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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, 2000 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 (IRS Employer
of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE
4TH FLOOR
HOUSTON, TEXAS
77042-4200
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(Address of principal executive offices)
(713) 346-7500
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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
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(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. [ ]
As of February 22, 2001, 80,610,233 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 7,229,833 shares beneficially owned by
directors and executive officers, the aggregate market value of the common
shares of National-Oilwell, Inc. held by non-affiliates was approximately $3
billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement in connection with the 2001 Annual Meeting of
Stockholders are incorporated in Part III of this report.
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ITEM 1. BUSINESS
GENERAL
National Oilwell is a worldwide leader in the design, manufacture and sale of
comprehensive systems and components used in oil and gas drilling and
production, as well as in providing supply chain integration services to the
upstream oil and gas industry.
National Oilwell manufactures and assembles drilling machinery, including
drawworks, mud pumps and top drives, which are the major mechanical components
of drilling rigs, as well as masts, derricks and substructures. Many of these
components are designed specifically for more demanding applications, which
include offshore, extended reach and deep land drilling. We also provide
electrical power systems, computer control systems and automation systems for
drilling rigs. Our systems, including the Cyberbase(TM) and automated pipe
handling systems, are used in many of the industry's most technologically
demanding applications. In addition, we provide engineering and fabrication
services to integrate our drilling products and deliver complete land drilling
and workover rigs as well as drilling modules for mobile offshore drilling rigs
or offshore drilling platforms.
Our Products and Technology segment also designs and manufactures drilling
motors and specialized downhole tools for rent and sale. Drilling motors are
essential components of systems for horizontal, directional, extended reach and
performance drilling. Downhole tools include fishing tools, drilling jars, shock
tools and other specialized products.
Our Distribution Services segment offers comprehensive supply chain integration
services to the drilling and production segments. Our network of service centers
located in the United States and Canada and near other major drilling and
production activity worldwide use state of the art information technology
platforms to provide procurement, inventory management and logistics services.
These service centers stock and sell a variety of expendable items for oilfield
applications and spare parts for equipment manufactured by National Oilwell.
BUSINESS STRATEGY
National Oilwell's business strategy is to enhance its market positions and
operating performance by:
Leveraging our Installed Base of Drilling Machinery and Equipment
We believe our market position and comprehensive product offering present
substantial opportunities to capture a significant portion of expenditures for
the construction of new drilling rigs and equipment as well as the upgrade and
refurbishment of existing drilling rigs and equipment. Over the next few years,
the advanced age of the existing fleet of drilling rigs, coupled with drilling
activity involving greater depths and extended reach, is expected to generate
demand for new equipment. National Oilwell's automation and control systems
offer the potential to improve the performance of new and existing drilling
rigs. The large installed base of our equipment also provides recurring demand
for spare parts and expendable products necessary for proper and efficient
operation.
Expanding the Downhole Products Business
We believe economic opportunities for directional, horizontal, extended reach
and other value-added drilling applications will increase, providing an
opportunity for growth in the rental and sale of high-performance drilling
motors and downhole tools.
Building on Information Technology and Process Improvement Strategy
National Oilwell has developed an integrated information technology and process
improvement strategy to enhance procurement, inventory management and logistics
activities. As a result of the need to improve industry efficiency, oil and gas
companies and drilling contractors are frequently seeking alliances with
suppliers, manufacturers and
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service providers, or are forward integrating suppliers operations to achieve
cost and capital improvements. We believe we are well positioned to provide
these services as a result of our:
- large and geographically diverse network of distribution service
centers in major oil and gas producing areas;
- strong relationship with a large community of industry suppliers;
- knowledge of customers' procurement processes, suppliers' capabilities
and products' performance; and
- information systems that offer customers and suppliers enhanced
e-commerce capabilities.
In addition, the integration of our distribution expertise, extensive network
and growing base of customer alliances provides an increased opportunity for
cost-effective marketing of our manufactured parts and equipment.
Continuing to Make Acquisitions That Enhance our Product Line
We believe 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 integrated
product offerings. From 1997 through January 2001, National Oilwell has made a
total of nineteen acquisitions and plans to continue to participate in this
trend.
OPERATIONS
Products and Technology
National Oilwell designs, manufactures and sells drilling systems and 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, top drives, SCR houses, solids control equipment, traveling equipment and
rotary tables. These components are essential to the pumping of fluids and
hoisting, supporting and rotating of 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 often replaced during
the upgrade and refurbishment of existing rigs.
Masts, derricks and substructures are designed and manufactured for use on land
rigs and on fixed and mobile offshore platforms, and are suitable for drilling
applications to depths of up to 30,000 feet or more. Other products include
pedestal cranes, reciprocating and centrifugal pumps and fluid end expendables
for all major manufacturers' pumps. Our business includes the sale of
replacement parts for our own manufactured machinery and equipment.
We also design and produce control and data acquisition systems for drilling
related operations and automated and remotely controlled machinery for drilling
rigs. Products include the Cyberbase(TM) operator system which incorporates
computer software, keypads and joysticks rather than traditional gauges, lights
and switches. The Cyberbase(TM) system forms the basis for the state-of-the-art
driller's cabin. Another product is the automated pipe handling system that
provides an efficient and cost effective method of joining lengths of drill pipe
or casing.
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 drilling and well servicing
rigs designed for the Arctic, 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. We also design and produce
fully integrated drilling solutions for the topside of offshore rigs.
National Oilwell designs and manufactures drilling motors, drilling jars and
specialized drilling tools for rent and sale. We also design and manufacture a
complete line of fishing tools used to remove objects stuck in the wellbore.
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Distribution Services
National Oilwell provides distribution services through its network of
approximately 130 distribution service centers. These distribution service
centers stock and sell a variety of expendable items for oilfield applications
and spare parts for our proprietary 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, our
distribution services have expanded to offer outsourcing and alliance
arrangements that include comprehensive procurement, inventory management and
logistics support. In addition, we believe we have a competitive advantage in
the distribution services business by distributing market-leading products
manufactured by us.
The supplies and equipment stocked by our 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 list price for each product or
product category.
Strategic alliances are significant to the Distribution Services business and
differ from standard agreements for supplies and equipment in that we become the
customer's primary supplier of those items. In certain cases, we assume
responsibility for procurement, inventory management and product delivery for
the customer, occasionally by working directly out of the customer's facilities.
We believe e-commerce brings a significant advantage to larger companies that
are technologically proficient. During the last three years, over $18 million
has been spent by us to improve our information technology systems. Our
e-commerce strategy incorporates interfacing directly with customers' systems,
trading exchanges and development of our own system that will leverage our
position in the upstream market. We believe we have an advantage in this effort
due to our investment in technology, geographic size, knowledge of the industry
and customers, existing relationships with vendors and existing means of product
delivery.
Marketing
Substantially all of our capital equipment and spare parts sales, and a large
portion of our smaller pumps and parts sales, are made through our direct sales
force and distribution service centers. Sales to foreign state-owned oil
companies are typically made in conjunction with agent or representative
arrangements. Our downhole products are generally rented in Canada and Venezuela
and sold worldwide through our own sales force and through commissioned
representatives. Distribution sales are made through our network of distribution
service centers. Customers for our 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 our
revenues and earnings can be affected by price changes, introduction of new
technologies and products and improved availability and delivery. We compete
with a large number of companies, none of which are dominant.
Manufacturing and Backlog
National Oilwell has manufacturing facilities located in the United States,
Canada and Norway. The manufacture of parts or purchase of components is
sometimes outsourced to qualified subcontractors. The manufacturing operations
require a variety of components, parts and raw materials which we purchase from
multiple commercial sources. We have not experienced and do not expect any
significant delays in obtaining deliveries of materials.
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Sales of products are made on the basis of written orders and oral commitments.
Our backlog for equipment at recent year ends has been:
December 31, 2000 $282 million
December 31, 1999 114 million
December 31, 1998 83 million
December 31, 1997 291 million
Distribution Suppliers
National Oilwell obtains products sold by its Distribution Services business
from a number of suppliers, including our own Products and Technology segment.
No single supplier of products is significant to our operations. We have not
experienced and do not expect a shortage of products that we sell.
Engineering
National Oilwell maintains a staff of engineers and technicians to:
- design and test new products, components and systems for use in drilling
and pumping applications;
- enhance the capabilities of existing products; and
- assist our sales organization and customers with special projects.
Our product engineering efforts focus on developing technology to improve the
economics and safety of drilling and pumping processes, and to emphasize
technology and complete drilling solutions.
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,
we do not consider any single patent to be of a critical or essential nature. In
general, our business has historically relied upon technological capabilities,
quality products and application of expertise rather than patented technology.
Employees
As of December 31, 2000, we had a total of 5,000 employees, 2,868 of whom were
salaried and 2,132 of whom were paid on an hourly basis. Of this workforce,
1,014 employees are employed in Canada and 481 are employed by our other foreign
subsidiaries.
RISK FACTORS
Before purchasing any shares of National Oilwell common stock, you should
consider carefully the following factors, in addition to the other information
contained or incorporated by reference herein.
