national oilwell varco 1998 Annual Report
Published on: Mar 3, 2016
Transcripts - national oilwell varco 1998 Annual Report
1998 ANNUAL REPORT
Our New Logo Selected Financial Data
Year Ended August 31,(1)
(In thousands of U.S. dollars, except per share amounts) Year Ended December 31,
1998 1995 1994
Revenues $ 1,172,013 $ 1,005,572 $ 761,816 $ 86,875 $ 79,663
Operating income (loss)(4) 121,106 87,239 27,499 10,059 (9,253)
Income (loss) before taxes and
extraordinary loss(5) 109,313 82,482 16,718 12,196 (6,709)
Income (loss) before extraordinary loss(5) 68,927 51,281 10,147 7,789 (6,682)
Net income (loss) 68,927 50,658 6,147 7,789 (6,682)
Income (loss) per share before
> Basic 1.31 1.00 0.25 0.69 (0.59)
Diluted 1.30 0.99 0.25 0.68 (0.59)
Net income (loss) per share
National Oilwell, one of the most recognized names in the industry, launched a new worldmark in 1998. Its solid,
Basic 1.31 0.99 0.15 0.69 (0.59)
rectangular-shaped “NOI” shows the integrity and strength of the organization, while the multi-shaded red sphere
Diluted 1.30 0.98 0.15 0.68 (0.59)
depicts movement, energy and global presence.
Over the last two years, we have achieved dynamic growth by combining with other well-known industry leaders — Depreciation and amortization 19,179 14,744 8,775 4,558 4,926
Capital expenditures 27,845 32,605 15,166 6,435 5,932
Dreco, Ross Hill and Griffith to name a few. These acquisitions brought similarly recognizable names into the
National Oilwell family — names long associated with technology, quality service and product reliability. Our stake- Balance Sheet Data:
Working capital 346,410 252,137 168,897 32,992 18,292
holders will continue to see these valued industry technologies and services — now supported by the new worldmark —
Total assets 817,993 567,511 352,518 72,355 69,323
illustrating the financial strength, breadth of product offering and global reach offered by National Oilwell. Long-term debt, less current maturities 205,637 61,565 39,136 1,987 1,440
Stockholders’ equity 386,803 277,688 169,016 48,957 38,690
The National Oilwell worldmark is a symbol of the company, its beliefs and its people, products and services.
(1) Data for the two years ended August 31, 1995 reflect the operations of Dreco only, as the operations of National Oilwell were acquired from a predecessor partnership as of January 1, 1996 and,
Our vision is that this worldmark will become synonymous with value creation and integrity.
in accordance with generally accepted accounting principles, cannot be combined prior to that date.
(2) In order to conform Dreco’s fiscal year end to match National Oilwell’s year end, the results of operations for the month of June 1997 have been included directly in stockholders’ equity.
Dreco’s revenues and net income were $13.4 million and $0.9 million for the month.
(3) In order to conform Dreco’s August 31 fiscal year end to a period within 93 days of National Oilwell’s December 31 year end, the results of operations for the period from September 1, 1995
through November 30, 1995 have been included directly in stockholders’ equity. Dreco’s revenues and net income were $33.4 million and $3.2 million for such period.
(4) In December 1998, National Oilwell recorded a $16,400,000 charge related to personnel reductions and facility closures and a $5,600,000 charge related to the writedown to the lower
of cost or market of certain tubular inventories. In September 1997, National Oilwell recorded a $10,660,000 charge related to merger expenses incurred in connection with the combination
with Dreco. In October 1996, National Oilwell recorded $16,611,000 in charges related to the cancellation of management agreements and expenses related to special incentive plans that ter-
minated upon the occurrence of the initial public offering of its common stock.
(5) National Oilwell recorded extraordinary losses in September 1997 of $623,000 (net of $376,000 income tax benefit) and in October 1996 of $4,000,000 (net of $2,400,000 income
tax benefit) due to the write-offs of deferred debt issuance costs.
Corporate Profile Fellow Stockholders
Whether you hold only National Oilwell stock or also invest in our peers, I’m sure by now you are painfully aware of
the depressed market environment faced by the oil service industry. Domestic drilling activity is at the lowest level on
record and oil prices continue to languish at levels that do not justify increased exploration and production spending.
We can’t predict when the price of this essential commodity will rebound, but we can manage our business to make a
reasonable return in these conditions and position ourselves to produce exceptional results in a balanced supply and
demand market. Recovery will occur; it is the timing that is uncertain. Our current focus, therefore, is upon sizing
our business for the current level of activity while maintaining our fundamental capabilities. In the short-term, our
National Oilwell is a worldwide leader in the design, manufacture and commitment is to reduce our operating costs, generate cash from our balance sheet and significantly reduce our debt.
This will position us to provide for future strategic acquisitions and to emerge from this downturn in a stronger posi-
sale of machinery, equipment and downhole tools used in oil and gas drilling and
tion relative to our peers. We believe the actions we have taken will ensure that we are successful in this effort. Our
production, as well as in the distribution to the oil and gas industry of mainte- longer-term commitment to create value by becoming an integral part of our customers’ strategy remains unchanged.
