<PAGE> 1
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475815
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 SAN FELIPE
HOUSTON, TEXAS
77056
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(Address of principal executive offices)
(713) 960-5100
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
- ---------------------------- -----------------------
(Title of Class) (Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 9, 1998, 51,665,804 common shares were outstanding. Based upon the
closing price of these shares on the New York Stock Exchange and, excluding
solely for purposes of this calculation 22,375,572 shares beneficially owned by
directors, executive officers and 5% or more stockholders, the aggregate market
value of the common shares of National-Oilwell, Inc. held by non-affiliates was
approximately $844 million. By this calculation, the Registrant is not making a
determination of the affiliate or non-affiliate status of any person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement in connection with the 1998 Annual Meeting of
Stockholders are incorporated in Part III of this report.
<PAGE> 2
Part I
ITEM 1. BUSINESS
GENERAL
National-Oilwell is a worldwide leader in the design, manufacture and sale of
machinery, equipment and downhole products used in oil and gas drilling and
production, as well as in the distribution to the oil and gas industry of
maintenance, repair and operating products.
National-Oilwell manufactures and assembles drilling machinery, including
drawworks, mud pumps and power swivels (also known as "top drives"), which are
the major mechanical components of drilling rigs, as well as masts, derricks and
substructures. Many of these components are designed specifically for
applications in offshore, extended reach and deep land drilling. The Company
estimates that approximately 65% of the mobile offshore rig fleet and the
majority of the world's larger land rigs (2,000 horsepower and greater)
manufactured in the last twenty years utilize drawworks, mud pumps and other
drilling machinery components manufactured by National-Oilwell.
As a result of the combination with Dreco Energy Services Ltd. ("Dreco"),
completed on September 25, 1997, ("Combination"), National-Oilwell expanded its
machinery and equipment capabilities and also added a business segment that
designs and manufactures drilling motors and specialized drilling tools for rent
and sale. Drilling motors are essential components of systems for horizontal,
directional, extended reach and performance drilling. Drilling tools include
drilling jars, shock tools and other specialized products.
National-Oilwell also provides distribution services through its network of
distribution service centers located near major drilling and production activity
worldwide, but principally in the United States and Canada. These distribution
service centers stock and sell a variety of expendable items for oilfield
applications and spare parts for National-Oilwell equipment. As oil and gas
companies and drilling contractors have refocused on their core competencies and
emphasized efficiency initiatives to reduce costs and capital requirements,
National-Oilwell's distribution services have expanded to offer outsourcing and
alliance arrangements that include comprehensive procurement, inventory
management and logistics support.
Over the last fifteen years, much of the demand for drilling machinery and
equipment has been satisfied from the large surplus built during the late
seventies and early eighties. National-Oilwell believes the surplus has been
reduced substantially over this period, especially for higher capacity machinery
and equipment for which National-Oilwell is a leading supplier. Drilling
activity worldwide has increased significantly since early 1996, with demand for
oil and gas rising and inventories comparatively low. In addition, increased use
of 3-D seismic, directional drilling and other technologies have lowered the
cost of finding and developing hydrocarbons, thereby further increasing the
incentive to explore for new reserves. As a result of these industry conditions,
drilling contractors have experienced significant increases in the prices they
charge for their services and equipment, and the resulting higher cash flows are
enabling capital spending to replace and upgrade the aging drilling rig fleet.
Current and near term expectations for oil prices declined in late 1997 and
early 1998 due to concerns about excess production, reduced demand from Asia due
to an economic slowdown and warmer than average weather in many parts of the
United States. See "Risk Factors" included in this section.
National-Oilwell was incorporated in Delaware in 1995, with its principal
executive offices located at 5555 San Felipe, Houston, Texas 77056, and its
telephone number is (713) 960-5100.
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BUSINESS STRATEGY
National-Oilwell's current business strategy is to enhance its market positions
and operating performance by:
Leveraging Its Installed Base of Higher Capacity Drilling Machinery and
Equipment National-Oilwell believes its market position presents substantial
opportunities to capture a significant portion of expenditures for the
construction of new, higher capacity drilling rigs and equipment as well as the
upgrade and refurbishment of existing drilling rigs and equipment. The Company
believes the advanced age of the existing fleet of drilling rigs, coupled with
drilling activity involving greater depths and extended reach, will generate
demand for new equipment, especially in the higher capacity end of the market.
National-Oilwell's larger drawworks, mud pumps and power swivels provide, in
many cases, the largest capacities currently available in the industry.
Expanding Its Downhole Products Business
National-Oilwell believes that the strengthened marketing and distribution
capabilities resulting from the Combination provide an opportunity for growth in
the rental and sale of high-performance drilling motors and downhole tools,
especially for use in directional, horizontal, extended reach and other
value-added drilling applications.
Building on Distribution Strengths and Alliance/Outsourcing Trends
National-Oilwell has developed and implemented integrated information and
process systems that enhance procurement, inventory management and logistics
activities. As a result of efficiency initiatives, oil and gas companies and
drilling contractors are frequently seeking alliances with suppliers,
manufacturers and service providers, or outsourcing their procurement, inventory
management and logistics requirements for equipment and supplies in order to
achieve cost and capital improvements. National-Oilwell believes that it is well
positioned to provide these services as a result of its (i) large and
geographically diverse network of distribution service centers in major oil and
gas producing areas, (ii) purchasing leverage due to the volume of products
sold, (iii) breadth of available product lines and (iv) information systems that
offer customers enhanced online and onsite services. In addition, the strategic
integration of National-Oilwell's distribution expertise, extensive distribution
network and growing base of customer alliances provides an increased opportunity
for cost-effective marketing of National-Oilwell's manufactured parts and
equipment.
Continuing to Make Acquisitions That Enhance its Product Line
National-Oilwell believes that the oilfield service and equipment industry will
continue to experience consolidation as businesses seek to align themselves with
other market participants in order to gain access to broader markets and become
affiliated with integrated product offerings, and National-Oilwell plans to
participate in this trend. During 1997, the Company made three acquisitions: in
September, National-Oilwell completed the Combination, which enables the Company
to provide a more complete rig package to its customers; in May, the Company
acquired PEP, Inc., a manufacturer of petroleum expendable pump products that
are similar to those manufactured by National-Oilwell; and, in April, the
Company acquired the drilling controls business of Ross Hill Controls, a leader
in the manufacture, sale and service of innovative electrical control systems
used in conjunction with drilling operations.
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OPERATIONS
Products and Technology
National-Oilwell designs, manufactures and sells the major mechanical components
for both land and offshore drilling rigs as well as complete land drilling and
well servicing rigs. The major mechanical components include drawworks, mud
pumps, power swivels, SCR houses, traveling equipment and rotary tables. These
are the major components involved in the primary functions of drilling oil and
gas wells, which consist of pumping fluids and hoisting, supporting and rotating
the drill string. Many of these components are designed specifically for
applications in offshore, extended reach and deep land drilling. This equipment
is installed on new rigs and used in the upgrade, refurbishment and repair of
existing rigs.
While offering a complete line of conventional rigs, National-Oilwell has
extensive experience in providing rig designs to satisfy requirements for harsh
or specialized environments. Such products include North Slope of Alaska and
Arctic drilling and well servicing rigs, highly mobile drilling and well
servicing rigs for jungle and desert use, modular well servicing rigs for
offshore platforms and modular drilling facilities for North Sea platforms.
Masts, derricks and substructures are made for use on land rigs and on fixed and
mobile offshore platforms and are suitable for drilling to maximum depths up to
more than 30,000 feet. Other products include pedestal cranes, reciprocating and
centrifugal pumps and fluid end expendables for all major manufacturers' pumps.
National-Oilwell's business includes the sale of replacement parts for its own
manufactured machinery and equipment.
Downhole Products
National-Oilwell designs and manufactures drilling motors and specialized
drilling tools for rent and sale. Rentals generally involve products that are
not economical for a customer to own or maintain because of the broad range of
equipment required for the diverse hole size and depths encountered in drilling
for oil and gas. Sales generally involve products that require infrequent
service, are disposable or are sold in countries where National-Oilwell does not
provide repair and maintenance services.
National-Oilwell's drilling motors are devices placed between the drill string
and the drill bit to cause the bit to rotate without necessarily rotating the
drill string. Drilling motors are essential components in systems for
horizontal, directional, extended reach and performance drilling.
National-Oilwell often rents its drilling motors, retaining control over the
servicing and maintenance function so as to preserve their operating
reliability. National-Oilwell is continuing to enhance and broaden the range of
its drilling motors by, among other things, widening the size range offered,
reducing the initial cost and ongoing repair and maintenance cost and developing
alternative designs of motor bearing assembly sealing systems and speed
reduction systems.
National-Oilwell manufactures hydraulic-mechanical and mechanical drilling jars
and shock tools. Drilling jars are used to assist in releasing a drill string
that becomes stuck in a well bore. A shock tool is a downhole shock absorber
that is placed low in the drill string and is intended to extend bit life,
reduce drill string failures and reduce damage to the drilling rig.
National-Oilwell also manufactures and rents or sells fishing jars, bumper subs,
reamers, stabilizers and kelly and tubing safety valves.
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Distribution Services
National-Oilwell provides distribution services through its network of
approximately 120 distribution service centers located near major drilling and
production activity worldwide, but principally in the United States and Canada.
These distribution service centers stock and sell a variety of expendable items
for oilfield applications and spare parts for National-Oilwell equipment. As oil
and gas companies and drilling contractors have refocused on their core
competencies and emphasized efficiency initiatives to reduce costs and capital
requirements, National-Oilwell's distribution services have expanded to offer
outsourcing and alliance arrangements that include comprehensive procurement,
inventory management and logistics support. In addition, management believes
that National-Oilwell has a competitive advantage in the distribution services
business by distributing market-leading products manufactured by its Products
and Technology business.
The supplies and equipment stocked by National-Oilwell's distribution service
centers vary by location. Each distribution point generally offers a large line
of oilfield products including valves, fittings, flanges, spare parts for
oilfield equipment and miscellaneous expendable items. Most drilling contractors
and oil and gas companies typically buy such supplies and equipment pursuant to
non-exclusive contracts, which normally specify a discount from
National-Oilwell's list price for each product or product category.
National-Oilwell's tubular business is focused on the procurement, inventory
management and delivery of oil country tubular goods manufactured by third
parties. Tubular goods primarily consist of well casing and production tubing
used in the drilling, completion and production of oil and gas wells. Well
casing is used to line the walls of a well bore to provide structural support.
Production tubing provides the conduit through which the oil or gas will be
brought to the surface upon completion of the well. Substantially all sales of
tubular goods are made through National-Oilwell's direct sales force and have
historically been concentrated in North America.
Strategic alliances constitute a significant percentage of the Company's
business and differ from standard agreements for supplies and equipment in that
National-Oilwell becomes the customer's primary supplier of those items. In
certain cases, National-Oilwell has assumed responsibility for procurement,
inventory management and product delivery for the customer, occasionally by
working directly out of the customer's facilities.
Marketing
Substantially all of National-Oilwell's drilling machinery, equipment and spare
parts sales, and a large portion of its smaller pumps and parts sales, are made
through National-Oilwell's direct sales force and distribution service centers.
Sales to foreign state-owned oil companies are typically made in conjunction
with agent or representative arrangements. Distribution sales are made through
the Company's network of distribution service centers. National-Oilwell's
downhole products are rented in Canada and Venezuela and marketed worldwide
through its own sales force and through commission representatives. Customers
for all of National-Oilwell's products and services include drilling and other
service contractors, exploration and production companies, supply companies and
nationally owned or controlled drilling and production companies.
Competition
The oilfield services and equipment industry is highly competitive and
National-Oilwell's revenues and earnings can be affected by price changes,
introduction of new technologies and products and improved availability and
delivery. National-Oilwell competes in one or more of its segments with a large
number of companies, none of which are dominant in that particular segment.
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Manufacturing and Backlog
National-Oilwell has numerous principal manufacturing facilities located in the
United States and Canada. National-Oilwell also outsources the manufacture of
parts or purchases components from qualified subcontractors. The Company's
manufacturing operations require a variety of components, parts and raw
materials which National-Oilwell purchases from multiple commercial sources.