National Oilwell Depends on the Oil and Gas Industry
National Oilwell is dependent upon the oil and gas industry and its willingness
to explore for and produce oil and gas. The industry's willingness to explore
and produce depends upon the prevailing view of future product prices. Many
factors affect the supply and demand for oil and gas and therefore influence
product prices, including:
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- level of production from known reserves;
- cost of producing oil and gas;
- level of drilling activity;
- worldwide economic activity;
- national government political requirements;
- development of alternate energy sources; and
- environmental regulation.
If there is a significant reduction in demand for drilling services, in cash
flows of drilling contractors or production companies or in drilling or well
servicing rig utilization rates, then demand for our products will drop.
Oil and Gas Prices Are Volatile
Oil and gas prices have been volatile over the last ten years, ranging from
$10-$40 per barrel. Oil prices were low in 1998, generally ranging from $11 to
$16 per barrel. In 1999, oil prices recovered to more normal historical levels,
and were generally in the $25-$30 per barrel range during 2000. Spot gas prices
have also been volatile over the last ten years, ranging from less than $1.00
per mcf of gas to above $10.00. Gas prices were moderate in 1998 and 1999,
generally ranging from $1.80 to $2.50 per mcf. Gas prices strengthened
throughout 2000, generally ranging from $4-$8 per mcf.
These price changes have caused many 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 we
manufacture. In the second half of 1998, lower oil prices slowed production and
new drilling, particularly in areas where the per barrel cost of production is
high. This slowdown quickly affected our Distribution Services segment and
subsequently negatively impacted our Products and Technology segment. We cannot
predict future oil and gas prices or the effect prices will have on exploration
and production levels.
National Oilwell's Industry Is Highly Competitive
The oilfield products and services industry is highly competitive. The following
competitive actions can each affect our revenues and earnings:
- price changes;
- new product and technology introductions; and
- improvements in availability and delivery.
We compete with many companies. Some of these companies may possess greater
financial resources or offer certain products that we do not have.
National Oilwell Faces Potential Product Liability and Warranty Claims
Customers use some of our products in potentially hazardous drilling, completion
and production applications that can cause:
- injury or loss of life;
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- damage to property, equipment or the environment; and
- suspension of operations.
We maintain amounts and types of insurance coverage that we believe are
consistent with normal industry practice. We cannot guarantee that insurance
will be adequate to cover all liabilities we may incur. We also may not be able
to maintain insurance in the future at levels we believe are necessary and at
rates we consider reasonable.
National Oilwell may be named as a defendant in product liability or other
lawsuits asserting potentially large claims if an accident occurs at a location
where our equipment and services have been used. We are currently party to
various legal and administrative proceedings. We cannot predict the outcome of
these proceedings, nor can we guarantee any negative outcomes will not be
significant to us.
Instability of Foreign Markets Could Have a Negative Impact on the Revenues of
National Oilwell
Some of our revenues depend upon customers in the Middle East, Africa, Southeast
Asia, South America and other international markets. These revenues are subject
to risks of instability of foreign economies and governments. Laws and
regulations limiting exports to particular countries can affect our sales and
sometimes export laws and regulations of one jurisdiction contradict those of
another.
National Oilwell is exposed to the risks of changes in exchange rates between
the U.S. dollar and foreign currencies. We do not currently engage in or plan to
engage in any significant hedging or currency trading transactions designed to
compensate for adverse currency fluctuations.
National Oilwell May Not Be Able to Successfully Manage Its Growth
National Oilwell acquired three companies in 1997, five in 1998, three in 1999,
five in 2000 and two in January 2001. We intend to acquire additional companies
in the future, whenever feasible. We cannot predict whether suitable acquisition
candidates will be available on reasonable terms or if we will have access to
adequate funds to complete any desired acquisition. Once acquired, we cannot
guarantee that we will successfully integrate the operations of the acquired
companies. Combining organizations could interrupt the activities of some or all
of our businesses and have a negative impact on operations.
National Oilwell Has Debt
In 1998, National Oilwell issued 6 7/8% senior notes due July 1, 2005. As a
result of this issuance, we became more leveraged. It is also possible that we
will incur additional debt in the future in connection with acquisitions,
operations or other matters. As of December 31, 2000, we had a total of $222.5
million of debt and a total of $767.2 million of stockholders' equity. Our
leverage requires us to use some of our cash flow from operations for payment of
interest on debt. Our leverage may also make it more difficult to obtain
additional financing in the future. Further, our leverage could make us more
vulnerable to economic downturns and competitive pressures.
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ITEM 2. PROPERTIES
National Oilwell owned or leased approximately 200 facilities worldwide as of
December 31, 2000, including the following principal manufacturing and
administrative facilities:
APPROXIMATE
BUILDING SPACE
LOCATION (SQUARE FOOT) DESCRIPTION STATUS
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Pampa, Texas 548,000 Manufactures drilling machinery and equipment Owned
Houston, Texas 540,000 Manufactures downhole tools and mobile rigs Owned
Houston, Texas 260,000 Manufactures and services drilling machinery and Leased
equipment
Sugarland, Texas 190,000 Manufactures braking systems and generators Owned
Galena Park, Texas 188,000 Fabricates drilling components and rigs Owned
Houston, Texas 178,000 Manufactures SCR systems Owned
Edmonton, Alberta, Canada 162,000 Manufactures downhole tools Owned
Tulsa, Oklahoma 140,000 Manufactures pumps and expendable parts Owned
McAlester, Oklahoma 117,000 Manufactures pumps and expendable parts Owned
Houston, Texas 100,000 Administrative offices Leased
Stavanger, Norway 87,000 Engineering and manufacturing of drilling components Leased
and systems
Victoria, Texas 71,000 Manufactures and services mobile rigs Owned
Marble Falls, Texas 65,000 Manufactures drilling expendable parts Owned
Nisku, Alberta, Canada 59,000 Manufactures drilling machinery and equipment Owned
Stavanger, Norway 62,000 Engineering and manufacturing of drilling components Owned
and systems
Edmonton, Alberta, Canada 57,000 Manufactures drilling machinery and equipment Owned
We own or lease 42 satellite repair and manufacturing facilities that refurbish
and manufacture new equipment and parts and approximately 130 distribution
service centers worldwide. We believe the capacity of our facilities is adequate
to meet demand currently anticipated for 2001.
ITEM 3. LEGAL PROCEEDINGS
National Oilwell 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, we
believe any ultimate liability resulting from the outcome of such proceedings
will not have a material adverse effect on our 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, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
National Oilwell common stock is listed on the New York Stock
Exchange (ticker symbol: NOI). The following table sets forth the stock price
range during the past three years:
2000 1999 1998
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Quarter High Low High Low High Low
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First $31.38 $14.25 $13.69 $ 8.50 $34.00 $23.88
Second 32.89 22.94 14.13 10.00 39.75 25.94
Third 37.50 27.25 18.50 13.00 29.13 7.75
Fourth 39.19 28.25 16.50 12.00 17.69 8.81
As of February 22, 2001, there were 593 holders of record of National Oilwell
common stock. Many stockholders choose to own shares through brokerage accounts
and other intermediaries rather than as holders of record. National Oilwell has
never paid cash dividends, and none are anticipated during 2001.
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ITEM 6. SELECTED FINANCIAL DATA
Data for all periods shown below is restated to combine IRI International,
Dupre' and Dreco results pursuant to pooling-of-interests accounting. As a
result of the differing year-ends of National Oilwell and Dreco prior to the
combination of the companies, the balance sheets 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.
YEAR ENDED DECEMBER 31,
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2000 1999 1998 1997 (1) 1996
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(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues $ 1,149,920 $ 839,648 $ 1,449,248 $ 1,282,772 $ 898,106
Operating income (loss) (2) 48,456 1,325 139,815 114,405 42,357
Income (loss) before taxes and extraordinary loss (3) 27,037 (14,859) 125,021 101,466 30,730
Income (loss) before extraordinary loss (3) 13,136 (9,385) 81,336 67,362 23,899
Net income (loss) 13,136 (9,385) 81,336 65,227 19,899
Income (loss) per share before extraordinary loss (3)
Basic 0.17 (0.13) 1.19 1.01 0.43
Diluted 0.16 (0.13) 1.19 1.00 0.36
Net income (loss) per share
Basic 0.17 (0.13) 1.19 0.98 0.43
Diluted 0.16 (0.13) 1.19 0.97 0.36
OTHER DATA:
Depreciation and amortization 35,034 25,541 20,518 21,194 9,317
Capital expenditures 24,561 17,547 39,246 40,538 17,697
BALANCE SHEET DATA:
Working capital 480,321 452,015 529,937 417,731 210,266
Total assets 1,278,894 1,005,715 1,091,028 844,674 435,194
Long-term debt, less current maturities 222,477 196,053 222,209 61,813 39,302
Stockholders' equity 767,206 596,375 603,568 482,614 198,002
(1) 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 have been
included directly in stockholders' equity. Dreco's revenues and net income
were $13.4 million and $0.9 million for the month.
