1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-15423
GRANT PRIDECO, INC.
(See Table of Additional Registrants on next page)
(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.)
1450 LAKE ROBBINS DRIVE
SUITE 600
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip Code)
(281) 297-8500
(Registrant's telephone number, include area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
OUTSTANDING AT
TITLE OF CLASS MAY 10, 2001
Common Stock, par value $0.01 109,247,872
2
TABLE OF ADDITIONAL REGISTRANTS
- -------------------------------------------------------------------------------
NAME** JURISDICTION OF Employer ID
FORMATION
- -------------------------------------------------------------------------------
GP Expatriate Services, Inc. Delaware 76-0632330
- -------------------------------------------------------------------------------
Grant Prideco Holding, LLC Delaware 76-0635560
- -------------------------------------------------------------------------------
Grant Prideco, L.P. Delaware 76-0635557
- -------------------------------------------------------------------------------
Grant Prideco USA, LLC Delaware 51-0397748
- -------------------------------------------------------------------------------
Star Operating Company Delaware 76-0655528
- -------------------------------------------------------------------------------
TA Industries, Inc. Delaware 76-0497435
- -------------------------------------------------------------------------------
Texas Arai, Inc. Delaware 74-2150314
- -------------------------------------------------------------------------------
Tube-Alloy Capital Corporation Texas 76-0012315
- -------------------------------------------------------------------------------
Tube-Alloy Corporation Louisiana 72-0714357
- -------------------------------------------------------------------------------
XL Systems International, Inc. Delaware 76-0602808
- -------------------------------------------------------------------------------
XL Systems, L.P. Texas 76-0324868
- -------------------------------------------------------------------------------
** Except for Grant Prideco USA, LLC, the address, telephone number and zip code
for each of the additional Registrants is the same as for Grant Prideco, Inc.
The address, telephone number and zip code for Grant Prideco USA, LLC is 500
Delaware Avenue, Suite 900, Wilmington, DE 19801.
Grant Prideco, Inc. (the "Company") owns directly or indirectly all of the
outstanding capital stock of each of the additional Registrants listed above.
Each of the additional Registrants is a guarantor of the Company's obligations
under its 9 5/8% Senior Notes Due 2007 (the "Senior Notes"). No separate
financial statements for the additional Registrants has been provided or
incorporated because: (1) the financial statements of the Company included in
this report include the operations of each of the additional Registrants and (2)
Note 14 to the Company's accompanying unaudited financial statements includes
unaudited condensed consolidating financial statements of the Company separating
the financial results for the additional Registrants from the Company and any
subsidiaries that are not guarantors of the Company's obligations under the
Senior Notes.
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRANT PRIDECO, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)
DECEMBER 31, MARCH 31,
2000 2001
------------ ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents .................................. $ 8,315 $ 8,986
Restricted Cash ............................................ 4,000 3,580
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $1,897 and $1,535 at December 31, 2000 and
March 31, 2001, respectively .............................. 132,067 129,024
Inventories ................................................ 200,252 197,391
Current Deferred Tax Asset ................................. 23,995 23,995
Other Current Assets ....................................... 8,404 10,833
--------- ---------
377,033 373,809
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Machinery and Equipment .................................... 234,597 240,357
Land, Buildings and Other Property ......................... 96,831 98,805
--------- ---------
331,428 339,162
Less: Accumulated Depreciation ............................. 118,647 126,034
--------- ---------
212,781 213,128
--------- ---------
GOODWILL, NET ................................................ 232,140 230,173
INVESTMENT IN UNCONSOLIDATED AFFILIATES ...................... 38,952 40,891
DEFERRED TAX ASSET ........................................... 336 384
OTHER ASSETS ................................................. 31,322 11,314
--------- ---------
$ 892,564 $ 869,699
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion of Long-Term
Debt ..................................................... $ 38,160 $ 55,424
Accounts Payable ........................................... 84,451 81,513
Current Deferred Tax Liability ............................. 2,278 2,278
Customer Advances .......................................... 2,275 2,275
Accrued Labor and Benefits ................................. 14,101 18,970
Other Accrued Liabilities .................................. 37,320 33,524
--------- ---------
178,585 193,984
--------- ---------
LONG-TERM DEBT ............................................... 219,104 216,438
DEFERRED INCOME TAXES ........................................ 40,378 29,199
MINORITY INTEREST ............................................ 1,098 1,467
OTHER LONG-TERM LIABILITIES .................................. 21,896 20,059
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 Par Value .............................. 1,085 1,086
Capital in Excess of Par Value ............................. 349,436 352,144
Treasury Stock, at Cost .................................... (1,046) (1,386)
Retained Earnings .......................................... 97,109 75,292
Deferred Compensation Obligation ........................... 4,973 2,951
Accumulated Other Comprehensive Loss ....................... (20,054) (21,535)
--------- ---------
431,503 408,552
--------- ---------
$ 892,564 $ 869,699
========= =========
The accompanying notes are an integral part of these financial statements.
3
4
GRANT PRIDECO, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 2001
--------- ---------
REVENUES ................................................... $ 107,291 $ 156,651
--------- ---------
COSTS AND EXPENSES:
Cost of Sales ............................................ 102,736 134,447
Selling, General and Administrative Attributable to
Segments ............................................... 8,218 12,232
Corporate General and Administrative ..................... 4,370 4,932
Equity Income in Unconsolidated Affiliates ............... (607) (1,984)
Weatherford Charges ...................................... 500 --
Other Charges ............................................ -- 32,280
--------- ---------
115,217 181,907
--------- ---------
OPERATING LOSS ............................................. (7,926) (25,256)
--------- ---------
OTHER INCOME (EXPENSE):
Interest Expense ......................................... (3,496) (6,870)
Other, Net ............................................... (215) (869)
--------- ---------
(3,711) (7,739)
--------- ---------
LOSS BEFORE INCOME TAXES ................................... (11,637) (32,995)
INCOME TAX BENEFIT ......................................... 3,795 11,547
--------- ---------
NET LOSS BEFORE MINORITY INTEREST .......................... (7,842) (21,448)
MINORITY INTEREST .......................................... (45) (369)
--------- ---------
NET LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE...... (7,887) (21,817)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX ......... (1,789) --
--------- ---------
NET LOSS ................................................... $ (9,676) $ (21,817)
========= =========
BASIC AND DILUTED NET LOSS PER SHARE:
(Pro forma prior to effective date of spinoff)
Basic and diluted net loss before cumulative effect
of accounting change ................................... $ (0.07) $ (0.20)
Cumulative effect of accounting change ................... (0.02) --
--------- ---------
Net loss ................................................. $ (0.09) $ (0.20)
========= =========
Basic and diluted weighted average shares outstanding .... 108,752 108,570
========= =========
The accompanying notes are an integral part of these financial statements.
3
5
GRANT PRIDECO, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ........................................................... $ (9,676) $(21,817)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization ................................... 7,988 9,323
Deferred Income Tax Provision (Benefit).......................... 872 (10,249)
Equity Income in Unconsolidated Affiliates ...................... (607) (1,984)
Non-Cash Portion of Other Charges ............................... -- 28,473
Changes in Operating Assets and Liabilities, Net of
Effect of Businesses Acquired:
Accounts Receivable ........................................... (12,527) 644
Inventories ................................................... 15,599 (8,150)
Other Current Assets .......................................... (1,915) (2,009)
Other Assets .................................................. (183) (8)
Accounts Payable .............................................. 2,510 (3,677)
Other Current Liabilities ..................................... (647) 3,135
Customer Advances ............................................. (10,223) --
Other, Net .................................................... 858 (1,974)
-------- --------
Net Cash Used by Operating Activities ...................... (7,951) (8,293)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures for Property, Plant and Equipment ............. (5,056) (5,945)
-------- --------
Net Cash Used by Investing Activities ...................... (5,056) (5,945)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Revolving Credit Facility ............................ -- 17,758
Repayments of Debt ................................................. (4,177) (2,727)
Proceeds from Stock Option Exercises ............................... -- 218
Purchases of Treasury Stock ........................................ -- (340)
Predecessor Stockholder's Investment ............................... 14,947 --
-------- --------
Net Cash Provided by Financing Activities .................. 10,770 14,909
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................. (2,237) 671
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................... 6,204 8,315
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 3,967 $ 8,986
======== ========
The accompanying notes are an integral part of these financial statements.
4
6
GRANT PRIDECO, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Weatherford International Spinoff Of Its Drilling Products Division
On October 22, 1999, the Board of Directors of Weatherford International,
Inc. (Weatherford) authorized the spinoff of its drilling products businesses
(the "Company" or "Grant Prideco") to its stockholders as an independent,
publicly traded company (the "Distribution"). The Internal Revenue Service
issued a favorable tax ruling stating that the Distribution should be tax-free
to the shareholders of Weatherford for U.S. federal income tax purposes.
Weatherford consummated the spinoff through a distribution to its stockholders
of one share of Grant Prideco common stock for each share of Weatherford common
stock held by the Weatherford stockholders on March 23, 2000, the record date
for the Distribution. The Distribution was completed on April 14, 2000.
Basis of Presentation
The statements of operations and cash flows for the time period prior to
April 14, 2000 reflect Weatherford's drilling products businesses that were
transferred to Grant Prideco from Weatherford in the Distribution. All activity
subsequent to April 14, 2000 reflects Grant Prideco as distributed. The
financial statements have been prepared using the historical results of
operations related to Grant Prideco. The financial statements include
allocations ("carve-outs") of general and administrative corporate overhead
costs of Weatherford to Grant Prideco and direct costs of services provided by
Weatherford for the benefit of Grant Prideco prior to the Distribution.
Management believes such allocations are reasonable; however, the costs of these
services charged to Grant Prideco are not necessarily indicative of the costs
that would have been incurred if Grant Prideco had performed these functions as
a stand-alone entity. Subsequent to the Distribution, Grant Prideco has
performed these functions using its own resources or purchased services and is
responsible for the costs and expenses associated with the management of a
public corporation. The financial statements included herein may not necessarily
reflect the results of operations, financial position and cash flows of Grant
Prideco in the future or what they would have been had it been a separate,
stand-alone entity during the periods presented.
The accompanying financial statements 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 among 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. These interim financial statements should be read in conjunction
with the audited financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2000.
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 2001 classifications and are of a normal recurring
nature. These reclassifications have no impact on net loss.
