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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
===============================================================================
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475875
- ---------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE
HOUSTON, TEXAS
77042-4200
----------------------------------------
(Address of principal executive offices)
(713) 346-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [X] NO [ ]
As of November 10, 2003, 85,059,721 common shares were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2003 2002
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 74,295 $ 118,338
Receivables, net 444,668 428,116
Inventories, net 526,725 470,088
Costs in excess of billings 97,104 53,805
Deferred income taxes 34,475 26,783
Prepaid and other current assets 33,921 17,938
--------------- ---------------
Total current assets 1,211,188 1,115,068
Property, plant and equipment, net 230,373 208,420
Deferred income taxes 27,598 36,864
Goodwill 650,190 581,576
Property held for sale 13,092 7,389
Other assets 22,568 19,345
--------------- ---------------
$ 2,155,009 $ 1,968,662
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 14,240 -
Accounts payable 222,223 168,548
Customer prepayments 13,576 9,533
Accrued compensation 20,793 5,087
Billings in excess of costs 39,178 61,738
Other accrued liabilities 99,922 101,310
--------------- ---------------
Total current liabilities 409,932 346,216
Long-term debt 571,126 594,637
Deferred income taxes 52,575 54,612
Other liabilities 32,101 30,229
--------------- ---------------
Total liabilities 1,065,734 1,025,694
Commitments and contingencies
Minority interest 13,643 9,604
Stockholders' equity:
Common stock - par value $.01; 85,053,837 and 81,014,713 shares
issued and outstanding at September 30, 2003 and December 31, 2002 851 810
Additional paid-in capital 673,949 594,849
Accumulated other comprehensive loss (43,574) (44,461)
Retained earnings 444,406 382,166
--------------- ---------------
1,075,632 933,364
--------------- ---------------
$2,155,009 $1,968,662
=============== ===============
The accompanying notes are an integral of these statements.
2
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Revenues $ 498,600 $ 366,929 $ 1,474,574 $ 1,128,305
Cost of revenues 378,819 278,396 1,125,231 859,323
------------- -------------- ------------- -------------
Gross profit 119,781 88,533 349,343 268,982
Selling, general, and administrative 75,940 56,631 221,113 167,127
------------- -------------- ------------- -------------
Operating income 43,841 31,902 128,230 101,855
Interest and financial costs (9,497) (6,349) (29,059) (18,524)
Interest income 762 124 2,388 594
Other income (expense), net (697) 2,066 (4,246) 3,421
------------- -------------- ------------- -------------
Income before income taxes and minority interest 34,409 27,743 97,313 87,346
Provision for income taxes 10,693 9,987 31,033 31,445
------------- -------------- ------------- -------------
Income before minority interest 23,716 17,756 66,280 55,901
Minority interest in income of consolidated subsidiaries (1,002) - (4,040) -
------------- -------------- ------------- -------------
Net income $ 22,714 $ 17,756 $ 62,240 $ 55,901
============= ============== ============= =============
Net income per share:
Basic $ 0.27 $ 0.22 $ 0.74 $ 0.69
============= ============== ============= =============
Diluted $ 0.27 $ 0.22 $ 0.73 $ 0.68
============= ============== ============= =============
Weighted average shares outstanding:
Basic 84,982 80,992 84,375 80,964
============= ============== ============= =============
Diluted 85,198 81,522 84,888 81,698
============= ============== ============= =============
The accompanying notes are an integral part of these statements.
