<PAGE> 1
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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 SEPTEMBER 30, 2000
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.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0312499
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
1450 LAKE ROBBINS DRIVE
SUITE 600
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip Code)
</TABLE>
(281) 297-8500
(Registrant's telephone number, include area code)
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(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:
<TABLE>
<S> <C>
OUTSTANDING AT
TITLE OF CLASS OCTOBER 30, 2000
Common Stock, par value $0.01 108,549,317
</TABLE>
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRANT PRIDECO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 2,899 $ 6,204
Restricted Cash........................................... 4,917 3,658
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $286 and $500 at September 30, 2000 and
December 31, 1999, respectively......................... 113,617 77,650
Inventories............................................... 192,478 173,904
Current Deferred Tax Asset................................ 6,136 6,197
Other Current Assets...................................... 7,830 4,425
-------- --------
327,877 272,038
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Machinery and Equipment................................... 229,300 224,225
Land, Buildings and Other Property........................ 84,182 81,390
-------- --------
313,482 305,615
Less: Accumulated Depreciation............................ 111,982 98,906
-------- --------
201,500 206,709
-------- --------
GOODWILL, NET............................................... 182,541 187,765
INVESTMENT IN UNCONSOLIDATED AFFILIATES..................... 35,863 37,453
OTHER ASSETS................................................ 30,193 30,610
-------- --------
$777,974 $734,575
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion of Long-Term
Debt.................................................... $ 52,507 $ 14,710
Accounts Payable.......................................... 55,459 47,459
Current Deferred Tax Liability............................ 7,144 7,144
Customer Advances......................................... 1,633 18,503
Other Accrued Liabilities................................. 33,423 19,585
-------- --------
150,166 107,401
-------- --------
SUBORDINATED NOTE TO WEATHERFORD............................ 100,000 100,000
LONG-TERM DEBT.............................................. 19,018 24,276
DEFERRED INCOME TAXES....................................... 30,056 44,533
MINORITY INTEREST........................................... 1,024 886
OTHER LONG-TERM LIABILITIES................................. 22,489 3,623
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 Par Value............................. 1,085 --
Capital in Excess of Par Value............................ 344,145 --
Predecessor Stockholder's Investment...................... -- 353,617
Treasury Stock, at Cost................................... (671) --
Retained Earnings......................................... 119,897 113,594
Deferred Compensation Obligation.......................... 4,708 --
Accumulated Other Comprehensive Loss...................... (13,943) (13,355)
-------- --------
455,221 453,856
-------- --------
$777,974 $734,575
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
GRANT PRIDECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES........................................... $131,232 $ 58,851 $350,912 $196,776
COSTS AND EXPENSES:
Cost of Sales.................................... 103,097 58,395 291,323 177,677
Selling, General and Administrative
Attributable to Segments...................... 8,845 7,965 25,550 23,181
Corporate General and Administrative............. 5,188 3,675 14,696 10,679
Equity Income in Unconsolidated Affiliates....... (1,801) -- (3,891) --
Weatherford Charges.............................. -- 500 500 1,000
-------- -------- -------- --------
115,329 70,535 328,178 212,537
-------- -------- -------- --------
OPERATING INCOME (LOSS)............................ 15,903 (11,684) 22,734 (15,761)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Expense................................. (4,262) (2,943) (11,572) (8,332)
Other, Net....................................... 43 109 (347) 400
-------- -------- -------- --------
(4,219) (2,834) (11,919) (7,932)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. 11,684 (14,518) 10,815 (23,693)
INCOME TAX (PROVISION) BENEFIT..................... (4,323) 4,075 (4,374) 6,293
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE MINORITY INTEREST......... 7,361 (10,443) 6,441 (17,400)
MINORITY INTEREST.................................. (69) -- (138) --
-------- -------- -------- --------
NET INCOME (LOSS).................................. $ 7,292 $(10,443) $ 6,303 $(17,400)
======== ======== ======== ========
INCOME (LOSS) PER SHARE
(Pro forma prior to effective date of spinoff)
Basic............................................ $ 0.07 $ (0.10) $ 0.06 $ (0.18)
======== ======== ======== ========
Diluted.......................................... $ 0.07 $ (0.10) $ 0.06 $ (0.18)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
(Pro forma prior to effective date of spinoff)
Basic............................................ 108,481 101,408 108,450 98,770
======== ======== ======== ========
Diluted.......................................... 110,595 101,408 110,335 98,770
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
GRANT PRIDECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)......................................... $ 6,303 $(17,400)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization.......................... 23,393 22,162
