================================================================================
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 MARCH 31, 2004 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 May 3, 2004, 85,797,276 common shares were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
2004 2003
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 67,691 $ 74,217
Receivables, net 432,534 460,910
Inventories, net 609,916 546,690
Costs in excess of billings 94,349 107,625
Deferred income taxes 15,990 15,410
Prepaid and other current assets 26,910 41,548
----------- -----------
Total current assets 1,247,390 1,246,400
Property, plant and equipment, net 249,709 252,365
Deferred income taxes 50,770 52,391
Goodwill 583,065 587,341
Intangibles, net 78,907 79,281
Property held for sale 8,693 8,693
Other assets 19,913 16,265
----------- -----------
$ 2,238,447 $ 2,242,736
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt -- 14,910
Accounts payable 236,203 228,576
Customer prepayments 29,288 26,424
Accrued compensation 20,381 25,382
Billings in excess of costs 40,394 49,259
Accrued income taxes 21,594 24,673
Other accrued liabilities 84,981 82,991
----------- -----------
Total current liabilities 432,841 452,215
Long-term debt 585,630 593,980
Deferred income taxes 55,859 52,368
Other liabilities 36,638 37,996
----------- -----------
Total liabilities 1,110,968 1,136,559
Commitments and contingencies
Minority interest 15,972 15,748
Stockholders' equity:
Common stock - par value $.01; 85,762,107 and 85,124,979 shares
issued and outstanding at March 31, 2004 and December 31, 2003 858 851
Additional paid-in capital 687,707 674,965
Accumulated other comprehensive loss (47,009) (44,374)
Retained earnings 469,951 458,987
----------- -----------
1,111,507 1,090,429
----------- -----------
$ 2,238,447 $ 2,242,736
=========== ===========
The accompanying notes are an integral part of these statements.
2
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
(Restated)
Revenues $ 496,205 $ 500,576
Cost of revenues 392,657 382,365
--------- ---------
Gross profit 103,548 118,211
Selling, general, and administrative 77,796 77,545
--------- ---------
Operating income 25,752 40,666
Interest and financial costs (9,296) (10,254)
Interest income 629 1,109
Other income (expense), net (1,327) (2,369)
--------- ---------
Income before income taxes and minority interest 15,758 29,152
Provision for income taxes 4,570 9,885
--------- ---------
Income before minority interest 11,188 19,267
Minority interest in income of consolidated subsidiaries (224) (1,926)
--------- ---------
Net income $ 10,964 $ 17,341
========= =========
Net income per share:
Basic $ 0.13 $ 0.21
========= =========
Diluted $ 0.13 $ 0.21
========= =========
Weighted average shares outstanding:
Basic 85,396 83,704
========= =========
Diluted 85,935 84,476
========= =========
The accompanying notes are an integral part of these statements.
3
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
(Restated)
Cash flow from operating activities:
Net income $ 10,964 $ 17,341
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 9,822 9,200
Provision for losses on receivables 1,221 1,167
Provision for deferred income taxes (2,030) 1,681
Gain on sale of assets (1,481) (1,441)
Foreign currency transaction loss 1,580 2,188
Interest rate contract (20) (30)
Tax benefit from exercise of nonqualified stock options 2,697 86
Changes in assets and liabilities, net of acquisitions:
Receivables 27,155 (12,270)
Inventories (63,226) (36,241)
Costs in excess of billings 13,276 14,234
Prepaid and other current assets 14,638 (10,358)
Accounts payable 29,087 44,789
Billings in excess of cost (8,865) (22,642)
Other assets/liabilities, net (23,416) (18,678)
--------- ---------
Net cash provided (used) by operating activities 11,402 (10,974)
--------- ---------
Cash flow from investing activities:
Purchases of property, plant and equipment (6,362) (7,831)
Proceeds from sale of assets 2,002 2,200
Businesses acquired, net of cash -- (47,113)
--------- ---------
Net cash used by investing activities (4,360) (52,744)
--------- ---------
Cash flow from financing activities:
Borrowings against lines of credit 119,470 105,265
Payments against lines of credit (142,730) (95,359)
Proceeds from stock options exercised 10,454 376
--------- ---------
Net cash provided (used) by financing activities (12,806) 10,282
--------- ---------
Effect of exchange rate gain (loss) on cash (762) 459
--------- ---------
Decrease in cash and equivalents (6,526) (52,977)
Cash and cash equivalents, beginning of period 74,217 118,338
--------- ---------
Cash and cash equivalents, end of period $ 67,691 $ 65,361
========= =========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 11,203 $ 11,369
Income taxes $ 12,409 $ 9,760
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 2003 Annual Report on Form 10K. The financial statements for the three
months ended March 31, 2003 have been restated to reflect the impact of
correcting a clearing account problem within the Distribution Group's purchasing
system. The restated information is disclosed in Note 12 to our consolidated
financial statements included in our 2003 Annual Report on Form 10K.
