<PAGE> 1
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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475815
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 SAN FELIPE
HOUSTON, TEXAS
77056
----------------------------------------------------
(Address of principal executive offices)
(713) 960-5100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of November 11, 1998, 52,996,785 common shares were outstanding, assuming the
exchange on a one-for-one basis of all Exchangeable Shares of Dreco Energy
Services Ltd. into shares of National-Oilwell, Inc. common stock.
================================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,471 $ 19,824
Receivables, less allowance of $4,640 and $4,056 251,194 223,991
Inventories 264,215 203,520
Deferred income taxes 12,497 9,839
Prepaids and other current assets 7,366 6,424
--------- ---------
556,743 463,598
Property, plant and equipment, net 100,125 74,282
Deferred income taxes 3,472 4,919
Goodwill 137,437 24,233
Other assets 6,004 479
--------- ---------
$ 803,781 $ 567,511
========= =========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,276 $ 1,340
Accounts payable 119,829 134,955
Customer prepayments 32,639 37,688
Accrued compensation 11,364 12,957
Other accrued liabilities 45,970 24,521
--------- ---------
211,078 211,461
Long-term debt 223,424 61,565
Deferred income taxes 3,365 2,675
Other liabilities 12,408 14,122
--------- ---------
450,275 289,823
Commitments and contingencies
Stockholders' equity:
Common stock - par value $.01; 52,996,785 shares
and 51,655,782 shares issued and outstanding
at September 30, 1998 and December 31, 1997 531 517
Additional paid-in capital 215,415 207,954
Retained earnings 149,471 76,291
Accumulated other comprehensive income (11,911) (7,074)
--------- ---------
353,506 277,688
--------- ---------
$ 803,781 $ 567,511
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 306,457 $ 264,959 $ 903,152 $ 705,719
Cost of revenues 230,710 209,607 689,805 568,689
--------- --------- --------- ---------
Gross profit 75,747 55,352 213,347 137,030
Selling, general and administrative 37,410 26,650 99,831 73,690
Special charge -- 10,660 -- 10,660
--------- --------- --------- ---------
Operating income 38,337 18,042 113,516 52,680
Other income (expense):
Interest and financial costs (4,688) (1,768) (8,184) (4,803)
Interest income 251 466 750 1,292
Other 105 (25) (434) (194)
--------- --------- --------- ---------
Income before income taxes
and extraordinary loss 34,005 16,715 105,648 48,975
Provision for income taxes 12,426 7,268 39,121 18,764
--------- --------- --------- ---------
Income before extraordinary loss 21,579 9,447 66,527 30,211
Extraordinary loss net of income tax
benefit of $376 -- (623) -- (623)
--------- --------- --------- ---------
Net income $ 21,579 $ 8,824 $ 66,527 $ 29,588
========= ========= ========= =========
Net income per share:
Basic
Net income excluding merger
and extraordinary item $ 0.40 $ 0.34 $ 1.27 $ 0.75
Income before extraordinary item 0.40 0.18 1.27 0.59
Net income 0.40 0.17 1.27 0.58
Diluted
Net income excluding merger
and extraordinary item $ 0.40 $ 0.34 $ 1.26 $ 0.74
Income before extraordinary item 0.40 0.18 1.26 0.58
Net income 0.40 0.17 1.26 0.57
Weighted average shares outstanding:
Basic 53,313 51,289 52,419 50,983
Diluted 53,389 52,148 52,646 51,971
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 66,527 $ 29,588
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 13,889 10,480
Provision for losses on receivables (301) (395)
Provision for deferred income taxes (725) (894)
Gain on sale of assets (2,458) (2,393)
Foreign currency transaction loss (163) 115
Special charge -- 10,660
Extraordinary loss, net of tax benefit -- 623
Changes in operating assets and liabilities, net of acquisitions:
Receivables 3,915 (30,891)
Inventories (31,855) (37,654)
Prepaid and other current assets 2,182 (1,157)
Accounts payable (19,903) 3,779
Other assets/liabilities, net (17,649) 8,710
--------- ---------
Net cash provided (used) by operating activities 13,459 (9,429)
--------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (17,858) (19,462)
Proceeds from sale of assets 5,329 4,081
Businesses acquired, net of cash (157,204) (18,045)
Other -- (1,403)
--------- ---------
Net cash used by investing activities (169,733) (34,829)
