Back to GetFilings.com
================================================================================
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475875
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE
HOUSTON, TEXAS
77042-4200
-----------------------------------------------------
(Address of principal executive offices)
(713) 346-7500
-----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of August 12, 2003, 84,950,930 common shares were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 62,153 $ 118,338
Receivables, net 481,007 428,116
Inventories 505,156 470,088
Costs in excess of billings 51,983 53,805
Deferred income taxes 28,049 26,783
Prepaid and other current assets 38,646 17,938
----------- -----------
Total current assets 1,166,994 1,115,068
Property, plant and equipment, net 236,464 208,420
Deferred income taxes 34,104 36,864
Goodwill, net 638,490 581,576
Property held for sale 7,389 7,389
Other assets 30,778 19,345
----------- -----------
$ 2,114,219 $ 1,968,662
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 13,800 --
Accounts payable 210,957 168,548
Customer prepayments 10,147 9,533
Accrued compensation 9,502 5,087
Billings in excess of costs 21,173 61,738
Other accrued liabilities 106,763 101,310
----------- -----------
Total current liabilities 372,342 346,216
Long-term debt 593,265 594,637
Deferred income taxes 53,777 54,612
Other liabilities 31,198 30,229
----------- -----------
Total liabilities 1,050,582 1,025,694
Commitments and contingencies
Minority interest 12,641 9,604
Stockholders' equity:
Common stock - par value $.01; 84,947,534 and 81,014,713 shares
issued and outstanding at June 30, 2003 and December 31, 2002 849 810
Additional paid-in capital 672,606 594,849
Accumulated other comprehensive loss (44,151) (44,461)
Retained earnings 421,692 382,166
----------- -----------
1,050,996 933,364
----------- -----------
$ 2,114,219 $ 1,968,662
=========== ===========
The accompanying notes are an integral part of these statements.
2
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 475,398 $ 372,390 $ 975,974 $ 761,376
Cost of revenues 366,281 284,986 746,412 580,927
--------- --------- --------- ---------
Gross profit 109,117 87,404 229,562 180,449
Selling, general, and administrative 68,156 55,167 145,173 110,496
--------- --------- --------- ---------
Operating income 40,961 32,237 84,389 69,953
Interest and financial costs (9,308) (6,112) (19,562) (12,175)
Interest income 517 233 1,626 470
Other income (expense), net (1,180) 143 (3,549) 1,355
--------- --------- --------- ---------
Income before income taxes and minority interest 30,990 26,501 62,904 59,603
Provision for income taxes 9,518 9,540 20,340 21,457
--------- --------- --------- ---------
Income before minority interest 21,472 16,961 42,564 38,146
Minority interest in income of consolidated subsidiaries (1,112) -- (3,038) --
--------- --------- --------- ---------
Net income $ 20,360 $ 16,961 $ 39,526 $ 38,146
========= ========= ========= =========
Net income per share:
Basic $ 0.24 $ 0.21 $ 0.47 $ 0.47
========= ========= ========= =========
Diluted $ 0.24 $ 0.21 $ 0.47 $ 0.47
========= ========= ========= =========
Weighted average shares outstanding:
Basic 84,440 80,980 84,072 80,950
========= ========= ========= =========
Diluted 84,990 81,985 84,733 81,785
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
3
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended June 30,
-------------------------
2003 2002
--------- ---------
Cash flow from operating activities:
Net income $ 39,526 $ 38,146
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 17,634 12,701
Provision for losses on receivables 2,221 1,759
Provision for deferred income taxes 1,681 366
Gain on sale of assets (2,154) (2,108)
Foreign currency transaction loss 3,331 261
Interest rate contract (60) --
Tax benefit from exercise of nonqualified stock options 3,301 --
Changes in assets and liabilities, net of acquisitions:
Receivables (40,117) 40,924
Inventories (23,708) (1,084)
Prepaid and other current assets (19,783) (6,904)
Accounts payable 36,266 (32,942)
Other assets/liabilities, net (36,992) (36,765)
--------- ---------
Net cash provided (used) by operating activities (18,854) 14,354
--------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (15,641) (8,935)
Proceeds from sale of assets 3,922 5,550
Businesses acquired, net of cash (47,113) (15,432)
--------- ---------
Net cash used by investing activities (58,832) (18,817)
--------- ---------
Cash flow from financing activities:
Borrowings against lines of credit 201,484 107,921
Payments against lines of credit (188,145) (113,695)
Proceeds from stock options exercised 7,935 932
--------- ---------
Net cash provided (used) by financing activities 21,274 (4,842)
--------- ---------
Effect of exchange rate gain on cash 227 635
--------- ---------
Decrease in cash and equivalents (56,185) (8,670)
Cash and cash equivalents, beginning of period 118,338 43,220
--------- ---------
Cash and cash equivalents, end of period $ 62,153 $ 34,550
========= =========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 18,007 $ 11,150
Income taxes $ 24,007 $ 29,837
The accompanying notes are an integral part of these statements.