Deferred Income Tax Provision.......................... 2,409 182
Equity Income in Unconsolidated Affiliates, Net of
Dividends............................................. (3,465) --
Other.................................................. 411 --
Changes in Operating Assets and Liabilities, Net of
Effect of Businesses Acquired:
Accounts Receivable.................................. (37,440) 59,090
Inventories.......................................... (19,119) 10,680
Other Current Assets................................. (4,551) 10,416
Other Assets......................................... (834) (1,701)
Accounts Payable..................................... 6,690 (14,208)
Other Current Liabilities............................ 3,643 (19,338)
Customer Advances.................................... (16,870) 12,952
Purchase Credit...................................... -- (7,002)
Other, Net........................................... 1,090 (3,177)
-------- --------
Net Cash (Used) Provided by Operating
Activities....................................... (38,340) 52,656
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of Cash Acquired........... (867) (10,703)
Capital Expenditures for Property, Plant and Equipment.... (15,111) (14,795)
-------- --------
Net Cash Used by Investing Activities............. (15,978) (25,498)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Revolving Credit Facility................... 47,459 --
Repayments of Debt........................................ (14,543) (53,608)
Proceeds from Stock Option Exercises...................... 1,036 --
Purchases of Treasury Stock............................... (671) --
Predecessor Stockholder's Investment...................... 17,732 22,123
-------- --------
Net Cash Provided (Used) by Financing
Activities....................................... 51,013 (31,485)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (3,305) (4,327)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 6,204 6,070
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,899 $ 1,743
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
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.
The condensed combined balance sheet as of December 31, 1999 and the
condensed combined 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
condensed consolidated financial statements have been prepared using the
historical bases in the assets and liabilities and historical results of
operations related to Grant Prideco. The condensed consolidated 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 condensed consolidated financial statements included
herein may not necessarily reflect the consolidated 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 condensed consolidated financial statements as of September 30, 2000
and for the three and nine months then ended have not been audited but have been
prepared in conformity with the accounting principles applied in the audited
combined financial statements for the fiscal year ended December 31, 1999
contained in the Grant Prideco Registration Statement on Form 10, as amended. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the condensed consolidated
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. This Form 10-Q should be read in conjunction with
the audited combined financial statements and notes included in the Form 10, as
amended.
Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 2000 classifications. These reclassifications have
no impact on net income.
5
<PAGE> 6
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in stockholders' equity during
the periods that do not result from transactions with stockholders. The
Company's total comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2000 1999 2000 1999
------- --------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Income (Loss)................................. $7,292 $(10,443) $6,303 $(17,400)
Foreign Currency Translation Adjustments.......... 853 1,265 (588) 25
------ -------- ------ --------
Total Comprehensive Income (Loss)................. $8,145 $ (9,178) $5,715 $(17,375)
====== ======== ====== ========
</TABLE>
3. INVENTORIES
Inventories by category are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials, components and supplies...................... $144,673 $ 93,980
Work in process............................................. 25,473 15,720
Finished goods.............................................. 22,332 64,204
-------- --------
$192,478 $173,904
======== ========
</TABLE>
4. ACQUISITIONS
In April 2000, the Company acquired a facility leased by Petro-Drive, Inc.
for $1.3 million to effect the completion of the acquisition that occurred
August 1999. Additionally, there was a final working capital adjustment to the
purchase price of Petro-Drive, Inc., which resulted in the Company receiving
approximately $0.4 million in cash.
In 1999, the Company completed seven acquisitions, including two
investments accounted for under the equity method, for $19.2 million in cash,
$31.2 million in notes payable and assumed debt and 0.45 million shares of
Weatherford common stock.
The acquisitions discussed above were accounted for using the purchase
method of accounting. The results of operations of all acquisitions are included
in the Condensed Consolidated Statements of Operations from their respective
dates of acquisition. The acquisitions are not material to the Company
individually or in the aggregate; therefore, pro forma information is not
provided.
5. CREDIT FACILITY
On April 14, 2000, the Company entered into 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.