5
7
2. COMPREHENSIVE LOSS
Comprehensive loss includes changes in stockholders' equity during the
periods that do not result from transactions with stockholders. The Company's
total comprehensive loss is as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 2001
------- --------
(IN THOUSANDS)
Net Loss .................................... $(9,676) $(21,817)
Foreign Currency Translation Adjustments .... 517 (869)
Unrealized Loss on Derivative Instruments,
net of tax of $349......................... -- (649)
Unrealized Gain on Marketable Securities,
net of tax of $20 ......................... -- 37
------- --------
Total Comprehensive Loss .................... $(9,159) $(23,298)
======= ========
3. INVENTORIES
Inventories by category are as follows:
DECEMBER 31, MARCH 31,
2000 2001
------------ --------
(IN THOUSANDS)
Raw materials, components and supplies .... $149,628 $126,558
Work in process ........................... 23,829 22,890
Finished goods ............................ 26,795 47,943
-------- --------
$200,252 $197,391
======== ========
4. OTHER CHARGES
First Quarter 2001 Charges
In the first quarter of 2001, the Company incurred approximately $43.0
million of pre-tax charges, $28.0 million net of tax, associated with its review
of the continued viability of its manufacturing arrangement with Oil Country
Tubular Ltd. (OCTL) in India, a modification of the Company's manufacturing
standards and costing in light of current market conditions and an ongoing
restructuring of the Company's operations. This charge also included executive
severance payments and related expenses of approximately $14.6 million. These
charges are summarized in the following chart:
LIABILITY
DRILLING ENGINEERED BALANCE
PRODUCTS CONNECTIONS CORPORATE TOTAL 3/31/01
-------- ----------- --------- ------- ---------
(IN THOUSANDS)
OCTL Write-Off(a) .............. $17,727 $ -- $ -- $17,727 $ --
Inventory Write-Off(b) ......... 4,482 1,692 -- 6,174 --
Write-Off of Capitalized
Manufacturing Variances(c) .... 3,791 781 -- 4,572 --
Severance(d) ................... 183 205 14,165 14,553 2,401
------- ------- ------- ------- -------
Total ..................... $26,183 $ 2,678 $14,165 $43,026 $ 2,401
======= ======= ======= ======= =======
- ---------
(a) In connection with the Company's operational review conducted in
the first quarter of 2001, the Company reassessed the viability
of restructuring its relationship with OCTL in India and
determined that a continued relationship was no longer viable. As
a result of this determination, the Company wrote-off the
remaining $17.7 million ($11.5 million after-tax) of unpaid
receivables and advances owed to it by OCTL. The $17.7 million in
unpaid receivables and advances was classified as "Other Assets"
in the accompanying Balance Sheets at December 31, 2000.
6
8
(b) The inventory write-off was reported as cost of sales and was
made pursuant to a review of the Company's planned dispositions
of inventory in an effort to reduce inventory levels of older,
slow-moving products. The amount was determined by use of
internal appraisals and evaluations to assess the estimated net
realizable value upon disposal and also included a charge related
to certain inventory purchase contract obligations with above
market prices.
(c) Certain capitalized manufacturing cost variances were expensed as
cost of sales in connection with the Company's operational review
and revisions of manufacturing standards and costing during the
first quarter.
(d) The severance charge relates to manufacturing and marketing
employees terminated as a result of the Company's restructuring
of its industrial drill pipe and marine connection product lines,
as well as the retirement of certain executive officers during
the first quarter of 2001. The total number of employees severed
was 24 and the amount accrued for severance was based upon the
positions eliminated and the Company's severance policy.
Approximately 20 of these employees left the Company prior to
March 31, 2001. The Company estimates that all of the accrued
severance at March 31, 2001 will be paid during 2001.
Fourth Quarter 2000 Charges
The Company incurred $41.3 million of pre-tax charges, $26.9 million net of
tax, in the fourth quarter of 2000 relating primarily to inventory write-offs
and other asset impairments and reductions. Of this amount, $7.9 million related
to cash provisions or accrued liabilities. The categories of the charge
incurred, the actual cash payments and the accrued balances at March 31, 2001
are summarized below:
LIABILITY LIABILITY
DRILLING ENGINEERED BALANCE CASH BALANCE
PRODUCTS CONNECTIONS 12/31/00 PAYMENTS 3/31/01
-------- ----------- --------- -------- ---------
(IN THOUSANDS)
Litigation Accrual .............. $ -- $2,500 $2,500 $ -- $2,500
Contingent Liability Accrual .... 4,650 -- 4,650 -- 4,650
Other Accrued Liabilities ....... 594 115 709 267 442
------ ------ ------ ------ ------
Total ................. $5,244 $2,615 $7,859 $ 267 $7,592
====== ====== ====== ====== ======
The Company estimates that all of the remaining accrued balances at March
31, 2001 will be paid during 2001.
5. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects 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 is anti-dilutive. The effect of
stock options is not included in the diluted computation for periods in which a
loss occurs because to do so would have been anti-dilutive. For the three month
periods ended March 31, 2000 and 2001, the Company had potentially dilutive
common stock equivalents of approximately 2.6 million and 1.4 million,
respectively, comprised of stock options.
The Company did not have a separate capital structure prior to the
Distribution from Weatherford. Accordingly, pro forma basic and weighted average
shares have been calculated by adjusting Weatherford's historical basic weighted
average shares outstanding for the applicable period to reflect the number of
Grant Prideco shares that would have been outstanding at the time assuming the
distribution of one share of Grant Prideco common stock for each share of
Weatherford common stock.
6. MARKETABLE SECURITIES
As of March 31, 2001, the Company owned marketable securities with a fair
market value of $2.3 million. These investments are classified as available for
sale and are included in "Other Assets" in the accompanying Balance Sheets at
their fair market value. Gross unrealized holding gains on these investments at
March 31, 2001 were $37,000 and are included in "Accumulated Other Comprehensive
Loss" in the accompanying Balance Sheets.
7
9
7. CREDIT FACILITY
The Company has a $100 million revolving credit and letter of credit
facility with a syndicate of U.S. banks (the "Credit Facility"), through April
14, 2003, with automatic one-year renewals thereafter, unless the agreement is
terminated by either party. The Credit Facility is secured by the Company's U.S.
and Canadian inventories, equipment and receivables and is guaranteed by Grant
Prideco's domestic subsidiaries. The Company is required to comply with various
affirmative and negative covenants as well as maintenance covenants relating to
fixed charge coverage and net worth. These covenants also place limits on the
Company's ability to incur new debt, engage in certain acquisitions and
investments, grant liens, pay dividends and make distributions to its
stockholders. As of March 31, 2001, the Company had outstanding borrowings of
$49.9 million under the revolving credit facility and $6.5 million had been used
to support outstanding letters of credit. The average interest rate for the
outstanding borrowings under the Credit Facility was 7.6% at March 31, 2001.
Additionally, at March 31, 2001, there were outstanding borrowings of $0.5
million under a miscellaneous credit facility and $0.7 million of outstanding
letters of credit had been supported under various available letter of credit
facilities that are not related to the Credit Facility.
8. DEBT
In January 2001, the Company made a scheduled debt payment of approximately
$1.5 million related to the Voest-Alpine debt. The interest rate on the
Voest-Alpine debt as of March 31, 2001 was 4.6% per annum.
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses foreign currency forwards and call options to hedge
certain of its exposures to changes in foreign exchange rates. The forwards and
call options have only nominal value at the time of purchase. The counterparties
to these derivative foreign exchange contracts are creditworthy multinational
commercial banks. Management believes that the risk of counterparty
nonperformance is minimal. The Company does not engage in derivative activity
for speculative or trading purposes.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended (SFAS No. 133). SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in the fair value
of assets, liabilities or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The adoption of SFAS No. 133 on January 1, 2001 did not
have a material impact on results of operations but resulted in the cumulative
effect of an accounting change of $0.3 million pre-tax being recognized as a
loss in "Accumulated Other Comprehensive Loss" in the accompanying Balance
Sheets.
Cash Flow Hedges
At March 31, 2001, the Company had forward contracts to purchase 31.1
million Euros in exchange for $28.1 million U.S. Dollars. These contracts are
designated as cash flow hedges related to anticipated Euro-denominated inventory
purchases through the end of the year. In addition, the Company's Italian
subsidiary had U.S. Dollar/Euro forward contracts and call options with notional
amounts totaling $30.5 million U.S. Dollars at March 31, 2001. These contracts
are designated as cash flow hedges of anticipated Euro-denominated expenditures
through the second quarter of 2002.
In accordance with SFAS No. 133, the contracts are marked to market (fair
value was $1.4 million at March 31, 2001) and recorded as "Other Accrued
Liabilities" in the accompanying Balance Sheets, with the offset recorded as
other comprehensive income (loss), net of applicable hedge ineffectiveness
(which is measured based on the forward price and was not material during the
quarter, other than the overhedge position discussed below) and income taxes,
and then subsequently recognized as a component of cost of sales or selling,
general and administrative expenses when the underlying hedged transaction is
recognized in the statement of operations. The Company anticipates that
approximately $0.5 million in net losses (after tax) existing as of March 31,
2001, will be reclassified into earnings over the next twelve months. The
Company recognized losses of $0.6 million in "Other, Net" in the accompanying
Statements of Operations related to foreign currency forward contracts that
resulted from an overhedge position with respect to the anticipated
Euro-denominated purchases of inventory during the first quarter of 2001.
Fair Value Hedge
The Company had forward contracts in place to purchase 4.4 million Euros
for a notional amount of $4.3 million U.S. Dollars at March 31, 2001. These
contracts are designated as fair value hedges related to payments on the
Voest-Alpine debt. The fair value of these instruments was $0.4 million as of
March 31, 2001, which was recorded as "Other Accrued Liabilities" in the
accompanying Balance Sheets with the income effect recorded to "Other, Net" in
the accompanying Statements of Operations. Changes in the fair value of the
underlying hedged debt are recorded as adjustments to the debt with the income
effect recorded to "Other, Net" in the Statements of Operations. Hedge
ineffectiveness is measured using the forward price and was zero during the
first quarter of 2001.
10. RESTRICTED CASH
At March 31 2001, the Company had $3.6 million of restricted cash related
to its 54% interest in H-Tech that is subject to dividend and distribution
restrictions.
11. TRANSACTIONS WITH WEATHERFORD
Sales
Weatherford purchases drill pipe and other related products from Grant
Prideco. Prior to the Distribution,
8
10
amounts purchased by Weatherford were recorded at Grant Prideco's cost. The
sales to Weatherford prior to the Distribution have been eliminated from the
accompanying financial statements.
In connection with the Distribution, the Company entered into a preferred
supplier agreement with Weatherford pursuant to which Weatherford agreed for at
least a three-year period to purchase a minimum of 70% of its requirements of
drill stem products from Grant Prideco. The price for those products will be at
a price not greater than that which the Company sells to its best rental tool
customers for similar products. Weatherford will be entitled to apply against
its purchases a drill stem credit granted to it in the aggregate amount of $30
million, subject to a limitation of the application of the credit to no more
than 20% of any purchase. At March 31, 2001, the current portion of the drill
stem credit, $10.0 million, is included in "Other Accrued Liabilities," with the
remaining $16.5 million included in "Other Long-Term Liabilities," in the
accompanying Balance Sheets.
Weatherford Overhead Charges
Weatherford overhead charges represented corporate overhead costs incurred
by Weatherford in providing services to the Company based on the time devoted to
Grant Prideco prior to the Distribution. These services included accounting,
legal, tax, treasury and risk management services. Such allocation is included
in "Weatherford Charges" in the accompanying Statements of Operations.
