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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475815
- ----------------------------------- -------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE
4TH FLOOR
HOUSTON, TEXAS
77042-4200
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(Address of principal executive offices)
(713) 346-7500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
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(Title of Class) (Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 13, 2000, 66,283,519 common shares were outstanding. Based upon the
closing price of these shares on the New York Stock Exchange and, excluding
solely for purposes of this calculation 16,091,583 shares beneficially owned by
directors, executive officers, and First Reserve Corporation, the aggregate
market value of the common shares of National-Oilwell, Inc. held by
non-affiliates was approximately $1.3 billion. By this calculation, the
Registrant is not making a determination of the affiliate or non-affiliate
status of any person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement in connection with the 2000 Annual Meeting of
Stockholders are incorporated in Part III of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
National Oilwell is a worldwide leader in the design, manufacture and sale of
comprehensive systems and components used in oil and gas drilling and
production, as well as in providing supply chain integration services to the
upstream oil and gas industry.
National Oilwell manufactures and assembles drilling machinery, including
drawworks, mud pumps and power swivels (also known as "top drives"), which are
the major mechanical components of drilling rigs, as well as masts, derricks and
substructures. Many of these components are designed specifically for more
demanding applications, which include offshore, extended reach and deep land
drilling. The Company estimates that more than 90% of the mobile offshore rig
fleet and the majority of the world's larger land rigs (2,000 horsepower and
greater) manufactured in the last twenty years utilize drawworks, mud pumps and
other drilling machinery components manufactured by National Oilwell's Products
and Technology segment. National Oilwell also provides electrical power systems,
computer control systems and automation systems for drilling rigs. The Company's
systems, including the Cyberbase(TM) and automated pipe handling systems, are
used in many of the industry's most technologically demanding applications. In
addition, National Oilwell provides engineering and fabrication services to
integrate its drilling products and deliver complete land drilling rigs and
drilling modules for mobile offshore drilling rigs or offshore drilling
platforms.
Through its Products and Technology segment, National Oilwell designs and
manufactures drilling motors and specialized drilling tools for rent and sale.
Drilling motors are essential components of systems for horizontal, directional,
extended reach and performance drilling. Drilling tools include drilling jars,
shock tools and other specialized products.
The Company's Distribution Services segment offers comprehensive supply chain
integration services to the drilling and production segments. National Oilwell's
network of service centers located in the United States and Canada and near
major drilling and production activity worldwide use state of the art
information technology platforms to provide procurement, inventory management
and logistics services. These service centers stock and sell a variety of
expendable items for oilfield applications and spare parts for equipment
manufactured by National Oilwell.
BUSINESS STRATEGY
National Oilwell's business strategy is to enhance its market positions and
operating performance by:
Leveraging Its Installed Base of Higher Capacity Drilling Machinery and
Equipment
The Company believes its market position and comprehensive product offering
present substantial opportunities to capture a significant portion of
expenditures for the construction of new, higher capacity drilling rigs and
equipment as well as the upgrade and refurbishment of existing drilling rigs and
equipment. Over the next few years, the advanced age of the existing fleet of
drilling rigs, coupled with drilling activity involving greater depths and
extended reach, is expected to generate demand for new equipment, especially in
the higher capacity end of the market. National Oilwell's automation and control
systems offer the potential to improve the performance of new and existing
drilling rigs. The Company's larger drawworks, mud pumps and power swivels often
provide the largest capacities currently available in the industry. The large
installed base of National Oilwell equipment also provides recurring demand for
spare parts and expendable products necessary for proper and efficient
operation.
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Expanding Its Downhole Products Business
National Oilwell believes that economic opportunities for directional,
horizontal, extended reach and other value-added drilling applications will
increase, providing an opportunity for growth in the rental and sale of
high-performance drilling motors and downhole tools.
Building on Information Technology and Process Improvement Strategy
National Oilwell has developed and is implementing an integrated information
technology and process improvement strategy to enhance procurement, inventory
management and logistics activities. As a result of the need to improve industry
efficiency, oil and gas companies and drilling contractors are frequently
seeking alliances with suppliers, manufacturers and service providers, or are
forward integrating suppliers into their procurement, inventory management and
logistics operations to achieve cost and capital improvements. The Company
believes that it is well positioned to provide these services as a result of
its:
o large and geographically diverse network of distribution service centers
in major oil and gas producing areas;
o strong relationship with a large community of industry suppliers;
o knowledge of customers' procurement processes, suppliers' capabilities
and products' performance; and
o information systems that offer customers and suppliers enhanced
e-commerce capabilities.
In addition, the integration of its distribution expertise, extensive network
and growing base of customer alliances provides an increased opportunity for
cost-effective marketing of National Oilwell's manufactured parts and equipment.
Continuing to Make Acquisitions That Enhance its Product Line
National Oilwell believes that the oilfield service and equipment industry will
continue to experience consolidation as businesses seek to align themselves with
other market participants in order to gain access to broader markets integrated
product offerings. From 1997 through the first quarter of 2000, National Oilwell
has made a total of eleven acquisitions and plans to continue to participate in
this trend.
OPERATIONS
Products and Technology
National Oilwell designs, manufactures and sells drilling systems and components
for both land and offshore drilling rigs as well as complete land drilling and
well servicing rigs. The major mechanical components include drawworks, mud
pumps, power swivels, SCR houses, solids control equipment, traveling equipment
and rotary tables. These components are essential to the pumping of fluids and
hoisting, supporting and rotating of the drill string. Many of these components
are designed specifically for applications in offshore, extended reach and deep
land drilling. This equipment is installed on new rigs and often replaced during
the upgrade and refurbishment of existing rigs.
Masts, derricks and substructures are designed and manufactured for use on land
rigs and on fixed and mobile offshore platforms, and are suitable for drilling
applications to depths of up to 30,000 feet or more. Other products include
pedestal cranes, reciprocating and centrifugal pumps and fluid end expendables
for all major manufacturers' pumps. National Oilwell's business includes the
sale of replacement parts for its own manufactured machinery and equipment.
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The merger with Hitec greatly expands National Oilwell's product offering and
capabilities. Hitec is a recognized leader in the design of drilling systems and
solutions. Its core business is the design and production of control and data
acquisition systems for drilling related operations and automated and remotely
controlled machinery for drilling rigs.
Together with National Oilwell, Hitec designed the ActiveHeave(TM) Drilling
System which incorporates an advanced computer control system within the
drawworks. The AHD uses the drawworks to compensate for the heaving motion of an
offshore vessel, thus eliminating the need for an expensive passive motion
compensation system in the derrick. As a result, offshore vessels can improve
their drilling efficiency and drill in more severe weather conditions and rough
seas.
Other products created by Hitec include the Cyberbase(TM) operator system which
incorporates computer software, keypads and joysticks rather than traditional
gauges, lights and switches. The Cyberbase(TM) system forms the basis for the
state-of-the-art driller's cabin. Another product is the automated pipe handling
system that provides an efficient and cost effective method of joining lengths
of drill pipe or casing.
While offering a complete line of conventional rigs, National Oilwell has
extensive experience in providing rig designs to satisfy requirements for harsh
or specialized environments. Such products include drilling and well servicing
rigs designed for the Arctic, highly mobile drilling and well servicing rigs for
jungle and desert use, modular well servicing rigs for offshore platforms and
modular drilling facilities for North Sea platforms. With Hitec, the Company can
also design and produce a fully integrated drilling solution for the topside of
an offshore rig.
National Oilwell also designs and manufactures drilling motors, drilling jars
and specialized drilling tools for rent and sale. Drilling motors are devices
placed between the drill string and the drill bit to cause the bit to rotate
without necessarily rotating the drill string. Drilling motors are essential
components in systems for horizontal, directional, extended reach and
performance drilling. Drilling jars are used to assist in the release of a drill
string that becomes stuck in a well bore. Other products include shock tools,
reamers and stabilizers.