(2) In connection with the IRI International Corporation merger in 2000, we
recorded charges of $14,500,000 related to direct merger costs, personnel
reductions, and facility closures and inventory write-offs of $15,684,000
due to product line rationalization. A credit of $418,000 was also recorded
in 2000 related to previous charges. In 1999, we recorded a $1,779,000
charge related to personnel reductions resulting from consolidating our
manufacturing operations. In 1998, a $17,023,000 charge was recorded
related to personnel reductions and facility closures and a $5,600,000
charge related to the write-down of certain tubular inventories. In 1997,
we recorded a $10,660,000 charge related to merger expenses incurred in
connection with the combination with Dreco. In 1996, a $16,611,000 charge
was recorded 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 our common stock.
(3) National Oilwell recorded extraordinary losses in 1997 of $2,135,000 and
1996 of $4,000,000, net of income tax benefits, due to the write-offs of
deferred debt issuance costs.
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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
drilling systems, drilling equipment and downhole products as well as the
distribution to the oil and gas industry of maintenance, repair and operating
products. Our revenues are directly related to the level of worldwide oil and
gas drilling and production activities and the profitability and cash flow of
oil and gas companies and drilling contractors, which in turn are affected by
current and anticipated prices of oil and gas. Beginning in late 1997, oil
prices declined to less than $15 per barrel 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. The resulting lower demand
for products and services had an increasingly negative effect on the
Distribution Services business throughout 1998 and on both segments in 1999. Oil
prices have recovered since late July 1999 to a range of $25-$30 per barrel. Gas
prices have also strengthened significantly. We expect revenues to increase if
our customers gain confidence in sustained commodity prices at this level and as
their cash flows from operations improve, allowing them to purchase products
sold by us. See "Risk Factors".
National Oilwell conducts its operations through the following segments:
Products and Technology
The Products and Technology segment designs and manufactures a large line of
proprietary products, including drawworks, mud pumps, top drives, automated pipe
handling, electrical control systems and downhole motors and tools, as well as
complete land drilling and well servicing rigs, and structural components such
as cranes, masts, derricks and substructures for offshore rigs. 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. In addition, the segment provides drilling pump expendable
products for maintenance of National Oilwell's and other manufacturers'
equipment.
Distribution Services
Distribution Services revenues result primarily from the sale of maintenance,
repair and operating supplies ("MRO") from our network of distribution service
centers. These products are purchased from numerous manufacturers and vendors,
including our Products and Technology segment.
RESULTS OF OPERATIONS
Operating results by segment, which have been restated to reflect business
combinations accounted for under the pooling-of-interests method, are as follows
(in millions):
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Products and Technology $ 683.5 $ 460.0 $ 907.1
Distribution Services 521.3 410.3 608.5
Eliminations (54.8) (30.7) (66.4)
-------- -------- --------
Total $1,150.0 $ 839.6 $1,449.2
======== ======== ========
Operating Income:
Products and Technology $ 61.0 $ 23.6 $ 160.0
Distribution Services 12.9 (6.0) 8.9
Corporate (11.3) (14.5) (12.1)
-------- -------- --------
62.6 3.1 156.8
Special Charge 14.1 1.8 17.0
-------- -------- --------
Total $ 48.5 $ 1.3 $ 139.8
======== ======== ========
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Products and Technology
Revenues for the Products and Technology segment increased by $223.5 million (49
%) from 1999 primarily due to increased sales of major capital equipment and
drilling spares of $110 million, expendable pumps and pump parts of $35 million
and downhole tools of $52 million. Operating income in 2000 increased by $37.4
million from the prior year due primarily to this substantial revenue increase.
Revenues from acquisitions completed in 2000 under the purchase method of
accounting accounted for $56 million in incremental revenues and $0.5 million in
operating income over 1999.
Revenues for 1999 decreased by $447.1 million (49%) from 1998 primarily due to
lower demand that resulted from lower oil and gas prices. Sales of all types of
capital equipment, rig packages and drilling spares were $370 million below 1998
levels. Sales of pumps and expendable pump parts were $23 million lower than in
the previous year and downhole tools revenue declined $50 million. Primarily due
to this revenue decline, operating income decreased $136.4 million in 1999
compared to the prior year. Lower margins due to the reduced sales volume was
partially offset with lower operating costs resulting from cost reduction
initiatives begun in late 1998.
Backlog of the Products and Technology capital products was $282 million at
December 31, 2000, $114 million at 1999 and $83 million at December 31, 1998.
Substantially all of the current backlog is expected to be shipped by the end of
2001.
Distribution Services
Distribution Services revenues in 2000 increased $111.0 million from the 1999
level, reflecting the enhanced drilling activity driven primarily by higher,
more stable oil and gas prices. Revenues of maintenance, repair and operating
("MRO") supplies in the United States were 26% greater while Canadian revenues
were 30% higher than the prior year. Operating income of $12.9 million in 2000
reflects an $18.9 million improvement from 1999. The margin increase resulting
from the higher revenues, coupled with the absence of startup costs associated
with the installation of a new operating system, were the primary contributors
to this significant improvement.
Distribution Services revenues in 1999 fell $198.2 million from the 1998 level
due to the depressed market conditions and the mid-year sale of the tubular
product line which generated revenues in 1999 of approximately $24 million. The
margin reduction resulting from the lower revenues was the primary contributor
to the $6.0 million operating loss recorded in 1999.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. A reduction of $3.2 million in 2000 as compared to 1999
reflects the elimination of the IRI corporate operations as a result of the
merger. Costs associated with various e-strategy and e-commerce initiatives
contributed in part to the $2.4 million increase in 1999 over 1998. Corporate
charges in 2001 are expected to approximate $8-10 million due to the elimination
of duplicative costs.
Special Charges
During 2000, the Company recorded a special charge, net of a $0.4 million credit
from previous special charges, of $14.1 million ($11.0 million after tax, or
$0.14 per share) related to the merger with IRI International. Components of the
charge were (in millions):
Direct transaction costs $ 6.6
Severance 6.4
Facility closures 1.5
-----
14.5
Prior year reversal (0.4)
-----
$14.1
-----
11
13
The cash and non-cash elements of the charge approximate $13 million and $1.1
million, respectively. Approximately $11 million of direct transaction and
severance costs had been spent at December 31, 2000. Facility closure costs
consist of lease cancellation costs and impairment of a closed manufacturing
facility that is for sale. The $0.4 million credit results from the settlement
of lease obligations earlier than previously anticipated. All of this charge is
applicable to the Products and Technology business segment.
During 1999, a $1.8 million charge related to additional severance costs
resulting from consolidating our manufacturing operations was recorded.
During 1998, we recorded a special charge of $17.0 million related to
operational changes resulting from the depressed market for the oil and gas
industry. The components of the special charge were asset impairments of $5.4
million, severance costs of $6.2 million and facility closures and exit costs of
$5.4 million.
Interest Expense
Interest expense was greater in 2000 than the prior year due to an average
borrowing rate increase of 0.25 basis points and a higher debt level throughout
the year. Interest expense in 1999 was greater than the prior year due to
carrying a higher debt level for the entire year resulting from the issuance of
the 6 7/8% senior notes in mid 1998.
Income Taxes
National Oilwell is subject to U.S. federal, state and foreign taxes and
recorded a combined tax rate of 51% in 2000, 37% in 1999 and 35% in 1998. The
2000 effective tax rate was impacted by certain transaction costs associated
with the IRI merger and the inclusion of pre-merger IRI capital losses due to
pooling-of-interests accounting that may not be deductible. The 1999 effective
tax rate was impacted by the inclusion of the pre-merger operating results of
the Dupre' companies and the termination of its status as an S Corporation.
Excluding the impact of the IRI merger costs and capital losses and Dupre's
pre-merger results, our combined effective tax rate for 2000 was 36%, compared
to 43% in 1999 and 37% in 1998.
We have net operating loss carryforwards in the United States that could reduce
future tax expense by up to $5.0 million. Additional loss carryforwards in
Europe generally would reduce goodwill if realized in the future. Due to the
uncertainty of future utilization, most of the potential benefits described
above have been fully reserved. During 2000, we realized a tax benefit of $0.9
million from its U.S. carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, National Oilwell had working capital of $480.3 million, an
increase of $28.3 million from December 31, 1999. Significant components of our
current assets are accounts receivable and inventories. During 2000, accounts
receivable and inventory increased by $94.8 million and $27.7 million,
respectively. Accounts payable increased $59.6 million during the year. An
increased activity level resulting from the higher sustained energy prices is
the primary driver in all of these changes.
Total capital expenditures were $24.6 million during 2000, $17.5 million in 1999
and $39.2 million in 1998. Additions and enhancements to the downhole rental
tool fleet and information management and inventory control systems represent
the majority of these capital expenditures. Capital expenditures are expected to
approximate $29 million in 2001. We believe we have sufficient existing
manufacturing capacity to meet currently anticipated demand through 2001 for our
products and services.
On September 25, 1997, National Oilwell entered into a five-year unsecured $125
million revolving credit facility. The credit facility is available for
acquisitions and general corporate purposes. The credit facility provides for
interest at prime or LIBOR plus 0.625%, subject to downward adjustment based on
our 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.
