<PAGE> 1
===============================================================================
FORM 10-Q
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, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-11051
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475815
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 SAN FELIPE
HOUSTON, TEXAS
77056
----------------------------------------
(Address of principal executive offices)
(713) 960-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registant (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 ____ NO __X__*
* The Registrant became subject to the filing requirements on October 28, 1996.
As of December 11, 1996, 17,857,698 common shares were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL-OILWELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Successor Predecessor
------------- -------------
September 30, December 31,
1996 1995
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,480 $ 65,452
Receivables, less allowance of $3,178 and $4,015 99,769 74,986
Inventories 116,624 120,686
Prepaids and other current assets 6,328 4,543
------------- -------------
Total current assets 228,201 265,667
Property, plant and equipment, net 17,652 18,877
Deferred taxes 6,722 1,450
Goodwill 6,367 -
Deferred financing costs 6,531 1,089
Other assets - 1,495
------------- -------------
$265,473 $ 288,578
============= =============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,750 $ -
Accounts payable 67,825 66,665
Customer prepayments 741 7,500
Accrued compensation 6,764 3,071
Other accrued liabilities 16,690 11,066
------------- -------------
Total current liabilities 94,770 88,302
Long-term debt 120,180 9,128
Insurance reserves 6,612 6,201
Other liabilities 5,011 6,935
------------- -------------
Total liabilities 226,573 110,566
Commitments and contingencies
OWNERS' EQUITY
Class A common stock - par value $.01; 13,288 shares
issued and outstanding - -
Common stock - par value $.01; 11,064,548 shares
issued and outstanding 111 -
Additional paid-in capital 30,068 -
Notes receivable from officers (500) -
Partners' capital - 185,506
Cumulative translation adjustment 465 (7,494)
Retained earnings 8,756 -
------------- -------------
38,900 178,012
------------- -------------
$265,473 $ 288,578
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
NATIONAL-OILWELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Successor Predecessor Successor Predecessor
--------- ----------- --------- -----------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $173,499 $133,641 $468,142 $400,084
Cost of revenues 148,824 116,157 403,380 347,713
---------- ---------- ----------- ---------
Gross profit 24,675 17,484 64,762 52,371
Selling, general, and administrative 14,461 11,805 41,142 42,708
Special charges (credits) - 113 - (7,387)
---------- ---------- ----------- ---------
Operating income 10,214 5,566 23,620 17,050
Interest and financial costs (3,374) (554) (10,113) (1,937)
Interest income 48 359 369 679
Other income (expense) 453 52 132 213
---------- ---------- ----------- ---------
Income before income taxes 7,341 5,423 14,008 16,005
Provision for income taxes 2,585 442 5,252 1,646
---------- ---------- ----------- ---------
Net income $4,756 $4,981 $8,756 $14,359
========== ========== =========== =========
Weighted average shares outstanding 13,590 13,590
========== ===========
Net income per share $0.35 $0.64
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
NATIONAL-OILWELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
Nine Months Ended
September 30,
-----------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $8,756 $14,359
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,856 3,022
Provision for losses on receivables 410 2,642
Provision for deferred income taxes 1,742 408
Gain on sale of assets (213) (536)
Foreign currency transaction (gain) loss (34) (9)
Special charges (credits) - (7,387)
Changes in operating assets and liabilities:
Decrease (increase) in receivables (22,456) 12,215
Decrease (increase) in inventories (517) (7,256)
Decrease (increase) in prepaids and other current assets (295) 2,460
Increase (decrease) in accounts payable 817 (2,772)
Increase (decrease) in other assets/liabilities, net (1,773) (10,947)
-------- --------
Net cash provided (used) by operating activities (10,707) 6,199
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment (1,489) (3,758)
Proceeds from sale of assets 293 4,423
Proceeds from disposition of businesses - 6,944
Acquisition of predecessor company, net of cash acquired (106,248) -
Other (350) (218)
-------- --------
Net cash provided (used) by investing activities (107,794) 7,391
-------- --------
Cash flow from financing activities:
Proceeds from revolving lines of credit, net 5,236 -
Principal payments on long-term debt (14,812) -