9
11
12. SEGMENT INFORMATION
The Company operates through two business segments: Drilling Products and
Engineered Connections. The Drilling Products segment manufactures drill pipe,
drill collars and heavy weight drill pipe and the Engineered Connections segment
manufactures premium production tubulars, liners, casing and connections for
marine conductors and subsea structures. The Company's products are used
primarily in the exploration and production of oil and natural gas. See Note 4
for information related to other charges recorded in the first quarter of 2001
discussed below.
DRILLING PRODUCTS SEGMENT
The following table sets forth information for our Drilling Products
segment. Such information also is broken down by our two principal product lines
in this segment: (1) drill stem products for the oil and gas industry and (2)
industrial drill stem products for fiber optic cable installation, water well
drilling and other industries.
OILFIELD
DRILLING
PRODUCTS INDUSTRIAL TOTAL
-------- ---------- --------
(IN THOUSANDS)
MARCH 31, 2000
Revenues from unaffiliated customers ...................... $ 47,918 $ 235 $ 48,153
EBITDA(a) ................................................. (4,579) 32 (4,547)
Depreciation and amortization ............................. 4,131 32 4,163
Equity income in unconsolidated affiliates ................ 607 -- 607
Operating loss ............................................ (8,710) -- (8,710)
Capital expenditures for property, plant and equipment .... 1,985 1,231 3,216
MARCH 31, 2001
Revenues from unaffiliated customers ...................... $ 69,438 $ 13,956 $ 83,394
EBITDA, before other charges(a)(b) ........................ 15,333 (570) 14,763
Other charges(c) .......................................... 17,835 75 17,910
Depreciation and amortization ............................. 3,894 1,198 5,092
Equity income in unconsolidated affiliates ................ 1,984 -- 1,984
Operating loss ............................................ (10,777) (5,735) (16,512)
Capital expenditures for property, plant and equipment .... 4,238 750 4,988
See footnotes (a)-(c) on pages 12.
10
12
ENGINEERED CONNECTIONS SEGMENT
The following table sets forth information for our Engineered Connections
segment. We also have provided this information for our five principal product
lines in this segment: (1) Atlas Bradford(R) engineered connections, (2) TCA(TM)
critical service casing and processing, (3) Tube-Alloy(TM) vacuum insulated
tubing and tubular accessories, (4) Texas Arai couplings and (5) XL Systems(TM)
marine conductors and installation services.
ATLAS TUBE- TEXAS XL
BRADFORD TCA ALLOY ARAI SYSTEMS TOTAL
-------- ------- ------- ------- ------- -------
(IN THOUSANDS)
MARCH 31, 2000
Revenues from unaffiliated customers .... $13,361 $17,813 $ 6,391 $11,578 $ 9,995 $59,138
EBITDA(a) ............................... 2,397 2,960 2,290 1,302 435 9,384
Depreciation and amortization ........... 660 904 320 941 905 3,730
Operating income (loss) ................. 1,737 2,056 1,970 361 (470) 5,654
Capital expenditures for property,
plant and equipment .................. 147 69 417 467 673 1,773
MARCH 31, 2001
Revenues from unaffiliated customers .... $19,902 $21,202 $11,481 $13,863 $ 6,809 $73,257
EBITDA, before other charges(a)(d) ...... 5,536 6,601 2,969 1,990 27 17,123
Other charges(e) ........................ -- -- -- -- 205 205
Depreciation and amortization ........... 725 982 407 933 1,045 4,092
Operating income (loss) ................. 4,811 5,619 2,310 800 (3,187) 10,353
Capital expenditures for property,
plant and equipment .................. 545 128 111 101 30 915
See footnotes (a), (d) and (e) on page 12.
11
13
Below is a reconciliation to the financial statements:
DRILLING ENGINEERED
PRODUCTS CONNECTIONS
SEGMENT SEGMENT CORPORATE TOTAL
--------- ----------- --------- ---------
(IN THOUSANDS)
MARCH 31, 2000
Revenues from unaffiliated customers .......... $ 48,153 $ 59,138 $ -- $ 107,291
EBITDA(a) ..................................... (4,547) 9,384 (4,775) 62
Depreciation and amortization ................. 4,163 3,730 95 7,988
Equity income in unconsolidated affiliates .... 607 -- -- 607
Operating income (loss) ....................... (8,710) 5,654 (4,870) (7,926)
Capital expenditures for property,
plant and equipment ......................... 3,216 1,773 67 5,056
MARCH 31, 2001
Revenues from unaffiliated customers .......... $ 83,394 $ 73,257 $ -- $ 156,651
EBITDA, before other charges(a)(b)(d) ......... 14,763 17,123 (4,793) 27,093
Other charges(c)(e)(f) ........................ 17,910 205 14,165 32,280
Depreciation and amortization ................. 5,092 4,092 139 9,323
Equity income in unconsolidated affiliates .... 1,984 -- -- 1,984
Operating income (loss) ....................... (16,512) 10,353 (19,097) (25,256)
Capital expenditures for property,
plant and equipment ......................... 4,988 915 42 5,945
- ---------
(a) We calculate EBITDA by taking operating income (loss) adding back
depreciation and amortization, excluding the impact of the other
charges discussed in (b)-(f) below for the respective periods of
those charges. Calculations of EBITDA should not be viewed as a
substitute to calculations under GAAP, in particular operating
income (loss) and net income (loss). In addition, EBITDA
calculations by one company may not be comparable to another
company.
(b) Excludes $8.3 million of charges ($4.4 million for Oilfield
Drilling Products and $3.9 million for Industrial) in the first
quarter of 2001 related to inventory write-offs and capitalized
manufacturing variance write-offs, which have been classified as
cost of sales. Also excludes $17.9 million of charges related to
Oilfield Drilling Products in the first quarter of 2001 to
write-off our assets related to our manufacturing arrangement
with OCTL in India of $17.7 million and severance and related
expenses of $0.2 million.
(c) Includes $17.9 million of charges related to Drilling Products
segment in the first quarter of 2001 to write-off our assets
related to our manufacturing arrangement with OCTL in India of
$17.7 million and severance and related expenses of $0.2 million.
(d) Excludes a charge in the first quarter of 2001 of $2.5 million
for inventory write-offs ($0.3 million for Texas Arai, $0.3
million for Tube-Alloy and $1.9 million for XL Systems), which
were classified, as cost of sales. Also excludes a charge of $0.2
million in the first quarter of 2001 for severance and related
expenses.
(e) Includes a charge of $0.2 million related to Engineered
Connections segment in the first quarter of 2001 for severance
and related expenses.
(f) Includes $14.2 million of charges related to Corporate in the
first quarter of 2001 for the severance related to the retirement
of certain executive officers.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarized the SEC's views in applying generally
accepted accounting principles to selected revenue recognition issues. Based on
guidance in SAB No. 101, the Company changed its accounting policy to recognize
revenue upon completion of all third-party specific performance obligations as
specified in the sales arrangement. Such third-party performance obligations had
been considered inconsequential or perfunctory prior to the issuance of SAB No.
101. The Company adopted SAB No. 101 in the fourth quarter of 2000, effective
January 1, 2000. The cumulative effect of the accounting change was $1.8
million, net of income taxes of $1.0 million.
12
14
Effective January 1, 2001, the Company adopted SFAS No. 133. See Note 9.
In February 2001, the Financial Accounting Standards Board issued a revised
Exposure Draft, "Business Combinations and Intangible Assets -- Accounting for
Goodwill". The Exposure Draft would continue to require recognition of goodwill
acquired in a business combination as an asset but would not permit amortization
of goodwill as currently required by Accounting Principals Board Opinion No. 17
"Intangible Assets". Instead goodwill would be reviewed for impairment, that is,
written down and expensed against earnings only in the periods in which the
recorded value of goodwill exceeded its implied fair value. The Exposure Draft
was issued with comments due by March 16, 2001. At March 31, 2001, the Company
had goodwill of $230.2 million, net of accumulated amortization. Amortization of
goodwill charged to earnings was $1.5 million for the three months ended March
31, 2001.