Distribution Services
National Oilwell provides distribution services through its network of over 145
distribution service centers. These distribution service centers stock and sell
a variety of expendable items for oilfield applications and spare parts for
National Oilwell equipment. As oil and gas companies and drilling contractors
have refocused on their core competencies and emphasized efficiency initiatives
to reduce costs and capital requirements, National Oilwell's distribution
services have expanded to offer outsourcing and alliance arrangements that
include comprehensive procurement, inventory management and logistics support.
In addition, management believes that the Company has a competitive advantage in
the distribution services business by distributing market-leading products
manufactured by its Products and Technology business.
The supplies and equipment stocked by National Oilwell's distribution service
centers vary by location. Each distribution point generally offers a large line
of oilfield products including valves, fittings, flanges, spare parts for
oilfield equipment and miscellaneous expendable items. Most drilling contractors
and oil and gas companies typically buy such supplies and equipment pursuant to
non-exclusive contracts, which normally specify a discount from National
Oilwell's list price for each product or product category.
Strategic alliances are significant to the Distribution Services business and
differ from standard agreements for supplies and equipment in that National
Oilwell becomes the customer's primary supplier of those items. In certain
cases, National Oilwell has assumed responsibility for procurement, inventory
management and product delivery for the customer, occasionally by working
directly out of the customer's facilities.
National Oilwell believes that e-commerce brings a significant advantage to
larger companies that are technologically proficient. During the last two years,
over $15 million has been spent by National Oilwell to improve the information
technology systems of the Distribution Group and allow ease of interface with
technology
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systems of others. National Oilwell's e-commerce strategy incorporates
interfacing directly with customers' systems, trading exchanges and development
of its own system that will leverage its position in the upstream market.
National Oilwell believes it has an advantage in this effort due to its
geographic size, knowledge of the industry and customers, existing relationships
with vendors and existing means of product delivery, all in addition to its
information systems and data base.
Marketing
Substantially all of National Oilwell's capital equipment and spare parts sales,
and a large portion of its smaller pumps and parts sales, are made through its
direct sales force and distribution service centers. Sales to foreign
state-owned oil companies are typically made in conjunction with agent or
representative arrangements. National Oilwell's downhole products are generally
rented in Canada and Venezuela and sold worldwide through its own sales force
and through commissioned representatives. Distribution sales are made through
the Company's network of distribution service centers. Customers for National
Oilwell's products and services include drilling and other service contractors,
exploration and production companies, supply companies and nationally owned or
controlled drilling and production companies.
Competition
The oilfield services and equipment industry is highly competitive and National
Oilwell's revenues and earnings can be affected by price changes, introduction
of new technologies and products and improved availability and delivery.
National Oilwell competes in each of its segments with a large number of
companies, none of which are dominant in that particular segment.
Manufacturing and Backlog
National Oilwell has manufacturing facilities located in the United States,
Canada and Norway as of February 2000. The manufacture of parts or purchase of
components is also outsourced to qualified subcontractors. The manufacturing
operations require a variety of components, parts and raw materials which
National Oilwell purchases from multiple commercial sources. National Oilwell
has not experienced and does not expect any significant delays in obtaining
deliveries of materials.
Sales of products are made on the basis of written orders and oral commitments.
The Company's backlog for equipment at recent year ends has been:
1999 $ 77 million
1998 77 million
1997 270 million
1996 38 million
Distribution Suppliers
National Oilwell obtains products sold by its Distribution Services business
from a number of suppliers, including its own Products and Technology segment.
No single supplier of products is significant to the company. National Oilwell
has not experienced and does not expect a shortage of products that it sells.
Engineering
National Oilwell maintains a staff of engineers and technicians to:
o design and test new products, components and systems for use in drilling
and pumping applications;
o enhance the capabilities of existing products; and
o assist the Company's sales organization and customers with special
projects.
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National Oilwell's product engineering efforts focus on developing technology to
improve the economics and safety of drilling and pumping processes. While
important in the past, the merger with Hitec demonstrates the commitment to
expand and accelerate efforts that emphasize technology and complete drilling
solutions.
Patents and Trademarks
National Oilwell owns or has a license to use a number of patents covering a
variety of products. Although in the aggregate these patents are of importance,
the Company does not consider any single patent to be of a critical or essential
nature. In general, National Oilwell has historically relied upon technological
capabilities, quality products and application of its expertise rather than
patented technology in the conduct of its business.
Employees
As of December 31, 1999, the Company had a total of 2,977 employees, 1,791 of
whom were salaried and 1,186 of whom were paid on an hourly basis. Of this
workforce, 827 employees are employed in Canada and 163 are employed by the
Company's other foreign subsidiaries.
RISK FACTORS
Before purchasing any shares of National Oilwell common stock, you should
consider carefully the following factors, in addition to the other information
contained or incorporated by reference herein.
National Oilwell Depends on the Oil and Gas Industry
National Oilwell is very dependent upon the oil and gas industry and its
willingness to explore for and produce oil and gas. The industry's willingness
to explore and produce depends upon the prevailing view of future product
prices. Many factors affect the supply and demand for oil and gas and therefore
influence product prices, including:
o level of production from known reserves;
o cost of producing oil and gas;
o level of drilling activity;
o worldwide economic activity;
o national government political requirements;
o development of alternate energy sources; and
o environmental regulation.
If there is a significant reduction in demand for drilling services, in cash
flows of drilling contractors or production companies or in drilling or well
servicing rig utilization rates, then demand for National Oilwell's products
will drop.
Oil and Gas Prices Are Volatile
Oil and gas prices have been volatile over the last ten years, ranging from $10
- - $40 per barrel. Oil prices were low in 1998, generally ranging from $11 to $16
per barrel. In 1999 oil prices recovered to more normal historical levels but
there is no assurance that oil prices will remain at these levels for any length
of time. Spot gas prices have also been volatile over the last ten years,
ranging from less than $1.00 per mcf of gas to above $3.00. Gas prices were
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moderate in 1998 generally ranging from $1.80 to $2.20 per mcf. In 1999 and
early 2000 gas prices have experienced an upward trend but still remain
volatile.
These price changes have caused many shifts in the strategies and expenditure
levels of oil and gas companies and drilling contractors, particularly with
respect to decisions to purchase major capital equipment of the type that we
manufacture. In the second half of 1998, lower oil prices slowed production and
new drilling, particularly in areas where the per barrel cost of production is
high. This slowdown quickly affected National Oilwell's Distribution business
and subsequently negatively impacted its Products and Technology segment. While
oil and gas commodity prices have been higher in 1999 and early 2000, this may
not have a positive impact on the businesses of National Oilwell. The Company
cannot predict future oil and gas prices or the effect prices will have on
exploration and production levels.
National Oilwell's Industry Is Highly Competitive
The oilfield products and services industry is highly competitive. The following
competitive actions can each affect the revenues and earnings of National
Oilwell:
o price changes;
o new product and technology introductions; and
o improvements in availability and delivery.
National Oilwell competes with many companies. Some of these companies may
possess greater financial resources than National Oilwell or offer certain
products that National Oilwell does not have.
National Oilwell Faces Potential Product Liability and Warranty Claims
Customers use some of National Oilwell's products in potentially hazardous
drilling, completion and production applications that can cause:
o injury or loss of life;
o damage to property, equipment or the environment; and
o suspension of operations.
National Oilwell has what it believes to be the amounts and types of insurance
coverage which are consistent with normal industry practice. However, National
Oilwell's insurance does not protect it against all liabilities. The Company
cannot guarantee that its insurance will be adequate to cover all liabilities
National Oilwell may incur. National Oilwell also cannot assure that it will be
able to maintain its insurance in the future at levels it thinks are necessary
and at rates it considers reasonable. Particular types of insurance coverage may
not be available in the future.
