<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13439
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DRIL-QUIP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 74-2162088
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
13550 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS 77040
(713) 939-7711
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
___
As of November 13, 1998, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 17,245,000.
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<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRIL-QUIP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 32,612 $ 14,641
Trade receivables................................. 27,336 41,417
Inventories....................................... 52,436 52,873
Deferred taxes.................................... 3,694 4,233
Prepaids and other current assets................. 657 1,420
-------- --------
Total current assets............................ 116,735 114,584
Property, plant and equipment, net.................. 35,814 56,108
Other assets........................................ 372 271
-------- --------
Total assets.................................... $152,921 $170,963
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 15,354 $ 14,732
Current maturities of long-term debt.............. 210 156
Accrued income taxes.............................. 1,176 2,711
Customer prepayments.............................. 4,324 7,528
Accrued compensation.............................. 3,098 3,473
Other accrued liabilities......................... 3,200 2,705
-------- --------
Total current liabilities....................... 27,362 31,305
Long-term debt...................................... 308 211
Deferred taxes...................................... 1,090 1,168
-------- --------
Total liabilities............................... 28,760 32,684
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized at
$0.01 par value (none issued).................... -- --
Common stock:
50,000,000 shares authorized at $0.01 par value,
17,245,000 shares issued and outstanding....... 172 172
Additional paid-in capital........................ 63,291 63,291
Retained earnings................................. 62,590 75,736
Foreign currency translation adjustment........... (1,892) (920)
-------- --------
Total stockholders' equity...................... 124,161 138,279
-------- --------
Total liabilities and stockholders' equity...... $152,921 $170,963
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DRIL-QUIP INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues......................... $ 38,004 $ 47,125 $ 106,673 $ 132,829
Cost and expenses:
Cost of sales.................. 25,468 31,925 73,193 89,482
Selling, general and
administrative................ 4,125 5,397 11,964 15,556
Engineering and product
development................... 2,451 3,174 6,560 8,728
---------- ---------- ---------- ----------
32,044 40,496 91,717 113,766
---------- ---------- ---------- ----------
Operating income................. 5,960 6,629 14,956 19,063
Interest expense (income)........ 747 (305) 2,147 (1,005)
---------- ---------- ---------- ----------
Income before income taxes....... 5,213 6,934 12,809 20,068
Income tax provision............. 1,693 2,391 4,176 6,922
---------- ---------- ---------- ----------
Net income....................... $ 3,520 $ 4,543 $ 8,633 $ 13,146
========== ========== ========== ==========
Earnings per share:
Basic.......................... $ 0.24 $ 0.26 $ 0.60 $ 0.76
========== ========== ========== ==========
Fully diluted.................. $ 0.24 $ 0.26 $ 0.60 $ 0.76
========== ========== ========== ==========
Weighted average shares:
Basic.......................... 14,370,000 17,245,000 14,370,000 17,245,000
========== ========== ========== ==========
Fully diluted.................. 14,370,000 17,245,000 14,370,000 17,285,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DRIL-QUIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
----------------
1997 1998
------ --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $8,633 $ 13,146
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,908 4,033
Gain on sale of equipment................................. (103) (3)
Deferred income taxes..................................... (601) (452)
Changes in operating assets and liabilities:
Trade receivables........................................ (5,950) (13,817)
Inventories.............................................. (1,846) 396
Prepaids and other assets................................ (360) (654)
Trade accounts payable and accrued expenses.............. (1,118) 3,765
------ --------
Net cash provided by operating activities.................... 2,563 6,414
INVESTING ACTIVITIES
Purchase of property, plant, and equipment.................. (5,210) (24,063)
Proceeds from sale of equipment............................. 192 190
------ --------
Net cash used in investing activities....................... (5,018) (23,873)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term
borrowings................................................. 4,373 0
Principal payments on long-term debt........................ (2,669) (135)
------ --------
Net cash provided by (used in) financing activities......... 1,704 ( 135)
Effect of exchange rate changes on cash activities.......... (50) (377)
------ --------
Increase (decrease) in cash................................. ( 801) (17,971)
Cash at beginning of period................................. 1,361 32,612
------ --------
Cash at end of period....................................... $ 560 $ 14,641
====== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Dril-Quip, Inc., a Delaware corporation (the "Company" or "Dril-Quip"),
manufactures highly engineered offshore drilling and production equipment
which is well suited for use in deepwater, harsh environment and severe
service applications. The Company's principal products consist of subsea and
surface wellheads, subsea and surface production trees, mudline hanger
systems, specialty connectors and associated pipe, drilling and production
riser systems, wellhead connectors and diverters for use by major integrated,
large independent and foreign national oil and gas companies in offshore areas
throughout the world. Dril-Quip also provides installation and reconditioning
services and rents running tools for use in connection with the installation
and retrieval of its products. The Company has three subsidiaries that
manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland,
and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ
Holdings PTY Ltd. is located in Perth, Australia.