13
15
14. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION
The following unaudited condensed consolidating balance sheet as of March
31, 2001, condensed combining statement of operations for the three months
ended March 31, 2000, condensed consolidating statement of operations for the
three months ended March 31, 2001, condensed combining statement of cash flows
for the three months ended March 31, 2000 and condensed consolidating statement
of cash flows for the three months ended March 31, 2001 are provided for the
Company's domestic subsidiaries that are guarantors of the Company's $200
million principal amount of 9 5/8% Senior Notes due 2007.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents .................... $ -- $ 989 $ 7,997 $ -- $ 8,986
Restricted Cash .............................. -- -- 3,580 -- 3,580
Accounts Receivable, Net ..................... -- 89,078 39,946 -- 129,024
Inventories .................................. -- 167,429 29,962 -- 197,391
Current Deferred Tax Asset ................... -- 23,859 136 -- 23,995
Other Current Assets ......................... -- 3,667 7,166 -- 10,833
--------- --------- --------- --------- ---------
-- 285,022 88,787 -- 373,809
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT .................. -- 246,852 92,310 -- 339,162
Less: Accumulated Depreciation ............... -- 103,804 22,230 -- 126,034
--------- --------- --------- --------- ---------
-- 143,048 70,080 -- 213,128
--------- --------- --------- --------- ---------
GOODWILL, NET .................................. -- 144,291 85,882 -- 230,173
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES ..... 40,891 -- -- -- 40,891
INVESTMENT IN UNCONSOLIDATED AFFILIATES ........ 609,495 -- -- (609,495) --
OTHER ASSETS ................................... 6,355 4,709 634 -- 11,698
--------- --------- --------- --------- ---------
$ 656,741 $ 577,070 $ 245,383 $(609,495) $ 869,699
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion
of Long-Term Debt .......................... $ 2,697 $ 50,932 $ 1,795 $ -- $ 55,424
Accounts Payable ............................. -- 46,826 34,687 -- 81,513
Current Deferred Tax Liability ............... -- -- 2,278 -- 2,278
Customer Advances ............................ -- 2,275 -- -- 2,275
Other Accrued Liabilities .................... 16,766 31,913 3,815 -- 52,494
--------- --------- --------- --------- ---------
19,463 131,946 42,575 -- 193,984
--------- --------- --------- --------- ---------
LONG-TERM DEBT ................................. 212,264 3,609 565 -- 216,438
DEFERRED INCOME TAXES .......................... -- 10,793 18,406 -- 29,199
MINORITY INTEREST .............................. -- -- 1,467 -- 1,467
OTHER LONG-TERM LIABILITIES .................... 16,462 3,297 300 -- 20,059
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY ........................... 408,552 427,425 182,070 (609,495) 408,552
--------- --------- --------- --------- ---------
$ 656,741 $ 577,070 $ 245,383 $(609,495) $ 869,699
========= ========= ========= ========= =========
14
16
CONDENSED COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS COMBINED
--------- ---------- ---------- ------------ --------
REVENUES ........................................ $ -- $ 96,305 $ 10,986 $ -- $ 107,291
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of Sales ................................. -- 93,703 9,033 -- 102,736
Selling, General and Administrative ........... -- 10,715 1,873 -- 12,588
Equity Income In Unconsolidated Affiliates .... (607) -- -- -- (607)
Weatherford Charges ........................... 500 -- -- -- 500
--------- --------- --------- --------- ---------
(107) 104,418 10,906 -- 115,217
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) ......................... 107 (8,113) 80 -- (7,926)
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest Expense .............................. (2,711) (722) (63) -- (3,496)
Equity in Subsidiaries, Net of Taxes .......... (8,230) -- -- 8,230 --
Other, Net .................................... -- (280) 65 -- (215)
--------- --------- --------- --------- ---------
(10,941) (1,002) 2 8,230 (3,711)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............... (10,834) (9,115) 82 8,230 (11,637)
INCOME TAX BENEFIT .............................. 1,158 2,886 (249) -- 3,795
--------- --------- --------- --------- ---------
NET LOSS BEFORE MINORITY INTEREST ............... (9,676) (6,229) (167) 8,230 (7,842)
MINORITY INTEREST ............................... -- -- (45) -- (45)
--------- --------- --------- --------- ---------
NET LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE .......................... (9,676) (6,229) (212) 8,230 (7,887)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX ............................ -- (1,789) -- -- (1,789)
--------- --------- --------- --------- ---------
NET LOSS ........................................ $ (9,676) $ (8,018) $ (212) $ 8,230 $ (9,676)
========= ========= ========= ========= =========
15
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------ ------------
REVENUES ........................................ $ -- $ 133,720 $ 22,931 $ -- $ 156,651
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of Sales ................................. -- 122,744 11,703 -- 134,447
Selling, General and Administrative ........... -- 13,558 3,606 -- 17,164
Equity Income in Unconsolidated Affiliates .... (1,984) -- -- -- (1,984)
Other Charges ................................. -- 32,280 -- -- 32,280
--------- --------- --------- --------- ---------
(1,984) 168,582 15,309 -- 181,907
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS).......................... 1,984 (34,862) 7,622 -- (25,256)
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest Expense .............................. (5,266) (1,459) (145) -- (6,870)
Equity in Subsidiaries, Net of Taxes .......... (20,072) -- -- 20,072 --
Other, Net .................................... -- (858) (11) -- (869)
--------- --------- --------- --------- ---------
(25,338) (2,317) (156) 20,072 (7,739)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............... (23,354) (37,179) 7,466 20,072 (32,995)
INCOME TAX (PROVISION) BENEFIT .................. 1,537 13,150 (3,140) -- 11,547
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ...... (21,817) (24,029) 4,326 20,072 (21,448)
MINORITY INTEREST ............................... -- -- (369) -- (369)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ............................... $ (21,817) $ (24,029) $ 3,957 $ 20,072 $ (21,817)
========= ========= ========= ========= =========
16
18
CONDENSED COMBINING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS COMBINED
-------- ---------- ---------- ------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash (Used) Provided by
Operating Activities ......................... $ (1,446) $(22,526) $ 16,021 -- $ (7,951)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures for Property,
Plant & Equipment ............................ -- (4,567) (489) -- (5,056)
-------- -------- -------- -------- --------
Net Cash Used by Investing
Activities ............................ -- (4,567) (489) -- (5,056)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on Debt, Net ......................... (1,478) (2,699) -- -- (4,177)
Predecessor Stockholder's Investment ............ 2,924 26,604 (14,581) -- 14,947
-------- -------- -------- -------- --------
Net Cash Provided (Used) by
Financing Activities .................. 1,446 23,905 (14,581) -- 10,770
-------- -------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ..................................... -- (3,188) 951 -- (2,237)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .... -- 4,998 1,206 -- 6,204
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......... $ -- $ 1,810 $ 2,157 $ 3,967
======== ======== ======== ======== ========
17
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided (Used) by Operating
Activities ................................... $ 1,659 $(15,105) $ 5,153 $ (8,293)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures for Property,
Plant & Equipment ............................ -- (4,518) (1,427) -- (5,945)
-------- -------- -------- -------- --------
Net Cash Used by Investing
Activities ............................ -- (4,518) (1,427) -- (5,945)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Revolving Credit
Facility ..................................... -- 17,089 669 -- 17,758
Repayments on Debt, Net ......................... (1,537) (631) (559) -- (2,727)
Proceeds from Stock Option Exercises ............ 218 -- -- -- 218
Purchases of Treasury Stock ..................... (340) -- -- -- (340)
-------- -------- -------- -------- --------
Net Cash (Used) Provided by
Financing Activities .................. (1,659) 16,458 110 -- 14,909
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................ -- (3,165) 3,836 -- 671
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .... -- 4,154 4,161 -- 8,315
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......... $ -- $ 989 $ 7,997 $ 8,986
======== ======== ======== ======== ========
18
20
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 position as of March 31, 2001 and 2000 and our results of operations
for the three months ended March 31, 2001 and 2000. This discussion should be
read in conjunction with our financial statements that are included with 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, 2000, 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, is not
intended to be a precise description of corporate relationships.
GENERAL
Grant Prideco is the world's largest manufacturer and supplier of oilfield
drill pipe and other drill stem products and one of the leading North American
providers of high-performance engineered connections and premium tubing and
casing. Our drill stem products are used in drilling oil and gas wells while
our engineered connections and premium tubing and casing are used to complete
successful oil and gas wells once they have been successfully drilled. Our
customers include major, independent and state-owned oil companies, drilling
contractors, oilfield service companies and North American oil country tubular
goods (OCTG) distributors. We operate 22 manufacturing facilities located in the
United States, Mexico, Canada, Europe, and Asia and 30 sales, service and repair
locations globally.
We operate through two business segments: (1) drilling products and (2)
engineered connections.
Our drilling products segment manufactures and sells a full range of
proprietary and API drill pipe, drill collars, heavy weight drill pipe and
accessories. These drill stem products make up the principal tools (other than
the rig) used for the drilling of an oil or gas well that are located between
the rig floor and the bit. Our drilling products are highly engineered tools
specifically designed for today's difficult and harsh drilling environments and
include a wide variety of sizes, designs and metallurgy. This segment also
manufactures drill pipe and other products used in the industrial markets for
fiber optic cable installation and water well drilling.
Our engineered connections segment designs, manufactures and sells a
complete line of premium engineered connections and associated premium tubular
products and accessories. The term "engineered" connections refers to threaded
connections with a gas-tight seal and the ability to handle high torque, tension
and pressure. "Premium" tubulars are seamless casing and tubing (as opposed to
rolled welded) with high-alloy chemistry and superior burst and
collapse-resistance characteristics under harsh conditions. Our connections and
premium products are used primarily for the completion of gas wells and offshore
and other wells that are drilled in harsh high temperature or high-pressure
environments or in environmentally sensitive areas.
For the three months ended March 31, 2001, we derived 47% of our revenues
from our engineered connections segment and 53% of our revenues from our
drilling products segment. Substantially all of our revenues in our engineered
connection segment are generated in North America and substantially all of our
drilling product sales are sold in North America regardless of their ultimate
destination. Although most of our revenues in the first quarter of 2001 were
from sales made in North America, we estimate that between 10% and 20% were
sold for use outside North America. As conditions in the oil and gas industry
continue to improve, we expect our drilling products revenues and international
revenues to represent a larger percentage of our revenue base.
19
21
Until April 14, 2000, we were a wholly owned subsidiary of Weatherford
International, Inc. We were spun off from Weatherford on April 14, 2000, through
a distribution by Weatherford to its stockholders of all of our common stock. As
result of the spinoff, Weatherford no longer has an ownership interest in us.
MARKET TRENDS AND OUTLOOK
Our business is materially dependent on drilling and production activity
and the associated demand for our drilling products and engineered connections.
Generally, demand for our drilling products and engineered connections closely
follows the domestic and international rig count, which closely follows the
prices of oil and natural gas. In addition to changes in prices of oil and
natural gas and the domestic and international rig count, demand for our
products and services is affected by increasingly harsh well conditions.
Drill stem products are consumable and wear out through a combination of
friction and metal fatigue. In recent years, we have seen increasing intensity
of use in drill stem products which causes our drill stem products to wear out
faster. This increased intensity of use results from more wells being drilled
either directionally or horizontally, which in turn create far higher abrasion
and bending loads than in vertical wells, more gas wells being drilled today,
which typically are drilled to greater depths than oil wells, and the increasing
prevalence of top drive rigs, which place more torsional stress on drill pipe
than traditional rotary table rigs. We believe this trend will favorably impact
demand for our drill stem products going forward.
We believe that, absent substantial declines in oil and gas prices and rig
count, demand for our engineered connections and premium tubulars should
continue to increase. Factors influencing this pattern include increases in the
average depths of wells and in the percentage of gas wells being drilled.
Generally, as well depths increase it is more likely that engineered connections
and premium tubulars, such as those we manufacture, will be used as opposed to
American Petroleum Institute (API) standard products. In addition, gas wells
encounter higher reservoir pressures and require larger diameter tubulars with
thicker walls and higher strength steel grades, and thus usually require
engineered connections and premium tubulars as opposed to API-standard products.
Prices for oil and natural gas have been and continue to be very volatile,
with material declines having adverse effects on the demand for our products and
services. The following table sets forth certain information with respect to oil
and natural gas prices at the dates indicated and the monthly North American
(U.S. and Canadian) and international rig counts for the months reflected:
AVERAGE
NORTH NORTH AVERAGE
HENRY HUB AMERICAN AMERICAN INTERNATIONAL INTERNATIONAL
WTI OIL(1) GAS(2) RIG COUNT(3) RIG COUNT(3) RIG COUNT(3) RIG COUNT(3)
---------- --------- ------------ ------------ ------------- -------------
March 31, 2000 ....... $23.98 $ 2.88 1,167 1,250 606 576
December 31, 2000 .... 26.72 10.53 1,507 1,448 705 710
March 31, 2001 ....... 26.37 5.32 1,609 1,655 722 724
(1) Price per barrel of West Texas Intermediate crude oil as of the dates
presented above -- Source: U.S. Energy Information Administration
(2) Price per MMBtu as of the dates presented above -- Source: U.S. Energy
Information Administration
(3) Source: Baker Hughes Rig Count (Excludes China and the Former Soviet
Union). Average rig counts are for the three month period ended.
FUTURE TRENDS AND EXPECTATIONS
The WTI crude oil price increases that began in the latter part of 1999
continued during 2000, moving above $30 per barrel during the first quarter of
2000. During 2000, WTI crude oil prices reached a high of $37.20 per barrel and
a low of only $23.85 per barrel. Similarly, natural gas prices increased
significantly during 2000, reaching a high of $10.53 per MMBtu and a low of only
$2.15 per MMBtu. Oil and natural gas prices remained strong during the first
quarter of 2001 as WTI crude oil prices averaged $28.96 per barrel and natural
gas prices averaged $6.37 per MMBtu.
