NATIONAL OILWELL INC - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2002 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12317

NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0475875
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

10000 RICHMOND AVENUE
HOUSTON, TEXAS
77042-4200
(Address of principal executive offices)

(713)346-7500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES [X] NO [ ]

As of November 1, 2002, 81,000,198 common shares were outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these statements.

1

NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these statements.

2

NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

Nine Months Ended September 30,
-------------------------------
2002 2001
------------ ------------

Cash flow from operating activities:
Net income $ 55,901 $ 75,715
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 18,732 28,882
Provision for losses on receivables 2,592 2,609
Provision (benefit) for deferred income taxes 438 (7)
Gain on sale of assets (2,317) (2,553)
Foreign currency transaction loss 1,006 84

Changes in assets and liabilities, net of acquisitions:
Receivables 27,892 (151,667)
Inventories 5,510 (124,838)
Prepaid and other current assets (6,435) 1,518
Accounts payable (31,038) 43,331
Other assets/liabilities, net (33,342) (14,420)
-------- ----------
Net cash provided (used) by operating activities 38,939 (141,346)
-------- ----------

Cash flow from investing activities:
Purchases of property, plant and equipment (14,459) (22,208)
Proceeds from sale of assets 5,915 6,973
Businesses acquired, net of cash (15,432) (36,710)
-------- ----------
Net cash used by investing activities (23,976) (51,945)
-------- ----------

Cash flow from financing activities:
Proceeds (payments) on line of credit (7,686) 16,578
Proceeds from stock options exercised 989 10,362
Net proceeds from issuance of long-term debt - 146,631
-------- ----------
Net cash provided (used) by financing activities (6,697) 173,571
-------- ----------
Effect of exchange rate gain (loss) on cash 800 (547)
-------- ----------

Increase (decrease) in cash and equivalents 9,066 (20,267)
Cash and cash equivalents, beginning of period 43,220 42,459
-------- ----------
Cash and cash equivalents, end of period $ 52,286 $ 22,192
-------- ----------

Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 21,397 $ 19,932
Income taxes $ 32,292 $ 22,563

The accompanying notes are an integral part of these statements.

3

NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

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.

The accompanying unaudited consolidated financial statements present information
in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and
applicable rules of Regulation S-X. They do not include all information or
footnotes required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
our 2001 Annual Report on Form 10-K.

In our opinion, the consolidated financial statements include all adjustments,
all of which are of a normal, recurring nature, necessary for a fair
presentation of the results for the interim periods. The results of operations
for the three months and nine months ended September 30, 2002 and 2001 may not
be indicative of results for the full year.

2. ACQUISITIONS

On January 10, 2002, we completed the acquisition of the assets and business of
HAL Oilfield Pump & Equipment Company ("Halco") for $15.4 million. This
business, which designs, manufactures and distributes centrifugal pumps, pump
packages and expendable parts, is complementary to our Mission pump product
line. The acquisition was accounted for as a purchase with goodwill
approximating $10.0 million.

We made nine acquisitions in 2001, ranging in value from $600,000 to a high of
$16.5 million, for a total cash outlay of $51.5 million. All of these
acquisitions were accounted for under the purchase method of accounting and
generated approximately $30 million in goodwill. Two of the larger acquisitions,
Integrated Power Systems and Maritime Hydraulics (Canada) Ltd., were acquired in
early January 2001 and their financial results were included in our consolidated
financial results for substantially the entire year. Pro-forma information
related to acquisitions has not been provided as such amounts are not material
individually or in the aggregate.

3. INVENTORIES

Inventories consist of (in thousands):

September 30, December 31,
2002 2001
------------- -------------

Raw materials and supplies $ 34,327 $ 39,272
Work in process 113,011 101,376
Finished goods and purchased products 306,690 315,286
--------- ---------
Total $ 454,028 $ 455,934
========= =========

4

4. COMPREHENSIVE INCOME

The components of comprehensive income are as follows (in thousands):

Quarter Ended September 30, Nine Months Ended September 30,
---------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ------------ ------------

Net income $ 17,756 $ 28,938 $ 55,901 $ 75,715

Currency translation adjustments (4,186) 5,166 (3,279) (6,156)

Unrealized losses on securities - - - (1,446)
--------- --------- --------- ---------

Comprehensive income $ 13,570 $ 34,104 $ 52,622 $ 68,113
========= ========= ========= =========