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 ended March 31, 2004 are not necessarily indicative of the
results to be expected for the full year.
2. 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):
Quarter Ended March 31,
2004 2003
---- ----
Restated
Net income, as reported $10,964 $17,341
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,510) (2,242)
------- -------
Pro forma net income $ 9,454 $15,099
Net income per common share:
Basic, as reported $ 0.13 $ 0.21
Basic, pro forma 0.11 0.18
Diluted, as reported $ 0.13 $ 0.21
Diluted, pro forma 0.11 0.18
5
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 three months of 2004 was $13.19 and $9.20 in 2003.
The key input variables used in valuing the options granted in 2004 and 2003
were: risk-free interest rate of 2.7% in 2004 and 2.6% in 2003; dividend yield
of zero in each year; stock price volatility of 51% in 2004 and 48% in 2003, and
expected option lives of five years for each year presented.
3. INVENTORIES
Inventories consist of (in thousands):
March 31, December 31,
2004 2003
---- ----
Raw materials and supplies $ 50,734 $ 45,354
Work in process 121,665 107,747
Finished goods and purchased products 437,517 393,589
-------- --------
Total $609,916 $546,690
======== ========
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Quarter Ended March 31,
-----------------------
2004 2003
---- ----
(Restated)
Net income $ 10,964 $ 17,341
Currency translation adjustments (2,138) (8,269)
Interest rate contract (20) (20)
-------- --------
Comprehensive income $ 8,806 $ 9,052
-------- --------
6
5. BUSINESS SEGMENTS
Segment information follows (in thousands):
Quarter Ended March 31,
-----------------------
2004 2003
---- ----
(Restated)
Revenues from unaffiliated customers
Products and Technology $ 280,639 $ 316,691
Distribution Services 215,566 183,885
----------- -----------
496,205 500,576
Intersegment revenues
Products and Technology 24,128 18,785
Distribution Services 2,542 451
----------- -----------
26,670 19,236
Operating income
Products and Technology 23,496 41,004
Distribution Services 5,480 2,782
----------- -----------
Total profit for reportable segments 28,976 43,786
Unallocated corporate costs (3,224) (3,120)
----------- -----------
Operating income 25,752 40,666
Net interest expense (8,667) (9,145)
Other income (expense) (1,327) (2,369)
----------- -----------
Income before income taxes and
minority interest $ 15,758 $ 29,152
=========== ===========
Total assets
Products and Technology $ 1,775,086 $ 1,761,307
Distribution Services 366,719 290,927
6. DEBT
Debt consists of (in thousands):
March 31, December 31,
2004 2003
---- ----
Credit facilities $ 85,630 $108,890
6.875% senior notes 150,000 150,000
6.50% senior notes 150,000 150,000
5.65% senior notes 200,000 200,000
-------- --------
585,630 608,890
Less current portion -- 14,910
-------- --------
$585,630 $593,980
======== ========
7
In November 2002, we sold $200 million of 5.65% unsecured senior notes due
November 15, 2012. Interest is payable on May 15 and November 15 of each year.