We believe cash generated from operations and amounts available under the credit
facility and from other sources of debt will be sufficient to fund operations,
working capital needs, capital expenditure requirements and financing
12
14
obligations. We also believe any significant increase in capital expenditures
caused by any need to increase manufacturing capacity can be funded from
operations or through debt financing.
We intend to pursue additional acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. We expect to fund future cash acquisitions primarily with
cash flow from operations and borrowings, including the unborrowed portion of
the credit facility or new debt issuances, but may also issue additional equity
either directly or in connection with acquisitions. There can be no assurance
that acquisition funds will be available at terms acceptable to us.
Inflation has not had a significant impact on National Oilwell's operating
results or financial condition in recent years.
SUBSEQUENT EVENTS
On January 3, 2001, the assets and business of Integrated Power Systems (IPS)
were acquired for approximately $9 million. IPS manufactures, sells and services
SCR units primarily used on land-based drilling rigs and is a complementary fit
to our existing SCR product line. Goodwill of approximately $4 million was
recorded in conjunction with this purchase.
On January 5, 2001, we completed the acquisition of the stock of Maritime
Hydraulics (Canada) Ltd. for Canadian $25 million (US$ 16.5 million). This
business, which designs, manufactures and sells coiled tubing units and truck
mounted wireline and nitrogen pumping units, was accounted for as a purchase.
Goodwill associated with this transaction was approximately $11 million.
MARKET RISK DISCLOSURE
We are subject to market risk exposure related to changes in interest rates on
our credit facility which is comprised of revolving credit notes in the United
States and Canada. A portion of the borrowings are denominated in Canadian funds
which could expose us to market risk with exchange rate movements, although such
is mitigated by our substantial operations in Canada. These instruments carry
interest at a pre-agreed upon percentage point spread from either the prime
interest rate or LIBOR. Under our credit facility, we may, at our option, fix
the interest rate for certain borrowings based on a spread over LIBOR for 30
days to 6 months. At December 31, 2000, we had $72.5 million outstanding under
our credit facilities. Based on this balance, an immediate change of one percent
in the interest rate would cause a change in interest expense of approximately
$0.7 million on an annual basis. Our objective in maintaining a portion of our
debt in variable rate borrowings is the flexibility obtained regarding early
repayment without penalties and lower overall cost as compared with fixed-rate
borrowings.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. We will adopt the
new Statement effective January 1, 2001. The Statement will require us to
recognize all derivatives on the balance sheet at fair value. We do not
anticipate that the adoption of this Statement will have a significant effect on
our results of operations or financial position.
FORWARD-LOOKING STATEMENTS
Some of the information in this document contains, or has incorporated by
reference, forward-looking statements. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements typically are identified by use of terms
such as "may," "will," "expect," "anticipate," "estimate," and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from those contained in
the forward-looking statements due to a number of factors, including changes in
oil and gas prices, customer demand for our products and worldwide economic
activity. You should also consider carefully the statements under "Risk Factors"
which address additional factors that could cause our actual results to differ
from those set forth in the forward-looking statements. Given these
uncertainties, current or prospective investors are cautioned not to place undue
reliance on any such forward-looking statements. We disclaim any obligation or
intent to update any such factors or forward-looking statement to reflect future
events or developments.
13
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Item 7 above, "Market Risk
Disclosure."
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the definitive Proxy Statement for the
2001 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the definitive Proxy Statement for the
2001 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the definitive Proxy Statement for the
2001 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the definitive Proxy Statement for the
2001 Annual Meeting of Stockholders
.
15
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
a) Financial Statements and Exhibits
1. Financial Statements
The following financial statements are presented in response to Part II,
Item 8:
Page(s) in
This Report
-----------
Consolidated Balance Sheets........................................20
Consolidated Statements of Operations..............................21
Consolidated Statements of Cash Flows..............................22
Consolidated Statements of Stockholders' Equity....................23
Notes to Consolidated Financial Statements.........................24
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
2.1 Combination Agreement, dated as of May 14, 1997, as amended,
between National-Oilwell, Inc. and Dreco Energy Services Ltd.
(Annex B) (3)
2.2 Plan of Arrangement and Exchangeable Share Provisions (Annex E) (3)
2.3 Merger Agreement dated October 10, 1999 by and between
National-Oilwell, Inc. and Hitec ASA (Appendix A) (7)
2.4 Agreement of Merger, dated as of March 15, 2000, between
National-Oilwell, Inc. and IRI International Corporation (Appendix
I) (8)
3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Exhibit 3.1) (5)
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) (3)
10.1 Employment Agreement dated as of January 16, 1996 between Joel V.
Staff and the Company with similar agreements with Jerry N. Gauche
and Steven W. Krablin, and a similar agreement dated as of February
5, 1996 between Merrill A. Miller, Jr. and the Company, and a
similar agreement dated as of March 1, 2000 between Jon Gjedebo and
the Company (Exhibit 10.1) (1)*
10.2 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.6) (2)*
10.3 Supplemental Savings Plan (Exhibit 10.12) (1)*
10.4 Loan Agreement dated September 25, 1997 (Exhibit 10.1) (4)
16
18
10.5 Amendment to Loan Agreement dated as of December 31, 1999 (Exhibit
10.9) (6)
10.6 Form of Support Agreement by and between National-Oilwell, Inc. and
Dreco Energy Services Ltd (Annex F) (3)
10.7 Employment Agreement dated as of April 19, 1999 between Honor
Guiney and the Company. (Exhibit 10.11) (6)*
10.8 Employment Agreement dated as of March 1, 2000 between Jon Gjedebo
and the Company.
10.9 Non-competition Agreement dated as of June 28, 2000 between Hushang
Ansary and the Company.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page hereto)
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2000.
- ----------
* 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 with the Proxy Statement for the 1999 Annual Meeting of
Stockholders, filed on May 12, 1999.
(3) 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.
(4) Filed as an Exhibit to the National-Oilwell, Inc. Quarterly Report on
Form 10-Q filed on November 7, 1997.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed on
August 11, 2000.
(6) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed on
March 16, 2000.
(7) Filed as an appendix to Amendment No. 2 to Registration Statement No.
333-91605 on Form S-4 filed on January 4, 2000.
(8) Filed as an appendix to the Joint Proxy Statement/Prospectus in
Amendment No.1 to Registration Statement No. 333-36644 on Form S-4
filed on May 23, 2000.
17
19
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: FEBRUARY 28, 2001 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 M. GAY MATHER, 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.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JOEL V. STAFF
--------------------------------- CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF FEBRUARY 28, 2001
JOEL V. STAFF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
/S/ STEVEN W. KRABLIN VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
--------------------------------- (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL FEBRUARY 28, 2001
STEVEN W. KRABLIN ACCOUNTING OFFICER)
/S/ HUSHANG ANSARY
--------------------------------- DIRECTOR FEBRUARY 28, 2001
HUSHANG ANSARY
/S/ HOWARD I. BULL
--------------------------------- DIRECTOR FEBRUARY 28, 2001
HOWARD I. BULL
/S/ JAMES C. COMIS III
--------------------------------- DIRECTOR FEBRUARY 28, 2001
JAMES C. COMIS III
/S/ W. MCCOMB DUNWOODY
--------------------------------- DIRECTOR FEBRUARY 28, 2001
W. MCCOMB DUNWOODY
/S/ JON GJEDEBO
--------------------------------- DIRECTOR FEBRUARY 28, 2001
JON GJEDEBO
/S/ BEN A. GUILL
--------------------------------- DIRECTOR FEBRUARY 28, 2001
BEN A. GUILL
/S/ WILLIAM E. MACAULAY
--------------------------------- DIRECTOR FEBRUARY 28, 2001
WILLIAM E. MACAULAY
/S/ FREDERICK W. PHEASEY
--------------------------------- DIRECTOR FEBRUARY 28, 2001
FREDERICK W. PHEASEY
18
20
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. 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 1999 or 1998, the financial statements of IRI
International Corporation, a wholly-owned subsidiary, which statements reflect
total assets of $217,093,000 as of December 31, 1999, and revenues of
$92,190,000 for the year ended December 31, 1999 and revenues of $175,045,000
for the year ended 1998. 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 IRI International Corporation, is based solely upon the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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,
2000 and 1999, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 6, 2001
To the Shareholders and Board of Directors
of IRI International Corporation:
We have audited the accompanying consolidated balance sheet of IRI
International Corporation and Subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31,1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IRI
International Corporation and Subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Houston, Texas
March 8, 2000
19
21
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 42,459 $ 48,091
Marketable securities, at fair value (cost of $13,437 at December 31, 1999) -- 14,686
Receivables, less allowance of $5,885 and $7,246 295,163 200,396
Inventories 375,734 348,024
Deferred income taxes 17,105 10,684
Income taxes receivable -- 12,888
Prepaid and other current assets 12,642 7,776
----------- -----------
Total current assets 743,103 642,545
Property, plant and equipment, net 173,646 154,844
Deferred income taxes 19,919 18,037
Goodwill, net 329,340 177,377
Property held for sale 8,271 7,424
Other assets 4,615 5,488
----------- -----------
$ 1,278,894 $ 1,005,715
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 165,801 106,219
Customer prepayments 19,371 18,776
Accrued compensation 10,996 4,232
Other accrued liabilities 66,614 61,303
----------- -----------
Total current liabilities 262,782 190,530
Long-term debt 222,477 196,053
Deferred income taxes 16,030 12,449
Other liabilities 10,399 10,308
----------- -----------
Total liabilities 511,688 409,340
Commitments and contingencies
Stockholders' equity:
Common stock - par value $.01; 80,508,535 and 71,736,609 shares
issued and outstanding at December 31, 2000 and December 31, 1999 805 717
Additional paid-in capital 583,225 415,701
Accumulated other comprehensive income (21,858) (11,923)
Retained earnings 205,034 191,880
----------- -----------
767,206 596,375
----------- -----------
$ 1,278,894 $ 1,005,715
=========== ===========
The accompanying notes are an integral part of these statements.