20
22
2001 Operational Restructuring
During the fourth quarter of 2000, our results of operations were below our
expectations and we recorded various other charges that substantially reduced
our net income for the quarter and the year. In light of our fourth quarter
results, we engaged in a full review of our businesses and operations with the
view of enhancing our profitability. This review identified several major areas
where action needed to be taken. To address these areas we implemented a plan of
action in the first quarter of 2001 that involved the following:
o Pricing. We enacted price increases across the board for our drill
stem products effective February 2001. We estimate that on average
our pricing of drill stem products has increased between 10% and
20%. The average sales price for new orders received since February
is $32.90 per foot, which represents an increase of $4.40 per foot
as compared to the average price per foot of our backlog at the
beginning of February. New sales orders that are not subject to
prior contractual pricing have averaged approximately $36 per foot.
Going forward, our objective is to obtain an average pricing on new
sales orders of between $36 to $40 per foot by year-end. Actual
sales prices, however, will be dependent on mix and market
conditions. We expect that the average sales price recognized on
completed orders in the second quarter of 2001 to be approximately
$30 per foot. However, we expect the average price to increase in
the third and fourth quarters of 2001 such that the average sales
price for fiscal 2001 will be between $32 and $33 per foot. We
expect that additional price increases will be implemented during
the year subject to market conditions.
o Manufacturing Capacity. We have implemented a plan whereby our drill
stem manufacturing productive capacity on a global basis is expected
to grow from around 1.6 million feet at March 31, 2001, to 2.0
million feet by the second quarter of 2001, 2.5 million feet by the
third quarter of 2001 and around 2.9 million feet by the end of the
year. This increased capacity will be made available by: (1)
dedicating our Navasota, Texas facility to oil field drill stem
products, (2) returning the manufacturing of oil field tubing and
drill pipe to our Bryan, Texas facility, and (3) refurbishing and
adding equipment at various other facilities that will improve our
efficiencies and increase capacity. We are scheduled to have a new
heavy weight drill pipe weld line in place by June, which will add
capacity and improve manufacturing efficiencies. Other process
improvements are also being implemented during the remainder of the
year.
o Manufacturing Costs. We are currently in the process of implementing a
capital improvement program for 2001 and 2002 with the objective of
reducing the average costs of production by 10% or more and
improving efficiencies. This program includes the addition of a new
automated drill pipe manufacturing line in Navasota and changes to
our incentive compensation program to provide a linkage to cost
savings objectives. We currently expect that the cost of the capital
improvement program will be between $25 and $35 million over the
next 18 months. We expect that some cost improvements will be
realized in 2001, but that the majority of the improvements will be
seen in 2002 and beyond. We also expect to see cost improvements
over the year as our reallocation of manufacturing is completed and
our absorption rates increase with higher production volumes.
o Industrial Drill Pipe. We have engaged in a reorganization of our
industrial drill pipe operations with the objective of improving the
performance and profitability of this product line. As part of this
reorganization, we have reallocated production among facilities to
improve efficiencies, reduced head count, refocused marketing and
concentrated on lowering costs. We expect that these efforts will
result in improved results as the year progresses, with an objective
of profitability for this product line by the second half of the
year. The initiatives resulted in a reduction in operating losses of
$1.6 million (excluding the impact of other charges) in the first
quarter of 2001 as compared to the fourth quarter of 2000.
o Marine Connections. We are currently reviewing the operations of our
XL marine connection product line with the objective of improving
the profitability and sales presence of this product line. In
connection with this review, we are in the process of strengthening
our sales force and consolidating certain operations and processes.
21
23
2001 Outlook
As we look forward at our projected results for 2001, we currently expect
that our results for the second quarter of 2001 will improve but will be
relatively low in comparison to market activity due to the large amount of
backlog of drill pipe that will be sold by us during this quarter at low margin.
We are, however, beginning to see cost improvements due to greater manufacturing
absorption, which should begin to improve our margins. Our results for the
second quarter also will likely be impacted by continued projected losses from
our industrial drill pipe and marine connection product lines. We, however,
expect that these losses will diminish as the year progresses and that our
results for the third and fourth quarters of 2001 will show steady improvement
from the actions currently being taken by us. Although actual results will be
dependent on our sales and operations over the quarter and our success in
increasing our production and reducing costs in the quarter, we expect that our
results for the second quarter will improve by $0.03 to $0.05 per share over the
first quarter excluding the first quarter charges.
The second half of the year is where we expect results to significantly
increase as we complete the production of our lower margin drill pipe backlog
and begin to realize the benefits of higher pricing and production of our drill
stem products. We also expect that demand for our premium tubular products and
connections should remain strong in the second half as North American drilling
and natural gas activity is expected to continue at its current pace.
Although our exact results for the second half of 2001 will be dependent on
a number of factors, including our ability to meet our planned manufacturing
capacity increases and to increase and maintain higher prices for our products,
we currently expect that during the second half of the year our operating profit
should increase and our earnings per share in the third quarter of 2001 should
be somewhere in the mid teens ($0.14 to $0.18 per share) and our earnings per
share for the fourth quarter of 2001 should be somewhere in the low to mid 20's
($0.23 to $0.28 per share).
The above forward-looking information with respect to our outlook for
fiscal 2001 is subject to various assumptions that are more specifically set
forth below under "Forward-Looking Statements and Exposures" below. There can be
no assurance that our expectations for future results will in fact occur or that
our results will not be materially different. We do, however, believe that our
current expectations are reasonable.
22
24
RESULTS OF OPERATIONS
First Quarter 2001 Charges
In the first quarter of 2001, we incurred approximately $43.0 million of
pre-tax charges, $28.0 million net of tax, associated with our review of the
continued viability of our manufacturing arrangement with Oil Country Tubular
Ltd. (OCTL) in India, a modification of our manufacturing standards and costing
in light of current market conditions and an ongoing restructuring of our
operations. This charge also included executive severance payments and related
expenses of approximately $14.6 million. These charges are summarized in the
following chart:
LIABILITY
DRILLING ENGINEERED BALANCE
PRODUCTS CONNECTIONS CORPORATE TOTAL 3/31/01
-------- ----------- --------- ------- ---------
(IN THOUSANDS)
OCTL Write-Off(a) ............................ $17,727 $ -- $ -- $17,727 $ --
Inventory Write-Off(b) ....................... 4,482 1,692 -- 6,174 --
Expense Associated With Standard Charges(c)... 3,791 781 -- 4,572 --
Severance(d) ................................. 183 205 14,165 14,553 2,401
------- ------- ------- ------- -------
Total .................................. $26,183 $ 2,678 $14,165 $43,026 $ 2,401
======= ======= ======= ======= =======
- -------
(a) In connection with our operational review conducted in the first
quarter of 2001, we reassessed the viability of restructuring our
relationship with OCTL in India and determined that a continued
relationship was no longer viable. As a result of this
determination, we wrote-off the remaining $17.7 million ($11.5
million after-tax) of unpaid receivables and advances owed to us
by OCTL.
(b) The inventory write-off was reported as cost of sales and was
made pursuant to a review of our planned dispositions of
inventory in an effort to reduce inventory levels of older,
slow-moving products. The amount was determined by use of
internal appraisals and evaluations to assess the estimated net
realizable value upon disposal and also included a charge related
to certain inventory purchase contract obligations with above
market prices.
(c) Certain capitalized manufacturing cost variances were expensed
as cost of sales in connection with our operational review and
revisions of manufacturing standards and costing during the first
quarter.
(d) Severance charge relates to manufacturing and marketing employees
terminated as a result of our restructuring of our industrial
drill pipe and marine connection product lines, as well as the
retirement of certain executive officers during the first quarter
of 2001. The total number of employees severed was 24 and the
amount accrued for severance was based upon the positions
eliminated and our severance policy. Approximately 20 of these
employees left prior to March 31, 2001. We estimate that all of
the accrued severance at March 31, 2001 will be paid during 2001.
Fourth Quarter 2000 Charges
We incurred $41.3 million of pre-tax charges, $26.9 million net of tax, in
the fourth quarter of 2000 relating primarily to inventory write-offs and other
asset impairments and reductions. Of this amount, $7.9 million related to cash
provisions or accrued liabilities. The categories of the charge incurred, the
actual cash payments and the accrued balances at March 31, 2001 are summarized
below:
LIABILITY LIABILITY
DRILLING ENGINEERED BALANCE CASH BALANCE
PRODUCTS CONNECTIONS 12/31/00 PAYMENTS 3/31/01
-------- ----------- --------- -------- ---------
(IN THOUSANDS)
Litigation Accrual .............. $ -- $2,500 $2,500 $ -- $2,500
Contingent Liability Accrual .... 4,650 -- 4,650 -- 4,650
Other Accrued Liabilities ....... 594 115 709 267 442
------ ------ ------ ------ ------
Total ................. $5,244 $2,615 $7,859 $ 267 $7,592
====== ====== ====== ====== ======
We estimate that all of the remaining accrued balances at March 31, 2001
will be paid during 2001.
23
25
Three Months Ended March 31, 2001 Compared to the Three Months Ended March
31, 2000
GENERAL
We recorded a net loss of $21.8 million, or $0.20 per share, on revenues of
$156.7 million in the first quarter of 2001 compared to a net loss of $9.7
million, or $0.09 per share, on operating revenues of $107.3 million for the
first quarter 2000. Our results for 2001 included $43.0 million in other charges
described above. Excluding the impact of these charges, our net income for the
first quarter was $6.2 million, or $0.06 per share. For the first quarter of
2001, we reported a total of $27.1 million in EBITDA, excluding other charges of
$43.0 million, as compared to a break-even EBITDA for the first quarter of 2000.
SEGMENT RESULTS
Drilling Products
The following table sets forth additional data regarding the results of our
drilling products segment for the three months ended March 31, 2000 and 2001:
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 2001
-------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues ............................... $ 48,153 $ 83,394
Gross Profit (Loss) .................... (5,451) 5,570(a)
Gross Profit (Loss) % .................. (11.3)% 6.7%
Selling, General and Administrative .... $ 3,866 $ 6,156
Operating Loss ......................... (8,710) (16,512)(a)(b)
EBITDA, Before Other Charges(d) ........ (4,547) 14,763(c)
(a) Includes $8.3 million of charges in the first quarter of 2001
related to inventory write-offs and capitalized manufacturing
variance write-offs, which have been classified as cost of sales.
(b) Includes a charge of $17.9 million in the first quarter of 2001
to write-off our assets related to our manufacturing arrangement
with OCTL in India of $17.7 million and severance and related
expenses of $0.02 million.
(c) Excludes $26.2 million of other charges discussed in (a) and (b)
above.
(d) We calculate EBITDA by taking operating income (loss) adding
back depreciation and amortization, excluding the impact of the
other charges discussed in (a) and (b) above for the respective
periods of those charges. Calculations of EBITDA should not be
viewed as a substitute to calculations under GAAP, in particular
operating income (loss) and net income (loss). In addition,
EBITDA calculations by one company may not be comparable to
another company.
24
26
Our drilling products segment consists of two principal product lines: (1)
drilling products for the oil and gas industry and (2) industrial drilling
products for fiber optic cable installation, water well drilling and other
industries. To assist in an understanding of our results in this segment, the
following table sets forth additional data regarding the results of the drilling
products and industrial product lines for the three months ended March 31, 2000
and 2001:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2000 2001
------------------- ------------------
% OF REV. % OF REV.
