10-Q 1 h01013e10vq.txt NATIONAL-OILWELL, INC. - DATED 9/30/2002 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 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 76-0475875 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
10000 RICHMOND AVENUE HOUSTON, TEXAS 77042-4200 (Address of principal executive offices) (713)346-7500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of November 1, 2002, 81,000,198 common shares were outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL-OILWELL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31, 2002 2001 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 52,286 $ 43,220 Receivables, less allowance of $9,962 and $9,094 354,208 382,153 Inventories 454,028 455,934 Deferred income taxes 13,232 16,825 Prepaids and other current assets 16,879 10,434 ------------- ------------ 890,633 908,566 Property, plant and equipment, net 165,478 168,951 Deferred income taxes 17,166 16,663 Goodwill 361,315 352,094 Property held for sale 7,602 12,144 Other assets 15,052 13,278 ------------- ------------ $ 1,457,246 $ 1,471,696 ============= ============ LIABILITIES AND OWNERS' EQUITY Current liabilities: Current portion of long-term debt 218 10,213 Accounts payable 130,136 161,277 Customer prepayments 10,689 9,843 Accrued compensation 6,192 23,661 Other accrued liabilities 57,900 72,315 ------------- ------------ 205,135 277,309 Long-term debt 300,000 300,000 Deferred income taxes 22,778 20,380 Other liabilities 8,181 6,467 ------------- ------------ 536,094 604,156 Commitments and contingencies Stockholders' equity: Common stock - par value $.01; 80,996,313 shares and 80,902,882 shares issued and outstanding at September 30, 2002 and December 31, 2001 810 809 Additional paid-in capital 593,495 592,507 Accumulated other comprehensive income (loss) (38,152) (34,873) Retained earnings 364,999 309,097 ------------- ------------ 921,152 867,540 ------------- ------------ $ 1,457,246 $ 1,471,696 ============= ============
The accompanying notes are an integral part of these statements. 1 NATIONAL-OILWELL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- -------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues $ 366,929 $ 486,812 $ 1,128,305 $ 1,281,712 Cost of revenues 278,396 366,907 859,323 967,140 ------------ ------------ ------------ ------------ Gross profit 88,533 119,905 268,982 314,572 Selling, general and administrative 56,631 63,003 167,127 174,650 ------------ ------------ ------------ ------------ Operating income 31,902 56,902 101,855 139,922 Other income (expense): Interest and financial costs (6,349) (6,963) (18,524) (18,522) Interest income 124 183 594 1,428 Other 2,066 (2,753) 3,421 (14) ------------ ------------ ------------ ------------ Income before income taxes 27,743 47,369 87,346 122,814 Provision for income taxes 9,987 18,431 31,445 47,099 ------------ ------------ ------------ ------------ Net income $ 17,756 $ 28,938 $ 55,901 $ 75,715 ============ ============ ============ ============ Net income per share: Basic $ 0.22 $ 0.36 $ 0.69 $ 0.94 ============ ============ ============ ============ Diluted $ 0.22 $ 0.36 $ 0.68 $ 0.93 ============ ============ ============ ============ Weighted average shares outstanding: Basic 80,992 80,887 80,964 80,787 ============ ============ ============ ============ Diluted 81,522 81,437 81,698 81,834 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 2 NATIONAL-OILWELL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 2002 2001 ------------ ------------ Cash flow from operating activities: Net income $ 55,901 $ 75,715 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 18,732 28,882 Provision for losses on receivables 2,592 2,609 Provision (benefit) for deferred income taxes 438 (7) Gain on sale of assets (2,317) (2,553) Foreign currency transaction loss 1,006 84 Changes in assets and liabilities, net of acquisitions: Receivables 27,892 (151,667) Inventories 5,510 (124,838) Prepaid and other current assets (6,435) 1,518 Accounts payable (31,038) 43,331 Other assets/liabilities, net (33,342) (14,420) -------- ---------- Net cash provided (used) by operating activities 38,939 (141,346) -------- ---------- Cash flow from investing activities: Purchases of property, plant and equipment (14,459) (22,208) Proceeds from sale of assets 5,915 6,973 Businesses acquired, net of cash (15,432) (36,710) -------- ---------- Net cash used by investing activities (23,976) (51,945) -------- ---------- Cash flow from financing activities: Proceeds (payments) on line of credit (7,686) 16,578 Proceeds from stock options exercised 989 10,362 Net proceeds from issuance of long-term debt - 146,631 -------- ---------- Net cash provided (used) by financing activities (6,697) 173,571 -------- ---------- Effect of exchange rate gain (loss) on cash 800 (547) -------- ---------- Increase (decrease) in cash and equivalents 9,066 (20,267) Cash and cash equivalents, beginning of period 43,220 42,459 -------- ---------- Cash and cash equivalents, end of period $ 52,286 $ 22,192 -------- ---------- Supplemental disclosures of cash flow information: Cash payments during the period for: Interest $ 21,397 $ 19,932 Income taxes $ 32,292 $ 22,563