5. BUSINESS SEGMENTS

Segment information (unaudited) follows (in thousands):

Quarter Ended September 30, Nine Months Ended September 30,
-------------------------------- ---------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------

Revenues from unaffiliated customers
Products and Technology $ 192,119 $ 294,011 $ 617,826 $ 750,995
Distribution Services 174,810 192,801 510,479 530,717
----------- ----------- ----------- -----------
366,929 486,812 1,128,305 1,281,712
Intersegment revenues
Products and Technology 20,948 23,006 61,336 63,078
Distribution Services 806 768 1,501 1,563
----------- ----------- ----------- -----------
21,754 23,774 62,837 64,641
Operating income
Products and Technology 30,241 50,413 95,758 124,542
Distribution Services 4,508 9,244 13,790 23,052
----------- ----------- ----------- -----------

Total profit for reportable segments 34,749 59,657 109,548 147,594
Unallocated corporate costs (2,847) (2,755) (7,693) (7,672)
----------- ----------- ----------- -----------
Operating income 31,902 56,902 101,855 139,922
Net interest expense (6,225) (6,780) (17,930) (17,094)
Other income (expense) 2,066 (2,753) 3,421 (14)
----------- ----------- ----------- -----------
Income before income taxes $ 27,743 $ 47,369 $ 87,346 $ 122,814
=========== =========== =========== ===========

Total assets

Products and Technology $ 1,137,999 $ 1,289,321
Distribution Services 277,115 280,736

5

6. DEBT

Debt consists of (in thousands):

September 30, December 31,
2002 2001
------------- -------------

Revolving credit facilities $ 218 $ 10,213
6-7/8% senior notes 150,000 150,000
6-1/2% senior notes 150,000 150,000
--------- ---------
300,218 310,213
Less current portion 218 10,213
--------- ---------
$ 300,000 $ 300,000
========= =========

On July 30, 2002, we replaced the existing credit facility with a new three-year
unsecured $175 million revolving credit facility. It is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $22.0 million were outstanding at September 30,
2002. Interest is based upon prime or Libor plus 0.5% subject to a ratings based
grid. In securing this new credit facility we incurred approximately $0.9
million in fees which will be amortized to expense over the term of the
facility.

We also have additional credit facilities totaling $70 million that are used
primarily for letters of credit. Borrowings against these credit facilities
totaled $9.8 million at September 30, 2002, essentially all applicable to
letters of credit.

The senior notes contain reporting covenants and the credit facility contains
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. At September 30, 2002, the Company was in compliance with all
covenants governing these facilities.

7. RECENTLY ISSUED ACCOUNTING STANDARDS

On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142"). Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with SFAS
No. 142. Other intangible assets will continue to be amortized over their useful
lives. During the second quarter of 2002, we completed the first of the required
impairment tests of goodwill and indefinite lived assets, which indicated no
impairment was required as of January 1, 2002.

The following information provides net income for the three-month and nine-month
period ended September 30, 2001 adjusted to exclude amortization expense
recognized in this period related to goodwill (in thousands):

6

Quarter ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------

Reported net income $ 28,938 $ 75,715
Add back: Goodwill amortization, net of tax 2,819 8,243
-------- --------
Adjusted net income $ 31,757 $ 83,958

Adjusted net income per share:
Basic $ 0.39 $ 1.04
Diluted $ 0.39 $ 1.03

Weighted average shares outstanding:
Basic 80,887 80,787
Diluted 81,437 81,834

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of Accounting Principles Board Opinion ("APB") No. 30, Reporting the
Results of Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions. This statement retains the fundamental provisions of SFAS No. 121
and the basic requirements of APB No. 30; however, it establishes a single
accounting model to be used for long-lived assets to be disposed of by sale and
it expands the presentation of discontinued operations to include more disposal
transactions. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of this statement did not have a material impact on our financial position or
results of operations.

In July, 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities, such as restructuring, involuntarily terminating employees,
and consolidating facilities, initiated after December 31, 2002. We do not
believe the adoption of this new statement will have a material impact on our
consolidated financial statements.

8. SUBSEQUENT EVENT

On October 11, 2002, we announced the signing of a definitive agreement to
acquire all of the outstanding shares of Hydralift ASA, a Norwegian oilfield
service company. On November 8, 2002 we made a cash Tender Offer of NOK 55,
approximately U.S. $7.33, for each share of Hydralift. The total value of the
transaction, including the assumption of debt, is approximately $300 million.
The transaction is subject to various conditions, including certain regulatory
approvals, and the acceptance of the Tender Offer by shareholders owning more
than 90% of the outstanding shares.

