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FORM 10-K/A
(AMENDMENT NO. 2)
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0475815
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE
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
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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/A or any amendment to
this Form 10-K/A. [ X ]
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 March 3, 2003, 84,224,527 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 4,140,609 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 $1.8
billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement in connection with the 2003 Annual Meeting of
Stockholders are incorporated in Part III of this report.
ITEM 1. BUSINESS
GENERAL
National Oilwell designs, manufactures and sells comprehensive systems,
components, and products used in oil and gas drilling and production, as well as
distributes products and provides services to the exploration and production
segment of the oil and gas industry.
Our Products and Technology segment designs and manufactures complete land
drilling and workover rigs, as well as drilling related systems on 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 (the hoisting winch used to raise and lower drill pipe), mud pumps
(used to circulate drilling fluids), top drives (used to turn drill pipe)
derricks, cranes, jacking and mooring systems (used to raise, lower and anchor
offshore jackup drilling rigs), 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.
Non-capital products produced by our Products and Technology segment include
drilling motors and specialized downhole tools that are sold or rented, spare
parts and service on the large installed base of our equipment, expendable parts
for mud pumps and other equipment, and smaller downhole, progressive cavity and
transfer pumps.
Our Distribution Services segment provides maintenance, repair and operating
supplies and spare parts 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.
BUSINESS STRATEGY
National Oilwell's business strategy is to enhance its market positions and
operating performance in the upstream oil and gas business by:
Leveraging our Capital Equipment Installed Base
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 our Non-Capital Products Business
Our non-capital equipment revenues continue to represent over half of our
products and technology business. We rent and sell high-performance drilling
motors and downhole tools and in the manufacture of certain expendable products
and spare parts needed in the drilling and production process. We believe
additional expansion in the non-capital upstream oil and gas industry would be
beneficial to our business and our customers.
1
Furthering our 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 service providers 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 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 our Acquisitions Strategy
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 2003, National Oilwell has made a
total of thirty-two acquisitions and plans to continue to participate in this
trend. While none of our individual acquisitions have materially affected the
development of our current business or the results of our operations, the
aggregate effect has positively impacted our ability to provide complete
drilling equipment systems to our customers.
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. Mechanical components include drawworks, mud pumps, top
drives, solids control equipment (used to remove particulates from drilling
fluids), traveling equipment (hooks and blocks used to hoist and lower drill
pipe) and rotary tables (used to rotate drill pipe). These components are
essential to pump fluids and hoist, support and rotate 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.
We design and manufacture masts, derricks and substructures for use on land rigs
and on fixed and mobile offshore platforms suitable for drilling applications to
depths of up to 30,000 feet or more. Other products include cranes, jacking and
mooring systems, 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 manufacture electrical systems and control and data
acquisition systems for drilling related operations and automated and remotely
controlled machinery for drilling rigs. Our control systems can control and
monitor many simultaneous operations on a drilling rig and often form the basis
for our state-of-the-art driller's
2
cabin. Our automated pipe handling system provides an efficient and cost
effective method of joining lengths of drill pipe or casing as does our iron
roughneck. These and similar technologically advanced products can greatly
improve the safety on rigs, often by reducing the number of persons working on
the drilling floor.
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 equipment packages for 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.
Distribution Services
National Oilwell provides distribution services through its network of
approximately 150 distribution service centers. National Oilwell's distribution
service centers are located throughout the oil and gas producing regions of
North America, with 105 in the United States, 40 in Canada, and the remainder in
various international locations. 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 products manufactured by us and from the
association of this business with our Products and Technology segment.
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 supplies and
equipment pursuant to non-exclusive contracts, which normally specify a discount
from list price for each product or product category. Our goal is to create
strategic alliances with our customers whereby 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 few years, we have invested over
$20 million to improve our information technology systems. Our e-commerce system
can interface directly with customers' systems to maximize efficiencies for us
and for our customers. 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 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.
3
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. National
Oilwell's Products and Technology business segment competes with several
companies in North America that have drilling products that compete directly
with certain of our products. National Oilwell's Distribution Services business
segment faces competition from various smaller regional competitors who leverage
geographic strength in a particular market area, as well as other multinational
distribution companies utilizing pricing power to compete. None of these
competing companies dominate in any of the business segments in which we
operate.
Manufacturing and Backlog
National Oilwell has manufacturing facilities located in the United States,
Canada, Norway and China. 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.
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, 2002 $364 million (includes $170 million from
the Hydralift ASA acquisition)
December 31, 2001 385 million
December 31, 2000 282 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 production 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.
4
Employees
As of December 31, 2002, we had a total of 6,900 employees, 4,300 of whom were
salaried and 2,600 of whom were paid on an hourly basis. Of this workforce,
1,300 employees are employed in Canada, 850 in Norway and 675 in other locations
outside the United States.
Available Information Regarding our SEC Filings
Our corporate offices are located at 10000 Richmond Avenue, Houston, Texas
77042-4200. Our phone number at that location is (713) 346-7500 and our Internet
address is www.natoil.com. Information we make public about our company,
including all SEC required filings, is available to you, free of charge, at our
Internet address.
RISK FACTORS
You should carefully consider the risks described below, in addition to
other information contained or incorporated by reference herein. Realization of
any of the following risks could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
Demand for Our Products is Dependent Upon the Price of Oil and Gas and the
Willingness to Explore and Produce Oil and Gas.
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:
o level of production from known reserves;
o cost of producing oil and gas;
o level of drilling activity;
o worldwide economic activity;
o national government political requirements;
o development of alternate energy sources; and
o environmental regulations.
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 decline.
Volatile Oil and Gas Prices Affect Demand for Our Products.
Oil and gas prices have been volatile since 1990, ranging from $10 -
$40 per barrel. Over the last three years, oil prices have generally ranged
within $20-$30 per barrel. Spot gas prices have also been volatile since 1990,
ranging from less than $1.00 per mmbtu of gas to above $10.00. Gas prices were
moderate in 1998 and 1999, generally ranging from $1.80 - $2.50 per mmbtu. Gas
prices in 2000 generally ranged from $4-$8 per mmbtu. In the second quarter of
2001, gas prices came under pressure, generally ranging between $2.20 to $3.00
per mmbtu through the first quarter of 2002. Gas prices have generally ranged
between $3.00 - $5.00 per mmbtu since that time.
Expectations for future oil and gas prices cause 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
5
equipment of the type we manufacture. Industry activity and our revenues have
not responded to the higher commodity prices that have existed since the second
quarter of 2002, presumably due to concerns that these prices will not continue
in the current range. The oil and gas prices which are determined by the
marketplace may be above or below a range that is acceptable to our customers,
which could reduce demand for our products.
Competition in our Industry Could Ultimately Lead to Lower Revenues and
Earnings.
The oilfield products and services industry is highly competitive. The
following competitive actions can each affect our revenues and earnings:
o price changes;
o new product and technology introductions; and
o improvements in availability and delivery.
National Oilwell's Products and Technology business segment competes
with several companies in North America that have drilling products that compete
directly with certain of our products. National Oilwell's Distribution Services
business segment faces competition from various smaller regional competitors who
leverage geographic strength in a particular market area, as well as other
multinational distribution companies utilizing pricing power to compete.
Competition in our industry could lead to lower revenues and earnings.
Because Some of Our Products are Used in Potentially Hazardous Activities, We
Face Potential Product Liability and Warranty Claims.
Customers use some of our products in potentially hazardous drilling,
completion and production applications that can cause:
o injury or loss of life;
o damage to property, equipment or the environment; and
o suspension of operations.
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. The outcome of any such legal
or administrative proceedings could have an adverse effect on our financial
condition.
The Location of Some of our Customers in Foreign Markets that may have Unstable
Economies or Governments Could Have a Negative Impact on Our Revenues and
Operating Results.
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 Sells Products and Services Outside the United States. Changes
in Foreign Currency Exchange Rates Could Have a Negative Impact on our Revenues
and Operating Results.
National Oilwell is exposed to the risks of changes in exchange rates
between the U.S. dollar and foreign currencies. Our Norwegian companies enter
into foreign exchange forward contracts, primarily between the Norwegian kroner
and the US dollar, to hedge cash flows on certain significant contracts. Our
decisions regarding
6
the need for hedging foreign currencies in Norway and other countries can
adversely affect our operating results.
Our Growth Could Cause Difficulties Integrating Operations that We Acquire.
National Oilwell has acquired 32 companies since April 1997, including
nine in 2001 and four in 2002. In addition, we acquired two other companies in
January 2003. We do not know whether suitable acquisition candidates will be
available on reasonable terms or if we will have access to adequate funds to
complete any desired acquisition. In addition, we may not be able to
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.
Our Indebtedness Could Limit Our Ability to Borrow Additional Funds and/or Make
Us Vulnerable to General Adverse Economic and Industry Conditions.
In 1998, National Oilwell issued $150 million of 6 7/8% unsecured senior notes
due July 1, 2005. In 2001, we issued an additional $150 million of 6 1/2%
unsecured senior notes due March 15, 2011. In 2002, we issued $200 million of
5.65% unsecured senior notes due November 15, 2012. We also have a $175 million
revolving line of credit and approximately $200 million in availability under
various borrowing arrangements of our wholly-owned foreign subsidiaries. Our
leverage requires us to use some of our cash flow from operations for payment of
interest on our 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.