In March 2001, we sold $150 million of 6.50% unsecured senior notes due March
15, 2011, with interest payable on March 15 and September 15 of each year. In
June 1998, we sold $150 million of 6.875% unsecured senior notes due July 1,
2005, with interest payments due on January 1 and July 1.
At March 31, 2004, we had two committed credit facilities, a North American and
a Norwegian facility, totaling $269 million. Both facilities are available for
general corporate purposes and acquisitions, including letters of credit and
performance bonds.
Our North American facility is an unsecured $175 million revolving credit
facility with availability up to $50 million for issuance of letters of credit
that expires July 31, 2005. At March 31, 2004, borrowings against this facility
totaled $70 million and there were $15 million in outstanding letters of credit.
Interest (1.6% @ 03/31/04) is based upon prime or Libor plus 0.5% subject to a
ratings based grid.
Our Norwegian facility, which expires in 2006, has revolving credit facilities
totaling $94 million, with $38 million available for letter of credit purposes.
At March 31, 2004, borrowings against this facility totaled $15 million and
there were $28 million in outstanding letters of credit. Interest (3.8% @
03/31/04) is based upon a pre-agreed percentage point spread from either the
prime interest rate, NIBOR or EURIBOR.
We also have additional uncommitted credit facilities totaling $134 million that
are used primarily for letters of credit, bid bonds and performance bonds. At
March 31, 2004, borrowings against these additional credit facilities totaled $1
million and there were $28 million in outstanding letters of credit and
performance bonds.
The senior notes contain reporting covenants and the credit facilities contain
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at March 31, 2004.
7. EMPLOYEE BENEFIT PLANS
Total net benefit expense associated with the Company's defined benefit pension
and postretirement benefit plans consisted of the following for the three months
ended March 31, 2004 and 2003 (in thousands):
Pension Benefits Postretirement Benefits
---------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 754 $ 748 $ 8 $ 10
Interest cost 1,917 1,868 127 124
Expected return on plan assets (1,985) (1,871) -- --
Net amortization and deferral 326 353 53 53
------- ------- ------- -------
Total net benefit expense $ 1,012 $ 1,098 $ 188 $ 187
======= ======= ======= =======
On December 8, 2003, the President signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. This Act introduces a Medicare
prescription drug benefit as well as a federal subsidy to sponsors of retiree
healthcare benefit plans that provide a benefit that is at least actuarially
equivalent to the Medicare benefit. As allowed by FASB Staff Position 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, we have elected to defer
recognizing the effects of the Act on our accumulated postretirement benefit
obligation and net periodic
8
postretirement benefit cost in the consolidated financial statements and notes
to consolidated financial statements until authoritative guidance on the
accounting for the federal subsidy is issued. The FASB plans to issue
authoritative guidance on the accounting for subsidies later in 2004. When the
authoritative guidance is issued, we may be required to change previously
reported information.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, 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. In December 2003, the FASB
made certain modifications and technical corrections to FIN 46 that are required
to be applied to all entities no later than March 31, 2004. 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 have any
material interests in VIEs created prior to February 1, 2003 that required
consolidation in the first quarter of 2004.
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. This is a cyclical industry and, unlike most prior cycles,
sustained, relatively high oil and gas prices have not driven a corresponding
level of increased spending by our customers.
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. We have made strategic
acquisitions during the past several years in an effort to expand our product
offering and our global manufacturing capabilities, including new operations in
Norway, the United Kingdom and China. Product and Technology revenues are
directly dependent on the levels of worldwide drilling activity.
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. Products are purchased from numerous manufacturers and
vendors, including our Products and Technology segment. We have expanded this
business to locations outside North America, including Europe, the Middle East,
Southeast Asia, and South America. We have made significant investments in
systems, staffing and inventory in the international market and, using our
information technology platforms and processes, we can provide complete
procurement, inventory management, and logistics services to our customers.
Approximately half of Distribution Services revenues are tied to worldwide
drilling activity, and the balance relates to the production of oil and gas
reserves.