The consolidated financial statements included herein have been prepared by
Dril-Quip and are unaudited, except for the balance sheet at December 31,
1997, which has been prepared from the audited financial statements at that
date. In the opinion of management, the unaudited consolidated interim
financial statements include all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the financial
position as of September 30, 1998, the results of operations for each of the
three and nine-month periods ended September 30, 1998 and 1997 and the cash
flows for each of the nine-month periods ended September 30, 1998 and 1997.
Although management believes the unaudited interim related disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results
of operations and the cash flows for the nine-month period ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year. The consolidated financial statements included herein should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies........................... $13,178 $11,353
Work in progress..................................... 14,766 19,942
Finished goods and purchased supplies................ 24,492 21,578
------- -------
$52,436 $52,873
======= =======
</TABLE>
5
<PAGE>
DRIL-QUIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
3. USE OF PROCEEDS
On October 28, 1997, the Company sold 2,875,000 shares of common stock in an
initial public offering (the "Offering"). The net proceeds to the Company from
the Offering were approximately $63 million. The Company is using these
proceeds for a three-year capital expansion program to increase manufacturing
capacity, improve and expand facilities and manufacture additional running
tools for rental. At the current time, the Company has made no changes to its
capital expansion program. However, due to changes in overall market
conditions, planned capital expenditures for 1999 are currently under review.
Pending application of the proceeds for these purposes, the Company used
approximately $30 million to repay its bank indebtedness in full during late
October and November 1997. The balance of the proceeds will be used for
working capital and excess cash is being invested in short-term investment
grade securities.
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or shareholders' equity. SFAS No. 130
requires the Company to include unrealized gains or losses on foreign currency
translation adjustments in other comprehensive income, which prior to adoption
were reported separately in shareholders' equity.
During the first nine months of 1998 and 1997, total comprehensive income
amounted to $14.1 million and $6.4 million, respectively. For the three-month
periods ended September 30, 1998 and 1997, total comprehensive income equaled
$5.1 million and $2.3 million, respectively.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited consolidated financial statements. This discussion should be read in
conjunction with the unaudited consolidated financial statements included
elsewhere herein, and with the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the annual
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
OVERVIEW
Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. The Company's principal products consist
of subsea and surface wellheads, subsea and surface production trees, mudline
hanger systems, specialty connectors and associated pipe, drilling and
production riser systems, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.
The market for offshore drilling and production equipment and services is
fundamentally driven by the exploration, development and production spending
of oil and gas companies, particularly with respect to offshore activities
worldwide.
Revenues. Dril-Quip's revenues are generated by its two operating groups:
the Product Group and the Service Group. The Product Group manufactures
offshore drilling and production equipment, and the Service Group provides
installation and reconditioning services as well as rental running tools for
installation and retrieval of its products. In 1997, the Company derived 86%
of its revenues from the sale of its products and 14% of its revenues from
services. Revenues from the Service Group generally correlate to revenues from
product sales because increased product sales generate increased revenues from
installation services and rental running tools. Substantially all of Dril-
Quip's sales are made on a purchase order basis. Purchase orders are subject
to change and/or termination at the option of the customer. In case of a
change or termination, the customer is required to pay the Company for work
performed and other costs necessarily incurred as a result of the change or
termination.
Historically, Dril-Quip recognized revenues upon the delivery of completed
product. Beginning in 1997, the Company has been involved with larger and more
complex projects that have longer manufacturing times. The Company accounted
for such projects on a percentage of completion basis. For the first nine
months of 1998, three projects representing approximately 17% of the Company's
revenues were accounted for using percentage of completion accounting. The
Company expects that this percentage may increase in the future. Revenues
accounted for in this manner are generally recognized on the ratio of costs
incurred to the total estimated costs. Accordingly, price and cost estimates
are reviewed periodically as the work progresses, and adjustments
proportionate to the percentage of completion are reflected in the period when
such estimates are revised. Amounts received from customers in excess of
revenues recognized are classified as a current liability. The Company
historically has experienced some seasonality, with revenues and operating
income slightly lower during the first and third quarters compared to the
second and fourth quarters. The Company's revenues are affected by its
customers' capital expenditure budgeting process, which generally results in
lower revenues in the first quarter and higher revenues in the fourth quarter.