National-Oilwell has not experienced and does not expect any significant delays
in obtaining deliveries of essential components, parts or raw materials.
Sales of products are made on the basis of written orders and oral commitments.
The Company's backlog for equipment at December 31, 1997 was $270 million as
compared to $38 million at December 31, 1996. The level of backlog at any
particular time is not necessarily indicative of the future operating
performance of National-Oilwell, and orders may be changed at any time.
Substantially all of the current backlog will be shipped by the end of 1998.
Distribution Suppliers
National-Oilwell obtains products sold by its Distribution Services business
from a number of suppliers, including its own Products and Technology segment.
National-Oilwell does not believe that any one supplier of products is material
to the Company. For the year ended December 31, 1997, National-Oilwell purchased
approximately one third of its tubular requirements pursuant to a distribution
agreement with the U.S. Steel Group of USX Corporation, and its remaining
requirements from various suppliers. National-Oilwell has not experienced and
does not foresee experiencing a shortage in products or tubular goods sold by
the Company, although order lead times for tubular goods have increased over the
last year due to higher demand for these products.
Engineering
National-Oilwell maintains a staff of engineers and technicians to (i) design
and test new products, components and systems for use in drilling and pumping
applications, (ii) enhance the capabilities of existing products and (iii)
assist the Company's sales organization and customers with special projects.
National-Oilwell's product engineering efforts focus on developing technology to
improve the economics and safety of drilling and pumping processes.
National-Oilwell has recently developed a 1,000 ton capacity power swivel to
complement its lower capacity models, and has also introduced a 6,000 horsepower
heave compensating drawworks and dual derrick systems to increase customer
efficiencies on deep water drilling rigs at extended depths and during
horizontal drilling.
Patents and Trademarks
National-Oilwell owns or has a license to use a number of patents covering a
variety of products. Although in the aggregate these patents are of importance,
the Company does not consider any single patent to be of a critical or essential
nature. In general, National-Oilwell depends on technological capabilities,
quality products and application of its expertise rather than patented
technology in the conduct of its business. The Company enjoys significant
product name-brand recognition, principally through its National-Oilwell(R),
Dreco(R), Ross Hill, Trudril(R), Vector(R), Griffith(R) and Mission-Fluid
King(R) trade names.
EMPLOYEES
As of December 31, 1997, National-Oilwell had a total of 3,138 employees, 1,677
of whom were salaried and 1,461 of whom were paid on an hourly basis. Of this
workforce, 1,152 of the employees are employed by the Company's foreign
subsidiaries and are located outside the United States. National-Oilwell
considers its relationship with its employees to be good.
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RISK FACTORS
In evaluating National-Oilwell and its business, the following risk factors
should be considered.
Dependence on Oil and Gas Industry
National-Oilwell's businesses are substantially dependent upon the condition of
the oil and gas industry and the industry's willingness to explore for and
produce oil and gas. The degree of such willingness is generally dependent upon
the prevailing view of future product prices, which are influenced by numerous
factors affecting the supply and demand for oil and gas, including the level of
drilling activity, worldwide economic activity, interest rates and the cost of
capital, the development of alternate energy sources, environmental regulation,
tax policies, political requirements of national governments, coordination by
the Organization of Petroleum Exporting Countries ("OPEC") and the cost of
producing oil and gas. Any significant reduction in demand for drilling
services, in cash flows of drilling contractors or in rig utilization rates
below current levels could result in a drop in demand for products manufactured
and sold by National-Oilwell.
Volatility of Oil and Gas Prices
Oil and gas prices and activity have been characterized by significant
volatility over the last twenty years. Since 1986, spot oil prices (West Texas
Intermediate) have ranged from a low of approximately $11 per barrel in 1986 to
a high of approximately $40 per barrel in 1991; spot gas prices (Henry Hub) have
ranged from lows below $1.00 per mcf of gas in 1992 to highs above $3.00 per mcf
in 1996 and 1997. These price changes have caused numerous shifts in the
strategies and expenditure levels of oil and gas companies and drilling
contractors, particularly with respect to decisions to purchase major capital
equipment of the type manufactured by National-Oilwell. Moreover, uncertainty
with respect to the stability and direction of future prices has often led to
deferral of such expenditures. No assurance can be given as to the future price
levels of oil and gas or the volatility thereof, or that the future price of oil
and gas will be sufficient to support current levels of exploration and
production.
Highly Competitive Industry
The oilfield products and services industry is highly competitive. The revenues
and earnings of National-Oilwell can be affected by competitive actions such as
price changes, introduction of new technologies and products or improved
availability and delivery. National-Oilwell competes with a large number of
companies, some of which may offer certain more technologically advanced
products, possess greater financial resources and have more extensive and
diversified operations.
Potential Product Liability and Warranty Claims
Certain products of National-Oilwell are used in potentially hazardous drilling,
completion and production applications that can cause personal injury or loss of
life, damage to property, equipment or the environment and suspension of
operations. National-Oilwell maintains insurance coverage in such amounts and
against such risks as it believes to be in accordance with normal industry
practice. Such insurance does not, however, provide coverage for all liabilities
(including liabilities for certain events involving pollution), and there can be
no assurance that such insurance will be adequate to cover all losses or
liabilities that may be incurred by National-Oilwell in its operations.
Moreover, no assurance can be given that National-Oilwell will, in the future,
be able to maintain insurance at levels it deems adequate and at rates it
considers reasonable or that any particular types of coverage will be available.
Litigation arising from a catastrophic occurrence at a location where
National-Oilwell's equipment and services are used may, in the future, result in
the Company being named as a defendant in product liability or other lawsuits
asserting potentially large claims. National-Oilwell is a party to various legal
and administrative proceedings which have arisen from its businesses. No
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effects such outcomes may have on
the Company.
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Impact of Governmental Regulations
Many aspects of National-Oilwell's operations are affected by political
developments, including restrictions on the ability to do business in various
foreign jurisdictions, and are subject to both domestic and foreign governmental
regulation, including those relating to oilfield operations, worker safety and
the protection of the environment. In addition, National-Oilwell depends on
demand for its services from the oil and gas industry and, therefore, is
affected by any changes in taxation, price controls or other laws and
regulations that affect the oil and gas industry generally. The adoption of laws
and regulations curtailing exploration for or production of oil and gas for
economic or other policy reasons could adversely affect the Company's
operations. National-Oilwell cannot determine the extent to which its future
operations and earnings may be affected by political developments, new
legislation, new regulations or changes in existing regulations.
Impact of Environmental Regulations
The operations of National-Oilwell and its customers are affected by numerous
foreign, federal, state, provincial and local environmental laws and
regulations. The technical requirements of these laws and regulations are
becoming increasingly expensive, complex and stringent. These laws may impose
penalties or sanctions for damages to natural resources or threats to public
health and safety. Such laws and regulations may also expose National-Oilwell to
liability for the conduct of or conditions caused by others, or for acts of
National-Oilwell that were in compliance with all applicable laws at the time
such acts were performed. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties and
criminal prosecution. Certain environmental laws provide for joint and several
liability for remediation of spills and releases of hazardous substances. In
addition, National-Oilwell may be subject to claims alleging personal injury or
property damage as a result of alleged exposure to hazardous substances, as well
as damage to natural resources.
Risk of Certain Foreign Markets
Certain of National-Oilwell's revenues result from the sale of products to
customers for ultimate destinations in the Middle East, Africa, Southeast Asia
and other international markets and are subject to risks of instability of
foreign economies and governments. Furthermore, National-Oilwell's sales can be
affected by laws and regulations limiting exports to particular countries. In
certain cases, export laws and regulations of one jurisdiction may contradict
those of another.
National-Oilwell attempts to limit its exposure to foreign currency fluctuations
by limiting the amount of sales denominated in currencies other than United
States dollars, Canadian dollars and British pounds. National-Oilwell has not
engaged in and does not currently intend to engage in any significant hedging or
currency trading transactions designed to compensate for adverse currency
fluctuations among those or any other foreign currencies.
Integration of Acquisitions and Management of Growth
National-Oilwell recently consummated the Combination with Dreco and expects to
evaluate and, where feasible, make additional strategic acquisitions in the
future. There is no guarantee that National-Oilwell will not encounter
integration difficulties or that it will extract any anticipated cost savings
and margin enhancements. In addition, the process of combining the organizations
could cause the interruption of, or a loss of momentum in, the activities of
some or all of the companies' businesses, which could have an adverse effect on
their combined operations. The Combination and recent growth in revenues and
backlog have placed significant demands on National-Oilwell and its management
to improve the combined entity's operational, financial and management
information systems, to develop further management skills and to continue to
train, motivate and effectively manage employees. Failure to manage growth
effectively could have a material adverse effect on National-Oilwell.
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National-Oilwell has pursued an aggressive acquisition strategy, acquiring three
businesses in 1997, and expects to continue to evaluate acquisitions that can
provide meaningful benefits by expanding National-Oilwell's business and
leveraging its existing infrastructure. There can be no assurance that suitable
acquisition candidates will be available, that such can be completed on
reasonable terms, or that National-Oilwell will have access to adequate funds to
effect any desired acquisitions.
Potential Future Sales of Shares Could Affect Market Price
Pursuant to the Stockholders Agreement (the "Stockholders Agreement") among
National-Oilwell and certain stockholders, Inverness/Phoenix LLC ("Inverness")
and First Reserve Corporation ("First Reserve") have certain demand registration
rights and certain other stockholders have certain rights to be included in any
such demand registrations. Inverness, First Reserve and certain other
stockholders also have piggyback registration rights pursuant to the
Stockholders Agreement. Inverness, First Reserve and various other stockholders
have registration rights with respect to 10,203,600, 8,370,494, and 6,460,222
shares of the Company's common stock ("Common Stock"), respectively. In November
1997, National-Oilwell filed a registration statement for the sale of shares
owned by certain stockholders but such filing was withdrawn in December 1997.
The sale of shares under a similar filing in the future could have a negative
effect on the market price of the Common Stock. In addition, at March 9, 1998,
National-Oilwell had outstanding options to purchase an aggregate of 1,063,853
shares of Common Stock at prices ranging from $5.63 to $42.38 per share.
Certain Anti-Takeover Provisions Could Discourage Unsolicited Proposals
National-Oilwell's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and By-laws contain certain provisions which may
have the effect of delaying, deferring or preventing a change in control of
National-Oilwell, including a classified board of directors, the removal of
directors from office only for cause, the prohibition of stockholder action by
written consent, advance notice requirements respecting stockholder nominations
for director or any other matter, the number of directors being set by the board
of directors, super majority voting provisions with respect to amendments to the
Certificate of Incorporation and limitation of persons who may call a special
stockholders' meeting. The Delaware General Corporation Law requires super
majority voting thresholds to approve certain "business combinations" between
interested stockholders and National-Oilwell, which may render more difficult or
tend to discourage attempts to acquire the Company. In addition,
National-Oilwell's board of directors has the authority to issue shares of
preferred stock ("Preferred Stock") in one or more series and to fix the rights
and preferences of the shares of any such series without stockholder approval.
Any series of Preferred Stock is likely to be senior to the Common Stock with
respect to dividends, liquidation rights and, possibly, voting rights. The
ability to issue Preferred Stock could also have the effect of discouraging
unsolicited acquisition proposals, thus affecting the market price of the Common
Stock and preventing stockholders from obtaining any premium offered by the
potential buyer.
No Anticipated Cash Dividends
National-Oilwell's board of directors has not previously authorized and does not
currently anticipate authorizing in the foreseeable future the payment of cash
dividends.