7
ITEM 2. PROPERTIES
National Oilwell owned or leased approximately 235 facilities worldwide as of
December 31, 2002, including the following principal manufacturing and
administrative facilities:
APPROXIMATE
BUILDING SPACE
LOCATION (SQUARE FOOT) DESCRIPTION STATUS
-------- -------------- ----------- ------
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 drilling machinery and equipment Leased
Carquefou, France 213,000 Manufactures offshore and marine handling Owned
equipment
Sugarland, Texas 190,000 Manufactures braking systems and generators Owned
Galena Park, Texas 188,000 Manufactures drilling components and rigs Owned
Houston, Texas 178,000 Manufactures electrical power systems Owned
Edmonton, Alberta, Canada 162,000 Manufactures downhole tools Owned
Kristiansand, Norway 157,000 Manufactures drilling and offshore equipment Owned
Tulsa, Oklahoma 140,000 Manufactures pumps and expendable parts Owned
McAlester, Oklahoma 117,000 Manufactures pumps and expendable parts Owned
Houston, Texas 115,000 Administrative offices Leased
Stavanger, Norway 87,000 Manufactures drilling components and systems Leased
Calgary, Alberta, Canada 76,000 Manufactures coiled tubing units and wireline trucks Owned
Molde, Norway 68,000 Manufactures marine handling equipment Owned
Marble Falls, Texas 65,000 Manufactures drilling expendable parts Owned
Stavanger, Norway 62,000 Manufactures drilling components and systems Owned
Nisku, Alberta, Canada 59,000 Manufactures drilling machinery and equipment Owned
Edmonton, Alberta, Canada 57,000 Manufactures drilling machinery and equipment Owned
We own or lease 65 satellite repair and manufacturing facilities that refurbish
and manufacture new equipment and parts and approximately 150 distribution
service centers worldwide. We believe the capacity of our facilities is adequate
to meet demand currently anticipated for 2003.
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, 2002.
8
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:
2002 2001 2000
------------------------ ----------------------- ------------------------
Quarter High Low High Low High Low
------- ------- ------- ------- ------- ------- -------
First $ 26.25 $ 16.43 $ 40.50 $ 33.65 $ 31.38 $ 14.25
Second 28.81 20.91 39.55 26.80 32.89 22.94
Third 21.29 15.19 25.74 12.91 37.50 27.25
Fourth 23.31 17.69 20.86 13.85 39.19 28.25
As of March 3, 2003, there were 537 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 so the actual number is
unknown but significantly higher. National Oilwell has never paid cash
dividends, and none are anticipated during 2003.
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ITEM 6. SELECTED FINANCIAL DATA
Data for periods prior to 2000 shown below is restated to combine IRI
International and Dupre' results pursuant to pooling-of-interests accounting.
YEAR ENDED DECEMBER 31,
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2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues $ 1,521,946 $ 1,747,455 $ 1,149,920 $ 839,648 $ 1,449,248
Operating income (1) 134,323 189,277 48,456 1,325 139,815
Income (loss) before taxes 112,465 168,017 27,037 (14,859) 125,021
Net income (loss) (2) 73,069 104,063 13,136 (9,385) 81,336
Net income (loss) per share
Basic (2) 0.90 1.29 0.17 (0.13) 1.19
Diluted (2) 0.89 1.27 0.16 (0.13) 1.19
OTHER DATA:
Depreciation and amortization 25,048 38,873 35,034 25,541 20,518
Capital expenditures 24,805 27,358 24,561 17,547 39,246
BALANCE SHEET DATA:
Working capital 768,852 631,257 480,321 452,015 529,937
Total assets 1,968,662 1,471,696 1,278,894 1,005,715 1,091,028
Long-term debt, less current maturities 594,637 300,000 222,477 196,053 222,209
Stockholders' equity 933,364 867,540 767,206 596,375 603,568
(1) In connection with the IRI International Corporation merger in 2000, we
recorded charges of $14.1 million related to direct merger costs,
personnel reductions, and facility closures and inventory write-offs of
$15.7 million due to product line rationalization. In 1998, a $17.0
million charge was recorded related to personnel reductions and
facility closures and a $5.6 million charge related to the write-down
of certain tubular inventories.
(2) We adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), effective January 1,
2002. The effects of not amortizing goodwill and other intangible
assets in periods prior to the adoption of SFAS 142 would have resulted
in net income (loss) of $115.0 million, $23.1 million, $(4.0) million
and $84.8 million for the years ended December 31, 2001, 2000, 1999,and
1998, respectively; basic earnings per common share of $1.42, $0.29,
$(0.06) and $1.24 for the years ending December 31, 2001, 2000, 1999
and 1998, respectively; and diluted earnings per common share of $1.41,
$0.29, $(0.06) and $1.24 for the years ending December 31, 2001, 2000,
1999 and 1998, respectively.
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ITEM 7. 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. See "Risk Factors".
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, which have been restated to reflect a business
combination accounted for under the pooling-of-interests method during 2000, are
as follows (in millions):
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues:
Products and Technology $ 917.3 $ 1,120.9 $ 683.5
Distribution Services 686.2 707.8 521.3
Eliminations (81.5) (81.3) (54.8)
---------- ---------- ----------
Total $ 1,522.0 $ 1,747.4 $ 1,150.0
========== ========== ==========
Operating Income:
Products and Technology $ 127.0 $ 171.0 $ 61.0 ?
Distribution Services 18.1 28.5 12.9
Corporate (10.8) (10.2) (11.3)
---------- ---------- ----------
134.3 189.3 62.6
Special Charge -- -- 14.1
---------- ---------- ----------
Total $ 134.3 $ 189.3 $ 48.5
========== ========== ==========
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Products and Technology
Products and Technology revenues in 2002 were $203.6 million (18%) lower than
the previous year as moderate oil and gas prices failed to sustain the 2001
levels of market activity in all product areas. Capital equipment revenues were
down $72 million while related spare parts and expendable parts were lower than
2001 by $38 million. Sales and rentals of downhole motors and fishing tools
decreased by approximately $74 million, impacted by its strong dependence on the
North American market. Operating income fell $44 million in 2002 when compared
to the prior year, impacted by the margin reduction due to the significantly
lower volume. Changes in sales price did not have any significant effect on
revenues compared to the prior year. The absence of amortization of goodwill in
2002, as required per the new accounting guidance, favorably impacted operating
income by $10.4 million. Reductions in compensation expense also contributed
approximately $11.0 million in operating income when compared to the prior year.
Revenues from the mid-December 2002 acquisition of Hydralift ASA, and the
consolidation of our Chinese joint venture, each contributed $8.0 million in
revenues and $0.3 million and $2.2 million in operating income, respectively.
Revenues for the Products and Technology segment in 2001 increased by $437.4
million (64 %) from 2000 as virtually all products experienced significant
revenue growth. Capital equipment revenues were up $285 million, drilling spares
up $35 million, expendable pumps and parts were higher by $47 million and
downhole tools increased $75 million. As a result of this robust growth in the
volume of product sales, operating income in 2001 increased by $110.0 million
from the prior year. Changes in sales price did not have any significant effect
on revenues compared to the prior year. Revenues from acquisitions completed in
2001 under the purchase method of accounting contributed $34 million in
incremental revenues.
Backlog of the Products and Technology capital products was $364 million at
December 31, 2002, $385 million at December 31, 2001 and $282 million at
December 31, 2000. Backlog at December 31, 2002 includes $170 million acquired
in late December through the purchase of Hydralift ASA. Substantially all of the
current backlog is expected to be shipped by mid-year 2004.
Distribution Services
Distribution Services revenues fell $21.6 million, or 3%, from the 2001 level as
this segment's strategy to create strategic alliances and expand its
international presence made significant market penetration during a difficult
market. North American revenues fell approximately 16% due to the lower activity
level while shipments in the international market almost doubled. Sales of our
own-make products increased almost 12% while maintenance, repair and operating
("MRO") supplies fell almost 5%. Changes in sales price did not have any
significant effect on revenues compared to the prior year. Operating income in
2002 was $10.4 million lower than the prior year. Margin reduction, due to the
lower volume and project bidding pressures, contributed to approximately 80% of
the operating income shortfall with the remainder due to significant
infrastructure growth.
Distribution Services revenues in 2001 increased $186.5 million from the 2000
level with all areas and products participating in the upswing that lasted until
the middle of the 4th quarter 2001. U.S. revenues of MRO supplies were up 44%
while Canadian revenues were 13% higher than the prior year. Changes in sales
price did not have any significant effect on revenues compared to the prior
year. Operating income in 2001 increased by $15.6 million from the prior year
due to the higher revenue volume and cost efficiencies linked to the new global
operating system. Revenues from acquisitions completed in 2001 under the
purchase method of accounting contributed $24 million in incremental revenues.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. Year 2002 costs of $10.8 million reflect certain corporate-led
marketing initiatives and general overhead incurred to support a larger company.
Year 2001 costs of $10.2 million represents a 10% reduction from the prior year
as various e-strategy
12
and e-commerce initiatives became operational. Year 2003 corporate charges are
expected to approximate $12 million due to recent acquisitions.
Special Charge
During 2000, we 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 approximated $13 million and $1.1
million, respectively. All direct cash outlays have been spent. Facility closure
costs consisted of lease cancellation costs and impairment of a closed
manufacturing facility that is classified with "Property held for sale" on our
balance sheet. All of this charge is applicable to the Products and Technology
business segment.
