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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 001-15423
GRANT PRIDECO, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 76-0312499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1330 POST OAK BLVD.
SUITE 2700
HOUSTON, TEXAS 77056
(Address of Principal Executive (Zip Code)
Offices)
(832) 681-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the issuer is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT MAY 3, 2004
------------------- --------------------------
Common Stock, par value $0.01 per share 122,204,189
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRANT PRIDECO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
---------- ----------
Revenues ....................................... $ 229,797 $ 190,482
Costs and Expenses:
Cost of sales ................................ 145,266 130,978
Sales and marketing .......................... 29,261 22,523
General and administrative ................... 20,061 16,876
Research and engineering ..................... 5,349 3,738
Other charges ................................ 2,734 --
---------- ----------
202,671 174,115
---------- ----------
Operating Income ............................... 27,126 16,367
Interest Expense ............................... (10,495) (11,008)
Equity Income in Unconsolidated Affiliates ..... 194 634
Other Income, Net .............................. 2,027 1,170
---------- ----------
Income Before Income Taxes ..................... 18,852 7,163
Income Tax Expense ............................. (6,919) (2,471)
---------- ----------
Net Income Before Minority Interests ........... 11,933 4,692
Minority Interests ............................. (1,260) (658)
---------- ----------
Net Income ..................................... $ 10,673 $ 4,034
========== ==========
Net Income Per Share:
Basic ........................................ $ 0.09 $ 0.03
Diluted ...................................... 0.09 0.03
Weighted Average Shares Outstanding:
Basic ........................................ 122,044 121,377
Diluted ...................................... 124,262 122,977
The accompanying notes are an integral part of these
consolidated financial statements.
2
GRANT PRIDECO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash ............................................................ $ 18,258 $ 19,230
Restricted cash ................................................. 2,498 283
Accounts receivable, net of allowance for uncollectible accounts
of $3,962 and $3,539 at March 31, 2004 and December 31, 2003,
respectively..................................................... 220,712 212,285
Inventories ..................................................... 240,592 231,994
Current deferred tax assets ..................................... 29,129 30,283
Prepaid expenses ................................................ 15,874 12,924
Other current assets ............................................ 5,051 3,864
------------ ------------
532,114 510,863
Property, Plant, and Equipment, Net ............................... 244,296 251,236
Goodwill .......................................................... 396,934 396,944
Intangible Assets, Net ............................................ 35,228 36,250
Investments In and Advances to Unconsolidated Affiliates .......... 49,906 47,786
Other Assets ...................................................... 17,501 18,982
------------ ------------
$ 1,275,979 $ 1,262,061
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current portion of long-term debt ..... $ 12,963 $ 11,073
Accounts payable ................................................ 80,388 74,408
Current deferred tax liabilities ................................ 3,806 3,763
Accrued labor and benefits ...................................... 27,635 30,406
Federal income taxes payable .................................... 13,955 14,401
Other accrued liabilities ....................................... 44,835 32,204
------------ ------------
183,582 166,255
Long-Term Debt .................................................... 410,684 426,853
Deferred Tax Liabilities .......................................... 26,480 26,965
Other Long-Term Liabilities ....................................... 17,779 23,843
Commitments and Contingencies ..................................... -- --
Minority Interests ................................................ 13,291 12,031
Stockholders' Equity:
Preferred stock, $0.01 par value .................................. -- --
Common stock, $0.01 par value ..................................... 1,218 1,212
Capital in excess of par value .................................. 488,917 482,122
Treasury stock, at cost ......................................... (7,572) (6,692)
Retained earnings ............................................... 147,696 137,023
Deferred compensation obligation ................................ 10,125 9,366
Accumulated other comprehensive loss ............................ (16,221) (16,917)
------------ ------------
624,163 606,114
------------ ------------
$ 1,275,979 $ 1,262,061
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
GRANT PRIDECO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- --------
Cash Flows From Operating Activities:
Net income ...................................................... $ 10,673 $ 4,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of businesses, net ............................. (774) (1,305)
(Gain)/Loss on sale of fixed assets ......................... (2,098) 253
Depreciation and amortization ............................... 10,809 10,926
Non-cash portion of other charges ........................... 641 --
Deferred income tax ......................................... 2,848 2,544
Deferred compensation expense ............................... 1,552 1,379
Minority interests in consolidated subsidiaries ............. 1,260 658
Equity income in unconsolidated affiliates, net of dividends (194) (634)
Change in operating assets and liabilities, net of effects of
businesses acquired:
Accounts receivable, net ................................ (9,072) 7,868
Inventories ............................................. (8,699) (3,145)
Other current assets .................................... (2,665) 14,549
Other assets ............................................ 1,160 1,295
Accounts payable ........................................ 6,512 (3,478)
Other accrued liabilities ............................... 5,188 8,591
Other, net .............................................. (922) (4,294)
-------- --------
Net cash provided by operating activities ............ 16,219 39,241
Cash Flows From Investing Activities:
Acquisition of businesses, net of cash acquired ................. -- (6,980)
Proceeds from sale of businesses, net of cash disposed .......... 2,180 11,000
Investments in and advances to unconsolidated affiliates ........ (193) (1,293)
Capital expenditures for property, plant, and equipment ......... (6,291) (10,490)
Proceeds from sale of fixed assets .............................. 2,516 46
-------- --------
Net cash used in investing activities ................. (1,788) (7,717)
Cash Flows From Financing Activities:
Repayments on debt, net ......................................... (17,853) (31,102)
Purchases of treasury stock ..................................... (1,005) (807)
Proceeds from stock option exercises ............................ 3,379 130
-------- --------
Net cash used in financing activities ................. (15,479) (31,779)
Effect of Exchange Rate Changes on Cash ........................... 76 88
-------- --------
Net Decrease in Cash .............................................. (972) (167)
Cash at Beginning of Year ......................................... 19,230 21,878
-------- --------
Cash at End of Period ............................................. $ 18,258 $ 21,711
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
GRANT PRIDECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Basis of Presentation
The accompanying consolidated financial statements of Grant Prideco, Inc.
(the "Company" or "Grant Prideco") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. All
significant transactions between Grant Prideco and its consolidated subsidiaries
have been eliminated. The interim financial statements have not been audited.
However, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
statements have been included. Results of operations for interim periods are not
necessarily indicative of the results of operations that may be expected for the
entire year. The balance sheet at December 31, 2003 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These interim financial statements 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, 2003.
The Annual Report on Form 10-K for the year ended December 31, 2003
includes disclosures related to significant accounting policies including
revenue recognition, inventory valuation, business combinations, impairment of
long-lived assets, goodwill and intangible assets, deferred tax asset valuation,
estimates related to contingent liabilities and future claims, and pension
liabilities.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements, and the
related reported amounts of revenues and expenses during the reporting period.
The significant estimates made by management in the accompanying consolidated
financial statements include reserves for inventory obsolescence, restructuring,
self-insurance, valuation of goodwill and long-lived assets, allowance for
doubtful accounts, determination of income taxes, contingent liabilities, and
purchase accounting allocations. Actual results could differ from those
estimates.
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 2004 classifications and are of a normal recurring
nature. These reclassifications have no impact on net income.
2. STOCK-BASED COMPENSATION
Pro Forma Stock Option Compensation Expense
The Company accounts for its stock-based compensation programs using the
intrinsic value method of accounting established by Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under APB No. 25, no compensation expense is recognized when
the exercise price of an employee stock option is equal to the market price of
common stock on the grant date. Non-employee stock-based compensation is
accounted for using the fair value method in accordance with Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation".
Had compensation expense for stock options been determined based on the
fair value at the grant dates for awards under the Company's incentive
compensation plans, the Company's net earnings and net earnings per share would
have been
5
reduced to the pro forma amounts indicated as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
---------- ----------
(IN THOUSANDS)
Net Income as Reported ................................. $ 10,673 $ 4,034
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects ........................................... 914 545
Deduct: Total stock-based employee compensation
expense determined under the fair value method for
all awards, net of related tax effects ............ (2,354) (4,460)
---------- ----------
Pro Forma Net Income ................................... $ 9,233 $ 119
========== ==========
Net Income Per Share:
Basic as reported .................................. $ 0.09 $ 0.03
========== ==========
Basic pro forma .................................... $ 0.08 $ 0.00
========== ==========
Diluted as reported ................................ $ 0.09 $ 0.03
========== ==========
Diluted pro forma .................................. $ 0.07 $ 0.00
========== ==========
The weighted average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes option pricing
model and is amortized over the vesting period of the underlying options.