The accompanying notes are an integral part of these statements. 3 NATIONAL-OILWELL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported and contingent amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying unaudited consolidated financial statements present information in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. They do not include all information or footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our 2001 Annual Report on Form 10-K. In our opinion, the consolidated financial statements include all adjustments, all of which are of a normal, recurring nature, necessary for a fair presentation of the results for the interim periods. The results of operations for the three months and nine months ended September 30, 2002 and 2001 may not be indicative of results for the full year. 2. ACQUISITIONS On January 10, 2002, we completed the acquisition of the assets and business of HAL Oilfield Pump & Equipment Company ("Halco") for $15.4 million. This business, which designs, manufactures and distributes centrifugal pumps, pump packages and expendable parts, is complementary to our Mission pump product line. The acquisition was accounted for as a purchase with goodwill approximating $10.0 million. We made nine acquisitions in 2001, ranging in value from $600,000 to a high of $16.5 million, for a total cash outlay of $51.5 million. All of these acquisitions were accounted for under the purchase method of accounting and generated approximately $30 million in goodwill. Two of the larger acquisitions, Integrated Power Systems and Maritime Hydraulics (Canada) Ltd., were acquired in early January 2001 and their financial results were included in our consolidated financial results for substantially the entire year. Pro-forma information related to acquisitions has not been provided as such amounts are not material individually or in the aggregate. 3. INVENTORIES Inventories consist of (in thousands):
September 30, December 31, 2002 2001 ------------- ------------- Raw materials and supplies $ 34,327 $ 39,272 Work in process 113,011 101,376 Finished goods and purchased products 306,690 315,286 --------- --------- Total $ 454,028 $ 455,934 ========= =========
4 4. COMPREHENSIVE INCOME The components of comprehensive income are as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30, ---------------------------- ------------------------------- 2002 2001 2002 2001 ---------- ---------- ------------ ------------ Net income $ 17,756 $ 28,938 $ 55,901 $ 75,715 Currency translation adjustments (4,186) 5,166 (3,279) (6,156) Unrealized losses on securities - - - (1,446) --------- --------- --------- --------- Comprehensive income $ 13,570 $ 34,104 $ 52,622 $ 68,113 ========= ========= ========= =========
5. BUSINESS SEGMENTS Segment information (unaudited) follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30, -------------------------------- --------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues from unaffiliated customers Products and Technology $ 192,119 $ 294,011 $ 617,826 $ 750,995 Distribution Services 174,810 192,801 510,479 530,717 ----------- ----------- ----------- ----------- 366,929 486,812 1,128,305 1,281,712 Intersegment revenues Products and Technology 20,948 23,006 61,336 63,078 Distribution Services 806 768 1,501 1,563 ----------- ----------- ----------- ----------- 21,754 23,774 62,837 64,641 Operating income Products and Technology 30,241 50,413 95,758 124,542 Distribution Services 4,508 9,244 13,790 23,052 ----------- ----------- ----------- ----------- Total profit for reportable segments 34,749 59,657 109,548 147,594 Unallocated corporate costs (2,847) (2,755) (7,693) (7,672) ----------- ----------- ----------- ----------- Operating income 31,902 56,902 101,855 139,922 Net interest expense (6,225) (6,780) (17,930) (17,094) Other income (expense) 2,066 (2,753) 3,421 (14) ----------- ----------- ----------- ----------- Income before income taxes $ 27,743 $ 47,369 $ 87,346 $ 122,814 =========== =========== =========== =========== Total assets Products and Technology $ 1,137,999 $ 1,289,321 Distribution Services 277,115 280,736
5 6. DEBT Debt consists of (in thousands):
September 30, December 31, 2002 2001 ------------- ------------- Revolving credit facilities $ 218 $ 10,213 6-7/8% senior notes 150,000 150,000 6-1/2% senior notes 150,000 150,000 --------- --------- 300,218 310,213 Less current portion 218 10,213 --------- --------- $ 300,000 $ 300,000 ========= =========
On July 30, 2002, we replaced the existing credit facility with a new three-year unsecured $175 million revolving credit facility. It 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 September 30, 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. We also have additional credit facilities totaling $70 million that are used primarily for letters of credit. Borrowings against these credit facilities totaled $9.8 million at September 30, 2002, essentially all applicable to letters of credit. The senior notes contain reporting covenants and the credit facility contains financial covenants and ratios regarding maximum debt to capital and minimum interest coverage. At September 30, 2002, the Company was in compliance with all covenants governing these facilities. 7. RECENTLY ISSUED ACCOUNTING STANDARDS On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS No. 142. Other intangible assets will continue to be amortized over their useful lives. During the second quarter of 2002, we completed the first of the required impairment tests of goodwill and indefinite lived assets, which indicated no impairment was required as of January 1, 2002. The following information provides net income for the three-month and nine-month period ended September 30, 2001 adjusted to exclude amortization expense recognized in this period related to goodwill (in thousands): 6