20
22
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues $ 1,149,920 $ 839,648 $ 1,449,248
Cost of revenues:
Cost of products and services sold 884,774 686,510 1,116,967
Merger related inventory write-offs 15,684 -- --
----------- ----------- -----------
Gross profit 249,462 153,138 332,281
Selling, general, and administrative 186,924 150,034 175,443
Special charge 14,082 1,779 17,023
----------- ----------- -----------
Operating income 48,456 1,325 139,815
Interest and financial costs (19,069) (15,872) (14,261)
Interest income 2,908 2,276 3,238
Other income (expense), net (5,258) (2,588) (3,771)
----------- ----------- -----------
Income (loss) before income taxes 27,037 (14,859) 125,021
Provision/(benefit) for income taxes 13,901 (5,474) 43,685
----------- ----------- -----------
Net income (loss) $ 13,136 $ (9,385) $ 81,336
=========== =========== ===========
Net income (loss) per share:
Basic $ 0.17 $ (0.13) $ 1.19
=========== =========== ===========
Diluted $ 0.16 $ (0.13) $ 1.19
=========== =========== ===========
Weighted average shares outstanding:
Basic 79,325 71,672 68,178
=========== =========== ===========
Diluted 80,760 71,672 68,363
=========== =========== ===========
The accompanying notes are an integral part of these statements.
21
23
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flow from operating activities:
Net income (loss) $ 13,136 $ (9,385) $ 81,336
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 35,034 25,541 20,518
Provision for losses on receivables 1,589 3,055 610
Provision for deferred income taxes (5,856) 2,528 (4,092)
Gain on sale of assets (3,522) (2,939) (2,315)
Foreign currency transaction (gain) loss (1,397) 464 (103)
Special charge 14,082 1,779 17,023
Merger related inventory write-offs 15,684 -- --
Changes in assets and liabilities, net of acquisitions:
Marketable securities 14,686 (11,686) 5,218
Receivables (65,619) 131,962 (45,541)
Inventories (27,219) 10,616 9,077
Income taxes receivable 12,888 (2,717) --
Prepaid and other current assets (4,802) 3,309 8,200
Accounts payable 47,345 (46,003) (60,671)
Other assets/liabilities, net (19,416) (21,971) 2,610
--------- --------- ---------
Net cash provided by operating activities 26,613 84,553 31,870
--------- --------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (24,561) (17,547) (39,246)
Proceeds from sale of assets 8,227 6,280 10,001
Proceeds from product line dispositions -- 26,599 --
Businesses acquired, net of cash (48,208) (67,029) (130,963)
--------- --------- ---------
Net cash used by investing activities (64,542) (51,697) (160,208)
--------- --------- ---------
Cash flow from financing activities:
Borrowings (payments) on line of credit 19,174 (33,597) 1,317
Retirement of long-term debt -- -- (40,855)
Net proceeds from issuance of long-term debt -- -- 148,937
Proceeds from stock options exercised 14,247 164 1,002
Other (662) (959) (2,268)
--------- --------- ---------
Net cash provided (used) by financing activities 32,759 (34,392) 108,133
--------- --------- ---------
Effect of exchange rate losses on cash (462) 189 (221)
--------- --------- ---------
Increase (decrease) in cash and equivalents (5,632) (1,347) (20,426)
Cash and cash equivalents, beginning of year 48,091 49,438 69,864
--------- --------- ---------
Cash and cash equivalents, end of year $ 42,459 $ 48,091 $ 49,438
========= ========= =========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 16,807 $ 16,899 $ 7,349
Income taxes 7,333 11,558 53,222
The accompanying notes are an integral part of these statements.
22
24
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS TOTAL
--------- --------- --------- --------- ---------
Balance at December 31, 1997 671 376,847 (8,475) 113,666 482,709
Net income 81,336 81,336
Currency translation adjustments (6,953) (6,953)
Unrealized losses on securities 176 176
Change in minimum pension liability (531) (531)
Comprehensive income 74,028
Stock issued for acquisitions 43 39,138 6,653 45,834
Stock options exercised 1,002 1,002
Tax benefit of options exercised 104 104
Other (24) (24)
--------- --------- --------- --------- ---------
Balance at December 31, 1998 714 417,067 (15,783) 201,655 603,653
Net income (9,385) (9,385)
Currency translation adjustments 1,332 1,332
Unrealized gains on securities 540 540
Change in minimum pension liability 1,988 1,988
---------
Comprehensive income (5,525)
Stock options exercised 3 165 168
Tax benefit of options exercised 217 217
Reversal of 1997 option tax benefits (1,736) (1,736)
Other (12) (390) (402)
--------- --------- --------- --------- ---------
Balance at December 31, 1999 717 415,701 (11,923) 191,880 596,375
Net income 13,136 13,136
Currency translation adjustments (10,684) (10,684)
Unrealized gains on securities 749 749
---------
Comprehensive income 3,201
Stock issued for acquisition 79 153,948 154,027
Stock options exercised 9 8,580 8,589
Tax benefit of options exercised 4,901 4,901
Other 95 18 113
--------- --------- --------- --------- ---------
Balance at December 31, 2000 $ 805 $ 583,225 $ (21,858) $ 205,034 $ 767,206
========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
23
25
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
issued in connection with the combination with Dreco Energy Services Ltd., as
described below. 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 September 25, 1997, National Oilwell completed a combination with
Dreco Energy Services Ltd. 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. As a
result of the combination, each Dreco Class "A" common share outstanding was
converted into .9159 of a Dreco Exchangeable Share and 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, 2000, approximately 89 % of the Exchangeable Shares
had been converted into National Oilwell common stock.
2. ACQUISITIONS
On July 1, 1999, National Oilwell acquired all the outstanding stock of Dupre'
Supply Company and Dupre' International Inc., a Louisiana based distribution and
valve automation business for 1.9 million shares of National Oilwell common
stock. The transaction was a tax-free exchange and was recorded in accordance
with the pooling-of-interests method of accounting. All prior periods have been
restated.
On February 28, 2000, the merger with Hitec ASA was completed for approximately
$158 million as the Company issued 7.9 million shares of common stock. This
transaction was accounted for as a purchase effective February 1, 2000 and
generated goodwill of approximately $150 million.
On June 27, 2000, IRI International Corporation was merged with the Company and
accounted for as a pooling-of-interests. The Company issued 13.5 million shares
of common stock valued at approximately $447 million. This business involves the
manufacture of drilling rigs and equipment as well as the manufacture, sales and
service of downhole rental tools. All prior periods have been restated.
Revenues, net income before special charges, and net income of the separate
companies for the periods preceding the merger were as follows (in thousands):
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Six Months Year Ended Year Ended
Ended June 30, December 31, December 31,
2000 1999 1998
----------- ----------- -----------
Revenues:
National-Oilwell $ 461,925 $ 745,215 $ 1,271,914
IRI International 72,271 94,433 177,334
----------- ----------- -----------
$ 534,196 $ 839,648 $ 1,449,248
Net income (loss) before special charges:
National-Oilwell $ 8,048 $ 1,520 $ 79,354
IRI International (2,724) (9,891) 12,736
----------- ----------- -----------
$ 5,324 $ (8,371) $ 92,090
Net income (loss):
National-Oilwell $ (2,256) $ 1,520 $ 68,954
IRI International (2,724) (10,905) 12,382
----------- ----------- -----------
$ (4,980) $ (9,385) $ 81,336
There were no material transaction between the Company and IRI prior to the
merger. The effects of conforming IRI's accounting policies to those of the
Company were not material. Certain reclassifications have been made to IRI's
historical amounts to conform with the Company's current year presentation.
On September 1, 2000, the Company acquired the Wheatley Gaso and Omega pump
product lines from Halliburton Company for approximately $13 million cash.
Wheatley Gaso manufactures and markets a complete line of piston and plunger
pumps that are complementary to the Company's existing pumping products. Omega
manufactures, markets and services pumps primarily used on well service trucks.
This transaction was accounted for as a purchase effective September 1, 2000 and
generated goodwill of approximately $3 million.
On September 27, 2000, the assets of the Baylor Company were acquired from Boots
and Coots International Well Control, Inc. for approximately $29 million cash.