3
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended September 30,
-------------------------------------
2003 2002
-------------- --------------
Cash flow from operating activities:
Net income $ 62,240 $ 55,901
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 26,833 18,732
Provision for losses on receivables 3,822 2,592
Provision for deferred income taxes 5,125 438
Gain on sale of assets (3,781) (2,317)
Foreign currency transaction loss 4,534 1,006
Interest rate contract (90) -
Tax benefit from exercise of nonqualified stock options 3,639 -
Changes in assets and liabilities, net of acquisitions:
Receivables (2,673) 27,892
Inventories (40,703) 5,510
Costs in excess of billings (43,299) -
Prepaid and other current assets (15,011) (6,435)
Accounts payable 49,368 (31,038)
Billings in excess of cost (22,560) -
Other assets/liabilities, net (20,504) (33,342)
-------------- --------------
Net cash provided by operating activities 6,940 38,939
-------------- --------------
Cash flow from investing activities:
Purchases of property, plant and equipment (21,960) (14,459)
Proceeds from sale of assets 6,473 5,915
Businesses acquired, net of cash (52,914) (15,432)
-------------- --------------
Net cash used by investing activities (68,401) (23,976)
-------------- --------------
Cash flow from financing activities:
Borrowings against lines of credit 302,631 184,308
Payments against lines of credit (296,501) (191,994)
Proceeds from stock options exercised 8,929 989
-------------- --------------
Net cash provided (used) by financing activities 15,059 (6,697)
-------------- --------------
Effect of exchange rate gain on cash 2,359 800
-------------- --------------
Increase (decrease) in cash and equivalents (44,043) 9,066
Cash and cash equivalents, beginning of period 118,338 43,220
-------------- --------------
Cash and cash equivalents, end of period $ 74,295 $ 52,286
============== ==============
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 28,958 $ 21,397
Income taxes $ 24,084 $ 32,292
The accompanying notes are an integral part of these statements.
4
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect reported and contingent amounts of assets and
liabilities as of the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The accompanying unaudited consolidated financial statements present information
in accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and
applicable rules of Regulation S-X. They do not include all information or
footnotes required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
our 2002 Annual Report on Form 10-K/A, as amended.
In our opinion, the consolidated financial statements include all adjustments,
all of which are of a normal, recurring nature, necessary for a fair
presentation of the results for the interim periods. The results of operations
for the three months and nine months ended September 30, 2003 are not
necessarily indicative of the results to be expected for the full year.
2. ACQUISITIONS
On January 16, 2003, we acquired the Mono pumping products business from
Halliburton Energy Services for approximately $89 million, consisting of $22.7
million in cash and 3.2 million shares of our common stock. This transaction,
which consisted of purchasing all the outstanding stock of Monoflo, Inc. in the
United States and Mono Group in the United Kingdom, generated approximately $51
million in goodwill and adds to the non-capital product lines within our
Products and Technology segment.
On January 2, 2003, we acquired LSI, a Houston, Texas based distributor of
specialty electrical products, for approximately $13 million. This transaction
generated approximately $7 million in goodwill and is complementary to our
distribution services business.
During December 2002, we completed the acquisition of Hydralift ASA, a Norwegian
based company specializing in the offshore drilling equipment industry, for a
total purchase price, including the assumption of debt, of approximately $300
million.
Allocation of the preliminary purchase price of Monoflo, Mono Group and
Hydralift ASA has been to the assets acquired and liabilities assumed based on
their relative fair values. The final allocation of the purchase price will be
based upon independent appraisals and other valuations and may reflect other
actions including product line rationalizations. It is expected that the final
allocations, to be completed in the fourth quarter of 2003, will differ from the
initial estimates. Changes to the fair value of fixed assets and identified
intangibles will impact the amount of depreciation and amortization to be
reported.