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in stockholders' equity
during the periods that do not result from transactions with stockholders. The
Company's total comprehensive income (loss) is as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
-------- --------
(IN THOUSANDS)
Net Income ................................ $ 10,673 $ 4,034
Foreign currency translation adjustments 696 (4,272)
-------- --------
Total Comprehensive Income (Loss) ......... $ 11,369 $ (238)
======== ========
4. INVENTORIES
Inventories by category are as follows:
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
(IN THOUSANDS)
Raw Materials, Components and Supplies $102,920 $ 96,528
Work in Process ...................... 39,049 36,889
Finished Goods ....................... 98,623 98,577
-------- --------
Total .............................. $240,592 $231,994
======== ========
6
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, net consisted of the following:
MARCH 31, DECEMBER 31,
2004 2003
---------- ----------
(IN THOUSANDS)
Land .......................... $ 22,424 $ 22,715
Buildings and Improvements .... 85,691 85,322
Machinery and Equipment ....... 255,900 255,788
Furniture and Fixtures ........ 28,110 23,479
Construction in Progress ...... 17,081 19,856
---------- ----------
409,206 407,160
Less: Accumulated Depreciation (164,910) (155,924)
---------- ----------
Net ......................... $ 244,296 $ 251,236
========== ==========
6. OTHER CHARGES
2004 Charges
In the first quarter of 2004, the Company incurred $2.7 million of pre-tax
charges, $1.7 million net of tax. These charges include $1.8 million due to
lease termination, severance and other exit costs related to the Drilling
Products rationalization program and $0.9 million of severance costs related to
the Tubular Technology and Services organizational restructuring. These charges
are summarized in the following chart (in thousands):
DRILLING TUBULAR
PRODUCTS TECHNOLOGY LIABILITY
AND AND TOTAL BALANCE
SERVICES SERVICES CHARGES UTILIZED 3/31/04
---------- ---------- ---------- ---------- ----------
Drilling Products Rationalization Program:
Lease termination costs (a) ............ $ 1,407 $ -- $ 1,407 $ -- $ 1,407
Severance costs (b) .................... 170 -- 170 -- 170
Other exit costs (c) ................... 239 -- 239 239 --
---------- ---------- ---------- ---------- ----------
1,816 -- 1,816 239 1,577
Severance Costs (d) ...................... -- 918 918 641 277
---------- ---------- ---------- ---------- ----------
Total .................................. $ 1,816 $ 918 $ 2,734 $ 880 $ 1,854
========== ========== ========== ========== ==========
(a) The lease termination costs of $1.4 million relate to expected lease
costs over the next 7 years relating to an operating lease for
equipment located at the Company's Canadian facility. Due to the
downsizing of the Company's Canadian operations, this equipment will
no longer be utilized. This amount was included in Other Current
Liabilities in the accompanying Consolidated Balance Sheets.
(b) Severance costs of $0.2 million relate to employees that were
terminated in connection with the downsizing of the Canadian
operations. These costs, which were included in Other Current
Liabilities in the accompanying Consolidated Balance Sheets, relate
to 71 employees and will be paid in April 2004.
(c) Other exit costs of $0.2 million are associated with the downsizing
of the Canadian operations and the closing of the Company's
manufacturing facility.
(d) Severance costs of $0.9 million relate to the organizational
restructuring of the Company's Tubular Technology and Services
segment. The remaining balance of $0.3 million will be paid in April
2004.
2000 Charges
The Company recorded certain charges in 2000 totaling $7.9 million that
related to a litigation accrual, a contingent liability accrual, and other
accrued liabilities. The remaining liability at December 31, 2003 of $0.7
million was paid in the first quarter of 2004.
7
7. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution from the exercise or
conversion of securities into common stock. Common stock equivalent shares are
excluded from the computation if their effect was antidilutive. The computation
of diluted earnings per share for the three months ended March 31, 2004 and 2003
did not include options to purchase 3.9 million and 5.4 million shares,
respectively, of common stock because their exercise prices were greater than
the average market price of the common stock for the applicable period.
8. SENIOR CREDIT FACILITY
As of March 31, 2004, the Company had outstanding borrowings of $41.1
million under its $240 million Senior Credit Facility (Senior Credit Facility),
which related to the term loan portion of the Senior Credit Facility.
Additionally, the Company had $5.8 million of revolver availability reserved to
support outstanding letters of credit. Net borrowing availability was $151.3
million as of March 31, 2004. Borrowings under the revolver portion of the
Senior Credit Facility are recorded as "Long-Term Debt" in the accompanying
Consolidated Balance Sheets, as the Company has the intent and ability under the
credit agreements to maintain these obligations for longer than one year.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill by reporting unit is as follows:
TUBULAR
DRILLING TECHNOLOGY
PRODUCTS AND
AND SERVICES DRILL BITS SERVICES OTHER TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Balance at December 31, 2002 .... $ 125,199 $ 155,983 $ 111,367 $ 1,534 $ 394,083
Acquisitions .................... -- 5,823 3,047 -- 8,870
Dispositions .................... -- -- (6,443) (1,534) (7,977)
Translation and Other Adjustments 4,259 509 (2,800) 2,500 4,468
Impairment Loss ................. -- -- -- (2,500) (2,500)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 .... $ 129,458 $ 162,315 $ 105,171 $ -- $ 396,944
Translation and Other Adjustments (29) 19 -- -- (10)
---------- ---------- ---------- ---------- ----------
Balance at March 31, 2004 ....... $ 129,429 $ 162,334 $ 105,171 $ -- $ 396,934
========== ========== ========== ========== ==========
Intangible assets of $35.2 million and $36.3 million, net of accumulated
amortization of $8.4 million and $7.3 million, as of March 31, 2004 and December
31, 2003, respectively, are recorded at cost and are amortized on a
straight-line basis. The Company's intangible assets primarily consist of
patents, covenants not to compete, technology licenses, trademarks, and customer
relationships that are amortized over the definitive terms of the related
agreement or the Company's estimate of their useful lives if there are no
definitive terms. The following table shows the Company's intangible assets by
asset category:
MARCH 31, 2004 DECEMBER 31, 2003
------------------------------------------- -------------------------------------------
GROSS ACCUMULATED NET GROSS ACCUMULATED NET
INTANGIBLES AMORTIZATION INTANGIBLES INTANGIBLES AMORTIZATION INTANGIBLES
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Patents ................ $ 33,144 $ (3,544) $ 29,600 $ 33,160 $ (2,877) $ 30,283
Technology Licenses .... 1,378 (404) 974 1,288 (373) 915
Customer Relationships . 3,300 (209) 3,091 3,300 (167) 3,133
Trademarks ............. 1,610 (522) 1,088 1,610 (424) 1,186
Covenants Not to Compete 4,150 (3,675) 475 4,150 (3,417) 733
---------- ---------- ---------- ---------- ---------- ----------
$ 43,582 $ (8,354) $ 35,228 $ 43,508 $ (7,258) $ 36,250
========== ========== ========== ========== ========== ==========
Amortization expense related to intangible assets for the three months
ended March 31, 2004 and 2003 was $1.1 million and $1.0 million, respectively,
and is recorded in General and Administrative and Research and Engineering
expenses in the Consolidated Statements of Operations. Amortization expense
related to existing intangible assets for the remainder of 2004 is estimated to
be $3.0 million and for each of the years 2005 through 2009 is estimated to be
approximately $3.4 million, $3.4 million, $2.7 million, $2.3 million, and $2.3
million, respectively.
8
10. RESTRICTED CASH
At March 31, 2004, the Company had $2.5 million of restricted cash. The
restricted cash relates to the Company's 60% interest in Tianjin Pipe Company
(TPCO) and is subject to dividend and distribution restrictions.
11. SEGMENT INFORMATION
BUSINESS SEGMENTS
The Company now operates through three primary business segments: Drilling
Products and Services, Drill Bits and Tubular Technology and Services. In the
first quarter of 2004, the Company announced an organizational restructuring
which combined the Tubular Technology and Services segment and the Marine
Products and Services segment into one unit managed by one chief operating
decision maker. As these operations have similar economic characteristics, they
have also been combined for segment reporting purposes. The former Marine
Products and Services segment has been aggregated and is now reflected in the
Tubular Technology and Services segment. Prior periods have been restated for
current year presentation.
The Company's Drilling Products and Services segment manufactures and
sells a full range of proprietary and API drill pipe, drill collars, heavyweight
drill pipe and accessories. The Drill Bits segment designs, manufactures, and
distributes fixed-cutter and roller-cone drill bits. The Company's Tubular
Technology and Services segment designs, manufactures, and sells a line of
premium connections and associated premium tubular products and accessories for
oil country tubular goods and offshore applications. The Company also has an
Other segment that prior to the first quarter of 2003 included our industrial
drill pipe operations and our construction casing and water well operations. The
Company exited the industrial drill pipe business in the second quarter of 2003
and the construction casing and water well business in the first quarter of
2003. This segment now only includes the remaining industrial product
inventories and operations from three of the Company's technology joint
ventures, of which one of the joint ventures was sold in the first quarter of
2004. See Note 13 for further discussion on dispositions.
DRILLING TUBULAR
PRODUCTS TECHNOLOGY
AND AND
THREE MONTHS ENDED: SERVICES DRILL BITS SERVICES OTHER CORPORATE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
MARCH 31, 2004
Revenues from Unaffiliated Customers $ 85,222 $ 79,258 $ 64,430 $ 887 $ -- $ 229,797
Operating Income (Loss) ............ 12,743 19,253 2,796 (1,179) (6,487) 27,126
MARCH 31, 2003
Revenues from Unaffiliated Customers $ 64,597 $ 53,254 $ 67,467 $ 5,164 $ -- $ 190,482
Operating Income (Loss) ............ 7,995 9,952 3,255 (545) (4,290) 16,367
12. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46) was issued. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to variable interest entities, which are certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated support from other parties. The
Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if some of
those activities are conducted through variable interest entities. The
Interpretation is effective immediately for variable interest entities created
after January 31, 2003, and to variable interest entities in which the Company
obtains an interest after that date. In December 2003, the FASB issued a
revision to FIN No. 46, (FIN No. 46R), to clarify some of the provisions of FIN
No. 46 and to exempt certain entities from its requirements. Under the new
guidance, special effective date provisions apply to enterprises that have fully
or partially applied FIN No. 46 prior to issuance of this revised
interpretation. Otherwise, application of FIN No. 46R is required in financial
statements of public entities that have interests in structures that are
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public entities, other than small business
issuers, for all other types of variable interest entities is required in
financial statements for periods ending after March 15, 2004. The Company is not
a primary
9
beneficiary of a variable interest entity (VIE) nor does it hold any significant
interests or involvement in a VIE. The adoption of this interpretation did not
have a material effect on the Company's results of operations or financial
position.