National Oilwell may be named as a defendant in product liability or other
lawsuits asserting potentially large claims if an accident occurs at a location
where its equipment and services have been used. National Oilwell is currently
party to legal and administrative proceedings. National Oilwell cannot predict
the outcome of these proceedings, nor the effects any negative outcomes may have
on it.
Foreign and Domestic Political Developments and Governmental Regulations Can
Affect National Oilwell
Many aspects of National Oilwell's operations are affected by political
developments, including restrictions on the ability to do business in various
foreign jurisdictions. National Oilwell is also subject to foreign and domestic
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government regulations, such as regulations relating to oilfield operations,
worker safety and environmental protection.
In addition, National Oilwell depends on demand for its products and services
from the oil and gas industry, and is therefore affected by any changes in laws
and regulations that affect the oil and gas industry. If laws or regulations are
adopted which hinder exploration for or production of oil and gas, the Company's
operations could suffer. National Oilwell cannot predict the extent to which its
future operations may be affected by political developments, new legislation or
new regulations.
Environmental Regulations Can Affect National Oilwell
Many foreign, federal, state, provincial and local environmental laws and
regulations affect the operations of National Oilwell, as well as the operations
of our customers. The technical requirements of these laws and regulations are
becoming increasingly expensive, complex and stringent. These laws and
regulations may sanction National Oilwell for damages to natural resources or
threats to public health and safety. These laws can also make National Oilwell
liable for the actions of others, or for our prior acts that were legal at the
time.
Violations of laws or regulations may result in any one or more of the
following:
o revocation of permits;
o corrective action orders;
o administrative or civil penalties; or
o criminal prosecution.
Certain environmental laws may subject National Oilwell to joint and several
liability for spills or releases of hazardous substances. This means that
National Oilwell could be forced to pay an entire judgment even in a case in
which it was only partially responsible for the damage. The Company could also
be sued for personal injuries or property damage as a result of alleged exposure
to hazardous substances, as well as damage to natural resources.
Instability of Foreign Markets Could Have a Negative Impact on the Revenues of
National Oilwell
Some of the revenues of National Oilwell depend upon customers in the Middle
East, Africa, Southeast Asia, South America and other international markets.
These revenues are subject to risks of instability of foreign economies and
governments. National Oilwell's sales can be affected by laws and regulations
limiting exports to particular countries and sometimes export laws and
regulations of one jurisdiction contradict those of another.
National Oilwell is exposed to the risks of changes in exchange rates between
the U.S. dollar and foreign currencies. National Oilwell does not currently
engage in or plan to engage in any significant hedging or currency trading
transactions designed to compensate for adverse currency fluctuations.
National Oilwell May Not Be Able to Successfully Manage Its Growth
National Oilwell acquired three companies in 1997, five in 1998, two in 1999 and
one in the first quarter of 2000. National Oilwell also intends to acquire
additional companies in the future, whenever feasible. National Oilwell cannot
predict whether suitable acquisition candidates will be available on reasonable
terms. Further, National Oilwell may not have access to adequate funds to
complete any desired acquisitions. Once acquired, National Oilwell cannot
guarantee that it will successfully integrate the operations of the acquired
companies.
Combining organizations could interrupt the activities of some or all of the
businesses of National Oilwell, and have a negative impact on operations. Recent
acquisitions and recent growth in revenues have placed significant demands on
National Oilwell to do the following:
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o improve the combined entity's operational, financial and management
information systems;
o develop further the management skills of National Oilwell's managers and
supervisors; and
o continue to train, motivate and effectively manage National Oilwell's
employees.
National Oilwell Has Debt
In 1998, National Oilwell issued 6 7/8% senior notes due July 1, 2005. As a
result of this issuance, National Oilwell has become more leveraged. As of
December 31, 1999, the Company had a total of $196.0 million of debt, and a
total of $395.1 million of stockholders' equity. National Oilwell's leverage
requires it to use some of its cash flow from operations for payment of interest
on its debt. National Oilwell's leverage may also make it more difficult to
obtain additional financing in the future. Further, National Oilwell's leverage
could make it more vulnerable to economic downturns and competitive pressures.
Potential Future Sale of Shares of National Oilwell Could Affect Its Market
Price
Future sales of shares of National Oilwell by stockholders or option holders
could have a negative effect on the market price of National Oilwell stock. At
March 10, 2000, National Oilwell has issued outstanding options to purchase a
total of 2,762,692 of its shares at prices ranging from $5.62 to $28.81 per
share. First Reserve Corporation has certain rights to cause National Oilwell to
file a registration statement with the SEC to allow the sale of their shares,
and certain others also have the right to be included in any registration
statements National Oilwell files. The following is a list of the amount of
shares subject to registration rights:
STOCKHOLDER NUMBER OF SHARES
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First Reserve Corporation 6,816,634
Other Stockholders (12 persons) 2,168,773
ITEM 2. PROPERTIES
National Oilwell owned or leased approximately 170 facilities worldwide as of
December 31, 1999, including the following principal manufacturing and
administrative facilities:
APPROXIMATE
BUILDING SPACE
LOCATION (SQUARE FOOT) DESCRIPTION STATUS
- -------- ------------- ----------- ------
Houston, Texas 260,000 Manufactures and services drilling Leased
machinery and equipment
Galena Park, Texas 188,000 Fabricates drilling components and rigs Owned
Houston, Texas 178,000 Administrative offices and Manufactures Owned
SCR systems
Edmonton, Alberta, Canada 162,000 Manufactures downhole tools Owned
McAlester, Oklahoma 117,000 Manufactures pumps and expendable parts Owned
Houston, Texas 100,000 Administrative offices Leased
Victoria, Texas 71,000 Manufactures and services mobile rigs Owned
Marble Falls, Texas 65,000 Manufactures drilling expendable parts Owned
Nisku, Alberta, Canada 59,000 Manufactures drilling machinery and Owned
equipment
Edmonton, Alberta, Canada 57,000 Manufactures drilling machinery and Owned
equipment
Rosenberg, Texas 44,000 Manufactures downhole tools Leased
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The Company owns or leases ten satellite repair and manufacturing facilities
that refurbish and manufacture new equipment and parts and approximately 145
distribution service centers worldwide. Management believes that the capacity of
facilities is adequate to meet demand currently anticipated for 2000.
ITEM 3. LEGAL PROCEEDINGS
National Oilwell has various claims, lawsuits and administrative proceedings
that are pending or threatened, all arising in the ordinary course of business,
with respect to commercial, product liability and employee matters. Although no
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effect such outcomes may have,
management believes that any ultimate liability resulting from the outcome of
such proceedings will not have a material adverse effect on National Oilwell's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
National Oilwell common stock is listed on the New York Stock Exchange (ticker
symbol: NOI). The following table sets forth the stock price range during the
past three years:
1999 1998 1997
-------------------- -------------------- --------------------
Quarter High Low High Low High Low
- ------- -------- ------- -------- ------- -------- -------
First $13.69 $ 8.50 $34.00 $23.88 $19.32 $14.00
Second 14.13 10.00 39.75 25.94 28.88 15.82
Third 18.50 13.00 29.13 7.75 37.50 25.07
Fourth 16.50 12.00 17.69 8.81 44.44 27.88
As of March 15, 2000, there were 424 holders of record of National Oilwell
common stock. National Oilwell has never paid cash dividends, and none are
anticipated during 2000.
ITEM 6. SELECTED FINANCIAL DATA
Data for all periods shown below 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 year 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.
