Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
-----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-13439
DRIL-QUIP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2162088
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS
77040
(Address of principal executive offices)
(Zip Code)
(713) 939-7711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES [X] NO [_]
As of May 13, 2003, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 17,293,373.
================================================================================
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DRIL-QUIP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,276 $ 5,903
Trade receivables................................................................. 58,381 49,194
Inventories....................................................................... 99,588 100,879
Deferred taxes.................................................................... 5,692 5,729
Prepaids and other current assets................................................. 2,439 2,868
-------- --------
Total current assets.......................................................... 169,376 164,573
Property, plant and equipment, net................................................... 112,129 105,703
Other assets......................................................................... 258 256
-------- --------
Total assets.................................................................. $281,763 $270,532
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 14,508 $ 13,007
Current maturities of long-term debt.............................................. 1,188 1,167
Accrued income taxes.............................................................. 2,505 2,709
Customer prepayments.............................................................. 8,109 5,057
Accrued compensation.............................................................. 5,208 5,442
Other accrued liabilities......................................................... 6,728 5,126
-------- --------
Total current liabilities..................................................... 38,246 32,508
Long-term debt....................................................................... 54,196 47,558
Deferred taxes....................................................................... 4,011 4,009
-------- --------
Total liabilities............................................................. 96,453 84,075
Stockholders' equity:
Preferred stock:
10,000,000 shares authorized at $0.01 par value (none issued)................... -- --
Common stock:
50,000,000 shares authorized at $0.01 par value, 17,293,373 shares issued and
outstanding................................................................... 173 173
Additional paid-in capital........................................................ 64,737 64,737
Retained earnings................................................................. 123,738 125,810
Foreign currency translation adjustment........................................... (3,338) (4,263)
-------- --------
Total stockholders' equity.................................................... 185,310 186,457
-------- --------
Total liabilities and stockholders' equity.................................... $281,763 $270,532
======== ========
The accompanying notes are an integral part of these statements.
2
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31,
----------------------------
2002 2003
----------- -----------
(In thousands except share
amounts)
Revenues............................... $ 51,097 $ 55,221
Cost and expenses:
Cost of sales....................... 35,616 40,130
Selling, general and administrative. 6,814 7,329
Engineering and product development. 3,914 4,287
----------- -----------
46,344 51,746
----------- -----------
Operating income....................... 4,753 3,475
Interest expense....................... 516 450
----------- -----------
Income before income taxes............. 4,237 3,025
Income tax provision................... 1,451 953
----------- -----------
Net income............................. $ 2,786 $ 2,072
=========== ===========
Earnings per share:
Basic............................... $ 0.16 $ 0.12
=========== ===========
Fully diluted....................... $ 0.16 $ 0.12
=========== ===========
Weighted average shares:
Basic............................... 17,293,000 17,293,000
=========== ===========
Fully diluted....................... 17,351,000 17,293,000
=========== ===========
The accompanying notes are an integral part of these statements.
3
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
----------------
2002 2003
------- -------
(In thousands)
Operating activities
Net income....................................................................... $ 2,786 $ 2,072
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................. 2,221 2,652
Loss on sale of equipment..................................................... 30 15
Deferred income taxes......................................................... 216 (43)
Changes in operating assets and liabilities:
Trade receivables......................................................... 2,676 8,916
Inventories............................................................... (2,216) (2,053)
Prepaids and other assets................................................. (145) (458)
Trade accounts payable and accrued expenses............................... (4,095) (5,489)
------- -------
Net cash provided by operating activities.............................. 1,473 5,612
Investing activities
Purchase of property, plant and equipment..................................... (5,876) (2,266)
Transfer of rental assets to inventory........................................ -- 5,518
Proceeds from sale of equipment............................................... 2 16
------- -------
Net cash (used in) provided by investing activities.................... (5,874) 3,268
Financing activities
Proceeds from revolving line of credit and long-term borrowing................ 87 --
Principal payments on long-term debt.......................................... (4,544) (6,498)
------- -------
Net cash used by financing activities.................................. (4,457) (6,498)
Effect of exchange rate changes on cash activities............................... 287 245
------- -------
Increase (decrease) in cash...................................................... (8,571) 2,627
Cash at beginning of period...................................................... 11,326 3,276
------- -------
Cash at end of period............................................................ $ 2,755 $ 5,903
======= =======
The accompanying notes are an integral part of these statements.