--------- ---------
Cash flow from financing activities:
Borrowings on line of credit 53,772 45,095
Principal payments on long-term debt (40,855) (21,359)
Net proceeds from issuance of long-term debt 148,937 --
Proceeds from issuance of common stock -- 37,700
Proceeds from stock options exercised 1,002 235
--------- ---------
Net cash provided (used) by financing activities 162,856 61,671
--------- ---------
Effect of exchange rate losses on cash (4,935) (1,544)
--------- ---------
Increase in cash and equivalents 1,647 15,869
Cash and cash equivalents, beginning of period 19,824 13,611
Change in cash during period to conform year end -- (1,750)
--------- ---------
Cash and cash equivalents, end of period $ 21,471 $ 27,730
========= =========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 3,183 $ 2,629
Income taxes 42,259 12,225
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 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. Information concerning
common stock and per share data has been restated on an equivalent share basis
and assumes the exchange of all Exchangeable Shares.
National-Oilwell has a year end of December 31 and, prior to the Combination,
Dreco had a year end of August 31. The income statement reflects the combined
nine months ended September 30, 1998 compared to the combination of the nine
months ended September 30, 1997 for National-Oilwell with the six months ended
May 31, 1997 and the three months ended September 30, 1997 for Dreco. As a
result of conforming reporting periods subsequent to the Combination to a
calendar quarter basis, the operating results for Dreco for the month of June
1997 were included in the Consolidated Statements of Stockholders' Equity. For
June 1997, Dreco recorded revenues of $13.4 million, net income of $917,000 and
net income per share of $0.04.
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and in accordance with generally accepted accounting
principles. In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal, recurring nature, necessary for a
fair presentation of the results of the interim periods. It is recommended that
these statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997. No significant accounting changes
have occurred during the nine months ended September 30, 1998.
2. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials and supplies $ 26,316 $ 19,970
Work in process 50,911 34,849
Finished goods and purchased products 186,988 148,701
-------- --------
Total $264,215 $203,520
======== ========
</TABLE>
4
<PAGE> 6
3. ACQUISITIONS
On May 29, 1998, the Company acquired all of the capital stock of Phoenix Energy
Products Holdings, Inc. for approximately $115 million in a business combination
which was accounted for under the purchase method of accounting. Phoenix
manufactures and sells multiple product lines that are complementary to those of
the Company. The acquisition of the stock and the repayment of approximately $41
million in Phoenix debt was financed primarily through the issuance of $150
million in unsecured seven year senior notes which have a coupon interest rate
of 6.875% payable on January 1 and July 1.
Assuming the acquisition had occurred at the beginning of each period, pro forma
summary results of operations would have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 936,611 $ 764,944
Income before extraordinary item 65,770 33,614
Net income 65,770 32,991
Net income per share:
Basic
Income before
extraordinary item $ 1.25 $ 0.66
Net income 1.25 0.65
Diluted
Income before
extraordinary item $ 1.25 $ 0.65
Net income 1.25 0.63
</TABLE>
The unaudited pro forma summary is not necessarily indicative of results of
operations that would have occurred had the purchase been made at the beginning
of the year or of future results of operations of the combined businesses.
On July 21, 1998, the Company purchased 100% of the capital stock of
Roberds-Johnson Industries, Inc., a manufacturer of a broad range of drilling
equipment, in exchange for 1.35 million shares of National-Oilwell common stock.
This transaction was accounted for under the pooling of interests method of
accounting. The Company's financial statements prior to July 1, 1998 have not
been restated since the transaction did not have a material effect on the
Company's historical financial statements.