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ITEM 2. PROPERTIES
The Company owned or leased approximately 150 facilities worldwide as of
December 31, 1997, including the following principal manufacturing and
administrative facilities:
<TABLE>
<CAPTION>
APPROXIMATE
BUILDING SPACE
LOCATION (SQUARE FOOT) DESCRIPTION STATUS
-------- ------------- ----------- ------
<S> <C> <C> <C>
Houston, Texas 260,000 Manufactures drilling machinery and equipment Leased
Channelview, Texas 193,000 Fabricates drilling components Owned
Houston, Texas 178,000 Manufactures SCR systems Owned
Edmonton, Alberta, Canada 162,000 Manufactures downhole tools Owned
Clearfield, Utah 120,000 Fabricates drilling components Leased
McAlester, Oklahoma 117,000 Manufactures pumps and expendable parts Owned
Houston, Texas 116,000 Administrative offices Leased
Nisku, Alberta, Canada 59,000 Manufactures drilling machinery and equipment Owned
Edmonton, Alberta, Canada 57,000 Manufactures drilling machinery and equipment Owned
Rosenberg, Texas 44,000 Manufactures downhole tools Leased
</TABLE>
The Company owns or leases five satellite repair and manufacturing facilities
that refurbish and manufacture new equipment and parts and approximately 120
distribution service centers worldwide. The Company believes that the capacity
of its facilities is adequate to meet demand currently anticipated for 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company has various claims, lawsuits and administrative proceedings that are
pending or threatened, all arising in the ordinary course of business, with
respect to commercial, product liability and employee matters. Although no
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effect such outcomes may have on
the Company, management believes that any ultimate liability resulting from the
outcome of such proceedings will not have a material adverse effect on the
Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock was listed on the New York Stock Exchange (ticker
symbol: NOI) effective October 29, 1996. The following table sets forth the
stock price range between the listing and December 31, 1997:
<TABLE>
<CAPTION>
1996 1997
------------------------------- -------------------------------
Quarter High Low High Low
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
First $ - $ - $ 19.32 $ 14.00
Second - - 28.88 15.82
Third - - 37.50 25.07
Fourth 15.38 10.00 44.44 27.88
</TABLE>
As of March 9, 1998, there were 306 holders of record of the Company's common
stock. National-Oilwell has not paid any cash dividends, and none are
anticipated during 1998.
Recent Sales of Unregistered Securities
In May 1997, the Company acquired PEP, Inc. by merger. In connection with the
merger, the Company issued 800,000 shares of Common Stock in exchange for all
the outstanding shares of PEP, Inc. The shares were issued in an unregistered
transaction in reliance on the exemption from registration provided by Section 4
(2) of the Securities Act of 1933, as amended. The shares were subsequently
registered for resale pursuant to a Registration Statement on Form S-3.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
As a result of the differing year ends of National-Oilwell and Dreco prior to
the Combination, the balance sheet and results of operations for dissimilar year
ends have been combined pursuant to pooling-of-interests accounting.
National-Oilwell's results of operations for the year ended December 31, 1997
include Dreco's results of operations for the six months ended May 31, 1997 and
the six months ended December 31, 1997. Data for the year ended December 31,
1996 includes the operations of Dreco for the twelve months ended and as of
November 30, 1996. Data for the three years ended August 31, 1995 reflect the
operations of Dreco only, as National-Oilwell did not exist as a corporation
prior to January 1, 1996.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended August 31, (1)
-------------------------------- -----------------------------------------
1997 (2) 1996 (3) 1995 1994 1993
-------------- -------------- -------------- -------------- -----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 1,005,572 $ 761,816 $ 86,875 $ 79,663 $ 93,981
Operating income (loss) before special items (4) 97,899 44,110 10,059 (9,253) 3,133
Operating income (loss) (4) 87,239 27,499 10,059 (9,253) 3,133
Income (loss) before taxes and extraordinary loss (5) 82,482 16,718 12,196 (6,709) 6,061
Income (loss) before extraordinary loss (5) 51,281 10,147 7,789 (6,682) 7,386
Net income (loss) 50,658 6,147 7,789 (6,682) 7,386
Income (loss) per share before extraordinary loss (5)
Basic 1.00 0.25 0.69 (0.59) 0.64
Diluted 0.99 0.25 0.68 (0.59) 0.64
Net income (loss) per share
Basic 0.99 0.15 0.69 (0.59) 0.64
Diluted 0.98 0.15 0.68 (0.59) 0.64
OTHER DATA:
Depreciation and amortization 14,744 8,775 4,558 4,926 4,481
Capital expenditures 32,605 15,166 6,435 5,932 6,167
BALANCE SHEET DATA:
Working capital 252,137 168,897 32,992 18,292 27,725
Total assets 567,511 352,518 72,355 69,323 74,047
Long-term debt, less current maturities 61,565 39,136 1,987 1,440 2,857
Stockholders' equity 277,688 169,016 48,957 38,690 46,626
</TABLE>
(1) Data for the three years ended August 31, 1995 reflect the operations of
Dreco only, as the operations of National-Oilwell were acquired from a
predecessor partnership as of January 1, 1996 and, in accordance with
generally accepted accounting principles, cannot be combined prior to that
date.
(2) In order to conform Dreco's fiscal year end to match National-Oilwell's
year end, the results of operations for the month of June 1997 has been
included directly in stockholders' equity. Dreco's revenues, net income and
net income per share (diluted) were $13.4 million, $0.9 million, and $0.02
for the month.
(3) In order to conform Dreco's August 31 fiscal year end to a period within 93
days of National-Oilwell's December 31 year end, the results of operations
for the period from September 1, 1995 through November 30, 1995 have been
included directly in stockholders' equity. Dreco's revenues, net income and
net income per share (diluted) were $33.4 million, $3.2 million, and $0.28
for such period.
(4) In September 1997, National-Oilwell recorded a $10,660,000 charge related
to merger expenses incurred in connection with the Combination. In October
1996, National-Oilwell recorded $16,611,000 in charges related to the
cancellation of management agreements and expenses related to special
incentive plans that terminated upon the occurrence of the initial public
offering of its common stock.
(5) National-Oilwell recorded extraordinary losses in September 1997 of
$623,000 (net of $376,000 income tax benefit) and in October 1996 of
$4,000,000 (net of $2,400,000 income tax benefit) due to the write-offs of
deferred debt issuance costs.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
National-Oilwell is a worldwide leader in the design, manufacture and sale of
machinery and equipment and in the distribution of maintenance, repair and
operating ("MRO") products used in oil and gas drilling and production.
National-Oilwell's revenues are directly related to the level of worldwide oil
and gas drilling and production activities and the profitability and cash flow
of oil and gas companies and drilling contractors, which in turn are affected by
current and anticipated prices of oil and gas. In late 1997 and early 1998,
current and near term expectations for oil prices declined due to concerns about
excess production, less demand from Asia due to an economic slowdown and warmer
than average weather in many parts of the United States. See "Risk Factors".
Information concerning common stock and per share data has been restated on an
equivalent share basis and assumes the exchange of all Exchangeable Shares as
defined below, as well as to reflect the two-for-one stock split recorded as of
November 18, 1997.
On September 25, 1997, National-Oilwell completed the Combination with Dreco. As
a result of the Combination, each Dreco Class "A" common share ("Dreco Common
Share") outstanding was converted into .9159 of a Dreco Exchangeable Share
("Exchangeable Share") and, accordingly, approximately 14.4 million Exchangeable
Shares were issued. Each Exchangeable Share is intended to have substantially
identical economic and legal rights as, and will ultimately be exchanged on a
one-for-one basis for, a share of National-Oilwell common stock. The Combination
was accounted for as a pooling-of-interests and the consolidated financial
statements of National-Oilwell and Dreco have been combined with all prior
periods restated to give effect to the Combination.
National-Oilwell has a December 31 year end and, prior to the Combination, Dreco
had an August 31 year end. The Consolidated Statement of Operations for 1997
includes Dreco's operating results for the six months ended May 31, 1997 and the
six months ended December 31, 1997. The month of June 1997 has been included in
the Consolidated Statement of Stockholders' Equity in order to conform the
reporting periods. For that month, Dreco recorded revenues of $13.4 million, net
income of $0.9 million and net income per share (diluted) of $0.02. The restated
Consolidated Statement of Operations for 1996 combines the operating results of
National-Oilwell for the year ended December 31, 1996 and the operating results
of Dreco for the twelve months ended November 30, 1996. As a result of changing
Dreco's reporting period from August 31 to November 30 for combination with 1996
results of National-Oilwell, the operating results for the three months ended
November 30, 1995 were included in the Consolidated Statement of Stockholders'
Equity. For the three month period, Dreco recorded revenues of $33.4 million,
net income of $3.2 million and net income per share (diluted) of $0.28. The
restated Consolidated Balance Sheet combines the December 31, 1996 balance sheet
of National-Oilwell with the November 30, 1996 balance sheet of Dreco. Prior to
1996, the financial statements reflect only the operations of Dreco as the
Acquisition (defined below) as recorded by National-Oilwell had not occurred and
generally accepted accounting principles do not allow combination with the
predecessor partnership.
In January 1996, National-Oilwell acquired the operations of National-Oilwell,
its predecessor partnership (the "Acquisition"), resulting in the incurrence of
significant amounts of debt and related interest expense. On October 29, 1996,
National-Oilwell sold 9.2 million shares of its common stock through an initial
public offering (the "IPO"). Net proceeds from the IPO of approximately $72
million were used to repay debt incurred in connection with the Acquisition. On
December 10, 1996, National-Oilwell sold 2,106,000 Dreco Common Shares for
proceeds of $39.2 million. This latter transaction is reflected in the financial
statements as a 1997 occurrence due to the combination of differing balance
sheet dates.
12
<PAGE> 14
RESULTS OF OPERATIONS
Operating results by segment are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED DECEMBER 31, August 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
Revenues:
<S> <C> <C> <C>
Products and Technology $ 371.8 $ 266.5 $ 62.2
Downhole Products 69.0 28.6 25.0
Distribution Services 630.9 518.7 -
Eliminations (66.1) (52.0) (0.3)
------------------ ----------------- -----------------
Total $ 1,005.6 $ 761.8 $ 86.9
================== ================= =================
Operating Income:
Products and Technology $ 53.4 $ 25.9 $ 3.9
Downhole Products 25.6 8.9 8.6
Distribution Services 27.6 17.5 -
Corporate (8.7) (8.2) (2.4)
------------------ ----------------- -----------------
97.9 44.1 10.1
Special Charge 10.7 16.6 -
------------------ ----------------- -----------------
Total $ 87.2 $ 27.5 $ 10.1
================== ================= =================
</TABLE>
Products and Technology
The Products and Technology segment designs and manufactures a large line of
proprietary products, including drawworks, mud pumps, power swivels, electrical
control systems and reciprocating pumps, as well as complete land drilling and
well servicing rigs and structural components such as masts, derricks and
substructures. 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 provides
drilling pump expendable products for maintenance of National-Oilwell's and
other manufacturers' equipment.
During the second quarter of 1996, National-Oilwell began to experience an
increase in demand for its capital equipment, especially from offshore drilling
contractors, which continued through 1997. Higher demand for and cash flows from
their services allowed offshore drillers to upgrade and repair machinery and
equipment that had been deferred for many years. If utilization rates of the
offshore mobile rig fleet remain above 90%, management believes demand for the
construction of new rigs could result in a further increase in demand for
machinery and equipment of the type manufactured by National-Oilwell. Similarly,
toward the end of 1996, National-Oilwell began to receive a significant increase
in the number of inquiries for the purchase of equipment for land rigs and has
received several orders for land rigs for international markets in 1997.
National-Oilwell believes the excess supply of large land drilling rigs and
equipment that has existed since 1981 may have reduced to the point that future
demand for land rigs and related equipment will increase.
Revenues during 1997 increased $105.3 million over 1996 primarily due to
increased demand for drilling capital equipment and spare parts as well as fluid
end expendable parts. Acquisitions in 1997 other than Dreco accounted for $26.6
million of the increase. Operating income for this segment increased by $27.5
million when compared to the prior year with 1997 acquisitions other than Dreco
accounting for $5.0 million of this incremental income and the remainder due to
the higher activity levels.
Revenues during 1996 increased $204.3 million over 1995 primarily due to the
combination of results from the Acquisition recorded by National-Oilwell. In
addition, international sales of new equipment increased for Dreco. Operating
income for the Products and Technology segment increased $22.0 million in 1996
as compared to the prior year as a result of the combination of results from the
Acquisition recorded by National-Oilwell.