--------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues
Oilfield Drilling Products
Drill Pipe ................................... $ 38,572 81% $ 43,853 52%
Drill Collars and Heavy Weight Drill Pipe .... 7,147 14% 16,720 20%
Drill Stem Accessories ....................... 2,199 5% 8,865 11%
-------- --- -------- ---
Total ................................ 47,918 100% 69,438 83%
Industrial ..................................... 235 0% 13,956 17%
-------- --- -------- ---
$ 48,153 100% $ 83,394 100%
======== === ======== ===
Gross Profit (Loss)(a)
Oilfield Drilling Products ..................... $ (5,479) (11)% $ 9,520 14%
Industrial ..................................... 28 12% (3,950) (28)%
-------- --------
$ (5,451) (11)% $ 5,570 7%
======== ========
Selling, General and Administrative
Oilfield Drilling Products ..................... $ 3,838 8% $ 4,446 6%
Industrial ..................................... 28 12% 1,710 12%
-------- --------
$ 3,866 8% $ 6,156 7%
======== ========
- ----------
(a) Includes $8.3 million of charges ($4.4 million for Oilfield
Drilling Products and $3.9 million for Industrial) in the first
quarter of 2001 related to inventory write-offs and capitalized
manufacturing variance write-offs, which have been classified as
cost of sales.
Revenues. Our drilling products revenues increased $35.2 million, or 73%,
in the first quarter of 2001 as compared to the same period in 2000 due
primarily to significant increases in oil and gas drilling activity. Sales of
drill stem products for the first quarter 2001 were 1.4 million feet compared to
0.8 million for the same period in 2000. The average North American and
International rig counts increased by 32% and 26%, respectively, during the
first quarter of 2001 as compared to the same period in 2000. Sales of
Industrial drill pipe also contributed approximately $13.7 million of additional
revenues over prior year due to the start up nature of the business last year.
Gross Profit (Loss). Our gross profit in the drilling products segment
increased $11.0 million in the first quarter of 2001 as compared to the same
period in 2000. The increase was due to increased sales reflecting primarily the
strengthening demand for our drilling products in North America as drilling
activity increased, in particular for natural gas. This improvement was also
attributable to the contribution to the segment of the equity results of our
investment in Voest-Alpine. Our results for 2000 included additional operational
ramp up costs in order to meet our customers' growing demand for our products.
Selling, General and Administrative. Our selling, general and
administrative expenses in the drilling products segment slightly decreased as a
percentage of revenues from 8% in the first quarter 2000 to 7% in the first
quarter of 2001. The decrease was due primarily to a higher revenue base related
to the increased oil and gas drilling activity, partially offset by increased
staffing levels.
Operating Loss. Our drilling products segment reported an operating loss of
$16.5 in the first quarter of 2001 as compared to an operating loss of $8.7
million for the same period in 2000. The increased loss was primarily due to the
other charges taken in the first quarter of 2001 of $26.2 million. Excluding the
effects of the first quarter charge, our drilling products business reported
operating income of $9.7 million. This increase primarily reflects the
strengthening demand for our products as oil and gas production activity
continues to recover from the low levels in 1999 and into 2000 coupled with the
equity earnings related to our investment in Voest-Alpine.
25
27
Other. Other significant factors affecting our first quarter 2001 results
in our drilling products segment included:
o Drill pipe production was in excess of 1.6 million feet compared to
around 1.5 million feet in the fourth quarter of 2000.
o Drill pipe footage produced in the first quarter of 2001 was greater
than drill pipe footage sold in the first quarter of 2001 due to a
very limited amount of finished production in the fourth quarter of
2000 carrying over into the first quarter of 2001 and a more
normalized production carry over from the first quarter of 2001 into
the second quarter.
o Our average price for sales of drill pipe in the first quarter was
$26.80 per foot due primarily to mix and committed sales at lower
prices. These sales included a large amount of pipe sold without
coating and hardbanding, which generally increases prices by more than
$3.00 per foot on average.
o We had a high level of sales of drill collars, heavy weights and other
drill stem products, including sales of our new proprietary landing
strings. We expect these sales to continue at or around their current
levels during the year, with potential increases.
Engineered Connections
Our engineered connections segment showed continued year-on-year and
quarter-on-quarter improvement during the first quarter of 2001. The growth
reflected the strong demand for premium completion tubulars and connections due
to the increased drilling activity, in particular for natural gas, in North
America. We also benefited from increasing prices and lower costs associated
with higher absorption rates.
The following table sets forth additional data regarding the results of our
engineered connections segment for the three months ended March 31, 2000 and
2001:
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 2001
------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues ................................ $59,138 $73,257
Gross Profit ............................ 10,006 16,634(a)
Gross Profit % .......................... 16.9% 22.7%
Selling, General and Administrative ..... $ 4,352 $ 6,076
Operating Income ........................ 5,654 10,353(a)(b)
EBITDA, Before Other Charges(d) ......... 9,384 17,123(c)
(a) Includes $2.5 million of charges in the first quarter of 2001
related to inventory write-offs and capitalized manufacturing
cost variance write-offs, which have been classified as cost of
sales.
(b) Includes a charge of $0.2 million in the first quarter of 2001
for severance and related expenses.
(c) Excludes $2.7 million of other charges discussed in (a) and (b)
above.
(d) We calculate EBITDA by taking operating income (loss) adding back
depreciation and amortization, excluding the impact of the other
charges discussed in (a) and (b) above for the respective periods
of those charges. Calculations of EBITDA should not be viewed as
a substitute to calculations under GAAP, in particular operating
income (loss) and net income (loss). In addition, EBITDA
calculations by one company may not be comparable to another
company.
Our engineered connections segment consists of five principal product
lines: (1) Atlas Bradford(R) engineered connections, (2) TCA(TM) critical
service casing and processing, (3) Tube-Alloy(TM) accessories, (4) Texas Arai
couplings and (5) XL Systems(TM) marine conductors and installation services.
The following table sets forth certain additional data regarding these product
lines for the three months ended March 31, 2000 and 2001:
26
28
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2000 2001
------------------- ------------------
% OF REV. % OF REV.
--------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues
Atlas Bradford Threading and Service ....... $13,361 22% $19,902 27%
TCA ........................................ 17,813 30% 21,202 29%
Tube-Alloy ................................. 6,391 11% 11,481 16%
Texas Arai ................................. 11,578 20% 13,863 19%
XL Systems ................................. 9,995 17% 6,809 9%
------- --- ------- ---
$59,138 100% $73,257 100%
======= === ======= ===
Gross Profit (a)
Atlas Bradford Threading and Service ....... $ 2,660 20% $ 6,221 31%
TCA ........................................ 2,508 14% 6,017 28%
Tube-Alloy ................................. 2,973 47% 3,847 34%
Texas Arai ................................. 1,246 11% 1,772 13%
XL Systems ................................. 619 6% (1,223) (18)%
------- -------
$10,006 17% $16,634 23%
======= =======
Selling, General and Administrative
Atlas Bradford Threading and Service ....... $ 923 7% $ 1,410 7%
TCA ........................................ 452 3% 398 2%
Tube-Alloy ................................. 1,003 16% 1,537 13%
Texas Arai ................................. 885 8% 972 7%
XL Systems ................................. 1,089 11% 1,759 26%
------- -------
$ 4,352 7% $ 6,076 8%
======= =======
- ---------
(a) Includes a charge in the first quarter 2001 of $2.5 million for
inventory write-offs ($0.3 million for Texas Arai, $0.3 million
for Tube-Alloy and $1.9 million for XL Systems), which were
classified, as cost of sales.
Revenues. Our engineered connections segment revenues increased $14.1
million, or 24%, in the first quarter of 2001 as compared to the first quarter
of 2000 due primarily to significant increases in oil and gas drilling and
completion activity. The average North American and International rig counts
increased by 32% and 26%, respectively, during the first quarter of 2001 as
compared to the same period in 2000. The growth in revenues reflects the
continued demand for our highly engineered tubing and casing products for
critical deep gas and offshore drilling and completion applications as well as
improved demand for our newly developed premium thread technology. Sales of our
TCA high collapse casing and Atlas Bradford premium threading in the first
quarter of 2001 were $21.2 million and $19.9 million, respectively, collectively
comprising 56% of revenue.
Gross Profit. The gross profit of our engineered connections segment
increased $6.6 million in the first quarter of 2001 as compared to the first
quarter of 2000. Our TCA high collapse casing and Atlas Bradford premium
threading were the largest contributors with $6.0 million and $6.2 million in
gross profit, respectively for the first quarter of 2001. The increase relates
primarily to growth in demand for our highly engineered tubing and casing
products and price increases that we initiated in the latter part of 2000.
Additionally, production volume increased, which provided increased utilization
of manufacturing facilities and higher fixed cost absorption.
Selling, General and Administrative. Selling, general and administrative
expenses in the engineered connections segment increased as a percentage of
revenues from 7% in the first quarter of 2000 to 8% in the first quarter of
2001. The increase was due primarily to higher expenses related to our XL
Systems marine connection product line as we have been strengthening our
management and sales force personnel to improve profitability.
Operating Income. Our engineered connections operating income increased
$4.7 million in the first quarter of 2001 as compared to the first quarter of
2000. Included in the results for 2001 are other charges of $2.7 million related
to inventory write-downs. Excluding the effect of the first quarter charge,
operating income was $13.0 million, which reflects the increase in demand for
our premium tubular products driven by the increased oil and gas drilling and
completion activity.
Other. Other significant factors affecting our first quarter 2001 results
in our engineered connections segment included:
o Our EBITDA and operating income margins in our Atlas Bradford tubing and
casing line increased in the first quarter of 2001 to 27.8% and 24.1%,
respectively, from 18.0% and 13.0%, respectively, in the fourth quarter of
2000.
27
29
o Our production of Atlas Bradford tubulars and connections increased 16%
over the December 2000 run rate.
o Our TCA facility produced 37.5 thousand tons in the first quarter of 2001
compared to 31.5 thousand tons and 28.1 thousand tons in the fourth and
first quarters of 2000, respectively. Production will likely be down in the
second quarter of 2001 due to scheduled maintenance and an equipment
upgrade that is designed to increase capacity by around 20%.
o Pricing at TCA was essentially flat in the first quarter of 2001 compared
to the fourth quarter of 2000, but up 10% to 20% over the first quarter of
2000.
o Our Tube-Alloy premium accessory business saw its EBITDA and operating
income margins increase to 25.9% and 20.1%, respectively, in the first
quarter of 2001 from 15% and 10% in the fourth quarter of 2000. This
increase was due to increasing international drilling activity, strong
North American drilling activity and high margin revenues associated with
its vacuum insulated tubing products.
o Although still not profitable, operating income and EBITDA in our marine
connection line improved by over $1 million in the first quarter of 2001
compared to the fourth quarter of 2000.
Other Items
Corporate General and Administrative. Our corporate general and
administrative expenses, excluding severance charges, increased $0.6 million in
the first quarter of 2001 as compared to the first quarter of 2000. The increase
was primarily due to overhead costs for additional financial, accounting, legal,
marketing and other administrative expenses required by Grant Prideco as a
separate public entity following our spinoff from Weatherford in April 2000.