RESULTS OF OPERATIONS
Operating results by segment are as follows (in thousands):
10
Quarter Ended March 31,
-----------------------
2004 2003
---- ----
Revenues:
Revenues from backlog $ 128,410 $ 169,850
Noncapital equipment 176,357 165,626
--------- ---------
Products and Technology 304,767 335,476
Distribution Services 218,108 184,336
Eliminations (26,670) (19,236)
--------- ---------
Total $ 496,205 $ 500,576
========= =========
Operating Income
Products and Technology $ 23,496 $ 41,004(1)
Distribution Services 5,480 2,782(1)
Corporate (3,224) (3,120)
--------- ---------
Total $ 25,752 $ 40,666(1)
========= ===========
Capital equipment backlog:
Beginning of quarter $ 338,900 $ 363,600
Add: Orders, net 201,300 174,400
Less: Revenues 128,410 169,850
--------- ---------
End of quarter $ 411,790 $ 368,150
========= =========
(1) Restated -See Note 1 to consolidated financial statements.
Products and Technology
Q1 2004 versus Q1 2003
Revenues for the Products and Technology segment decreased $31 million, or 9%,
during the first quarter of 2004 as compared to the same quarter in 2003, due
principally to a decline in capital equipment revenue of $42 million. Sales of
expendable pump parts and downhole tools and rentals increased approximately $13
million, as expected with the increase in the North American rotary rig count.
Sales of drilling spare parts remained virtually the same as the prior year.
Given our current backlog and shipment delays in the first quarter of certain
drilling packages, we anticipate significant improvement during the remainder of
2004 over our first quarter results.
Operating income decreased $18 million in the first quarter of 2004 compared to
the same quarter in 2003 due to the lower revenue volume and a 3% reduction in
gross margins. Unusually high costs on several capital equipment orders resulted
in the lower overall margins. Selling, general and administrative expenses
declined approximately $2 million in the first quarter of 2004 over 2003 as we
benefited from certain cost reduction initiatives begun in 2003.
Backlog of the Products and Technology capital products was $412 million at
March 31, 2004, reflecting an increase of $73 million from the December 31, 2003
level. Backlog at March 31, 2003 was $368 million. Product in current backlog
will be delivered by the middle of 2005.
11
Distribution Services
Q1 2004 versus Q1 2003
Distribution Services revenues increased $34 million, or approximately 18%,
during the first quarter of 2004 over the comparable 2003 period as the number
of active rigs running in the U.S. and Canada has seen a gradual increase during
the past twelve months. Revenues in the United States increased 9%, Canada was
higher by 33%, due in part to revenues generated by the November 2003 Corlac
acquisition, and the international sector was up by approximately 25%. Sales of
products manufactured by the Products and Technology segment showed a robust
gain of $20 million and maintenance, repair and operating supplies revenues
increased by $10 million, while the sales of line pipe reflected a slight gain
of $4 million.
Operating income in the first quarter of 2004 virtually doubled the prior year
level due principally to the margin increase on the incremental revenue and a
slight improvement in margin percent due to product mix. We did experience an
increase of almost $3 million to operate our network of facilities and another
$3 million increase in selling, general and administrative expenses due in part
to this segment's international expansion and the Corlac acquisition.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. These costs have been slightly above the $3 million level
since our last major acquisition in the fourth quarter of 2002 and we expect
spending to approximate this level in the near term.
Interest Expense
Interest expense decreased during the three months ended March 31, 2004 as
compared to the prior year due to lower borrowing levels and lower interest
rates.
Income Taxes
The effective tax rate for the three months ended March 31, 2004 was 29%
compared to 34% for the three months ended March 31, 2003, reflecting a higher
percentage of earnings in foreign jurisdictions with lower tax rates and the
benefit 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 to 32%.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004 we had working capital of $815 million, an increase of $21
million from December 31, 2003. Reduction in the current portion of long-term
debt accounted for $15 million of this increase, as we repaid all of the
Norwegian term loans, and we experienced a $63 million increase in inventory as
we position ourselves for the anticipated market upturn and the related capital
projects. A reduction of $28 million in accounts receivable and an increase in
accounts payable and accrued liabilities partially offset the inventory
increase. Cash decreased approximately $7 million during the first three months
ended March 31, 2004.