This business designs, manufactures and markets braking systems and large
synchronous generators used on drilling rigs. This transaction was accounted for
as a purchase effective October 1, 2000 and generated goodwill of approximately
$5 million.
Pro-forma information for Hitec ASA, Wheatley Gaso and Omega, and the Baylor
Company has not been provided as such amounts are not material.
On January 3, 2001, the assets and business of Integrated Power Systems (IPS)
were acquired for approximately $9 million. IPS manufactures, sells and services
SCR units primarily used on land-based drilling rigs and is a complementary fit
to our existing SCR product line. Goodwill of approximately $4 million was
recorded in conjunction with this purchase.
On January 5, 2001, we completed the acquisition of the stock of Maritime
Hydraulics (Canada) Ltd. for Canadian $25 million (US$ 16.5 million). This
business, which designs, manufactures and sells coiled tubing units and truck
mounted wireline and nitrogen pumping units, was accounted for as a purchase.
Goodwill associated with this transaction was approximately $11 million.
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of National Oilwell
and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments
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.
Inventories
Inventories consist of oilfield products, 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 that 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 $873,000 and $539,000
at December 31, 2000 and 1999, respectively. Goodwill is amortized on a
straight-line basis over its estimated life of 10-40 years. Accumulated
amortization at December 31, 2000 and 1999 was $19,559,000 and $9,234,000. On an
annual basis, the Company estimates the future estimated discounted cash flows
of the business to which goodwill related in order to determine that the
carrying value of the goodwill had not been impaired.
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 accumulated other
comprehensive income. 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
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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.
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29
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to amounts which are more likely than not to be realized.
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. Reserves are
maintained for potential credit losses and such credit losses have historically
been within management's expectations.
Stock-Based Compensation
National Oilwell uses the intrinsic value method in accounting for its
stock-based employee compensation plans. Compensation costs for stock options
would be recognized over the vesting period if options were granted with an
exercise price below market on the date of grant.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. We will adopt the
new Statement effective January 1, 2001. The Statement will require us to
recognize all derivatives on the balance sheet at fair value. We do not
anticipate that the adoption of this Statement will have a significant effect on
our results of operations or financial position.
Net Income Per Share
The following table sets forth the computation of weighted average basic and
diluted shares outstanding (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
------ ------ ------
Denominator for basic earnings per
share--weighted average shares 79,325 71,672 68,178
Effect of dilutive securities:
Employee stock options 1,435 -- 185
------ ------ ------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 80,760 71,672 68,363
====== ====== ======
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4. INVENTORIES
Inventories consist of (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Raw materials and supplies $ 32,306 $ 54,958
Work in process 63,758 48,122
Finished goods and purchased products 279,670 244,944
------------ ------------
Total $ 375,734 $ 348,024
============ ============
As a result of the merger with IRI International, the Company conducted a
comprehensive review of its operations and decided to exit a non-core
business and certain product lines. These actions resulted in inventory
write-offs of $15.7 million in 2000.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 2000 1999
------------ ------------ ------------
Land and improvements 2-20 Years $ 11,109 $ 9,211
Buildings and improvements 5-31 Years 55,640 49,435
Machinery and equipment 5-12 Years 87,794 77,996
Computer and office equipment 3-10 Years 67,302 42,658
Rental equipment 1-7 Years 63,315 61,402
------------ ------------
285,160 240,702
Less accumulated depreciation (111,514) (85,858)
------------ ------------
$ 173,646 $ 154,844
============ ============
6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Revolving credit facilities $ 72,527 $ 46,353
6 7/8% senior notes 150,000 150,000
Other -- --
------------ ------------
222,527 196,353
Less current portion 50 300
------------ ------------
$ 222,477 $ 196,053
============ ============
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31
In 1997, National Oilwell entered into a five-year unsecured $125 million
revolving credit facility. The credit facility is available for acquisitions and
general corporate purposes and provides up to $50 million for letters of credit,
of which $19.4 million were outstanding at December 31, 2000. The credit
facility provides for interest at prime or LIBOR plus 0.5% (9.5% and 7.0% at
December 31, 2000) subject to adjustment based on National Oilwell'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. At December 31, 2000, the Company was in
compliance with all the covenants governing this credit facility.
National Oilwell also has additional credit facilities totaling $38.6 million
used primarily for letters of credit, of which $2.7 million were outstanding at
December 31, 2000.
In June 1998, National Oilwell sold $150 million of 6.875% unsecured senior
notes due July 1, 2005. Interest is payable on January 1 and July 1 of each
year.
7. PENSION AND OTHER POSTRETIREMENT PLANS
National Oilwell and its consolidated subsidiaries have 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, 2000, 1999 and 1998, pension expense for
defined-contribution plans was $4.2 million, $3.8 million and $5.0 million, and
all funding is current.
Certain retired or terminated employees also participate in defined benefit
plans in the United States but they are no longer accruing benefits. Active
employees are ineligible to participate in any of these defined benefit plans.
In addition, certain U.S. employees participate in defined benefit health care
plans that provide postretirement medical and life insurance benefits. Active
employees only participate in the plan providing life insurance benefits.
The change in benefit obligation, plan assets and the funded status of defined
pension and postretirement plans in the United States follows:
Pension Postretirement
benefits benefits
----------------- ----------------
At year end 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------
(in thousands)
Benefit obligation at beginning of year $ 15,293 $ 17,498 $ 3,122 $ 4,912
Service cost 108 134 16 22
Interest cost 1,186 907 232 218
Change in assumptions -- -- -- (1,532)
Actuarial (gain) loss 726 (2,070) 17 (219)
Benefits paid (1,618) (1,266) (321) (316)
Retiree contributions -- -- 35 26
Other -- 89 6 11
--------------------- -------------------
BENEFIT OBLIGATION AT END OF YEAR $ 15,695 $ 15,293 $ 3,107 $ 3,122
--------------------- -------------------
Fair value of plan assets at beginning
of year $ 16,091 $ 15,471 $ -- $ --
Actual return (508) 1,796 -- --
Benefits paid (1,618) (1,266) (246) (198)
Contributions 529 -- 246 198
Other -- 89 -- --
--------------------- -------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 14,493 $ 16,090 $ -- $ --
--------------------- -------------------
Funded status $ (1,202) $ 797 $ (3,107) $(3,122)
Unrecognized actuarial net loss/(gain) 1,256 (1,265) (551) (597)
Prior service costs not yet recognized -- -- 90 100
--------------------- -------------------
PREPAID (ACCRUED) BENEFIT COST $ 54 $ (468) $ (3,569) $(3,619)
--------------------- -------------------
Significant assumptions used for the plans follow:
Pension benefits Postretirement benefits
------------------------------ ------------------------------
For the year 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Weighted average assumptions:
Discount rate 7.6% 8.0% 7.0% 7.6% 7.3% 6.5%
Expected long-term rate of return 8.0% 8.0% 8.0% n/a n/a n/a
Rate of compensation increase n/a n/a n/a n/a n/a n/a
An 8.0% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2001, decreasing gradually to 5.5% in 2006, with 5.5%
increases per year thereafter.
Net periodic benefit cost (credit):
Pension benefits Postretirement benefits
------------------------------ ------------------------------
For the year 2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
(in thousands)
Service cost - benefits
earned during the
period $ 108 $ 134 $ 151 $ 16 $ 22 $ 17
Interest cost on projected
benefit obligation 1,186 907 1,166 232 218 327
Expected return on plan
assets (1,280) (844) (1,264) -- -- --
Recognized net (gain)/loss -- 72 9 20 19 45
Net amortization and deferral (8) (8) 15 (33) (23) (25)
---------------------------------- --------------------------------
NET PERIODIC BENEFIT COST
(CREDIT) $ 6 $ 161 $ 77 $ 235 $236 $364
================================== ================================
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement benefits. A one percentage point change in
assumed health care cost trend rates would have the following effects:
1% Point Increase 1% Point Decrease
(in thousands) ------------------ -----------------
Effect on total of service and interest cost components in 2000 $67 $39
Effect on postretirement benefit obligation at year-end 2000 ($628) ($744)
The Company's subsidiaries in the United Kingdom have 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. At December 31, 2000, the plan assets at fair market value were $46.2
million and the projected benefit obligation was $31.0 million.
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32
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement benefits. A one percentage point change in
assumed health care cost trend rates would have the following effects:
1% Point Increase 1% Point Decrease
(in thousands) ------------------ -----------------
Effect on total of service and interest cost components in 2000 $67 $39
Effect on postretirement benefit obligation at year-end 2000 ($628) ($744)
The Company's subsidiaries in the United Kingdom have 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. At December 31, 2000, the plan assets at fair market value were $46.2
million and the projected benefit obligation was $31.0 million.