Borrowings under the Credit Facility are based on the lender's determination of
the collateral value of the inventories and receivables securing the Credit
Facility. The Credit Facility also provides the Company with availability for
stand-by letters of credit and bid and performance bonds. 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 September 30, 2000, the Company had
outstanding borrowings of
6
<PAGE> 7
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$47.5 million under the revolving credit facility and $6.3 million had been used
to support outstanding letters of credit. The average interest rate for the
outstanding borrowings under the Credit Facility was 9.3% at September 30, 2000.
Additionally, at September 30, 2000, $0.8 million of outstanding letters of
credit had been supported under various available letter of credit facilities
that are not related to the revolving credit and letter of credit facility.
6. DEBT
In connection with the October 1, 1999 acquisition of Drill Pipe
Industries, Inc., the Company issued a non-interest bearing note payable of $1.4
million that was paid in January 2000.
In connection with the July 1999 acquisition of a 50.01% interest in
Voest-Alpine Stahlrohr Kindberg GmbH & Co. KG ("Voest Alpine"), the Company
incurred debt in the amount of $24.6 million (the "Voest-Alpine Debt"). As of
September 30, 2000, principal of $5.0 million is payable over two years in four
equal installments in each January and July until July 2002. Additionally, $12.4
million, is payable over the remaining 6.5-year period out of the annual
dividend payable to the Company as a shareholder of Voest-Alpine. Any remaining
principal balance that has not been repaid by July 2004, is payable in five
equal semi-annual installments beginning on December 1, 2004. In June 2000, a
dividend from Voest-Alpine of approximately $0.4 million was applied as a
principal payment on the Voest-Alpine Debt. In May 2000, Voest-Alpine changed
their functional currency from Austrian schillings to Euros; therefore the
Company's debt to Voest-Alpine is now payable in Euros. Voest-Alpine's change in
functional currency to Euros had no material effect on the Company's financial
condition or results of operations. Interest on the Voest-Alpine debt is payable
every six months beginning January 2000. The interest rate as of September 30,
2000 was 4.9% per annum.
7. SUBORDINATED NOTE TO WEATHERFORD
In connection with the Distribution, the Company issued to Weatherford an
unsecured subordinated note in the amount of $100 million. The Weatherford note
bears interest at an annual rate of 10%. Interest payments are due quarterly,
and principal and all unpaid interest is due no later than March 31, 2002. If
the Company completes a debt or equity financing (whether public or private, but
excluding working capital borrowings under the Credit Facility and any equity
issued in connection with a business combination) while the Weatherford note is
outstanding, the Company generally will be required to use a portion of the net
proceeds of that financing to repay any amount outstanding under the Weatherford
note as of the time the Company completes that financing. The terms of the
Weatherford note restrict Grant Prideco's ability to declare and make dividends
and other distributions to Grant Prideco's stockholders.
Interest expense on the Weatherford note prior to January 1, 2000 shown in
the condensed combined financial statements includes the interest expense
associated with the $100 million indebtedness based on Weatherford's average
long-term debt rates, or 7.25%. Beginning January 1, 2000, interest expense on
the Weatherford note is based on the stated annual rate of 10%.
8. FINANCIAL INSTRUMENTS
The functional currency for most of the Company's 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. The Company hedges it's
exposure to changes in foreign exchange principally with forward contracts.
7
<PAGE> 8
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Forward contracts designated as hedges of foreign currency denominated
monetary assets and liabilities are also marked to spot with the resulting gains
and losses similarly recognized in earnings, offsetting losses and gains on the
net monetary assets and liabilities hedged. The Company enters into foreign
exchange contracts only as a hedge against existing economic exposures and not
for speculative or trading purposes. The counterparties to the Company's foreign
exchange contracts are creditworthy multinational commercial banks. Management
believes that the risk of counterparty nonperformance is immaterial. At
September 30, 2000, the Company had open forward contracts to exchange U.S.
dollars for Austrian schillings and Euros totaling $31.1 million.
Gains and losses attributable to the translation of the Voest-Alpine Debt
are included as a separate component of Stockholders' Equity since the
Voest-Alpine Debt, is designated as, and is effective as, a partial economic
hedge of the net investment in Voest-Alpine.
Gains and losses on forward contracts designated as hedges of identifiable
foreign currency firm commitments are not recognized until the underlying
transaction is recorded.
9. 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 and
nine month periods ended September 30, 2000, the Company had potentially
dilutive common stock equivalents of approximately 2.1 million and 1.9 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.
10. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At September 30,
2000, the Company had $4.9 million of restricted cash related to its 54%
interest in H-Tech that is subject to dividend and distribution restrictions.
11. COMMITMENTS
As part of the arrangement to invest in Voest-Alpine, the Company entered
into a four-year supply contract with Voest-Alpine commencing July 1999. Under
this agreement, the Company agreed to purchase a minimum of 60,000 metric tons
of tubulars per year for the next three years at a negotiated third party price.
12. TRANSACTIONS WITH WEATHERFORD
Sales
Weatherford purchases drill pipe and other related products from Grant
Prideco. Prior to the Distribution, 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 condensed combined
financial statements.
8
<PAGE> 9
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 September 30, 2000, the current portion of the
drill stem credit, $10.0 million, is included in "Other Accrued Liabilities,"
with the remaining $19.6 million included in "Other Long-Term Liabilities," in
the accompanying Condensed Consolidated Balance Sheets.
Weatherford Overhead Charges
Weatherford overhead charges represent 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 include accounting,
legal, tax, treasury and risk management services. Such allocation is included
in the accompanying Condensed Consolidated Statements of Operations as
Weatherford Charges.
Weatherford Direct Services
Grant Prideco was allocated $1.4 million and $4.3 million of costs related
to Weatherford's information systems function for the three and nine months
ended September 30, 1999, respectively. As of January 1, 2000, Grant Prideco had
completed the formation of a separate information systems department.
Information systems charges were allocated based on direct support provided,
equipment usage and number of system users and are included in "Corporate
General and Administrative" expense in the accompanying Condensed Consolidated
Statements of Operations.
13. SEGMENT INFORMATION
The Company operates through two business segments: Drill Stem Products and
Engineered Connections and Premium Tubulars. The Drill Stem Products segment
manufactures drill pipe, drill collars and heavyweight drill pipe and the
Engineered Connections and Premium Tubulars segment manufactures and provides
engineered threads for premium production tubulars, liners, casing and marine
conductors. The Company's products are used primarily in the exploration and
production of oil and natural gas.
9
<PAGE> 10
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by industry segment for each of the three and nine
month periods ended September 30, 2000 and 1999, is summarized below:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Drill Stem....................................... $ 65,831 $ 17,305 $162,353 $ 88,900
Engineered Connections and Premium Tubulars...... 65,401 41,546 188,559 107,876
-------- -------- -------- --------
$131,232 $ 58,851 $350,912 $196,776
======== ======== ======== ========
EBITDA(a):
Drill Stem....................................... $ 15,364 $ (1,258) $ 25,839 $ 14,765
Engineered Connections and Premium Tubulars...... 13,391 1,150 35,166 2,494
Corporate........................................ (5,072) (3,901) (14,878) (10,858)
-------- -------- -------- --------
$ 23,683 $ (4,009) $ 46,127 $ 6,401
======== ======== ======== ========
Depreciation and amortization:
Drill Stem....................................... $ 3,775 $ 3,803 $ 11,662 $ 10,731
Engineered Connections and Premium Tubulars...... 3,889 3,598 11,413 10,610
Corporate........................................ 116 274 318 821
-------- -------- -------- --------
$ 7,780 $ 7,675 $ 23,393 $ 22,162
======== ======== ======== ========
Operating income (loss):
Drill Stem....................................... $ 11,589 $ (5,061) $ 14,177 $ 4,034
Engineered Connections and Premium Tubulars...... 9,502 (2,448) 23,753 (8,116)
Corporate........................................ (5,188) (4,175) (15,196) (11,679)
-------- -------- -------- --------
$ 15,903 $(11,684) $ 22,734 $(15,761)
======== ======== ======== ========
Capital Expenditures for Property, Plant and
Equipment:
Drill Stem....................................... $ 3,422 $ 6,056 $ 9,989 $ 8,682
Engineered Connections and Premium Tubulars...... 2,042 822 5,040 6,012
Corporate........................................ 10 34 82 101
-------- -------- -------- --------
$ 5,474 $ 6,912 $ 15,111 $ 14,795
======== ======== ======== ========
</TABLE>
---------------
(a) The Company evaluates performance and allocates resources based on EBITDA,
which is calculated as operating income (loss) adding back depreciation and
amortization. Calculations of EBITDA should not be viewed as a substitute to
calculations under generally accepted accounting principles (GAAP), in
particular operating income (loss) and net income (loss). In addition,
EBITDA calculations by one company may not be comparable to another company.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarized the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
required to apply SAB 101 in the fourth quarter of 2000, retroactive to the
first quarter of 2000. The Company believes that the adoption of this statement
will not have a material impact on its financial position or results of
operations.