Proceeds from issuance of common stock 30,179 -
Acquisition debt proceeds 103,378 -
Cash distribution to partners - (1,918)
-------- --------
Net cash provided (used) by financing activities 123,981 (1,918)
-------- --------
Effect of exchange rate gains on cash - 45
-------- --------
Increase in cash and equivalents 5,480 11,717
Cash and cash equivalents, beginning of period - 9,418
-------- --------
Cash and cash equivalents, end of period $5,480 $21,135
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
NATIONAL-OILWELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
National-Oilwell, Inc. was formed to acquire National-Oilwell, a general
partnership between National Supply Company, Inc., a subsidiary of Armco
Inc., and Oilwell, Inc., a subsidiary of USX Corporation, and subsidiaries,
(the "Partnership"). The consolidated financial information of the
Partnership, as predecessor, has been included with the consolidated
financial information of National-Oilwell, Inc. and subsidiaries for
purposes of comparability. References herein to the "Company" refer to the
Partnership for periods prior to January 1, 1996 and to National-Oilwell,
Inc. for subsequent periods. Effective as of January 1, 1996,
National-Oilwell, Inc. acquired the Partnership for a purchase price of
$180 million, which approximated book value, plus approximately $12 million
in transaction costs (the "Acquisition"). The transaction was accounted for
under the purchase method of accounting and accordingly all assets and
liabilities of the Partnership were recorded at their fair values resulting
in only minimal basis adjustments. The Acquisition resulted in deferred
financing costs of $7.7 million and goodwill of $6.5 million. The
Acquisition was funded from the sale of $30 million in equity, incurrence
of $114 million of debt and the use of $48 million of acquired cash.
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally
accepted accounting principles. In the opinion of management, the
information furnished reflects all adjustments, all of which are of a
normal, recurring nature, necessary for a fair presentation of the results
of the interim periods. It is recommended that these statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's prospectus dated October 28, 1996. No significant
accounting changes have occurred during the nine months ended September 30,
1996.
2. INITIAL PUBLIC OFFERING
On October 29, 1996, the Company sold 4.6 million shares of its common
stock through an initial public offering (the "IPO"). Net proceeds of
approximately $72 million were used to repay debt incurred in connection
with the January 1996 Acquisition. The Company repaid the outstanding
balance of approximately $24 million in term loans under the existing
credit facility, repaid the $5 million subordinated note and applied the
remaining net proceeds of approximately $43 million to the revolving credit
facility. The Company did not repay the $20 million in seller notes from
the net proceeds of the IPO.
Shares Outstanding
In connection with the IPO, the 13,288 shares of Class A common stock
converted into 1,902,543 shares of common stock and a warrant to acquire
282,392 shares of common stock was exercised, bringing the total shares
outstanding to 13,249,483. At the same time, the IPO represented a
triggering event under the Company's Value Appreciation Plans, resulting in
a commitment to issue an additional 340,924 shares of common stock,
one-half of which will be issued on October 29, 1997 and the remaining
one-half on January 17, 1999, subject to certain accelerating events.
All of these 13,590,407 shares are outstanding or considered to
<PAGE> 6
be common stock equivalents for purposes of calculating net income per
share during all periods in 1996 prior to the IPO.
New Credit Facility
Effective with the IPO, the Company entered into a new five-year senior
secured revolving credit facility (the "New Credit Facility") that will be
available for acquisitions and general corporate purposes. The New Credit
Facility provides for a $120 million revolving loan and is subject to a
borrowing base limitation of 60% of eligible inventory plus 85% of eligible
accounts receivable plus various percentages of the book value of certain
fixed assets, all of which exceeded $120 million as of September 30, 1996.
The New Credit Facility bears interest at prime plus .75% or LIBOR plus
2.0%, subject to adjustment based on the Company's total funded debt and
operating profit. Depending on the Company's financial performance, the
interest rate could be prime plus .25%, .75% or 1.25% or LIBOR plus 1.5%,
2.0% or 2.5%. The New Credit Facility is secured by substantially all of
the Company's assets and contains financial covenants and ratios as well as
a limitation on dividends.