Interest Expense
Interest expense in 2002 totaled $24.1 million, an increase of $1.3 million from
the prior year. All of this increase is a direct result of our mid-November 2002
sale of $200 million of 5.65% unsecured senior notes. Our average borrowing cost
during 2002 of 6.4% remained the same as 2001. We expect our interest expense in
2003 to increase by at least $10 million as a result of our higher senior debt
level.
Despite continual borrowing rate declines during 2001, interest expense
increased approximately $5.5 million over 2000 due to our higher debt level to
support the working capital associated with the robust business climate. In
March 2001, we sold $150 million of 6 1/2% unsecured senior notes which
increased our total senior debt to $300 million. Year 2001 average monthly debt,
including the senior notes, was $334 million or $118 million (54%) greater than
the 2000 level.
Income Taxes
National Oilwell is subject to U.S. federal, state and foreign taxes and
recorded a combined tax rate of 35% in 2002, 38% in 2001 and 51% in 2000. 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. Excluding the impact
of merger-related costs and capital losses, our combined effective tax rate for
2000 was 36%. We expect our tax rate in 2003 to approximate 34%.
We have net operating loss carryforwards in the United States that could reduce
future tax expense by up to $4.2 million. They expire at various dates through
2017. Additional loss carryforwards in Europe could reduce future tax expense by
$10.3 million and reduce goodwill $9.4 million if realized in the future. Due to
the uncertainty of future utilization of these loss carryforwards, $2.8 million
of the potential benefits in the U.S. and $9.6 million in Europe have been fully
reserved.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, National Oilwell had working capital of $768.9 million, an
increase of $137.6 million from December 31, 2001. The addition of Hydralift ASA
and consolidation of the Chinese joint venture accounted for $123.3 million of
this increase, including $78 million of the increase in cash. After considering
the Halco acquisition in January 2002 and the change in current deferred taxes,
the rest of the company reduced our need for working capital during 2002. Due to
a new revolving three-year credit facility put in place during July 2002, all of
our debt is of a long-term nature.
13
Total capital expenditures were $24.8 million during 2002, $27.4 million in 2001
and $24.6 million in 2000. 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 $35 million in 2003, which should also approximate depreciation
expense in that year, with continued emphasis on rental tools and information
technology. We believe we have sufficient existing manufacturing capacity to
meet currently anticipated demand through 2003 for our products and services.
In November 2002, we sold $200 million of 5.65 % unsecured senior notes due
November 15, 2012. Proceeds were used to acquire Hydralift ASA. 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 annually on January 1 and July 1.
On July 30, 2002, we replaced the existing credit facility with a new three-year
unsecured $175 million revolving credit facility. This facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $22.0 million were outstanding at December 31, 2002.
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 will be amortized to expense over the term of the facility.
The senior notes contain reporting covenants and the credit facility contains
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at December 31, 2002.
We also have additional credit facilities totaling $223 million that are used
primarily for acquisitions, general corporate purposes and letters of credit.
Recently acquired Hydralift ASA represents $152 million of these facilities.
These multi-currency Hydralift committed facilities are secured by a guarantee,
contain financial covenants and expire in 2006. Borrowings against these
additional credit facilities totaled $93 million at December 31, 2002 and an
additional $39 million had been used for letters of credit and guarantees.
We believe cash generated from operations and amounts available under our 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.
We have not entered 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. A
summary of our outstanding contractual obligations and other commercial
commitments at December 31, 2002 is as follows (in thousands):
14
PAYMENTS DUE BY PERIOD
----------------------------------------------------
LESS THAN 1
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
--------------------------------------- ---------- ------------ ---------- ---------- -------------
Long Term Debt $ 594,637 $ -- $ 244,637 $ -- $ 350,000
Operating Leases 63,625 17,658 30,450 6,943 8,574
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 658,262 $ 17,658 $ 275,087 $ 6,943 $ 358,574
========== ========== ========== ========== ==========
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
----------------------------------------------------
LESS THAN 1
COMMERCIAL COMMITMENTS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
--------------------------------------- ---------- ------------ ---------- ---------- -------------
Line of Credit $ 326,698 $ -- $ 326,698 $ -- $ --
Standby Letters of Credit 61,432 41,635 19,797 -- --
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 388,130 $ 41,635 $ 346,495 $ -- $ --
========== ========== ========== ========== ==========
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.
MARKET RISK DISCLOSURE
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. 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.
The impact of foreign currency exchange rates has not materially affected our
results of operations in any of the last three years. We do not believe that a
hypothetical 10% movement in these foreign currencies would have a material
impact on our earnings.
15
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 $94.6 million at December
31, 2002. 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 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 December 31,
2002 borrowings under our variable rate facilities of $94.6 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.
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, value of intangible
assets, and deferred income tax accounting. Note 1 to the consolidated financial
statements contains the accounting policies governing each of these matters. 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.
We believe the following accounting policies are the most critical in the
preparation of our consolidated financial statements:
We maintain an allowance for doubtful accounts for accounts receivables by
providing for specifically identified accounts where collectibility is doubtful
and a general allowance based on the aging of the receivables compared to past
experience and current trends. A majority of our revenues come from drilling
contractors, independent oil companies, international oil companies and
government-owned or government-controlled oil companies, and we have
receivables, some denominated in local currency, in many foreign countries. If,
due to changes in worldwide oil and gas drilling activity or changes in economic
conditions in certain foreign countries, our customers were unable to repay
these receivables, additional allowances would be required.
Allowances for inventory obsolescence are determined based on our historical
usage of inventory on-hand as well as our future expectations related to our
substantial installed base and the development of new products. The amount
reserved is the recorded cost of the inventory minus its estimated realizable
value. Changes in worldwide oil and gas drilling activity and the development of
new technologies associated with the drilling industry could require additional
allowances to reduce the value of inventory to the lower of its cost or net
realizable value.
We account for our defined benefit pension plans in accordance with Statement of
Financial Accounting Standards No. 87, Employers' Accounting for Pensions (FAS
87), which requires that amounts recognized in the financial statements be
determined on an actuarial basis. Significant elements in determining our
pension income or expense in accordance with FAS 87 is the discount rate
assumption and the expected return on plan assets. The discount rate used
approximates the weighted average rate of return on high-quality fixed income
investments whose maturities match the expected payouts. The expected return on
plan assets is based upon the geometric mean of historical returns of a number
of different equities, including stocks, bonds and U.S. treasury bills. The
assumed long-term rate of return on assets is applied to a calculated value of
plan assets, which results in an estimated return on plan assets that is
included in current year pension income or expense. The difference between this
expected return and the actual return on plan assets is deferred and amortized
against future pension income or expense. A substantial portion of our pension
amounts relate to its defined benefit plans in the United States and the United
Kingdom. During 2000, 2001 and 2002, we assumed that the expected long-term rate
of return on plan assets for these plans would be between 6.3% and 8.0%. Prior
to 2001, our actual cumulative long-term rate of return on the pension
16
assets of these plans was in excess of these amounts; however, these plans'
assets have recently earned substantially less than the assumed rates of return.
The impact of our pension plans on our 2002 results of operations, cash flow and
liquidity has been immaterial but recent actual returns of the plan assets may
effect future contributions to the plans and our earnings. The amount of
unrecognized losses on pension assets is $31.8 million. For 2003, we have
lowered the assumed rates of return to between 6.0% and 7.0%, depending on the
plan. As a result of this and other factors, we believe there will be an
increase in pension expense of approximately $0.5-$1.0 million for 2003.
Business acquisitions are accounted for using the purchase method of accounting.
The cost of the acquired company is allocated to identifiable tangible and
intangible assets based on estimated fair value, with the excess allocated to
goodwill. On at least an annual basis, we assess whether goodwill is impaired.
Our annual impairment tests are performed at the beginning of the 4th quarter of
each year. If we determine that goodwill is impaired, we measure that impairment
based on the amount by which the book value of goodwill exceeds its implied fair
value. The implied fair value of goodwill is determined by deducting the fair
value of a reporting unit's identifiable assets and liabilities from the fair
value of that reporting unit as a whole. Additional impairment assessments may
be performed on an interim basis if we encounter events or changes in
circumstances that would indicate that, more likely than not, the carrying
amount of goodwill has been impaired. The fair value of the reporting units is
determined based on internal management estimates that considers multiple
valuation techniques.
Our net deferred tax assets and liabilities are recorded at the amount that is
more likely than not to be realized or paid. Should we determine that we would
not be able to realize all or part of the net deferred tax asset in the future,
an adjustment to the deferred tax assets would be charged to income in the
period of such determination.
SUBSEQUENT EVENTS
On January 2, 2003, we acquired LSI, a Houston, Texas based distributor of
specialty electrical products, for approximately $13 million. This transaction
generated approximately $6 million in goodwill and is complementary to our
distribution services business.
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 $46
million in goodwill and will add to the non-capital product lines within our
Products and Technology segment.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board 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", addresses disposal activities and
termination costs in exiting an activity. These pronouncements are generally
effective January 1, 2003. The Company believes the adoption of these new
accounting pronouncements will not have a significant impact on its 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 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
17
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 undertake no obligation to
update any such factors or forward-looking statements to reflect future events
or developments.
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 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders.