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YEAR
ENDED
YEAR ENDED DECEMBER 31, AUGUST 31,
--------------------------------------------------------- ----------
1999 1998 1997(2) 1996(3) 1995(1)
-------- ---------- ---------- -------- ----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
OPERATING DATA:
Revenues $745,215 $1,271,914 $1,097,406 $822,443 $129,634
Operating income (loss)(4) 21,901 122,512 91,786 30,534 11,203
Income (loss) before taxes and extraordinary loss(5) 4,518 109,356 86,145 19,428 13,045
Income (loss) before extraordinary loss (5) 1,520 68,954 54,827 12,695 8,493
Net income (loss) 1,520 68,954 54,204 8,695 8,493
Income (loss) per share before extraordinary loss(5)
Basic 0.03 1.26 1.03 0.30 0.60
Diluted 0.03 1.26 1.02 0.30 0.59
Net income (loss) per share
Basic 0.03 1.26 1.02 0.20 0.60
Diluted 0.03 1.26 1.01 0.20 0.59
OTHER DATA:
Depreciation and amortization 23,244 20,598 15,443 9,219 4,907
Capital expenditures 15,369 29,241 34,783 15,796 6,666
BALANCE SHEET DATA:
Working capital 302,166 364,130 255,610 171,608 35,090
Total assets 782,311 855,888 602,993 376,523 87,208
Long-term debt, less current maturities 196,007 221,198 61,719 39,302 2,183
Stockholders' equity 395,075 393,299 284,208 173,099 51,584
(1) Data for the year 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' is as of December 31, 1995.
(2) In order to conform Dreco's fiscal year end to match National Oilwell's
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.
ITEM 7. 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 to the oil and gas industry of maintenance, repair and operating
products. 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 the
Distribution Services business throughout 1998 and on both segments in 1999. Oil
prices have recovered since late July 1999 to a range of $25-$31 per barrel.
National Oilwell
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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. See "Risk Factors".
National Oilwell conducts its operations through the following segments:
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 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 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. In addition, the segment provides drilling pump expendable products for
maintenance of National Oilwell's and other manufacturers' equipment.
With the addition of Hitec in February 2000, the Company intends to expand its
emphasis on technology, especially in the areas of automation and remotely
controlled equipment.
Effective January 1, 1999, National Oilwell changed the structure of its
internal organization and now includes the former Downhole Products segment as a
product line within the Products and Technology segment. Prior year segment
information has been restated to reflect this change. The Company sold its drill
bit product line in June 1999 for approximately $12 million, recording a pre-tax
loss of $1.0 million ($0.6 million after-tax). Revenues and operating income
recorded in 1999 for the drill bit operations were $6.1 million and $0.1
million, respectively.
On July 8, 1999, National Oilwell acquired the assets of CE Drilling Products,
Inc. for approximately $65 million in cash, financed primarily by borrowing $57
million under its revolving credit facility. This business involves the
manufacture, sale and service of drilling machinery and related parts. The
transaction has been accounted for under the purchase method of accounting.
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.
On July 1, 1999, National Oilwell purchased 100% of the outstanding stock of
Dupre' Supply Company and Dupre' International Inc. in exchange for 1,920,000
shares of National Oilwell common stock, pending finalization of post-closing
adjustments. These companies are leading suppliers of pipe, fittings, valves and
valve automation services and complement the existing operations of the
Distribution Services segment. This transaction has been accounted for under the
pooling-of-interests method of accounting and, accordingly, historical financial
statements have been restated.
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RESULTS OF OPERATIONS
Operating results by segment are as follows (in millions):
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------ -------- --------
Revenues:
Products and Technology $365.6 $ 729.9 $ 440.8
Distribution Services 410.3 608.5 722.7
Eliminations (30.7) (66.5) (66.1)
------ -------- --------
Total $745.2 $1,271.9 $1,097.4
====== ======== ========
Operating Income:
Products and Technology $ 33.3 $ 136.6 $ 79.0
Distribution Services (6.0) 8.9 32.1
Corporate (5.4) (6.6) (8.7)
------ -------- --------
$ 21.9 $ 138.9 $ 102.4
Special Charge - 16.4 10.7
------ -------- --------
Total $ 21.9 $ 122.5 $ 91.7
====== ======== ========
Products and Technology
Revenues for the Products and Technology segment decreased by $364.3 million (50
%) from 1998 primarily due to reduced sales of major capital equipment ($250
million), drilling spares ($92 million) and expendable pump parts ($17 million).
The sales of all types of capital equipment were substantially lower than the
prior year. Operating income in 1999 decreased by $103.3 million from the prior
year due to this substantial revenue decline. As a percentage of revenue, 1999
operating income fell approximately 50% from 18.7% to 9.1% with lower volume
being the primary driver.
Revenues for 1998 increased by $289.1 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 $57.6 million in 1998 compared to the prior year due
principally to the increased sales volume. Various acquisitions completed in
1998 contributed $2.6 million in operating profit during the year.
Backlog of the Products and Technology capital products was $77 million at
December 31, 1999 and 1998 compared to $270 million at December 31, 1997.
Substantially all of the current backlog is expected to be shipped by June 2000.
Distribution Services
Distribution Services revenues in 1999 fell $198.2 million from the 1998 level
due to the depressed market conditions and the mid-year sale of the tubular
product line which generated revenues in 1999 of approximately $24 million, or
$23 million lower than the prior year. The margin reduction resulting from the
lower revenues was the primary contributor to the $6.0 million operating loss.
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 20%, 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.
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Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. A reduction of $1.1 million in 1999 as compared to 1998 was
attributable to ongoing decentralization efforts and relocation of the corporate
offices. These costs also decreased substantially in 1998 due to the elimination
of duplicate corporate costs that existed prior to the combination with Dreco.
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 were asset impairments of $5.4
million, severance costs of $5.6 million and facility closures and exit costs of
$5.4 million. All of the actions related to this charge have been implemented.
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.
Interest Expense
Interest expense in 1999 was greater than the prior year due to carrying a
higher debt level for the entire year resulting from the issuance of the 6 7/8%
senior notes in mid 1998. Interest expense also increased during 1998 when
compared to 1997 due to the incurrence of the senior notes.
Income Taxes
National Oilwell is subject to U.S. federal, state and foreign taxes and
recorded a combined tax rate of 66% in 1999, 37% in 1998 and 36% in 1997. The
1999 effective tax rate was impacted by the inclusion of the pre-merger
operating results of the Dupre' companies (see Note 1) due to
pooling-of-interests accounting and its S Corporation tax status. Concurrent
with the acquisition, Dupre' terminated its status as an S Corporation.
Excluding the impact of Dupre's pre-merger results, National Oilwell's combined
effective tax rate for 1999 was 43%, compared to 37% in 1998 and 38% in 1997.
The Company has net operating loss carryforwards in the United States that could
reduce future tax expense by up to $5.9 million. Additional loss carryforwards
in Europe generally would reduce goodwill if realized in the future. Due to the
uncertainty of future utilization, most of the potential benefits described
above have been fully reserved. During 1999, National Oilwell realized a tax
benefit of $1.0 million from its U.S. carryforwards.
The Company generated a tax loss in 1999 and intends to carry back this loss
against prior years. Accordingly, the Company has recorded a current tax benefit
and corresponding current tax receivable of $10.2 million.
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
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, National Oilwell had working capital of $302.2 million, a
decrease of $62.0 million from December 31, 1998. Significant components of
National Oilwell's assets are accounts receivable and inventories. Accounts
receivable decreased by $115.5 million during 1999. Inventories at each year-end
were similar as reductions from lower activity levels and sales of product lines
were offset by additions from companies acquired. Other significant changes in
working capital components include a decrease in accounts payable of $30.6
million and customer prepayments of $8.6 million, due to lower activity levels
and the recognition of a $10.2 million income tax receivable.