33
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows (in thousands):
CHANGE IN CURRENCY UNREALIZED GAINS
MINIMUM TRANSLATION ON AVAILABLE-
PENSION LIABILITY ADJUSTMENTS FOR-SALE SECURITIES TOTAL
----------------- ----------- ------------------- -------------
Balance at December 31, 1997 $ (1,457) $ (7,018) $ -- $ (8,475)
Currency translation adjustments (6,953) -- (6,953)
Unrealized gains on available-
for-sale securities -- 244 244
Deferred taxes relating to unrealized
gains on available-for-sale securities -- (68) (68)
Change in pension liability (531) (531)
----------------- ----------- ------------------- -------------
Balance at December 31, 1998 (1,988) (13,971) 176 (15,783)
Currency translation adjustments 1,332 -- 1,332
Unrealized gains on available- --
for-sale securities -- 815 815
Deferred taxes relating to unrealized --
gains on available-for-sale securities -- (275) (275)
Change in pension liability 1,988 1,988
----------------- ----------- ------------------- -------------
Balance at December 31, 1999 -- (12,639) 716 (11,923)
Currency translation adjustments (10,684) -- (10,684)
Unrealized gains on available- --
for-sale securities -- 1,136 1,136
Deferred taxes relating to unrealized
gains on available-for-sale securities -- (387) (387)
----------------- ----------- ------------------- -------------
Balance at December 31, 2000 $ -- $ (23,323) $ 1,465 $ (21,858)
================= =========== =================== =============
9. COMMITMENTS AND CONTINGENCIES
National Oilwell leases land, buildings and storage facilities, vehicles and
data processing equipment and software under operating leases extending through
various dates up to the year 2005. Rent expense for the years ended December 31,
2000, 1999 and 1998 was $12.6 million, $14.3 million and $13.1 million. National
Oilwell's minimum rental commitments for operating leases at December 31, 2000,
excluding future payments applicable to facilities closed as part of the 1998
and 2000 Special Charge, were as follows: 2001 - $8.5 million; 2002 - $6.5
million; 2003 - $4.8 million; 2004 - $1.6 million and 2005 - $0.9 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, 2000 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. Although National
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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.
10. COMMON STOCK
National Oilwell has authorized 150 million shares of $.01 par value common
stock. National Oilwell also has authorized 10 million shares of $.01 par value
preferred stock, none of which is issued or outstanding.
National Oilwell's stock plans collectively authorize the grant or options to
purchase up to 6,038,733 shares of National Oilwell's common stock to officers,
key employees, non-employee directors and other persons. Options granted
generally vest over a 3-year period starting one year from the date of grant and
expire 5 or 10 years from the date of grant.
Options outstanding at December 31, 2000 under the stock option plans have
exercise prices between $5.62 and $33.00 per share, and expire at various dates
from March 21, 2002 to July 21, 2010. The weighted average exercise price on the
2,792,585 outstanding options at December 31, 2000 is $16.50.
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35
The following summarizes option activity:
WEIGHTED AVERAGE TOTAL
SHARE PRICE OPTIONS
---------------- --------------
OPTIONS OUTSTANDING:
Balance at December 31, 1997 13.94 538,592
Granted 27.46 513,896
Cancelled 22.82 (44,020)
Exercised 9.60 (103,957)
---------------
Balance at December 31, 1998 21.74 904,511
Granted 10.43 1,357,255
Cancelled 20.73 (194,656)
Exercised 6.85 (25,906)
---------------
Balance at December 31, 1999 14.59 2,041,204
---------------
Granted 16.13 1,765,303
Cancelled 14.10 (86,425)
Exercised 11.80 (927,497)
---------------
Balance at December 31, 2000 16.50 2,792,585
===============
Exercisable at December 31, 1997 $ 6.16 46,948
Vested 13.74 178,249
Cancelled 22.32 (7,034)
Exercised 9.60 (103,957)
---------------
Exercisable at December 31, 1998 $ 13.97 114,206
Vested 15.39 329,234
Cancelled 21.61 (37,073)
Exercised 6.85 (25,906)
---------------
Exercisable at December 31, 1999 $ 15.31 380,461
---------------
Vested 12.21 1,697,123
Cancelled 10.12 (52,760)
Exercised 11.80 (927,497)
---------------
Exercisable at December 31, 2000 $ 13.73 1,097,327
===============
The weighted average fair value of options granted during 2000, 1999 and 1998
was approximately $15.70, $7.71, and $7.97 per share, respectively, 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 option's vesting period, earnings per share would have been
affected by $0.09, $0.07, and $0.03 for 2000, 1999 and 1998, respectively, 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
in February 2001, 961,009 options to purchase shares of common stock were
granted at an exercise price of $40.50, the fair value of the common stock at
the date of grant.
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11. INCOME TAXES
The domestic and foreign components of income before income taxes were as
follows (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Domestic $(10,555) $ (28,549) $ 74,433
Foreign 37,592 13,690 50,588
-------- --------- --------
$ 27,037 $ (14,859) $125,021
======== ========= ========
The components of the provision (benefit) for income taxes consisted of (in
thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------------- ----------------- -----------------
Current:
Federal $ 5,401 $ (11,777) $ 26,966
State 123 (745) 2,499
Foreign 14,258 4,520 18,312
------ ------- ------
19,782 (8,002) 47,777
------ ------- ------
Deferred:
Federal (6,757) 1,028 (4,151)
State (507) 572 (845)
Foreign 1,383 928 904
------ ------- ------
(5,881) 2,528 (4,092)
------ ------- ------
$ 13,901 $ (5,474) $ 43,685
====== ======= ======
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):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Federal income tax at statutory rate $ 9,462 $ (5,200) $ 43,758
Foreign income tax rate differential 781 (68) 229
State income tax, net of federal benefit 336 (181) 1,427
S Corporation earnings -- 824 (9)
Tax benefit of foreign sales corporation (1,492) -- (2,547)
Unutilized foreign operating losses -- -- 328
Nondeductible expenses 4,626 2,243 1,675
Amortization of negative goodwill -- (1,409) (1,879)
Foreign dividends net of FTCs (1,046) -- 2,517
Net operating loss carryforwards 1,744 990 2,575
Change in deferred tax valuation allowance (606) (2,787) (3,763)
Other 96 114 (626)
-------- -------- --------
$ 13,901 $ (5,474) $ 43,685
======== ======== ========
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Significant components of National Oilwell's deferred tax assets and
liabilities were as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Deferred tax assets:
Accrued liabilities $ 9,122 $ 8,722
Net operating loss carryforwards 21,265 20,676
Foreign tax credit carryforwards 10,942 2,203
Capital loss carryforward 3,594 935
Other 20,390 15,413
-------- --------
Total deferred tax assets 65,313 47,949
Valuation allowance for deferred tax assets (28,289) (19,228)
-------- --------
37,024 28,721
======== ========
Deferred tax liabilities:
Tax over book depreciation 8,594 5,953
Other 7,436 6,496
-------- --------
Total deferred tax liabilities 16,030 12,449
-------- --------
Net deferred tax assets $ 20,994 $ 16,272
======== ========
In the United States, the Company has $16.8 million of net operating loss
carryforwards as of December 31, 2000, which expire at various dates through
2009. These operating losses were acquired in the combination with Dreco Energy
Services Ltd. in 1997 and are associated with Dreco's US subsidiary. As a result
of share exchanges occurring since the date of the combination resulting 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 $5.8 million has been
recorded with a full valuation allowance. Future income tax expense will be
reduced if the Company ultimately realizes the benefit of these net operating
losses.
Also in the United States, the Company has $9.3 million of capital loss
carryforwards as of December 31, 2000, which expire at various dates through
2004. These capital loss carryforwards can only be used to offset future capital
gains generated by the Company. Since the ultimate realization of these capital
loss carryforwards is uncertain, the related potential benefit of $3.6 million
has been recorded with a valuation allowance of $2.1 million. Future income tax
expense will be reduced if the Company ultimately realizes the benefit of these
capital loss carryforwards. In addition, the Company has $10.9 million of
foreign tax credit carryforwards as of December 31, 2000, which expire at
various dates through 2005. Since the ultimate realization of these credits is
uncertain, the related potential benefit has been recorded with a valuation
allowance of $7.3 million. Future income tax expense will be reduced if the
Company ultimately realizes the benefit of these foreign tax credits.
Outside the United States, the company has $50.9 million of net operating loss
carryforwards as of December 31, 2000. Of this amount, $37.4 million will expire
at various dates through 2010 and $13.5 million is available indefinitely. The
related potential benefit available of $15.5 million has been recorded with a
valuation allowance of $13.0 million. If the Company ultimately
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realizes the benefit of these net operating losses, $11.8 million would reduce
goodwill and other intangible assets and $1.2 million would reduce income tax
expense.
The deferred tax valuation allowance increased $9.1 million for the period
ending December 31, 2000 resulting primarily from the purchase of Hitec ASA.
The deferred tax valuation allowance decreased $2.8 million for the period
ending December 31, 1999 resulting from the realization of foreign net operating
losses and investment tax credits that were previously deferred. National
Oilwell's deferred tax assets are expected to be realized principally through
future earnings.
Undistributed earnings of the Company's foreign subsidiaries amounted to $113.0
million and $86.0 million at December 31, 2000 and December 31, 1999,
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 $9.1 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 2000.