Let me share with you the ways in which we have delivered on both these commitments in 1998 and our plans to con-
nance, repair and operating products.
tinue throughout 1999.
The Company manufactures and assembles drilling machinery, including draw-
works, mud pumps, power swivels, SCR systems, traveling equipment and rotary 1998 Results. Fueled by oil prices in the $16–26 per bar- and 11%. The Company’s backlog for capital equipment,
rel range, drilling activity was high during 1997 and the which began the year at $270 million, totaled $77 million
tables, as well as masts, derricks and substructures. National Oilwell also designs
beginning of 1998. Many customers placed orders for at the end of 1998.
and manufactures drilling motors and specialized drilling tools for rent and sale.
Long-Term Strategy. Throughout the course of the year, we
equipment to be delivered in 1998, resulting in National
Many of the Company’s products are designed specifically for applications in off- continued to pursue our long-term strategy of enhancing
Oilwell achieving record consolidated results. Revenues
our market positions and focusing on customer economics.
of $1.2 billion increased 17% from the prior year, while
shore, deep land, extended reach and performance drilling.
During 1998, five new companies were integrated
operating income of $143 million, excluding special
National Oilwell provides distribution services through its network of approxi- into the National Oilwell fold.
charges, grew by 46%. Operating income margins
• May 1998. Aberdeen-based Specialty Tools Ltd. and
increased from 9.7% in 1997 to 12.2% in 1998. Our
mately 125 distribution service centers located in the United States, Canada and
Versatech International Ltd. of Calgary, designers and
Products and Technology Group achieved a 124%
near major drilling and production activity worldwide. The Company also offers manufacturers of downhole coiled tubing products.
increase in operating profit on revenue growth of 80%.
• May 1998. Phoenix Energy Products, Inc., a manufacturer
Our Distribution Services and Downhole Products
outsourcing and alliance arrangements that include comprehensive procurement,
of multiple product lines that are complementary to
Groups, however, were affected much earlier by the
inventory management and logistics support. those of National Oilwell, including drilling and com-
worldwide decrease in the demand for oil and the resultant
pletion expendable products and solids control equip-
deterioration in hydrocarbon pricing. These groups
ment, as well as downhole equipment. This acquisition
reported year-over-year revenue reductions of 20%
FELLOW STOCKHOLDERS FELLOW STOCKHOLDERS
Joel V. Staff
New products that increase performance and reduce in 1999. At the core of this implementation is a business
was financed primarily through the issuance of $150 mil- proud to share with you three stories included in this
downtime in offshore, deepwater and deep land drilling application system developed by SAP, which will enable us
lion in unsecured seven-year senior notes which have a year’s annual report illustrating ways in which the
were introduced, while others are under development. to significantly increase information processing effi-
coupon interest rate of 6.875%. employees of National Oilwell successfully pursued this
• July 1998. Roberds-Johnson Industries, Inc., a manu- • Active Heave Compensating Drawworks. As more fully ciency and respond more rapidly to changing market strategy in 1998. These stories are a testament to our
facturer of equipment used on deepwater drilling rigs, described on page 11 of this annual report, this draw- conditions. employees’ creativity, innovation and dedication. As the
including modular packages for production facilities, works is the first offering of a cooperative venture Short-Term Strategy. We began taking the steps necessary to industry recovers, all stakeholders will be the beneficiar-
small platform drilling rig packages, mud tank and between National Oilwell and Hitec A.S.A. of Norway. ensure our position in the marketplace early in 1998. ies of their commitment.
engine packages and other fabricated equipment. This technological advance in the design of drawworks Capital expenditures totaling $28 million for the year I end this letter in tribute to James T. Dresher, who
Roberds also has a full rig-up facility with employees allows for faster and safer drilling operations, as well as were $5 million below 1997 levels, as capital expenditures passed away on February 28, 1999. Jim served as a director
that did not have compelling economic justification were
experienced in the engineering and construction of reduced maintenance and downtime for offshore rigs. of the Company since January 1996 and also as a member
• The National Oilwell 7500 PSI Hydrodynamic System. This canceled or deferred. Decisions were made and imple-
conventional land drilling rigs. of the audit committee and Chairman of the compensa-
• December 1998. DOSCO, a major Canadian oilfield dis- new wash pipe packing system dramatically extends the mented to reduce personnel to appropriate levels and to tion committee. He was a dedicated and valued member of
tribution business, which we are combining with our period between packing failures in higher pressure permanently close and sell certain facilities. A special the board, and the directors, management and employees
existing Canadian distribution business. With thirteen drilling applications. In a recent high pressure field charge of $22 million was taken in the fourth quarter in of National Oilwell would like to express our great respect
overlapping locations, this combination consolidates the test, the new system ran for 180 hours before replace- respect of these reductions and to write down the value of and gratitude for his service. He will be missed.