Total capital expenditures were $15.4 million during 1999, $29.2 million in 1998
and $34.8 million in 1997. Additions and enhancements to the downhole rental
tool fleet and information management and inventory control
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systems represent the majority of these capital expenditures. Capital
expenditures are expected to approximate $20 million in 2000. National Oilwell
believes it has sufficient existing manufacturing capacity to meet currently
anticipated demand through 2000 for its products and services.
On September 25, 1997, National Oilwell entered into a 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. In March 2000, the credit
facility was amended to lower the minimum interest coverage ratio effective as
of December 31, 1999.
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.
SUBSEQUENT EVENT
On February 4, 2000, stockholders of 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, approved a merger with
National Oilwell. Approximately 7.9 million shares of common stock and NOK 148.7
million (approximately $19 million) were issued in exchange for 98.7% of the
outstanding shares of Hitec. Each Hitec share was exchanged for .2125904 of a
National Oilwell share plus NOK 3.95152. Concurrently with the combination, the
non-drilling related assets of Hitec were sold for NOK 148.7 million. National
Oilwell will account for this transaction as a purchase for financial reporting
purposes with goodwill related to this transaction approximating $150 million.
On March 15, 2000, National Oilwell signed a definitive merger agreement with
IRI International Corporation (NYSE: IIR) whereby National Oilwell would issue
approximately 13,500,000 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. The transaction would be
accounted for as a pooling of interests.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. The Company experienced no significant disruptions in
information technology or any other systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
expensed approximately $700,000 during 1999 in connection with remediating its
systems. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
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, 1999, the
Company had $46.0 million outstanding under its credit facility. Based on this
14
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balance, an immediate change of one percent in the interest rate would cause a
change in interest expense of approximately $0.5 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 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.
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 those contained in
the forward-looking statements due to a number of factors, including 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"
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 disclaim any obligation or
intent to update any such factors or forward-looking statement to reflect future
events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Item 7 above, "Market Risk Disclosure".
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
Attached hereto and a part of this report are financial statements and
supplementary data listed in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
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Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the definitive Proxy Statement for the
2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the definitive Proxy Statement for the
2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the definitive Proxy Statement for the
2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the definitive Proxy Statement for the
2000 Annual Meeting of Stockholders
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
a) Financial Statements and Exhibits
1. Financial Statements
The following financial statements are presented in response to Part II,
Item 8:
Page(s) in
This Report
-----------
Consolidated Balance Sheets....................................21
Consolidated Statements of
Operations.....................................................22
Consolidated Statements of Cash Flows..........................23
Consolidated Statements of Stockholders' Equity................24
Notes to Consolidated Financial Statements.....................25
2. Financial Statement Schedules
All schedules are omitted because they are not applicable, not required or
the information is included in the financial statements or notes thereto.
3. Exhibits
2.1 Combination Agreement, dated as of May 14, 1997, as amended, between
National-Oilwell, Inc. and Dreco Energy Services Ltd. (Annex B) (3)
2.2 Plan of Arrangement and Exchangeable Share Provisions (Annex E) (3)
3.1 Amended and Restated Certificate of Incorporation of National-Oilwell,
Inc. (Annex D)(3)
3.2 By-laws of National-Oilwell, Inc. (Exhibit 3.2)(1)
9.1 Form of Voting and Exchange Trust Agreement by and between
National-Oilwell, Inc., Dreco Energy Services Ltd. and Montreal Trust
Company of Canada (Annex G)(3)
10.1 Employment Agreement dated as of January 16, 1996 between Joel V. Staff
and the Company with similar agreements with James J. Fasnacht,
Jerry N. Gauche and Steven W. Krablin, and a similar agreement dated
as of February 5, 1996 between Merrill A. Miller, Jr. and the Company,
and a similar agreement dated as of March 1, 2000 between Jon Gjedebo
and the Company (Exhibit 10.1)(1)*
10.2 Restricted Stock Agreement between the Company and Joel V. Staff, with
similar agreements with James J. Fasnacht, Jerry N. Gauche, Steven W.
Krablin and Merrill A. Miller, Jr. (Exhibit 10.10)(1)*
10.3 Stockholders Agreement among the Company and its stockholders dated as
of January 16, 1996 (Exhibit 10.3)(1)
10.4 Waiver and First Amendment to Stockholders Agreement dated as of July
24, 1996 (Exhibit 10.4)(1)
10.5 Second Amendment to Stockholders Agreement dated as of October 18, 1996
(Exhibit 10.17)(1)
10.6 Amended and Restated Stock Award and Long-Term Incentive Plan (Exhibit
10.6)(2)*
17
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10.7 Supplemental Savings Plan (Exhibit 10.12)(1)*
10.8 Loan Agreement dated September 25, 1997 (Exhibit 10.1) (4)
10.9 Amendment to Loan Agreement dated as of December 31, 1999
10.10 Form of Support Agreement by and between National-Oilwell, Inc. and
Dreco Energy Services Ltd. (Annex F)(3)
10.11 Employment Agreement dated as of April 19, 1999 between Honor Guiney
and the Company.*
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
- ---------------
* Compensatory plan or arrangement for management or others
(1) Filed as an Exhibit to Registration Statement No. 333-11051 on Form
S-1, as amended, initially filed on August 29, 1996.
(2) Filed with the Proxy Statement for the 1999 Annual Meeting of
Stockholders, filed on May 12, 1999.
(3) Filed as an Annex to the Joint Proxy Statement/Prospectus in Post
Effective Amendment No. 1 to Registration Statement No. 333-32191 on
Form S-4 filed on August 21, 1997.
(4) Filed as an Exhibit to the National-Oilwell, Inc. Quarterly Report on
Form 10-Q filed on November 7, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NATIONAL-OILWELL, INC.
Date: March 16, 2000 By: /s/ STEVEN W. KRABLIN
--------------------- -------------------------
Steven W. Krablin
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Each person whose signature appears below in so signing, constitutes and
appoints Steven W. Krablin and M. Gay Mather, and each of them acting alone,
his true and lawful attorney-in-fact and agent, with full power of substitution,
for him and in his name, place and stead, in any and all capacities, to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments to this report, and in each case to file the same, with all exhibits
thereto and other documents in connection therewith, and hereby ratifies and
confirms all that said attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
Signatures Title Date
---------- ----- ----
/s/ JOEL V. STAFF Chairman of the Board, March 16, 2000
- ------------------------- President and Chief --------------
Joel V. Staff Executive Officer (Principal
Executive Officer)
/s/ STEVEN W. KRABLIN Vice President and Chief March 16, 2000
- ------------------------- Financial Officer (Principal --------------
Steven W. Krablin Financial Officer and
Principal Accounting Officer)
/s/ HOWARD I. BULL Director March 16, 2000
- ------------------------- --------------
Howard I. Bull
/s/ JAMES C. COMIS III Director March 16, 2000
- ------------------------- --------------
James C. Comis III
/s/ W. McCOMB DUNWOODY Director March 16, 2000
- ------------------------- --------------
W. McComb Dunwoody
/s/ JON GJEDEBO Director March 16, 2000
- ------------------------- --------------
Jon Gjedebo
/s/ BEN A. GUILL Director March 16, 2000
- ------------------------- --------------
Ben A. Guill
/s/ WILLIAM E. MACAULAY Director March 16, 2000
- ------------------------- --------------
William E. Macaulay
/s/ FREDRICK W. PHEASEY Director March 16, 2000
- ------------------------- --------------
Fredrick W. Pheasey
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REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
National-Oilwell, Inc.