4. 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.
5
<PAGE> 7
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per share:
Net income before extraordinary loss $21,579 $ 9,447 $66,527 $30,211
Denominator:
Denominator for basic earnings per
share--weighted average shares 53,313 51,289 52,419 50,983
Effect of dilutive securities:
Employee stock options 76 859 227 988
------- ------- ------- -------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 53,389 52,148 52,646 51,971
======= ======= ======= =======
Basic earnings per share $ 0.40 $ 0.18 $ 1.27 $ 0.59
======= ======= ======= =======
Diluted earnings per share $ 0.40 $ 0.18 $ 1.26 $ 0.58
======= ======= ======= =======
</TABLE>
5. RECENTLY ISSUED ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130. Total comprehensive income amounted to $18,380
and $8,353 during the third quarter of 1998 and 1997. For the first nine months
of 1998 and 1997, total comprehensive income was $59,711 and $26,863,
respectively.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
6. 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 net of
income taxes, or $0.31 per share) related to various professional fees and
integration costs.
7. EXTRAORDINARY LOSS
The Combination described in Note 1 above required the existing credit facility
to be replaced, resulting in the write-off of $1.0 million ($0.6 million after
tax) in deferred financing costs related to the replaced agreement.
8. SUBSEQUENT EVENT
On November 9, 1998, the Company announced the signing of a definitive agreement
to acquire the business of DOSCO, a major Canadian oilfield distribution
supplier, in exchange for 3.0 million shares of National-Oilwell common stock
and a $10.0 million (Canadian) short-term note. The transaction, which is
subject to a due diligence process and certain regulatory approvals, will be
accounted for under the purchase method of accounting.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is a worldwide leader in the design, manufacture and sale of
machinery and equipment and in the distribution of maintenance, repair and
operating ("MRO") products used in oil and gas drilling and production. The
Company's revenues are directly related to the level of worldwide oil and gas
drilling and production activities and the profitability and cash flow of oil
and gas companies and drilling contractors, which in turn are affected by
current and anticipated prices of oil and gas.
Beginning in late 1997, increased production of oil by certain exporting
countries and lower growth in demand for oil, particularly in Southeast Asia,
caused a significant decline in the price of oil from the $18-20 per barrel
range to the $13-15 per barrel range in the first half of 1998. Lower oil prices
quickly resulted in lower spending in areas where production costs are
relatively high, in particular the shallow and heavy oil areas in West Texas,
Kansas, California and Canada. This in turn affected all segments of the
Company's business. When significant decreases in worldwide oil production were
not evident by mid 1998, we believe the Company's customers anticipated a
continuation of low prices for an extended period and began to reduce their
intended levels of expenditure for offshore and deep land drilling equipment.
The lower level of new orders coupled with $23 million of project cancellations
and deferrals and record shipments resulted in a decline in the Company's
backlog from $260 million at June 30, 1998 to $159 million at September 30,
1998. Reduction in new orders for and backlog of capital equipment will result
in future revenue decreases for the Products and Technology segment.
Until confidence in future oil prices above current levels is restored, new
orders are expected to remain at lower levels than experienced in 1997 and the
first half of 1998 and may become restricted to equipment for specific projects
that require capabilities that are not currently available. Due to long project
lead times and contractual obligations, any cancellations of orders included in
the September 30, 1998 backlog are not expected to be significant.
In contrast to the low oil prices, gas prices have remained at a sufficient
level to encourage continued exploration for and production of gas throughout
1998. Gas prices are expected to increase further if the United States
experiences a more normal demand for gas heating needs in the November 1998 -
April 1999 heating season than experienced in the prior year.
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 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. Approximately 82% of the Exchangeable Shares have
been exchanged for National-Oilwell common stock as of September 30, 1998.
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. Information concerning
common stock and per share data has been restated on an equivalent share basis
and assumes the exchange of all Exchangeable Shares.