4
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect reported and contingent amounts of assets and
liabilities as of the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The accompanying unaudited consolidated financial statements present information
in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and
applicable rules of Regulation S-X. They do not include all information or
footnotes required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
our 2002 Annual Report on Form 10-K/A.
In our opinion, the consolidated financial statements include all adjustments,
all of which are of a normal, recurring nature, necessary for a fair
presentation of the results for the interim periods. The results of operations
for the three months and six months ended June 30, 2003 are not necessarily
indicative of the results to be expected for the full year.
2. ACQUISITIONS
On January 16, 2003, we acquired the Mono pumping products business from
Halliburton Energy Services for approximately $89 million, consisting of $22.7
million in cash and 3.2 million shares of our common stock. This transaction,
which consisted of purchasing all the outstanding stock of Monoflo, Inc. in the
United States and Mono Group in the United Kingdom, generated approximately $51
million in goodwill and adds to the non-capital product lines within our
Products and Technology segment.
On January 2, 2003, we acquired LSI, a Houston, Texas based distributor of
specialty electrical products, for approximately $13 million. This transaction
generated approximately $7 million in goodwill and is complementary to our
distribution services business.
During December 2002, we completed the acquisition of Hydralift ASA, a Norwegian
based company specializing in the offshore drilling equipment industry, for a
total purchase price, including the assumption of debt, of approximately $300
million. Allocation of the purchase price, which is preliminary, will be to the
assets acquired and liabilities assumed based on their relative fair values. The
final allocation of the purchase price will be based upon independent appraisals
and other valuations and may reflect other actions including product line
rationalizations.
3. INVENTORIES
Inventories consist of (in thousands):
June 30, December 31,
2003 2002
--------- ------------
Raw materials and supplies $ 50,380 $ 60,699
Work in process 96,304 109,924
Finished goods and purchased products 358,472 299,465
--------- ---------
Total $ 505,156 $ 470,088
========= =========
5
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Quarter Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 20,360 $ 16,961 $ 39,526 $ 38,146
Currency translation adjustments 8,669 3,357 400 907
Interest rate contract (30) -- (60) --
-------- -------- -------- --------
Comprehensive income $ 28,999 $ 20,318 $ 39,866 $ 39,053
======== ======== ======== ========
5. BUSINESS SEGMENTS
Segment information (unaudited) follows (in thousands):
Quarter Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues from unaffiliated customers
Products and Technology $ 286,785 $ 203,688 $ 603,476 $ 425,707
Distribution Services 188,613 168,702 372,498 335,669
---------- ---------- ---------- ----------
475,398 372,390 975,974 761,376
Intersegment revenues
Products and Technology 24,679 21,135 43,464 40,388
Distribution Services 644 133 1,095 695
---------- ---------- ---------- ----------
25,323 21,268 44,559 41,083
Operating income
Products and Technology 38,419 30,067 80,251 65,517
Distribution Services 5,499 4,714 10,215 9,282
---------- ---------- ---------- ----------
Total profit for reportable segments 43,918 34,781 90,466 74,799
Unallocated corporate costs (2,957) (2,544) (6,077) (4,846)
---------- ---------- ---------- ----------
Operating income 40,961 32,237 84,389 69,953
Net interest expense (8,791) (5,879) (17,936) (11,705)
Other income (expense) (1,180) 143 (3,549) 1,355
---------- ---------- ---------- ----------
Income before income taxes and minority interest $ 30,990 $ 26,501 $ 62,904 $ 59,603
========== ========== ========== ==========
Total assets
Products and Technology $1,724,436 $1,156,156
Distribution Services 304,171 270,042
6
6. DEBT
Debt consists of (in thousands):
June 30, December 31,
2003 2002
--------- ------------
Credit facilities $ 107,065 $ 94,637
6.875% senior notes 150,000 150,000
6.50% senior notes 150,000 150,000
5.65% senior notes 200,000 200,000
--------- ---------
607,065 594,637
Less current portion 13,800 --
--------- ---------
$ 593,265 $ 594,637
========= =========
At June 30, 2003, we had $320 million of committed credit facilities and were in
compliance with all covenants governing these facilities.