Quarter ended Nine months ended September 30, 2001 September 30, 2001 ------------------ ------------------ Reported net income $ 28,938 $ 75,715 Add back: Goodwill amortization, net of tax 2,819 8,243 -------- -------- Adjusted net income $ 31,757 $ 83,958 Adjusted net income per share: Basic $ 0.39 $ 1.04 Diluted $ 0.39 $ 1.03 Weighted average shares outstanding: Basic 80,887 80,787 Diluted 81,437 81,834
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion ("APB") No. 30, Reporting the Results of Extraordinary, Unusual, and Infrequently Occurring Events and Transactions. This statement retains the fundamental provisions of SFAS No. 121 and the basic requirements of APB No. 30; however, it establishes a single accounting model to be used for long-lived assets to be disposed of by sale and it expands the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of this statement did not have a material impact on our financial position or results of operations. In July, 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructuring, involuntarily terminating employees, and consolidating facilities, initiated after December 31, 2002. We do not believe the adoption of this new statement will have a material impact on our consolidated financial statements. 8. SUBSEQUENT EVENT On October 11, 2002, we announced the signing of a definitive agreement to acquire all of the outstanding shares of Hydralift ASA, a Norwegian oilfield service company. On November 8, 2002 we made a cash Tender Offer of NOK 55, approximately U.S. $7.33, for each share of Hydralift. The total value of the transaction, including the assumption of debt, is approximately $300 million. The transaction is subject to various conditions, including certain regulatory approvals, and the acceptance of the Tender Offer by shareholders owning more than 90% of the outstanding shares. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION National Oilwell is a worldwide leader in the design, manufacture and sale of comprehensive systems and components used in oil and gas drilling and production, as well as in providing supply chain integration services to the upstream oil and gas industry. Our revenues are directly related to the level of worldwide oil and gas drilling and production activities and the profitability and cash flow of oil and gas companies and drilling contractors, which in turn are affected by current and anticipated prices of oil and gas. Oil and gas prices have been volatile since 1990, ranging from $10 - $40 per barrel. Oil prices were low in 1998, generally ranging from $11 - $16 per barrel. In 1999, oil prices increased and were generally in the $25 - $30 per barrel range during 2000. Prices once again declined in the second half of 2001, generally ranging between $18 and $22. Then, since the second quarter of 2002, oil has generally ranged from $25 - $30 per barrel. Spot gas prices have also been volatile since 1990, ranging from less than $1.00 per mmbtu to above $10.00. Gas prices were moderate in 1998 and 1999, generally ranging from $1.80 - $2.50 per mmbtu. Gas prices strengthened throughout 2000, generally ranging from $4 - $8 per mmbtu. In the second quarter of 2001, gas prices again came under pressure, and generally ranged from $2.20 - $3.00 per mmbtu through the first quarter of 2002. Gas prices increased in the second quarter of 2002 and have generally ranged between $3 - $4 per mmbtu since then. We conduct our operations through the following segments: Products and Technology The Products and Technology segment manufactures and assembles drilling machinery, including drawworks, mud pumps and top drives, which are the major mechanical components of drilling rigs, as well as masts, derricks, cranes and substructures. Many of these components are designed specifically for more demanding applications, which include offshore, extended reach and deep land drilling. We also provide electrical power systems, computer control systems and automation systems for drilling rigs. Our systems are used in many of the industry's most technologically demanding applications. In addition, we provide engineering and fabrication services to integrate our drilling products and deliver complete land drilling and workover rigs as well as drilling modules for mobile offshore drilling rigs or offshore drilling platforms. A substantial installed base of these products results in a recurring replacement parts and maintenance business. Sales of new capital equipment can result in large fluctuations in volume between periods depending on the size and timing of the shipment of orders. This segment also designs and manufactures drilling motors and specialized downhole tools for rent and sale. Drilling motors are essential components of systems for horizontal, directional, extended reach and performance drilling. Downhole tools include fishing tools, drilling jars, shock tools and other specialized products. Distribution Services Our Distribution Services segment offers comprehensive supply chain integration services to the drilling and production segments. Our network of service centers located in the United States and Canada and near other major drilling and production activity worldwide use state of the art information technology platforms to provide procurement, inventory management and logistics services. These service centers stock and sell a variety of expendable items for oilfield applications and spare parts for equipment manufactured by National Oilwell. 8 RESULTS OF OPERATIONS Operating results by segment are as follows (in thousands):