On May 29, 1998, the Company acquired all of the capital stock of Phoenix Energy
Products Holdings, Inc. for approximately $115 million in a business combination
which was accounted for under the purchase method of accounting. Phoenix
manufactures and sells multiple product lines that are complementary to those of
the Company. The acquisition of the stock and the repayment of approximately $41
million in Phoenix debt was financed primarily through the issuance of $150
million in unsecured seven year senior notes which have a coupon interest rate
of 6.875% payable on January 1 and July 1.
7
<PAGE> 9
On July 21, 1998, the Company purchased 100% of the capital stock of
Roberds-Johnson Industries, Inc., a manufacturer of a broad range of drilling
equipment, in exchange for 1.35 million shares of National-Oilwell common stock.
This transaction was accounted for under the pooling of interests method of
accounting. The Company's financial statements prior to July 1, 1998 have not
been restated since the transaction did not have a material effect on the
Company's historical financial statements.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
Revenues ------- ------- ------- -------
<S> <C> <C> <C> <C>
Products and Technology $ 197.7 $ 102.3 $ 505.9 $ 248.0
Downhole Products 13.4 18.1 48.9 48.6
Distribution Services 115.3 162.4 404.7 456.8
Eliminations (19.9) (17.8) (56.3) (47.7)
------- ------- ------- -------
Total $ 306.5 $ 265.0 $ 903.2 $ 705.7
======= ======= ======= =======
Operating Income
Products and Technology $ 35.2 $ 15.0 $ 92.7 $ 31.7
Downhole Products 2.9 7.7 14.7 18.5
Distribution Services 2.1 8.1 11.1 19.5
Corporate (1.9) (2.1) (5.0) (6.3)
------- ------- ------- -------
38.3 28.7 113.5 63.4
Special Charge -- 10.7 -- 10.7
Total $ 38.3 $ 18.0 $ 113.5 $ 52.7
======= ======= ======= =======
</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 the Company's and other
manufacturers' equipment. As noted above, continued low prices for oil are
expected to have a negative impact on future results.
Revenues for the Products and Technology segment increased by $95.4 million in
the third quarter of 1998 as compared to the same quarter in 1997 due to
increased sales of major capital equipment and drilling spares. Specifically,
the sale of complete rig packages, mud pumps, drawworks and SCR equipment were
substantially greater than the prior 1997 quarter. Revenues generated by 1998
acquisitions totaled approximately $37 million during the third quarter of 1998.
Operating income increased by $20.2 million in the third quarter compared to the
same quarter in 1997 due principally to the increased sales volume and higher
margins from manufacturing and operating cost efficiencies resulting from the
higher volumes.
8
<PAGE> 10
Products and Technology revenues increased $257.9 million in the first nine
months of 1998 as compared to 1997 due primarily to the increased demand for new
capital equipment and the inclusion of approximately $43.0 million of revenues
generated by acquisitions. Operating income increased by $61.0 million in the
first nine months of 1998 compared to the same period of 1997 due to the higher
activity levels.
Backlog of the Products and Technology capital products was $159 million at
September 30, 1998 compared to $271 million at December 31, 1997 and $240
million at September 30, 1997. Substantially all of the current backlog is
expected to be shipped by June 30, 1999.
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.
Downhole Products revenues decreased by $4.7 million (26%) in the third quarter
of 1998 when compared to the same period in 1997, due to lower rental of tools
and lower motor sales, particularly in Canada. Operating income decreased $4.8
million in the third quarter of 1998 compared to the same quarter in 1997. This
decrease in operating income was a result of reduced margins due to the volume
reduction and an increase in overhead spending caused by the addition of two
minor acquisitions.
Revenues during the first nine months of 1998 were at the same level as the
comparable 1997 period. However, a significant movement in product mix from
motor sales and rentals unfavorably impacted margins. Operating income decreased
$3.8 million during the first nine months of 1998 compared to the same period in
1997, attributable primarily to the margin decline, lower lost-in-hole revenues
and higher depreciation expense.