13. DISPOSITIONS
On March 4, 2004, the Company sold its Plexus Ocean Systems (POS) rental
wellhead business for $1.3 million in net cash. The POS operations were included
in the Company's Other segment. The Company recognized a pre-tax loss of $0.1
million on the sale, which is recorded in the Consolidated Statement of
Operations in "Other Income, Net". Revenue related to POS included in the Other
segment's results for the three months ended March 31, 2004 and 2003 was $0.2
million and $0.1 million, respectively. Operating loss related to POS for the
three months ended March 31, 2004 and 2003 was $0 million and $0.2 million,
respectively.
On September 2, 2003, the Company sold Rotator AS (Rotator) for $14.3
million in cash, which included a post-closing working capital adjustment of
$0.8 million that was recorded in the first quarter of 2004 in the Consolidated
Statement of Operations in "Other Income, Net". Revenue and operating income
related to Rotator included in the Tubular Technology Services segment's results
for the three months ended March 31, 2003 were $3.4 million and $0.3 million,
respectively.
On March 25, 2003, the Company sold Star Iron Works, Inc. (Star), a
manufacturer of drilling tools for the water well, construction, and utility
boring industries, for $11.0 million in cash and a note valued at approximately
$0.9 million. The gain recognized on the sale of Star was $1.3 million, $0.8
million net of tax, and is recorded in the Consolidated Statements of Operations
in "Other Income, Net". Revenue and operating income related to Star included in
the Other segment's results for the three months ended March 31, 2003 were $3.6
million and $0.1 million, respectively.
14. PENSION PLANS
U.S. Pension Plan
The following table shows the components of Net Periodic Benefit Cost for
the Company's Reed Hourly Pension Plan:
THREE MONTHS ENDED
MARCH 31,
----------------
2004 2003
------ -----
(IN THOUSANDS)
Service Cost ............................................. $ 96 $ --
Interest Cost ............................................ 214 --
Expected Return on Plan Assets ........................... (141) --
Amortization of Initial Net Obligation ................... -- --
Amortization of Prior Service Cost ....................... -- --
Amortization of Net Actuarial Gain ....................... -- --
Administration Expenses .................................. 13 --
Settlements, Curtailment, and Special Termination Benefits -- --
------ ------
Net Periodic Benefit Cost .............................. $ 182 $ --
====== ======
There was no pension expense recorded in the first quarter of 2003 related
to the Reed Hourly Pension Plan. Minimum funding requirements related to the
Reed Hourly Pension Plan is expected to be approximately $0.5 million during
2004.
Non-U.S. Pension Plan
There was no pension expense recorded in the first quarter of 2004 or 2003
related to the UK Hycalog Retirement Death Benefit Scheme.
10
15. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company's 50.01% owned joint venture, Voest-Alpine, is accounted for
under the equity method of accounting due to the minority owner having
substantive participating rights. Summarized financial information for
Voest-Alpine is as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
Net Sales ............................ $ 63,092 $ 58,034
---------- ----------
Gross Profit ......................... 5,044 8,753
---------- ----------
Net Income ........................... $ 849 $ 3,053
========== ==========
Company's Equity Income .............. $ 522 $ 1,808
========== ==========
Dividends Received ................... $ -- $ --
========== ==========
The Company's equity in earnings differs from its proportionate share of
net income due to the elimination of intercompany profit on Voest-Alpine
sales to the Company.
16. PREFERRED SUPPLIER CREDIT AGREEMENT
In April 2000, Weatherford spun off Grant Prideco to its stockholders as
an independent, publicly traded company (the "Distribution"). In connection with
the initial capitalization of the Company, and in consideration of amounts due
from the Company to Weatherford at the time of the Distribution, the Company
entered into a preferred supplier agreement with Weatherford. Pursuant to this
agreement Weatherford agreed for at least a three-year period from the
Distribution date to purchase a minimum of 70% of its requirements of certain
products from the Company; and the Company agreed to a $30 million credit,
subject to a limitation of the application of the credit to no more than 20% of
any purchase. In April 2003, the agreement was extended for two additional years
and the unused preferred supplier credit balance was reduced by $6.6 million and
was treated as a reduction in the accrued liability as a credit to other income.
At March 31, 2004, the remaining credit balance of $7.3 million was classified
as Other Accrued Liabilities.
17. SUBSEQUENT EVENT
The Company sold substantially all of the assets and business of its Texas
Arai division effective April 23, 2004 for approximately $20.5 million cash,
subject to final working capital adjustments and standard closing requirements.
Due primarily to the write-off of goodwill associated with this business, the
Company estimates an after-tax loss of approximately $11.0 million associated
with this sale, which will be recorded in the second quarter of 2004.
The accompanying Consolidated Balance Sheets include the following assets
and liabilities to be sold related to Texas Arai:
March 31, December 31,
2004 2003
-------- ------------
(In thousands)
Account Receivable........................ $ 4,654 $ 4,116
Inventories............................... 13,279 13,654
-------- ------------
Total Current Assets................... 17,933 17,770
Property, Plant, and Equipment, Net....... 7,778 8,287
Goodwill.................................. 8,038 8,038
-------- ------------
Total Assets........................... 33,749 34,095
Accounts Payable.......................... 2,854 3,750
Other Current Liabilities................. 249 102
-------- ------------
Total Current Liabilities.............. 3,103 3,852
18. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION
The following unaudited condensed consolidating balance sheet as of March
31, 2004, condensed consolidating statements of operations for the three months
ended March 31, 2004 and 2003 and condensed consolidating statements of cash
flows for the three months ended March 31, 2004 and 2003 are provided for the
Company's domestic subsidiaries that are guarantors of debt securities issued by
the Company. The Company's obligations to pay principal and interest under the
9% and 9 5/8% Senior Notes are guaranteed on a joint and several basis by all of
the Company's domestic subsidiaries. The guarantees are full and unconditional
and the guarantor subsidiaries are 100% owned by Grant Prideco, Inc.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS TOTAL
---------- ---------- ---------- ---------- ----------
Revenues .................................. $ -- $ 152,804 $ 76,993 $ -- $ 229,797
Costs and Expenses:
Cost of sales ........................... -- 105,418 39,848 -- 145,266
Selling, general, and administrative .... -- 37,168 17,503 -- 54,671
Other charges ........................... -- 918 1,816 -- 2,734
---------- ---------- ---------- ---------- ----------
-- 143,504 59,167 -- 202,671
---------- ---------- ---------- ---------- ----------
Operating Income .......................... -- 9,300 17,826 -- 27,126
Interest Expense .......................... (9,190) (1,170) (135) -- (10,495)
Equity Income in Unconsolidated Affiliates -- 194 -- -- 194
Other Income (Expense), Net ............... -- 4,244 (2,217) -- 2,027
Equity in Subsidiaries, Net of Taxes ...... 16,408 -- -- (16,408) --
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes ......... 7,218 12,568 15,474 (16,408) 18,852
Income Tax (Provision) Benefit ............ 3,455 (5,407) (4,967) -- (6,919)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) Before Minority Interests 10,673 7,161 10,507 (16,408) 11,933
Minority Interests ........................ -- -- (1,260) -- (1,260)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) ......................... $ 10,673 $ 7,161 $ 9,247 $ (16,408) $ 10,673
========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS TOTAL
---------- ---------- ---------- ---------- ----------
Revenues .................................. $ -- $ 115,724 $ 74,758 $ -- $ 190,482
Costs and Expenses:
Cost of sales ........................... -- 96,103 34,875 -- 130,978
Selling, general, and administrative .... -- 25,596 17,541 -- 43,137
---------- ---------- ---------- ---------- ----------
-- 121,699 52,416 -- 174,115
---------- ---------- ---------- ---------- ----------
Operating Income (Loss) ................... -- (5,975) 22,342 -- 16,367
Interest Expense .......................... (9,130) (1,662) (216) -- (11,008)
Equity Income in Unconsolidated Affiliates -- 634 -- -- 634
Other Income (Expense), Net ............... 1,305 2,050 (2,185) -- 1,170
Equity in Subsidiaries, Net of Taxes ...... 9,159 -- -- (9,159) --
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes ......... 1,334 (4,953) 19,941 (9,159) 7,163
Income Tax (Provision) Benefit ............ 2,700 2,162 (7,333) -- (2,471)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) Before Minority Interests 4,034 (2,791) 12,608 (9,159) 4,692
Minority Interests ........................ -- -- (658) -- (658)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) ......................... $ 4,034 $ (2,791) $ 11,950 $ (9,159) $ 4,034
========== ========== ========== ========== ==========
12