Canadian market and enhances our offering of inventory ment was required, versus 40 hours using conventional certain inventory.
procurement and supply chain management services. wash pipe and packing. Thus, we enter 1999 structured to ensure continued Sincerely,
We also continued to deliver new drilling technolo- Our commitment to being the leading provider of customer support and the maintenance of our market
gies, designed to lower the cost required to produce supply chain management services and to lowering the leading installed base of capital equipment. We will
attractive returns from exploration and production, and total cost of ownership for our customers led to the aggressively manage our balance sheet and focus on cash
Joel V. Staff
made substantial capital investments in information tech- investment of $7 million in 1998 for the implementation generation and debt reduction, leaving us poised to cap-
Chairman, President and Chief Executive Officer
nologies that will enable the process changes that create of redesigned processes, hardware, software and training. italize on opportunities that arise and to deliver our
value for us and our customers. We will invest an additional $11 million toward this goal longer-term strategy of value creation economics. I am
The Deutag International/National Oilwell Story
n 1997 Deutag International, a leading worldwide drilling contractor, began looking
at the issue of supply chain management as a means of driving down repair and main-
tenance costs, improving delivery time and reducing the time spent in procurement
and logistics. Their goal was to develop an alliance partnership with a provider who would
manage their supply chain, operate their warehouses and help reduce their net capital
employed. Deutag wanted to free up their personnel for higher value added activities, and
ultimately increase their profit. By reducing repair and maintenance costs, increasing return
on net capital employed, raising the level of customer satisfaction and improving drilling
efficiency, Deutag would be better positioned to attract additional customers in the interna-
National Oilwell was selected as Deutag’s alliance partner based on its best overall
knowledge of supply chain management, existing presence in key international areas and
willingness to do business wherever Deutag International operates. The initial agreement
provided for National Oilwell to be the single source provider of materials to the Deutag rigs
National Oilwell was selected as the single source provider of materials to Deutag International drilling rigs
in key international areas based on its best overall knowledge of supply chain management. The alliance
agreement has been expanded to include Deutag’s platform operations in Scotland.
DEUTAG INTERNATIONAL DEUTAG INTERNATIONAL
> “This alliance
duplicative procurement and logistics efforts Jeremy Thigpen
and allows each partner to spend more time focusing
on their respective core competencies.”
in Algeria, Nigeria, Venezuela, Thailand, Bangladesh, Oman and Azerbaijan. Together, the affected operations. By streamlining the supply chain, reducing the time between the
Deutag and National Oilwell established benchmarks against which the success of the part- identification of a need and its fulfillment and consolidating inventories among several
nership would be measured, including reductions in the total costs of materials supplied and drilling contractors operating in a geographic area, National Oilwell can reduce total inven-
capital employed. Financial gains or losses measured against these benchmarks are shared tory required to support any given rig, freeing up scarce working capital for deployment
between the partners. elsewhere and improving the return on capital employed of all the affected drilling contractors.
For National Oilwell, this partnering opportunity is an effective strategy for adding To date, National Oilwell and Deutag have implemented the supply chain concept in all
value. It has tremendous potential to reduce transaction costs across the business interface, of the locations included in the initial agreement except Algeria, which will follow in April
allowing partners to eliminate duplicative procurement and logistics efforts, and permit 1999. Both partners have recognized operational and financial successes as compared to the
each to spend more time focusing on their respective core competencies. By working with historical benchmark performance models. Aside from the financial results, the most
Deutag in support of its drilling operations, National Oilwell gained a partner doing busi- reported and obvious improvement at the various Deutag operational sites is found in the
ness in a number of regions, improving our capacity for additional global expansion. This National Oilwell software reporting tools which provide the Deutag area personnel with real-
relationship also provides us with the opportunity to be the preferred provider of other serv- time visibility and budgetary control by rig.
ices to Deutag, such as the maintenance of rigs, upgrading of equipment and the consolida- Through this alliance partnership, National Oilwell and Deutag are striving to identify
tion of “in country” inventories across its many customers. Our internal estimates indicate and implement innovative solutions to achieve a best-in-class performance through contin-
that a drilling rig operating internationally may carry as much as $3 million in inventory to uous modification and improvement of the process. The partners have displayed their con-
support the rig. In a country with a number of contractors and several drilling rigs, these fidence in the continued success of this relationship by expanding the alliance to include
inventories may be duplicative and unnecessarily high, reducing the return on capital for all Deutag’s platform operations in Scotland.
ow and again, a new product sets sail with the ability to dramatically impact
drilling efficiency. Such was the case on October 4, 1998, when the Deepwater
Pathfinder, a drillship commissioned and owned by Conoco and R&B Falcon,
left Koje, South Korea on her maiden voyage. This ultra deepwater dynamically positioned
drillship is designed to drill in up to 10,000 feet of water, primarily in the Gulf of Mexico,
where she is currently stationed. The Deepwater Pathfinder, outfitted for efficient drilling oper-
ations, includes the premier installation of the Active Heave Compensating Drawworks.