We have audited the accompanying consolidated balance sheets of
National-Oilwell, Inc., as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 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. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
National-Oilwell, Inc., at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 16, 2000
22
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 12,403 $ 11,963
Receivables, less allowance of $5,506 and $4,963 185,920 301,405
Inventories 254,052 253,385
Deferred taxes 9,296 16,489
Income taxes receivable 10,171 --
Prepaid and other current assets 6,534 7,677
-------- --------
Total current assets 478,376 590,919
Property, plant and equipment, net 109,147 96,174
Deferred taxes 7,781 6,757
Goodwill, net 174,498 145,696
Property held for sale 7,424 9,981
Other assets 5,085 6,361
-------- --------
$782,311 $855,888
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 8,427
Accounts payable 100,963 131,575
Customer prepayments 16,838 25,392
Accrued compensation 4,232 7,237
Other accrued liabilities 54,177 54,158
-------- --------
Total current liabilities 176,210 226,789
Long-term debt 196,007 221,198
Deferred taxes 6,138 4,097
Other liabilities 8,881 10,505
-------- --------
Total liabilities 387,236 462,589
Commitments and contingencies
Stockholders' equity:
Common stock-par value $.01; 58,223,971 and 57,916,785
shares issued and outstanding at December 31, 1999 and
December 31, 1998 582 579
Additional paid-in capital 246,553 248,194
Accumulated other comprehensive income (11,537) (13,821)
Retained earnings 159,477 158,347
-------- --------
395,075 393,299
-------- --------
$782,311 $855,888
======== ========
The accompanying notes are an integral part of these statements.
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NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- ---------- ----------
Revenues $745,215 $1,271,914 $1,097,406
Cost of revenues 603,579 990,341 880,708
-------- ---------- ----------
Gross profit 141,636 281,573 216,698
Selling, general, and administrative 119,735 142,628 114,252
Special charge -- 16,433 10,660
-------- ---------- ----------
Operating income 21,901 122,512 91,786
Interest and financial costs (15,509) (13,901) (7,088)
Interest income 737 1,025 1,524
Other income (expense), net (2,611) (280) (77)
-------- ---------- ----------
Income before income taxes and extraordinary loss 4,518 109,356 86,145
Provision for income taxes 2,998 40,402 31,318
-------- ---------- ----------
Net income before extraordinary loss 1,520 68,954 54,827
Extraordinary loss, net of tax benefit -- -- 623
-------- ---------- ----------
Net income $ 1,520 $ 68,954 $ 54,204
======== ========== ==========
Net income per share:
Basic
Net income before extraordinary loss $ 0.03 $ 1.26 $ 1.03
Extraordinary loss -- -- (0.01)
-------- ---------- ----------
Net income $ 0.03 $ 1.26 $ 1.02
======== ========== ==========
Net income per share:
Diluted
Net income before extraordinary loss $ 0.03 $ 1.26 $ 1.02
Extraordinary loss -- -- (0.01)
-------- ---------- ----------
Net income $ 0.03 $ 1.26 $ 1.01
======== ========== ==========
Weighted average shares outstanding:
Basic 58,214 54,665 53,009
======== ========== ==========
Diluted 58,528 54,847 53,842
======== ========== ==========
The accompanying notes are an integral part of these statements.
22
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NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- --------- --------
Cash flow from operating activities:
Net income $ 1,520 $ 68,954 $ 54,204
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 23,244 20,598 15,443
Provision for losses on receivables 3,055 610 730
Provision for deferred income taxes 7,861 (4,092) (3,121)
Gain on sale of assets (2,937) (2,315) (2,954)
Foreign currency transaction (gain) loss 464 (103) 602
Special charge -- 16,433 10,660
Extraordinary loss -- -- 999
Changes in assets and liabilities, net of acquisitions:
Receivables 117,291 (49,524) (64,290)
Unbilled revenues -- 31,521 (17,641)
Inventories (5,963) 17,327 (71,359)
Prepaid and other current assets 1,083 3,985 1,886
Accounts payable (41,479) (46,986) 51,252
Other assets/liabilities, net (19,653) (23,379) 23,332
-------- --------- --------
Net cash provided (used) by operating activities 84,486 33,029 (257)
-------- --------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment (15,369) (29,241) (34,783)
Proceeds from sale of assets 5,674 10,001 4,525
Proceeds from product line dispositions 26,599 -- --
Businesses acquired, net of cash (67,029) (130,963) (19,253)
Other -- -- 248
-------- --------- --------
Net cash used by investing activities (50,125) (150,203) (49,263)
-------- --------- --------
Cash flow from financing activities:
Borrowings (payments) on line of credit (33,597) 1,317 61,267
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
Proceeds from stock options exercised 164 1,002 6,546
Other (677) (1,434) (2,134)
-------- --------- --------
Net cash provided (used) by financing activities (34,110) 108,967 61,560
-------- --------- --------
Effect of exchange rate losses on cash 189 (221) (4,097)
-------- --------- --------
Increase (decrease) in cash and equivalents 440 (8,428) 7,943
Cash and cash equivalents, beginning of year 11,963 20,391 14,198
Change in cash to conform fiscal year end -- -- (1,750)
-------- --------- --------
Cash and cash equivalents, end of year $ 12,403 $ 11,963 $ 20,391
======== ========= ========
The accompanying notes are an integral part of these statements.
23
25
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS TOTAL
------ --------- ------------- ---------- ---------
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 S-corp distributions (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 securities 176 176
---------
Comprehensive income 61,502
Stock options exercised 1,002 1,002
Stock issued for acquisition 43 39,138 6,653 45,834
Tax benefit of options exercised 104 104
------ --------- -------- --------- ---------
Balance at December 31, 1998 579 248,194 (13,821) 158,347 393,299
Net income 1,520 1,520
Currency translation adjustments 1,744 1,744
Unrealized gains on securities 540 540
---------
Comprehensive income 3,804
Stock options exercised 3 165 168
Tax benefit of options exercised 217 217
Premerger S-corp distributions (287) (390) (677)
Reversal of 1997 option
tax benefits (1,736) (1,736)
------ --------- -------- --------- ---------
Balance at December 31, 1999 $ 582 $ 246,553 $(11,537) $ 159,477 $ 395,075
====== ========= ======== ========= =========
The accompanying notes are an integral part of these statements.
24
26
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and 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., 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.
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, 1999, approximately 84% of the Exchangeable Shares had
been converted into National Oilwell common stock.
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 1.9 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. All prior periods have been
restated.
Effective July 8, 1999, National Oilwell acquired the assets and certain
operating liabilities of CE Drilling Products, Inc. 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. The financial statements reflect
the preliminary allocation of purchase price. The final purchase price is
subject to certain pre-acquisition contingencies and valuation of certain
assets. The transaction did not have a material effect on National Oilwell's
statements.
On June 17, 1999, National Oilwell 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). Revenues and operating
loss recorded in 1999 for the tubular operations were $23.6 million and $0.6
million, respectively.
On June 24, 1999, National Oilwell 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). Revenues and operating income
recorded in 1999 for the drill bit business were $6.1 million and $0.1 million,
respectively.
25
27
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, 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 $539,000 and $205,000
at December 31, 1999 and 1998, respectively. Goodwill is amortized on a
straight-line basis over its estimated life of 10-40 years. Accumulated
amortization at December 31, 1999 and 1998 was $9,234,000 and $4,061,000. On an
annual basis, the Company estimates the future estimated discounted cash flows
of the business to which goodwill related in order to determine that the
carrying value of the goodwill had not been impaired.
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 accumulated other
comprehensive income. 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.
26
28
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.