18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of our fiscal year ended December
31, 2002, with respect to compensation plans under which our common stock may be
issued:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO FUTURE ISSUANCE UNDER
BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY (a) (b) (c) (1)
----------------------- ------------------------ -------------------- -----------------------
Equity compensation
plans approved by
security holders 3,790,496 $ 21.99 4,219,162
Equity compensation
plans not approved by
security holders 0 0 0
----------- -------- -----------
Total 3,790,496 $ 21.99 4,219,162
=========== ======== ===========
(1) Shares could be issued other than upon the exercise of stock
options, warrants or rights; however, none are anticipated during 2003.
On February 14, 2003, we issued 977,500 stock options at an exercise
price of $20.14.
Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our chief executive officer and chief financial officer, based
on their evaluation of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date
within 90 days prior to the filing of this annual report on
Form 10-K, have concluded that our disclosure controls and
procedures are adequate and effective for the information
required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934, as amended
(the "Exchange
19
Act"), and that this information is recorded, processed,
summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms.
(b) Changes in internal control
There were no significant changes in our internal controls or
in other factors that could significantly affect our internal
controls subsequent to the date of their evaluation described
above.
PART IV
ITEM 15. 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.........................................................24
Consolidated Statements of Operations...............................................25
Consolidated Statements of Cash Flows...............................................26
Consolidated Statements of Stockholders' Equity.....................................27
Notes to Consolidated Financial Statements..........................................28
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts.....................................49
All schedules, other than Schedule II, 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 between National-Oilwell, Inc. and
Hydralift ASA regarding the transaction announced October 11,
2002 (Exhibit 2.1) (5).
3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Exhibit 3.1) (1).
3.2 By-laws of National-Oilwell, Inc. Filed as an exhibit to the
Annual Report on Form 10-K, filed March 7, 2003.
10.1 Employment Agreement dated as of January 1, 2002 between
Merrill A. Miller, Jr. and National Oilwell, with a similar
agreement with Steven W. Krablin (Exhibit 10.1) (2).
10.2 Employment Agreement dated as of January 1, 2002 between
Dwight W. Rettig and National Oilwell, with similar agreements
with Robert L. Bloom, Kevin Neveu, Mark A. Reese and Robert R.
Workman (Exhibit 10.2) (2).
20
10.3 Employment Agreement dated as of June 28, 2000 between Gary W.
Stratulate and IRI International, Inc., which has now merged
into National Oilwell (Exhibit 10.3) (2).
10.4 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.1) (3)*.
10.5 Loan Agreement dated July 30, 2002 (Exhibit 10.2) (3).
10.6 Employment Agreement dated as of March 1, 2000 between Jon
Gjedebo and a National Oilwell subsidiary (Exhibit 10.8) (4).
10.7 Non-competition Agreement dated as of June 28, 2000 between
Hushang Ansary and National Oilwell (Exhibit 10.9) (4).
21.1 Subsidiaries of the Company. Filed as an exhibit to the Annual
Report on Form 10-K, filed March 7, 2003.
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page hereto). Filed
as an exhibit to the Annual Report on Form 10-K, filed March
7, 2003.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 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 October 16, 2002 regarding
a press release announcing the signing of a Combination Agreement to
acquire Hydralift ASA for NOK 55, approximately U.S. $7.33, per share.
A report on Form 8 - K was filed on November 14, 2002 which
contained the Combination Agreement of the previously announced
transaction with Hydralift ASA.
A report on Form 8 - K was filed on February 12, 2003
regarding a press release announcing our financial results for the
fourth quarter and full year ended December 31,2002.
----------
* Compensatory plan or arrangement for management or others
(1) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on
August 11, 2000.
(2) Filed as an Exhibit to our Annual Report on Form 10-K filed on March
28, 2002.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on
November 12, 2002.
(4) Filed as an Exhibit to our Annual Report on Form 10-K filed on March 1,
2001.
(5) Filed as an Exhibit to our Current Report on Form 8-K filed on November
14, 2002.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL-OILWELL, INC.
DATE: JUNE 11, 2003 BY: /S/ STEVEN W. KRABLIN
------------------------------------
STEVEN W. KRABLIN
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
CERTIFICATIONS
I, Steven W. Krablin, certify that:
1. I have reviewed this annual report on Form 10-K/A/A of National Oilwell,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
DATE: JUNE 11, 2003 BY: /S/ STEVEN W. KRABLIN
---------------------------------
STEVEN W. KRABLIN
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
22
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National-Oilwell, Inc.
We have audited the accompanying consolidated balance sheets of
National-Oilwell, Inc., as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National-Oilwell, Inc., at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and other
intangible assets.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 18, 2003
23
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, December 31,
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 118,338 $ 43,220
Receivables, net 428,116 382,153
Inventories 470,088 455,934
Costs in excess of billings 53,805 --
Deferred income taxes 26,783 16,825
Prepaid and other current assets 17,938 10,434
------------- -------------
Total current assets 1,115,068 908,566
Property, plant and equipment, net 208,420 168,951
Deferred income taxes 36,864 16,663
Goodwill, net 581,576 352,094
Property held for sale 7,389 12,144
Other assets 19,345 13,278
------------- -------------
$ 1,968,662 $ 1,471,696
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt -- 10,213
Accounts payable 168,548 161,277
Customer prepayments 9,533 9,843
Accrued compensation 5,087 23,661
Billings in excess of costs 61,738 --
Other accrued liabilities 101,310 72,315
------------- -------------
Total current liabilities 346,216 277,309
Long-term debt 594,637 300,000
Deferred income taxes 54,612 20,380
Other liabilities 30,229 6,467
------------- -------------
Total liabilities 1,025,694 604,156
Commitments and contingencies
Minority interest 9,604 --
Stockholders' equity:
Common stock - par value $.01; 81,014,713 and 80,902,882 shares
issued and outstanding at December 31, 2002 and December 31, 2001 810 809
Additional paid-in capital 594,849 592,507
Accumulated other comprehensive loss (44,461) (34,873)
Retained earnings 382,166 309,097
------------- -------------
933,364 867,540
------------- -------------
$ 1,968,662 $ 1,471,696
============= =============
The accompanying notes are an integral part of these statements.
24
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Revenues $ 1,521,946 $ 1,747,455 $ 1,149,920
Cost of revenues:
Cost of products and services sold 1,160,082 1,319,621 884,774
Merger related inventory write-offs -- -- 15,684
------------- ------------- -------------
Gross profit 361,864 427,834 249,462
Selling, general, and administrative 227,541 238,557 186,924
Special charge -- -- 14,082
------------- ------------- -------------
Operating income 134,323 189,277 48,456
Interest and financial costs (27,279) (24,929) (19,069)
Interest income 2,638 1,775 2,908
Other income (expense), net 3,656 1,894 (5,258)
------------- ------------- -------------
Income before income taxes and minority interest 113,338 168,017 27,037
Provision for income taxes 39,396 63,954 13,901
------------- ------------- -------------
Income before minority interest 73,942 104,063 13,136
Minority interest in income of consolidated subsidiaries (873) -- --
Net income $ 73,069 $ 104,063 $ 13,136
============= ============= =============
Net income per share:
Basic $ 0.90 $ 1.29 $ 0.17
============= ============= =============
Diluted $ 0.89 $ 1.27 $ 0.16
============= ============= =============
Weighted average shares outstanding:
Basic 80,974 80,813 79,325
============= ============= =============
Diluted 81,709 81,733 80,760
============= ============= =============
The accompanying notes are an integral part of these statements.
25
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Cash flow from operating activities:
Net income $ 73,069 $ 104,063 $ 13,136
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 25,048 38,873 35,034
Provision for losses on receivables 3,606 3,897 1,589
Provision for deferred income taxes 11,446 7,847 (5,881)
Gain on sale of assets (4,551) (2,878) (3,522)
Foreign currency transaction (gain) loss 307 573 (1,397)
Tax benefit from exercise of nonqualified stock options 328 2,348 4,901
Special charge -- -- 14,082
Merger related inventory write-offs -- -- 15,684
Changes in assets and liabilities, net of acquisitions:
Marketable securities -- -- 14,686
Receivables 58,953 (74,700) (65,619)
Inventories 25,189 (71,906) (27,219)
Income taxes receivable -- -- 12,888
Prepaid and other current assets (2,960) 2,411 (4,802)
Accounts payable (32,031) (23,357) 47,345
Other assets/liabilities, net (54,363) (22,547) (24,292)
---------- ---------- ----------
Net cash provided (used) by operating activities 104,041 (35,376) 26,613
---------- ---------- ----------
Cash flow from investing activities:
Purchases of property, plant and equipment (24,805) (27,358) (24,561)
Proceeds from sale of assets 12,534 7,927 8,227
Businesses acquired and investments in joint ventures, net of cash (213,052) (38,517) (48,208)
---------- ---------- ----------
Net cash used by investing activities (225,323) (57,948) (64,542)
---------- ---------- ----------
Cash flow from financing activities:
Borrowings against lines of credit 303,220 294,084 273,376
Payments against lines of credit (311,018) (354,310) (254,202)
Net proceeds from issuance of long-term debt 199,070 146,631 --
Proceeds from stock options exercised 2,343 9,286 14,247
Other 1,363 -- (662)
---------- ---------- ----------
Net cash provided by financing activities 194,978 95,691 32,759
---------- ---------- ----------
Effect of exchange rate losses on cash 1,422 (1,606) (462)
---------- ---------- ----------
Increase (decrease) in cash and equivalents 75,118 761 (5,632)
Cash and cash equivalents, beginning of year 43,220 42,459 48,091
---------- ---------- ----------
Cash and cash equivalents, end of year $ 118,338 $ 43,220 $ 42,459
========== ========== ==========
Supplemental disclosures of cash flow information: Cash payments during the
period for:
Interest $ 21,579 $ 20,772 $ 16,807
Income taxes 45,615 26,775 7,333
The accompanying notes are an integral part of these statements.