7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

National Oilwell is a worldwide leader in the design, manufacture and sale of
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. Our 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. Oil and gas
prices have been volatile since 1990, ranging from $10 - $40 per barrel. Oil
prices were low in 1998, generally ranging from $11 - $16 per barrel. In 1999,
oil prices increased and were generally in the $25 - $30 per barrel range during
2000. Prices once again declined in the second half of 2001, generally ranging
between $18 and $22. Then, since the second quarter of 2002, oil has generally
ranged from $25 - $30 per barrel. Spot gas prices have also been volatile since
1990, ranging from less than $1.00 per mmbtu to above $10.00. Gas prices were
moderate in 1998 and 1999, generally ranging from $1.80 - $2.50 per mmbtu. Gas
prices strengthened throughout 2000, generally ranging from $4 - $8 per mmbtu.
In the second quarter of 2001, gas prices again came under pressure, and
generally ranged from $2.20 - $3.00 per mmbtu through the first quarter of 2002.
Gas prices increased in the second quarter of 2002 and have generally ranged
between $3 - $4 per mmbtu since then.

We conduct our operations through the following segments:

Products and Technology

The Products and Technology segment manufactures and assembles drilling
machinery, including drawworks, mud pumps and top drives, which are the major
mechanical components of drilling rigs, as well as masts, derricks, cranes and
substructures. Many of these components are designed specifically for more
demanding applications, which include offshore, extended reach and deep land
drilling. We also provide electrical power systems, computer control systems and
automation systems for drilling rigs. Our systems are used in many of the
industry's most technologically demanding applications. In addition, we provide
engineering and fabrication services to integrate our drilling products and
deliver complete land drilling and workover rigs as well as drilling modules for
mobile offshore drilling rigs or offshore drilling platforms. A substantial
installed base of these products results in a recurring replacement parts and
maintenance business. Sales of new capital equipment can result in large
fluctuations in volume between periods depending on the size and timing of the
shipment of orders.

This segment also designs and manufactures drilling motors and specialized
downhole tools for rent and sale. Drilling motors are essential components of
systems for horizontal, directional, extended reach and performance drilling.
Downhole tools include fishing tools, drilling jars, shock tools and other
specialized products.

Distribution Services

Our Distribution Services segment offers comprehensive supply chain integration
services to the drilling and production segments. Our network of service centers
located in the United States and Canada and near other 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.

8

RESULTS OF OPERATIONS

Operating results by segment are as follows (in thousands):

Quarter Ended September 30, Nine Months Ended September 30,
----------------------------- ---------------------------------
2002 2001 2002 2001
----------- ----------- ------------- -------------

Revenues
Products and Technology $ 213,067 $ 317,017 $ 679,162 $ 814,073
Distribution Services 175,616 193,569 511,980 532,280
Eliminations (21,754) (23,774) (62,837) (64,641)
--------- --------- ----------- -----------
Total $ 366,929 $ 486,812 $ 1,128,305 $ 1,281,712
========= ========= =========== ===========
Operating Income
Products and Technology $ 30,241 $ 50,413 $ 95,758 $ 124,542
Distribution Services 4,508 9,244 13,790 23,052
Corporate (2,847) (2,755) (7,693) (7,672)
--------- --------- ----------- -----------
Total $ 31,902 $ 56,902 $ 101,855 $ 139,922
========= ========= =========== ===========

Products and Technology

Q3 2002 versus Q3 2001

Revenues for the Products and Technology segment decreased by one-third, or $104
million, during the third quarter of 2002 as compared to the same quarter in
2001 as lower drilling activity in the Western Hemisphere markets impacted all
product lines. Capital equipment revenues fell $54 million and drilling spare
part sales were down $14 million, reflecting the lower number of rigs operating
in the United States. Revenues of electrical power systems and other rig control
systems fell approximately $7 million. Sales of Mission expendable pump parts
and centrifugal pumps and packages declined $7 million (20%) in the quarter when
compared to the same quarter in the prior year. The downhole motors and tools
business experienced a 39% decline in revenue, reflecting the reduced activity
in the Canadian marketplace.