4
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Dril-Quip, Inc., a Delaware corporation (the "Company" or "Dril-Quip"),
manufactures highly engineered offshore drilling and production equipment which
is well suited for use in deepwater, harsh environment and severe service
applications. The Company's principal products consist of subsea and surface
wellheads, subsea and surface production trees, mudline hanger systems,
specialty connectors and associated pipe, drilling and production riser
systems, wellhead connectors and diverters for use by major integrated, large
independent and foreign national oil and gas companies in offshore areas
throughout the world. Dril-Quip also provides installation and reconditioning
services and rents running tools for use in connection with the installation
and retrieval of its products. The Company has four subsidiaries that
manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland and
Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ Holdings
PTY Ltd. is located in Perth, Australia and Dril-Quip do Brasil LTDA is located
in Macae, Brazil.
The condensed consolidated financial statements included herein have been
prepared by Dril-Quip and are unaudited, except for the balance sheet at
December 31, 2002, which has been prepared from the audited financial
statements at that date. In the opinion of management, the unaudited condensed
consolidated interim financial statements include all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair presentation of
the financial position as of March 31, 2003, and the results of operations and
the cash flows for each of the three-month periods ended March 31, 2003 and
2002. Although management believes the unaudited interim related disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results of
operations and the cash flows for the three-month period ended March 31, 2003
are not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements included herein should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
Short term investments that have a maturity of three months or less from the
date of purchase are classified as cash equivalents.
Inventories
The Company's inventories are reported at the lower of cost (first-in,
first-out method) or market.
5
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost, with depreciation
provided on a straight-line basis over their estimated useful lives.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided on income and expenses which are reported in
different periods for income tax and financial reporting purposes.
Revenue Recognition
The Company delivers most of its products and services on an as-needed basis
by its customers and records revenues as the products are shipped and as
services are rendered. Allowances for doubtful accounts are determined
generally on a case by case basis and historically have been insignificant.
Certain revenues are derived from long-term contracts which generally require
more than one year to fulfill. Revenues and profits on long-term contracts are
recognized under the percentage-of-completion method based on a cost-incurred
basis. Losses, if any, on contracts are recognized when they become known.
Contracts for long-term projects contain provisions for customer progress
payments. Payments in excess of revenues recognized are included as a customer
prepayment liability.
Foreign Currency
The financial statements of foreign subsidiaries are translated into U.S.
dollars at current exchange rates except for revenues and expenses, which are
translated at average rates during each reporting period. Translation
adjustments are reflected as a separate component of stockholders' equity and
have no current effect on earnings or cash flows.
Foreign currency exchange transactions are recorded using the exchange rate
at the date of the settlement. These amounts are included in selling, general,
and administrative costs in the consolidated statements of income.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting For Stock Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized for stock options granted under the Company's incentive plan.
Under SFAS No. 123, pro forma information is required to reflect the
estimated effect on the net income and earnings per share as if the Company had
accounted for the stock options using the fair value method. The fair value was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions:
2003
- ------
Risk fee interest rate............. 4.25%
Volatility of the stock price...... .626
Expected life of options (in years) 5
Expected dividend.................. 0.0%
Calculated fair value per share.... $11.66
6
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the
above plan consistent with the method available under SFAS No. 123, the
Company's net income and earnings per share for the three months ended March
31, 2002 and 2003 would have been reduced to the pro forma amounts listed below.