10
<PAGE> 11
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133 was amended by SFAS No. 137, which delays the
effective date to fiscal years beginning after June 15, 2000. In May 2000, the
Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities". SFAS No. 138
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. The Company is currently
completing an assessment of its derivative instruments as well as a plan for
implementation. The Company does not believe that the adoption of SFAS No. 133
and SFAS No. 138 will have a material impact on its financial position or
results of operations.
15. STOCKHOLDERS' EQUITY
At September 30, 2000, the authorized capital structure of Grant Prideco
was composed of 300 million shares of common stock, $0.01 par value (the "Common
Stock") and 10 million shares of preferred stock, $0.01 par value. In connection
with the Distribution, on April 14, 2000, the Company issued approximately 108.4
million shares of Common Stock for each share of Weatherford common stock held
by the Weatherford stockholders on March 23, 2000, the record date of the
Distribution. At September 30, 2000, there were approximately 108.5 million
shares of Common Stock outstanding.
Stock Option Plans
Various employees of the Company were granted stock options under
Weatherford's 1998 Employee Stock Option Plan (the "1998 Plan"). Under the terms
of the Distribution, the options granted to the Grant Prideco employees were
converted into options to acquire solely Common Stock. A total of 2,647,793
stock options were granted to the employees of Grant Prideco in connection with
the Distribution. Such options were granted pursuant to Grant Prideco's 2000
Employee Stock Option and Restricted Stock Plan.
Employees and directors of Weatherford also held various options to
purchase shares of Weatherford that were granted prior to September 1998. Under
the terms of the Distribution, these employees and directors were granted an
equal number of options to purchase Common Stock. The Company granted a total of
1,247,255 stock options related to the Weatherford grants prior to September
1998.
There was no compensation expense recognized in connection with the
substitution of Grant Prideco stock options for Weatherford stock options. There
were no accounting consequences for changes made to the exercise price and
number of shares of the outstanding stock options as the aggregate intrinsic
value of the stock options immediately after the substitution was not greater
than the aggregate intrinsic value of the stock options immediately before the
substitution and the ratio of the exercise price per share to the market value
per share was not reduced.
Executive Deferred Compensation Plans
Weatherford maintains various Executive Deferred Compensation Stock
Ownership Plans (the "Weatherford EDC Plans"). Prior to the Distribution,
participants in the Weatherford EDC Plans had a right to receive shares of
Weatherford common stock upon termination of their employment based on the
deferred amounts placed in their individual accounts. Under the Weatherford EDC
Plans, in the event of a dividend or special distribution to the shareholders of
Weatherford, the accounts of the employees are to represent a right to receive
the consideration provided through the dividend or special distribution. As a
result, upon the Distribution, participants in the Weatherford EDC Plans were
entitled to receive shares of both Weatherford common stock and Common Stock in
respect of amounts deferred by the participants prior to the Distribution.
Accordingly, in connection with the Distribution, a portion of the deferred
compensation liability recorded by Weatherford was allocated to Grant Prideco
based on the relative market value of the Common
11
<PAGE> 12
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock to the relative market value of the Weatherford common stock on the date
of Distribution. The liability transferred to Grant Prideco was approximately
$4.2 million and is included in the Condensed Consolidated Balance Sheets as
"Deferred Compensation Obligation". Settlements under the Weatherford EDC Plans
will be in Weatherford common stock and Common Stock.
At the time of the Distribution, Grant Prideco established separate
Executive Deferred Compensation Stock Ownership Plans (the "Grant EDC Plans") in
which certain Grant Prideco employees and directors participate. The terms of
the Grant EDC Plans are substantially similar to the Weatherford EDC Plans. A
separate trust (the "New Trust") has been established by Grant Prideco following
the Distribution to fund the benefits under the Grant EDC Plans. The funds
provided to the New Trust are invested in Common Stock through open market
purchases by a trustee independent of the Company. The assets of the New Trust
are available to satisfy the claims of all general creditors of Grant Prideco in
the event of a bankruptcy or insolvency. Settlements under the Grant EDC Plans
will be in Common Stock.