Interest Expense. Our interest expense increased $3.4 million in the first
quarter of 2001 as compared to the first quarter of 2000. Increased borrowings
included the revolving credit and letter of credit facility agreement, which we
entered into in April 2000 coupled with the $200 million 9 5/8% Senior Notes
which were issued in December 2000.
Tax Benefit. Our effective tax rate in the first quarter of 2001 was 35%,
as compared to 33% in the first quarter of 2000.
28
30
LIQUIDITY AND CAPITAL RESOURCES
Overview
As a wholly owned subsidiary of Weatherford prior to our spinoff in April
2000, our liquidity and capital resources historically have been provided from
cash flow from operations and cash provided to us by Weatherford. As an
independent entity following the spinoff, our liquidity and capital resources
now depend upon our cash flow from operations and our ability to raise capital
from third parties.
At March 31, 2001, we had cash and cash equivalents of $9.0 million and
working capital of $179.8 million as compared to cash and cash equivalents of
$8.3 million and working capital of $198.4 million at December 31, 2000. At
March 31, 2001, we also had $3.6 million in restricted cash related to our 54%
interest in H-Tech that is subject to dividend and distribution restrictions.
The following table summarizes our cash flows used by operating activities,
net cash used by investing activities and net cash provided by financing
activities for the periods presented (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 2001
-------- --------
(UNAUDITED)
Net Cash Used by Operating Activities ........ $ (7,951) $ (8,293)
Net Cash Used by Investing Activities ........ (5,056) (5,945)
Net Cash Provided by Financing Activities .... 10,770 14,909
Net cash flow used by operating activities increased by $0.3 million in the
first quarter of 2001 as compared to the first quarter of 2000 due to increased
working capital requirements to support the increase in demand for our products.
Net cash used by investing activities increased by $0.9 million in the first
quarter of 2001 as compared to the first quarter of 2000 due primarily to
increased capital expenditures for property, plant and equipment related to our
capital improvement program to reduce production costs and improve efficiencies.
Net cash provided by financing activities increased by $4.1 million in the first
quarter of 2001 as compared to the first quarter of 2000 due primarily to
borrowings of $17.8 million on our revolving credit facility, which we entered
into on April 14, 2000. In the first quarter of 2000, $14.9 million of cash was
provided to us by Weatherford.
Capital Expenditures
Our capital expenditures for property, plant and equipment totaled $5.1
million and $5.9 million for the three months ended March 31, 2000 and 2001,
respectively. We currently expect to expend approximately $19 million to $29
million for capital expenditures for property, plant and equipment during the
remainder of 2001 related to our capital improvement program to reduce
production costs and improve efficiencies, our manufacturing consolidation
projects and maintaining the existing equipment base. We also estimate that our
required principal and interest payments for our outstanding debt to be
approximately $18.2 million for the remainder of 2001. We currently expect to
satisfy all required capital expenditures and debt service requirements during
the remainder of 2001 from operating cash flows, existing cash balances and our
revolving credit facility. Acquisitions and expansions will be financed from
cash flow from operations, borrowings under our credit facility, or through a
combination of the issuance of equity and debt financing. We expect that we
would issue debt only to the extent that it is consistent with our objective of
maintaining a conservative capital structure.
Credit Facility and Long-Term Debt
As of March 31, 2001, the Company had outstanding borrowings of $49.9
million under the revolving credit facility and $6.5 million had been used to
support outstanding letters of credit. The average interest rate for the
outstanding borrowings under the Credit Facility was 7.6% at March 31, 2001.
Additionally, at March 31, 2001, there were outstanding borrowings of $0.5
million under a miscellaneous credit facility and $0.7 million of outstanding
letters of credit had been supported under various available letter of credit
facilities that are not related to the Credit Facility.
29
31
In January 2001, we made a scheduled debt payment of approximately $1.5
million related to our Voest-Alpine debt. The interest rate as of March 31, 2001
was 4.6% per annum.
As part of our arrangement to invest in Voest-Alpine, we entered into a
four-year supply contract with Voest-Alpine. Under this agreement, we have
agreed to purchase a minimum of 60,000 metric tons of "green" tubulars per year
through September 2003 at a negotiated third party price that we believe to be
beneficial due to market conditions that existed at the time the pricing was
established. The volume requirements represent less than half of our normal
worldwide requirements for this type of tubular for drill pipe and tubing.
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 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 use or sell all of the tubular products we are required to
purchase from Voest-Alpine.
TAX MATTERS
As a result of our spinoff from Weatherford, subsequent to April 14, 2000
we are no longer able to combine the results of our operations with those of
Weatherford in reporting income for United States federal income tax purposes
and for income tax purposes in some states and foreign countries. We believe
this will not have a material adverse effect on our earnings. Under the terms of
a tax allocation agreement with Weatherford, we will not have the future benefit
of any prior tax losses or benefits incurred as part of a consolidated return
with Weatherford. Moreover, we will be liable to Weatherford for any corporate
level taxes incurred by Weatherford as a result of the spinoff, except to the
extent the taxes arise solely as a result of a change of control of Weatherford.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarized the SEC's views in applying generally
accepted accounting principles to selected revenue recognition issues. Based on
guidance in SAB No. 101, we changed our accounting policy to recognize revenue
upon completion of all third-party specific performance obligations as specified
in the sales arrangement. Such third-party performance obligations had been
considered inconsequential or perfunctory prior to the issuance of SAB No. 101.
We adopted SAB No. 101 in the fourth quarter of 2000, effective January 1, 2000.
The cumulative effect of the accounting change was $1.8 million, net of income
taxes of $1.0 million.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities". See Note 9.
30
32
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 data. 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 anticipate that 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 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.
Expectations for the Second Quarter 2001 and the Remainder of Fiscal 2001
As previously noted, as we look forward at our projected results for the
second quarter of 2001, we currently expect to report earnings before those
charges of approximately $0.08 to $0.11 per share. Looking beyond the second
quarter of 2001, we currently expect to report earnings per share in the third
and fourth quarter of 2001 in the mid teens ($0.14 to $0.18 per share) and
low-to-mid 20's ($0.23 to $0.28 per share), respectively.
Investors should be cautioned that our actual earnings for 2001 will be
highly dependent on our ability to increase our production of drill stem
products and our targeted levels of production, our ability to implement and
maintain pricing increases, in particular the pricing increases we are pushing
forward in our drill stem product line, our ability to maintain our current
market shares in our various businesses, our ability to reduce the losses in our
industrial drill pipe and marine connection product lines and to generate income
at those operations, our ability to reduce our manufacturing costs and general
world economic trends. Any material change in the markets or changes that affect
the assumptions used by us in modeling our 2001 results will affect our actual
results.
In modeling our earnings for 2001, we have made the following assumptions
regarding our operations. Although we believe, as of the date this report is
filed, that these assumptions are reasonable, there can be no assurance that
they will be correct in the future.
o Our production of drill pipe will be around 2.0 million feet in the
second quarter, 2.5 million feet in the third quarter and between
2.8 to 3.0 million feet in the fourth quarter.
o The recent declines in the United States and world economics will not
materially reduce drilling activity or the demand and pricing of our
products and services.
o Our average price of drill pipe will be around $33 to $34 a foot in
the third and fourth quarters and our recent price increases will
not result in any material loss of business.
o Our customers are holding very little excess drill pipe inventory.
o We will have pricing improvements in certain product lines within our
engineered connections segment of around 5%-10% during the remainder
of the year without any material loss of business.
o Our gross profit in our oilfield drill stem product line will increase
to around 30% by the fourth quarter.
o Our gross profit for all of our engineered connection segment
operations will average around 25% during the year.
31
33
o Our industrial drill pipe and marine connection product lines will
become profitable in the second half of 2001.
o Our marine connection product lines will not be further materially
affected by the impact of the Watts litigation described in our
Annual Report on Form 10-K.
o Distributor inventory of premium casing and tubing will not rise in
amounts that will materially affect demand. In particular, we have
assumed only a minor reduction in demand from distributors in the
second and fourth quarters.
o Our utility costs and other expenses will not increase substantially
from their current levels.
Our projections for 2001 are also based on the following assumptions
regarding our business and the industry we serve, which are subject to
modification from time to time as more fully described below under "Risk Factors
and Exposures." If any of these assumptions is not borne out, our results could
vary materially from those currently projected.
o North American drilling activity will continue to be strong, with
pricing increases realized.
o Oil prices will trade on average in the mid $20 a barrel range and
natural gas prices will not fall below $3.00 to $3.50 per MMBtu. In
addition, we have assumed that any short term declines in commodity
prices will not materially affect drilling activity.
o Drilling activity will continue to be strong and increase during 2001
due to strong commodity prices and a need to replace and add
reserves.
o International rig activity and volumes will continue to pick up.
o We will not experience any material unusual losses, expenses or
charges associated with litigation, warranty claims, environmental
matters or property losses.
o Our manufacturing operations will not experience any material
disruptions in supply or efficiencies.
o There will be no material geo-political events that disrupt energy
markets.
o We will not incur any material currency remeasurement or transactional
losses.
o There will not be any material acquisitions or divestments during the
year. Although we have made this assumption for modeling purposes,
we do expect that some acquisitions and divestments will be made
during the year that will affect our projections.
o Capital expenditures for the remainder of 2001 will approximate $19 to
$29 million and will relate primarily to the addition of revenue
producing assets.
Risk Factors and Exposures
This report and our other filings with the SEC and our public releases
contain statements relating to our future results, including our projections and
business trends. We believe these statements constitute "Forward-Looking
Statements" as defined in the Private Securities Litigation Reform Act of 1995.
Our company and the businesses in which it operates 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. Our Annual Report on Form 10-K
describes many of these risks and uncertainties and you should read that report
for additional information. These risks and uncertainties include, but are not
limited to, the following:
32
34
A MATERIAL DECLINE IN WORLDWIDE DRILLING ACTIVITY WOULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
Our business is materially dependent on the level of drilling activity
worldwide, which in turn depends primarily on prices for oil and gas. Lower
drilling activity not only decreases demand for our products, but following
rapid declines in drilling such as occurred in late 1998, the resulting
oversupply of used drill pipe of reasonable quality further impairs our
revenues. In general, we believe that our drill stem business trails changes in
the rig count by six to nine months due in part to the time required for the
industry to consume excess inventory of stockpiled used drill pipe. When
drilling activity declined in the second half of 1998 and 1999, our revenues and
profitability declined significantly. In addition, substantially all of our
customers are engaged in the oil and gas industry. This concentration of
customers may impact our overall exposure to credit risk, either positively or
negatively, in that our customers may be similarly affected by changes in
economic and industry conditions. We perform ongoing credit evaluations of our
customers and do not generally require collateral in support of our trade
receivables extensions of credit. We maintain reserves for potential credit
losses, and generally, actual losses have historically been within our
expectations.
AN ECONOMIC DOWNTURN COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND SERVICES
AND OUR RESULTS OF OPERATIONS.