Quarter Ended September 30, Nine Months Ended September 30, ----------------------------- --------------------------------- 2002 2001 2002 2001 ----------- ----------- ------------- ------------- Revenues Products and Technology $ 213,067 $ 317,017 $ 679,162 $ 814,073 Distribution Services 175,616 193,569 511,980 532,280 Eliminations (21,754) (23,774) (62,837) (64,641) --------- --------- ----------- ----------- Total $ 366,929 $ 486,812 $ 1,128,305 $ 1,281,712 ========= ========= =========== =========== Operating Income Products and Technology $ 30,241 $ 50,413 $ 95,758 $ 124,542 Distribution Services 4,508 9,244 13,790 23,052 Corporate (2,847) (2,755) (7,693) (7,672) --------- --------- ----------- ----------- Total $ 31,902 $ 56,902 $ 101,855 $ 139,922 ========= ========= =========== ===========
Products and Technology Q3 2002 versus Q3 2001 Revenues for the Products and Technology segment decreased by one-third, or $104 million, during the third quarter of 2002 as compared to the same quarter in 2001 as lower drilling activity in the Western Hemisphere markets impacted all product lines. Capital equipment revenues fell $54 million and drilling spare part sales were down $14 million, reflecting the lower number of rigs operating in the United States. Revenues of electrical power systems and other rig control systems fell approximately $7 million. Sales of Mission expendable pump parts and centrifugal pumps and packages declined $7 million (20%) in the quarter when compared to the same quarter in the prior year. The downhole motors and tools business experienced a 39% decline in revenue, reflecting the reduced activity in the Canadian marketplace. Operating income decreased by $20 million in the third quarter of 2002 compared to the same quarter in 2001 due principally to the lower revenue volume, offset in part by the exclusion of goodwill amortization ($2.7 million in the third quarter of 2001), as required by the new accounting standard "SFAS No. 142". 1st nine months 2002 versus 1st nine months 2001 Products and Technology segment revenues declined $135 million in the first nine months of 2002 as compared to the same period in 2001. This 17% decrease was a direct result of lower rig activity in North America, which is a key driver of sales of drilling spare parts, pump expendable parts and downhole tools and motors. All product lines reported lower revenues during the first half of 2002 when compared to 2001. Operating income decreased $29 million in the first nine months of 2002 compared to the same period last year due principally to the lower margin resulting from the reduced revenue volume and increases in selling expenses and agent commissions. Reduced spending in field operations and plant shipping expenses and a reduction of $7.9 million in goodwill amortization (amortization is no longer required by the new accounting standard "SFAS No. 142") offset a portion of the margin shortfall. 9 Backlog of the Products and Technology capital products was $231 million at September 30, 2002, down $47 million from the June 30, 2002 balance of $278 million. Backlog at December 31, 2001 and September 30, 2001 was $385 million and $453 million, respectively. Approximately 40% of the product in current backlog will be delivered during the fourth quarter of 2002 with the remainder during 2003. Distribution Services Q3 2002 versus Q3 2001 Distribution Services revenues decreased $18 million during the second quarter of 2002 over the comparable 2001 period. Lower market activity in North America was the key driver of this 9% decrease. Tubular revenues were $2 million lower when compared to the second quarter of 2001 while revenues from the sale of parts manufactured by the Products & Technology segment increased by $2 million. Maintenance, repair and operating supplies revenues declined approximately $18 million (11%). Operating income in the third quarter of 2002 was approximately half of the third quarter of the prior year results, principally due to the lower revenue volume, a 1-point reduction in gross margin percent due to the highly competitive North American marketplace and higher infrastructure expenses to cover our expanded international market. 