We replaced an existing credit facility in July 2002 with a new three-year
unsecured $175 million revolving credit facility. Borrowings against this
facility at June 30, 2003 totaled $41 million. This facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $12 million were outstanding at June 30, 2003.
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 are being amortized to expense over the term of the facility. This
credit facility contains financial covenants and ratios regarding maximum debt
to capital and minimum interest coverage.
Recently acquired Hydralift ASA has multi-currency term loans and revolving
credit facilities totaling $145 million, which expire in 2006. These facilities
contain financial covenants and the term loans have mandatory repayments of
approximately $14 million beginning in May 2004. Interest is based upon a
pre-agreed upon percentage point spread from either the prime interest rate or
NIBOR. At June 30, 2003, borrowings totaled $62 million and there were $25
million of outstanding letters of credit and guarantees.
We also have additional uncommitted credit facilities totaling $129 million that
are used primarily for acquisitions, general corporate purposes and letters of
credit. Borrowings against these additional credit facilities totaled $4 million
at June 30, 2003 and an additional $23 million had been used for letters of
credit and guarantees.
7. STOCK-BASED COMPENSATION
We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for our
stock option plans. Accordingly, no compensation expense has been recognized for
stock option grants as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had
compensation expense for the stock option grants been determined on the fair
value at the grant dates consistent with the method of Statement of Financial
Accounting Standards Board (SFAS) No. 123, "Accounting for Stock-Based
Compensation", our net income and income per share would have been adjusted to
the pro forma amounts indicated below (amounts in thousands, except per share
amounts):
7
Quarter Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported $ 20,360 $ 16,961 $ 39,526 $ 38,146
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2,158) (2,274) (4,400) (4,659)
-------- -------- -------- --------
Pro forma net income $ 18,202 $ 14,687 $ 35,126 $ 33,487
Net income per common share:
Basic, as reported $ 0.24 $ 0.21 $ 0.47 $ 0.47
Basic, pro forma 0.22 0.18 0.42 0.41
Diluted, as reported $ 0.24 $ 0.21 $ 0.47 $ 0.47
Diluted, pro forma 0.21 0.18 0.41 0.41
For purposes of determining compensation expense using the provisions of SFAS
No. 123, the fair value of option grants was determined using the Black-Scholes
option-valuation model. The weighted average fair value per share of stock
options granted in the first six months of 2003 was $9.20 and $8.95 in 2002. The
key input variables used in valuing the options granted in 2003 and 2002 were:
risk-free interest rate of 2.58% in 2003 and 2.40% in 2002; dividend yield of
zero in each year; stock price volatility of 50% in 2003 and 54% in 2002, and
expected option lives of five years for each year presented.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement on Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which sets forth the accounting and reporting to be followed for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses disposal
activities and termination costs in exiting an activity. Effective January 1,
2003, we adopted these new accounting pronouncements and they did not have a
significant impact on our results of operations or financial position.
The FASB issued Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation," ("SFAS No. 148") in December 2002. SFAS No. 148
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 were adopted on January 1, 2003 (see Note
7).
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others," ("FIN 45"), which
we adopted effective January 1, 2003. FIN 45 requires that upon issuance of
certain types of guarantees, a guarantor recognize and account for the fair
value of the guarantee as a liability. FIN 45 contains exclusions to this
requirement, including the exclusion of a parent's guarantee of its
subsidiaries' debt to a third party. Upon adoption, this new accounting
pronouncement had no material impact on our consolidated financial position,
results of operations or cash flows.
The FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), which we adopted effective January 31, 2003. This
statement addresses the consolidation of variable interest entities
8
("VIEs") by business enterprises that are the primary beneficiaries. A VIE is an
entity that does not have sufficient equity investment at risk to permit it to
finance its activities without additional subordinated financial support, or
whose equity investors lack the characteristics of a controlling financial
interest. The primary beneficiary of a VIE is the enterprise that has the
majority of the risks or rewards associated with the VIE. We do not believe we
have any material interests in VIEs that will require disclosure or
consolidation under FIN 46 but are continuing our evaluation.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
We design, manufacture and sell drilling systems, drilling equipment and
downhole products as well as distribute maintenance, repair and operating
products to the oil and gas industry. Our revenues and operating results are
directly related to the level of worldwide oil and gas drilling and production
activities and the profitability and cash flow of oil and gas companies and
drilling contractors, which in turn are affected by current and anticipated
prices of oil and gas. Oil and gas prices have been and are likely to continue
to be volatile.
We conduct our operations through the following segments:
Products and Technology
Our Products and Technology segment designs and manufactures complete land
drilling and workover rigs, and drilling related systems for offshore rigs.
Technology has increased the desirability of one vendor assuming responsibility
for the entire suite of components used in the drilling process, as mechanical
and hydraulic components are replaced by or augmented with integrated
computerized systems. In addition to traditional components such as drawworks,
mud pumps, top drives, derricks, cranes, jacking and mooring systems, and other
structural components, we provide automated pipehandling, control and electrical
power systems. We have also developed new technology for drawworks and mud pumps
applicable to the highly demanding offshore markets.
Distribution Services
Our Distribution Services segment provides maintenance, repair and operating
supplies and spare parts from our network of distribution service centers to
drill site and production locations throughout North America and to offshore
contractors worldwide. Increasingly, this business also is expanding to
locations outside North America, including the Middle East, Southeast Asia, and
South America. Using our information technology platforms and processes, we can
provide complete procurement, inventory management, and logistics services to
our customers. Products are purchased from numerous manufacturers and vendors,
including our Products and Technology segment.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in thousands):
Quarter Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues
Products and Technology $ 311,464 $ 224,823 $ 646,940 $ 466,095
Distribution Services 189,257 168,835 373,593 336,364
Eliminations (25,323) (21,268) (44,559) (41,083)
--------- --------- --------- ---------
Total $ 475,398 $ 372,390 $ 975,974 $ 761,376
========= ========= ========= =========
Operating Income
Products and Technology $ 38,419 $ 30,067 $ 80,251 $ 65,517
Distribution Services 5,499 4,714 10,215 9,282
Corporate (2,957) (2,544) (6,077) (4,846)
--------- --------- --------- ---------
Total $ 40,961 $ 32,237 $ 84,389 $ 69,953
========= ========= ========= =========
10
Products and Technology
Q2 2003 versus Q2 2002
Revenues for the Products and Technology segment increased $87 million during
the second quarter of 2003 as compared to the same quarter in 2002. The
Hydralift ASA and Mono acquisitions accounted for all of this increase as
revenues for the remaining operations in this segment were down approximately
$15 million. Despite an overall increase in the number of drilling rigs
operating in the United States, sluggish drilling activity in the Gulf of Mexico
and an ongoing cautious approach to capital spending by many operators and
drilling contractors has negatively impacted our revenues in this segment.
Operating income increased by $8 million in the second quarter of 2003 compared
to the same quarter in 2002 due to operating profit generated by the Hydralift
ASA and Mono operations. Lower gross margins of 1.4% and increases in insurance,
advertising and sales and general administrative costs offset the benefits
derived from those acquisitions.
Backlog of the Products and Technology capital products was $366 million at June
30, 2003, relatively unchanged from the March 31, 2003 and the December 31, 2002
balances of $368 million and $364 million, respectively. Backlog at June 30,
2002, which excluded any Hydralift ASA capital products, was $278 million.
