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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 2002 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-13439
DRIL-QUIP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2162088
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS
77040
(Address of principal executive offices)
(Zip Code)
(713) 939-7711
(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 13, 2002, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 17,293,373.
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PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DRIL-QUIP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, September 30,
2001 2002
------------ -------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 11,326 $ 3,388
Trade receivables............................................................. 59,789 65,867
Inventories................................................................... 98,283 100,950
Deferred taxes................................................................ 5,320 4,676
Prepaids and other current assets............................................. 2,642 3,144
-------- --------
Total current assets...................................................... 177,360 178,025
Property, plant and equipment, net............................................... 102,310 113,391
Other assets..................................................................... 289 259
-------- --------
Total assets.............................................................. $279,959 $291,675
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 28,009 $ 19,071
Current maturities of long-term debt.......................................... 1,074 1,155
Accrued income taxes.......................................................... 490 1,989
Customer prepayments.......................................................... 7,725 10,248
Accrued compensation.......................................................... 5,675 6,010
Other accrued liabilities..................................................... 3,289 4,937
-------- --------
Total current liabilities................................................. 46,262 43,410
Long-term debt................................................................... 57,814 62,260
Deferred taxes................................................................... 3,018 3,435
-------- --------
Total liabilities......................................................... 107,094 109,105
Stockholders' equity:
Preferred stock:
10,000,000 shares authorized at $0.01 par value (none issued)............... -- --
Common stock:
50,000,000 shares authorized at $0.01 par value, 17,293,373 shares issued
and outstanding........................................................... 173 173
Additional paid-in capital....................................................... 64,737 64,737
Retained earnings................................................................ 115,015 122,428
Foreign currency translation adjustment.......................................... (7,060) (4,768)
-------- --------
Total stockholders' equity................................................ 172,865 182,570
-------- --------
Total liabilities and stockholders' equity................................ $279,959 $291,675
======== ========
The accompanying notes are an integral part of these statements.
2
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
(In thousands except share amounts)
Revenues............................... $ 54,356 $ 52,621 $ 150,361 $ 157,731
Cost and expenses:
Cost of sales....................... 38,773 38,261 104,453 113,385
Selling, general and administrative. 6,389 6,807 19,562 20,511
Engineering and product development. 3,772 3,721 10,667 11,125
----------- ----------- ----------- -----------
48,934 48,789 134,682 145,021
----------- ----------- ----------- -----------
Operating income....................... 5,422 3,832 15,679 12,710
Interest expense....................... 583 530 1,827 1,574
----------- ----------- ----------- -----------
Income before income taxes............. 4,839 3,302 13,852 11,136
Income tax provision................... 1,689 1,049 4,808 3,723
----------- ----------- ----------- -----------
Net income............................. $ 3,150 $ 2,253 $ 9,044 $ 7,413
=========== =========== =========== ===========
Earnings per share:
Basic............................... $ 0.18 $ 0.13 $ 0.52 $ 0.43
=========== =========== =========== ===========
Fully diluted....................... $ 0.18 $ 0.13 $ 0.52 $ 0.43
=========== =========== =========== ===========
Weighted average shares:
Basic............................... 17,293,000 17,293,000 17,292,000 17,293,000
=========== =========== =========== ===========
Fully diluted....................... 17,293,000 17,307,000 17,371,000 17,343,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
3
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
------------------
2001 2002
-------- --------
(in thousands)
Operating activities
Net income....................................................................... $ 9,044 $ 7,413
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 6,323 7,105
Gain on sale of equipment...................................................... (44) (23)
Deferred income taxes.......................................................... 91 1,085
Changes in operating assets and liabilities:
Trade receivables.......................................................... 4,052 (5,062)
Inventories................................................................ (24,306) (864)
Prepaids and other assets.................................................. (1,497) (697)
Trade accounts payable and accrued expenses................................ (4,000) (4,248)
-------- --------
Net cash provided by (used in) operating activities...................... (10,337) 4,709
Investing activities
Purchase of property, plant and equipment........................................ (14,808) (16,726)
Proceeds from sale of equipment.................................................. 150 114
-------- --------
Net cash used in investing activities.................................... (14,658) (16,612)
Financing activities
Proceeds from revolving line of credit and long-term borrowing................... 20,966 4,787
Principal payments on long-term debt............................................. (399) (807)
Activity under stock option plan................................................. 77 -0-
-------- --------
Net cash provided by financing activities................................ 20,644 3,980
Effect of exchange rate changes on cash activities................................ 1,167 (15)
-------- --------
Decrease in cash.................................................................. (3,184) (7,938)
Cash at beginning of period....................................................... 5,870 11,326
-------- --------
Cash at end of period............................................................. $ 2,686 $ 3,388
======== ========
The accompanying notes are an integral part of these statements.