13
<PAGE> 15
Downhole Products
National-Oilwell designs and manufactures drilling motors and specialized
drilling tools for rent and sale. Rentals generally involve products that are
not economical for a customer to own or maintain because of the broad range of
equipment required for the diverse hole sizes and depths encountered in drilling
for oil and gas. Sales generally involve products that require infrequent
service, are disposable or are sold in countries where National-Oilwell does not
provide repair and maintenance services. Effective December 1, 1996, Dreco
acquired Vector Oil Tool Ltd., a downhole motor designer and manufacturer, with
revenues of $19.9 million in its most recent fiscal year ended July 31, 1996.
This acquisition is reflected in the combined consolidated financial statements
in 1997 and is included in the 1997 operating results.
Revenues in 1997 increased $40.4 million over 1996 due to a general increase in
market activity plus the inclusion of Vector Oil Tool revenues of $24.6 million.
Operating income in 1997 exceeded the prior year by $16.7 million with Vector
accounting for $14.7 million of the increase.
Revenues increased $3.6 million in 1996 due to higher worldwide rental activity,
as sales to non-rental territories was comparable to the prior year. Operating
income increased in 1996 by $0.3 million over 1995 levels due to the higher
revenues offset by changes in product mix.
Distribution Services
Distribution Services revenues result primarily from the sale of MRO products
from National-Oilwell's network of distribution service centers and from the
sale of well casing and production tubing. These products are purchased from
numerous manufacturers and vendors, including National-Oilwell's Products and
Technology segment.
Distribution Services revenues in 1997 exceeded 1996 by $112.2 million. This 22%
increase reflects the increased spending levels of the Company's alliance
partners and other customers. Incremental sales of MRO products ($34.2 million),
tubular products ($58.0 million), drilling spares ($8.1 million) and fluid end
expendable parts and related pumps ($8.0 million) accounted for the majority of
this increase. Operating income in 1997 exceeded the prior year by $10.1 million
(58%) as an increase in operating expenses offset part of the incremental
margin, netting a 9% flow through of the revenue increase.
This segment is not included in the combined statements prior to 1996 as it was
part of the Acquisition recorded by National-Oilwell.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. While corporate charges in 1997 were comparable to 1996, such
increased substantially over the 1995 amount due to the inclusion of the
Acquisition recorded by National-Oilwell.
Special Charges
During 1997, National-Oilwell recorded a $10.7 million charge related to merger
expenses incurred in connection with the Combination. During 1996,
National-Oilwell incurred certain one-time expenses in connection with its
initial public offering of common stock, as follows: (i) a management services
agreement was terminated at a cost of $4.4 million ($2.8 million after tax) with
subsequent cash payments of $0.3 million in 1996, $2.2 million in 1997 and
future quarterly installments of $250,000 through December 31, 1999, and (ii)
expenses and payout under National-Oilwell's Value Appreciation Plans. The Value
Appreciation Plans resulted in National-Oilwell recording an expense of $12.2
million ($7.6 million after tax). National-Oilwell paid $2.9 million of this
amount in cash at the time of the IPO and became obligated to pay an additional
$3.5 million in cash in five annual installments of $0.7 million beginning
January 17, 1997. The Value Appreciation Plans also required the issuance of
681,852 shares of common stock.
14
<PAGE> 16
Interest Expense
Interest expense decreased substantially in 1997 due to lower amounts of debt
outstanding and lower interest rates under the new credit facilities. Interest
expense increased substantially during 1996 due to debt incurred in connection
with the Acquisition as recorded by National-Oilwell. A substantial portion of
the debt was repaid in late 1996 with proceeds from the IPO.
Income Taxes
National-Oilwell is subject to U.S. federal, state, and foreign taxes and
recorded a combined tax rate of 38% in 1997 and 39% in 1996. National-Oilwell
has investment tax credits of approximately $1.0 million in Canada and net
operating tax loss carryforwards of $22.7 million in the United States that may
be available to reduce future tax expense. Additional loss carryforwards in
Europe generally would reduce goodwill if realized in the future. Due to the
uncertainty of future utilization, all of the potential benefits described above
have been fully reserved.
Extraordinary Losses
In the third quarter of 1997, National-Oilwell replaced its existing credit
facility and recorded a charge of $1.0 million ($0.6 million after tax) due to
the write-off of deferred debt costs. In the fourth quarter of 1996, the credit
facility established in connection with the Acquisition was replaced, resulting
in the write-off of $6.4 million ($4.0 million after tax) in deferred debt
costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, National-Oilwell had working capital of $252.1 million, an
increase of $83.2 million from December 31, 1996. Significant components of
National-Oilwell's assets are accounts receivable and inventories. Accounts
receivable, including unbilled revenues, increased by $84.8 million and
inventories increased $74.9 million during 1997. These amounts were partially
offset by increases in accounts payable of $47.5 million, customer prepayments
of $31.8 million and other accrued liabilities of $9.2 million.
Total capital expenditures were $32.6 million during 1997, $15.2 million in 1996
and $6.4 million in 1995. Additions and enhancements to the downhole rental tool
fleet and information management and inventory control systems represent a large
portion of these capital expenditures. Increased annual capital expenditures are
anticipated as National-Oilwell further enhances its rental tool fleet,
facilities and information systems. National-Oilwell believes it has sufficient
existing manufacturing capacity to meet currently anticipated demand through
1998 for its products and services. Any significantly greater increases in
demand for oilfield equipment products, to the extent qualified subcontracting
and outsourcing are not available, could result in further increases in capital
expenditures.
On September 25, 1997, National-Oilwell entered into a new five-year unsecured
$125 million revolving credit facility (the "New Credit Facility") that was used
in part to repay amounts outstanding under the previous credit facility and
other notes payable. The balance of the New Credit Facility is available for
acquisitions and general corporate purposes. The New Credit Facility provides
for interest at prime or LIBOR plus 0.5%, subject to adjustment based on
National-Oilwell's Capitalization Ratio, as defined. The New Credit Facility
contains financial covenants and ratios regarding minimum tangible net worth,
maximum debt to capital and minimum interest coverage.
National-Oilwell believes that cash generated from operations and amounts
available under the New Credit Facility will be sufficient to fund operations,
working capital needs, capital expenditure requirements and financing
obligations. National-Oilwell also believes any significant increase in capital
expenditures caused by any need to increase manufacturing capacity can be funded
from operations or through debt financing.
15
<PAGE> 17
National-Oilwell intends to pursue acquisition candidates, but the timing, size
or success of any acquisition effort and the related potential capital
commitments cannot be predicted. National-Oilwell expects to fund future cash
acquisitions primarily with cash flow from operations and borrowings, including
the unborrowed portion of the New Credit Facility or new debt issuances, but may
also issue additional equity either directly or in connection with acquisitions.
There can be no assurance that acquisition funds will be available at terms
acceptable to National-Oilwell.
Inflation has not had a significant impact on National-Oilwell's operating
results or financial condition in recent years.
YEAR 2000
National-Oilwell has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
implementing its plan to resolve the issue. The Year 2000 problem is a result of
computer programs being written using two digits (rather than four) to define
the applicable year, resulting in the recognition of "00" as the year 1900
rather than the year 2000, which could result in a major system failure or
miscalculations. National-Oilwell presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for National-Oilwell's computer systems as
so modified and converted, nor will the Company incur significant expense that
would not have otherwise been incurred to upgrade systems for operational
reasons.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
No. 131) which establishes standards for reporting information about operating
segments in both annual and interim financial statements. SFAS No. 131 also
establishes standards for disclosures about products and services, geographic
areas and major customers. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. National-Oilwell will adopt SFAS No. 131 retroactively
in 1998 and the standards and disclosure required thereby are not expected to
affect significantly the current disclosure.
In June 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes new rules for the reporting and display of
comprehensive income. Adoption of SFAS No. 130 will have no impact on
National-Oilwell's net income or financial position. SFAS No. 130 would require
National-Oilwell's foreign currency translation adjustments, which are currently
reported in stockholders' equity, to be added to net income to determine total
comprehensive income and for such amounts to be disclosed.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that could prove not to be accurate. Such forward-looking statements
include, without limitation, the statements regarding the trends in the industry
set forth in the "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections regarding
National-Oilwell's anticipated future financial results and position. Although
National-Oilwell believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from National-Oilwell's expectations are
disclosed in this filing, including but not limited to the matters described in
"Risk Factors" at Item 1.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
Attached hereto and a part of this report are financial statements and
supplementary data listed in Item 14. The financial statements of
National-Oilwell, a general partnership, as predecessor, are
incorporated by reference to the Registration Statement No. 333-11051
on Form S-1 filed on August 29, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the definitive Proxy Statement for the
1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the definitive Proxy Statement for the
1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the definitive Proxy Statement for the
1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the definitive Proxy Statement for the
1998 Annual Meeting of Stockholders.
17
<PAGE> 19
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a) Financial Statements and Exhibits
1. Financial Statements
The following financial statements are presented in response to Part II,
Item 8:
<TABLE>
<CAPTION>
Page(s) in
This Report
<S> <C>
Consolidated Balance Sheets...................................................................................23
Consolidated Statements of Operations.........................................................................24
Consolidated Statements of Cash Flows.........................................................................25
Consolidated Statements of Stockholders' Equity...............................................................26
Notes to Consolidated Financial Statements....................................................................27
</TABLE>
2. Financial Statement Schedules
All schedules are omitted because they are not applicable, not required or
the information is included in the financial statements or notes thereto.
3. Exhibits
<TABLE>
<S> <C>
2.1 Combination Agreement, dated as of May 14, 1997, as amended,
between National-Oilwell, Inc. and Dreco Energy Services Ltd.
(Annex B) (4)
2.2 Plan of Arrangement and Exchangeable Share Provisions (Annex E)
(4)
2.3 Purchase Agreement by and among Oilwell, Inc., National Supply
Company, Inc., USX Corporation, Armco Inc. and the Company dated
September 22, 1995, as amended (Exhibit 2.1) (1)
3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Annex D) (4)
3.2 By-laws of National-Oilwell, Inc. (Exhibit 3.2) (1)
9.1 Form of Voting and Exchange Trust Agreement by and between
National-Oilwell, Inc., Dreco Energy Services Ltd. and Montreal
Trust Company of Canada (Annex G) (4)
10.1 Employment Agreement dated as of January 16, 1996 between Joel V.
Staff and the Company with similar agreements with James J.
Fasnacht, Jerry N. Gauche, Steven W. Krablin and Paul M. Nation
and a similar agreement dated as of February 5, 1996 between
Merrill A. Miller, Jr. and the Company (Exhibit 10.1) (1)*
10.2 Restricted Stock Agreement between the Company and Joel V. Staff,
with similar agreements with James J. Fasnacht, Jerry N. Gauche,
Steven W. Krablin, Merrill A. Miller, Jr. and Paul M. Nation
(Exhibit 10.10) (1)*
10.3 Stockholders Agreement among the Company and its stockholders
dated as of January 16, 1996 (Exhibit 10.3) (1)
</TABLE>
18
<PAGE> 20
<TABLE>
<S> <C>
10.4 Waiver and First Amendment to Stockholders Agreement dated as of
July 24, 1996 (Exhibit 10.4) (1)
10.5 Second Amendment to Stockholders Agreement dated as of October 18,
1996 (Exhibit 10.17) (1)
10.6 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.6) (2)*
10.7 Value Appreciation and Incentive Plan A (Exhibit 10.8) (1)*
10.8 Value Appreciation and Incentive Plan B (Exhibit 10.9) (1)*
10.9 First Amendment to Value Appreciation and Incentive Plan A
(Exhibit 10.15) (1)*
10.10 First Amendment to Value Appreciation and Incentive Plan B
(Exhibit 10.16) (1)*
10.11 Supplemental Savings Plan (Exhibit 10.12) (1)*
10.12 Loan Agreement dated September 25, 1997 (Exhibit 10.1) (5)
10.13 Deferred Fee Agreement (Exhibit 10.14) (1)
10.14 Form of Support Agreement by and between National-Oilwell, Inc.
and Dreco Energy Services Ltd. (Annex F) (4)
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial Data Schedule
</TABLE>
- -------------------
* Compensatory plan or arrangement for management or others
(1) Filed as an Exhibit to Registration Statement No. 333-11051 on
Form S-1, as amended, initially filed on August 29, 1996
(2) Filed as an Exhibit to the National-Oilwell, Inc. Proxy Statement
for the Annual Meeting of Stockholders on May 14, 1997, filed on
April 14, 1997
(3) Filed as an Exhibit to the National-Oilwell, Inc. Form 8-K filed
on May 21, 1997
(4) Filed as an Annex to the Joint Proxy Statement/Prospectus in Post
Effective Amendment No. 1 to Registration Statement No. 333-32191
on Form S-4 filed on August 21, 1997.