The Active Heave Compensating Drawworks marks the first jointly designed product of a
cooperative venture between National Oilwell and Hitec ASA. Hitec, based in Norway, is a
leading supplier of highly advanced systems and solutions for the oil and gas industry. Its lead-
ing-edge automation and remote control technologies are applied in oil and gas drilling, off-
shore oil and gas production and transport, and remote operated subsea construction and
maintenance. In August 1998, the two companies announced a cooperative agreement under
which joint engineering expertise and product knowledge would be used to enhance current
The Deepwater Pathfinder, an ultra deepwater drillship outfitted for efficient drilling operations, includes
the premier installation of the Active Heave Compensating Drawworks. This new drawworks system allows
for faster and safer drilling operations, reduced maintenance and an extended drilling window.
ACTIVE HEAVE COMPENSATING DRAWWORKS ACTIVE HEAVE COMPENSATING DRAWWORKS
> “The Active Heave Compensating Drawworks
offers significant benefits to our customers Tim Watson
over traditional drawworks systems.”
product offerings and provide new products to the oil and gas industry. The combination of total weight is reduced and its center of gravity is lowered. Reduced equipment weight per-
National Oilwell’s manufacturing expertise and worldwide marketing platform with Hitec’s mits higher variable deck loads, enabling more supplies to be carried on board which, in
state-of-the-art drilling technologies delivers compelling economic and operational benefits turn, decreases the frequency of resupplying the vessel. Operating costs are reduced by
to our customers, as evidenced by the Active Heave Compensating Drawworks. improved wire-rope life and load-working range. Most importantly, however, drilling oper-
This new drawworks system, which combines traditional drawworks and compensating ations are made safer, with two sets of motors, gears, brakes and critical parts of the control
systems into a single machine with AC motors and drives managed by an advanced control system for back-up. By integrating the National Oilwell-Hitec system into the design of new
system, directly addresses the wave action and other motion challenges faced by drillship and vessels, operators can expect not only more efficient operations and a longer drilling win-
semi-submersible drilling rig operators. It offers significant benefits to customers over tra- dow, but lower capital costs and improved vessel dynamics. Likewise, these benefits can be
ditional passive compensation systems, which ultimately result in improved drilling safety recognized by drilling contractors and their customers when retrofitted to existing drill-
and efficiency. The technological and economic advantages of this drawworks span the life ships and semi-submersibles. To date, ten orders have been placed for the Active Heave
cycle of the product. Improved drilling control through accurate motion compensation Compensating Drawworks.
allows the operator to continue drilling through more extreme weather conditions than This product and the cooperative agreement with Hitec are outstanding examples of our
conventional systems. This extended operational window reduces downtime in the drilling commitment to create value by becoming an integral part of our customers’ strategies. Many
curve, thereby reducing the cost of drilling. Fewer moving parts than the traditional system exciting opportunities are possible through the companies’ joint efforts. National Oilwell
make the Active Heave Compensating Drawworks more reliable and easier to maintain. A now offers Hitec’s Cyberbase drilling control systems with its line of conventional draw-
vessel’s motion characteristics are improved through less bit load variation. With the need works. This is a powerful alliance, with a vision toward complete automation of the rig floor.
for a heavy crown-mounted passive heave compensator eliminated, a floating drilling rig’s
The Delta Revolution
he Distribution Strategy Vision 2000 Team was established by National Oilwell
in 1997 with a charter to develop initiatives that would deliver a dynamic global
Distribution Services business in the coming decade. As this team reviewed the
current state of the business and interviewed customers, vendors and best-in-class service
providers, it was evident that this could only be accomplished by transforming our supply
chain management capabilities and significantly changing the way we do business. Thus, in
1998, a major initiative was launched which centered around implementing business process
improvements that would culminate in supply chain optimization, and the Delta Revolution Team
Armed with National Oilwell’s commitment to make the necessary investments in the
systems, people and training required to deliver this initiative, the Delta Revolution Team’s first
order of business was the selection of a business application system. The selection criteria
demanded a real-time, global system providing common data base management and capable
of directly interfacing with our customers and vendors. SAP R/3 was chosen as the system
The Delta Revolution Team is responsible for identifying and implementing business process improvements
that will culminate in supply chain optimization. Delivery of these improvements will minimize our cus-
tomers’ transaction costs, reduce their procurement costs, optimize their product selections and lower
THE DELTA REVOLUTION THE DELTA REVOLUTION
> “Information technology and process redesign Rosalinda Schulli
efficiencies and gainsharing opportunities Team Member
for our customers, our vendors and National Oilwell.”
best designed to significantly increase our information processing efficiency and fully inte- its commitment. Among others, the anticipated improvements include: a 50% reduction in
grate our business operations. Equally critical in the choice was the fact that this system pro- supply chain costs for National Oilwell’s top twenty customers; a significant reduction in
vides a proven, effective platform for electronic commerce. Implementation of the system is National Oilwell’s vendor base; a greater than two-fold improvement in inventory turns;
well underway, with the Tubular Division successfully going live on January 1st and the entire and 90% electronic transactions with our top customers.
Distribution Group to be live before the end of the year. The realization of this exciting initiative is a strategic supplier network for the future.