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash ...................................... $ -- $ 4,781 $ 13,477 $ -- $ 18,258
Restricted cash ........................... -- -- 2,498 -- 2,498
Accounts receivable, net .................. -- 122,066 98,646 -- 220,712
Inventories ............................... -- 134,920 105,672 -- 240,592
Current deferred tax assets ............... -- 26,788 2,341 -- 29,129
Other current assets ...................... -- 10,166 10,759 -- 20,925
------------ ------------ ------------ ------------ ------------
-- 298,721 233,393 -- 532,114
Property, Plant, and Equipment, Net ......... -- 153,956 90,340 -- 244,296
Goodwill .................................... -- 208,900 188,034 -- 396,934
Investments In and Advances to
Subsidiaries .............................. 1,009,585 -- -- (1,009,585) --
Investments In and Advances to Unconsolidated
Affiliates ................................ -- 49,906 -- -- 49,906
Other Assets ................................ 7,287 27,803 17,639 -- 52,729
------------ ------------ ------------ ------------ ------------
$ 1,016,872 $ 739,286 $ 529,406 $ (1,009,585) $ 1,275,979
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings and current
portion of long-term debt .............. $ -- $ 11,105 $ 1,858 $ -- $ 12,963
Accounts payable .......................... -- 45,177 35,211 -- 80,388
Current deferred tax liabilities .......... -- 3 3,803 -- 3,806
Other accrued liabilities ................. 18,359 32,355 35,711 -- 86,425
------------ ------------ ------------ ------------ ------------
18,359 88,640 76,583 -- 183,582
Long-Term Debt .............................. 374,350 34,298 2,036 -- 410,684
Deferred Tax Liabilities .................... -- 6,062 20,418 -- 26,480
Other Long-Term Liabilities ................. -- 9,719 8,060 -- 17,779
Commitments and Contingencies ............... -- -- -- -- --
Minority Interests .......................... -- -- 13,291 -- 13,291
Stockholders' Equity ........................ 624,163 600,567 409,018 (1,009,585) 624,163
------------ ------------ ------------ ------------ ------------
$ 1,016,872 $ 739,286 $ 529,406 $ (1,009,585) $ 1,275,979
============ ============ ============ ============ ============
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Cash Flows From Operating Activities:
Net cash (used in) provided by operating activities . $ (2,374) $ 17,836 $ 757 $ -- $ 16,219
Cash Flows From Investing Activities:
Proceeds from sale of business ......................... -- 1,349 831 -- 2,180
Investments in and advances to unconsolidated affiliates -- (193) -- -- (193)
Capital expenditures for property, plant & equipment ... -- (1,565) (4,726) -- (6,291)
Other, net ............................................. -- 2,481 35 -- 2,516
-------- -------- -------- --------- --------
Net cash provided by (used in) investing activities . -- 2,072 (3,860) -- (1,788)
Cash Flows From Financing Activities:
Repayments on debt, net ................................ -- (17,747) (106) -- (17,853)
Purchases of treasury stock ............................ (1,005) -- -- -- (1,005)
Proceeds from stock option exercises ................... 3,379 -- -- -- 3,379
-------- -------- -------- --------- --------
Net cash provided by (used in) financing activities . 2,374 (17,747) (106) -- (15,479)
Effect of Exchange Rate Changes on Cash .................. -- -- 76 -- 76
-------- -------- -------- --------- --------
Net Increase (Decrease) in Cash .......................... -- 2,161 (3,133) -- (972)
Cash at Beginning of Year ................................ -- 2,620 16,610 -- 19,230
-------- -------- -------- --------- --------
Cash at End of the Period ................................ $ -- $ 4,781 $ 13,477 $ -- $ 18,258
======== ======== ======== ========= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------- ------------
Cash Flows From Operating Activities:
Net cash (used in) provided by operating activities . $ (7,211) $ 35,134 $ 11,318 $ -- $ 39,241
Cash Flows From Investing Activities:
Acquisition of businesses, net of cash acquired ........ (1,819) -- (5,161) -- (6,980)
Proceeds from sale of business ......................... 11,000 -- -- -- 11,000
Investments in and advances to unconsolidated affiliates (1,293) -- -- -- (1,293)
Capital expenditures for property, plant & equipment ... -- (7,682) (2,808) -- (10,490)
Other, net ............................................. -- 43 3 -- 46
-------- -------- -------- --------- --------
Net cash provided by (used in) investing activities . 7,888 (7,639) (7,966) -- (7,717)
Cash Flows From Financing Activities:
Repayments on debt, net ................................ -- (29,055) (2,047) -- (31,102)
Purchases of treasury stock ............................ (807) -- -- -- (807)
Proceeds from stock option exercises ................... 130 -- -- -- 130
-------- -------- -------- --------- --------
Net cash used in financing activities ............... (677) (29,055) (2,047) -- (31,779)
Effect of Exchange Rate Changes on Cash .................. -- -- 88 -- 88
-------- -------- -------- --------- --------
Net (Decrease) Increase in Cash .......................... -- (1,560) 1,393 -- (167)
Cash at Beginning of Year ................................ -- 2,690 19,188 -- 21,878
-------- -------- -------- --------- --------
Cash at End of the Period ................................ $ -- $ 1,130 $ 20,581 $ -- $ 21,711
======== ======== ======== ========= ========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist you in understanding our
financial condition as of March 31, 2004, and our results of operations for the
three months ended March 31, 2004 and 2003. This discussion should be read with
our financial statements and their notes included elsewhere in this report as
well as our financial statements and related Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 2003, previously filed with the Securities and Exchange Commission
in our Annual Report on Form 10-K.
Our discussion of our results of operations and financial condition
contains statements relating to our future results, including certain
projections and trends, which constitute forward-looking statements. Certain
risks and uncertainties may cause actual results to be materially different from
projected results contained in these forward-looking statements and other
disclosures. These risks and uncertainties are more fully described under
"Forward-Looking Statements and Exposures" below. As used herein, unless
otherwise required by the context, the term "Grant Prideco" refers to Grant
Prideco, Inc. and the terms "we," "our," and similar words refer to Grant
Prideco and its subsidiaries. The use herein of such terms as "group,"
"organization," "we," "us," "our," and "its," or references to specific
entities, are not intended to be a precise description of corporate
relationships.
GENERAL
We are the world leader in drill stem technology development and drill
pipe manufacturing, sales and service; a global leader in drill bit technology,
manufacturing, sales and service; and a leading provider of high-performance
engineered connections and premium tubular products and services. We operate
primarily through three business segments: (1) Drilling Products and Services,
(2) Drill Bits, and (3) Tubular Technology and Services. In the first quarter of
2004, the Company announced an organizational restructuring that resulted in the
former Marine Products and Services businesses now being reflected in the
Tubular Technology and Services segment. Prior periods have been restated for
comparability.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In our annual report on Form 10-K for the year ended December 31, 2003, we
identified our most critical accounting policies upon which our financial
condition depends as those relating to revenue recognition and accounts
receivable valuation, inventory valuation, business combinations, impairment of
long-lived assets, goodwill and intangible assets, valuation allowance for
deferred tax assets, estimates related to contingent liabilities and future
claims, and pension liabilities.
EXITED PRODUCT LINES
During the first quarter of 2003, we made a strategic decision to exit the
manufacture and sale of industrial drilling products and oil and gas tubing
product lines. Pursuant to this decision, we sold our Star Iron Works, Inc.
(Star) subsidiary, shut-down operations at our Bryan, Texas facility, and we are
in the process of liquidating our remaining inventory. As a result of this
decision, we recognized a $1.3 million pre-tax, $0.8 million after tax, gain on
the sale of our Star operation during the first quarter of 2003. During the
third quarter of 2003, we sold our Rotator control value business for $14.3
million in cash, which included a working capital adjustment of $0.8 million in
the first quarter of 2004 recorded in "Other Income, Net" in the accompanying
Statements of Operations. Additionally, in March 2004 we sold our Plexus Ocean
Systems (POS) business for $1.3 million in net cash and recorded a pre-tax loss
on the sale of approximately $0.1 million.
Additionally, we sold substantially all of the assets and business of
Texas Arai, Inc., our API coupling business, effective April 23, 2004, for
approximately $20.5 million cash, subject to final working capital adjustments
and standard closing requirements. This sale reflects our continuing efforts to
improve long-term profitability by focusing on our premium product lines within
the Tubular Technology and Services segment. Due primarily to the write-off of
goodwill associated with this business, we estimate an after-tax loss of
approximately $11.0 million associated with this sale, which will be recorded in
the second quarter of 2004.