(5) Filed as an Exhibit to the National-Oilwell, Inc. Quarterly Report
on Form 10-Q filed on November 7, 1997.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL-OILWELL, INC.
Date: March 10, 1998 By: /s/ Steven W. Krablin
---------------------------
Steven W. Krablin
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Each person whose signature appears below in so signing, constitutes and
appoints Steven W. Krablin and Paul M. Nation, and each of them acting alone,
his true and lawful attorney-in-fact and agent, with full power of substitution,
for him and in his name, place and stead, in any and all capacities, to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments to this report, and in each case to file the same, with all exhibits
thereto and other documents in connection therewith, and hereby ratifies and
confirms all that said attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board, President and Chief
/s/ Joel V. Staff Executive Officer (Principal Executive Officer) March 10, 1998
- -------------------------------- ----------------------
Joel V. Staff
/s/ Steven W. Krablin Vice President and Chief Financial Officer
- ---------------------------------- (Principal Financial Officer and Principal March 10, 1998
Steven W. Krablin Accounting Officer) ----------------------
Director
/s/ Howard I. Bull March 10, 1998
- ---------------------------------- ----------------------
Howard I. Bull
Director
/s/ James C. Comis III March 10, 1998
- ---------------------------------- ----------------------
James C. Comis III
Director
/s/ James T. Dresher March 10, 1998
- ---------------------------------- ----------------------
James T. Dresher
Director
/s/ W. McComb Dunwoody March 10, 1998
- ---------------------------------- ----------------------
W. McComb Dunwoody
Director
/s/ William E. Macaulay March 10, 1998
- ---------------------------------- ----------------------
William E. Macaulay
Director
March 10, 1998
/s/ Fredrick W. Pheasey ----------------------
- ----------------------------------
Fredrick W. Pheasey
Director March 10, 1998
/s/ Bruce M. Rothstein ----------------------
- ----------------------------------
Bruce M. Rothstein
</TABLE>
20
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
National-Oilwell, Inc.
We have audited the accompanying consolidated balance sheets of
National-Oilwell, Inc., as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit, in 1996, the
financial statements of Dreco Energy Services, Ltd., a wholly-owned subsidiary,
which statements reflect total assets of $85,775,000 as of November 30, 1996,
and total revenues of $113,195,000 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Dreco Energy Services, Ltd.,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of National-Oilwell, Inc., at December 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 5, 1998
21
<PAGE> 23
REPORTS OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
National-Oilwell, Inc.
We have audited the consolidated balance sheet of National-Oilwell, Inc.
(as defined in Note 1) as at August 31, 1995 and the consolidated statements of
operations, stockholders' equity and cash flows for the year ended August 31,
1995. We have also audited the consolidated balance sheet of National-Oilwell,
Inc. as at November 30, 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for the three months ended
November 30, 1995; such financial statements are not presented separately
herein. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of National-Oilwell, Inc. (as
defined in Note 1) as at August 31, 1995 and at November 30, 1995 and the
results of its operations and its cash flows for the year ended August 31, 1995
and the three months ended November 30, 1995 in accordance with generally
accepted accounting principles in the United States.
COOPERS & LYBRAND
Chartered Accountants
Edmonton, Alberta
November 1, 1996, except as to Note 1
which is as of September 25, 1997
To the Directors of
Dreco Energy Services Ltd.
We have audited the consolidated balance sheet of Dreco Energy Services
Ltd. as at November 30, 1996 and the consolidated statements of operations,
shareholders' equity and cash flows for the twelve months ended November 30,
1996. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the company as at November 30, 1996 and the consolidated results of its
operations and its cash flows for the twelve months then ended in accordance
with generally accepted accounting principles in the United States.
COOPERS & LYBRAND
Chartered Accountants
Edmonton, Alberta
October 21, 1997
22
<PAGE> 24
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,824 $ 13,611
Receivables, less allowance of $4,056 and $3,165 192,470 125,306
Unbilled revenues 31,521 13,880
Inventories 203,520 128,611
Deferred taxes 9,839 4,028
Prepaid and other current assets 6,424 7,963
--------- ---------
Total current assets 463,598 293,399
Property, plant and equipment, net 74,282 44,446
Deferred taxes 4,919 6,847
Goodwill 24,233 6,327
Other assets 479 1,499
--------- ---------
$ 567,511 $ 352,518
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,340 $ 6,100
Accounts payable 134,955 87,461
Customer prepayments 37,688 5,889
Accrued compensation 12,957 9,778
Other accrued liabilities 24,521 15,274
--------- ---------
Total current liabilities 211,461 124,502
Long-term debt 61,565 39,136
Deferred taxes 2,675 1,913
Insurance reserves 5,512 6,599
Other liabilities 8,610 11,352
--------- ---------
Total liabilities 289,823 183,502
Commitments and contingencies
Stockholders' equity:
Common stock - par value $.01; 51,655,782 and 23,543,717 shares
issued and outstanding at December 31, 1997 and December 31, 1996 517 235
Additional paid-in capital 207,954 149,497
Cumulative translation adjustment (7,074) (2,302)
Retained earnings 76,291 21,586
--------- ---------
277,688 169,016
--------- ---------
$ 567,511 $ 352,518
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 25
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED DECEMBER 31, AUGUST 31,
------------------------ -----------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Revenues $ 1,005,572 $ 761,816 $ 86,875
Cost of Revenues 799,367 639,433 61,252
----------- ---------- -----------
Gross profit 206,205 122,383 25,623
Selling, general, and administrative 108,306 78,273 15,564
Special Charge 10,660 16,611 --
----------- ---------- -----------
Operating income 87,239 27,499 10,059
Interest and financial costs (6,196) (12,241) (64)
Interest income 1,524 1,301 1,505
Other income (expense), net (85) 159 696
----------- ---------- -----------
Income before income taxes and
extraordinary loss 82,482 16,718 12,196
Provision for income taxes 31,201 6,571 4,407
----------- ---------- -----------
Net income before extraordinary loss $ 51,281 $ 10,147 $ 7,789
Extraordinary loss, net of tax benefit 623 4,000 --
----------- ---------- -----------
Net income $ 50,658 $ 6,147 $ 7,789
=========== ========== ===========
Net income per share:
Basic
Net income before extraordinary loss $ 1.00 $ 0.25 $ 0.69
Extraordinary loss (0.01) (0.10) -
----------- ---------- -----------
Net income $ 0.99 $ 0.15 $ 0.69
=========== ========== ===========
Net income per share:
Diluted
Net income before extraordinary loss $ 0.99 $ 0.25 $ 0.68
Extraordinary loss (0.01) (0.10) -
----------- ---------- -----------
Net income 0.98 $ 0.15 $ 0.68
=========== ========== ===========
Weighted average shares outstanding
Basic 51,124 40,018 11,257
=========== ========== ===========
Diluted 51,956 40,553 11,422
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 26
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED DECEMBER 31, AUGUST 31,
-------------------------- ---------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 50,658 $ 6,147 $ 7,789
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 14,744 8,775 4,558
Provision for losses on receivables 730 526 87
Provision for deferred income taxes (3,121) (2,433) 2,924
Gain on sale of assets (2,973) (2,727) (1,304)
Foreign currency transaction (gain) loss 602 (157) --
Special charge 10,660 16,611 --
Extraordinary loss 999 6,400 --
Changes in assets and liabilities, net of acquisitions:
Receivables (60,815) (25,682) (820)
Unbilled revenues (17,641) (8,151) (1,046)
Inventories (64,978) (2,410) (2,572)
Prepaid and other current assets 1,864 (889) 245
Accounts payable 45,083 5,555 (202)
Other assets/liabilities, net 23,339 (8,177) (7,591)
--------- --------- ---------
Net cash provided (used) by operating activities (849) (6,612) 2,068
--------- --------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (32,605) (15,166) (6,435)
Proceeds from sale of assets 4,415 3,995 3,234
Businesses acquired, net of cash (19,253) -- --
Partnership acquired, net of cash -- (106,248) --
Other 248 (350) --
--------- --------- ---------
Net cash used by investing activities (47,195) (117,769) (3,201)
--------- --------- ---------
Cash flow from financing activities:
Borrowings (payments) on line of credit 57,677 (89,259) (1,308)
Retirement of long-term debt (41,359) -- --
Proceeds from issuance of common stock 37,240 107,947 --
Proceeds from stock options exercised 6,546 341 161
Proceeds from Acquisition debt -- 103,378 --
Other -- 5,125 (1,470)
--------- --------- ---------
Net cash provided (used) by financing activities 60,104 127,532 (2,617)
--------- --------- ---------
Effect of exchange rate losses on cash (4,097) (180) --
--------- --------- ---------
Increase (decrease) in cash and equivalents 7,963 2,971 (3,750)
Cash and cash equivalents, beginning of year 13,611 16,266 20,016
Change in cash to conform fiscal year end (1,750) (5,626) --
--------- --------- ---------
Cash and cash equivalents, end of year $ 19,824 $ 13,611 $ 16,266
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 27
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED
STOCK CAPITAL ADJUSTMENT EARNINGS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1994 $ 56 $ 38,237 $ (4,087) $ 4,484 $ 38,690
Net income 7,789 7,789
Translation adjustment 848 848
Tax benefit of options exercised 1,469 1,469
Stock options exercised -- 161 161
--------- --------- --------- --------- ---------
Balance at August 31, 1995 56 39,867 (3,239) 12,273 48,957
Change in fiscal year end 271 (491) 3,166 2,946
--------- --------- --------- --------- ---------
Balance at November 30, 1995 56 40,138 (3,730) 15,439 51,903
Net income 6,147 6,147
Stock options exercised -- 341 341
Issuance of 17,857,698 shares 179 107,497 107,676
Translation adjustment 1,428 1,428
Tax benefit of options exercised 1,521 1,521
--------- --------- --------- --------- ---------
Balance at December 31, 1996 235 149,497 (2,302) 21,586 169,016
Net income 50,658 50,658
Stock options exercised 5 6,546 6,551
Issuance of 1,053,000 shares 10 37,225 37,235
Stock issued for acquisitions 8 10,984 3,130 14,122
Two-for-one stock split 259 (259) --
Change in subsidiary's year end 917 917
Translation adjustment (4,772) (4,772)
Tax benefit of options exercised 3,961 3,961
--------- --------- --------- --------- ---------
Balance at December 31, 1997 $ 517 $ 207,954 $ (7,074) $ 76,291 $ 277,688
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 28
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Information concerning common stock and per share data has been restated on an
equivalent share basis and assumes the exchange of all Exchangeable Shares as
well as to reflect the two for one stock split recorded as of November 18, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported and contingent amounts of assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Effective January 1, 1996, National-Oilwell, Inc. acquired National-Oilwell, a
general partnership, for a purchase price of $180 million, which approximated
book value. The transaction was accounted for under the purchase method of
accounting. The purchase price and related expenses were financed by new equity,
existing cash, a new credit facility and seller notes. A summary of the
transaction is as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, other than cash $242,268
Cash paid to acquire Partnership 106,248
Purchase price financed by seller notes 20,000
--------
Liabilities assumed $116,020
========
</TABLE>
Effective September 25, 1997, National-Oilwell completed a combination
("Combination") with Dreco Energy Services Ltd. ("Dreco"). As a result of the
Combination, each Dreco Class "A" common share ("Dreco Common Share")
outstanding was converted into .9159 of a Dreco Exchangeable Share
("Exchangeable Share") and, accordingly, approximately 14.4 million Exchangeable
Shares were issued. Each Exchangeable Share is intended to have substantially
identical economic and legal rights as, and will ultimately be exchanged on a
one-for-one basis for, a share of National-Oilwell common stock. As of December
31, 1997, approximately 75% of the Exchangeable Shares had been converted into
National-Oilwell common stock.