4
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Dril-Quip, Inc., a Delaware corporation (the "Company" or "Dril-Quip"),
manufactures highly engineered offshore drilling and production equipment which
is well suited for use in deepwater, harsh environment and severe service
applications. The Company's principal products consist of subsea and surface
wellheads, subsea and surface production trees, mudline hanger systems,
specialty connectors and associated pipe, drilling and production riser
systems, wellhead connectors and diverters for use by major integrated, large
independent and foreign national oil and gas companies in offshore areas
throughout the world. Dril-Quip also provides installation and reconditioning
services and rents running tools for use in connection with the installation
and retrieval of its products. The Company has four subsidiaries that
manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland and
Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore, DQ Holdings
PTY Ltd. is located in Perth, Australia and Dril-Quip do Brasil LTDA is located
in Macae, Brazil.
The condensed consolidated financial statements included herein have been
prepared by Dril-Quip and are unaudited, except for the balance sheet at
December 31, 2001, which has been prepared from the audited financial
statements at that date. In the opinion of management, the unaudited condensed
consolidated interim financial statements include all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair presentation of
the financial position as of September 30, 2002, and the results of operations
for each of the three and nine-month periods ended September 30, 2002 and 2001
and cash flows for the nine-month periods ended September 30, 2002 and 2001.
Although management believes the unaudited interim related disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results of
operations and the cash flows for the nine-month period ended September 30,
2002 are not necessarily indicative of the results to be expected for the full
year. The consolidated financial statements included herein should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
2. INVENTORIES
Inventories consist of the following:
(Unaudited)
December 31, September 30,
2001 2002
------------ -------------
(In thousands)
Raw materials and supplies........... $21,840 $ 14,271
Work in progress..................... 22,418 31,012
Finished goods and purchased supplies 54,025 55,667
------- --------
$98,283 $100,950
======= ========
3. COMPREHENSIVE INCOME
SFAS No. 130 establishes rules for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires the Company to
include unrealized gains or losses on foreign currency translation adjustments
in other comprehensive income, which prior to adoption were reported separately
in stockholders' equity.
5
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
During the first nine months of 2002 and 2001, total comprehensive income
equaled $9.7 million and $8.3 million, respectively. For the three-month
periods ended September 30, 2002 and 2001, total comprehensive income equaled
$2.5 million and $4.7 million, respectively.
4. NEW ACCOUNTING STANDARDS
Effective January 1, 2002, Dril-Quip adopted Financial Accounting Standards
No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. The amortization provisions of FAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. The adoption of
this statement did not have a significant impact on Dril-Quip's financial
position or results of operations.
Effective January 1, 2002, Dril-Quip adopted Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement established a single accounting model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired.
Additionally, the statement expands the definition of a discontinued operation
from a segment of business to a component of an entity that had been disposed
of or is classified as held for sale and can be clearly distinguished,
operationally and for reporting purposes, from the rest of the entity. The
results of operations of a component classified as held for sale shall be
reported in discontinued operations in the period incurred. Adoption of this
statement did not have a significant impact on Dril-Quip's financial position
or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
No. 145"). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003. Under SFAS No. 145, the
Company will report gains and losses on the extinguishment of debt in pre-tax
earnings rather than in extraordinary items.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 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.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited consolidated financial statements. This discussion should be read in
conjunction with the unaudited consolidated financial statements included
elsewhere herein, and with the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the annual
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
Overview
Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. The Company's principal products consist
of subsea and surface wellheads, subsea and surface production trees, mudline
hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.
Both the market for offshore drilling and production equipment and services
and the Company's business are substantially dependent on the condition of the
oil and gas industry and, in particular, the willingness of oil and gas
companies to make capital expenditures on exploration, drilling and production
operations offshore. Oil and gas prices and the level of offshore drilling and
production activity have historically been characterized by significant
volatility.
Revenues. Dril-Quip's revenues are generated by its two operating groups:
the Product Group and the Service Group. The Product Group manufactures
offshore drilling and production equipment, and the Service Group provides
installation and reconditioning services as well as rental running tools for
installation and retrieval of its products. For the nine months ended September
30, 2002, the Company derived 86% of its revenues from the sale of its products
and 14% of its revenues from services. Revenues from the Service Group
generally correlate to revenues from product sales because increased product
sales generate increased revenues from installation services and rental running
tools. Substantially all of Dril-Quip's sales are made on a purchase order
basis. Purchase orders are subject to change and/or termination at the option
of the customer. In case of a change or termination, the customer is required
to pay the Company for work performed and other costs necessarily incurred as a
result of the change or termination.