1st nine months 2002 versus 1st nine months 2001 Revenues for the Distribution Services segment decreased $20 million in the first nine months of 2002 when compared to the prior year. Revenue increases in the international market were offset by decreases in both the U.S. and Canadian operations. Revenues from the sale of parts manufactured by the Products & Technology segment were up $7 million (11%) while the maintenance, repair and operating supplies revenues reflected a 5% decline from the first nine months of 2001. Tubular revenues were lower by approximately one-third, or $6 million. Operating income in the first nine months of 2002 of $14 million was approximately $9 million lower than the comparable period in 2001. Gross margin accounted for roughly $6 million of the decline due to the lower sales volume and a decline in base margin percent in the U.S. and international operations. Significant infrastructure growth and ongoing e-commerce initiatives account for the remaining decline in operating profit in the first nine months of 2002 when compared to 2001. Excluding goodwill amortization, as required under the new accounting standard "SFAS No. 142", operating income in the third quarter and first nine months of 2001 would have increased $0.4 million and $0.9 million, respectively. Corporate Corporate charges represent the unallocated portion of centralized and executive management costs. These costs increased approximately $0.3 million during the quarter, in part due to corporate marketing initiatives. Spending was flat for the nine months ending September 30, 2002 when compared to the same time period in the prior year. Interest Expense Interest expense decreased slightly during the three months ended September 30, 2002 as compared to the prior year due to a lower average debt level during the period. For the first nine months of 2002, interest expense was lower than the previous year by $0.6 million due to both reduced borrowings and reduced rates. Other financial costs, principally bank fees related to letters of credit and performance 10 bonds, increased during the three and nine month periods ending September 30, 2002 when compared to the same period of the prior year, reflecting our increased international activity. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002 we had working capital of $685 million, an increase of $54 million from December 31, 2001 primarily due to cash generated from operations and a $28 million reduction in receivables, reflecting the overall weaker market environment during 2002. Inventory remained virtually flat as decreases in both raw material and finished goods were offset by increases in work-in-process. Total capital expenditures were $14 million during the first nine months of 2002 compared to $22 million in the first nine months of the prior year. Enhancements to information management systems and additions to the downhole rental tool fleet represent the majority of these capital expenditures. We believe we have sufficient existing manufacturing capacity to meet currently anticipated demand through 2003 for our products and services. On July 30, 2002, we replaced the existing credit facility with a new three-year unsecured $175 million revolving credit facility. It 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 September 30, 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. We also have additional credit facilities totaling $70 million that are used primarily for letters of credit. Borrowings against these credit facilities totaled $9.8 million at September 30, 2002, essentially all applicable to letters of credit. The senior notes contain reporting covenants and the credit facility contains financial covenants and ratios regarding maximum debt to capital and minimum interest coverage. At September 30, 2002 and December 31, 2001, the Company was in compliance with all covenants governing these facilities. We believe cash generated from operations and amounts available under the credit facilities and from other sources of debt will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. We also believe any significant increase in capital expenditures caused by any need to increase manufacturing capacity can be funded from operations or through debt financing. 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. We intend to pursue additional acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We expect to fund future cash acquisitions primarily with cash flow from operations and borrowings, including the unborrowed portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us. 11 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. 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. Reserves 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. 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. The determination of impairment on long-lived assets, including goodwill, is conducted as indicators of impairment are present. If such indicators were present, the determination of the amount of impairment would be based on our judgments as to the future operating cash flows to be generated from these assets throughout their estimated useful lives. Our industry is highly cyclical and our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying value of these assets. In periods of prolonged down cycles, impairment charges may result. 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. 12 RECENTLY ISSUED ACCOUNTING STANDARDS On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS No. 142. Other intangible assets will continue to be amortized over their useful lives. During the second quarter of 2002, we completed the first of the required impairment tests of goodwill and indefinite lived assets, which indicated no impairment was required as of January 1, 2002. The following information provides net income for the three-month and nine-month period ended September 30, 2001 adjusted to exclude amortization expense recognized in this period related to goodwill (in thousands):