Global procurement and the application of world class materials requirement planning will
The Delta Revolution Team is also responsible for the identification of innovative business
ensure our customer base with consistency and control across the supply chain, ultimately
practices that will improve the procurement process and reduce transaction costs. One such
reducing their inventory investment. Skill and service levels will be consistent worldwide
tool identified by the team and currently being implemented by National Oilwell to drive
and available around the clock. Boundaries between National Oilwell, our vendors and our
process changes and efficiencies into the entire supply chain is Activity Based Cost Manage-
customers will become invisible as we work together to create opportunities for increased
ment (ABCM). ABCM is a non-traditional method of cost accounting that traces expenses
to their appropriate activities and shows how these activities support customers, vendors and
The employees of National Oilwell are dedicated to fulfilling the goals established by the
products. Application of ABCM results in more accurate measurements of efficiency and
profitability within each of these areas. This ability to identify and favorably impact cost driv- Delta Revolution Team. The vision has been clearly defined and communicated, the investment
ers allows us to provide gainsharing opportunities with existing and potential strategic in financial and human capital has been made, and National Oilwell’s future as the leading
alliance partners. provider of enhanced supply chain services is secure.
In developing its action plan, the Delta Revolution Team worked from a future vantage
point, identifying specific improvements that would emerge with the successful delivery of
Financial Review Management’s Discussion & Analysis of Financial Condition
and Results of Operations
National Oilwell is a worldwide leader in the design, manufacture and sale of machinery and equipment and in
Management’s Discussion & Analysis of Financial Condition and Results of Operations 19
the distribution of maintenance, repair and operating products used in oil and gas drilling and production. National
Oilwell’s 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
Report of Independent Auditors 24
anticipated prices of oil and gas. Beginning in late 1997, current and near term expectations for oil prices declined
due to concerns about excess production, less demand from Asia due to an economic slowdown and warmer than aver-
age weather in many parts of the United States. The resulting lower demand for products and services is expected to
Consolidated Balance Sheets 25
have a negative impact on National Oilwell’s 1999 operating results.
Consolidated Statements of Operations 26 Results of Operations
Operating results by segment are as follows (in millions):
Year Ended December 31,
Consolidated Statements of Cash Flows 27 1998 1997 1996
Products and Technology $ 668.1 $ 371.8 $ 266.5
Consolidated Statements of Stockholders’ Equity 28
Downhole Products 61.8 69.0 28.6
Distribution Services 508.6 630.9 518.7
Eliminations (66.5) (66.1) (52.0)
Notes to Consolidated Financial Statements 29
Total $ 1,172.0 $ 1,005.6 $ 761.8
Products and Technology $ 119.6 $ 53.4 $ 25.9
Market for Registrant’s Common Equity and Related Stockholder Matters 40 Downhole Products 17.0 25.6 8.9
Distribution Services 7.5 27.6 17.5
Corporate (6.6) (8.7) (8.2)
137.5 97.9 44.1
Special Charge 16.4 10.7 16.6
Total $ 121.1 $ 87.2 $ 27.5
Products and Technology
The Products and Technology segment designs and manufactures a large line of proprietary products, including
drawworks, mud pumps, power swivels, electrical control systems and reciprocating pumps, as well as complete land
drilling and well servicing rigs and structural components such as masts, derricks and substructures. A substantial
installed base of these products results in a recurring replacement parts and maintenance business. Sales of new capi-
tal equipment can result in large fluctuations in volume between periods depending on the size and timing of the ship-
ment of orders. This segment also provides drilling pump expendable products for maintenance of National Oil-
well’s and other manufacturers’ equipment. As noted above, low oil prices are expected to have a negative impact on
operating results in 1999.
Revenues for the Products and Technology segment increased by $296.3 million over 1997 primarily due to
increased sales of major capital equipment and drilling spares. Specifically, the sale of complete rig packages, mud
pumps, cranes and SCR equipment were substantially greater than the prior year. Revenues generated by acquisitions
completed in 1998 totaled approximately $48 million during the year.
Operating income increased by $66.2 million in 1998 compared to the prior year due principally to the increased
sales volume. Operating income as a percentage of revenues increased due to higher prices and manufacturing and
operating cost efficiencies resulting from the higher volumes. Various acquisitions completed in 1998 contributed
$2.6 million in operating profit during the year.
Management’s Discussion & Analysis of Financial Condition and Results of Operations
Revenues during 1997 increased $105.3 million over 1996 primarily due to increased demand for drilling capital Special Charges
equipment and spare parts as well as fluid end expendable parts. Acquisitions in 1997 other than Dreco accounted for During the fourth quarter of 1998, the Company recorded a special charge of $16.4 million ($10.4 million after
$26.6 million of the increase. Operating income for this segment increased by $27.5 million when compared to the tax, or $0.20 per share) related to operational changes resulting from the depressed market for the oil and gas indus-
prior year with 1997 acquisitions other than Dreco accounting for $5.0 million of this incremental income and the try. The components of the special charge are as follows (in millions):
remainder due to the higher activity levels.