Distribution Services
Distribution Services revenues result primarily from the sale of MRO products
from the Company'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 the Company's Products and Technology
segment.
Distribution Services revenues during the third quarter of 1998 fell short of
the comparable 1997 period by $47.1 million. This 29% decrease reflects the
reduced demand for tubular and MRO products precipitated by lower oil prices.
North American revenues were off approximately 30%, with tubular revenues
roughly half of the level achieved in the third quarter of 1997. Operating
income in the third quarter of 1998 was approximately $6 million below the third
quarter of 1997. A $7.7 million reduction in gross margin due to the decline in
revenues was partially offset by $1.5 million in reduced operating expenses.
Revenues for the Distribution Services segment fell $52.1 million in the first
nine months of 1998 when compared to the prior year, reflecting the significant
decrease in oil prices between the periods. Operating income was $8.4 million
lower in the first nine months of 1998 when compared to 1997. A reduction in
gross margin of $9.1 million coupled with a decrease in operating expenses of
$0.7 million contributed to this shortfall in operating income.
9
<PAGE> 11
Corporate
Corporate costs during the third quarter of 1998 and the first nine months of
1998 were $0.2 million and $1.3 million lower than the prior year primarily due
to elimination of duplicate corporate costs that existed prior to the
Combination.
Interest Expense
Interest expense increased during the three months and nine months ended
September 30, 1998 due to the incurrence of debt to finance the Phoenix
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $345 million, an
increase of $94 million from December 31, 1997. Acquisitions completed during
the first nine months of 1998 accounted for $48 million of this working capital
increase. An inventory build-up of $42 million in the Products and Technology
segment, primarily to support completion of orders in backlog, accounted for
virtually all of the remaining increase.
Total capital expenditures were $17.9 million during the first nine months of
1998. Enhancements to information and inventory control systems represent a
large portion of these capital expenditures. The Company believes it has
sufficient existing manufacturing capacity to meet currently anticipated demand
for its products and services.
In June 1998, the Company sold $150 million in unsecured seven year senior notes
to raise cash for the purchase of Phoenix. The notes have a coupon interest rate
of 6.875% payable on January 1 and July 1.
The Company has a five-year unsecured $125 million revolving credit facility
(the "Credit Facility") of which $35 million is available at September 30, 1998
for acquisitions and general corporate purposes. The Credit Facility provides
for interest at prime or LIBOR plus 0.625% (8.25% and 6.3% at September 30,
1998), subject to adjustment based on the Company's Capitalization Ratio, as
defined. The Credit Facility contains financial covenants and ratios regarding
minimum tangible net worth, maximum debt to capital and minimum interest
coverage.
The Company believes that cash generated from operations and amounts available
under the Credit Facility will be sufficient to fund operations, working capital
needs, capital expenditure requirements and financing obligations.
The Company intends to pursue acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. The Company expects to fund future cash acquisitions
primarily with cash flow from operations and borrowings, including the
unborrowed portion of the Credit Facility or new debt issuances. There can be no
assurance that additional financing for acquisitions will be available at terms
acceptable to the Company.
SUBSEQUENT EVENT
On November 9, 1998, the Company announced the signing of a definitive agreement
to acquire the business of DOSCO, a major Canadian oilfield distribution
supplier, in exchange for 3.0 million shares of National-Oilwell common stock
and a $10.0 million (Canadian) short-term note. The transaction, which is
subject to a due diligence process and certain regulatory approvals, will be
accounted for under the purchase method of accounting.