The economic downturn that began in Asia in 1997 affected the economies in
other regions of the world, including South America and the former Soviet Union,
and contributed to the decline in the price of oil and the level of drilling
activity. The United States and worldwide economies (particularly in Europe and
Japan), have recently begun to decline. If these declines were to materially
affect the demand for oil and gas, the price for oil and gas and our products
and services could again decline and adversely affect our results of operations.
LABOR SHORTAGES COULD LIMIT OUR MANUFACTURING CAPACITY AND INCREASE OUR LABOR
COSTS, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our manufacturing operations are substantially dependent upon our ability
to recruit and retain qualified machinists, factory workers and other laborers.
As demand for our products and services improved during 2000, we increased our
headcount and are continuing to recruit qualified workers. During 2000, this was
increasingly difficult due to the strong labor market in the United States in
general, as well as the improving conditions in the oil and gas industry in
particular. Our ability to benefit from the expected continued upturn in the oil
and gas industry during 2001 and achieve the expected results of operations set
forth in our forward-looking statements assumes that we will continue to be able
to expand our manufacturing capacity and hire and retain qualified machinists,
factory workers and other laborers. Currently, demand for these employees in the
markets where our manufacturing operations are located have softened and we do
not expect to experience severe labor issues during 2001; however, labor
shortages could limit our manufacturing capacity. If we are not able to increase
our manufacturing capacity rapidly enough to take advantage of increased demand,
we could lose market share and our results of operations could be adversely
impacted. Additionally, if we are forced to significantly increase wages and
other benefits to attract additional workers, our future operating margins may
decrease.
OUR ABILITY TO MEET EARNINGS AND REVENUE GOALS FOR 2001 IS BASED UPON OUR
ABILITY TO SUCCESSFULLY INCREASE OUR MANUFACTURING CAPACITY, WHICH CAN BE
ADVERSELY AFFECTED BY UNEXPECTED COSTS AND DISRUPTIONS.
We have recently taken steps to increase our manufacturing capacity and
reduce manufacturing costs in all of our manufacturing operations. These
activities are ongoing and will continue throughout 2001, with the goal of being
able to manufacture between 2.8 and 3.0 million feet of drill pipe per quarter
by the end of 2001. These steps include reallocation of manufacturing capacity
among our existing product lines as well as bringing new and refurbished
equipment online. Our forward-looking statements assume that the manufacturing
expansion and consolidation are completed without any material disruptions or
delays. If there are any material disruptions or excess costs associated with
the manufacturing changes, our results of operations during 2001 could be
adversely affected.
33
35
OUR ABILITY TO MEET EARNINGS AND REVENUES GOALS FOR 2001 IS BASED UPON OUR
ABILITY TO SUCCESSFULLY RAISE PRICES FOR OUR DRILL STEM PRODUCTS, WHICH CAN BE
ADVERSELY AFFECTED BY CHANGES IN INDUSTRY CONDITIONS AND COMPETITIVE FORCES.
Beginning in 2001, we initiated substantial price increases for our drill
stem products, with the expectation that these price increases will begin
benefiting revenues and operating profit during the third quarter of 2001, when
we expect our existing backlog to have been produced. Our ability to raise and
maintain prices are subject to various risks, including adverse changes in
industry conditions and regulation as well as unexpected actions by our
competitors. Our forward-looking statements assume that such price increases
will be successful without any material adverse affects on our backlog or
volumes produced.
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.
For the first quarter of 2001, we derived approximately 13% of our total
revenues from our facilities outside the United States. We expect this
percentage to increase substantially as demand for our drill stem products
improves and our expectations for 2001 depend on our ability to increase our
international sales. In addition, many of our key manufacturing operations are
outside the United States. Our operations in certain international locations,
including Mexico, Austria, Italy, China and Indonesia, are subject to various
political and economic conditions existing in those countries that could disrupt
operations. These risks include:
o currency fluctuations and potential devaluations in most countries, in
particular those in South America and Asia and,
o currency restrictions and limitations on repatriation of profits in
various countries and political instability.
Our foreign operations may suffer disruptions, and we may incur losses that
will not be covered by insurance. Any material currency fluctuations or
devaluations or political disruptions that disrupt oil and gas exploration and
production or the movement of funds and assets could adversely affect our
results of operations and financial position.
OUR LONG-TERM SUPPLY CONTRACT MAY OBLIGATE US TO PURCHASE UNNEEDED MATERIALS,
AND AN INCREASE IN THE COST OF EUROS WOULD MAKE THOSE MATERIALS MORE EXPENSIVE
TO US.
We have entered into an agreement with Voest-Alpine Stahlrohr Kindberg
GmbH & Co. KG, an entity of which we own 50.01%, to purchase 60,000 metric tons
of raw materials per year through September 2003. 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 United States on the resale of these tubulars, which could affect our
ability to resell the tubulars in the United States. Further, our long-term
supply contract with Voest-Alpine is denominated in Euros. We have no
significant offsetting revenues in Euros, and we cannot currently hedge against
this contract for its entire term. Thus, a material long-term strengthening of
the Euro versus the U.S. dollar could adversely affect our results of
operations.
WE COULD BE SUBJECT TO SUBSTANTIAL LIABILITY CLAIMS, WHICH WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Many of our products are used in hazardous drilling and production
applications where an accident or a failure of a product can cause personal
injury, loss of life, damage to property, equipment or the environment, as well
as the suspension of the end-user's operations. If our products were to be
involved in any of these difficulties, we could face litigation and may be held
liable for those losses. Our insurance coverage may not be adequate in risk
coverage or policy limits to cover all losses or liabilities that we may incur.
Moreover, we may not be able in the future to maintain insurance at levels of
risk coverage or policy limits that we deem adequate. Any claims made under our
policies likely will cause our premiums to increase. Any future damages deemed
to be caused by our products or services 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 business, results of operations and
financial condition.
34
36
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. Compliance with these
environmental laws are a major consideration in the manufacturing of our
products, as we use and generate hazardous substances and wastes in our
manufacturing operations, and we may be subject to material financial liability
for any investigation and clean-up of such hazardous materials. 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. 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 also 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 IF THE ANTIDUMPING ORDERS
COVERING ARGENTINA, JAPAN, KOREA, ITALY AND MEXICO WERE REVOKED.
As described in our Annual Report on Form 10-K, the International Trade
Commission and the U.S. Department of Commerce are conducting "sunset reviews"
of antidumping orders covering Argentina, Italy, Japan, Korea and Mexico. Many
of the worlds largest OCTG producers are located in these countries. If these
orders were revoked, these producers of oil country tubular goods would be able
to import tubular products into the United States without the restriction of
these orders, which would subject us to increased competition and potentially
decrease our domestic market share as well as the prices we receive and expect
to receive for our products, which would adversely affect our results of
operations.
WE COULD BE SUBJECT TO ADDITIONAL EXPENSES FROM THE WATTS LITIGATION.
As more fully described in our Annual Report on Form 10-K, we have recorded
a reserve as a result of a jury verdict in litigation involving John D. Watts
and our XL Systems subsidiary. The trial judge has the discretion to award
additional damages and attorneys' fees that could increase our liability by an
additional $3.5 million to $4.5 million which could reduce our net income. The
trial judge also has the discretion to permanently enjoin us from utilizing the
premium connection that was the subject of the litigation in its current
configuration in the United States. We have identified and currently are testing
a redesign of this connection that will be outside the scope of the trial
court's and jury's decision, and therefore, do not expect any injunction to have
a material effect on our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
FINANCIAL INSTRUMENTS
We currently are exposed to certain market risks arising from transactions
that we enter into in the normal course of business. These risks relate to
fluctuations in foreign currency exchange rates and changes in interest rates.
We do not believe these risks are material.
FOREIGN CURRENCY RISK
The functional currency for most of our international operations is the
applicable local currency. Results of operations for foreign subsidiaries with
functional currencies other than the U.S. dollar are translated using average
exchange rates during the period. Assets and liabilities of these foreign
subsidiaries are translated into U.S. dollars using the exchange rates in effect
at the balance sheet date, and the resulting translation adjustments are
included in stockholders' equity. However, foreign currency transaction gains
and losses are reflected in income for the period. We hedge a portion of our
exposure to changes in foreign exchange rates principally with forward
contracts and call options.
35
37
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. See Note 9.
At March 31, 2001, we had open forward contracts and call options to
exchange U.S. dollars for Euros at a fair value loss of $1.8 million. If a 10%
change in the forward rate of were to occur subsequent to March 31, 2001, the
fair value of the open forward contracts and call options would change by
approximately $0.2 million. We recognized hedging losses of $0.6 million in
the first quarter of 2001.
INTEREST RATES
We are and will be subject to interest rate risk on our long-term fixed
interest rate debt and, to a lesser extent, variable interest rate borrowings.
We are subject to market risk exposure related to changes in interest rates on
our credit facility and certain variable rate indebtedness. As of March 31,
2001, we had borrowed $49.9 million under our credit facility. Additionally, at
March 31, 2001, there were outstanding borrowings of $0.5 million under a
miscellaneous credit facility, and there was $16.1 million of variable interest
rate debt outstanding. Based upon these balances, an immediate change of one
percent in the interest rate would not cause a material change in interest
expense on an annual basis. Excluding the 9 5/8% Senior Notes due 2007, most of
our borrowings are at variable rates and therefore the fair value of these
borrowings approximates book value. The fair value of our long-term debt at
March 31, 2001 was $225.1 million as compared to a carrying value of $216.4
million.
36
38
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(b) Six reports on Form 8-K were filed during the quarter ended March 31, 2001.
Current Report on Form 8-K dated January 31, 2001 which included a copy of
a presentation made at an industry conference in Vail, Colorado as Exhibit
99.1.
Current Report on Form 8-K dated February 5, 2001 which included our press
release dated February 5, 2001 as Exhibit 99.1 announcing the election of
Curtis W. Huff as President and Chief Executive Officer.
Current Report on Form 8-K dated February 12, 2001 which included our press
release dated February 12, 2001 as Exhibit 99.1, announcing financial
results for the quarter ended and year ended December 31, 2000. Also
included as Exhibit 99.2 was certain restated quarterly financial
information.
Current Report on Form 8-K dated February 13, 2001 which included certain
unaudited quarterly and annual financial information as Exhibit 99.1.
Amendment No. 1 on Form 8-K/A dated February 12, 2001 to Current Report on
Form 8-K originally filed on February 12, 2001 amends and restates certain
restated quarterly financial information as Exhibit 99.1.
Amendment No. 1 on Form 8-K/A dated February 13, 2001 to Current Report on
Form 8-K originally filed on February 13, 2001 amends and restates certain
restated quarterly financial information as Exhibit 99.1.
37
39
SIGNATURE
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/ FRANCES R. POWELL
------------------------------------------
Frances R. Powell*
Vice President and Chief Financial Officer
* Also signing on behalf of each of the
additional Registrants, other than
Grant Prideco USA, LLC.
GRANT PRIDECO, USA, LLC.
By: /s/ SAL SEGRETO
------------------------------------
Sal Segreto
President
Date: May 15, 2001
38