Total capital expenditures were $6 million during the first three months of 2004
compared to $8 million in the same period 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 2004 to total approximately $35 million. We believe we have
sufficient existing manufacturing capacity to meet currently anticipated demand
for our products and services.
12
In November 2002, we sold $200 million of 5.65% unsecured senior notes due
November 15, 2012. Interest is payable on May 15 and November 15 of each year.
In March 2001, we sold $150 million of 6.50% unsecured senior notes due March
15, 2011, with interest payable on March 15 and September 15 of each year. In
June 1998, we sold $150 million of 6.875% unsecured senior notes due July 1,
2005, with interest payments due on January 1 and July 1.
At March 31, 2004, we had two committed credit facilities, a North American and
a Norwegian facility, totaling $269 million. Both facilities are available for
general corporate purposes and acquisitions, including letters of credit and
performance bonds.
Our North American facility is an unsecured $175 million revolving credit
facility with availability up to $50 million for issuance of letters of credit
that expires July 31, 2005. At March 31, 2004, borrowings against this facility
totaled $70 million and there were $15 million in outstanding letters of credit.
Interest (1.6% @ 03/31/04) is based upon prime or Libor plus 0.5% subject to a
ratings based grid.
Our Norwegian facility, which expires in 2006, has revolving credit facilities
totaling $94 million, with $38 million available for letter of credit purposes.
At March 31, 2004, borrowings against this facility totaled $15 million and
there were $28 million in outstanding letters of credit. Interest (3.8% @
03/31/04) is based upon a pre-agreed percentage point spread from either the
prime interest rate, NIBOR or EURIBOR.
We also have additional uncommitted credit facilities totaling $134 million that
are used primarily for letters of credit, bid bonds and performance bonds. At
March 31, 2004, borrowings against these additional credit facilities totaled $1
million and there were $28 million in outstanding letters of credit and
performance bonds.
The senior notes contain reporting covenants and the credit facilities contain
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at March 31, 2004.
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 three months ended March 31, 2004, 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
for the year ending December 31, 2003.
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, revenue recognition on
long term contracts, 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
13
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 be material to the Critical Accounting Policies and Estimates as
disclosed in our Form 10-K for the year ending December 31, 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, 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. In December 2003, the FASB
made certain modifications and technical corrections to FIN 46 that are required
to be applied to all entities no later than March 31, 2004. 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 have any
material interests in VIEs created prior to February 1, 2003 that required
consolidation in the first quarter of 2004.
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 for the year
ending December 31, 2003, 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.
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, China 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.
These operations also have net assets and liabilities not denominated in the
local currency, which exposes us to changes in foreign currency exchange rates
that do impact income. We recorded foreign exchange losses in our income
statement of approximately $1.6 million in the first quarter of 2004, compared
to $2.2 million in the same period of the prior year. We do not believe that a
hypothetical 10% movement in these foreign currencies would have a material
impact on our earnings.
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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 facilities totaling $86 million at March 31,
2004 (weighted average interest rate of 2.2% at March 31, 2004). A portion of
the borrowings 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, NIBOR or EURIBOR. Under our credit facilities, we may, at our option, fix
the interest rate for certain borrowings based on a spread over LIBOR, NIBOR or
EURIBOR for 30 days to 6 months. Based upon our March 31, 2004 borrowings under
our variable rate facilities of $86 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 pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
31.2 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
A report on Form 8 - K was filed on February 12, 2004 regarding a
press release announcing our financial results for the fourth quarter and full
year ended December 31, 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: May 7, 2004 /s/ Steven W. Krablin
-------------- -----------------------
Steven W. Krablin
Principal Financial and Accounting Officer
and Duly Authorized Signatory
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INDEX TO EXHIBITS
(a) Exhibits
31.1 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
31.2 Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the
Securities and Exchange Act, as amended
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17