10
<PAGE> 12
YEAR 2000
The year 2000 issue is the result of computer programs having been written using
two digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
In early 1998, the Company's Distribution Services segment decided to upgrade
its main business system with SAP R/3 ("SAP"), a Year 2000-ready program. This
system installation is expected to be complete in the third quarter of 1999. In
addition, the Company continues to identify, evaluate and implement
modifications to its business systems in order to achieve year 2000 date
conversion compliance. The Company currently estimates that it will incur costs
of approximately $500,000 to complete its assessment of the problem. The total
cost of the year 2000 readiness is dependent upon this assessment and has not
yet been determined although the Company currently estimates that it may be in
the range of $1.0 to $3.0 million, excluding the cost of upgrading to SAP. This
review covers internal computer systems and process control systems, as well as
embedded systems in products delivered and purchased in the supply chain. In
addition, the Company has initiated formal communication with its significant
suppliers, customers and business partners to determine the extent to which the
Company is vulnerable to these third parties' failure to remedy their own Year
2000 issues. Third party vendors of hardware and packaged software have also
been contacted about their products' compliance status. While the ability of
third parties with whom the Company transacts business to address adequately
their year 2000 issue is outside the Company's control, the Company will
evaluate the need to change product and services sources as necessary.
Management believes that with installation of new systems, conversion to new
software and modifications to existing software, the year 2000 issue will pose
no significant operational problems for the Company. The Company expects to
complete all new installations, conversions and necessary systems modifications
and conversions by September 30, 1999. To date, the Company has not identified
any information technology assets under the control of the Company that present
a material risk of not being year 2000 ready or for which a suitable alternative
cannot be implemented or is not being implemented. Accordingly, the Company does
not have a contingency plan with respect to the year 2000 issue if all systems
upgrades are delayed beyond the end of 1999. There can be no assurance, however,
that the Company will be able to install and maintain year 2000 compliant
software and should this occur the Company could face significant operational
difficulties.
The costs of the project and the dates on which the Company believes it will
complete its Year 2000 project are based on management's best estimates. These
estimates were derived using numerous assumptions of future events, including
continued availability of resources, third party's Year 2000 status and plans,
and other factors. However, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel, the ability to identify and
correct all Year 2000 impacted areas, timely and effective action by third
parties, the ability to implement interfaces between Year 2000-ready systems and
those systems not being replaced, and other similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 issues (partially attributable to
the interconnection of global businesses), the Company cannot confidently
predict its ability to resolve appropriately all Year 2000 issues that may
affect its operations and business or expose it to third-party liability.
11
<PAGE> 13
FORWARD-LOOKING STATEMENTS
This document, other than historical financial information, contains
forward-looking statements that involve risks and uncertainties. Such statements
relate to the Company's sales of capital equipment, backlog, capacity, liquidity
and capital resources, plans for acquisitions and any related financings and the
impact of Year 2000. Readers are referred to documents filed by the Company with
the Securities and Exchange Commission which identify significant risk factors
which could cause actual results to differ from those contained in the
forward-looking statements, including "Risk Factors" at Item 1 of the Annual
Report on Form 10-K. Given these uncertainties, current or prospective investors
are cautioned not to place undue reliance on any such forward-looking
statements. The Company disclaims any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Financial Statements of Businesses Acquired and Proforma Financial
Information on Form 8-K/A filed August 17, 1998
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998 /s/ Steven W. Krablin
----------------------- -------------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
12
<PAGE> 14
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,471
<SECURITIES> 0
<RECEIVABLES> 255,834
<ALLOWANCES> 4,640
<INVENTORY> 264,215
<CURRENT-ASSETS> 556,743
<PP&E> 155,708
<DEPRECIATION> 55,583
<TOTAL-ASSETS> 803,781
<CURRENT-LIABILITIES> 211,078
<BONDS> 223,424
0
0
<COMMON> 531
<OTHER-SE> 352,975
<TOTAL-LIABILITY-AND-EQUITY> 803,781
<SALES> 903,152
<TOTAL-REVENUES> 903,152
<CGS> 689,805
<TOTAL-COSTS> 689,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (301)
<INTEREST-EXPENSE> (8,184)
<INCOME-PRETAX> 105,648
<INCOME-TAX> 39,121
<INCOME-CONTINUING> 66,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,527
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.26
</TABLE>