3. INVENTORIES
Inventories consist of (in thousands):
September 30, December 31,
2003 2002
-------------- --------------
Raw materials and supplies $ 47,125 $ 60,699
Work in process 110,716 109,924
Finished goods and purchased products 368,884 299,465
-------------- --------------
Total $ 526,725 $ 470,088
============== ==============
5
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------------- ------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net income $ 22,714 $ 17,756 $ 62,240 $ 55,901
Currency translation adjustments 577 (4,186) 977 (3,279)
Interest rate contract (30) - (90) -
--------------- --------------- --------------- ---------------
Comprehensive income $ 23,261 $ 13,570 $ 63,127 $ 52,622
=============== =============== =============== ===============
5. BUSINESS SEGMENTS
Segment information follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------------ -------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Revenues from unaffiliated customers
Products and Technology $ 292,322 $ 192,119 $ 895,798 $ 617,826
Distribution Services 206,278 174,810 578,776 510,479
--------------- --------------- --------------- ---------------
498,600 366,929 1,474,574 1,128,305
Intersegment revenues
Products and Technology 26,385 20,948 69,849 61,336
Distribution Services 669 806 1,764 1,501
--------------- --------------- --------------- ---------------
27,054 21,754 71,613 62,837
Operating income
Products and Technology 42,390 30,241 122,641 95,758
Distribution Services 4,757 4,508 14,972 13,790
--------------- --------------- --------------- ---------------
Total profit for reportable segments 47,147 34,749 137,613 109,548
Unallocated corporate costs (3,306) (2,847) (9,383) (7,693)
--------------- --------------- --------------- ---------------
Operating income 43,841 31,902 128,230 101,855
Net interest expense (8,735) (6,225) (26,671) (17,930)
Other income (expense) (697) 2,066 (4,246) 3,421
--------------- --------------- --------------- ---------------
Income before income taxes and
minority interest $ 34,409 $ 27,743 $ 97,313 $ 87,346
=============== =============== =============== ===============
Total assets
Products and Technology $ 1,748,495 $ 1,137,999
Distribution Services 323,861 277,115
6
6. DEBT
Debt consists of (in thousands):
September 30, December 31,
2003 2002
------------- -------------
Credit facilities $ 85,366 $ 94,637
6.875% senior notes 150,000 150,000
6.50% senior notes 150,000 150,000
5.65% senior notes 200,000 200,000
------------- -------------
585,366 594,637
Less current portion 14,240 -
------------- -------------
$ 571,126 $ 594,637
============= =============
At September 30, 2003, we had $307 million of committed credit facilities and
were in compliance with all covenants governing these facilities.
We replaced an existing credit facility in July 2002 with a new three-year
unsecured $175 million revolving credit facility. Borrowings against this
facility at September 30, 2003 totaled $32 million. This facility is available
for acquisitions and general corporate purposes and provides up to $50 million
for letters of credit, of which $14 million were outstanding at September 30,
2003. Interest is based upon prime or Libor plus 0.5% subject to a ratings based
grid. In securing this new credit facility, we incurred approximately $0.9
million in fees, which are being amortized to expense over the term of the
facility. This credit facility contains financial covenants and ratios regarding
maximum debt to capital and minimum interest coverage.
Recently acquired Hydralift ASA has multi-currency term loans and revolving
credit facilities totaling $132 million, which expire in 2006. These facilities
contain financial covenants and the term loans have mandatory repayments of
approximately $14 million beginning in May 2004. Interest is based upon a
pre-agreed upon percentage point spread from either the prime interest rate or
NIBOR. At September 30, 2003, borrowings totaled $53 million and there were $23
million of outstanding letters of credit.
We also have additional uncommitted credit facilities totaling $123 million that
are used primarily for letters of credit, bid bonds and performance bonds.
Borrowings against these additional credit facilities totaled $2 million at
September 30, 2003 and an additional $30 million had been used for letters of
credit and performance bonds.