26
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
STOCK CAPITAL LOSS EARNINGS TOTAL
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1999 $ 717 $ 415,701 $ (11,923) $ 191,880 $ 596,375
------------ ------------ ------------ ------------ ------------
Net income 13,136 13,136
Other comprehensive income
Currency translation adjustments (10,684) (10,684)
Marketable securities valuation adjustment 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
------------ ------------ ------------ ------------ ------------
Net income 104,063 104,063
Other comprehensive income
Currency translation adjustments (11,569) (11,569)
Marketable securities valuation adjustment (1,446) (1,446)
------------
Comprehensive income 91,048
Stock options exercised 4 6,934 6,938
Tax benefit of options exercised 2,348 2,348
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 $ 809 $ 592,507 $ (34,873) $ 309,097 $ 867,540
============ ============ ============ ============ ============
Net income 73,069 73,069
Other comprehensive income
Currency translation adjustments 2,474 2,474
Interest rate contract 886 886
Minimum liability of defined benefit plans (12,948) (12,948)
------------
Comprehensive income 63,481
Stock options exercised 1 2,014 2,015
Tax benefit of options exercised 328 328
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 $ 810 $ 594,849 $ (44,461) $ 382,166 $ 933,364
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
27
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
NATURE OF BUSINESS
We design, manufacture and sell comprehensive systems, components, and products
used in oil and gas drilling and production, as well as distribute products and
provide supply chain integration services to the upstream 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
National-Oilwell, Inc. and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Investments that are not wholly-owned, but where we exercise control, are fully
consolidated with the equity held by minority owners reflected as minority
interest in the accompanying balance sheet and their portion of net income
(loss) is included in other income (expense) in the accompanying statement of
operations. Investments in unconsolidated affiliates, over which we exercise
significant influence, but not control, are accounted for by the equity method.
Investments in which we exercise no control or significant influence would be
accounted for under the cost method.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, and payables approximated fair value because of the
relatively short maturity of these instruments. Cash equivalents include only
those investments having a maturity date of three months or less at the time of
purchase. The carrying values of other financial instruments approximate their
respective fair values.
Derivative Financial Instruments
We record all derivative financial instruments at their fair value in our
consolidated balance sheet. All derivative financial instruments we hold are
designated as cash flow hedges and are highly effective in offsetting movements
in the underlying risks. Accordingly, gains and losses from changes in the fair
value of derivative financial instruments are deferred and recognized in
earnings as the underlying transactions occur. Because our derivative financial
instruments are so closely related to the underlying transactions, hedge
ineffectiveness is insignificant.
We use foreign currency forward contracts to mitigate our exposure to changes in
foreign currency exchange rates on firm sale commitments to better match the
local currency cost components of our fixed US dollar contracts. Such
arrangements typically have terms between three months and one year, depending
upon the customer's purchase order. We also use, from time to time, interest
rate contracts to mitigate our exposure to changes in interest rates on
anticipated long-term debt issuances. These contracts are typically short term
in nature. We do not use derivative financial instruments for trading or
speculative purposes.
28
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.
Allowances for excess and obsolete inventories are determined based on our
historical usage of inventory on-hand as well as our future expectations related
to our substantial installed base and the development of new products. The
amount reserved, which totaled $49.4 million and $49.1 million at December 31,
2002 and 2001, respectively, is the recorded cost of the inventory minus its
estimated realizable value. Provisions for excess and obsolete inventories have
been immaterial in recent years.
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. Depreciation expense was $25.0 million, $27.1 million
and $24.7 million for the years ending December 31, 2002, 2001 and 2000.
Long-lived Assets
Effective January 1, 2002, we adopted SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 superceded SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". The adoption of SFAS 144 had no effect on our results of operations. We
record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amount of those assets. The net carrying value of assets not recoverable is
reduced to fair value if lower than carrying value. In determining the fair
market value of the assets, we consider market trends and recent transactions
involving sales of similar assets, or when not available, discounted cash flow
analysis. Impairments of our equity investments would be recognized when
declines in market values below carrying amounts were considered other than
temporary.
Assets Held for Sale
In the course of integrating acquisitions and streamlining operations, we have
closed certain manufacturing facilities. Facilities where we have a formal plan
to sell the facility are classified as held for sale. We expect these facilities
to be sold within one year but market conditions may impact our ability to sell
the facilities. When we designate an asset as held for sale, we record its
carrying value at the lower of its current carrying amount or the estimated fair
value less costs to sell and stop recording depreciation expense. Carrying
values are adjusted to reflect any subsequent deterioration in fair value.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the life of
the related debt security. Beginning in 2002, we adopted FAS 142 "Accounting for
Goodwill and Other Intangible Assets" and accordingly stopped amortizing
goodwill that arose from acquisitions before June 30, 2001. We also performed an
impairment test as of the beginning of 2002 that indicated no impairment of
goodwill or other intangibles. The effect of not amortizing goodwill and other
intangibles in periods prior to adoption follows (in thousands):
29
YEAR ENDED DECEMBER 31,
2002 2001 2000
---------- ---------- ----------
Reported net income $ 73,069 $ 104,063 $ 13,136
Add back: Goodwill amortization, net of tax -- 10,959 9,930
---------- ---------- ----------
Adjusted net income $ 73,069 $ 115,022 $ 23,066
Adjusted net income per share:
Basic $ 0.90 $ 1.42 $ 0.29
Diluted $ 0.89 $ 1.41 $ 0.29
Weighted average shares outstanding:
Basic 80,974 80,813 79,325
Diluted 81,709 81,733 80,760
On at least an annual basis, we assess whether goodwill is impaired. Our annual
impairment tests are performed at the beginning of the 4th quarter of each year.
Our annual impairment test indicated no impairment. If we determine that
goodwill is impaired, we measure that impairment based on the amount by which
the book value of goodwill exceeds its implied fair value. The implied fair
value of goodwill is determined by deducting the fair value of a reporting
unit's identifiable assets and liabilities from the fair value of that reporting
unit as a whole. Additional impairment assessments may be performed on an
interim basis if we encounter events or changes in circumstances that would
indicate that, more likely than not, the carrying amount of goodwill has been
impaired. Fair value of the reporting units is determined based on internal
management estimates.
Foreign Currency
The functional currency for our Canadian, United Kingdom, Norwegian, German,
Netherlands 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. Revenues and expenses are translated at average exchange
rates in effect during the period. The U.S. dollar is used as the functional
currency for the Singapore and Venezuelan operations. Accordingly, financial
statements of these foreign subsidiaries are remeasured to U.S. dollars for
consolidation purposes using current rates of exchange for monetary assets and
liabilities and historical rates of exchange for nonmonetary assets and related
elements of expense. Revenue and other expense elements are remeasured at rates
that approximate the rates in effect on the transaction dates. For all
operations, gains or losses from remeasuring foreign currency transactions into
the functional currency are included in income. Foreign currency transactions
losses/(gains) were $0.3 million, $0.6 million and $(1.4) million for the years
ending December 31, 2002, December 31, 2001 and December 31, 2000, respectively.
Revenue Recognition
Our products and services are generally sold based upon purchase orders or
contracts with the customer that include fixed or determinable prices and that
do not include right of return or other similar provisions or other significant
post delivery obligations. Except for the construction of large rig packages, we
record revenue at the time delivery has occurred, the customer has been provided
with all proper inspection and other required documentation, title and risk of
loss has passed to the customer and collectibility is reasonably assured.
Customer advances or deposits are deferred and recognized as revenue when we
have completed all of our performance obligations related to the sale. We also
recognize revenue as services are performed and as rental charges are
30
incurred. The amounts billed for shipping and handling costs are included in
revenue and related costs are included in costs of sales.
Revenues for the construction of large rig packages are reported on the
percentage of completion method of accounting. Revenues and gross profit are
recognized as work is performed based upon the relationship between actual costs
incurred and total expected costs at completion. All known or anticipated losses
on contracts are provided for immediately in earnings.
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
We grant credit to our customers, which operate primarily in the oil and gas
industry. We perform periodic credit evaluations of our customers' financial
condition and generally do not require collateral, but may require letters of
credit for certain international sales. We maintain an allowance for doubtful
accounts for accounts receivables by providing for specifically identified
accounts where collectibility is doubtful and an additional allowance based on
the aging of the receivables compared to past experience and current trends.
Accounts receivable are net of allowances for doubtful accounts of approximately
$12.6 million and $9.1 million at December 31, 2002 and December 31, 2001,
respectively.
Stock-Based Compensation
We use the intrinsic value method in accounting for our stock-based employee
compensation plans.
Environmental Liabilities
When environmental assessments or remediations are probable and the costs can be
reasonably estimated, remediation liabilities are recorded on an undiscounted
basis and are adjusted as further information develops or circumstances change.
Use of Estimates
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.