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,
------------------------------------
1999 1998 1997
------ ------ ------
Denominator for basic earnings per
share--weighted average shares 58,214 54,665 53,009
Effect of dilutive securities:
Employee stock options 314 182 833
------ ------ ------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 58,528 54,847 53,842
====== ====== ======
3. INVENTORIES
Inventories consist of (in thousands):
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Raw materials and supplies $ 19,434 $ 24,304
Work in process 32,793 39,991
Finished goods and purchased products 201,825 189,090
-------- --------
Total $254,052 $253,385
======== ========
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29
4. STATEMENTS OF CASH FLOWS
The following information supplements the Consolidated Statements of Cash
Flows (in thousands):
DECEMBER 31,
-------------------------------
1999 1998 1997
------- ------- -------
Cash paid during the period for:
Interest $16,539 $ 6,989 $ 7,648
Income taxes 13,214 48,003 24,405
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 1999 1998
------------ ------------ ------------
Land and improvements 2-20 Years 6,388 $ 6,421
Buildings and improvements 5-31 Years 41,266 27,080
Machinery and equipment 5-12 Years 54,276 52,774
Computer and office equipment 3-12 Years 42,658 36,810
Rental equipment 1-7 Years 37,081 29,217
-------- --------
181,669 152,302
Less accumulated depreciation (72,522) (56,128)
-------- --------
$109,147 $ 96,174
======== ========
6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Revolving credit facilities $ 46,007 $ 55,637
6 7/8 senior notes 150,000 150,000
Other -- 23,988
-------- --------
196,007 229,625
Less current portion -- 8,427
-------- --------
$196,007 $221,198
======== ========
On September 25, 1997, National Oilwell entered into a five-year unsecured $125
million revolving credit facility. The credit facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $13.9 million were outstanding at December 31, 1999.
The credit facility provides for interest at prime or LIBOR plus 0.625% (8.50%
and 7.125% at December 31, 1999) 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. In March 2000, the credit
facility was amended to lower the minimum interest coverage ratio effective as
of December 31, 1999.
National Oilwell also has additional credit facilities totaling $23.0 million
used primarily for letters of credit, of which $4.1 million were outstanding at
December 31, 1999.
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.
28
30
7. PENSION PLANS
National Oilwell and its consolidated subsidiaries have 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, 1999, 1998 and 1997, pension expense for
defined-contribution plans was $2.8 million, $3.7 million and $3.5 million, and
all funding is current.
National Oilwell's subsidiaries in the United Kingdom have 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, 1999, the plan assets at fair market
value were $52.6 million and the projected benefit obligation was $30.0 million.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows (in thousands):
Unrealized
Currency On Available-
Translation for-sale
Adjustments Securities Total
------------- ------------- -------------
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)
Currency translation
adjustments 1,744 -- 1,744
Unrealized gains on available-
for-sale securities -- 815 815
Deferred taxes relating to
unrealized gains on
available-for-sale
securities -- (275) (275)
------------- ------------- -------------
Balance at December 31, 1999 $ (12,253) $ 716 $ (11,537)
============= ============= =============
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, 1999, 1998
and 1997 was $11.8 million, $10.3 million and $9.0 million. National Oilwell's
minimum rental commitments for operating leases at December 31, 1999, excluding
future payments applicable to facilities to be closed as part of the 1998
Special Charge, were as follows: 2000 - $7.0 million; 2001 - $5.1 million; 2002
- - $3.2 million; 2003 - $2.0 million and 2004 - $0.8 million.
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31
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, 1999 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. 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.
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.
Options outstanding at December 31, 1999 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 2,068,666 outstanding options at December 31, 1999 is $14.59.
The following summarizes option activity:
WEIGHTED AVERAGE TOTAL
SHARE PRICE OPTIONS
------------------ ---------
OPTIONS OUTSTANDING:
Balance at December 31, 1997 13.94 538,592
Granted 27.46 513,896
Cancelled 22.82 (44,020)
Exercised 9.60 (103,957)
---------
Balance at December 31, 1998 21.74 904,511
Granted 10.43 1,357,255
Cancelled 20.73 (167,194)
Exercised 6.85 (25,906)
---------
Balance at December 31, 1999 14.59 2,068,666
=========
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32
OPTIONS EXERCISABLE
Exercisable at December 31, 1997 $ 6.16 46,948
Vested 13.74 178,249
Cancelled 22.32 (7,034)
Exercised 9.60 (103,957)
---------
Exercisable at December 31, 1998 $13.97 114,206
Vested 15.39 329,234
Cancelled 21.61 (37,073)
Exercised 6.85 (25,906)
---------
Exercisable at December 31, 1999 $15.31 380,461
=========
The weighted average fair value of options granted during 1999 was approximately
$7.31 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, earnings
per share would have been affected by $0.05 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
in February 2000, 681,683 options to purchase shares of common stock were
granted at an exercise price of $22.56, the fair value of the common stock at
the date of grant.
11. INCOME TAXES
The domestic and foreign components of income before income taxes were as
follows (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
Domestic $(9,172) $ 58,788 $50,996
Foreign 13,690 50,568 35,149
------- -------- -------
$ 4,518 $109,356 $86,145
======= ======== =======
The components of the provision for income taxes consisted of (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
Current:
Federal $(8,238) $ 24,357 $17,508
State (745) 2,074 1,496
Foreign 4,120 18,063 15,435
------- -------- -------
(4,863) 44,494 34,439
------- -------- -------
Deferred:
Federal 6,361 (4,151) (287)
State 572 (845) (64)
Foreign 928 904 (2,770)
------- -------- -------
7,861 (4,092) (3,121)
------- -------- -------
$ 2,998 $ 40,402 $31,318
======= ======== =======
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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, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
Federal income tax at statutory rate $ 1,582 $ 38,282 $ 30,115
Foreign income tax rate differential (68) 237 495
State income tax, net of federal benefit (181) 1,151 919
S Corporation earnings 824 (9) (1,179)
Tax benefit of foreign sales corporation -- (2,547) (990)
Nondeductible expenses 1,804 1,223 2,837
Incremental U.S. tax on foreign earnings -- 2,517 --
Unbenefited losses 990 2,903 209
Change in deferred tax valuation allowance (1,758) (2,765) (1,617)
Other (195) (590) 529
------- -------- --------
$ 2,998 $ 40,402 $ 31,318
======= ======== ========
The Company generated a loss in the current year for U.S. federal income tax
purposes and intends to carry this loss back to the 1997 taxable year and claim
a refund of federal income taxes paid. Accordingly, the Company has recorded a
current tax benefit and corresponding current tax receivable of $10.2 million.
Significant components of National Oilwell's deferred tax assets and
liabilities were as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Deferred tax assets:
Accrued liabilities $ 11,161 $ 18,641
Net operating loss carryforwards 12,531 13,521
Other 10,168 9,625
-------- --------
Total deferred tax assets 33,860 41,787
Valuation allowance for deferred tax assets (16,783) (18,541)
-------- --------
17,077 23,246
-------- --------
Deferred tax liabilities:
Tax over book depreciation 1,349 1,743
Other 4,789 2,354
-------- --------
Total deferred tax liabilities 6,138 4,097
-------- --------
Net deferred tax assets $ 10,939 $ 19,149
======== ========
In the United States, the Company has $17.3 million of net operating loss
carryforwards as of December 31, 1999 which expire at various dates through
2009. These operating losses were acquired in the combination with Dreco Energy
Services Ltd. and are associated with Dreco's US subsidiary. As a result of
share exchanges occurring since the date of 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
32
34
taxable income of Dreco's US subsidiary. Since the ultimate realization of these
net operating losses is uncertain, the related potential benefit of $5.9 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, 1999 that are available indefinitely. The
related potential benefit available of $6.7 million has been recorded with a
valuation allowance of $5.5 million. If the Company ultimately realizes the
benefit of these net operating losses, $3.8 million would reduce goodwill and
other intangible assets and $1.7 million would reduce income tax expense.