The Company accounts for larger and more complex projects that have
relatively longer manufacturing time frames on a percentage of completion
basis. For the first nine months of 2002, 11 projects representing
approximately 15% of the Company's revenues were accounted for using percentage
of completion accounting. This percentage may fluctuate in the future. Revenues
accounted for in this manner are generally recognized on the ratio of costs
incurred to the total estimated costs. Accordingly, price and cost estimates
are reviewed periodically as the work progresses, and adjustments proportionate
to the percentage of completion are reflected in the period when such estimates
are revised. Amounts received from customers in excess of revenues recognized
are classified as a current liability.
Foreign sales represent a significant portion of the Company's business. In
the nine months ended September 30, 2002, the Company generated approximately
63% of its revenues from foreign sales. In this period, approximately 60% (on
the basis of revenues generated) of all products sold were manufactured in the
United States.
Cost of Sales. The principal elements of cost of sales are labor, raw
materials and manufacturing overhead. Variable costs, such as labor, raw
materials, supplies and energy, generally account for approximately two-thirds
7
of the Company's cost of sales. Fixed costs, such as the fixed portion of
manufacturing overhead, constitute the remainder of the Company's cost of
sales. Cost of sales as a percentage of revenues is also influenced by the
product mix sold in any particular quarter and market conditions. The Company's
costs related to its foreign operations do not significantly differ from its
domestic costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs associated with sales and marketing,
general corporate overhead, compensation expense, legal expenses and other
related administrative functions.
Engineering and Product Development Expenses. Engineering and product
development expenses consist of new product development and testing, as well as
application engineering related to customized products.
Income Tax Provision. Dril-Quip's effective tax rate has historically been
lower than the statutory rate due to benefits from its foreign sales
corporation.
Results of Operations
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of revenues:
Three months Nine months
ended ended
September 30, September 30,
------------ ------------
2001 2002 2001 2002
----- ----- ----- -----
Revenues:
Product Group............................ 87.0% 84.2% 86.3% 86.0%
Service Group............................ 13.0% 15.8% 13.7% 14.0%
----- ----- ----- -----
Total................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 71.3% 72.7% 69.5% 71.9%
Selling, general and administrative expenses 11.8% 12.9% 13.0% 13.0%
Engineering and product development expenses 6.9% 7.1% 7.1% 7.0%
----- ----- ----- -----
Operating income............................ 10.0% 7.3% 10.4% 8.1%
Interest expense............................ 1.1% 1.0% 1.2% 1.0%
----- ----- ----- -----
Income before income taxes.................. 8.9% 6.3% 9.2% 7.1%
Income tax provision........................ 3.1% 2.0% 3.2% 2.4%
----- ----- ----- -----
Net income.................................. 5.8% 4.3% 6.0% 4.7%
===== ===== ===== =====
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001.
Revenues. Revenues decreased by $1.7 million, or approximately 3%, to $52.6
million in the three months ended September 30, 2002 from $54.3 million in the
three months ended September 30, 2001. The net decrease resulted from decreased
domestic sales in the United States of $3.9 million and decreased sales of
approximately $3.4 million in the European area offset by increased export
sales from the United States of $1.6 million and increased sales of $4 million
in the Asia-Pacific region.
Cost of Sales. Cost of sales decreased $512,000, or approximately 1%, to
$38.3 million for the three months ended September 30, 2002 from $38.8 million
for the same period in 2001. As a percentage of revenues, cost of sales were
approximately 73% and 71% for the three-month periods ending September 30, 2002
and 2001, respectively. This increase in cost of sales as a percentage of
revenues was primarily attributed to lower than anticipated margins resulting
from an ongoing project related to the Company's entry into the deepwater
development market. This project, which includes numerous deepwater subsea
trees and assorted installation equipment, represented approximately $4 million
in revenues during the third quarter of 2002, versus approximately $600,000
during the third quarter of 2001.
8
Selling, General and Administrative Expenses. In the three months ended
September 30, 2002, selling, general and administrative expenses increased by
$418,000, or approximately 6.5%, to $6.8 million from $6.4 million in the 2001
period. Selling, general and administrative expenses increased as a percentage
of revenues to approximately 13% in 2002 from approximately 12% in 2001.