Recently Issued Accounting Standards
The Financial Accounting Standards Board 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", addresses disposal activities and
termination costs in exiting an activity. These pronouncements are generally
effective January 1, 2003. The Company believes the adoption of these new
accounting pronouncements will not have a significant impact on its results of
operations or financial position.
31
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,
----------------------------
2002 2001 2000
------ ------ ------
Denominator for basic earnings per
share - weighted average 80,974 80,813 79,325
Effect of dilutive securities:
Employee stock options 735 920 1,435
------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 81,709 81,733 80,760
====== ====== ======
2. ACQUISITIONS
Year 2002
On December 18, 2002, we completed a cash tender offer for 92% of the common
shares of Hydralift ASA, a Norwegian based company specializing in the offshore
drilling equipment industry. By December 31, 2002, we had substantially
completed the acquisition of the remaining shares for a total purchase price,
including the assumption of debt, of approximately $300 million. The results of
Hydralift's operations have been included in our income statement since the
acquisition date.
As a result of this acquisition, we strengthened our position in the offshore
drilling market and gained access to new product lines that complement our
existing product offerings. The combination of our product offerings will open
new markets to us, particularly within the FPSO (floating production storage and
offloading) market.
32
The purchase price will be allocated to the assets acquired and liabilities
assumed based on their relative fair values. A preliminary allocation of the
purchase price follows (in thousands):
Assets acquired:
Cash $ 47,387
Other current assets 138,709
Fixed assets 28,626
Other 24,920
Goodwill and other intangible assets 221,073
--------
460,715
Liabilities assumed:
Current liabilities 95,223
Debt obligations 93,101
Other 27,390
--------
215,714
Net assets acquired $245,001
========
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 or other actions. All of the goodwill from this
acquisition will be allocated to the Products and Technology segment and will be
fully deductible for tax purposes.
The following unaudited pro forma information assumes the acquisition of
Hydralift had occurred as of the beginning of each year shown (in thousands):
2002 2001
---------- ----------
Revenues $1,862,372 $2,003,995
Net income 87,148 116,718
Per diluted share $ 1.07 $ 1.43
Adjustments made to derive the pro forma data relate principally to acquisition
financing. These results are not necessarily indicative of what actually would
have occurred if the acquisition had happened as of the beginning of 2002 or
2001 nor are they indicative of future results. The estimated effects of cost
reductions arising from the acquisition of Hydralift have been excluded.
In January 2002, we also completed the acquisition of the assets and business of
HAL Oilfield Pump & Equipment Company for approximately $16 million. This
business, which designs, manufactures and distributes centrifugal pumps, pump
packages and expendable parts, is complementary to our Mission pump product
line. Goodwill related to this acquisition was approximately $10 million and is
fully deductible for tax purposes.
During 2002 we also acquired two other businesses for approximately $1.2 million
in cash.
33
Year 2001
In 2001, we acquired nine companies for an aggregate of $51 million in cash.
Individual purchase prices ranged from $0.6 million to $16.5 million. Each of
these acquisitions enhanced or expanded our market position within each of our
segments. Five of these acquisitions related to our Products and Technology
segment, including Integrated Power Systems, Maritime Hydraulics (Canada) Ltd.,
Tech Power Controls Company, Houston Scientific International, Inc. and Rigquip
UK business and related assets. The remaining acquisitions, including Demij (a
Netherlands distribution company), Rye Supply Company, Inc., Texas Oil Works
Supply, Inc. and Well-Serv, Inc. related to our Distribution segment. Aggregate
goodwill relating to these acquisitions was $30 million and approximately half
of this amount is deductible for tax purposes.
Year 2000
In February 2000, the merger with Hitec ASA was completed for approximately $158
million as we 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.
In June 2000, IRI International Corporation was merged with the Company and
accounted for as a pooling-of-interests. We issued 13.5 million shares of common
stock valued at approximately $447 million.
During 2000 we also acquired four other businesses for approximately $48 million
in cash. The purchase method of accounting was used to account for these
acquisitions and generated approximately $9 million in goodwill.
Subsequent Events
On January 2, 2003, we acquired LSI, a Houston, Texas based distributor of
specialty electrical products, for approximately $13 million. This transaction
generated approximately $6 million in goodwill and is complementary to our
distribution services business.
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 $46
million in goodwill.
3. INVENTORIES
Inventories consist of (in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Raw materials and supplies $ 60,699 $ 39,272
Work in process 109,924 101,376
Finished goods and purchased products 299,465 315,286
-------- --------
Total $470,088 $455,934
======== ========
34
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 2002 2001
------------ ------------ ------------
Land and improvements 2-20 Years $ 11,927 $ 9,557
Buildings and improvements 5-31 Years 74,610 53,268
Machinery and equipment 5-12 Years 111,652 89,268
Computer and office equipment 3-10 Years 92,794 73,322
Rental equipment 1-7 Years 77,328 63,971
--------- ---------
368,311 289,386
Less accumulated depreciation (159,891) (120,435)
--------- ---------
$ 208,420 $ 168,951
========= =========
5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Credit facilities $ 94,637 $ 10,213
6.875% senior notes 150,000 150,000
6.50% senior notes 150,000 150,000
5.65% senior notes 200,000 --
-------- --------
594,637 310,213
Less current portion -- 10,213
-------- --------
$594,637 $300,000
======== ========
In November 2002, we sold $200 million of 5.65 % unsecured senior notes due
November 15, 2012. Proceeds were used to acquire Hydralift ASA. 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 annually on January 1 and July 1.
On July 30, 2002, we replaced the existing credit facility with a new three-year
unsecured $175 million revolving credit facility. This facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $22.0 million were outstanding at December 31, 2002.
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 will be amortized to expense over the term of the facility.
The senior notes contain reporting covenants and the credit facility contains
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at December 31, 2002.
We also have additional credit facilities totaling $223 million that are used
primarily for acquisitions, general corporate purposes and letters of credit.
Recently acquired Hydralift ASA
35
represents $152 million of these facilities. These multi-currency Hydralift
committed facilities are secured by a guarantee, contain financial covenants and
expire in 2006. These instruments carry interest at a pre-agreed upon percentage
point spread from either the prime interest rate or NIBOR. Borrowings against
these additional credit facilities totaled $93 million at December 31, 2002 and
an additional $39 million had been used for letters of credit and guarantees.
6. PENSION 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, 2002, 2001 and 2000, pension expense for
defined-contribution plans was $9.1 million, $6.0 million and $4.2 million, and
all funding is current.
Certain retired or terminated employees of predecessor or acquired companies
also participate in defined benefit plans in the United States which have been
retained by National Oilwell subsidiaries but which no longer accrue benefits.
Active employees are ineligible to participate in any of these defined benefit
plans. Our 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. In addition, approximately 160 U.S. retirees and
spouses participate in defined benefit health care plans of predecessor or
acquired companies that provide postretirement medical and life insurance
benefits. Pension assets are principally invested in a fixed income bond fund,
equity securities, United Kingdom government securities and cash deposits.
36
The change in benefit obligation, plan assets and the funded status of the
defined pension plans in the United States and the United Kingdom, and defined
postretirement plans in the United States, follows:
Pension benefits Postretirement benefits
---------------------- -----------------------
At year end 2002 2001 2002 2001
-------------- -------- -------- -------- ---------
(in thousands)
Benefit obligation at beginning of year $ 49,605 $ 46,511 $ 7,416 $ 3,107
Service cost 274 173 40 21
Interest cost 3,336 3,457 552 506
Actuarial (gain) loss 10,973 1,272 1,094 4,079
Benefits paid (2,996) (2,186) (645) (503)
Retiree contributions 161 99 32 --
Other 3,357 279 -- 206
-------- -------- -------- --------
BENEFIT OBLIGATION AT END OF YEAR $ 64,710 $ 49,605 $ 8,489 $ 7,416
-------- -------- -------- --------
Fair value of plan assets at beginning of year $ 51,211 $ 60,062 $ -- $ --
Actual return (9,335) (7,715) -- --
Benefits paid (2,996) (2,186) (645) (503)
Contributions 1,621 450 645 503
Other 4,174 600 -- --
-------- -------- -------- --------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 44,675 $ 51,211 -- --
-------- -------- -------- --------
Funded status $(20,035) $ 1,606 (8,489) (7,416)
Unrecognized actuarial net loss/ (gain) 31,815 7,662 4,270 3,389
Prior service costs not yet recognized 281 303 213 257
Minimum pension liability (19,698) -- -- --
Other (10,543) (9,223)
-------- -------- -------- --------
PREPAID (ACCRUED) BENEFIT COST $(18,180) $ 348 (4,006) (3,770)
-------- -------- -------- --------
37
Significant assumptions used for the plans follow:
Pension benefits Postretirement benefits
------------------------ -----------------------
For the year 2002 2001 2000 2002 2001 2000
------------ ---- ---- ---- ---- ---- -----
Weighted average assumptions:
Discount rate 5.8% 6.5% 7.5% 6.5% 6.9% 7.6%
Expected long-term rate of return 6.3% 7.0% 8.0% n/a n/a n/a
Rate of compensation increase 4.0% 4.25% 5.0% n/a n/a n/a
A 17% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2003, decreasing by approximately 3% points per year to
5.5% in 2007, with 5.5% increases per year thereafter.