7. STOCK-BASED COMPENSATION
We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for our
stock option plans. Accordingly, no compensation expense has been recognized for
stock option grants as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had
compensation expense for the stock option grants been determined on the fair
value at the grant dates consistent with the method of Statement of Financial
Accounting Standards Board (SFAS) No. 123, "Accounting for Stock-Based
Compensation", our net income and income per share would have been adjusted to
the pro forma amounts indicated below (amounts in thousands, except per share
amounts):
7
Quarter Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income, as reported $ 22,714 $ 17,756 $ 62,240 $ 55,901
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2,094) (2,247) (6,494) (6,906)
------------- ------------- ------------- -------------
Pro forma net income $ 20,620 $ 15,509 $ 55,746 $ 48,995
Net income per common share:
Basic, as reported $ 0.27 $ 0.22 $ 0.74 $ 0.69
Basic, pro forma 0.24 0.19 0.66 0.61
Diluted, as reported $ 0.27 $ 0.22 $ 0.73 $ 0.68
Diluted, pro forma 0.24 0.19 0.66 0.60
For purposes of determining compensation expense using the provisions of SFAS
No. 123, the fair value of option grants was determined using the Black-Scholes
option-valuation model. The weighted average fair value per share of stock
options granted in the first nine months of 2003 was $9.20 and $8.95 in 2002.
The key input variables used in valuing the options granted in 2003 and 2002
were: risk-free interest rate of 2.58% in 2003 and 2.40% in 2002; dividend yield
of zero in each year; stock price volatility of 50% in 2003 and 54% in 2002, and
expected option lives of five years for each year presented.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement on Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which sets forth the accounting and reporting to be followed for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses disposal
activities and termination costs in exiting an activity. Effective January 1,
2003, we adopted these new accounting pronouncements and they did not have a
significant impact on our results of operations or financial position.
The FASB issued Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation," ("SFAS No. 148") in December 2002. SFAS No. 148
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 were adopted on January 1, 2003.
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others," ("FIN 45"), which
we adopted effective January 1, 2003. FIN 45 requires that upon issuance of
certain types of guarantees, a guarantor recognize and account for the fair
value of the guarantee as a liability. FIN 45 contains exclusions to this
requirement, including the exclusion of a parent's guarantee of its
subsidiaries' debt to a third party. This new accounting pronouncement had no
material impact on our consolidated financial position, results of operations or
cash flows.
The FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), which is effective January 31, 2003 for any new interests
in VIEs created after that date. This statement addresses the consolidation of
variable interest entities ("VIEs") by business enterprises that are the primary
beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the expected losses
8
or expected residual returns associated with the VIE. We do not believe we have
any material interests in VIEs created prior to February 1, 2003 that will
require consolidation when FIN 46 is required to be adopted at December 31, 2003
for such entities, but we are continuing our evaluation.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
We design, manufacture and sell drilling systems, drilling equipment and
downhole products as well as distribute maintenance, repair and operating
products to the oil and gas industry. Our revenues and operating results are
directly related to the level of worldwide oil and gas drilling and production
activities and the profitability and cash flow of oil and gas companies and
drilling contractors, which in turn are affected by current and anticipated
prices of oil and gas. Oil and gas prices have been and are likely to continue
to be volatile.
We conduct our operations through the following segments:
Products and Technology
Our Products and Technology segment designs and manufactures complete land
drilling and workover rigs, and drilling related systems for offshore rigs.
Technology has increased the desirability of one vendor assuming responsibility
for the entire suite of components used in the drilling process, as mechanical
and hydraulic components are replaced by or augmented with integrated
computerized systems. In addition to traditional components such as drawworks,
mud pumps, top drives, derricks, cranes, jacking and mooring systems, and other
structural components, we provide automated pipehandling, control and electrical
power systems. We have also developed new technology for drawworks and mud pumps
applicable to the highly demanding offshore markets.