Operating income decreased by $20 million in the third quarter of 2002 compared
to the same quarter in 2001 due principally to the lower revenue volume, offset
in part by the exclusion of goodwill amortization ($2.7 million in the third
quarter of 2001), as required by the new accounting standard "SFAS No. 142".

1st nine months 2002 versus 1st nine months 2001

Products and Technology segment revenues declined $135 million in the first nine
months of 2002 as compared to the same period in 2001. This 17% decrease was a
direct result of lower rig activity in North America, which is a key driver of
sales of drilling spare parts, pump expendable parts and downhole tools and
motors. All product lines reported lower revenues during the first half of 2002
when compared to 2001.

Operating income decreased $29 million in the first nine months of 2002 compared
to the same period last year due principally to the lower margin resulting from
the reduced revenue volume and increases in selling expenses and agent
commissions. Reduced spending in field operations and plant shipping expenses
and a reduction of $7.9 million in goodwill amortization (amortization is no
longer required by the new accounting standard "SFAS No. 142") offset a portion
of the margin shortfall.

9

Backlog of the Products and Technology capital products was $231 million at
September 30, 2002, down $47 million from the June 30, 2002 balance of $278
million. Backlog at December 31, 2001 and September 30, 2001 was $385 million
and $453 million, respectively. Approximately 40% of the product in current
backlog will be delivered during the fourth quarter of 2002 with the remainder
during 2003.

Distribution Services

Q3 2002 versus Q3 2001

Distribution Services revenues decreased $18 million during the second quarter
of 2002 over the comparable 2001 period. Lower market activity in North America
was the key driver of this 9% decrease. Tubular revenues were $2 million lower
when compared to the second quarter of 2001 while revenues from the sale of
parts manufactured by the Products & Technology segment increased by $2 million.
Maintenance, repair and operating supplies revenues declined approximately $18
million (11%).

Operating income in the third quarter of 2002 was approximately half of the
third quarter of the prior year results, principally due to the lower revenue
volume, a 1-point reduction in gross margin percent due to the highly
competitive North American marketplace and higher infrastructure expenses to
cover our expanded international market.

1st nine months 2002 versus 1st nine months 2001

Revenues for the Distribution Services segment decreased $20 million in the
first nine months of 2002 when compared to the prior year. Revenue increases in
the international market were offset by decreases in both the U.S. and Canadian
operations. Revenues from the sale of parts manufactured by the Products &
Technology segment were up $7 million (11%) while the maintenance, repair and
operating supplies revenues reflected a 5% decline from the first nine months of
2001. Tubular revenues were lower by approximately one-third, or $6 million.

Operating income in the first nine months of 2002 of $14 million was
approximately $9 million lower than the comparable period in 2001. Gross margin
accounted for roughly $6 million of the decline due to the lower sales volume
and a decline in base margin percent in the U.S. and international operations.
Significant infrastructure growth and ongoing e-commerce initiatives account for
the remaining decline in operating profit in the first nine months of 2002 when
compared to 2001. Excluding goodwill amortization, as required under the new
accounting standard "SFAS No. 142", operating income in the third quarter and
first nine months of 2001 would have increased $0.4 million and $0.9 million,
respectively.

Corporate

Corporate charges represent the unallocated portion of centralized and executive
management costs. These costs increased approximately $0.3 million during the
quarter, in part due to corporate marketing initiatives. Spending was flat for
the nine months ending September 30, 2002 when compared to the same time period
in the prior year.

Interest Expense

Interest expense decreased slightly during the three months ended September 30,
2002 as compared to the prior year due to a lower average debt level during the
period. For the first nine months of 2002, interest expense was lower than the
previous year by $0.6 million due to both reduced borrowings and reduced rates.
Other financial costs, principally bank fees related to letters of credit and
performance

10

bonds, increased during the three and nine month periods ending September 30,
2002 when compared to the same period of the prior year, reflecting our
increased international activity.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2002 we had working capital of $685 million, an increase of
$54 million from December 31, 2001 primarily due to cash generated from
operations and a $28 million reduction in receivables, reflecting the overall
weaker market environment during 2002. Inventory remained virtually flat as
decreases in both raw material and finished goods were offset by increases in
work-in-process.

Total capital expenditures were $14 million during the first nine months of
2002 compared to $22 million in the first nine months of the prior year.
Enhancements to information management systems and additions to the downhole
rental tool fleet represent the majority of these capital expenditures. We
believe we have sufficient existing manufacturing capacity to meet currently
anticipated demand through 2003 for our products and services.