Net periodic benefit cost (credit):
Pension benefits Postretirement benefits
----------------------------------- ---------------------------------
For the year 2002 2001 2000 2002 2001 2000
-------------- ------- ------- ------- ------- ------- -------
(in thousands)
Service cost - benefits earned during the period $ 422 $ -- $ 108 $ 40 $ 21 $ 16
Interest cost on projected benefit obligation 3,313 1,194 1,186 552 506 232
Expected return on plan assets (3,886) (1,183) (1,280) -- -- --
Net amortization and deferral 74 46 (8) 257 178 (13)
------- ------- ------- ------- ------- -------
NET PERIODIC BENEFIT COST (CREDIT) $ (77) $ 57 $ 6 $ 849 $ 705 $ 235
======= ======= ======= ======= ======= =======
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 2002 $ 47 $ (40)
Effect on postretirement benefit obligation at year-end 2002 $ 770 $(655)
In addition, our subsidiaries in Norway have defined benefit pension plans. The
pension plan assets are invested primarily in equity securities, overseas bonds,
real estate and cash deposits. At December 31, 2002, the plan assets at fair
market value and the projected benefit obligation were approximately $12.0
million.
38
7. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The components of other comprehensive loss are as follows (in thousands):
Cumulative Cumulative
Change in Currency Marketable
Minimum Translation Interest Securities
Pension Liability Adjustment Rate Contract Valuation Adj. TOTAL
----------------- ----------- ------------- -------------- ---------
Balance at December 31, 1999 $ -- $ (12,639) $ -- $ 716 $ (11,923)
Current period activity (10,684) 1,136 (9,548)
Tax effect (387) (387)
--------- --------- --------- --------- ---------
Balance at December 31, 2000 -- (23,323) -- 1,465 (21,858)
Current period activity (11,569) (2,191) (13,760)
Tax effect 745 745
--------- --------- --------- --------- ---------
Balance at December 31, 2001 -- (34,892) -- 19 (34,873)
--------- --------- --------- --------- ---------
Current period activity (19,698) 2,474 1,363 (15,861)
Tax effect 6,750 (477) 6,273
--------- --------- --------- --------- ---------
Balance at December 31, 2002 $ (12,948) $ (32,418) $ 886 $ 19 $ (44,461)
========= ========= ========= ========= =========
8. COMMITMENTS AND CONTINGENCIES
We lease land, buildings, storage facilities, vehicles, data processing
equipment and software under operating leases expiring in various years through
2012. Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$21.2 million, $19.0 million and $12.6 million. Our minimum rental commitments
for operating leases at December 31, 2002 were as follows: 2003 - $17.7 million;
2004 - $13.8 million; 2005 - $9.9 million; 2006 - $6.8 million; 2007 - $5.8
million and subsequent to 2007 - $9.7 million.
We are 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, 2002 cannot be determined; however, in our
opinion, any ultimate liability, to the extent not otherwise provided for,
should not materially affect our financial position, liquidity or results of
operations.
Our 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 our business.
Although we have not incurred material costs in connection with our 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
us.
39
9. COMMON STOCK
National Oilwell has authorized 150 million shares of $.01 par value common
stock. We also have authorized 10 million shares of $.01 par value preferred
stock, none of which is issued or outstanding.
Under the terms of National Oilwell's Stock Award and Long-Term Incentive Plan,
as amended, 8.4 million shares of common stock are authorized for the grant of
options to officers, key employees, non-employee directors and other persons.
Options granted under our stock option plan generally vest over a three-year
period starting one year from the date of grant and expire five or ten years
from the date of grant. The purchase price of options granted may not be less
than the market price of National Oilwell common stock on the date of grant. At
December 31, 2002, approximately 4.2 million shares were available for future
grants.
We also have inactive stock option plans that were acquired in connection with
the acquisitions of Dreco Energy Services, Ltd. in 1997, and of Hitec ASA and
IRI International Corporation in 2000. We converted the outstanding stock
options under these plans to options to acquire our common stock and no further
options are being issued under these plans. Stock option information summarized
below includes amounts for the National Oilwell Stock Award and Long-Term
Incentive Plan and stock plans of acquired companies.
Options outstanding at December 31, 2002 under the stock option plans have
exercise prices between $5.62 and $40.50 per share, and expire at various dates
from February 19, 2003 to August 15, 2012.
The following summarizes options activity:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Shares under option at 3,094,160 $ 22.95 2,792,585 $ 16.50 2,041,204 $ 14.59
beginning of year
Granted 977,500 18.53 911,626 40.50 758,961 23.56
Options from acquisitions -- -- -- -- 1,006,342 10.52
Cancelled (133,465) 28.54 (218,086) 25.47 (86,425) 14.10
Exercised (147,699) 13.52 (391,965) 16.39 (927,497) 11.80
---------- ---------- ---------- ---------- ---------- ----------
Shares under option at 3,790,496 $ 21.99 3,094,160 $ 22.95 2,792,585 $ 16.50
end of year
Exercisable at end of year 2,119,692 $ 18.71 1,474,833 $ 15.68 1,097,327 $ 13.73
========== ========== ========== ========== ========== ==========
40
The following summarizes information about stock options outstanding as of
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVG. ----------------------------- -------------------------------
RANGE OF REMAINING WEIGHTED-AVG. WEIGHTED-AVG.
EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------- ---------------- --------- -------------- --------- --------------
$ 5.62 to $10.52 2.98 1,131,451 $ 10.21 1,131,451 $ 10.21
$11.45 to $21.70 8.57 1,049,425 18.21 111,925 15.56
$22.56 to $40.50 6.55 1,609,620 32.73 876,316 30.10
---- --------- ------- --------- -------
Totals 6.04 3,790,496 $ 21.99 2,119,692 $ 18.71
==== ========= ======= ========= =======
The weighted average fair value of options granted during 2002, 2001 and 2000
was approximately $8.95, $22.04, and $15.70 per share, respectively, as
determined using the Black-Scholes option-pricing model. Assuming that we had
accounted for our 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, our net income and net income per share would
have been (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
----------- ----------- -----------
Net income:
As reported $ 73,069 $ 104,063 $ 13,136
Pro forma $ 63,926 $ 94,227 $ 5,584
Basic net income per share:
As reported $ 0.90 $ 1.29 $ 0.17
Pro forma 0.79 1.17 0.07
Diluted net income per share:
As reported $ 0.89 $ 1.27 $ 0.16
Pro forma 0.78 1.15 0.07
These pro forma results may not be indicative of future effects.
The assumptions used in the Black-Scholes option-pricing model were:
ASSUMPTIONS 2002 2001 2000
---------------------------- ---- ---- ----
Risk-free interest rate 2.4% 6.3% 4.7%
Expected dividend -- -- --
Expected option life (years) 5 5 4
Expected volatility 54% 55% 94%
The Company evaluates annually the grant of options to eligible participants and
in February 2003, 977,500 options to purchase shares of common stock were
granted at an exercise price of $20.14, the fair value of the common stock at
the date of grant.
41
10. INCOME TAXES
The domestic and foreign components of income before income taxes were as
follows (in thousands):
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Domestic $ 45,716 $101,700 $(10,555)
Foreign 66,749 66,317 37,592
-------- -------- --------
$112,465 $168,017 $ 27,037
======== ======== ========
The components of the provision (benefit) for income taxes consisted of (in
thousands):
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Current:
Federal $ 11,315 $ 32,222 $ 5,401
State 909 581 123
Foreign 15,726 23,304 14,258
-------- -------- --------
27,950 56,107 19,782
-------- -------- --------
Deferred:
Federal 4,888 4,925 (6,757)
State 1,144 391 (507)
Foreign 5,414 2,531 1,383
-------- -------- --------
11,446 7,847 (5,881)
-------- -------- --------
$ 39,396 $ 63,954 $ 13,901
======== ======== ========
42
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, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Federal income tax at statutory rate $ 39,363 $ 58,806 $ 9,462
Foreign income tax rate differential (2,990) 1,405 781
State income tax, net of federal benefit 556 299 336
Tax benefit of foreign sales income (1,580) (1,575) (1,492)
Nondeductible expenses 1,053 2,423 4,626
Foreign dividends net of FTCs 1,176 (1,967) (1,046)
Net operating loss carryforwards -- 2,948 1,744
Change in deferred tax valuation allowance 400 1,223 (606)
Prior year taxes 1,126 -- --
Other 292 392 96
-------- -------- --------
$ 39,396 $ 63,954 $ 13,901
======== ======== ========
Significant components of National Oilwell's deferred tax assets and
liabilities were as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Deferred tax assets:
Allowances and operating liabilities $ 29,047 $ 9,408
Net operating loss carryforwards 23,891 16,107
Foreign tax credit carryforwards 15,082 13,580
Capital loss carryforward 3,527 3,527
Other 22,012 20,378
-------- --------
Total deferred tax assets 93,559 63,000
Valuation allowance for deferred tax assets (29,912) (29,512)
-------- --------
63,647 33,488
-------- --------
Deferred tax liabilities:
Tax over book depreciation 14,168 10,366
Operating and other assets 31,688 --
Other 8,756 10,014
-------- --------
Total deferred tax liabilities 54,612 20,380
-------- --------
Net deferred tax assets $ 9,035 $ 13,108
======== ========
In the United States, the Company has $12.0 million of net operating loss
carryforwards as of December 31, 2002, which expire at various dates through
2017. These operating losses were acquired primarily in the combination with
Dreco Energy Services, Ltd. 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 $4.2 million has been
recorded with a $2.8 million valuation allowance. Future income tax expense will
be reduced if the Company ultimately realizes the benefit of these net operating
losses.