Approximately 2/3 of the product in current backlog will be delivered during
2003 with the remaining shipments to occur in 2004.
1st six months 2003 versus 1st six months 2002
Products and Technology segment revenues increased $181 million in the first six
months of 2003 as compared to the same period in 2002. This 39% increase was
directly attributable to the Hydralift ASA and Mono acquisitions. Excluding
these acquisitions, revenues were lower by $22 million and all product lines
reported a decline during the first half of 2003 when compared to 2002.
The Hydralift ASA and Mono acquisitions were the primary contributors to the
generation of a $15 million operating income improvement in the first six months
of 2003 compared to 2002. Excluding these acquisitions, reduced margins due to
the lower revenue volume and higher selling and administrative expenses
negatively impacted the operating income for the first six months of 2003 when
compared to the prior year.
Distribution Services
Q2 2003 versus Q2 2002
Distribution Services revenues increased $20 million, or approximately 12%,
during the second quarter of 2003 over the comparable 2002 period. All
geographic regions showed improvement but the North American revenues were the
principal contributor to this increase due to the increase in the number of
active rigs running in the U.S. and Canada during 2003. The international sector
experienced strong revenue gains in Asia but was adversely impacted by the
Venezuelan political instability and the Iraqi war impact in the Middle East.
Maintenance, repair and operating supplies revenues accounted for all of the
revenue increase.
Operating income in the second quarter of 2003 reflects an increase of $0.8
million over the prior year results due to the margin on the revenue increase
offset partially by an increase in expenses. North American expenses have been
managed to retain our geographic coverage, employee retention and overall
customer service while international expenses include startup and systems
installation costs in Singapore, Brazil and Mexico.
11
1st six months 2003 versus 1st six months 2002
Revenues for the Distribution Services segment increased $37 million in the
first half of 2003 when compared to the prior year. Revenue in the international
market and Canada were both up 9% and the U.S. operations reflected a 13%
improvement. A decline in Venezuela and Middle East revenues was offset by
improved revenues in Indonesia. Revenues from the sale of parts manufactured by
the Products & Technology segment declined $7 million (13%) while the
maintenance, repair and operating supplies revenues reflected a 15% improvement
from the first six months of 2002. Tubular revenues were higher by approximately
$2 million.
Operating income in the first half of 2003 of $10 million was approximately $1
million higher than the comparable period in 2002. Gross margin improvement
resulting from the revenue volume increase was offset by higher administrative
expenses to support the expansion into the new global markets.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. These costs are approximately $1.2 million higher during the
six months ending June 30, 2003 when compared to the same period in the prior
year. Corporate-led initiatives, such as marketing, safety and training plus
general overhead incurred to support a larger company are the principal reasons
for the increase in corporate spending. Corporate expenses are expected to
approximate the current level for the remaining quarters of 2003.
Interest Expense
Interest expense increased during the three months and six months ended June 30,
2003 as compared to the prior year due to the senior notes issued in November
2002 to acquire Hydralift ASA plus interest incurred on Hydralift's existing
borrowings. Other financial costs, principally bank fees related to letters of
credit and performance bonds, increased $0.5 million during the six months
ending June 30, 2003 when compared to the same period of the prior year,
reflecting increased activity in our international markets.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003 we had working capital of $795 million, an increase of $26
million from December 31, 2002 primarily due to increases in accounts receivable
and inventories, partially offset by an increase in accounts payable and a
reclassification from long-term to short-term debt. Cash decreased $56 million
during the first six months ended June 30, 2003 due primarily to financing the
Mono and LSI acquisitions for $35 million and payment of semi-annual interest on
the senior notes of approximately $15 million.
Total capital expenditures were $18 million during the first six months of 2003
compared to $13 million in the first six months of the prior year. The majority
of these capital expenditures represent additions to the downhole rental tool
fleet and enhancements to information management systems. We expect our capital
expenditures in 2003 to total approximately $35 million. We believe we have
sufficient existing manufacturing capacity to meet currently anticipated demand
through 2003 for our products and services.
At June 30, 2003, we had $320 million of committed credit facilities and were in
compliance with all covenants governing these facilities.