IPO Related Expenses
The Company incurred certain one-time expenses in connection with the IPO,
as follows: (i) the Management Services Agreement was terminated at a cost
of $4.4 million ($2.8 million after tax) which will be paid in quarterly
installments of $250,000 through March 31, 2001, subject to certain
accelerating events; (ii) the existing credit facility was replaced by the
New Credit Facility, resulting in the write-off of $6.4 million in deferred
financing costs related to the existing agreement (after tax cost of $4.0
million); and (iii) the Company's Value Appreciation Plans were triggered,
resulting in an expense of $12.2 million ($7.6 million after tax). Pursuant
to the Value Appreciation Plans, the Company made a cash payment of $2.9
million in November 1996 and will make future annual cash payments of $.7
million for five years beginning January 17, 1997 and will issue 340,924
shares of Common Stock valued at $5.8 million. Each of the IPO related
expenses will be recorded in the fourth quarter of 1996.
3. INVENTORIES
Inventories consist of (in thousands):
September 30, December 31,
1996 1995
--------------- -------------
Raw materials $ 9,122 $ 11,528
Work in process 4,234 4,842
Finished goods 103,268 104,316
--------------- -------------
$ 116,624 $ 120,686
=============== =============
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company is a worldwide leader in the design, manufacture and sale
of machinery and equipment and in the distribution of maintenance,
repair and operating products used in oil and gas drilling and
production. The Company'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.
During 1996, the Company completed two significant capital
transactions. First, in January 1996, the Company acquired the
operations of National-Oilwell, a general partnership. This resulted
in the incurrence of significant amounts of debt and related interest
expense. Second, on October 29, 1996, the Company sold 4.6 million
shares of its common stock through an initial public offering (the
"IPO"). Net proceeds of approximately $72 million were used to repay
debt incurred in connection with the January 1996 Acquisition. At that
same time, the Company entered into a new $120 million five-year
senior secured revolving credit facility.
RESULTS OF OPERATIONS
Operating results (unaudited) by segment are as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars in millions)
Revenues
Oilfield Equipment $ 53.4 $ 33.3 $ 134.3 $ 112.2
Distribution Services 134.5 110.0 371.9 313.5
Eliminations (14.4) (9.7) (38.1 (25.6)
--------- -------- --------- --------
Total $173.5 $133.6 $ 468.1 $ 400.1
========= ======== ========= ========
Operating Income
Oilfield Equipment $ 6.6 $ 2.7 $ 14.7 $ 5.9
Distribution Services 4.6 3.7 11.9 6.1
Corporate (1.0) (0.8) (3.0) (2.3)
-------- -------- --------- --------
Total $ 10.2 $ 5.6 $ 23.6 $ 9.7 (1)
======== ======== ========= ========
(1) Excludes special gain of $7.4 million in the 1995 nine month
period resulting from the sale of a disposed product line and
certain other assets.
6
<PAGE> 8
Oilfield Equipment
The Oilfield Equipment segment designs and manufactures a large line
of proprietary products, including drawworks, mud pumps, power swivels
and reciprocating pumps. A substantial installed base of these
products results in a recurring replacement parts and maintenance
business. Drilling pump expendable products are sold for maintenance
of the Company's and other manufacturers' equipment. 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.
Oilfield Equipment revenues increased $20.1 million (60%) in the third
quarter of 1996 as compared to 1995 due primarily to an increase in
demand for drilling capital equipment, fluid end expendable parts, and
reciprocating pumps and associated parts. Operating Income for the
Oilfield Equipment segment increased $3.9 million in the third quarter
of 1996 as compared to the prior year, representing 19% of the revenue
increase. The increase in operating income as a percentage of the
revenue increase was lowered by the inclusion of over $4 million in
revenues that represented pass-through products that carry small
margins.