15
MARKET TRENDS AND OUTLOOK
Our business is materially dependent on the level of oil and gas drilling
activity worldwide, which, in turn, depends on the level of capital spending by
major, independent, and state-owned exploration and production companies. This
capital spending is driven by current prices for oil and gas and the perceived
stability and sustainability of those prices. All of our business segments
generally track the level of domestic and international drilling activity,
however their revenues, cash flows, and profitability follow the rig count at
different stages within the market cycles. Drill pipe demand is also a function
of customer inventory levels and typically lags changes in the worldwide rig
count until customers no longer have sufficient inventory to sustain current and
near-term expected future activity. Drill bit demand and our Drill Bits
segment's earnings and cash flows have closely tracked the worldwide rig count.
Results from our premium connections and accessories product lines in our
Tubular Technology and Services segment predominately follow changes in North
American offshore drilling, deep drilling, and natural gas drilling rig counts;
but short-term demand is also affected by inventories held by oil country
tubular goods (OCTG) distributors. Demand for other product lines in this
segment can also follow the level of worldwide offshore drilling activity.
For the periods below, the revenues, profitability, and cash flows from
each of our business segments have been impacted by changes in oil and gas
prices and rig counts. The following table sets forth certain information with
respect to oil and gas prices at the dates indicated and the North American
(U.S. and Canadian) and international rig counts for the periods reflected:
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003
-------------- ----------------- --------------
WTI Oil(a)
Average ................. $ 35.33 $ 31.18 $ 33.96
Ending .................. 35.76 32.52 31.04
Henry Hub Gas(b)
Average ................. $ 5.62 $ 5.09 $ 6.38
Ending .................. 5.65 5.80 5.01
North American Rig Count(c)
Average ................. 1,647 1,517 1,394
Ending .................. 1,598 1,531 1,390
International Rig Count(c)
Average ................. 797 791 744
Ending .................. 799 803 747
- ----------
(a) Price per barrel of West Texas Intermediate (WTI) crude. Source:
U.S. Energy Information Administration.
(b) Price per MMBtu. Source: U.S. Energy Information Administration.
(c) Source: Baker Hughes Rig Count (International Rig Count excludes
China and the former Soviet Union).
FUTURE MARKET TRENDS AND EXPECTATIONS
Looking forward, we anticipate that our 2004 results will be based on the
level of drilling activity and our customers' views regarding the sustainability
of that activity. These perceptions, in turn, will depend on their views
regarding the sustainability of oil and natural gas prices. Commodity prices
have been particularly strong during the first few months of 2004, and this has
resulted in increased drilling activity. This activity contributed to the
increase in our March 31, 2004 backlog to $176.3 million, which is a 65%
increase over the backlog at this time last year, and it is the highest company
backlog level since November 2001. We expect this higher activity and backlog to
result in strong revenues from our Drill Bits and Drilling Products segments in
the second half of the year. However, we anticipate slight declines from these
segments during the second quarter of 2004 due to seasonal declines in Canada
relating to the spring break-up. Unfortunately, higher overall activity levels
have not translated into the level of increased demand historically experienced
by our Tubular Technology and Services segment due to its strong leverage to the
Gulf of Mexico rig count, which has declined despite the
16
overall increase in the U.S. rig count.
Our future results also could be affected by recent changes in steel
prices, which have significantly increased since the end of 2003, caused
primarily by increases in the prices paid by our suppliers for scrap and coke
utilized in their operations. As a result, our costs for tubulars utilized to
manufacture tool joints, drill collars, and heavy weight drill pipe have
increased. In addition, rising steel costs could offset some of the anticipated
benefits from our vertical integration in China. Our partner in our Austrian
joint venture also is seeking to renegotiate its supply contract for billets to
our Voest-Alpine affiliate. Although we intend to increase the prices that we
charge to our customers to pass along any cost increases borne by us as a result
of these recent changes in steel prices, there is no assurance that we will be
able to successfully accomplish this in all regions in which we operate. To the
extent we are unable to do so, our results of operations would be adversely
affected.
When forecasting our operations for the balance of 2004, we relied on
various assumptions including little improvement in drilling activity from
current levels and only gradual improvement in drill pipe demand. As a result,
we have forecasted that we would again sell less drill pipe than consumed by our
customer base in 2004 as they continue to draw down their inventories of these
items; we now believe the draw from inventory will be smaller than in 2003. We
have also forecasted productivity improvements resulting from our manufacturing
rationalization project being executed in early 2004 and cost reductions from
consolidating our Marine Products and Services segment into our Tubular
Technology and Services segment. These improvements will be partially offset by
increased expenses from inflation and the strengthened Euro. Using these
assumptions, we expect to earn between $0.38 and $0.42 per share during 2004
(before the expected loss on sale of Texas Arai, and severance and similar costs
expected to be incurred during the second quarter associated with the
reorganization and consolidation of our Marine Products and Services and Tubular
Technology and Services segments, which have not yet been determined by the
Company).
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
The following table summarizes the results of the Company (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
Revenues:
Drilling Products and Services.... $ 85,222 $ 64,597
Drill Bits........................ 79,258 53,254
Tubular Technology and Services... 64,430 67,467
Other............................. 887 5,164
------------ -----------
Total Revenues............... 229,797 190,482
Operating Income (Loss):
Drilling Products and Services.... 12,743(a) 7,995
Drill Bits........................ 19,253 9,952(c)
Tubular Technology and Services... 2,796(b) 3,255
Other............................. (1,179) (545)
Corporate......................... (6,487) (4,290)
------------ -----------
Total Operating Income....... 27,126 16,367
- ----------
(a) Includes other charges of $1.8 million related to the Drilling
Products rationalization program, which includes lease termination,
severance and other exit costs.
(b) Includes other charges of $0.9 million related to severance due to
the Tubular Technology and Services organizational restructuring.
(c) Includes transition costs of $1.5 million related to the ReedHycalog
acquisition in December 2002.
Net income was $10.7 million ($0.09 per share) on revenues of $229.8
million in the first quarter of 2004 compared to net income of $4.0 million
($0.03 per share) on revenues of $190.5 million in the first quarter of 2003.
Consolidated operating income was $27.1 million in the first quarter of 2004
compared to $16.4 million in the first quarter of 2003. These increases were due
to increased drill pipe sales in the Drilling Products and Services segment
coupled with favorable
17
results from new product lines in the Drill Bits segment. Consolidated operating
income in the first quarter of 2004 includes other charges of $1.8 million
related to exit costs associated with the Drilling Products rationalization
program and $0.9 million of severance costs related to the recent Tubular
Technology and Services organizational restructuring. Consolidated operating
income in the first quarter of 2003 includes transition costs of $1.5 million
related to ReedHycalog. Included in other income, net in the first quarter of
2004 were net gains on sales of assets of $2.8 million, which includes $2.0
million related to the Drilling Products rationalization program.
DRILLING PRODUCTS AND SERVICES
Our Drilling Products and Services segment revenues increased $20.6
million, or 32%, in the first quarter of 2004 compared to the same period in
2003. Operating income margins of 15% are up from 12% in last year's first
quarter. These increases were due primarily to increased drill pipe sales, which
were driven by a 13% improvement in drilling activity over last year's first
quarter coupled with delivery of a large order of premium completion drill pipe
to be used to drill the deepest and highest-pressured production well in the
Gulf of Mexico.
DRILL BITS
Our Drill Bits revenues increased $26.0 million, or 49%, in the first
quarter of 2004 compared to the same period in 2003. Operating income margins
increased from 19% in last year's first quarter to 24% in the first quarter of
2004. These increases reflect strong worldwide market penetration of
ReedHycalog's TReX(TM), SteeringWheel(TM) and Rotary Steerable Bit technologies,
as well as revenue contributions from recently introduced TuffDuty(TM),
TuffCutter(TM) and Titan(TM) roller-cone products.
TUBULAR TECHNOLOGY AND SERVICES
In the first quarter of 2004, we announced an organizational restructuring
that resulted in the Marine Products and Services businesses now being reflected
in the Tubular Technology and Services segment. Prior periods have been restated
for comparability.
Revenues for the Tubular Technology and Services segment in the first
quarter of 2004 were $64.4 million compared to $67.5 million in last year's
first quarter. The year-over-year decrease was primarily due to the sale of our
Rotator division in the third quarter of 2003 partially offset by increased
sales by our XL System's product line. Operating income of $2.8 million in the
first quarter of 2004 compares to $3.3 million in last year's first quarter.
Included in the first quarter of 2004 was a severance charge of $0.9 million
related to the organizational restructuring, which was partially offset by
improvements in our XL Systems and Atlas Bradford product lines, as well as our
Texas Arai product line, which we sold in April 2004.
OTHER OPERATIONS
In 2003, our Other segment included our industrial drill pipe operations
and our construction casing and water well operations. We exited the industrial
drill pipe business in the second quarter of 2003 and the construction casing
and water well business with the sale of Star in the first quarter of 2003. This
segment now only includes the remaining industrial product inventories and
operations from two of our technology joint ventures.