Backlog of the Products and Technology capital products was $77 million at December 31, 1998 compared to Asset impairments $ 5.4
$270 million at December 31, 1997 and $38 million at December 31, 1996. Substantially all of the current backlog is
Facility closures and exit costs 5.4
expected to be shipped by June 30, 1999.
The cash and non-cash elements of the charge approximate $11.0 million and $5.4 million, respectively. Break-
National Oilwell designs and manufactures drilling motors and specialized drilling tools for rent and sale. Rentals
down of the charge by business segment is:
generally involve products that are not economical for a customer to own or maintain because of the broad range of
equipment required for the diverse hole sizes and depths encountered in drilling for oil and gas. Sales generally involve
Products and Technology $ 11.1
products that require infrequent service, are disposable or are sold in countries where National Oilwell does not
Downhole Products 1.4
provide repair and maintenance services.
Distribution Services 3.0
Downhole Products revenues decreased by $7.2 million (10%) in 1998 when compared to 1997, due primarily to
lower motor sales and rentals, particularly in Canada. Operating income decreased $8.6 million in 1998 compared to
the prior year. This decrease in operating income was a result of reduced margins due to the volume reduction and an
increase in overhead spending caused by the addition of two minor acquisitions.
The asset impairment losses of $5.4 million consists primarily of the shutdown of four North American manu-
Revenues in 1997 increased $40.4 million over 1996 due to a general increase in market activity plus the inclu-
facturing facilities. Assets related to these non-productive facilities which are not in service totaling $10.0 million have
sion of Vector Oil Tool revenues, a 1997 acquisition, of $24.6 million. Operating income in 1997 exceeded the prior
been reclassified on the balance sheet to property held for sale and have been written down to their estimated fair value,
year by $16.7 million with Vector accounting for $14.7 million of the increase.
less cost of disposal. Severance costs of $5.6 million relate to the involuntary termination of approximately 200 employ-
ees, most of which are located in North America. Facility closure costs of $5.4 million consists principally of lease can-
cellation and facility exit costs. Substantially all of the actions associated with this charge will be fully implemented
Distribution Services revenues result primarily from the sale of maintenance, repair and operating supplies from
before the end of the first quarter of 1999.
the Company’s network of distribution service centers and from the sale of well casing and production tubing. These
During 1997, National Oilwell recorded a $10.7 million charge ($8.1 million after tax) related to various profes-
products are purchased from numerous manufacturers and vendors, including the Company’s Products and Tech-
sional fees and integration costs incurred in connection with the combination with Dreco.
During 1996, National Oilwell incurred certain one-time expenses in connection with its initial public offering
Distribution Services revenues during 1998 fell short of the comparable 1997 period by $122.3 million. This 19%
of common stock, as follows: (i) a management services agreement was terminated at a cost of $4.4 million ($2.8 mil-
decrease reflects the reduced demand for tubular and general rig operating supplies precipitated by the significant
lion after tax) and (ii) expenses and payout under National Oilwell’s Value Appreciation Plans, which resulted in
decrease in oil prices. North American revenues were off approximately 20%, with tubular revenues roughly two-thirds
National Oilwell recording an expense of $12.2 million ($7.6 million after tax). The Value Appreciation Plans
of the level achieved in 1997. Operating income in 1998 was approximately $20 million below 1997, due to reduced
required the issuance of 681,852 shares of common stock and payment of $6.4 million in cash.
margins from the decline in revenues partially offset by reduced operating expenses, and the recording of a $5.6 mil-
lion charge related to the writedown to lower of cost or market of certain tubular inventories.
Distribution Services revenues in 1997 exceeded 1996 by $112.2 million. This 22% increase reflects the increased
Interest expense increased during 1998 when compared to the prior year due to the incurrence of debt to finance
spending levels of the Company’s alliance partners and other customers. Incremental sales of maintenance, repair and
the Phoenix acquisition. Interest expense in 1997 was substantially lower than 1996 due to lower amounts of debt out-
operating supplies ($34.2 million), tubular products ($58.0 million), drilling spares ($8.1 million) and fluid end
standing and lower interest rates under the new credit facilities.
expendable parts and related pumps ($8.0 million) accounted for the majority of this increase. Operating income in
1997 exceeded the prior year by $10.1 million (58%) as an increase in operating expenses offset part of the incremen-
National Oilwell is subject to U.S. federal, state and foreign taxes and recorded a combined tax rate of 37% in
1998, 38% in 1997 and 39% in 1996. National Oilwell has net operating tax loss carryforwards in the United States
that could reduce future tax expense by up to $6.8 million. Additional loss carryforwards in Europe generally would
Corporate charges represent the unallocated portion of centralized and executive management costs. While cor-
reduce goodwill if realized in the future. Due to the uncertainty of future utilization, all of the potential benefits
porate charges in 1997 were comparable to 1996, these costs decreased substantially in 1998 due to the elimination of
described above have been fully reserved. During 1998, National Oilwell realized a tax benefit of $2.6 million from its
duplicate corporate costs that existed prior to the combination with Dreco.
U.S. carryforwards, but closure of certain operations may significantly reduce future realization. National Oilwell’s
combined tax rate in 1998 would have been 39% if these carryforwards were excluded.