Revenues during the first nine months of 1996 increased $22.1 million
(20%) over the comparable 1995 period with most of the increase in the
third quarter. Strong demand for drilling repair parts and capital
equipment, primarily power swivels, were principal drivers of the
increase. Increased revenues of fluid end expendable parts in 1996
offset the loss of revenues from a product line sold in June 1995.
Operating income for the Oilfield Segment increased $8.8 million in
the first nine months of 1996 as compared to the prior year. Higher
revenues in the third quarter of 1996, improved product mix throughout
the year, and lower costs in the first half of 1996 as compared to the
first half of the prior year that resulted from a manufacturing
facility consolidation in 1995 contributed to the large increase in
operating income over the 1995 results.
Distribution Services
Distribution Services revenues result primarily from the sale of
maintenance, repair and operating supplies ("MRO") from the Company's
network of 121 distribution service centers and from the sale of well
casing and production tubing. These products are purchased from
numerous manufacturers and vendors, including the Company's Oilfield
Equipment segment. While the Company has increased revenues and
improved its operating income by entering into alliances and
outsourcing arrangements, improvements in operating results remain
primarily dependent on attaining increased volumes of activity through
its distribution service centers while controlling the fixed costs
associated with numerous points of sale.
Revenues during the third quarter of 1996 increased $24.5 million
(22%) over the comparable 1995 period as MRO products and tubular
products sales reflected gains of $10 million and $9 million,
respectively. Business with alliance customers reflected substantial
growth during the quarter. Operating income increased $0.9 million
during the third quarter of 1996 compared to the same period in 1995
as a large portion of the increased margin from the higher revenue
levels was offset by higher operating costs
7
<PAGE> 9
associated with a consolidation of service center assets and
administrative functions in order to better manage assets and
resources in the future.
For the nine month period, revenues for the Distribution Services
segment were up $58.4 million in 1996 as compared to 1995. Market
activity has been strong throughout 1996 as reflected in increased
revenues in virtually all product lines and geographic areas.
Operating income for the nine months of 1996 is up $5.8 million (95%)
over the same period in 1995, representing approximately 10% of the
increase in revenues.
Corporate
Corporate costs were up during the third quarter and the first nine
months of 1996 as compared to the same periods of 1995 primarily due
to the expense of the management fee paid pursuant to the Management
Services Agreement that was terminated in connection with the IPO.
Special Charges (Credits)
During the first nine months of 1995, the Company recorded gains of
$7.4 million from the sale of a non-oilfield centrifugal pump and
switch valve product line and from the sale of excess property and
equipment of closed manufacturing facilities in the United Kingdom and
Canada.
Interest Expense
Interest expense increased substantially during the first nine months
of 1996 due to debt incurred in connection with the Acquisition.
Income Taxes
Due to its partnership status, the Company was not subject to U.S.
federal or state income taxes prior to 1996 and accordingly the tax
provisions during such periods relate to foreign income taxes as
computed under Statement of Financial Accounting Standard ("SFAS") No.
109. Beginning in 1996, the Company is subject to U.S. federal and
state taxes and currently estimates the combined U.S. federal, state
and foreign tax rate will approximate 37.5% of income before taxes for
1996. Actual taxes paid may be lower as a result of realization of
deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $133
million, a decrease of $44 million from December 31, 1995, primarily
due to the use of cash in connection with the Acquisition.
Due to the size of the Company's distribution services business,
significant components of the Company's assets are accounts receivable
and inventories. Accounts receivable increased by $25 million during
the first nine months of 1996 due to higher revenues during the
period. Inventories decreased by $4 million during this period due to
8
<PAGE> 10
continued emphasis on improving the Company's return on capital
employed, including the consolidation of certain distribution services
inventories into regional locations.
The Company's business has not required large expenditures for capital
equipment in recent years. Total capital expenditures were $1.5
million during the first nine months of 1996 and have averaged $3.5
million per year over the last three years. Enhancements to data
processing and inventory control systems represent a large portion of
recent capital expenditures. Increases in capital expenditures to as
much as an aggregate of $6 million are anticipated over the next three
years to further enhance the Company's information systems. The
Company believes it has sufficient existing manufacturing capacity to
meet current and anticipated demand for its products and services.