Quarter ended Nine months ended September 30, 2001 September 30, 2001 ---------------------- ---------------------- Reported net income $ 28,938 $ 75,715 Add back: Goodwill amortization, net of tax 2,819 8,243 -------- -------- Adjusted net income $ 31,757 $ 83,958 Adjusted net income per share: Basic $ 0.39 $ 1.04 Diluted $ 0.39 $ 1.03 Weighted average shares outstanding: Basic 80,887 80,787 Diluted 81,437 81,834
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of , and the accounting and reporting provisions of Accounting Principles Board Opinion ("APB") No. 30, Reporting the Results of Extraordinary, Unusual, and Infrequently Occurring Events and Transactions. This statement retains the fundamental provisions of SFAS No. 121 and the basic requirements of APB No. 30; however, it establishes a single accounting model to be used for long-lived assets to be disposed of by sale and it expands the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of this statement did not have a material impact on our financial position or results of operations. In July, 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructuring, involuntarily terminating employees, and consolidating facilities, initiated after December 31, 2002. We do not believe the adoption of this new statement will have a material impact on our consolidated financial statements. SUBSEQUENT EVENT On October 11, 2002, we announced the signing of a definitive agreement to acquire all of the outstanding shares of Hydralift ASA, a Norwegian oilfield service company. On November 8, 2002 we made a cash Tender Offer of NOK 55, approximately U.S. $7.33, for each share of Hydralift. The total 13 value of the transaction, including the assumption of debt, is approximately $300 million. The transaction is subject to various conditions, including certain regulatory approvals, and the acceptance of the Tender Offer by shareholders owning more than 90% of the outstanding shares. FORWARD-LOOKING STATEMENTS This document, other than historical financial information, contains forward-looking statements that involve risks and uncertainties. Such statements relate to our revenues, sales of capital equipment, backlog, capacity, liquidity and capital resources and plans for acquisitions and any related financings. Readers are referred to documents filed by us with the Securities and Exchange Commission which identify significant risk factors which could cause actual results to differ from those contained in the forward-looking statements, including "Risk Factors" at Item 1 of the Annual Report on Form 10-K. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements. We disclaim any obligation or intent to update any such factors or forward-looking statements to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change during 2002 in our market risk, as disclosed in our 2001 Annual Report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Within 90 days before filing this report, we carried out an evaluation, under the supervision and with the participation of the company's management, including the company's President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures. Based upon that evaluation, the company's President and Chief Executive Officer along with the company's Chief Financial Officer concluded that the company's disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company's periodic Securities and Exchange Commission filings. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of our evaluation. 14 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amended and Restated Stock Award and Long-Term Incentive Plan 10.2 Loan Agreement dated July 30, 2002 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 August 13, 2002 regarding the submission of sworn statements by the chief executive officer and the chief financial officer relating to Exchange Act filings pursuant to Commission Order No. 4-460. 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. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 2002 /s/ Steven W. Krablin ------------------------------------------ Steven W. Krablin Principal Financial and Accounting Officer and Duly Authorized Signatory 15 CERTIFICATION I, Merrill A. Miller, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of National-Oilwell, Inc. 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly 16 affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 5, 2002 /s/ Merrill A. Miller, Jr. -------------------------- Merrill A. Miller, Jr. Chief Executive Officer 17 CERTIFICATION I, Steven W. Krablin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National-Oilwell, Inc. 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 18 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 5, 2002 /s/ Steven W. Krablin ----------------------- Steven W. Krablin. Chief Financial Officer 19 INDEX TO EXHIBITS (a) Exhibits 10.1 Amended and Restated Stock Award and Long-Term Incentive Plan 10.2 Loan Agreement dated July 30, 2002 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.