Management’s Discussion & Analysis of Financial Condition and Results of Operations
Management believes that with installation of new systems, conversion to new software and modifications to exist-
ing software, the year 2000 issue will pose no significant operational problems for National Oilwell. The Company
In the third quarter of 1997, National Oilwell replaced its existing credit facility and recorded a charge of
expects to complete all new installations, conversions and necessary systems modifications and conversions by Septem-
$1.0 million ($0.6 million after tax) due to the write-off of deferred debt costs. In the fourth quarter of 1996, the
ber 30, 1999. Accordingly, the Company does not have a contingency plan with respect to the year 2000 issue. There
credit facility established in connection with the acquisition of the Company was replaced, resulting in the write-off of
can be no assurance, however, that the Company will be able to install and maintain year 2000 compliant software and
$6.4 million ($4.0 million after tax) in deferred debt costs.
should this occur, operational difficulties could result. In such circumstances, delays in financial processes could
occur, but neither these nor any product-related problems are expected to have an adverse effect on the Company’s
Liquidity and Capital Resources
At December 31, 1998, National Oilwell had working capital of $346.4 million, an increase of $94.3 million from
The costs of the project and the dates on which the Company believes it will complete its Year 2000 project are
December 31, 1997. Significant components of National Oilwell’s assets are accounts receivable and inventories.
based on management’s best estimates. These estimates were derived using numerous assumptions of future events,
Accounts receivable, including unbilled revenues, increased by $57.3 million and inventories increased $38.5 million
including continued availability of resources, third party’s Year 2000 status and plans and other factors. However,
during 1998. Decreases in accounts payable of $16.4 million and customer prepayments of $12.3 million were offset
there can be no assurance that these estimates will be achieved and actual results could differ materially from those
by an increase in other accrued liabilities of $28.2 million.
anticipated. Specific factors that might cause such material differences include the availability and cost of personnel,
Total capital expenditures were $27.8 million during 1998, $32.6 million in 1997 and $15.2 million in 1996.
the ability to identify and correct all Year 2000 impacted areas, timely and effective action by third parties, the abil-
Additions and enhancements to the downhole rental tool fleet and information management and inventory control
ity to implement interfaces between Year 2000-ready systems and those systems not being replaced, and other sim-
systems represent a large portion of these capital expenditures. Capital expenditures are expected to decline to approx-
imately $20-22 million in 1999, which will include approximately $7 million necessary to complete the installation of
a new information system for the Distribution Services group. National Oilwell believes it has sufficient existing man-
ufacturing capacity to meet currently anticipated demand through 1999 for its products and services. Market Risk Disclosure
On September 25, 1997, National Oilwell entered into a new five-year unsecured $125 million revolving credit The Company is subject to market risk exposure related to changes in interest rates on its credit facility which is
facility. The credit facility is available for acquisitions and general corporate purposes. The credit facility provides for comprised of revolving credit notes in the United States and Canada. A portion of the borrowings are denominated
interest at prime or LIBOR plus 0.625%, subject to adjustment based on National Oilwell’s Capitalization Ratio, as in Canadian funds which could expose the Company to market risk with exchange rate movements, although such is
defined. The credit facility contains financial covenants and ratios regarding minimum tangible net worth, maximum mitigated by the Company’s substantial operations in Canada. These instruments carry interest at a pre-agreed upon
debt to capital and minimum interest coverage. percentage point spread from either the prime interest rate or LIBOR. Under its credit facility, the Company may, at
National Oilwell believes that cash generated from operations and amounts available under the credit facility will its option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days to 6 months. At
be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. December 31, 1998, the Company had $55.6 million outstanding under its credit facility. Based on this balance, an
National Oilwell also believes any significant increase in capital expenditures caused by any need to increase manufac- immediate change of one percent in the interest rate would cause a change in interest expense of approximately
turing capacity can be funded from operations or through debt financing. $0.6 million on an annual basis. The Company’s objective in maintaining variable rate borrowings is the flexibility
National Oilwell intends to pursue acquisition candidates, but the timing, size or success of any acquisition effort obtained regarding early repayment without penalties and lower overall cost as compared with fixed-rate borrowings.
and the related potential capital commitments cannot be predicted. National Oilwell expects to fund future cash acqui-
sitions primarily with cash flow from operations and borrowings, including the unborrowed portion of the credit facil- Recently Issued Accounting Standards
ity or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments
can be no assurance that acquisition funds will be available at terms acceptable to National Oilwell. and Hedging Activities. The Company expects to adopt the new Statement effective January 1, 2000. The Statement will
Inflation has not had a significant impact on National Oilwell’s operating results or financial condition in recent years. require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate
that the adoption of this Statement will have a significant effect on its results of operations or financial position.