The Combination was accounted for as a pooling-of-interests and the
consolidated financial statements of National-Oilwell and Dreco have been
combined with all prior periods restated to give effect to the Combination.
Revenues, net income before special charges and extraordinary loss, and net
income of the separate companies for the periods preceding the Combination were
as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Revenues:
National-Oilwell $593,415 $648,621
Dreco 112,304 113,195
-------- --------
$705,719 $761,816
======== ========
Net income before special charges
and extraordinary loss:
National-Oilwell $ 25,348 $ 14,545
Dreco 12,991 5,902
-------- --------
$ 38,339 $ 20,447
======== ========
Net income:
National-Oilwell $ 19,407 $ 245
Dreco 10,181 5,902
-------- --------
$ 29,588 $ 6,147
======== ========
</TABLE>
27
<PAGE> 29
National-Oilwell has a December 31 year end and, prior to the Combination, Dreco
had an August 31 year end. The Consolidated Statement of Operations for 1997
includes Dreco's operating results for the six months ended May 31, 1997 and the
six months ended December 31, 1997. The month of June 1997 has been included in
the Consolidated Statement of Stockholders' Equity in order to conform the
reporting periods. For that month, Dreco recorded revenues of $13.4 million, net
income of $0.9 million and net income per share (diluted) of $0.02. The restated
Consolidated Statement of Operations for 1996 combines the operating results of
National-Oilwell for the year ended December 31, 1996 and the operating results
of Dreco for the twelve months ended November 30, 1996. As a result of changing
Dreco's reporting period from August 31 to November 30 for combination with 1996
results of National-Oilwell, the operating results for the three months ended
November 30, 1995 were included in the Consolidated Statements of Stockholders'
Equity. For the three month period, Dreco recorded revenues of $33.4 million,
net income of $3.2 million and net income per share (diluted) of $0.28. The
restated Consolidated Balance Sheet combines the December 31, 1996 balance sheet
of National-Oilwell with the November 30, 1996 balance sheet of Dreco. Prior to
1996, the financial statements reflect only the operations of Dreco as the
Acquisition (defined below) as recorded by National-Oilwell had not occurred and
generally accepted accounting principles do not allow combination with the
predecessor partnership.
Other Acquisitions
On December 2, 1996, Dreco acquired 100% of the issued and outstanding shares of
Vector Oil Tool Ltd. ("Vector") for consideration of 778,000 Dreco Common Shares
and cash consideration of $1.5 million. This business involves the manufacture,
sale, rental and service of downhole motors and other products. The transaction
was accounted for using the purchase method, is reflected in the 1997 financial
statements due to the combination of differing balance sheet dates as discussed
above and did not have a material effect on the Company's consolidated financial
statements.
On April 25, 1997, the Company purchased the drilling controls business of Ross
Hill Controls and its affiliate, Hill Graham Controls Limited for $19.2 million
in cash. This business involves the manufacture, sale and service of electrical
control systems used in conjunction with drilling operations. The transaction
was accounted for under the purchase method of accounting and did not have a
material effect on the Company's consolidated financial statements.
On May 15, 1997, the Company acquired by merger 100% of the common stock of PEP,
Inc., a manufacturer of petroleum expendable pump products. The Company issued
800,000 shares of common stock pursuant to the transaction which was recorded in
accordance with the pooling-of-interests method of accounting. The transaction
did not have a material effect on the Company's historical consolidated
financial statements and financial statements prior to April 1, 1997 were not
restated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of National-Oilwell
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Fair Value of Financial Instruments
National-Oilwell's financial instruments consist primarily of cash and cash
equivalents, receivables, payables and debt instruments. Cash equivalents
include only those investments having a maturity of three months or less at the
time of purchase. The carrying values of these financial instruments approximate
their respective fair values.
28
<PAGE> 30
Inventories
Inventories consist of oilfield products and oil country tubular goods,
manufactured equipment, manufactured specialized drilling products and downhole
motors and spare parts for manufactured equipment and drilling products.
Inventories are stated at the lower of cost or market using the first-in,
first-out or average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
improvements which extend the lives of property and equipment are capitalized
while minor replacements, maintenance and repairs are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations. Depreciation is provided using
the straight-line method or declining balance method over the estimated useful
lives of individual items.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the life of
the related debt security and accumulated amortization was $24,000 and $40,000
at December 31, 1997 and 1996, respectively. Goodwill is amortized on a
straight-line basis over its estimated life of up to 40 years. Accumulated
amortization at December 31, 1997 and 1996 was $1,214,000 and $162,000,
respectively.
Foreign Currency
The functional currency for National-Oilwell's Canadian, United Kingdom, German
and Australian operations is the local currency. The cumulative effects of
translating the balance sheet accounts from the functional currency into the
U.S. dollar at current exchange rates are included in cumulative foreign
currency translation adjustments. The U.S. dollar is used as the functional
currency for the Singapore and Venezuelan operations. Accordingly, certain
assets are translated at historical exchange rates and all translation
adjustments are included in income. For all operations, gains or losses from
remeasuring foreign currency transactions into the functional currency are
included in income.
Revenue Recognition
Revenue from the sale and rental of products and delivery of services is
recognized upon passage of title, incurrance of rental charges or delivery of
services to the customer. Revenue is recognized on certain significant contracts
in the Products and Technology segment using the percentage of completion method
based on the percentage of total costs incurred to total costs expected.
Provision for estimated losses, if any, is made in the period such losses are
estimable.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax reporting basis of assets and liabilities.
Investment tax credits are accounted for using the cost reduction approach at
the time of the qualifying expenditures.
Concentration of Credit Risk
National-Oilwell grants credit to its customers which operate primarily in the
oil and gas industry. National-Oilwell performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral,
but may require letters of credit for certain international sales.
National-Oilwell maintains reserves for potential credit losses and such credit
losses have historically been within management's expectations.
29
<PAGE> 31
Stock-Based Compensation
National-Oilwell uses the intrinsic value method in accounting for its
stock-based employee compensation plans and, accordingly, would recognize
compensation costs for stock options over the vesting period only if options
were granted with an exercise price below market on the date of grant.
Net Income Per Share
The computation of earnings per common share is based on SFAS No. 128, "Earnings
per Share" which was issued by the Financial Accounting Standards Board in 1997.
The statement, which was effective for fiscal years ending after December 15,
1997, replaces the presentation of primary and fully diluted earnings per common
share with a presentation of basic and diluted earnings per common share.
Results for 1996 and 1995 have been restated to be consistent with the 1997
presentation. Shares issued pursuant to the Acquisition and shares associated
with the Value Appreciation Plans are deemed to be outstanding for the entire
years of 1997 and 1996.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended
Year Ended December 31, August 31,
----------------------------- ----------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income before extraordinary loss $51,281 $10,147 $ 7,789
Denominator:
Denominator for basic earnings per
share--weighted average shares 51,124 40,018 11,257
Effect of dilutive securities:
Employee stock options 832 535 165
------- ------- -------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 51,956 40,553 11,422
======= ======= =======
Basic earnings per share $ 1.00 $ 0.25 $ 0.69
======= ======= =======
Diluted earnings per share $ 0.99 $ 0.25 $ 0.68
======= ======= =======
</TABLE>
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Raw materials and supplies $ 19,970 $ 12,854
Work in process 34,849 8,367
Finished goods and purchased products 148,701 107,390
-------- --------
Total $203,520 $128,611
======== ========
</TABLE>
30
<PAGE> 32
4. STATEMENTS OF CASH FLOWS
The following information is provided to supplement the Consolidated
Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- AUGUST 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 6,904 $ 8,819 $ 64
Income taxes 24,175 4,252 53
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 1997 1996
------------ ------------ ---------
<S> <C> <C> <C>
Land and improvements 2-20 Years $ 6,823 $ 2,906
Buildings and improvements 5-31 Years 22,760 11,360
Machinery and equipment 5-12 Years 31,254 17,324
Computer and office equipment 3-10 Years 15,104 11,219
Rental equipment 1-7 Years 36,982 27,956
--------- ---------
112,923 70,765
Less accumulated depreciation (38,641) (26,319)
--------- ---------
$ 74,282 $ 44,446
========= =========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Revolving credit facilities $ 60,560 $ 22,492
Seller notes -- 20,000
Other loans 2,345 2,744
-------- --------
62,905 45,236
Less current portion 1,340 (6,100)
-------- --------
$ 61,565 $ 39,136
======== ========
</TABLE>
On September 25, 1997, National-Oilwell entered into a new five-year unsecured
$125 million revolving credit facility (the "New Credit Facility") that was used
in part to repay amounts outstanding under the previous revolving credit
facilities as well as certain notes payable to the sellers incurred in
connection with the Acquisition. The New Credit Facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $21 million were outstanding at December 31, 1997.
The New Credit Facility provides for interest at prime or LIBOR plus 0.5% (8.5%
and 6.31% at December 31, 1997) subject to adjustment based on
National-Oilwell's Capitalization Ratio, as defined. The New Credit Facility
contains financial covenants and ratios regarding minimum tangible net worth,
maximum debt to capital and minimum interest coverage.
National-Oilwell also has additional credit facilities totaling $22.5 million
used primarily for letters of credit, of which $4.0 million were outstanding at
December 31, 1997.
31
<PAGE> 33
7. PENSION PLANS
National-Oilwell and its consolidated subsidiaries have several pension plans
covering substantially all of its employees. Defined-contribution pension plans
cover most of the U.S. and Canadian employees and are based on years of service,
a percentage of current earnings and matching of employee contributions. For the
years ended December 31, 1997 and 1996 and August 31, 1995, pension expense for
defined-contribution plans was $3.5 million, $2.3 million, and $0.1 million, and
all funding is current.
One of National-Oilwell's subsidiaries in the United Kingdom has a
defined-benefit pension plan whose participants are primarily retired and
terminated employees who are no longer accruing benefits. The pension plan
assets are invested primarily in equity securities, United Kingdom government
securities, overseas bonds and cash deposits. The plan assets at fair market
value were $41.1 million at December 31, 1997. The projected benefit obligation
was $26.0 million at December 31, 1997.
8. COMMITMENTS AND CONTINGENCIES
National-Oilwell leases land, buildings and storage facilities, vehicles and
data processing equipment under operating leases extending through various dates
up to the year 2004. Rent expense for the years ended December 31, 1997 and 1996
and August 31, 1995 was $9.0 million, $10.5 million and $0.8 million.
National-Oilwell's minimum rental commitments for operating leases at December
31, 1997 were as follows: 1998 - $6.0 million; 1999 - $3.5 million; 2000 - $2.3
million; 2001 - $1.4 million; 2002 - $1.3 million; thereafter - $1.6 million.
National-Oilwell is involved in various claims, regulatory agency audits and
pending or threatened legal actions involving a variety of matters. The total
liability on these matters at December 31, 1997 cannot be determined; however,
in the opinion of management, any ultimate liability, to the extent not
otherwise provided for, should not materially affect the financial position,
liquidity or results of operations of National-Oilwell.
National-Oilwell's business is affected both directly and indirectly by
governmental laws and regulations relating to the oilfield service industry in
general, as well as by environmental and safety regulations that specifically
apply to National-Oilwell's business. Laws and regulations protecting the
environment have generally become more expansive and stringent in recent years
and National-Oilwell believes the trend will continue. Although National-Oilwell
has not incurred material costs in connection with its compliance with such
laws, there can be no assurance that other developments, such as stricter
environmental laws, regulations and enforcement policies thereunder, could not
result in additional, presently unquantifiable, costs or liabilities to
National-Oilwell.
9. COMMON STOCK
At the Special Meeting of Stockholders on September 23, 1997, the number of
authorized shares of common stock was increased to 75 million from 40 million.