12. SPECIAL CHARGES
During 2000, the Company recorded a special charge, net of a $0.4 million credit
from previous special charges, of $14.1 million ($11.0 million after tax, or
$0.14 per share) related to the merger with IRI International. Components of the
charge were (in millions):
Direct transaction costs $ 6.6
Severance 6.4
Facility closures 1.5
-----
14.5
Prior year reversal (0.4)
-----
$14.1
=====
The cash and non-cash elements of the charge approximate $13 million and $1.1
million, respectively. Approximately $11 million of direct transaction and
severance costs had been spent at December 31, 2000. Facility closure costs
consist of lease cancellation costs and impairment of a closed manufacturing
facility that is for sale. All of this charge is applicable to the Products and
Technology business segment.
During 1999, a $1.8 million charge related to additional severance costs
resulting from consolidating our manufacturing operations was recorded.
During 1998, we recorded a special charge of $17.0 million related to
operational changes resulting from the depressed market for the oil and gas
industry. The components of the special charge were asset impairments of $5.4
million, severance costs of $6.2 million and facility closures and exit costs of
$5.4 million.
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13. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
National Oilwell's operations consist of two segments: Products and Technology
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, including drilling motors and specialized
drilling tools for rent and sale. The Distribution Services segment distributes
an extensive line of oilfield supplies and equipment. Intersegment sales and
transfers are accounted for at commercial prices and are eliminated in
consolidation. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies of the
Company. The Company evaluates performance of each reportable segment based upon
its operating income, excluding non-recurring items.
No single customer accounted for 10% or more of consolidated revenues during the
three years ended December 31, 2000.
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Summarized financial information is as follows (in thousands):
Business Segments
PRODUCTS AND DISTRIBUTION CORPORATE /
TECHNOLOGY SERVICES ELIMINATIONS (1) TOTAL
------------ ------------ ---------------- -------------
DECEMBER 31, 2000
Revenues from:
Unaffiliated customers $ 629,967 $ 519,911 $ 42 $1,149,920
Intersegment sales 53,500 1,362 (54,862) --
---------- --------- -------- ----------
Total revenues 683,467 521,273 (54,820) 1,149,920
Operating income (loss) 60,992(3) 12,884 (25,420) 48,456(3)
Capital expenditures 14,960 7,387 2,214 24,561
Depreciation and amortization 28,712 5,985 337 35,034
Identifiable assets 1,001,391 223,973 53,530 1,278,894
DECEMBER 31, 1999
Revenues from:
Unaffiliated customers $ 429,968 $ 409,680 $ -- $ 839,648
Intersegment sales 30,053 674 (30,727) --
---------- --------- -------- ----------
Total revenues 460,021 410,354 (30,727) 839,648
Operating income (loss) 23,552 (5,959) (16,268) 1,325
Capital expenditures 7,472 9,968 107 17,547
Depreciation and amortization 24,964 4,269 334 29,567
Identifiable assets 772,305 197,918 35,492 1,005,715
DECEMBER 31, 1998
Revenues from:
Unaffiliated customers $ 840,736 $ 608,512 $ -- $1,449,248
Intersegment sales 66,420 -- (66,420) --
---------- --------- -------- ----------
Total revenues 907,156 608,512 (66,420) 1,449,248
Operating income (loss) 159,980 8,911(2) (29,076) 139,815(2)
Capital expenditures 24,147 14,220 879 39,246
Depreciation and amortization 21,798 3,047 1,040 25,885
Identifiable assets 837,729 226,893 30,432 1,095,054
(1)Operating loss of Corporate includes a special charge of $14,082 for 2000,
$1,779 for 1999 and $17,023 for 1998
(2) Includes a $5,600 charge related to the write-down to the lower of cost or
market of certain tubular inventories.
(3) Includes $15,684 of inventory write-offs related to the merger with IRI.
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Geographic Areas:
UNITED UNITED
STATES CANADA NORWAY KINGDOM OTHER ELIMINATIONS TOTAL
---------- -------- -------- ------- ------- ------------ ----------
DECEMBER 31,2000
Revenues from:
Unaffiliated customers $ 799,415 $239,940 $ 31,961 $48,050 $30,554 $ -- $1,149,920
Interarea sales 43,521 28,302 3,786 4,796 737 (81,142) --
---------- -------- -------- ------- ------- -------- ----------
Total revenues 842,936 268,242 35,747 52,846 31,291 (81,142) 1,149,920
Long-lived assets 646,210 338,319 216,866 44,633 32,866 -- 1,278,894
DECEMBER 31,1999
Revenues from:
Unaffiliated customers $ 613,724 $163,597 $ -- $35,723 $26,604 $ -- $ 839,648
Interarea sales 31,249 22,577 -- 2,441 619 (56,886) --
---------- -------- -------- ------- ------- -------- ----------
Total revenues 644,973 186,174 -- 38,164 27,223 (56,886) 839,648
Long-lived assets 618,291 317,558 -- 37,637 32,229 -- 1,005,715
DECEMBER 31,1998
Revenues from:
Unaffiliated customers $1,165,446 $196,493 $ -- $54,625 $32,684 $ -- $1,449,248
Interarea sales 58,112 34,912 -- 4,056 1,044 (98,124) --
---------- -------- -------- ------- ------- -------- ----------
Total revenues 1,223,558 231,405 -- 58,681 33,728 (98,124) 1,449,248
Long-lived assets 728,278 306,847 -- 36,321 23,608 -- 1,095,054
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results as restated to reflect the merger with IRI
International and Dupre' were as follows (in thousands, except per share data)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2000
Revenues $263,891 $ 270,305 $286,325 $ 329,399 $ 1,149,920
Gross Profit (1) 57,714 58,184 64,285 69,279 249,462
Special charge 13,000 1,082 14,082
Income (loss) before taxes 7,229 (11,645) 19,207 12,246 27,037
Net income (loss) 4,484 (9,464) 11,908 6,208 13,136
Net income (loss) per diluted share 0.06 (0.12) 0.15 0.08 0.16
YEAR ENDED DECEMBER 31, 1999
Revenues $227,266 $ 195,004 $194,870 $ 222,508 $ 839,648
Gross Profit 49,185 29,317 37,799 36,837 153,138
Special charge 805 653 321 -- 1,779
Income (loss) before taxes 3,791 (17,861) 1,013 (1,802) (14,859)
Net income (loss) 1,833 (12,033) 474 341 (9,385)
Net income per diluted share 0.03 (0.17) 0.01 0.00 (0.13)
(1) The 4th quarter includes $15,684 of inventory write-offs related to the
merger with IRI.
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INDEX TO EXHIBITS
2.1 Combination Agreement, dated as of May 14, 1997, as amended, between
National-Oilwell, Inc. and Dreco Energy Services Ltd. (Annex B) (3)
2.2 Plan of Arrangement and Exchangeable Share Provisions (Annex E) (3)
2.3 Merger Agreement dated October 10, 1999 by and between
National-Oilwell, Inc. and Hitec ASA (Appendix A) (7)
2.4 Agreement of Merger, dated as of March 15, 2000, between
National-Oilwell, Inc. and IRI International Corporation (Appendix I)
(8)
3.1 Amended and Restated Certificate of Incorporation of National-Oilwell,
Inc. (Exhibit 3.1) (5)
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) (3)
10.1 Employment Agreement dated as of January 16, 1996 between Joel V. Staff
and the Company with similar agreements with Jerry N. Gauche and Steven
W. Krablin, and a similar agreement dated as of February 5, 1996
between Merrill A. Miller, Jr. and the Company, and a similar agreement
dated as of March 1, 2000 between Jon Gjedebo and the Company (Exhibit
10.1) (1)*
10.2 Amended and Restated Stock Award and Long-Term Incentive Plan (Exhibit
10.6) (2)*
10.3 Supplemental Savings Plan (Exhibit 10.12) (1)*
10.4 Loan Agreement dated September 25, 1997 (Exhibit 10.1) (4)
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10.5 Amendment to Loan Agreement dated as of December 31, 1999 (Exhibit
10.9) (6)
10.6 Form of Support Agreement by and between National-Oilwell, Inc. and
Dreco Energy Services Ltd (Annex F) (3)
10.7 Employment Agreement dated as of April 19, 1999 between Honor Guiney
and the Company. (Exhibit 10.11) (6)*
10.8 Employment Agreement dated as of March 1, 2000 between Jon Gjedebo and
the Company.
10.9 Non-competition Agreement dated as of June 28, 2000 between Hushang
Ansary and the Company.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page hereto)
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 2000.
- -----------------
* 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 with the Proxy Statement for the 1999 Annual Meeting of Stockholders,
filed on May 12, 1999.
(3) 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.
(4) Filed as an Exhibit to the National-Oilwell, Inc. Quarterly Report on Form
10-Q filed on November 7, 1997.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed on August
11, 2000.
(6) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed on March 16,
2000.
(7) Filed as an appendix to Amendment No. 2 to Registration Statement No.
333-91605 on Form S-4 filed on January 4, 2000.
(8) Filed as an appendix to the Joint Proxy Statement/Prospectus in Amendment
No.1 to Registration Statement No. 333-36644 on Form S-4 filed on May 23,
2000.