In April 1998, the AICPA issued SOP 98-5, Reporting the Costs of Start-up Activities. The SOP is effective for
The year 2000 issue is the result of computer programs having been written using two digits rather than four to fiscal years beginning after December 15, 1998, which requires that the costs associated with such activities be expensed
define the applicable year. Any computer programs that have date-sensitive software may recognize a date using “00” as as incurred. The adoption of the new statement will not have a significant effect on earnings or the financial position
the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of the Company.
of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Fo r wa r d - L o o k i ng S tat e m e n t s
In 1997, the Company’s Distribution Services segment decided to replace its main business system in order to sig- This document, other than historical financial information, contains forward-looking statements that involve
nificantly improve our supply chain capabilities. The new system installation is expected to be complete in the third risks and uncertainties. Such statements relate to National Oilwell’s sales of capital equipment, backlog, capacity, liq-
quarter of 1999 and will be Year 2000 compliant. In addition, the Company continues to identify, evaluate and uidity and capital resources, plans for acquisitions and any related financings and the impact of Year 2000. Given
implement modifications to its other business systems in order to achieve year 2000 date conversion compliance. The these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-
total cost of the year 2000 readiness is estimated at $1.0 million, of which approximately half has been spent. The Year looking statements. National Oilwell disclaims any obligation or intent to update any such factors or forward-looking
2000 review covers internal computer systems and process control systems, as well as embedded systems in products statements to reflect future events or developments.
delivered. In addition, the Company has initiated formal communication with its significant suppliers, customers and Although National Oilwell believes that the expectations reflected in such forward-looking statements are reason-
business partners to determine the extent to which we are vulnerable to any failure of these third parties to remedy their able, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause
own Year 2000 issues. Third party vendors of hardware and packaged software have also been contacted about their actual results to differ materially from National Oilwell’s expectations are disclosed in, but not limited to, the matters
products’ compliance status. While the ability of third parties with whom the Company transacts business to address described in “Risk Factors” in National Oilwell’s annual report on Form 10-K.
adequately their year 2000 issue is outside its control, the Company will evaluate the need to change sources as necessary.
Report of Independent Auditors Consolidated Balance Sheets
To t h e S t o c k h o l d e r s a n d B o a r d o f D i r e c t o r s (In thousands, except share data) December 31, December 31,
We have audited the accompanying consolidated balance sheets of National-Oilwell, Inc., as of December 31, 1998 Assets
and 1997, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the
Cash and cash equivalents $ 11,440 $ 19,824
years then ended. These financial statements are the responsibility of the Company’s management. Our responsibil-
Receivables, less allowance of $4,718 and $4,056 281,312 192,470
ity is to express an opinion on these financial statements based on our audits. We did not audit, in 1996, the financial
Unbilled revenues – 31,521
statements of Dreco Energy Services, Ltd., a wholly-owned subsidiary, which statements reflect total revenues of
Inventories 241,987 203,520
$113,195,000 for the year ended November 30, 1996. Those statements were audited by other auditors whose report
Deferred taxes 16,489 9,839
has been furnished to us, and our opinion, insofar as it relates to data included for Dreco Energy Services, Ltd., is
Prepaid and other current assets 6,533 6,424
based solely on the report of the other auditors.
Total current assets 557,761 463,598
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that
Property, plant and equipment, net 91,756 74,282
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate-
Deferred taxes 6,757 4,919
rial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
Goodwill 145,696 24,233
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
Property held for sale 9,981 –
by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the
Other assets 6,042 479
report of other auditors provide a reasonable basis for our opinion. $ 817,993 $ 567,511
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of National-Oilwell, Inc., at December 31, Liabilities and stockholders’ equity
1998 and 1997, and the consolidated results of its operations and its cash flows for each of the years then ended, in Current liabilities:
conformity with generally accepted accounting principles. Current portion of long-term debt $ 7,447 $ 1,340
Accounts payable 118,579 134,955
Ernst & Young LLP Customer prepayments 25,392 37,688
Houston, Texas Accrued compensation 7,237 12,957
February 3, 1999 Other accrued liabilities 52,696 24,521
Total current liabilities 211,351 211,461
Long-term debt 205,637 61,565
Deferred taxes 4,097 2,675
To t h e D i r e c t o r s o f
Other liabilities 10,105 14,122
Dreco Energy Services Ltd.
Total liabilities 431,190 289,823
We have audited the consolidated balance sheet of Dreco Energy Services Ltd. as at November 30, 1996 and the con-
solidated statements of operations, shareholders’ equity and cash flows for the twelve months ended November 30, 1996.
Commitments and contingencies
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 audit.
We conducted our audit in accordance with generally accepted auditing standards in Canada. Those standards
Common stock – par value $.01; 55,996,785 and 51,655,782 shares issued
require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of
and outstanding at December 31, 1998 and December 31, 1997 561 517
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
Additional paid-in capital 248,198 207,954
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
Accumulated other comprehensive income (13,827) (7,074)
made by management as well as evaluating the overall financial statement presentation.
Retained earnings 151,871 76,291
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the company as at November 30, 1996 and the consolidated results of its operations and its cash
$ 817,993 $ 567,511
flows for the twelve months then ended in accordance with generally accepted accounting principles in the United States.
The accompanying notes are an integral part of these statements.
Coopers & Lybrand
October 21, 1997