National-Oilwell also has authorized 10 million shares of $.01 par value
preferred stock, none of which is issued or outstanding. On November 18, 1997,
the Company effected a two-for-one stock split in the form of a stock dividend
to stockholders of record on November 10, 1997. In addition, an equivalent stock
dividend was paid to holders of Exchangeable Shares on the same date.
On October 29, 1996, National-Oilwell sold 9.2 million shares of common stock
through an initial public offering (the "IPO"). Net proceeds from the IPO of
approximately $72 million were used to repay debt incurred in connection with
the Acquisition. On December 10, 1996, National-Oilwell, by virtue of the
Combination described in Note 1, also sold 2,106,000 shares of common stock for
proceeds of $39.2 million. This latter transaction is reflected in the 1997
financial statements due to the combination of differing balance sheet dates as
also discussed in Note 1.
32
<PAGE> 34
National-Oilwell's stock option plans include the Dreco Energy Services Ltd.
Amended and Restated 1989 Employee Incentive Option Plan and the
National-Oilwell Stock Award and Long-Term Incentive Plan, (the "Incentive
Plans"), and collectively authorize the grant of options to purchase up to
3,950,000 shares of National-Oilwell's common stock to officers, key employees
and non-employee directors. Options granted are generally exercisable between 3
and 5 years starting one year from the date of grant and generally expire 5 to
10 years from the date of grant.
Pursuant to National-Oilwell's Stock Award and Long-Term Incentive Plan,
1,882,606 shares of restricted common stock were purchased by executive
officers. These shares are subject to restrictions on transferability and are
not entitled to receive dividends or distributions until such restrictions
lapse. Restrictions lapse annually on 20% of these shares beginning on January
17, 1997 or in their entirety upon the occurrence of (i) a merger or
consolidation of National-Oilwell into another company, (ii) a sale of all or
substantially all the assets of National-Oilwell, or (iii) a sale of all the
common stock of National-Oilwell. Restrictions also lapse in their entirety upon
a participant's disability, death or involuntary termination of employment
without cause. On May 12, 1997, an executive officer of National-Oilwell
resigned and 225,906 shares of restricted stock were repurchased by the Company
pursuant to the restricted stock agreement granted under the Company's Stock
Award and Long-Term Incentive Plan. In accordance with the plan, these forfeited
shares may be reawarded in the future.
The Incentive Plans and Dreco private stock option agreements, (the "Private
Agreements"), remained in effect after the Combination. Substantially all of the
options outstanding at December 31, 1997 under the Incentive Plans have exercise
prices between $5.62 and $21.70 per share, and expire at various dates from
January 18, 2005 to January 13, 2007. The weighted average exercise price on the
538,592 outstanding options at December 31, 1997 is $13.94. All options
outstanding under the Private Agreements were exercised prior to December 31,
1997.
The following summarizes option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARE PRICE
----------------------------
INCENTIVE PRIVATE INCENTIVE PRIVATE TOTAL
PLANS AGREEMENTS PLANS AGREEMENTS OPTIONS
----- ---------- ----- ---------- -------
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING:
Balance at August 31, 1995 $ 5.62 $ 7.03 659,450 219,816 879,266
Granted 8.98 -- 84,262 -- 84,262
Exercised 5.96 7.03 (73,272) (18,318) (91,590)
-------- -------- --------
Balance at August 31, 1996 6.01 7.03 670,440 201,498 871,938
Exercised 5.62 -- (7,326) -- (7,326)
-------- -------- --------
Balance at December 31, 1996 6.01 7.03 663,114 201,498 864,612
Granted 17.95 21.84 447,142 119,062 566,204
Cancelled 14.90 -- (132,456) -- (132,456)
Exercised 5.77 12.53 (439,208) (320,560) (759,768)
-------- -------- --------
Balance at December 31, 1997 13.94 -- 538,592 -- 538,592
======== ======== ========
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARE PRICE
----------------------------
INCENTIVE PRIVATE INCENTIVE PRIVATE TOTAL
PLANS AGREEMENTS PLANS AGREEMENTS OPTIONS
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPTIONS EXERCISABLE:
Balance at August 31, 1995 $ 5.62 $ 7.03 241,798 219,816 461,614
Became exercisable 5.96 -- 167,060 -- 167,060
Exercised 5.96 7.03 (73,272) (18,318) (91,590)
---------- ---------- ----------
Balance at August 31, 1996 5.72 7.03 335,586 201,498 537,084
Exercised 5.62 -- (7,326) -- (7,326)
---------- ---------- ----------
Balance at December 31, 1996 5.72 7.03 328,260 201,498 529,758
Became exercisable 5.96 21.84 167,055 119,062 286,117
Exercisable cancelled 5.62 -- (9,159) -- (9,159)
Exercised 5.77 12.53 (439,209) (320,560) (759,769)
---------- ---------- ----------
Balance at December 31, 1997 6.16 -- 46,947 -- 46,947
========== ========== ==========
</TABLE>
The weighted average fair value of options granted during 1997 was approximately
$8.60 per share as determined using the Black-Scholes option pricing model.
Assuming that National-Oilwell had accounted for its stock-based compensation
using the alternative fair value method of accounting under FAS No. 123 and
amortized the fair value to expense over the options vesting period, net income
and earnings per share would have been affected by less than $0.01 from the
amounts reported.
These pro forma results may not be indicative of future effects.
The Company evaluates annually the grant of options to eligible participants and
on February 18, 1998, 470,405 options to purchase shares of common stock were
granted at an exercise price of $28.25, the fair value of the Common Stock at
that date.
In January 1996, National-Oilwell established Value Appreciation Plans (the
"Plans") intended to reward participants for enhancing the value of
National-Oilwell's common stock. The IPO represented a triggering event under
these Plans, resulting in a one-time charge before taxes of $12.2 million ($7.6
million after tax). National-Oilwell paid $2.9 million of this amount in cash at
the time of the IPO and became obligated to pay an additional $3.5 million in
cash in five annual installments beginning January 17, 1997. The balance of the
obligation was payable by the issuance of common stock, with 365,588 shares of
common stock having been issued as of December 31, 1997 and another 316,264
shares of common stock to be issued on or about January 17, 1999, subject to
earlier issuance to terminated employees in certain circumstances.
34
<PAGE> 36
10. INCOME TAXES
The domestic and foreign components of income before income taxes were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Domestic $ 47,436 $ 1,096 $ 4,363
Foreign 35,046 15,622 7,833
------------ ------------ ------------
$ 82,482 $ 16,718 $ 12,196
============ ============ ============
</TABLE>
The components of the provision for income taxes consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 17,428 $ 4,435 $ 1,316
State 1,496 561 167
Foreign 15,398 4,008 --
------------ ------------ ------------
34,322 9,004 1,483
------------ ------------ ------------
Deferred:
Federal (287) (3,898) --
State (64) (864) --
Foreign (2,770) 2,329 2,924
------------ ------------ ------------
(3,121) (2,433) 2,924
------------ ------------ ------------
$ 31,201 $ 6,571 $ 4,407
============ ============ ============
</TABLE>
The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 28,869 $ 5,851 $ 4,269
Foreign income tax rate differential 494 173 138
State income tax net of federal benefit 919 -- --
Tax benefit of foreign sales corporation (990) -- --
Nondeductible expenses 2,837 1,170 --
Unutilized foreign operating loss 209 -- --
Change in deferred tax valuation allowance (1,617) (462) --
Previously unrecognized tax benefits -- (355) --
Other 480 194 --
------------ ------------ ------------
$ 31,201 $ 6,571 $ 4,407
============ ============ ============
</TABLE>
35
<PAGE> 37
Significant components of National-Oilwell's deferred tax assets and liabilities
were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 14,055 $ 12,876
Net operating loss carryforwards 16,096 16,305
Other 5,913 6,104
------------ ------------
Total deferred tax assets 36,064 35,285
Valuation allowance for deferred tax assets (21,306) (22,923)
------------ ------------
14,758 12,362
------------ ------------
Deferred tax liabilities:
Tax over book depreciation 2,226 2,968
Other 449 432
------------ ------------
Total deferred tax liabilities 2,675 3,400
------------ ------------
Net deferred tax assets $ 12,083 $ 8,962
============ ============
</TABLE>
In the United States, National-Oilwell has $22.7 million of net operating loss
carryforwards as of December 31, 1997 which expire at various dates through
2009. These operating losses were acquired in the Combination and are associated
with Dreco's US subsidiary. Since share exchanges occurring after the
Combination have resulted in a more than 50% aggregate change in the beneficial
ownership of Dreco, the availability of these loss carryforwards to reduce
future United States federal taxable income may have become subject to various
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
In addition, these net operating losses can only be used to offset separate
company taxable income of Dreco's US subsidiary. Since the ultimate realization
of these net operating losses is uncertain, the related potential benefit of
$7.7 million has been recorded with a full valuation allowance. If Dreco's US
subsidiary ultimately realizes the benefit of these net operating losses, the
entire benefit would reduce income tax expense.
In Europe, National-Oilwell has $25.5 million of net operating loss
carryforwards as of December 31, 1997 that are available indefinitely. The
related potential benefit available of $8.4 million has been recorded with a
full valuation allowance. The majority of any benefit realized from these net
operating losses would reduce goodwill and other intangible assets.
The deferred tax valuation allowance decreased $1.6 million and $1.7 million for
the period ending December 31, 1997 and December 31, 1996, respectively,
resulting from the realization of foreign net operating losses and investment
tax credits that were previously deferred. The valuation allowance includes $4.4
million for assets recorded in connection with the Acquisition. Any future
decrease in this portion of the valuation allowance will reduce goodwill and
other intangible assets. National-Oilwell expects to realize its deferred tax
assets principally through future earnings.
Undistributed earnings of the Company's foreign subsidiaries amounted to $44.4
million and $22.5 million at December 31, 1997 and December 31, 1996,
respectively. Those earnings are considered to be permanently reinvested and no
provision for U.S. federal and state income taxes has been made. Distribution of
these earnings in the form of dividends or otherwise would result in both U.S.
federal taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable in various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical; however,
unrecognized foreign tax credit carryforwards would be available to reduce some
portion of the U.S. liability. Withholding taxes of approximately $3.5 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 1997.
36
<PAGE> 38
11. SPECIAL CHARGES
In connection with the Combination described in Note 1 above, National-Oilwell
incurred one-time combination expenses of $10.7 million ($8.1 million after tax,
or $0.16 per diluted share) related to various professional fees and integration
costs.
In connection with the IPO, National-Oilwell incurred certain one-time expenses
in 1996, including the termination of the Management Services Agreement at a
cost of $4.4 million ($2.8 million after tax, or $0.07 per diluted share) as
discussed in Note 13, and the triggering of National-Oilwell's Value
Appreciation Plans, resulting in awards to certain executives and key employees
totaling $12.2 million ($7.6 million after tax, or $0.18 per diluted share) as
discussed in Note 9.
12. EXTRAORDINARY LOSSES
In the third quarter of 1997, the replacement of the previous credit facility by
the New Credit Facility resulted in the write-off of $1.0 million ($0.6 million
after tax) in deferred financing costs related to the replaced agreement. In the
fourth quarter of 1996, the revolving credit facility established in connection
with the Acquisition was replaced, resulting in the write-off of $6.4 million
($4.0 million after tax) in deferred financing costs related to the replaced
agreement.
13. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, National-Oilwell entered into a five-year
Management Services Agreement with National-Oilwell's largest stockholder,
Inverness/Phoenix LLC, whereby National-Oilwell would pay $1.0 million per year
for senior management assistance and other services as agreed. The agreement
also provided that Inverness/Phoenix LLC receive 1% of the aggregate transaction
value in connection with each acquisition or disposition completed during the
five-year period and that First Reserve Corporation, National-Oilwell's second
largest stockholder, receive certain fees in connection with specific
acquisitions. In connection with the IPO, this agreement was terminated pursuant
to a Deferred Fee Agreement which provides for cash payments of up to $4.4
million. During 1997 and 1996, cash payments aggregating $2.5 million were made
to Inverness/Phoenix LLC and First Reserve Corporation in connection with the
Deferred Fee Agreement. Future quarterly payments of $250,000 will continue to
be made to Inverness/Phoenix LLC through December 31, 1999. In addition,
National-Oilwell paid transaction and management fees of $2.6 million to the
Inverness/Phoenix LLC and $1.2 million to First Reserve Corporation in
connection with the Acquisition.
14. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
National-Oilwell's operations consist of three segments: Products and
Technology, Downhole Products and Distribution Services. The Products and
Technology segment designs and manufactures a variety of oilfield equipment for
use in oil and gas drilling, completion and production activities. The Downhole
Products segment designs and manufactures drilling motors and specialized
drilling tools for rent and sale. The Distribution Services segment distributes
an extensive line of oilfield supplies, oilfield equipment and tubular products.
Intersegment sales and transfers are accounted for at commercial prices and
eliminated in consolidation.
No single customer accounted for 10% or more of consolidated revenues during the
years ended December 31, 1997 and December 31, 1996. In 1995, sales of
$17,365,000 and $13,720,000 were made to two separate customers by the Products
and Technology segment.
37
<PAGE> 39
Summarized financial information is as follows (in thousands):
Business Segments
<TABLE>
<CAPTION>
PRODUCTS AND DOWNHOLE DISTRIBUTION
TECHNOLOGY PRODUCTS SERVICES CORPORATE (1) ELIMINATION TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Revenues from:
Unaffiliated customers $ 306,481 $ 68,192 $ 630,899 $ -- $ -- $1,005,572
Intersegment sales 65,360 820 -- -- (66,180) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 371,841 69,012 630,899 -- (66,180) 1,005,572
Operating income (loss) 53,453 25,551 27,581 (19,346) -- 87,239
Capital expenditures 13,812 16,724 1,434 635 -- 32,605
Depreciation and amortization 3,448 8,950 1,131 1,215 -- 14,744
Identifiable assets 274,336 78,036 177,574 40,642 (3,077) 567,511
DECEMBER 31, 1996
Revenues from:
Unaffiliated customers $ 214,802 $ 28,329 $ 518,685 $ -- $ -- $ 761,816
Intersegment sales 51,732 275 -- -- (52,007) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 266,534 28,604 518,685 -- (52,007) 761,816
Operating income (loss) 25,902 8,858 17,483 (24,744) -- 27,499
Capital expenditures 3,126 10,959 1,050 31 -- 15,166
Depreciation and amortization 2,766 4,304 1,650 55 -- 8,775
Identifiable assets 123,680 43,338 154,985 33,303 (2,788) 352,518
AUGUST 31, 1995
Revenues from:
Unaffiliated customers $ 62,027 $ 24,848 $ -- $ -- $ -- $ 86,875
Intersegment sales 140 198 -- -- (338) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 62,167 25,046 -- -- (338) 86,875
Operating income (loss) 3,907 8,587 -- (2,435) -- 10,059
Capital expenditures 1,006 5,429 -- -- -- 6,435
Depreciation and amortization 919 3,639 -- -- -- 4,558
Identifiable assets 20,523 28,404 -- 23,428 -- 72,355
</TABLE>
(1) Operating loss of Corporate includes a special charge of $10,660 for 1997
and $16,611 for 1996.
38
<PAGE> 40
Geographic Areas:
<TABLE>
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM OTHER ELIMINATION TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31,1997
Revenues from:
Unaffiliated customers $ 733,905 $ 201,360 $ 38,223 $ 32,084 $ -- $1,005,572
Interarea sales 42,273 11,858 2,383 703 (57,217) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 776,178 213,218 40,606 32,787 (57,217) 1,005,572
Operating income 65,516 17,294 1,857 2,572 -- 87,239
Export sales of U.S. -- 2,929 1,669 117,072 -- 121,670
Identifiable assets 373,544 131,078 27,240 35,649 -- 567,511
DECEMBER 31,1996
Revenues from:
Unaffiliated customers $ 554,686 $ 146,067 $ 29,152 $ 31,911 $ -- $ 761,816
Interarea sales 34,252 10,028 1,912 504 (46,696) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 588,938 156,095 31,064 32,415 (46,696) 761,816
Operating income 14,643 6,036 970 5,850 -- 27,499
Export sales of U.S. -- 1,845 3,815 90,183 -- 95,843
Identifiable assets 228,881 66,129 21,632 35,876 -- 352,518
AUGUST 31,1995
Revenues from:
Unaffiliated customers $ 21,226 $ 58,758 $ 727 $ 6,164 $ -- $ 86,875
Interarea sales 6,331 4,785 -- 363 (11,479) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 27,557 63,543 727 6,527 (11,479) 86,875
Operating income (loss) 4,545 4,210 (952) 2,256 -- 10,059
Export sales of U.S. -- -- -- 9,011 -- 9,011
Identifiable assets 15,422 41,596 1,252 14,085 -- 72,355
</TABLE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results as restated to reflect the Combination with
Dreco were as follows (in thousands, except per share data which have been
restated to comply with FAS 128):
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Revenues $ 206,670 $ 234,090 $ 264,959 $ 299,853 $1,005,572
Gross profit 38,640 43,038 55,352 69,175 206,205
Special charge -- -- 10,660 -- 10,660
Income (loss) before taxes 15,096 17,164 16,715 33,507 82,482
Net income before extraordinary loss 9,699 11,065 9,447 21,070 51,281
Net income 9,699 11,065 8,824 21,070 50,658
Net income per diluted share, before extraordinary loss 0.19 0.21 0.18 0.41 0.99
Net income per diluted share 0.19 0.21 0.17 0.41 0.98
Year ended December 31, 1996
Revenues $ 169,333 $ 190,917 $ 200,773 $ 200,793 $ 761,816
Gross profit 27,242 26,215 34,758 34,168 122,383
Special charge -- -- -- 16,611 16,611
Income (loss) before taxes 7,374 4,112 10,815 (5,583) 16,718
Net income before extraordinary loss 4,614 1,577 6,867 (2,911) 10,147
Net income 4,614 1,577 6,867 (6,911) 6,147
Net income per diluted share, before extraordinary loss 0.12 0.04 0.18 (0.06) 0.25
Net income per diluted share 0.12 0.04 0.18 (0.15) 0.15
</TABLE>
39
<PAGE> 41
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
<TABLE>
<S> <C>
2.1 Combination Agreement, dated as of May 14, 1997, as amended,
between National-Oilwell, Inc. and Dreco Energy Services Ltd.
(Annex B) (4)
2.2 Plan of Arrangement and Exchangeable Share Provisions (Annex E)
(4)
2.3 Purchase Agreement by and among Oilwell, Inc., National Supply
Company, Inc., USX Corporation, Armco Inc. and the Company dated
September 22, 1995, as amended (Exhibit 2.1) (1)
3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Annex D) (4)
3.2 By-laws of National-Oilwell, Inc. (Exhibit 3.2) (1)
9.1 Form of Voting and Exchange Trust Agreement by and between
National-Oilwell, Inc., Dreco Energy Services Ltd. and Montreal
Trust Company of Canada (Annex G) (4)
10.1 Employment Agreement dated as of January 16, 1996 between Joel V.
Staff and the Company with similar agreements with James J.
Fasnacht, Jerry N. Gauche, Steven W. Krablin and Paul M. Nation
and a similar agreement dated as of February 5, 1996 between
Merrill A. Miller, Jr. and the Company (Exhibit 10.1) (1)*
10.2 Restricted Stock Agreement between the Company and Joel V. Staff,
with similar agreements with James J. Fasnacht, Jerry N. Gauche,
Steven W. Krablin, Merrill A. Miller, Jr. and Paul M. Nation
(Exhibit 10.10) (1)*
10.3 Stockholders Agreement among the Company and its stockholders
dated as of January 16, 1996 (Exhibit 10.3) (1)
10.4 Waiver and First Amendment to Stockholders Agreement dated as of
July 24, 1996 (Exhibit 10.4) (1)
10.5 Second Amendment to Stockholders Agreement dated as of October 18,
1996 (Exhibit 10.17) (1)
10.6 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.6) (2)*
10.7 Value Appreciation and Incentive Plan A (Exhibit 10.8) (1)*
10.8 Value Appreciation and Incentive Plan B (Exhibit 10.9) (1)*
10.9 First Amendment to Value Appreciation and Incentive Plan A
(Exhibit 10.15) (1)*
10.10 First Amendment to Value Appreciation and Incentive Plan B
(Exhibit 10.16) (1)*
10.11 Supplemental Savings Plan (Exhibit 10.12) (1)*
10.12 Loan Agreement dated September 25, 1997 (Exhibit 10.1) (5)
10.13 Deferred Fee Agreement (Exhibit 10.14) (1)
10.14 Form of Support Agreement by and between National-Oilwell, Inc.
and Dreco Energy Services Ltd. (Annex F) (4)
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial Data Schedule
</TABLE>
<PAGE> 42
- -------------------
* Compensatory plan or arrangement for management or others
(1) Filed as an Exhibit to Registration Statement No. 333-11051 on
Form S-1, as amended, initially filed on August 29, 1996
(2) Filed as an Exhibit to the National-Oilwell, Inc. Proxy Statement
for the Annual Meeting of Stockholders on May 14, 1997, filed on
April 14, 1997
(3) Filed as an Exhibit to the National-Oilwell, Inc. Form 8-K filed
on May 21, 1997
(4) Filed as an Annex to the Joint Proxy Statement/Prospectus in Post
Effective Amendment No. 1 to Registration Statement No. 333-32191
on Form S-4 filed on August 21, 1997.
(5) Filed as an Exhibit to the National-Oilwell, Inc. Quarterly Report
on Form 10-Q filed on November 7, 1997.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
National Oilwell (U.K.) Limited
National-Oilwell Canada Ltd.
National-Oilwell Pty Ltd.
National-Oilwell Pte. Ltd.
National-Oilwell International, Inc.
National-Oilwell de Venezuela
National-Oilwell, L.P.
Dreco Energy Services, Ltd.
Dreco Inc.
Dreco International Holdings Ltd.
Dreco Limited (U.K.)
Vector Oil Tool Ltd.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of National-Oilwell, Inc. and in the related Prospectus of our report
dated February 5, 1998 with respect to the consolidated financial statements of
National-Oilwell, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1997.
We also consent to the incorporation by reference in the following Registration
Statements of National-Oilwell, Inc. and in the related Prospectus of our report
dated January 31, 1996 with respect to the consolidated financial statements of
National-Oilwell, a general partnership, and subsidiaries (the predecessor) for
the year ended December 31, 1995 incorporated by reference in this Annual
Report (Form 10-K) for the year ended December 31, 1997.
Form Description
- ---- -----------
S-8 Stock Award and Long Term Incentive Plan, Value Appreciation and
Incentive Plan A and Value Appreciation and Incentive Plan B
(No. 333-15859)
S-8 National-Oilwell Retirement and Thrift Plan (No. 333-46459)
S-8 Post Effective Amendment No. 3 to the Registration Statement on Form
S-4 filed on Form S-8 pertaining to the Dreco Energy Services Ltd.
Amended and Restated 1989 Employee Incentive Stock Option Plan, as
amended, and Employment and Compensation Arrangements Pursuant to
Private Stock Option Agreements (No. 333-32191)
S-3 Registration of 800,000 shares of common stock (No. 333-43615)
S-3 Post Effective Amendment No. 4 to Form S-4 filed on Form S-3
(No. 333-32191)
ERNST & YOUNG LLP
Houston, Texas
March 10, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated November 1, 1996, except as to Note 1
which is as of September 25, 1997, with respect to the consolidated financial
statements of National-Oilwell, Inc. for the year ended August 31, 1995 and the
three months ended November 30, 1995 incorporated by reference in its Current
Report (Form 10-K) dated March 16, 1998, filed with the Securities and Exchange
Commission.
We also consent to the use of our report dated October 21, 1997 with respect to
the consolidated financial statements of Dreco Energy Services Ltd. for the
twelve months ended November 30, 1996 included in the Current Report
(Form 10-K) of National-Oilwell, Inc. dated March 16, 1998 filed with the
Securities and Exchange Commission.
Coopers & Lybrand
Chartered Accountants
Edmonton, Alberta
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,824
<SECURITIES> 0
<RECEIVABLES> 228,047
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0
0
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</TABLE>