43
Also in the United States, the Company has $9.1 million of capital loss
carryforwards as of December 31, 2002, which expire at various dates through
2005. The related potential benefit of $3.5 million has been recorded with a
valuation allowance of $3.5 million. These capital losses are not available to
reduce future operating income but are expected to be realized as deductions
against future capital gains. The Company has $ 15.1 million of excess foreign
tax credits as of December 31, 2002, which expire at various dates through 2006.
These credits have been allotted a valuation allowance of $ 14.1 million and
would be realized as a reduction of future income tax expense.
Outside the United States, the company has $67.5 million of net operating loss
carryforwards as of December 31, 2002. Of this amount, $65.3 million will expire
at various dates through 2012 and $2.2 million is available indefinitely. The
related potential benefit available of $19.7 million has been recorded with a
valuation allowance of $9.6 million. If the Company ultimately realizes the
benefit of these net operating losses, $9.4 million would reduce goodwill and
other intangible assets and $10.3 million would reduce income tax expense.
The deferred tax valuation allowance increased $0.4 million for the period
ending December 31, 2002 and $1.2 million for the period ending December 31,
2001. These increases resulted primarily from the recognition of additional
excess foreign tax credits that may not be realized in the future.
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 $193.4
million and $149.2 million at December 31, 2002 and December 31, 2001,
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 could result in either 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 $23.4 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 2002.
11. SPECIAL CHARGE
During 2000, we 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 approximated $13 million and $1.1
million, respectively. All direct cash outlays have been spent. Facility closure
costs consisted of lease cancellation costs and impairment of a closed
manufacturing facility that is classified with "Property held for sale" on our
balance sheet. All of this charge is applicable to the Products and Technology
business segment.
44
12. 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. 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, 2002.
45
Summarized financial information is as follows (in thousands):
Business Segments
PRODUCTS AND DISTRIBUTION CORPORATE/
TECHNOLOGY SERVICES ELIMINATIONS TOTAL
------------ ------------ ------------ ----------
DECEMBER 31, 2002
Revenues from:
Unaffiliated customers $ 837,750 $ 684,196 $ -- $1,521,946
Intersegment sales 79,500 1,978 (81,478) --
---------- ---------- ---------- ----------
Total revenues 917,250 686,174 (81,478) 1,521,946
Operating income (loss) 127,011 18,083 (10,771) 134,323
Capital expenditures 19,849 3,612 1,344 24,805
Depreciation and amortization 19,340 4,883 825 25,048
Goodwill 560,235 16,457 4,884 581,576
Identifiable assets 1,640,171 266,663 61,828 1,968,662
DECEMBER 31, 2001
Revenues from:
Unaffiliated customers $1,041,614 $ 705,817 $ 24 $1,747,455
Intersegment sales 79,305 2,001 (81,306) --
---------- ---------- ---------- ----------
Total revenues 1,120,919 707,818 (81,282) 1,747,455
Operating income (loss) 171,013 28,473 (10,209) 189,277
Capital expenditures 22,170 4,066 1,122 27,358
Depreciation and amortization 31,882 6,428 563 38,873
Goodwill 332,121 15,089 4,884 352,094
Identifiable assets 1,178,118 260,212 33,366 1,471,696
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(2) 12,884 (25,420)(1) 48,456(1)(2)
Capital expenditures 14,960 7,387 2,214 24,561
Depreciation and amortization 28,712 5,985 337 35,034
Goodwill 313,468 10,843 5,029 329,340
Identifiable assets 1,001,391 223,973 53,530 1,278,894
(1) Includes a special charge of $14,082 for 2000 related to the merger with
IRI.
(2) Includes $15,684 of inventory write-offs related to the merger with IRI.
46
Geographic Areas:
UNITED UNITED
STATES CANADA NORWAY KINGDOM OTHER ELIMINATIONS TOTAL
---------- ---------- ---------- ---------- ---------- ------------ ----------
DECEMBER 31, 2002
Revenues from:
Unaffiliated customers $1,054,956 $ 254,361 $ 86,169 $ 44,733 $ 81,727 $ -- $1,521,946
Interarea sales 108,191 59,370 18,561 7,393 1,199 (194,714) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 1,163,147 313,731 104,730 52,126 82,926 (194,714) 1,521,946
Long-lived assets 618,501 423,029 787,505 48,525 91,102 -- 1,968,662
DECEMBER 31, 2001
Revenues from:
Unaffiliated customers $1,280,598 $ 337,447 $ 38,171 $ 42,978 $ 48,261 $ -- $1,747,455
Interarea sales 129,525 45,890 11,591 7,421 445 (194,872) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 1,410,123 383,337 49,762 50,399 48,706 (194,872) 1,747,455
Long-lived assets 768,160 379,976 223,747 49,750 50,063 -- 1,471,696
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
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results were as follows (in thousands, except per share
data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- ----------
YEAR ENDED DECEMBER 31, 2002
Revenues $ 388,986 $ 372,390 $ 366,929 $ 393,641 $1,521,946
Gross Profit 93,045 87,404 88,533 92,882 361,864(1)
Income before taxes 33,102 26,501 27,743 25,119 112,465
Net income 21,185 16,961 17,756 17,167 73,069
Net income per basic share 0.26 0.21 0.22 0.21 0.90
Net income per diluted share 0.26 0.21 0.22 0.21 0.89
YEAR ENDED DECEMBER 31, 2001
Revenues $ 360,272 $ 434,628 $ 486,812 $ 465,743 $1,747,455
Gross Profit 91,173 103,494 119,905 113,262 427,834(1)
Income before taxes 34,640 40,805 47,369 45,203 168,017
Net income 21,478 25,299 28,938 28,348 104,063
Net income per basic share 0.27 0.31 0.36 0.35 1.29
Net income per diluted share 0.26 0.31 0.36 0.35 1.27
47
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National-Oilwell, Inc.
We have audited the consolidated financial statements of National-Oilwell, Inc.
as of December 31, 2002 and 2001, and for each of the three years in the period
ended December 31, 2002, and have issued our report thereon dated February 18,
2003 (included elsewhere in this Form 10-K/A). Our audits also included the
financial statement schedule listed in the index at item 15a of this Form
10-K/A. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 18, 2003
48
SCHEDULE II
NATIONAL-OILWELL, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ADDITIONS
(DEDUCTIONS)
BALANCE CHARGED TO CHARGE BALANCE
BEGINNING COSTS AND OFFS AND END OF
OF YEAR EXPENSES OTHER YEAR
--------- ------------ -------- --------
(IN THOUSANDS)
Allowance for doubtful accounts:
2002 $ 9,094 $ 3,606 $ (124) $ 12,576
2001 5,885 3,897 (688) 9,094
2000 8,986 1,589 (4,690) 5,885
Allowance for excess and obsolete
inventory reserves:
2002 $ 49,084 $ 1,672 $ (1,364) $ 49,392
2001 53,283 807 (5,006) 49,084
2000 39,355 16,814 (2,886) 53,283
Valuation allowance for deferred tax assets:
2002 $ 29,512 $ 400 $ -- $ 29,912
2001 28,289 1,223 -- 29,512
2000 19,228 (606) 9,667 28,289
49
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Combination Agreement between National-Oilwell, Inc. and Hydralift
ASA regarding the transaction announced October 11, 2002 (Exhibit
2.1) (5).
3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Exhibit 3.1) (1).
3.2 By-laws of National-Oilwell, Inc. Filed as an exhibit to the
Annual Report on Form 10-K, filed March 7, 2003.
10.1 Employment Agreement dated as of January 1, 2002 between Merrill
A. Miller, Jr. and National Oilwell, with a similar agreement with
Steven W. Krablin (Exhibit 10.1) (2).
10.2 Employment Agreement dated as of January 1, 2002 between Dwight W.
Rettig and National Oilwell, with similar agreements with Robert
L. Bloom, Kevin Neveu, Mark A. Reese and Robert R. Workman
(Exhibit 10.2) (2).
10.3 Employment Agreement dated as of June 28, 2000 between Gary W.
Stratulate and IRI International, Inc., which has now merged into
National Oilwell (Exhibit 10.3) (2).
10.4 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.1) (3)*.
10.5 Loan Agreement dated July 30, 2002 (Exhibit 10.2) (3).
10.6 Employment Agreement dated as of March 1, 2000 between Jon Gjedebo
and a National Oilwell subsidiary (Exhibit 10.8) (4).
10.7 Non-competition Agreement dated as of June 28, 2000 between
Hushang Ansary and National Oilwell (Exhibit 10.9) (4).
21.1 Subsidiaries of the Company. Filed as an exhibit to the Annual
Report on Form 10-K, filed March 7, 2003.
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on signature page hereto). Filed as an
exhibit to the Annual Report on Form 10-K, filed March 7, 2003.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
----------
* Compensatory plan or arrangement for management or others
(1) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on
August 11, 2000.
(2) Filed as an Exhibit to our Annual Report on Form 10-K filed on March
28, 2002.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on
November 12, 2002.
(4) Filed as an Exhibit to our Annual Report on Form 10-K filed on March 1,
2001.
(5) Filed as an Exhibit to our Current Report on Form 8-K filed on November
14, 2002.