We replaced an existing credit facility in July 2002 with a new three-year
unsecured $175 million revolving credit facility. Borrowings against this
facility at June 30, 2003 totaled $41 million. This facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $12 million were outstanding at June 30, 2003.
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 are being amortized to expense over the term of the facility. This
credit facility contains financial covenants and ratios regarding maximum debt
to capital and minimum interest coverage.
12
Recently acquired Hydralift ASA has multi-currency term loans and revolving
credit facilities totaling $145 million, which expire in 2006. These facilities
contain financial covenants and the term loans have mandatory repayments of
approximately $14 million beginning in May 2004. Interest is based upon a
pre-agreed upon percentage point spread from either the prime interest rate or
NIBOR. At June 30, 2003, borrowings totaled $62 million and there were $25
million of outstanding letters of credit and guarantees.
We also have additional uncommitted credit facilities totaling $129 million that
are used primarily for acquisitions, general corporate purposes and letters of
credit. Borrowings against these additional credit facilities totaled $4 million
at June 30, 2003 and an additional $23 million had been used for letters of
credit and guarantees.
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.
During the six months ended June 30, 2003, we did not enter into any
transactions, arrangements, or relationships with unconsolidated entities or
other persons which would materially affect liquidity, or the availability of or
requirements for capital resources, from the amounts disclosed in our Form
10-K/A for the year ending December 31, 2002.
We intend to pursue additional acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. We expect to fund future cash acquisitions primarily with
cash flow from operations and borrowings, including the unborrowed portion of
the credit facility or new debt issuances, but may also issue additional equity
either directly or in connection with acquisitions. There can be no assurance
that additional financing for acquisitions will be available at terms acceptable
to us.
Inflation has not had a significant impact on our operating results or financial
condition in recent years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our estimation process generally relates to
potential bad debts, obsolete and slow moving inventory, pension plan
accounting, 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.
These estimates may change as new events occur, as more experience is acquired,
as additional information is obtained and as our operating environment changes.
There have been no material changes or developments in our evaluation of the
accounting estimates and the underlying assumptions or methodologies that we
believe to be Critical Accounting Policies and Estimates as disclosed in our
Form 10-K/A for the year ending December 31, 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement on Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which sets forth the accounting and reporting to be followed for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses disposal
activities and termination costs in exiting an activity. Effective January 1,
2003, we adopted these new accounting pronouncements and they did not have a
significant impact on our results of operations or financial position.
13
The FASB issued Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation," ("SFAS No. 148") in December 2002. SFAS No. 148
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 were adopted on January 1, 2003 (see Note
7).
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others," ("FIN 45"), which
we adopted effective January 1, 2003. FIN 45 requires that upon issuance of
certain types of guarantees, a guarantor recognize and account for the fair
value of the guarantee as a liability. FIN 45 contains exclusions to this
requirement, including the exclusion of a parent's guarantee of its
subsidiaries' debt to a third party. Upon adoption, this new accounting
pronouncement had no material impact on our consolidated financial position,
results of operations or cash flows.
The FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), which we adopted effective January 31, 2003. This
statement addresses the consolidation of variable interest entities ("VIEs") by
business enterprises that are the primary beneficiaries. A VIE is an entity that
does not have sufficient equity investment at risk to permit it to finance its
activities without additional subordinated financial support, or whose equity
investors lack the characteristics of a controlling financial interest. The
primary beneficiary of a VIE is the enterprise that has the majority of the
risks or rewards associated with the VIE. We do not believe we have any material
interests in VIEs that will require disclosure or consolidation under FIN 46 but
we are continuing our evaluation.
FORWARD-LOOKING STATEMENTS
Some of the information in this document contains, or has incorporated by
reference, forward-looking statements. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements typically are identified by use of terms
such as "may," "will," "expect," "anticipate," "estimate," and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from results
anticipated in the forward-looking statements due to a number of factors,
including but not limited to changes in oil and gas prices, customer demand for
our products and worldwide economic activity. You should also consider carefully
the statements under "Risk Factors" which address additional factors that could
cause our actual results to differ from those set forth in the forward-looking
statements. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements. We
undertake no obligation to update any such factors or forward-looking statements
to reflect future events or developments.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in foreign currency exchange rates and interest rates.