Engineering and Product Development Expenses. In the three months ended
September 30, 2002, engineering and product development expenses decreased by
approximately 1.4% to $3.7 million from $3.8 million in the same period in
2001. Engineering and product development expenses increased as a percentage of
revenues to 7.1% in 2002 from 6.9% in 2001.
Interest Expense. Interest expense for the three months ended September 30,
2002 was $530,000 as compared to interest expense of $583,000 for the
three-month period ended September 30, 2001. This change resulted primarily
from lower interest rates on borrowings during the period ended September 30,
2002 under the Company's unsecured revolving line of credit.
Net Income. Net income decreased by $897,000, or approximately 28% to $2.3
million in the three months ended September 30, 2002, versus $3.2 million for
the same period in 2001, for the reasons set forth above.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001.
Revenues. Revenues increased by approximately $7.4 million, or 5%, to
$157.7 million in the nine months ended September 30, 2002 from $150.3 million
in the nine months ended September 30, 2001. The net increase was primarily due
to increased export sales from the United States of $8.3 million, increased
sales of $7.1 million in the Asia-Pacific area and $3.8 million in the European
area, offset by decreased domestic sales in the United States of $11.8 million.
Cost of Sales. Cost of sales increased $8.9 million, or approximately 9%,
to $113.4 million for the nine months ended September 30, 2002 from $104.5
million for the same period in 2001. As a percentage of revenues, cost of sales
were 71.9% and 69.5% for the nine month periods ending September 30, 2002 and
2001, respectively. This increase in cost of sales as a percentage of revenues
was attributed to increases in costs of raw material, labor, energy, and
outside services which, due to competitive pricing pressures, were not offset
by price increases. In addition, the increase in cost of sales as a percentage
of revenues resulted from lower than anticipated margins on an ongoing project
related to the Company's entry into the deepwater development market as noted
above.
Selling, General and Administrative Expenses. In the nine months ended
September 30, 2002, selling, general and administrative expenses increased by
$949,000, or approximately 5%, to $20.5 million from $19.6 million in the 2001
period. Selling, general and administrative expenses as a percent of revenues
remained constant at 13%.
Engineering and Product Development Expenses. In the nine months ended
September 30, 2002, engineering and product development expenses increased by
$458,000, or approximately 4%, to $11.1 million from $10.7 million in the same
period in 2001. Engineering and product development expenses decreased as a
percentage of revenues to 7.0% in 2002 from 7.1% in 2001.
Interest Expense. Interest expense for the nine months ended September 30,
2002 was approximately $1.6 million as compared to interest expense of $1.8
million for the nine month period ended September 30, 2001. This change
resulted primarily from lower interest rates on borrowings during the period
ended September 30, 2002 under the Company's unsecured revolving line of credit.
Net Income. Net income decreased by approximately $1.6 million, or
approximately 18%, to $7.4 million in the nine months ended September 30, 2002
from $9.0 million for the same period in 2001 for the reasons set forth above.
9
Liquidity and Capital Resources
The primary liquidity needs of the Company are (i) to fund capital
expenditures to increase manufacturing capacity, improve and expand facilities
and manufacture additional rental running tools and (ii) to fund working
capital. The Company's principal sources of funds are cash flows from
operations and bank indebtedness.
Net cash provided by operating activities was approximately $4.7 million for
the nine months ended September 30, 2002. During the nine months ended
September 30, 2001, net cash used in operating activities was approximately
$10.3 million. The improvement in cash flow from operating activities was
principally due to decreased working capital requirements attributable to
inventories, offset by increased accounts receivable.
Capital expenditures by the Company were $16.7 million and $14.8 million for
the nine months ended September 30, 2002 and 2001, respectively. Principal
payments on long-term debt were approximately $807,000 and $399,000 for the
nine months ended September 30, 2002 and 2001, respectively.
The Company has a credit facility with Guaranty Bank, FSB providing an
unsecured revolving line of credit of up to $60 million. At the option of the
Company, borrowing under this facility bears interest at either a rate equal to
LIBOR (London Interbank Offered Rate) plus 1.75% or the Guaranty Bank base
rate. In addition, the facility calls for quarterly interest payments and
terminates on May 18, 2004. As of September 30, 2002, the Company had drawn
down $54.2 million under this facility for operating activities and capital
expenditures.
Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland
dated March 21, 2001 in the amount of U.K. Pounds Sterling 4.0 million
(approximately U.S. $6.3 million). Borrowing under this facility bears interest
at the Bank of Scotland base rate, currently 4%, plus 1%, and is repayable in
120 equal monthly installments, plus interest. This facility was used to
finance capital expenditures in Norway.
Dril-Quip Asia Pacific PTE Ltd. has a secured term loan with the Overseas
Union Bank dated August 29, 2001 in the amount of Singapore $6 million
(approximately U.S. $3.4 million). Borrowing under this facility bears interest
at the swap rate, approximately 1.4%, plus 1.5% and is repayable in 40 equal
quarterly installments, plus interest. This facility was used to finance
capital expenditures in Singapore.
The Company believes that cash generated from operations plus cash on hand
and its existing lines of credit will be sufficient to fund operations, working
capital needs and anticipated capital expenditure requirements. However, should
market conditions result in unexpected cash requirements, the Company believes
that additional borrowing from commercial lending institutions would be readily
available and more than adequate to meet such requirements.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in any material hedging transactions, forward
contracts or currency trading which could be subject to market risks inherent
to such transactions.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of its
management, including its Co-Chief Executive Officers and Chief Financial
Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934. Based on that evaluation, the Co-Chief Executive Officers and the
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 its periodic SEC filings. Subsequent to the date of their
evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls. There were no corrective actions with regard to significant
deficiencies and material weaknesses.
10
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Forward Looking Statements.
Statements contained in all parts of this document that are not historical
facts are forward looking statements that involve risks and uncertainties that
are beyond the Company's control. These forward-looking statements include the
following types of information and statements as they relate to the Company:
. scheduled, budgeted and other future capital expenditures;
. working capital requirements;
. the availability of expected sources of liquidity;
. statements regarding the market for Dril-Quip products;
. statements regarding the exploration and production activities of
Drip-Quip customers;
. all statements regarding future operations, financial results, business
plans and cash needs; and
. the use of the words "anticipate," "estimate," "expect," "may,"
"project," "believe" and similar expressions intended to identify
uncertainties.
These statements are based upon certain assumptions and analyses made by
management of the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, including but not
limited to, those relating to the volatility of oil and natural gas prices and
cyclicality of the oil and gas industry, the Company's international
operations, operating risks, the Company's dependence on key employees, the
Company's dependence on skilled machinists and technical personnel, the
Company's reliance on product development and possible technological
obsolescence, control by certain stockholders, the potential impact of
governmental regulation and environmental matters, competition, reliance on
significant customers and other factors detailed in the Company's filings with
the Securities and Exchange Commission. Prospective investors are cautioned
that any such statements are not guarantees of future performance, and that,
should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially
from those indicated.
11
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description
- ------- -----------
*3.1 --Restated Certificate of Incorporation of the Company (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration
No. 333-33447)).
*3.2 --Bylaws of the Company (Incorporated herein by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-33447)).
*4.1 --Certificate of Designations for Series A Junior Participating Preferred Stock (Incorporated herein
by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1 (Registration
No. 333-33447)).
*4.2 --Form of certificate representing Common Stock (Incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (Registration No. 333-33447)).
*4.3 --Rights Agreement between Dril-Quip, Inc. and Chase Mellon Shareholder Services, L.L.C., as
rights agent (Incorporated herein by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-33447)).
99.1 --Certification by Co-Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 --Certification by Co-Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 --Certification by Co-Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.4 --Certification by Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
- --------
* Incorporated herein by reference as indicated.
Reports on Form 8-K
None.
12
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.
DRIL-QUIP, INC.
/s/ Jerry M. Brooks
-------------------------------
Principal Financial Officer
and Duly Authorized Signatory
Date: November 13, 2002
13
CERTIFICATIONS
I, Larry E. Reimert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act 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 officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
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 officers 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.
Date: November 13, 2002
By /s/ LARRY E. REIMERT
------------------------------------
Larry E. Reimert
Co-Chief Executive Officer
14
I, Gary D. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act 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 officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
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 officers 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.
Date: November 13, 2002
By /s/ GARY D. SMITH
------------------------------------
Gary D. Smith
Co-Chief Executive Officer
15
I, J. Mike Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act 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 officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
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 officers 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.
Date: November 13, 2002
By /s/ J. MIKE WALKER
------------------------------------
J. Mike Walker
Co-Chief Executive Officer
16
I, Jerry M. Brooks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act 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 officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
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 officers 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.
Date: November 13, 2002
By /s/ JERRY M. BROOKS
------------------------------------
Jerry M. Brooks
Chief Financial Officer
17