Distribution Services
Our Distribution Services segment provides maintenance, repair and operating
supplies and spare parts from our network of distribution service centers to
drill site and production locations throughout North America and to offshore
contractors worldwide. Increasingly, this business also is expanding to
locations outside North America, including the Middle East, Southeast Asia, and
South America. Using our information technology platforms and processes, we can
provide complete procurement, inventory management, and logistics services to
our customers. Products are purchased from numerous manufacturers and vendors,
including our Products and Technology segment.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------------------------------------------------------------
2003 2002 2003 2002
----------------- ---------------- ---------------- ----------------
Revenues
Products and Technology $ 318,707 $ 213,067 $ 965,647 $ 679,162
Distribution Services 206,947 175,616 580,540 511,980
Eliminations (27,054) (21,754) (71,613) (62,837)
----------------- ---------------- ---------------- ----------------
Total $ 498,600 $ 366,929 $ 1,474,574 $ 1,128,305
================= ================ ================ ================
Operating Income
Products and Technology $ 42,390 $ 30,241 $ 122,641 $ 95,758
Distribution Services 4,757 4,508 14,972 13,790
Corporate (3,306) (2,847) (9,383) (7,693)
----------------- ---------------- ---------------- ----------------
Total $ 43,841 $ 31,902 $ 128,230 $ 101,855
================= ================ ================ ================
10
Products and Technology
Q3 2003 versus Q3 2002
Revenues for the Products and Technology segment increased $106 million during
the third quarter of 2003 as compared to the same quarter in 2002. The Hydralift
ASA and Mono acquisitions accounted for all but approximately $3 million of this
increase as revenues for the remaining operations in this segment were
essentially flat. We believe that many drilling contractors, faced with lower
contract day rates, as well as numerous operators have continued their generally
cautious approach to capital spending commitments. Spare part sales and downhole
tool rentals did improve over last year due primarily to an overall increase in
the number of drilling rigs operating in North America.
Operating income increased by $12 million in the third quarter of 2003 compared
to the same quarter in 2002 due to the operating profit generated by the
Hydralift ASA and Mono operations. Lower overall margins of approximately 2% and
rising employee health care costs, liability insurance premiums and selling and
marketing expenses reduced by almost $2 million the benefits derived from those
acquisitions.
Backlog of the Products and Technology capital products was $340 million at
September 30, 2003, reflecting a decline of $26 million from the June 30, 2003
level. Backlog at September 30, 2002, which excluded any Hydralift ASA capital
products, was $231 million. Virtually all product in current backlog will be
delivered by the end of 2004.
1st nine months 2003 versus 1st nine months 2002
Products and Technology segment revenues increased $286 million in the first
nine months of 2003 as compared to the same period in 2002. This 42% increase
was a direct result of the Hydralift ASA and Mono acquisitions. Excluding these
acquisitions, revenues were lower by $17 million with the declines occurring in
the capital equipment and systems and controls product lines.
The Hydralift ASA and Mono acquisitions were the primary contributors to the
generation of a $27 million operating income improvement in the first nine
months of 2003 compared to 2002. Excluding these acquisitions, reduced margins
due to the lower revenue volume and higher employee health care costs, liability
insurance premiums and selling and marketing expenses negatively impacted the
operating income for the first nine months of 2003 when compared to the prior
year.
Distribution Services
Q3 2003 versus Q3 2002
Distribution Services revenues increased $31 million, or approximately 18%,
during the third quarter of 2003 over the comparable 2002 period as the number
of active rigs running in the U.S. and Canada has increased during 2003.
Revenues in the United States increased 15%, Canada was higher by 38% and the
international sector was up by approximately 8%. Revenue gains in Asia, Latin
America and the Middle East were offset by a decline in the North Sea.
Maintenance, repair and operating supplies revenues increased by $25 million
while the sales of line pipe and products manufactured by the Products and
Technology segment showed modest gains of $3 and $4 million, respectively.
Operating income in the third quarter of 2003 reflects a marginal increase of
$0.2 million over the prior year results due to the margin increase on the
incremental revenue offset by an increase in expenses, specifically liability
insurance premiums, employee health care costs and vehicle fuel and maintenance
costs. North American expenses have been managed to retain our geographic
coverage, employee retention and overall customer service while international
expenses include startup and systems installation costs in Singapore, Brazil and
Mexico.