Three Months
Ended March 31,
- ---------------
2002 2003
------ ------
Net Income
As reported.... $2,786 $2,072
Pro forma...... $2,346 $1,491
Earnings per share
Basic.......... $ .16 $ .12
Diluted........ $ .16 $ .12
Pro forma.........
Basic.......... $ .14 $ .09
Diluted........ $ .14 $ .09
There were no option grants during the first quarter of 2003.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables, and debt instruments. The carrying values
of these financial instruments approximate their respective fair values as they
are either short-term in nature or carry interest rates which approximate
market rates.
Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company grants credit to its
customers, which operate primarily in the oil and gas industry. The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. The Company maintains reserves for
potential losses and such losses have historically been within management's
expectations.
Comprehensive Income
SFAS No. 130 establishes the rules for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires the Company to
include unrealized gains or losses on foreign currency translation adjustments
in other comprehensive income.
The following table provides comprehensive income for the periods indicated:
Three months
ended March 31,
- --------------
2002 2003
------ ------
(In thousands)
Net income............................. $2,786 $2,072
Foreign currency translation adjustment (740) (925)
------ ------
Comprehensive income................ $2,046 $1,147
====== ======
7
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed considering the dilutive effect of stock options.
New Accounting Standards
Effective January 1, 2003, Dril-Quip adopted Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS No. 145"). SFAS No. 145
requires that gains and losses from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No.
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent and meet the criteria for
classification as an extraordinary item. Under SFAS No. 145, the Company will
report gains and losses on the extinguishment of debt, if any, in pre-tax
earnings rather than in extraordinary items.
Effective January 1, 2003, Dril-Quip adopted Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
("SFAS No. 146"). SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities, such as restructuring,
involuntarily terminating employees, and consolidating facilities. Adoption of
this statement did not have a significant impact on Dril-Quip's financial
position or results of operations.
3. INVENTORIES
Inventories consist of the following:
(Unaudited)
December 31, March 31,
2002 2003
------------ -----------
(In thousands)
Raw materials and supplies........... $13,636 $ 13,873
Work in progress..................... 26,034 21,191
Finished goods and purchased supplies 59,918 65,815
------- --------
$99,588 $100,879
======= ========
8
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
4. GEOGRAPHIC AREAS
Three months ended
March 31,
------------------
2002 2003
-------- --------
(In thousands)
Revenues
United States:
Domestic.................... $ 20,524 $ 20,917
Export...................... 5,402 13,916
Intercompany................ 6,549 6,917
-------- --------
Total United States..... 32,475 41,750
Europe, Middle East, and Africa 17,303 14,491
Asia-Pacific................... 7,868 5,897
Eliminations................... (6,549) (6,917)
-------- --------
Total................... $ 51,097 $ 55,221
======== ========
Operating Income
United States.................. $ 2,092 $ 3,513
Europe, Middle East, and Africa 825 (1,476)
Asia-Pacific................... 1,828 1,756
Eliminations................... 8 (318)
-------- --------
Total................... $ 4,753 $ 3,475
======== ========
Identifiable Assets
United States.................. $186,276 $179,311
Europe, Middle East, and Africa 76,652 77,541
Asia-Pacific................... 15,590 17,810
Eliminations................... (5,400) (4,130)
-------- --------
Total................... $273,118 $270,532
======== ========
Export sales from the United States to unaffiliated customers consist of
worldwide sales outside the territorial waters of the United States. Europe
sales are primarily to the North Sea, with lesser sales to Africa and the
Middle East, while Asia-Pacific's sales are primarily to Australia, Thailand,
Malaysia, and Indonesia.
Eliminations of operating profits are related to intercompany inventory
transfers that are deferred until shipment is made to third party customers.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited consolidated financial statements. This discussion should be read in
conjunction with the unaudited consolidated financial statements included
elsewhere herein, and with the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the annual
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
Overview
Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. The Company's principal products consist
of subsea and surface wellheads, subsea and surface production trees, mudline
hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.
Both the market for offshore drilling and production equipment and services
and the Company's business are substantially dependent on the condition of the
oil and gas industry and, in particular, the willingness of oil and gas
companies to make capital expenditures on exploration, drilling and production
operations offshore. Oil and gas prices and the level of offshore drilling and
production activity have historically been characterized by significant
volatility.
Revenues. Dril-Quip's revenues are generated by its two operating groups:
the Product Group and the Service Group. The Product Group manufactures
offshore drilling and production equipment, and the Service Group provides
installation and reconditioning services as well as rental running tools for
installation and retrieval of its products. For the three months ended March
31, 2003, the Company derived 84% of its revenues from the sale of its products
and 16% of its revenues from services. Revenues from the Service Group
generally correlate to revenues from product sales because increased product
sales generate increased revenues from installation services and rental running
tools. Substantially all of Dril-Quip's sales are made on a purchase order
basis. Purchase orders are subject to change and/or termination at the option
of the customer. In case of a change or termination, the customer is required
to pay the Company for work performed and other costs necessarily incurred as a
result of the change or termination.
The Company accounts for larger and more complex projects that have
relatively longer manufacturing time frames on a percentage of completion
basis. For the first three months of 2003, 6 projects representing
approximately 14% of the Company's revenues were accounted for using percentage
of completion accounting. This percentage may fluctuate in the future. Revenues
accounted for in this manner are generally recognized on the ratio of costs
incurred to the total estimated costs. Accordingly, price and cost estimates
are reviewed periodically as the work progresses, and adjustments proportionate
to the percentage of completion are reflected in the period when such estimates
are revised. Losses, if any, are recognized when they become known. Amounts
billed to or received from customers in excess of revenues recognized are
classified as a current liability.
Foreign sales represent a significant portion of the Company's business. In
the three months ended March 31, 2003, the Company generated approximately 62%
of its revenues from foreign sales. In this period, approximately 73% (on the
basis of revenues generated) of all products sold were manufactured in the
United States.
10
Cost of Sales. The principal elements of cost of sales are labor, raw
materials and manufacturing overhead. Variable costs, such as labor, raw
materials, supplies and energy, generally account for approximately two-thirds
of the Company's cost of sales. Fixed costs, such as the fixed portion of
manufacturing overhead, constitute the remainder of the Company's cost of
sales. Cost of sales as a percentage of revenues is also influenced by the
product mix sold in any particular quarter and market conditions. The Company's
costs related to its foreign operations do not significantly differ from its
domestic costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs associated with sales and marketing,
general corporate overhead, compensation expense, legal expenses and other
related administrative functions.
Engineering and Product Development Expenses. Engineering and product
development expenses consist of new product development and testing, as well as
application engineering related to customized products.
Income Tax Provision. Dril-Quip's effective tax rate has historically been
lower than the statutory rate due to benefits from its foreign sales
corporation or foreign income tax rate differentials.
Results of Operations
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of revenues:
Three months
ended
March 31,
------------
2002 2003
----- -----
Revenues:
Product Group............................ 88.2% 84.2%
Service Group............................ 11.8% 15.8%
----- -----
Total................................ 100.0% 100.0%
Cost of sales............................... 69.7% 72.7%
Selling, general and administrative expenses 13.3% 13.3%
Engineering and product development expenses 7.7% 7.7%
Operating income............................ 9.3% 6.3%
Interest expense............................ 1.0% 0.8%
----- -----
Income before income taxes.................. 8.3% 5.5%
Income tax provision........................ 2.8% 1.7%
----- -----
Net income.................................. 5.5% 3.8%
===== =====
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002.
Revenues. Revenues increased by $4.1 million, or approximately 8%, to $55.2
million in the three months ended March 31, 2003 from $51.1 million in the
three months ended March 31, 2002. The net increase resulted from increased
export sales and domestic sales from the United States of $8.5 million and
$400,000 respectively, offset by decreased sales of $2.8 million in the
European area and $2.0 million in the Asia Pacific area.
Cost of Sales. Cost of sales increased $4.5 million, or approximately 13%,
to $40.1 million for the three months ended March 31, 2003 from $35.6 million
for the same period in 2002. As a percentage of revenues, cost of sales were
approximately 73% and 70% for the three-month periods ending March 31, 2003 and
2002, respectively. This increase in cost of sales as a percentage of revenues
was attributed to competitive pricing pressure combined with increases in
manufacturing costs and changes in product mix.
11
Selling, General and Administrative Expenses. In the three months ended
March 31, 2003, selling, general and administrative expenses increased by
approximately $500,000, or 8%, to $7.3 million from $6.8 million in the 2002
period. The increase in selling, general and administrative expenses was
primarily due to increased costs of labor, insurance and employee benefits.
Selling, general and administrative expenses as a percentage of revenues
remained constant at 13.3%.
Engineering and Product Development Expenses. In the three months ended
March 31, 2003, engineering and product development expenses increased by
approximately 10% to $4.3 million from $3.9 million for the same period in
2002. This increase was primarily due to costs related to the development of
new products. Engineering and product development expenses as a percentage of
revenues were 7.7% in 2003 and 2002.
Interest Expense. Interest expense for the three months ended March 31,
2003 was $450,000 as compared to interest expense of $516,000 for the
three-month period ended March 31, 2002. This change resulted primarily from
reduced borrowings during the period ended March 31, 2003 under the Company's
unsecured revolving line of credit as compared to borrowings during the period
ended March 31, 2002.
Net Income. Net income was approximately $2.1 million in the three months
ended March 31, 2003 and $2.8 million for the same period in 2002, for the
reasons set forth above.
Liquidity and Capital Resources
The primary liquidity needs of the Company are (i) to fund capital
expenditures to increase manufacturing capacity, improve and expand facilities
and manufacture additional rental running tools and (ii) to fund working
capital. The Company's principal sources of funds are cash flows from
operations and bank indebtedness.
Net cash provided by operating activities was approximately $5.6 million and
$1.5 million for the three months ended March 31, 2003 and 2002, respectively.
The improvement in cash flow from operating activities was principally due to
decreased working capital requirements attributable to accounts receivable,
offset by an increase in inventories and reduced payables and accrued expenses.
Capital expenditures by the Company were $2.3 million and $5.9 million for
the three months ended March 31, 2003 and 2002, respectively. Principal
payments on long-term debt were approximately $6.5 million and $4.5 million for
the three months ended March 31, 2003 and 2002, respectively.
The Company has a credit facility with Guaranty Bank, FSB providing an
unsecured revolving line of credit of up to $60 million. At the option of the
Company, borrowing under this facility bears interest at either a rate equal to
LIBOR (London Interbank Offered Rate) plus 1.75% or the Guaranty Bank base
rate. The facility calls for quarterly interest payments and terminates on May
18, 2004. As of March 31, 2003, the Company had drawn down $40 million under
this facility for operating activities and capital expenditures.
Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland
dated March 21, 2002 in the amount of U.K. Pounds Sterling 3.7 million
(approximately U.S. $5.9 million). Borrowing under this facility bears interest
at the Bank of Scotland base rate, currently 3.75%, plus 1%, and is repayable
in 120 equal monthly installments, plus interest. This facility was used to
finance capital expenditures in Norway.
Dril-Quip Asia Pacific PTE Ltd. has a secured term loan with the Overseas
Union Bank dated August 29, 2001 in the amount of Singapore $6 million
(approximately U.S. $3.4 million). Borrowing under this facility bears interest
at the swap rate, approximately 0.8%, plus 1.5% and is repayable in 40 equal
quarterly installments, plus interest. This facility was used to finance
capital expenditures in Singapore.
12
The Company believes that cash generated from operations plus cash on hand
and its existing lines of credit will be sufficient to fund operations, working
capital needs and anticipated capital expenditure requirements in 2003.
However, should market conditions result in unexpected cash requirements, the
Company believes that additional borrowing from commercial lending institutions
would be readily available and more than adequate to meet such requirements.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in any material hedging transactions, forward
contracts or currency trading which could be subject to market risks inherent
to such transactions.
Item 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of its
management, including its Co-Chief Executive Officers and Chief Financial
Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934. Based on that evaluation, the Co-Chief Executive Officers and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in its periodic SEC filings. Subsequent to the date of their
evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weakness.
13
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in a number of legal actions arising in the ordinary
course of business. Although no assurance can be given with respect to the
ultimate outcome of such legal actions, in the opinion of management, the
ultimate liability with respect thereto will not have a material adverse effect
on the Company's financial position.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the Company
during the quarter ended March 31, 2003.
Item 5. Other Information.
Forward Looking Statements.
This Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Statements contained in all parts of this document that are not historical
facts are forward looking statements that involve risks and uncertainties that
are beyond Dril-Quip's control. You can identify Dril-Quip's forward looking
statements by the words "anticipate," "estimate," "expect," "may," "project,"
"believe" and similar expressions. These forward-looking statements include the
following types of information and statements as they relate to Dril-Quip:
. scheduled, budgeted and other future capital expenditures;
. working capital requirements;
. the availability of expected sources of liquidity;
. statements regarding the market for Dril-Quip products;
. statements regarding the exploration and production activities of
Dril-Quip customers; and
. all statements regarding future operations, financial results, business
plans and cash needs.
These statements are based upon certain assumptions and analyses made by
management of Dril-Quip in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, including but not
limited to, those relating to the volatility of oil and natural gas prices and
the cyclical nature of the oil and gas industry, Dril-Quip's international
operations, operating risks, Dril-Quip's dependence on key employees,
Dril-Quip's dependence on skilled machinists and technical personnel,
Dril-Quip's reliance on product development and possible technological
obsolescence, control by certain stockholders, the potential impact of
governmental regulation and environmental matters, competition, reliance on
significant customers, political instability, acts of terrorism or war, the
risk factors discussed herein and other factors detailed in Dril-Quip's other
filings with the Securities and Exchange Commission. Prospective investors are
cautioned that any such statements are not guarantees of future performance,
and that, should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
14
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
No. Description
- ------- -----------
*3.1 --Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)).
*3.2 --Bylaws of the Company (Incorporated herein by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-33447)).
*4.1 --Certificate of Designations for Series A Junior Participating Preferred Stock (Incorporated herein by
reference to Exhibit 3.3 to the Company's Report on Form 10-Q for the Quarter ended September 30,
1997).
*4.2 --Form of certificate representing Common Stock (Incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (Registration No. 333-33447)).
*4.3 --Registration Rights Agreement among the Company and certain stockholders (Incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-
33447)).
*4.4 --Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as rights
agent (Incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-33447)).
99.1 --Certification by Co-Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 --Certification by Co-Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 --Certification by Co-Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of
2002.
99.4 --Certification by Chief Financial Officer required by Section 906 of the Sarbanes-Oxley-Act of 2002.
- --------
* Incorporated herein by reference as indicated.
Reports on Form 8-K
None.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRIL-QUIP, INC.
By: /s/ JERRY M. BROOKS
-----------------------------
Jerry M. Brooks
Principal Financial Officer
and Duly Authorized Signatory
Date: May 13, 2003
16
CERTIFICATIONS
I, Larry E. Reimert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By /s/ LARRY E. REIMERT
--------------------------
Larry E. Reimert
Co-Chief Executive Officer
17
I, Gary D. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By /s/ GARY D. SMITH
--------------------------
Gary D. Smith
Co-Chief Executive Officer
18
I, J. Mike Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By /s/ J. MIKE WALKER
--------------------------
J. Mike Walker
Co-Chief Executive Officer
19
I, Jerry M. Brooks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
By /s/ JERRY M. BROOKS
-------------------------
Jerry M. Brooks
Chief Financial Officer
20