Our Other segment revenues decreased $4.3 million, or 83%, in the first
quarter of 2004 compared to the same period in 2003. Operating loss was $1.2
million in the first quarter of 2004 compared to an operating loss of $0.5
million in the first quarter of 2003. The 2004 operating loss represents losses
from the Company's discontinued product lines and joint ventures.
CORPORATE
Corporate general and administrative expenses for the first quarter of
2004 were $6.5 million compared to $4.3 million in last year's first quarter.
The increase was primarily due to higher depreciation due to the implementation
of a new ERP system and higher incentive compensation costs.
18
OTHER ITEMS
Our interest expense decreased $0.5 million in the first quarter of 2004
as compared to the same period in 2003. This decrease was due to lower debt
balances year-over-year.
Other income, net increased $0.9 million in the first quarter of 2004 as
compared to the same period in 2003. The increase primarily relates to gain on
asset sales of $2.8 million partially offset by foreign currency losses of $0.7
million in the first quarter of 2004. Last year's first quarter also included
transition costs of $1.1 million related to ReedHycalog, which we acquired in
December 2002.
Our equity income in unconsolidated affiliates was $0.2 million in the
first quarter of 2004 as compared to $0.6 million in the first quarter of 2003.
Equity income contributed by our investment in Voest-Alpine decreased by $1.3
million in the first quarter of 2004 and was offset by lower equity losses of
$0.6 million in our Intelliserv joint venture due to the receipt of Department
of Energy funding for the development of this venture.
The effective tax rate for the first quarter of 2004 was 37% as compared
to 35% for the same period in 2003. This increase in the effective tax rate was
due to higher expected foreign earnings in 2004 and an increase in the effective
tax rate in China.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
At March 31, 2004, we had cash of $18.3 million, working capital of $348.5
million, and unused borrowing availability of $151.3 million under our revolving
credit facility, compared to cash of $19.2 million, working capital of $344.6
million, and unused borrowing availability of $122.3 million at December 31,
2003.
The following table summarizes our cash flows provided by operating
activities, net cash used in investing activities and net cash used in financing
activities for the periods presented (in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
---- ----
Net Cash Provided by Operating Activities $ 16,219 $ 39,241
Net Cash Used in Investing Activities ... (1,788) (7,717)
Net Cash Used in Financing Activities ... (15,479) (31,779)
OPERATING ACTIVITIES
Net cash flows provided by operating activities decreased by $23.0 million
for the three months ended March 31, 2004 compared to the same period in 2003.
Cash flow before changes in operating assets and liabilities increased by $6.7
million, which was offset by a use of cash of $29.7 million related to net
increases in operating assets and liabilities. These increases reflect increased
working capital requirements in our Drilling Products and Services and Drill
Bits segments.
INVESTING ACTIVITIES
Net cash used in investing activities decreased by $5.9 million for the
three months ended March 31, 2004 compared to the same period in 2003. This
decrease primarily relates to decreased acquisition and divestiture activity in
the first quarter of 2004 compared to the same period in 2003. In the first
quarter of 2003, we acquired the remaining 35% interest purchase of Rotator for
$5.2 million and also recorded purchase price adjustments of $1.8 million
related to the ReedHycalog acquisition in December 2002. This acquisition
activity was more than offset by proceeds received from the sale of Star of
$11.0 million. In the first quarter of 2004, proceeds from the sale of
businesses include $1.3 million related to the sale of POS and $0.8 million
related to a post-closing working capital adjustment for the sale of Rotator in
September 2003. Additionally, capital expenditures decreased $4.2 million and
proceeds from fixed assets sales increased $2.5 million.
19
FINANCING ACTIVITIES
Net cash used in financing activities decreased $16.3 million for the
three months ended March 31, 2004 compared to the same period in 2003. This
decrease reflects lower repayments on our debt when compared to the same period
in 2003, coupled with increased proceeds from stock options exercised in the
first quarter of 2004. As of March 31, 2004, there were no borrowings
outstanding under the revolver portion of our Senior Credit Facility.
Capital Expenditures
Our capital expenditures for property, plant, and equipment totaled $6.3
million and $10.5 million for the three months ended March 31, 2004 and 2003,
respectively. We currently expect to expend approximately $40 million for
capital expenditures for property, plant, and equipment during 2004. Much of
this spending is related to our capital improvement program to reduce operating
expenditures.
Senior Credit Facility and Other Long-Term Debt
Our debt balances are primarily comprised of: (1) borrowings under our
Senior Credit Facility, (2) our $200 million 9 5/8% Senior Notes due 2007, and
(3) our $175 million 9% Senior Notes due 2009.
As of March 31, 2004, we had outstanding borrowings of $41.1 million under
our $240 million Senior Credit Facility (Senior Credit Facility), which related
to the term loan portion of the Senior Credit Facility. Additionally, we had
$5.8 million of revolver availability reserved to support outstanding letters of
credit. At December 31, 2003, we had outstanding borrowings of $57.2 million
under the Senior Credit Facility, of which $42.9 million related to the term
loan portion and $14.3 million related to the revolving credit facility.
Additionally, we had $5.9 million of revolver availability reserved to support
outstanding letters of credit.
We estimate our required principal and interest payments for our
outstanding debt to be approximately $47 million for the remainder of 2004. We
currently expect to satisfy all capital expenditures and debt service
requirements during 2004 from operating cash flows, with any shortfall utilizing
existing cash balances and the revolver portion of our Senior Credit Facility.
Based on our current projected capital expenditures, required principal
and interest payments, operating cash flows, existing cash balances, and
estimated availability under the Senior Credit Facility, we believe we can
satisfy all of our expected commitments during the next 12 months and will have
sufficient liquidity to not only maintain our existing operations but to take
advantage of strategic opportunities that may present themselves during such
period. Acquisitions and expansions will be financed from cash flow from
operations, borrowings under our Senior Credit Facility, or through the issuance
of additional debt and equity financing, as appropriate. Any future financing
will be arranged to meet our requirements, with the timing, amount, and form of
issue dependent on the prevailing market and general economic conditions.
Other Commitments
As part of our investment in Voest-Alpine, we entered into a supply
contract with Voest-Alpine under which we agreed to purchase a minimum of 57,000
metric tons of green tubulars during 2003 and 52,000 metric tons per year
thereafter through July 2007. Because this agreement requires us to purchase
tubulars regardless of our needs, our purchases under this agreement may be made
for inventory during periods of low customer demand. These types of purchases
would require us to use our working capital and expose us to risks of excess
inventory during those periods. Although these purchases could require us to
expend a material amount of money, we expect that we will be able to eventually
use or sell all of the tubular products we are required to purchase from
Voest-Alpine. We currently believe we will meet our contractual commitments for
2004 without incurring unnecessary penalties or material unnecessary inventory
positions.
In connection with our spinoff from Weatherford in April 2000, we entered
into a preferred supplier agreement with Weatherford in which Weatherford agreed
for at least a three-year period from April 2000 to purchase at least 70% of its
requirements for certain products from us. In return, we agreed to sell those
products at prices not greater than the price that we sell to similarly situated
customers, and, as partial consideration for amounts due to Weatherford at that
time, we provided Weatherford a $30 million credit towards 20% of the purchase
price of those products. In the second quarter of
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2003, we renegotiated this contract with Weatherford, which extended this
contract until March 2005 and reduced the unused preferred supplier credit
balance by $6.6 million. At March 31, 2004, the remaining credit balance was
$7.3 million.
RECENT ACCOUNTING PRONOUNCEMENTS
For recent accounting pronouncements, see Note 12 of the unaudited
consolidated financial statements included herein.
FORWARD-LOOKING STATEMENTS AND EXPOSURES
In light of the SEC's Regulation FD, we have elected to provide in this
report various forward-looking statements and operational details. We have done
so to assure full market disclosure of information that we generally make
available to our investors and securities analysts. We expect to provide updates
to this information on a regular basis in our periodic and current reports filed
with the SEC. We have also made our investor conference calls open to all
investors and encourage all investors to listen in on these calls. We will
publicly announce the call-in information in a press release before such calls.
We are providing this information to assist our stockholders in better
understanding our business. These expectations reflect only our current view on
these matters as of the date of this report and are subject to change based on
changes of facts and circumstances. There can be no assurance that these
expectations will be met and our actual results will likely vary (up or down)
from those currently projected. These estimates speak only of our expectations
as of the date of this report and we make no undertaking to update this
information. The absence of an update should not be considered as an affirmation
of our current expectations or that facts have not changed during the quarter
that would impact our expectations.
In modeling our earnings for all of 2004, we have made numerous
assumptions regarding our operations that are more fully described in our Annual
Report on Form 10-K.