11
1st nine months 2003 versus 1st nine months 2002
Revenues for the Distribution Services segment increased $69 million in the
first nine months of 2003 when compared to the prior year. Revenue in the
international market was up 9%, Canada was up 18% and the U.S. operations
reflected a 14% improvement. Increased revenues in Asia were partially offset by
declines in Latin America, Middle East and North Sea revenues. Revenues from the
sale of parts manufactured by the Products & Technology segment declined $3
million while the maintenance, repair and operating supplies revenues reflected
a 18% improvement from the first nine months of 2002. Line pipe revenues were
higher by approximately $4 million.
Operating income in the first nine months of 2003 of $15 million was
approximately $1 million higher than the comparable period in 2002. Gross margin
improvement resulting from the revenue volume increase was offset by higher
administrative expenses to support the expansion into the new global markets.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. These costs are approximately $1.7 million higher during the
nine months ending September 30, 2003 when compared to the same period in the
prior year. Corporate-led initiatives, such as governance, marketing, safety and
training programs, are the principal reasons for the increase in corporate
spending. Corporate expenses are expected to approximate the current level in
the near term.
Interest Expense
Interest expense increased during the three months and nine months ended
September 30, 2003 as compared to the prior year due principally to the senior
notes issued in November 2002 to acquire Hydralift ASA. Other financial costs,
principally bank fees related to letters of credit and performance bonds,
increased $0.5 million during the nine months ending September 30, 2003 when
compared to the same period of the prior year, reflecting increased activity in
our international markets.
Income Taxes
The effective tax rate for the nine-months ended September 30, 2003 was 32%
compared to 36% for the nine-months ended September 30, 2002, reflecting a
higher percentage of earnings in foreign jurisdictions with lower tax rates. The
effective tax rate includes benefits associated with export sales, which is
currently the subject of legislation to repeal these benefits. If repealed and
not replaced with similar benefits, we expect our effective tax rate to increase
slightly.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 we had working capital of $801 million, an increase of $32
million from December 31, 2002 primarily due to increases in accounts
receivable, costs in excess of billings on capital projects, and inventories,
partially offset by an increase in accounts payable and current maturities of
term debt. Cash decreased $44 million during the first nine months ended
September 30, 2003 due primarily to financing acquisitions totaling $53 million.
Total capital expenditures were $22 million during the first nine months of 2003
compared to $14 million in the first nine months of the prior year. The majority
of these capital expenditures represent additions to the downhole rental tool
fleet and enhancements to information management systems. We expect our capital
expenditures in 2003 to total approximately $32 million. We believe we have
sufficient existing manufacturing capacity to meet currently anticipated demand
for our products and services.
12
At September 30, 2003, we had $307 million of committed credit facilities and
were in compliance with all covenants governing these facilities.
We replaced an existing credit facility in July 2002 with a new three-year
unsecured $175 million revolving credit facility. Borrowings against this
facility at September 30, 2003 totaled $32 million. This facility is available
for acquisitions and general corporate purposes and provides up to $50 million
for letters of credit, of which $14 million were outstanding at September 30,
2003. Interest is based upon prime or Libor plus 0.5% subject to a ratings based
grid. In securing this new credit facility, we incurred approximately $0.9
million in fees, which are being amortized to expense over the term of the
facility. This credit facility contains financial covenants and ratios regarding
maximum debt to capital and minimum interest coverage.
Recently acquired Hydralift ASA has multi-currency term loans and revolving
credit facilities totaling $132 million, which expire in 2006. These facilities
contain financial covenants and the term loans have mandatory repayments of
approximately $14 million beginning in May 2004. Interest is based upon a
pre-agreed upon percentage point spread from either the prime interest rate or
NIBOR. At September 30, 2003, borrowings totaled $53 million and there were $23
million of outstanding letters of credit.
We also have additional uncommitted credit facilities totaling $123 million that
are used primarily for letters of credit, bid bonds and performance bonds.