The increase in revenues recognized using percentage of completion accounting
may result in less fluctuation in revenues recognized from quarter to quarter.
7
<PAGE>
Foreign sales represent a significant portion of the Company's business. In
the nine months ended September 30, 1998, the Company generated approximately
66% of its revenues from foreign sales. In this period, approximately 68% (on
the basis of revenues generated) of all products sold were manufactured in the
United States.
Cost of Sales. The principal elements of cost of sales are labor, raw
materials and manufacturing overhead. Variable costs, such as labor, raw
materials, supplies and energy, generally account for approximately two-thirds
of the Company's cost of sales. The Company has experienced increased labor
costs over the past few years due to the limited supply of skilled workers.
Fixed costs, such as the fixed portion of manufacturing overhead, constitute
the remainder of the Company's cost of sales. Cost of sales as a percentage of
revenues is also influenced by the product mix sold in any particular quarter
and market conditions. The Company's costs related to its foreign operations
do not significantly differ from its domestic costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs associated with sales and marketing,
general corporate overhead, compensation expense, legal expenses and other
related administrative functions.
Engineering and Product Development Expenses. Engineering and product
development expenses consist of new product development and testing, as well
as application engineering related to customized products.
Income Tax Provision. Dril-Quip's effective tax rate has historically been
lower than the statutory rate due to benefits from its foreign sales
corporation.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product Group.................................... 85.8% 88.0% 85.7% 87.7%
Service Group.................................... 14.2% 12.0% 14.3% 12.3%
------ ------ ------ ------
Total.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 67.0% 67.7% 68.6% 67.4%
Selling, general and administrative expenses....... 10.9% 11.5% 11.2% 11.7%
Engineering and product development expenses....... 6.4% 6.7% 6.2% 6.6%
------ ------ ------ ------
Operating income................................... 15.7% 14.1% 14.0% 14.3%
Interest expense................................... 2.0% -0.6% 2.0% -0.8%
------ ------ ------ ------
Income before income taxes......................... 13.7% 14.7% 12.0% 15.1%
Income tax provision............................... 4.4% 5.1% 3.9% 5.2%
------ ------ ------ ------
Net income......................................... 9.3% 9.6% 8.1% 9.9%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997.
Revenues. Revenues increased by $9.1 million, or 24%, to $47.1 million in
the three months ended September 30, 1998 from $38.0 million in the three
months ended September 30, 1997. This increase resulted from increased
domestic sales in the United States of $1.3 million, increased export sales
from the United States of $9.9 million, increased European sales of $1.1
million and decreased sales of $3.2 million in the Asia-Pacific area. In
general, revenue increases were the result of increased manufacturing capacity
and increased sales of new products related to larger and longer-term
projects. Decreased revenues, based upon a quarter-to-quarter comparison, in
the Asia-Pacific area resulted from an unusually large shipment which occurred
in the third quarter of 1997.
Cost of Sales. Cost of sales increased $6.4 million, or 25%, to $31.9
million for the three months ended September 30, 1998 from $25.5 million for
the same period in 1997. As a percentage of revenues, cost of sales was 67%
and 68% for the three-month periods ending September 30, 1997 and 1998.
Selling, General and Administrative Expenses. In the three months ended
September 30, 1998, selling, general and administrative expenses increased by
$1.3 million, or 32%, to $5.4 million from $4.1 million in the 1997 period.
The increase was due to an increased number of personnel to support higher
sales volumes and increased labor costs. Selling, general and administrative
expenses increased as a percentage of revenues from 11% to 12%.
Engineering and Product Development Expenses. In the three months ended
September 30, 1998, engineering and product development expenses increased by
$723,000, or 29% to $3.2 million from $2.5 million in the same period in 1997.
The increase reflects an increased number of personnel and increased
development testing related to new products.
Interest Expense. Interest expense for the three months ended September 30,
1997 was $747,000 as compared to interest income of $305,000 for the three-
month period ended September 30, 1998. This fluctuation of approximately $1.05
million resulted from the repayment of substantially all of the Company's bank
debt during the fourth quarter of 1997.
Net Income. Net income increased by approximately $1.0 million, or 29%, from
$3.5 million in the three months ended September 30, 1997 to $4.5 million for
the same period in 1998 for the reasons set forth above.
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997.
Revenues. Revenues increased by $26.1 million, or 24%, to $132.8 million in
the nine months ended September 30, 1998 from $106.7 million in the nine
months ended September 30, 1997. This increase resulted from increased
domestic sales in the United States of $8.7 million, increased export sales
from the United States of $15.8 million, increased European sales of $2.1
million and decreased sales of $500,000 in the Asia-Pacific area. In general,
these revenue increases were the result of increased manufacturing capacity
and an increase in sales of new products related to larger and longer-term
projects.
