activity. You should also consider carefully
the statements under "Risk Factors," as disclosed in our Form 10-K for the year
ending December 31, 2003, which address additional factors that could cause our
actual results to differ from those set forth in the forward-looking statements.
Given these uncertainties, current or prospective investors are cautioned not to
place undue reliance on any such forward-looking statements. We undertake no
obligation to update any such factors or forward-looking statements to reflect
future events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in foreign currency exchange rates and interest rates.
Additional information concerning each of these matters follows:
Foreign Currency Exchange Rates
We have operations in foreign countries, including Canada, Norway and the United
Kingdom, as well as operations in Latin America, China and other European
countries. The net assets and liabilities of these operations are exposed to
changes in foreign currency exchange rates, although such fluctuations generally
do not affect income since their functional currency is the local currency.
These operations also have net assets and liabilities not denominated in the
local currency, which exposes us to changes in foreign currency exchange rates
that do impact income. We recorded foreign exchange gains in our income
statement of approximately $1.0 million in the first six months of 2004,
compared to $3.3 million in foreign exchange losses in the same period of the
prior year. We do not believe that a hypothetical 10% movement in these foreign
currencies would have a material impact on our earnings.
Some of our revenues in foreign countries are denominated in US dollars, and
therefore, changes in foreign currency exchange rates impact our earnings to the
extent that costs associated with those US dollar revenues are denominated in
the local currency. In order to mitigate that risk, we may utilize foreign
currency forward contracts to better match the currency of our revenues and
associated costs. We do not use foreign currency forward contracts for trading
or speculative purposes. The counterparties to these contracts are major
financial institutions, which minimizes counterparty credit risk.
Interest Rate Risk
Our long term borrowings consist of $150 million in 6.875% senior notes, $150
million in 6.5% senior notes and $200 million in 5.65% senior notes. We also
have borrowings under our other facilities totaling $79 million at June 30, 2004
(weighted average interest rate of 2.2% at June 30, 2004). A portion of the
borrowings are denominated in multiple currencies which could expose us to
market risk with exchange rate movements. These instruments carry interest at a
pre-agreed upon percentage point spread from either the prime interest rate,
LIBOR, NIBOR or EURIBOR. Under our credit facilities, we may, at our option, fix
the interest rate for certain borrowings based on a spread over LIBOR, NIBOR or
EURIBOR for 30 days to 6 months. Based upon our June 30, 2004 borrowings under
our variable rate facilities of $79 million, an immediate change of one percent
in the interest rate would cause a change in annual interest expense of
approximately $0.8 million. Our objective in maintaining a portion of
15
our debt in variable rate borrowings is the flexibility obtained regarding early
repayment without penalties and lower overall cost as compared with fixed-rate
borrowings.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days before filing this report, we carried out an evaluation, under
the supervision and with the participation of the company's management,
including the company's President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's President and Chief Executive Officer along with the company's Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including its consolidated subsidiaries) required to be
included in the company's periodic Securities and Exchange Commission filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our evaluation.
16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 19, 2004. Stockholders
elected three directors nominated by the board of directors for terms expiring
in 2007 by the following votes: Merrill A. Miller, Jr. - 80,028,976 votes for
and 1,577,794 votes withheld, Frederick W. Pheasey - 80,029,976 votes for and
1,576,794 votes withheld, and Roger L. Jarvis - 80,029,986 votes for and
1,576,784 votes withheld. There were no nominees to office other than the
directors elected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
31.2 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
A report on Form 8 - K was filed on April 25, 2004 regarding a press
release announcing our financial results for the first three months of 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 2004 / s / Steven W. Krablin
---------------------- -----------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
17
INDEX TO EXHIBITS
(a) Exhibits
31.1 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
31.2 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
18
EXHIBIT 31.1
CERTIFICATION
I, Merrill A. Miller, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of National-Oilwell, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) [INTENTIONALLY OMITTED PURSUANT TO SEC RELEASE NO. 33-8238];
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 9, 2004 By: /s/ Merrill A. Miller,Jr.
-------------------------
Merrill A. Miller, Jr.
Chairman, President and
Chief Executive Officer
19
EXHIBIT 31.2
CERTIFICATION
I, Steven W. Krablin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National-Oilwell, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) [INTENTIONALLY OMITTED PURSUANT TO SEC RELEASE NO. 33-8238];
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 9, 2004 By: /s/ Steven W. Krablin
--------------------------
Steven W. Krablin
Chief Financial Officer
20
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National-Oilwell, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Merrill A. Miller, Jr., Chairman, President and Chief Executive
Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
The certification is given to the knowledge of the undersigned.
By: /s/ Merrill A. Miller, Jr.
--------------------------
Name: Merrill A. Miller, Jr.
Title: Chairman, President and Chief Executive Officer
Date: August 9, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to National-Oilwell, Inc. and will be
retained by National-Oilwell, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
21
EXHIBIT 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National-Oilwell, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Steven W. Krablin, the Chief Financial Officer of the Company,
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
The certification is given to the knowledge of the undersigned.
By: /s/ Steven W. Krablin
----------------------
Name: Steven W. Krablin
Title: Chief Financial Officer
Date: August 9, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to National-Oilwell, Inc. and will be
retained by National-Oilwell, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
22