On July 30, 2002, we replaced the existing credit facility with a new
three-year unsecured $175 million revolving credit facility. It is available
for acquisitions and general corporate purposes and provides up to $50 million
for letters of credit, of which $22.0 million were outstanding at September 30,
2002. Interest is based upon prime or Libor plus 0.5% subject to a ratings
based grid. In securing this new credit facility we incurred approximately $0.9
million in fees which will be amortized to expense over the term of the
facility.

We also have additional credit facilities totaling $70 million that are used
primarily for letters of credit. Borrowings against these credit facilities
totaled $9.8 million at September 30, 2002, essentially all applicable to
letters of credit.

The senior notes contain reporting covenants and the credit facility contains
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. At September 30, 2002 and December 31, 2001, the Company was
in compliance with all covenants governing these facilities.

We believe cash generated from operations and amounts available under the
credit facilities and from other sources of debt will be sufficient to fund
operations, working capital needs, capital expenditure requirements and
financing obligations. We also believe any significant increase in capital
expenditures caused by any need to increase manufacturing capacity can be
funded from operations or through debt financing.

We have not entered into any transactions, arrangements, or relationships with
unconsolidated entities or other persons which would materially affect
liquidity, or the availability of or requirements for capital resources.

We intend to pursue additional acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. We expect to fund future cash acquisitions primarily with
cash flow from operations and borrowings, including the unborrowed portion of
the credit facility or new debt issuances, but may also issue additional equity
either directly or in connection with acquisitions. There can be no assurance
that additional financing for acquisitions will be available at terms
acceptable to us.

11

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements requires us to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our estimation process generally relates to
potential bad debts, obsolete and slow moving inventory, value of intangible
assets, and deferred income tax accounting. Our estimates are based on
historical experience and on our future expectations that we believe to be
reasonable under the circumstances. The combination of these factors result in
the amounts shown as carrying values of assets and liabilities in the financial
statements and accompanying notes. Actual results could differ from our current
estimates and those differences may be material.

We believe the following accounting policies are the most critical in the
preparation of our consolidated financial statements:

We maintain an allowance for doubtful accounts for accounts receivables by
providing for specifically identified accounts where collectibility is doubtful
and a general allowance based on the aging of the receivables compared to past
experience and current trends. A majority of our revenues come from drilling
contractors, independent oil companies, international oil companies and
government-owned or government-controlled oil companies, and we have
receivables, some denominated in local currency, in many foreign countries. If,
due to changes in worldwide oil and gas drilling activity or changes in
economic conditions in certain foreign countries, our customers were unable to
repay these receivables, additional allowances would be required.

Reserves for inventory obsolescence are determined based on our historical
usage of inventory on-hand as well as our future expectations related to our
substantial installed base and the development of new products. The amount
reserved is the recorded cost of the inventory minus its estimated realizable
value. Changes in worldwide oil and gas drilling activity and the development
of new technologies associated with the drilling industry could require
additional allowances to reduce the value of inventory to the lower of its cost
or net realizable value.

Business acquisitions are accounted for using the purchase method of
accounting. The cost of the acquired company is allocated to identifiable
tangible and intangible assets based on estimated fair value, with the excess
allocated to goodwill. The determination of impairment on long-lived assets,
including goodwill, is conducted as indicators of impairment are present. If
such indicators were present, the determination of the amount of impairment
would be based on our judgments as to the future operating cash flows to be
generated from these assets throughout their estimated useful lives. Our
industry is highly cyclical and our estimates of the period over which future
cash flows will be generated, as well as the predictability of these cash
flows, can have a significant impact on the carrying value of these assets. In
periods of prolonged down cycles, impairment charges may result.

Our net deferred tax assets and liabilities are recorded at the amount that is
more likely than not to be realized or paid. Should we determine that we would
not be able to realize all or part of the net deferred tax asset in the future,
an adjustment to the deferred tax assets would be charged to income in the
period of such determination.