Borrowings against these additional credit facilities totaled $2 million at
September 30, 2003 and an additional $30 million had been used for letters of
credit and performance bonds.
We believe cash generated from operations and amounts available under the credit
facilities and from other sources of debt will be sufficient to fund operations,
working capital needs, capital expenditure requirements and financing
obligations. We also believe any significant increase in capital expenditures
caused by any need to increase manufacturing capacity can be funded from
operations or through debt financing.
During the nine months ended September 30, 2003, we did not enter into any
transactions, arrangements, or relationships with unconsolidated entities or
other persons which would materially affect liquidity, or the availability of or
requirements for capital resources, from the amounts disclosed in our Form
10-K/A for the year ending December 31, 2002.
We intend to pursue additional acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. We expect to fund future cash acquisitions primarily with
cash flow from operations and borrowings, including the unborrowed portion of
the credit facility or new debt issuances, but may also issue additional equity
either directly or in connection with acquisitions. There can be no assurance
that additional financing for acquisitions will be available at terms acceptable
to us.
Inflation has not had a significant impact on our operating results or financial
condition in recent years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our estimation process generally relates to
potential bad debts, obsolete and slow moving inventory, pension plan
accounting, value of goodwill and intangible assets, and deferred income tax
accounting. Our estimates are based on historical experience and on our future
expectations that we believe to be reasonable under the circumstances. The
combination of these factors result in the amounts shown as carrying values of
assets and liabilities in the financial statements and accompanying notes.
Actual results could differ from our current estimates and those differences may
be material.
These estimates may change as new events occur, as more experience is acquired,
as additional information is obtained and as our operating environment changes.
There have been no material changes or developments in our evaluation of the
accounting estimates and the underlying assumptions or methodologies that we
believe to
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be Critical Accounting Policies and Estimates as disclosed in our Form 10-K/A
for the year ending December 31, 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement on Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which sets forth the accounting and reporting to be followed for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses disposal
activities and termination costs in exiting an activity. Effective January 1,
2003, we adopted these new accounting pronouncements and they did not have a
significant impact on our results of operations or financial position.
The FASB issued Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation," ("SFAS No. 148") in December 2002. SFAS No. 148
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 were adopted on January 1, 2003 (see
Note 7).
The FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others," ("FIN 45"), which
we adopted effective January 1, 2003. FIN 45 requires that upon issuance of
certain types of guarantees, a guarantor recognize and account for the fair
value of the guarantee as a liability. FIN 45 contains exclusions to this
requirement, including the exclusion of a parent's guarantee of its
subsidiaries' debt to a third party. Upon adoption, this new accounting
pronouncement had no material impact on our consolidated financial position,
results of operations or cash flows.
The FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46"), which is effective January 31, 2003 for any new interests
in VIEs created after that date. This statement addresses the consolidation of
variable interest entities ("VIEs") by business enterprises that are the primary
beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the expected losses or expected
residual returns associated with the VIE. We do not believe we have any material
interests in VIEs created prior to February 1, 2003 that will require
consolidation when FIN 46 is required to be adopted at December 31, 2003 for
such entities, but we are continuing our evaluation.
FORWARD-LOOKING STATEMENTS
Some of the information in this document contains, or has incorporated by
reference, forward-looking statements. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements typically are identified by use of terms
such as "may," "will," "expect," "anticipate," "estimate," and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from results
anticipated in the forward-looking statements due to a number of factors,
including but not limited to changes in oil and gas prices, customer demand for
our products and worldwide economic activity. You should also consider carefully
the statements under "Risk Factors," as disclosed in our Form 10-K/A for the
year ending December 31, 2002, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements. We
undertake no obligation to update any such factors or forward-looking statements
to reflect future events or developments.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in foreign currency exchange rates and interest rates.