Significant increases in demand for oilfield equipment products, to
the extent qualified subcontracting and outsourcing are not available,
could result in greater increases in capital expenditures.
The Company believes that cash generated from operations and amounts
available under its credit facility will be sufficient to fund
operations, working capital needs, capital expenditure requirements
and financing obligations. The Company also believes any significant
increase in capital expenditures caused by any need to increase
manufacturing capacity can be funded from operations or debt
financing.
At the time of the IPO, the Company entered into a new five-year
senior secured revolving credit facility that is available for
acquisitions and general corporate purposes. The New Credit Facility
provides for a $120 million revolving loan and is subject to a
borrowing base limitation of 60% of eligible inventory plus 85% of
eligible accounts receivable plus various percentages of the book
value of certain fixed assets, all of which exceeded $120 million as
of September 30, 1996.
The New Credit Facility bears interest at prime plus .75% or LIBOR
plus 2.0%, subject to adjustment based on the Company's total funded
debt and operating profit. Depending on the Company's financial
performance, the interest rate could be prime plus .25%, .75% or 1.25%
or LIBOR plus 1.5%, 2.0% or 2.5%. The New Credit Facility is secured
by substantially all of the Company's assets and contains certain
financial covenants and ratios as well as a limitation on dividends.
The Company intends to identify acquisition candidates for
investigation and pursue acquisition opportunities. The timing, size
or success of any acquisition effort and the related potential capital
commitments cannot be predicted. The Company expects to fund future
acquisitions primarily through cash flow from operations and
borrowings, including the unborrowed portion of the New Credit
Facility, as well as issuances of additional equity. There can be no
assurance that additional financing for acquisitions will be available
at terms acceptable to the Company.
IPO RELATED EXPENSES
The Company incurred certain one-time expenses in connection with the
IPO, as follows: (i) the Management Services Agreement was terminated
at a cost of $4.4 million ($2.8 million after tax) which will be paid
in quarterly installments of $250,000 through March 31, 2001, subject
to certain accelerating events; (ii) the existing credit facility was
replaced by the New Credit Facility, resulting in the write-off of
$6.4 million in deferred financing costs related to the existing
agreement (after tax cost of $4.0 million); and (iii) the Company's
Value Appreciation Plans were triggered, resulting in an expense of
$12.2 million ($7.6 million after tax). Pursuant to the Valuation
Appreciation Plans, the Company made a cash payment of $2.9 million in
November 1996 and will make future annual cash payments of $.7 million
for five years beginning January 17, 1997 and will issue 340,924
shares of Common Stock valued at $5.8 million, one-half of which will
be issued on October 29, 1997 and the remaining one-half on January
17, 1999. Each of the IPO related expenses will be recorded in the
fourth quarter of 1996.
9
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
The Company has not filed any report on Form 8-K during the quarter for
which this report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 11, 1996 / S /Steven W. Krablin
----------------- ----------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
10
<PAGE> 12
EXHIBIT INDEX
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,480
<SECURITIES> 0
<RECEIVABLES> 102,947
<ALLOWANCES> 3,178
<INVENTORY> 116,624
<CURRENT-ASSETS> 228,201
<PP&E> 20,508
<DEPRECIATION> 2,856
<TOTAL-ASSETS> 265,473
<CURRENT-LIABILITIES> 94,770
<BONDS> 120,180
0
0
<COMMON> 111
<OTHER-SE> 38,789
<TOTAL-LIABILITY-AND-EQUITY> 265,473
<SALES> 468,142
<TOTAL-REVENUES> 468,142
<CGS> 403,380
<TOTAL-COSTS> 403,380
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 410
<INTEREST-EXPENSE> 10,113
<INCOME-PRETAX> 14,008
<INCOME-TAX> 5,252
<INCOME-CONTINUING> 8,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,756
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