12

RECENTLY ISSUED ACCOUNTING STANDARDS

On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142"). Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in
accordance with SFAS No. 142. Other intangible assets will continue to be
amortized over their useful lives. During the second quarter of 2002, we
completed the first of the required impairment tests of goodwill and indefinite
lived assets, which indicated no impairment was required as of January 1, 2002.
The following information provides net income for the three-month and
nine-month period ended September 30, 2001 adjusted to exclude amortization
expense recognized in this period related to goodwill (in thousands):

Quarter ended Nine months ended
September 30, 2001 September 30, 2001
---------------------- ----------------------

Reported net income $ 28,938 $ 75,715
Add back: Goodwill amortization, net of tax 2,819 8,243
-------- --------
Adjusted net income $ 31,757 $ 83,958

Adjusted net income per share:
Basic $ 0.39 $ 1.04
Diluted $ 0.39 $ 1.03

Weighted average shares outstanding:
Basic 80,887 80,787
Diluted 81,437 81,834

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of , and the accounting and reporting provisions of Accounting
Principles Board Opinion ("APB") No. 30, Reporting the Results of
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions.
This statement retains the fundamental provisions of SFAS No. 121 and the basic
requirements of APB No. 30; however, it establishes a single accounting model
to be used for long-lived assets to be disposed of by sale and it expands the
presentation of discontinued operations to include more disposal transactions.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. Adoption of this statement
did not have a material impact on our financial position or results of
operations.

In July, 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This
statement addresses financial accounting and reporting for costs associated
with exit or disposal activities, such as restructuring, involuntarily
terminating employees, and consolidating facilities, initiated after December
31, 2002. We do not believe the adoption of this new statement will have a
material impact on our consolidated financial statements.

SUBSEQUENT EVENT

On October 11, 2002, we announced the signing of a definitive agreement to
acquire all of the outstanding shares of Hydralift ASA, a Norwegian oilfield
service company. On November 8, 2002 we made a cash Tender Offer of NOK 55,
approximately U.S. $7.33, for each share of Hydralift. The total

13

value of the transaction, including the assumption of debt, is approximately
$300 million. The transaction is subject to various conditions, including
certain regulatory approvals, and the acceptance of the Tender Offer by
shareholders owning more than 90% of the outstanding shares.

FORWARD-LOOKING STATEMENTS

This document, other than historical financial information, contains
forward-looking statements that involve risks and uncertainties. Such
statements relate to our revenues, sales of capital equipment, backlog,
capacity, liquidity and capital resources and plans for acquisitions and any
related financings. Readers are referred to documents filed by us with the
Securities and Exchange Commission which identify significant risk factors
which could cause actual results to differ from those contained in the
forward-looking statements, including "Risk Factors" at Item 1 of the Annual
Report on Form 10-K. Given these uncertainties, current or prospective
investors are cautioned not to place undue reliance on any such forward-looking
statements. We disclaim any obligation or intent to update any such factors or
forward-looking statements to reflect future events or developments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change during 2002 in our market risk, as disclosed
in our 2001 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days before filing this report, we carried out an evaluation, under
the supervision and with the participation of the company's management,
including the company's President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's President and Chief Executive Officer along with the company's Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including its consolidated subsidiaries) required to
be included in the company's periodic Securities and Exchange Commission
filings.

There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of our evaluation.

14

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Amended and Restated Stock Award and Long-Term Incentive Plan

10.2 Loan Agreement dated July 30, 2002

99.1 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.

99.2 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.

(b) Reports on Form 8-K

A report on Form 8 - K was filed on August 13, 2002 regarding the
submission of sworn statements by the chief executive officer and the chief
financial officer relating to Exchange Act filings pursuant to Commission Order
No. 4-460.

A report on Form 8 - K was filed on October 16, 2002 regarding a press
release announcing the signing of a Combination Agreement to acquire Hydralift
ASA for NOK 55, approximately U.S. $7.33, per share.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: November 12, 2002 /s/ Steven W. Krablin
------------------------------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory

15

CERTIFICATION

I, Merrill A. Miller, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of National-Oilwell, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly

16

affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

Dated: November 5, 2002

/s/ Merrill A. Miller, Jr.
- --------------------------
Merrill A. Miller, Jr.
Chief Executive Officer

17

CERTIFICATION

I, Steven W. Krablin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of National-Oilwell, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

18

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: November 5, 2002

/s/ Steven W. Krablin
- -----------------------
Steven W. Krablin.
Chief Financial Officer

19

INDEX TO EXHIBITS

(a) Exhibits

10.1 Amended and Restated Stock Award and Long-Term Incentive Plan

10.2 Loan Agreement dated July 30, 2002

99.1 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.

99.2 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.