Additional information concerning each of these matters follows:
Foreign Currency Exchange Rates
We have operations in foreign countries, including Canada, Norway and the United
Kingdom, as well as operations in Latin America, Asia, the Middle East and other
European countries. The net assets and liabilities of these operations are
exposed to changes in foreign currency exchange rates, although such
fluctuations generally do not affect income since their functional currency is
the local currency. For operations where our functional currency is not the
local currency, such as Singapore and Venezuela, the net asset or liability
position is insignificant and, therefore, changes in foreign currency exchange
rates are not expected to have a material impact on earnings.
Some of our revenues in foreign countries are denominated in US dollars, and
therefore, changes in foreign currency exchange rates impact our earnings to the
extent that costs associated with those US dollar revenues are denominated in
the local currency. In order to mitigate that risk, we may utilize foreign
currency forward contracts to better match the currency of our revenues and
associated costs. We do not use foreign currency forward contracts for trading
or speculative purposes. The counterparties to these contracts are major
financial institutions, which minimizes counterparty credit risk.
Interest Rate Risk
Our long-term borrowings consist of $150 million in 6.875% senior notes, $150
million in 6.5% senior notes and $200 million in 5.65% senior notes. We also
have borrowings under our other credit facilities totaling $85 million at
September 30, 2003. A portion of the borrowings under our other credit
facilities are denominated in multiple currencies which could expose us to
market risk with exchange rate movements. These instruments carry interest at a
pre-agreed upon percentage point spread from either the prime interest rate,
LIBOR or NIBOR. Under our credit facilities, we may, at our option, fix the
interest rate for certain borrowings based on a spread over LIBOR or NIBOR for
30 days to 6 months. Based upon our September 30, 2003 borrowings under our
variable rate facilities of $85 million, an immediate change of one percent in
the interest rate would cause a change in annual interest expense of
approximately $0.9 million. Our objective in maintaining a portion of our debt
in variable rate borrowings is the flexibility obtained regarding early
repayment without penalties and lower overall cost as compared with fixed-rate
borrowings.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days before filing this report, we carried out an evaluation, under
the supervision and with the participation of the company's management,
including the company's President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon that evaluation, the
company's President and Chief Executive Officer along with the company's Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including its consolidated subsidiaries) required to be
included in the company's periodic Securities and Exchange Commission filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
our evaluation.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Merrill A. Miller, Jr., Chairman, President and
Chief Executive Officer, dated November 14, 2003, pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Steven W. Krablin, Chief Financial Officer,
dated November 14, 2003, pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
32 Statement of Merrill A. Miller, Jr., Chairman, President and
Chief Executive Officer, and Steven W. Krablin, Chief Financial
Officer, dated November 14, 2003, furnished pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K
A report on Form 8 - K was filed on July 25, 2003 regarding a press
release announcing our financial results for the three and six months ended June
30, 2003.
A report on Form 8 - K was filed on August 21, 2003 regarding a notice
provided to company directors and executive officers as required by Rule 104 of
Regulation BTR of a temporary suspension of trading under the company employee
benefit plans.
A report on Form 8 - K was filed on October 10, 2003 announcing the
establishment of a governance hotline that can be used by any interested parties
who may want to communicate directly and confidentially with the company's
non-management directors.
A report on Form 8 - K was filed on October 28, 2003 regarding a press
release announcing our financial results for the three and nine months ended
September 30, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2003 / s / Steven W. Krablin
------------------------- ------------------------------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
16
INDEX TO EXHIBITS
(a) Exhibits
31.1 Certification of Merrill A. Miller, Jr., Chairman, President and Chief
Executive Officer, dated November 14, 2003, pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Steven W. Krablin, Chief Financial Officer, dated
November 14, 2003, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
32 Statement of Merrill A. Miller, Jr., Chairman, President and Chief
Executive Officer, and Steven W. Krablin, Chief Financial Officer,
dated November 14, 2003, furnished pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended.
17