Cost of Sales. Cost of sales increased $16.3 million, or 22%, to $89.5
million for the nine months ended September 30, 1998 from $73.2 million for
the same period in 1997. As a percentage of revenues, cost of sales was 69%
and 67% for the nine-month periods ending September 30, 1997 and 1998,
respectively. This improvement in cost of sales was mainly due to changes in
the Company's overall product mix.
Selling, General and Administrative Expenses. In the nine months ended
September 30, 1998, selling, general and administrative expenses increased by
$3.6 million, or 30%, to $15.6 million from $12.0 million in the 1997 period.
The increase was due to an increased number of personnel to support higher
sales volumes and increased labor costs. Selling, general and administrative
expenses increased as a percent of revenues from 11% to 12%.
Engineering and Product Development Expenses. In the nine months ended
September 30, 1998, engineering and product development expenses increased by
$2.1 million, or 32%, to $8.7 million from $6.6 million in the same period in
1997. The increase reflects an increased number of personnel and increased
development testing related to new products.
Interest Expense. Interest expense for the nine months ended September 30,
1997 was approximately $2.1 million as compared to interest income of $1.0
million for the nine-month period ended September 30, 1998. This fluctuation
of approximately $3.1 million resulted from the repayment of substantially all
of the Company's bank debt during the fourth quarter of 1997.
Net Income. Net income increased by approximately $4.5 million, or 52%, from
$8.6 million in the nine months ended September 30, 1997 to $13.1 million for
the same period in 1998 for the reasons set forth above.
LIQUIDITY AND CAPITAL RESOURCES
The primary liquidity needs of the Company are to fund capital expenditures
and to fund working capital. Historically, the Company's principal sources of
funds have been cash flow from operations and bank indebtedness. However, in
October of 1997, the Company sold 2,875,000 shares of common stock in an
initial public offering (the "Offering") which resulted in net proceeds to the
Company of approximately $63 million. The Company is using the proceeds from
the Offering for a three-year capital expansion program to increase
manufacturing capacity, improve and expand facilities and manufacture
additional running tools for rental. At the current time, the Company has made
no changes to its capital expansion program. However, due to changes in
overall market conditions, planned capital expenditures for 1999 are currently
under review.
Pending application of the proceeds for these purposes, the Company used
approximately $30 million to repay its bank indebtedness in full during late
October and November 1997. The balance of the proceeds will be used for
working capital and excess cash is being invested in short-term investment
grade securities.
Net cash provided by operating activities was approximately $2.6 million and
$6.4 million for the nine months ended September 30, 1997 and 1998,
respectively. Improvements in cash flow from operating activities are
principally due to improved operating results, offset by increased working
capital requirements attributable to increases in accounts receivable due to
increased revenues and project sales.
10
<PAGE>
Capital expenditures by the Company were $5.2 million and $24.1 million for
the nine months ended September 30, 1997 and 1998, respectively. Principal
payments on long-term debt were approximately $2.7 million and $135,000 for
the nine months ended September 30, 1997 and 1998, respectively.
The Company believes that the remaining proceeds from the Offering and cash
generated from operations will be sufficient to fund operations, working
capital needs and anticipated capital expenditure requirements.
YEAR 2000
The Company has undertaken a compliance program which includes a
comprehensive review of its computer systems and operational equipment to
identify the systems that may be impacted by the Year 2000 problem. The Year
2000 problem is a result of computer codes being written using two digits,
rather than four, to define the applicable year. This could result in system
failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company's Year 2000 compliance program has been initiated to ensure that
all of the critical systems and processes under its direct control remain
operational. This program will focus on the Company's information technology
systems and software, embedded systems in production control equipment, and
third party readiness in the supply of products and services. Upon completion
of the assessment phase of the program, the Company plans to remediate or
replace all systems, equipment and products that are negatively affected by
the Year 2000 problem.
The Company is currently implementing the program and anticipates completion
of remediation and testing prior to July 1, 1999. The Company does not
anticipate that its products will be affected by Year 2000 issues because its
products are mechanical and structural in nature and do not include integrated
circuitry requiring data input. Although the Company is attempting to
determine the readiness of third parties, there may be certain interactive or
interdependent systems or processes outside the control of the Company, and
there can be no assurance that these systems or processes will remain
functional. Non-compliance by key third parties could have a material effect
on the operations of the Company, causing shutdowns or other significant
business interruptions.