The deferred tax valuation allowance decreased $1.8 million and $2.8 million for
the period ending December 31, 1999 and December 31, 1998, 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 $58.5
million and $59.1 million at December 31, 1999 and December 31, 1998,
respectively. 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 $6.9 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 1999.
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 were asset impairments of $5.4
million, severance costs of $5.6 million and facility closures and exit costs of
$5.4 million. All of the severance actions related to this charge have been
implemented.
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.
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.
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
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35
Agreement. As of December 31, 1999, cash payments aggregating $4.4 million have
been made to Inverness/Phoenix LLC and First Reserve Corporation in connection
with the Deferred Fee Agreement and no further liability exists.
On May 29, 1998, National Oilwell acquired Phoenix Energy Products Holdings,
Inc., an affiliate of First Reserve Corporation, for approximately $115 million.
15. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
National Oilwell's operations consist of two segments: Products and Technology
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, including drilling motors and specialized
drilling tools for rent and sale. The Distribution Services segment distributes
an extensive line of oilfield supplies and equipment. 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, 1999.
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36
Summarized financial information is as follows (in thousands):
Business Segments
PRODUCTS AND DISTRIBUTION CORPORATE/
TECHNOLOGY SERVICES ELIMINATIONS(1) TOTAL
------------ ------------ --------------- ----------
DECEMBER 31, 1999
Revenues from:
Unaffiliated customers $335,535 $409,680 $ -- $ 745,215
Intersegment sales 30,053 674 (30,727) --
-------- -------- --------- ----------
Total revenues 365,588 410,354 (30,727) 745,215
Operating income (loss) 33,329 (5,959) (5,469) 21,901
Capital expenditures 5,294 9,968 107 15,369
Depreciation and amortization 18,641 4,269 334 23,244
Identifiable assets 555,212 197,918 29,181 782,311
DECEMBER 31, 1998
Revenues from:
Unaffiliated customers $663,402 $608,512 $ -- $1,271,914
Intersegment sales 66,420 -- (66,420) --
-------- -------- --------- ----------
Total revenues 729,822 608,512 (66,420) 1,271,914
Operating income (loss) 136,594 8,911(2) (22,993) 122,512(2)
Capital expenditures 14,142 14,220 879 29,241
Depreciation and amortization 16,511 3,047 1,040 20,598
Identifiable assets 598,563 226,893 30,432 855,888
DECEMBER 31, 1997
Revenues from:
Unaffiliated customers $374,673 $722,733 $ -- $1,097,406
Intersegment sales 66,180 -- (66,180) --
-------- -------- --------- ----------
Total revenues 440,853 722,733 (66,180) 1,097,406
Operating income (loss) 79,004 32,128 (19,346) 91,786
Capital expenditures 30,536 3,612 635 34,783
Depreciation and amortization 12,398 1,830 1,215 15,443
Identifiable assets 352,372 213,056 37,565 602,993
(1) Operating loss of Corporate includes a special charge of $16,433 for 1998
and $10,660 for 1997
(2) Includes a $5,600 charge related to the writedown to the lower of cost or
market of certain tubular inventories.
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37
Geographic Areas:
UNITED UNITED
STATES CANADA KINGDOM OTHER ELIMINATIONS TOTAL
---------- -------- ------- ------- ------------ ----------
DECEMBER 31, 1999
Revenues from:
Unaffiliated customers $ 519,291 $163,597 $35,723 $26,604 $ -- $ 745,215
Interarea sales 31,249 22,577 2,441 619 (56,886) --
---------- -------- ------- ------- -------- ----------
Total revenues 550,540 186,174 38,164 27,223 (56,886) 745,215
Long-lived assets 394,887 317,558 37,637 32,229 -- 782,311
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
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)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- ----------
YEAR ENDED DECEMBER 31, 1999
Revenues $203,923 $174,765 $168,244 $198,283 $ 745,215
Gross Profit 41,464 33,080 30,051 37,041 141,636
Income (loss) before taxes 5,619 (2,625) (2,595) 4,119 4,518
Net income 3,335 (2,443) (1,872) 2,500 1,520
Net income per diluted share 0.06 (0.04) (0.03) 0.04 0.03
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
- ---------------
(1) The 4th quarter includes a $5,600 charge related to the writedown of certain
tubular inventories to the lower of cost or market.
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17. SUBSEQUENT EVENT
On February 4, 2000, stockholders of 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, approved a merger with
National Oilwell. Approximately 7.9 million shares of common stock and NOK 148.7
million (approximately $19 million) were issued in exchange for 98.7% of the
outstanding shares of Hitec. Each Hitec share was exchanged for .2125904 of a
National Oilwell share plus NOK 3.95152. Concurrently with the combination, the
non-drilling related assets of Hitec were sold for NOK 148.7 million. National
Oilwell will account for this transaction as a purchase for financial reporting
purposes with goodwill related to this transaction approximating $150 million.
On March 15, 2000, National Oilwell signed a definitive merger agreement with
IRI International Corporation (NYSE: IIR) whereby National Oilwell would issue
approximately 13,500,000 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. The transaction would be
accounted for as a pooling of interests.
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Combination Agreement, dated as of May 14, 1997, as amended,
between National-Oilwell, Inc. and Dreco Energy Services Ltd.
(Annex B)(3)
2.2 Plan of Arrangement and Exchangeable Share Provisions (Annex
E)(3)
3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Annex D)(3)
3.2 By-laws of National-Oilwell, Inc. (Exhibit 3.2)(1)
9.1 Form of Voting and Exchange Trust Agreement by and between
National-Oilwell, Inc., Dreco Energy Services Ltd. and Montreal
Trust Company of Canada (Annex G)(3)
10.1 Employment Agreement dated as of January 16, 1996 between Joel
V. Staff and the Company with similar agreements with James J.
Fasnacht, Jerry N. Gauche and Steven W. Krablin, and a similar
agreement dated as of February 5, 1996 between Merrill A. Miller,
Jr. and the Company, and a similar agreement dated as of March 1,
2000 between Jon Gjedebo and the Company (Exhibit 10.1)(1)*
10.2 Restricted Stock Agreement between the Company and Joel V. Staff,
with similar agreements with James J. Fasnacht, Jerry N. Gauche,
Steven W. Krablin and Merrill A. Miller, Jr. (Exhibit 10.10)(1)*
10.3 Stockholders Agreement among the Company and its stockholders
dated as of January 16, 1996 (Exhibit 10.3)(1)
10.4 Waiver and First Amendment to Stockholders Agreement dated as of
July 24, 1996 (Exhibit 10.4)(1)
10.5 Second Amendment to Stockholders Agreement dated as of October
18, 1996 (Exhibit 10.17)(1)
10.6 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.6)(2)*
10.7 Supplemental Savings Plan (Exhibit 10.12)(1)*
10.8 Loan Agreement dated September 25, 1997 (Exhibit 10.1)(4)
10.9 Amendment to Loan Agreement dated as of December 31, 1999
10.10 Form of Support Agreement by and between National-Oilwell, Inc.
and Dreco Energy Services Ltd. (Annex F)(3)
10.11 Employment Agreement dated as of April 19, 1999 between Honor
Guiney and the Company.*
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial Data Schedule
- -----------------
* Compensatory plan or arrangement for management or others
(1) Filed as an Exhibit to Registration Statement No. 333-11051 on Form S-1, as
amended, initially filed on August 29, 1996.
(2) Filed with the Proxy Statement for the 1999 Annual Meeting of Stockholders,
filed on May 12, 1999.
(3) Filed as an Annex to the Joint Proxy Statement/Prospectus in Post Effective
Amendment No. 1 to Registration Statement No. 333-32191 on Form S-4 filed
on August 21, 1997.
(4) Filed as an Exhibit to the National-Oilwell, Inc. Quarterly Report on Form
10-Q filed on November 7, 1997.