RISK FACTORS AND EXPOSURES
The businesses in which we operate are subject to various risks and
uncertainties that could have adverse consequences on our results of operations
and financial condition and that could cause actual results to be materially
different from projected results contained in the forward-looking statements in
this report and in our other disclosures. Investors should carefully consider
these risks and uncertainties when evaluating our company and the
forward-looking statements that we make. These risks and uncertainties include,
but are not limited to, the following:
A DECLINE IN DOMESTIC AND WORLDWIDE OIL AND GAS DRILLING ACTIVITY WOULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our forward-looking statements and projections of future results assume
stable to moderately increasing demand for our products and services. However,
our businesses are materially dependent on the level of oil and gas drilling
activity in North America and worldwide, which in turn depends on the level of
capital spending by major, independent and state-owned exploration and
production companies. This capital spending is driven by current prices for oil
and gas and the perceived stability and sustainability of those prices. Oil and
gas prices have been subject to significant fluctuation in recent years in
response to changes in the supply and demand for oil and gas, market
uncertainty, world events, governmental actions, and a variety of additional
factors that are beyond our control, including:
- the level of North American and worldwide oil and gas exploration
and production activity;
- worldwide economic conditions, particularly economic conditions in
North America;
- oil and gas production costs;
- the expected costs of developing new reserves;
- national government political requirements and the policies of the
OPEC;
- the price and availability of alternative fuels;
21
- environmental regulation; and
- tax policies.
Decreased demand for our products results not only from periods of lower
drilling activity, but also from the resulting build up of customer inventory of
drill pipe associated with idle rigs, which can be used on active rigs in lieu
of new purchases. The time period during which drill pipe inventory is used is a
function of the number of rigs actively drilling and the expected level of
drilling activity. A decrease in the number of rigs actively drilling results in
a large amount of unused drill pipe on idle rigs and a decrease in demand for
new drill pipe.
AN ECONOMIC DOWNTURN COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND
SERVICES AND OUR RESULTS OF OPERATIONS.
The U.S. and worldwide economies have been very volatile, and their future
directions are uncertain. If North American or international economies decline
unexpectedly, our results of operations and financial condition could be
materially adversely affected.
INCREASES IN THE PRICES OF OUR RAW MATERIALS COULD AFFECT OUR RESULTS OF
OPERATIONS.
We use large amounts of steel tubulars and bars in the manufacture of our
products. The price of these raw materials has a significant impact on our cost
of producing products. If we are unable to pass future raw material price
increases on to our customers, our margins and results of operations could be
adversely affected.
Steel prices have increased significantly since the end of 2003, caused
primarily by significant increases in the prices paid by our suppliers for scrap
and coke utilized in their operations. Although we have a long-term supply
contract with our Voest-Alpine affiliate relating to our supply of green tubes
utilized in our drill pipe operations, we do not have such supply contracts in
place for our suppliers of bars and billets utilized to manufacture our tool
joints, drill collars and heavyweight drill pipe. Our partner in our Austrian
joint venture also is seeking to renegotiate its supply contract for billets to
our Voest-Alpine affiliate. Our forward-looking statements assume that we will
be able to pass on to our customers any cost increases we may experience as a
result of the current shortages being experienced in the worldwide steel
markets. If we are unable to, our results of operations could be materially
adversely affected.
With respect to our Chinese operations, we purchase green tubes from our
supplier on a cost-plus basis. As such, any increase in our raw material costs
that we cannot pass on to our customers could have an adverse impact on our
operations. In addition, certain of the benefits forecasted from our joint
venture to manufacture upset-to-grade tubulars in China are based upon price
differentials between our Chinese supplier and our Voest-Alpine affiliate, which
may not materialize if steel prices continue to rise.
In addition, rising steel costs also have the potential to delay increases
in demand for our drill stem components and premium casing products. As drill
stem products are not consumables, our customers could elect to defer purchases
until such time as they determine that steel prices have stabilized or returned
to more normalized conditions. Our forward-looking statements do not assume that
there will be any reduced demand for our drill stem products or premium casing
as a result of increased prices caused by the current shortages being
experienced in the worldwide steel markets. Reduced demand could adversely
affect our results of operations.
DUE TO INTENSE COMPETITION IN OUR INDUSTRY, OUR REVENUES MAY DECLINE IF WE
DO NOT DEVELOP, PRODUCE, AND COMMERCIALIZE NEW COMPETITIVE TECHNOLOGIES
AND PRODUCTS OR IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR CURRENT AND
FUTURE INTELLECTUAL PROPERTY RIGHTS RELATING TO OUR TECHNOLOGIES AND
PRODUCTS.
The markets for our premium products and services are characterized by
continual developments. Substantial improvements in the scope and quality of
product function and performance can occur over a short period of time. In order
to remain competitive, we must be able to develop commercially competitive
products in a timely manner in response to changes in technology. Our ability to
develop new products and maintain competitive advantages depends on our ability
to design and commercially market products that meet the needs of our customers,
including delivery schedules and product specifications.
22
Additionally, the time and expense invested in product development may not
result in commercially feasible applications that provide revenues. We could be
required to write-off our entire investment in a new product that does not reach
commercial viability. Moreover, we may experience operating losses after new
products are introduced and commercialized because of high start-up costs,
unexpected manufacturing costs or problems, or lack of demand.
Many of our products and the processes we use to manufacture them have
been granted U.S. and international patent protection, or have patent
applications pending. Nevertheless, patents may not be granted for our
applications and, if patents are issued, the claims allowed may not be
sufficient to protect our technology. If our patents are not enforceable, or if
any of our products infringe patents held by others, our financial results may
be adversely affected. Our competitors may be able to independently develop
technology that is similar to ours without infringing on our patents, which is
especially true internationally where the protection of intellectual property
rights may not be as effective. In addition, obtaining and maintaining
intellectual property protection internationally may be significantly more
expensive than doing so domestically. We may have to spend substantial time and
money defending our patents and, after our patents expire, our competitors will
not be legally constrained from developing products substantially similar to
ours.
In addition, we are in the process of developing new products that we
intend to introduce to the market during 2004. These products include 1) large
diameter premium connectors for our Tubular Technology and Services segment and
2) new drill bits. If we are unable to introduce such products as a result of
delays in our development activities, such introductions not being accepted by
our end-users, or delays or abandonment for other reasons, our projected results
could be adversely affected.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE DEPENDENT UPON OUR
ABILITY TO SUCCESSFULLY INCREASE AND DECREASE, WITHOUT MATERIAL
DISRUPTION, OUR MANUFACTURING CAPACITY AND EXPENSE IN RESPONSE TO CHANGES
IN DEMAND AND TO MAINTAIN PRICES FOR OUR PRODUCTS, WHICH CAN BE ADVERSELY
AFFECTED BY CHANGES IN INDUSTRY CONDITIONS AND COMPETITIVE FORCES.
Our projections assume steady demand for our products and services during
2004, in particular our drill stem products. In the event demand for these
products increases, we will be required to increase our production during peak
demand periods with minimal operational disruption and inefficiency. If this
does not happen, or we experience difficulties in this regard, our results of
operations during this ramp-up for high demand periods could be adversely
affected.
OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE SEVERE INTERRUPTIONS DUE TO
POLITICAL, ECONOMIC, OR OTHER RISKS, WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
During the first quarter of 2004, we derived approximately 41% of our
total revenues from our facilities outside the U.S. In addition, a large part of
sales from our domestic locations were for use in foreign countries. In
addition, many of our key manufacturing operations are outside of the U.S.,
including Mexico, Austria, Italy, China, Indonesia, and Singapore. Our
operations in certain international locations are subject to various political
and economic conditions existing in those countries that could disrupt
operations. These risks include:
- changes in foreign tax laws;
- changes in regulations and labor practices;
- currency fluctuations and devaluations;
- currency restrictions, banking crises, and limitations on
repatriation of profits; and
- political instability or military conflict.
Our foreign operations may suffer disruptions, and we may incur losses
that will not be covered by insurance. We have not historically carried
political risk insurance. In particular, terrorist attacks and other threats to
U.S. national security and resulting U.S. military activity throughout the world
increase the possibility that our operations could be interrupted or adversely
affected. Such disruption could result in our inability to ship products in a
timely and cost-effective manner or our inability to place contractors and
employees in various countries or regions.
23
Any material currency fluctuations or devaluations, or political events
that disrupt oil and gas exploration and production or the movement of funds and
assets could materially adversely affect our results of operations and financial
position.
During the first quarter of 2004, approximately $13.5 million of our
revenues were earned by our Chinese operations. As is customary in this country,
it is common for our Chinese operations to settle receivables and payables
through bearer bonds and notes. Recently, Chinese banks have been experiencing a
shortage of currencies, which could affect our ability to fully realize these
notes. At March 31, 2004, we were holding $0.8 million of such notes. To date,
our Chinese operations have not experienced significant losses as a result of
such practice; however, there can be no assurance that such losses could not
occur in the future. Any such losses could have a materially adverse affect on
our results of operations in the period in which they occur.
We have renewed an agreement with Voest-Alpine, an entity of which we own
50.01%, to purchase green tubulars through September 2007. Our future results
could be adversely affected if we are unable to use or resell these tubulars. In
addition, we have agreed to be responsible for paying any "anti-dumping" duties
in the U.S. on the resale of these tubulars, which could affect our ability to
resell the tubulars in the U.S. Further, our long-term supply contract with
Voest-Alpine is denominated in Euros. We have no significant offset for revenues
in Euros and we have not hedged for currency risk with respect to this contract.
Thus, a material long-term strengthening of the Euro versus the U.S. dollar
could materially adversely affect our results of operations.
IN CONNECTION WITH OUR BUSINESS OPERATIONS, WE COULD BE SUBJECT TO
SUBSTANTIAL LIABILITY CLAIMS THAT ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our products are complex, and the failure of this equipment to operate
properly or to meet specifications may greatly increase our customers' costs of
drilling a well. In addition, many of these products are used in hazardous
drilling and production applications where an accident or product failure can
cause personal injury or loss of life; damage to property, equipment, or the
environment; regulatory investigations and penalties; and the suspension of the
end-user's operations. If our products or services fail to meet specifications
or are involved in accidents or failures, we could face warranty, contract, or
other litigation claims for which we may be held responsible and our reputation
for providing quality products may suffer.
Our insurance may not be adequate in risk coverage or policy limits to
cover all losses or liabilities that we may incur or be responsible. Moreover,
in the future we may not be able to maintain insurance at levels of risk
coverage or policy limits that we deem adequate or at premiums that are
reasonable for us, particularly in the recent environment of significant
insurance premium increases. Further, any claims made under our policies will
likely cause our premiums to increase.
Any future damages deemed to be caused by our products or services that
are assessed against us and that are not covered by insurance, or that are in
excess of policy limits or subject to substantial deductibles, could have a
material adverse effect on our results of operations and financial condition.
Litigation and claims for which we are not insured can occur, including employee
claims, intellectual property claims, breach of contract claims, and warranty
claims. Our forward-looking statements assume that such uninsured claims or
issues will not occur. We account for warranty reserves on a specific
identification basis. As a result, a significant unexpected warranty issue
during a particular quarter or year could cause a material reduction in our
results of operations in the quarter or year that the reserve for such warranty
is made.
WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH, AND SAFETY LAWS AND REGULATIONS
THAT EXPOSE US TO POTENTIAL FINANCIAL LIABILITY.
Our operations are regulated under a number of federal, state, local, and
foreign environmental laws and regulations, which govern, among other things,
the discharge of hazardous materials into the air and water, as well as the
handling, storage, and disposal of hazardous materials and the remediation of
contaminated sites. Compliance with these environmental laws is a major
consideration in the manufacturing of our products. Because we use and generate
hazardous substances and wastes in our manufacturing operations, we may be
subject to material financial liability for any investigation and clean up of
such hazardous materials, and any related personal injury damages or toxic tort
claims. We
24
have not historically carried insurance for such matters.
In addition, many of our current and former properties are or have been
used for industrial purposes. Accordingly, we also may be subject to financial
liabilities relating to the investigation and remediation of hazardous materials
resulting from the action of previous owners or operators of industrial
facilities on those sites. Liability in many instances may be imposed on us
regardless of the legality of the original actions relating to the hazardous or
toxic substances or whether or not we knew of, or were responsible for, the
presence of those substances. Liabilities we have assumed in connection with the
ReedHycalog acquisition include, subject to certain exceptions, certain
obligations, liabilities, costs, and expenses for violations of health, safety
and environmental laws relating to the assets and include certain unknown, as
well as known, obligations, liabilities, costs, and expenses arising or incurred
prior to, on or after the closing date. Furthermore, with certain exceptions, we
may be required to indemnify Schlumberger against losses incurred in connection
with or related to these assumed liabilities.
We are also subject to various federal, state, local, and foreign laws and
regulations relating to safety and health conditions in our manufacturing
facilities. Those laws and regulations may subject us to material financial
penalties or liabilities for any noncompliance, as well as potential business
disruption if any of our facilities or a portion of any facility is required to
be temporarily closed as a result of any violation of those laws and
regulations. Any such financial liability or business disruption could have a
material adverse effect on our financial condition and results of operations.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY ACTIONS UNDER
U.S. TRADE LAWS AND NEW FOREIGN ENTRANTS INTO U.S. MARKETS.
Although we are a U.S.-based manufacturing company, we do own and operate
international manufacturing operations that support our U.S.-based business. If
actions under U.S. trade laws were instituted that limited our access to these
products, our ability to meet our customer specifications and delivery
requirements would be reduced. Any adverse effects on our ability to import
products from our foreign subsidiaries could have a material adverse effect on
our results of operations.
Additionally, foreign producers of tubular goods have been found to have
sold their products, which may include premium connections, for export to the
U.S. at prices that are lower than the cost of production, or their prices in
their home market, or a major third-country market. Anti-dumping orders
restricting the manner and price at which tubular goods from certain countries
can be imported are currently in effect. If such orders are revoked or changed,
we could be exposed to increased competition from imports that could reduce our
sales and market share. In addition, the premium connections market served by
our Atlas Bradford product line is highly competitive. The level of competition
could further increase if foreign steel mills, with their own lines of
internationally accepted premium connections, more successfully penetrate the
U.S. market, which could adversely affect our results of operations.
OUR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY
CHARGES ASSOCIATED WITH FUTURE OPERATIONAL CHANGES IMPLEMENTED BY
MANAGEMENT OF OUR COMPANY.
Our management recently completed a review and assessment of our drill
stem manufacturing operations that resulted in a downsizing of certain of our
operations, primarily in Canada. As a result of this downsizing, we wrote-off
during 2003 various equipment and assets that were no longer useful in our
business and incurred approximately $1.8 million in lease termination,
severance, and other exit costs during the first quarter of 2004.
During the first quarter of 2004, we also announced the combination of our
Marine Products and Services businesses into our Tubular Technology and Services
segment. As a result of this combination, we incurred approximately $0.9 million
in severance and related costs during the first quarter.
During the second quarter of 2004, as part of our ongoing review of our
operations to focus on our key product lines, we sold our API coupling business
and expect to recognize an after-tax loss on sale of approximately $11.0
million, subject to final working capital adjustments and standard closing
requirements that have not yet been determined.
In addition to these activities, management continues to conduct
company-wide assessments of all of our related manufacturing strategies and
practices and of our under-performing product lines to determine possible
improvements to
25
manufacturing efficiencies and future profitability. Such assessment could in
the future result in divestitures or operational rationalizations that result in
write-downs or other losses during any particular accounting period. Our
forward-looking statements assume that none of the results of these reviews or
activities will adversely affect our results of operations in any period.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO AN
IMPLEMENTATION OF A NEW ENTERPRISE-WIDE RESOURCE PLANNING (ERP) SYSTEM.
We currently are implementing a new management ERP system that we believe
will, in the long term, significantly enhance our information systems, internal
processes and controls. This implementation is ongoing and includes a
significant amount of management's time and dedication and may distract
management in unpredictable ways from our core businesses. Additionally, the ERP
system might not result in the anticipated benefits and may actually cause
disruptions and inefficiencies in our businesses which could result in increases
in our operating and other cost that could adversely affect our results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 1, 2004, the Company sold without registration under the
Securities Act of 1933 or exemption from registration 90,786 shares of common
stock for $10.22 per share pursuant to the Company's Employee Stock Purchase
Plan (ESPP). As such, the shares are subject to rescission by the employees or
subsequent purchases for a period of twelve months at a maximum aggregate total
rescission price of $927,833. Future shares issued under the ESPP will be
registered on Form S-8.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
INTEREST RATES
Currently, we have variable interest rate debts totaling approximately
$42.4 million. These variable rate debts expose us to the risk of increased
interest expense in the event of increases in short-term interest rates. If the
variable interest rates were to increase by 1% from March 2004 levels, our
combined interest expense would increase by approximately $0.4 million annually.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's
principal executive officer and principal financial officer, evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the fiscal quarter ended
March 31, 2004. Based on this evaluation, the Company's principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures were effective as of the end of the fiscal
quarter ended March 31, 2004, to ensure that information that is required to be
disclosed by the Company in the reports it files or submits under the Exchange
Act is recorded, processed, summarized, and reported, within the time periods
specified in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal control over financial
reporting that occurred during the fiscal quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
26
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
31.1 Certification of Michael McShane
31.2 Certification of Matthew D. Fitzgerald
32.1 Section 906 Certification
(b) Reports filed on Form 8-K during the three months ended March 31,
2004 -
1. Report on Form 8-K, dated February 5, 2004, filing the
Company's presentation to investors at the CSFB Energy Summit
2004.
2. Report on Form 8-K dated February 11, 2004, filing the
Company's press release related to its fourth quarter 2004
results of operations.
3. Report on Form 8-K/A, dated February 11, 2004, filing
correction to the Company's press release related to its
fourth quarter 2004 results of operations.
27
SIGNATURES
Pursuant to the requirements of Section 12 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.
GRANT PRIDECO, INC.
By: /s/ MATTHEW D. FITZGERALD
------------------------------------------------------
Matthew D. Fitzgerald
Sr. Vice President and Chief Financial Officer
By: /s/ GREG L. BOANE
------------------------------------------------------
Greg L. Boane
Corporate Controller and Principal Accounting Officer
Date: May 10, 2004
28
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
31.1 Certification of Michael McShane
31.2 Certification of Matthew D. Fitzgerald
32.1 Section 906 Certification
29