To date, costs incurred by the Company related solely to the Year 2000
problem have been minimal. In the opinion of management, the costs to complete
the Year 2000 compliance program will not have a material effect on the
Company's financial position, cash flows or consolidated results of
operations.
11
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Use of Proceeds.
In October 1997 the Company sold 2,875,000 shares of Common Stock in the
Offering. The net proceeds to the Company from the Offering were $63.3
million. As of September 30, 1998, the Company had used such net proceeds as
follows: (i) to repay $30 million of indebtedness outstanding under the
Company's credit facilities and term loans, which constitutes repayment of
such facilities in full, (ii) $27.5 million for the purchase of buildings,
machinery and equipment and (iii) $5.8 million in temporary investments. None
of such payments was a direct or indirect payment to directors or officers of
the Company or their associates, to persons owning 10% or more of any class of
equity securities of the Company or to affiliates of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Forward Looking Statements.
Statements contained in all parts of this document that are not historical
facts are forward looking statements that involve risks and uncertainties that
are beyond the Company's control. These forward looking statements include the
following types of information and statements as they relate to the Company:
. scheduled, budgeted and other future capital expenditures;
. use of Offering proceeds;
. working capital requirements;
. the availability of expected sources of liquidity;
. the impact of the Year 2000 problem;
. all statements regarding future operations, financial results, business
plans and cash needs; and
. the use of any of the words "anticipate," "estimate," "expect," "may,"
"project," "believe" and similar expressions intended to identify
uncertainties.
These statements are based upon certain assumptions and analyses made by
management of the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, including but not
limited to, those relating to the volatility of oil and natural gas prices and
cyclicality of the oil and gas industry, the Company's international
operations, operating risks, the Company's dependence on key employees, the
Company's dependence on skilled machinists and technical personnel, the
Company's reliance on product development and possible technological
obsolescence, control by certain stockholders, the potential impact of
governmental regulation and environmental matters, competition,
12
<PAGE>
reliance on significant customers and other factors detailed in the
Registration Statement on Form S-1 (Registration No. 333-33447) filed in
connection with the Offering and the Company's other filings with the
Securities and Exchange Commission. Prospective investors are cautioned that
any such statements are not guarantees of future performance, and that, should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 --Agreement and Plan of Merger by and Between Dril-Quip, Inc., a Texas
corporation, and Dril-Quip, Inc., a Delaware corporation
(Incorporated herein by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-33447)).
*3.1 --Restated Certificate of Incorporation of the Company (Incorporated
herein by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-33447)).
*3.2 --Bylaws of the Company (Incorporated herein by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-1 (Registration
No. 333-33447)).
*3.3 --Certificate of Designations for Series A Junior Participating
Preferred Stock.
*4.1 --Form of certificate representing Common Stock (Incorporated herein
by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1 (Registration No. 333-33447)).
*4.2 --Registration Rights Agreement among Dril-Quip, Inc. and certain
stockholders (Incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
33447)).
*4.3 --Rights Agreement between Dril-Quip, Inc. and Chase Mellon
Shareholder Services, L.L.C., as rights agent (Incorporated herein by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-33447)).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* Incorporated herein by reference as indicated.
REPORTS ON FORM 8-K
None.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRIL-QUIP, INC.
Date: November 13, 1998 /s/ Larry E. Reimert
_____________________________________
Principal Financial Officer
and Duly Authorized Signatory
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 32,612 14,641
<SECURITIES> 0 0
<RECEIVABLES> 27,336 41,417
<ALLOWANCES> 0 0
<INVENTORY> 52,436 52,873
<CURRENT-ASSETS> 116,735 114,584
<PP&E> 69,049 93,744
<DEPRECIATION> (33,235) (37,636)
<TOTAL-ASSETS> 152,921 170,963
<CURRENT-LIABILITIES> 27,362 31,305
<BONDS> 0 0
0 0
0 0
<COMMON> 172 172
<OTHER-SE> 123,989 138,107
<TOTAL-LIABILITY-AND-EQUITY> 152,921 170,963
<SALES> 146,823 132,829
<TOTAL-REVENUES> 146,823 132,829
<CGS> 99,800 89,482
<TOTAL-COSTS> 125,271 113,766
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,027 (1,005)
<INCOME-PRETAX> 19,525 20,068
<INCOME-TAX> 6,587 6,922
<INCOME-CONTINUING> 12,938 13,146
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,938 13,146
<EPS-PRIMARY> 0.87 0.76
<EPS-DILUTED> 0.87 0.76
</TABLE>