Additional information concerning each of these matters follows:
Foreign Currency Exchange Rates
We have operations in foreign countries, including Canada, Norway and the United
Kingdom, as well as operations in Latin America, China and other European
countries. The net assets and liabilities of these operations are exposed to
changes in foreign currency exchange rates, although such fluctuations generally
do not affect income since their functional currency is the local currency. For
operations where our functional currency is not the local currency, such as
Singapore and Venezuela, the net asset or liability position is insignificant
and, therefore, changes in foreign currency exchange rates are not expected to
have a material impact on earnings.
Some of our revenues in foreign countries are denominated in US dollars, and
therefore, changes in foreign currency exchange rates impact our earnings to the
extent that costs associated with those US dollar revenues are denominated in
the local currency. In order to mitigate that risk, we may utilize foreign
currency forward contracts to better match the currency of our revenues and
associated costs. We do not use foreign currency forward contracts for trading
or speculative purposes. The counterparties to these contracts are major
financial institutions, which minimizes counterparty credit risk.
The impact of foreign currency exchange rates has not materially affected our
results of operations in any of the last two years.
Interest Rate Risk
Our long-term borrowings consist of $150 million in 6.875% senior notes, $150
million in 6.5% senior notes and $200 million in 5.65% senior notes. We also
have borrowings under our other credit facilities totaling $107.1 million at
June 30, 2003. A portion of the borrowings under our other credit facilities are
denominated in multiple currencies which could expose us to market risk with
exchange rate movements. These instruments carry interest at a pre-agreed upon
percentage point spread from either the prime interest rate, LIBOR or NIBOR.
Under our credit facilities, we may, at our option, fix the interest rate for
certain borrowings based on a spread over LIBOR or NIBOR for 30 days to 6
months. Based upon our June 30, 2003 borrowings under our variable rate
facilities of $107.1 million, an immediate change of one percent in the interest
rate would cause a change in annual interest expense of approximately $1.1
million. Our objective in maintaining a portion of our debt in variable rate
borrowings is the flexibility obtained regarding early repayment without
penalties and lower overall cost as compared with fixed-rate borrowings.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days before filing this report, we carried out an evaluation, under
the supervision and with the participation of the company's management,
including the company's President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's President and Chief Executive Officer along with the company's Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including its consolidated subsidiaries) required to be
included in the company's periodic Securities and Exchange Commission filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our evaluation.
15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on June 25, 2003. Stockholders
elected two directors nominated by the board of directors for terms expiring in
2006 by the following votes: Hushang Ansary - 74,182,932 votes for and 1,189,345
votes withheld, and Ben A. Guill - 50,426,944 votes for and 24,945,333 votes
withheld. There were no nominees to office other than the directors elected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Merrill A. Miller, Jr., Chairman, President
and Chief Executive Officer, dated August 14, 2003, pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Steven W. Krablin, Chief Financial Officer,
dated August 14, 2003, pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
32 Statement of Merrill A. Miller, Jr., Chairman, President and
Chief Executive Officer, and Steven W. Krablin, Chief
Financial Officer, dated August 14, 2003, furnished pursuant
to Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended.
(b) Reports on Form 8-K
A report on Form 8 - K was filed on April 25, 2003 regarding a press
release announcing our financial results for the three months ended March 31,
2003.
A report on Form 8 - K was filed on July 25, 2003 regarding a press
release announcing our financial results for the three and six months ended June
30, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003 /s/ Steven W. Krablin
------------------------------ ----------------------------------
Steven W. Krablin
Principal Financial and
Accounting Officer and
Duly Authorized Signatory
16
INDEX TO EXHIBITS
31.1 Certification of Merrill A. Miller, Jr., Chairman, President
and Chief Executive Officer, dated August 14, 2003, pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Steven W. Krablin, Chief Financial Officer,
dated August 14, 2003, pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
32 Statement of Merrill A. Miller, Jr., Chairman, President and
Chief Executive Officer, and Steven W. Krablin, Chief
Financial Officer, dated August 14, 2003, furnished pursuant
to Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended.