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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 001-13439
DRIL-QUIP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction 74-2162088
of incorporation or organization) (I.R.S. Employer Identification No.)
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS
77040
(Address of principal executive offices)
(Zip Code)
(713) 939-7711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
As of May 13, 2002, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 17,293,373.
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PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DRIL-QUIP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, March 31,
2001 2002
------------ ---------
(In thousands)
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 11,326 $ 2,755
Trade receivables..................................... 59,789 56,775
Inventories........................................... 98,283 99,754
Deferred taxes........................................ 5,320 5,234
Prepaids and other current assets..................... 2,642 2,774
-------- --------
Total current assets................................ 177,360 167,292
Property, plant and equipment, net...................... 102,310 105,537
Other assets............................................ 289 289
-------- --------
Total assets........................................ $279,959 $273,118
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................... $ 28,009 $ 17,727
Current maturities of long-term debt.................. 1,074 1,072
Accrued income taxes.................................. 490 1,555
Customer prepayments.................................. 7,725 9,340
Accrued compensation.................................. 5,675 5,370
Other accrued liabilities............................. 3,289 6,748
-------- --------
Total current liabilities........................... 46,262 41,812
Long-term debt.......................................... 57,814 53,239
Deferred taxes.......................................... 3,018 3,156
-------- --------
Total liabilities................................... 107,094 98,207
Stockholders' equity:
Preferred stock:
10,000,000 shares authorized at $0.01 par value (none
issued)............................................. -- --
Common stock:
50,000,000 shares authorized at $0.01 par value,
17,293,373 shares issued and outstanding............. 173 173
Additional paid-in capital............................ 64,737 64,737
Retained earnings..................................... 115,015 117,801
Foreign currency translation adjustment............... (7,060) (7,800)
-------- --------
Total stockholders' equity.......................... 172,865 174,911
-------- --------
Total liabilities and stockholders' equity.......... $279,959 $273,118
======== ========
The accompanying notes are an integral part of these statements.
2
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31,
-----------------------
2001 2002
----------- -----------
(In thousands except
share amounts)
Revenues............................................... $ 47,105 $ 51,097
Cost and expenses:
Cost of sales........................................ 32,506 35,616
Selling, general and administrative.................. 6,355 6,814
Engineering and product development.................. 3,340 3,914
----------- -----------
42,201 46,344
----------- -----------
Operating income....................................... 4,904 4,753
Interest expense....................................... 615 516
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Income before income taxes............................. 4,289 4,237
Income tax provision................................... 1,481 1,451
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Net income............................................. $ 2,808 $ 2,786
=========== ===========
Earnings per share:
Basic................................................ $ 0.16 $ 0.16
=========== ===========
Fully diluted........................................ $ 0.16 $ 0.16
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Weighted average shares:
Basic................................................ 17,291,000 17,293,000
=========== ===========
Fully diluted........................................ 17,411,000 17,351,000
=========== ===========
The accompanying notes are an integral part of these statements.
3
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months
ended March 31,
----------------
2001 2002
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(In thousands)
Operating activities
Net income.................................................. $ 2,808 $ 2,786
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,094 2,221
Loss on sale of equipment.................................. 5 30
Deferred income taxes...................................... (77) 216
Changes in operating assets and liabilities:
Trade receivables......................................... 3,310 2,676
Inventories............................................... (8,120) (2,216)
Prepaids and other assets................................. (330) (145)
Trade accounts payable and accrued expenses............... (5,247) (4,095)
------- -------
Net cash provided by (used in) operating activities...... (5,557) 1,473
Investing activities
Purchase of property, plant and equipment................... (5,549) (5,876)
Proceeds from sale of equipment............................. 0 2
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Net cash used in investing activities.................... (5,549) (5,874)
Financing activities
Proceeds from revolving line of credit and long-term
borrowing.................................................. 8,149 87
Principal payments on long-term debt........................ (62) (4,544)
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Net cash provided by financing activities................ 8,087 (4,457)
Effect of exchange rate changes on cash activities........... 432 287
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Decrease in cash............................................. (2,587) (8,571)
Cash at beginning of period.................................. 5,870 11,326
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Cash at end of period........................................ $ 3,283 $ 2,755
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The accompanying notes are an integral part of these statements.
4
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Dril-Quip, Inc., a Delaware corporation (the "Company" or "Dril-Quip"),
manufactures highly engineered offshore drilling and production equipment
which is well suited for use in deepwater, harsh environment and severe
service applications. The Company's principal products consist of subsea and
surface wellheads, subsea and surface production trees, mudline hanger
systems, specialty connectors and associated pipe, drilling and production
riser systems, wellhead connectors and diverters for use by major integrated,
large independent and foreign national oil and gas companies in offshore areas
throughout the world. Dril-Quip also provides installation and reconditioning
services and rents running tools for use in connection with the installation
and retrieval of its products. The Company has four subsidiaries that
manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland and
Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ Holdings
PTY Ltd. is located in Perth, Australia and Dril-Quip do Brasil LTDA is
located in Macae, Brazil.
The condensed consolidated financial statements included herein have been
prepared by Dril-Quip and are unaudited, except for the balance sheet at
December 31, 2001, which has been prepared from the audited financial
statements at that date. In the opinion of management, the unaudited condensed
consolidated interim financial statements include all adjustments, consisting
solely of normal recurring adjustments, necessary for a fair presentation of
the financial position as of March 31, 2002, and the results of operations and
the cash flows for each of the three-month periods ended March 31, 2002 and
2001. Although management believes the unaudited interim related disclosures
in these financial statements are adequate to make the information presented
not misleading, certain information and footnote disclosures normally included
in annual audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results
of operations and the cash flows for the three-month period ended March 31,
2002 are not necessarily indicative of the results to be expected for the full
year. The consolidated financial statements included herein should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
2. INVENTORIES
Inventories consist of the following:
(Unaudited)
December 31, March 31,
2001 2002
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(In thousands)
Raw materials and supplies.......................... $21,840 $18,900
Work in progress.................................... 22,418 22,488
Finished goods and purchased supplies............... 54,025 58,366
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$98,283 $99,754
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Certain balances at December 31, 2001 have been reclassified to conform to
current period presentation.
3. 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, which prior to adoption were reported
separately in stockholders' equity.
5
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
During the first three months of 2002 and 2001, total comprehensive income
equaled approximately $2 million and $805,000, respectively.
4. NEW ACCOUNTING STANDARDS
Effective January 1, 2002, Dril-Quip adopted Financial Accounting Standards
No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue
to be amortized over their useful lives. The adoption of this statement did
not have a significant impact on Dril-Quip's financial position or results of
operations.
Effective January 1, 2002, Dril-Quip adopted Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement established a single accounting model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired.
Additionally, the statement expands the definition of a discontinued operation
from a segment of business to a component of an entity that has been disposed
of or is classified as held for sale and can be clearly distinguished,
operationally and for reporting purposes, from the rest of the entity.
Adoption of this statement did not have an effect on Dril-Quip's financial
position or results of operations.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected certain aspects of the Company's
financial position and results of operations during the periods included in
the accompanying unaudited consolidated financial statements. This discussion
should be read in conjunction with the unaudited consolidated financial
statements included elsewhere herein, and with the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the annual consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Overview
Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. The Company's principal products consist
of subsea and surface wellheads, subsea and surface production trees, mudline
hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.
Both the market for offshore drilling and production equipment and services
and the Company's business are substantially dependent on the condition of the
oil and gas industry and, in particular, the willingness of oil and gas
companies to make capital expenditures on exploration, drilling and production
operations offshore. Oil and gas prices and the level of offshore drilling and
production activity have historically been characterized by significant
volatility.
Revenues. Dril-Quip's revenues are generated by its two operating groups:
the Product Group and the Service Group. The Product Group manufactures
offshore drilling and production equipment, and the Service Group provides
installation and reconditioning services as well as rental running tools for
installation and retrieval of its products. For the three months ended March
31, 2002, the Company derived 88.2% of its revenues from the sale of its
products and 11.8% 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 2002, seven projects representing
approximately 4% of the Company's revenues were accounted for using percentage
of completion accounting. This percentage may fluctuate in the future.
Revenues accounted for in this manner are generally recognized on the ratio of
costs incurred to the total estimated costs. Accordingly, price and cost
estimates are reviewed periodically as the work progresses, and adjustments
proportionate to the percentage of completion are reflected in the period when
such estimates are revised. Amounts 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, 2002, the Company generated approximately 60%
of its revenues from foreign sales. In this period, approximately 60% (on the
basis of revenues generated) of all products sold were manufactured in the
United States.
7
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.
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,
------------
2001 2002
----- -----
Revenues:
Product Group................................................ 87.5% 88.2%
Service Group................................................ 12.5% 11.8%
----- -----
Total...................................................... 100.0% 100.0%
Cost of sales.................................................. 69.0% 69.7%
Selling, general and administrative expenses................... 13.5% 13.3%
Engineering and product development expenses................... 7.1% 7.7%
----- -----
Operating income............................................... 10.4% 9.3%
Interest expense (income)...................................... 1.3% 1.0%
----- -----
Income before income taxes..................................... 9.1% 8.3%
Income tax provision........................................... 3.1% 2.8%
----- -----
Net income..................................................... 6.0% 5.5%
===== =====
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001.
Revenues. Revenues increased by $4.0 million, or approximately 8%, to $51.1
million in the three months ended March 31, 2002 from $47.1 million in the
three months ended March 31, 2001. The net increase resulted from increased
sales of $3.2 million in the Asia-Pacific area and $3.4 million in the
European area, offset by decreased domestic sales and export sales from the
United States of $1 million and $1.6 million, respectively.
Cost of Sales. Cost of sales increased $3.1 million, or approximately 10%,
to $35.6 million for the three months ended March 31, 2002 from $32.5 million
for the same period in 2001. As a percentage of revenues, cost of sales were
approximately 70% and 69% for the three-month periods ending March 31, 2002
and 2001, respectively. This increase in cost of sales as a percentage of
revenues was attributed to increases in costs of raw material, labor, energy,
and outside services.
Selling, General and Administrative Expenses. In the three months ended
March 31, 2002, selling, general and administrative expenses increased by
approximately $400,000, or 7%, to $6.8 million from $6.4 million in
8
the 2001 period The increase in selling, general and administrative expenses
was primarily due to increased expenditures made for the purposes of expanding
the Company's worldwide sales force. Selling, general and administrative
expenses decreased as a percentage of revenues to 13.3% from 13.5%.
Engineering and Product Development Expenses. In the three months ended
March 31, 2002, engineering and product development expenses increased by
approximately 17% to $3.9 million from $3.3 million for the same period in
2001. This increase was primarily due to costs related to the development of
new products. Engineering and product development expenses increased as a
percentage of revenues to 7.7% from 7.1%.
Interest Income and Expense. Interest expense for the three months ended
March 31, 2002 was $516,000 as compared to interest expense of $615,000 for
the three-month period ended March 31, 2001. This change resulted primarily
from lower interest rates on borrowings during the period ended March 31, 2002
under the Company's unsecured revolving line of credit.
Net Income. Net income was approximately $2.8 million in the three months
ended March 31, 2002 and also $2.8 million for the same period in 2001.
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 $1.5 million
for the three months ended March 31, 2002. During the three months ended March
31, 2001, net cash used in operating activities was approximately $5.6
million. The improvement in cash flow from operating activities was
principally due to decreased working capital requirements attributable to
inventories and trade accounts payable and accrued expenses.
Capital expenditures by the Company were $5.9 million and $5.5 million for
the three months ended March 31, 2002 and 2001, respectively. Principal
payments on long-term debt were approximately $4.5 million and $62,000 for the
three months ended March 31, 2002 and 2001, respectively.
The Company has a credit facility with Guaranty Bank, FSB providing an
unsecured revolving line of credit of up to $60 million. At the option of the
Company, borrowing under this facility bears interest at either a rate equal
to LIBOR (London Interbank Offered Rate) plus 1.75% or the Guaranty Bank base
rate. In addition, the facility calls for quarterly interest payments and
terminates on May 18, 2004. As of March 31, 2002, the Company had drawn down
$45.2 million under this facility for operating activities and capital
expenditures.
Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland
dated March 21, 2001 in the amount of U.K. Pounds Sterling 3.7 million
(approximately U.S. $5.5 million). Borrowing under this facility bears
interest at the Bank of Scotland base rate, currently 4%, plus 1%, and is
repayable in 120 equal monthly installments, plus interest. This facility was
used to finance capital expenditures in Norway.
Dril-Quip Asia Pacific PTE Ltd. has a secured term loan with the Overseas
Union Bank dated August 29, 2001 in the amount of Singapore $6 million
(approximately U.S. $3.2 million). Borrowing under this facility bears
interest at the swap rate, approximately 1.1%, plus 1.5% and is repayable in
40 equal quarterly installments, plus interest. This facility was used to
finance capital expenditures in Singapore.
The Company believes that cash generated from operations plus cash on hand
and its existing lines of credit will be sufficient to fund operations,
working capital needs and anticipated capital expenditure requirements.
However, should market conditions result in unexpected cash requirements, the
Company believes that additional borrowing from commercial lending
institutions would be readily available and more than adequate to meet such
requirements.
9
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.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Forward Looking Statements.
Statements contained in all parts of this document that are not historical
facts are forward looking statements that involve risks and uncertainties that
are beyond the Company's control. These forward-looking statements include the
following types of information and statements as they relate to the Company:
. scheduled, budgeted and other future capital expenditures;
. working capital requirements;
. the availability of expected sources of liquidity;
. statements regarding the market for Dril-Quip products;
. statements regarding the exploration and production activities of Dril-
Quip customers;
. all statements regarding future operations, financial results, business
plans and cash needs; and
. the use of the words "anticipate," "estimate," "expect," "may,"
"project," "believe" and similar expressions intended to identify
uncertainties.
These statements are based upon certain assumptions and analyses made by
management of the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, including but not
limited to, those relating to the volatility of oil and natural gas prices and
cyclicality of the oil and gas industry, the Company's international
operations, operating risks, the Company's dependence on key employees, the
Company's dependence on skilled machinists and technical personnel, the
Company's reliance on product development and possible technological
obsolescence, control by certain stockholders, the potential impact of
governmental regulation and environmental matters, competition, reliance on
significant customers and other factors detailed in the Company's filings with
the Securities and Exchange Commission. Prospective investors are cautioned
that any such statements are not guarantees of future
10
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.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description
------- -----------
*3.1 --Restated Certificate of Incorporation of the Company (Incorporated
herein by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-33447)).
*3.2 --Bylaws of the Company (Incorporated herein by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-1 (Registration
No. 333-33447)).
*4.1 --Certificate of Designations for Series A Junior Participating
Preferred Stock (Incorporated herein by reference to Exhibit 3.4 to
the Company's Registration Statement on Form S-1 (Registration No.
333-33447)).
*4.2 --Form of certificate representing Common Stock (Incorporated herein
by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1 (Registration No. 333-33447)).
*4.3 --Rights Agreement between Dril-Quip, Inc. and Chase Mellon
Shareholder Services, L.L.C., as rights agent (Incorporated herein by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-33447)).
- --------
* Incorporated herein by reference as indicated.
Reports on Form 8-K
None.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRIL-QUIP, INC.
/s/ Jerry M. Brooks
-------------------------------------
Principal Financial Officer
and Duly Authorized Signatory
Date: May 13, 2002
12