16. SUBSEQUENT EVENTS
On October 1, 2000, the Company acquired a tubular accessories producer,
for approximately $2.5 million in cash and $1.9 million in deferred and
contingent payments.
On October 19, 2000, the Company acquired the assets of a manufacturer of
drilling tools for the water well, construction and utility boring industries,
for approximately $12.3 million in cash.
On October 31, 2000, the Company entered into an agreement to make a $30.0
million investment in a European metalworking operation. We may pay all or a
portion of this investment in cash, stock or any combination of cash and stock.
12
<PAGE> 13
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION
The following unaudited condensed consolidating balance sheet as of
September 30, 2000, condensed combining statements of operations for the three
and nine month periods ended September 30, 1999, condensed consolidating
statements of operations for the three and nine month periods ended September
30, 2000, condensed combining statement of cash flows for the nine months ended
September 30, 1999 and condensed consolidating statement of cash flows for the
nine months ended September 30, 2000 are provided for the Company's domestic
subsidiaries that we expect would be guarantors of debt securities issued by the
Company in the future.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................. $ -- $ 1,212 $ 1,687 $ -- $ 2,899
Restricted Cash........................... -- -- 4,917 -- 4,917
Accounts Receivable, Net.................. -- 100,385 13,232 -- 113,617
Inventories............................... -- 165,229 27,249 -- 192,478
Current Deferred Tax Asset................ -- 5,258 878 -- 6,136
Other Current Assets...................... -- 4,685 3,145 -- 7,830
-------- -------- -------- --------- --------
-- 276,769 51,108 -- 327,877
-------- -------- -------- --------- --------
PROPERTY, PLANT AND EQUIPMENT............... -- 232,687 80,795 -- 313,482
Less: Accumulated Depreciation............ -- 92,589 19,393 -- 111,982
-------- -------- -------- --------- --------
-- 140,098 61,402 -- 201,500
-------- -------- -------- --------- --------
GOODWILL, NET............................... -- 121,131 61,410 -- 182,541
INVESTMENT IN AND ADVANCES TO
SUBSIDIARIES.............................. 562,644 -- -- (562,644) --
INVESTMENT IN UNCONSOLIDATED AFFILIATES..... 35,863 -- -- -- 35,863
OTHER ASSETS................................ -- 27,132 3,061 -- 30,193
-------- -------- -------- --------- --------
$598,507 $565,130 $176,981 $(562,644) $777,974
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion
of Long-Term Debt....................... $ 2,697 $ 46,449 $ 3,361 $ -- $ 52,507
Accounts Payable.......................... -- 47,179 8,280 -- 55,459
Current Deferred Tax Liability............ -- 717 6,427 -- 7,144
Customer Advances......................... -- 1,633 -- -- 1,633
Other Accrued Liabilities................. 6,307 19,984 7,132 -- 33,423
-------- -------- -------- --------- --------
9,004 115,962 25,200 -- 150,166
-------- -------- -------- --------- --------
SUBORDINATED NOTE TO WEATHERFORD............ 100,000 -- -- -- 100,000
LONG-TERM DEBT.............................. 14,701 4,317 -- -- 19,018
DEFERRED INCOME TAXES....................... -- 22,641 7,415 -- 30,056
MINORITY INTEREST........................... -- -- 1,024 -- 1,024
OTHER LONG-TERM LIABILITIES................. 19,581 2,907 1 -- 22,489
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY........................ 455,221 419,303 143,341 (562,644) 455,221
-------- -------- -------- --------- --------
$598,507 $565,130 $176,981 $(562,644) $777,974
======== ======== ======== ========= ========
</TABLE>
13
<PAGE> 14
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS COMBINED
-------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
REVENUES............................... $ -- $51,659 $7,192 $ -- $ 58,851
-------- ------- ------ ------ --------
COSTS AND EXPENSES:
Cost of Sales........................ -- 51,291 7,104 -- 58,395
Selling, General and
Administrative.................... -- 9,470 2,170 -- 11,640
Weatherford Charges.................. 500 -- -- -- 500
-------- ------- ------ ------ --------
500 60,761 9,274 -- 70,535
-------- ------- ------ ------ --------
OPERATING LOSS......................... (500) (9,102) (2,082) -- (11,684)
-------- ------- ------ ------ --------
OTHER INCOME (EXPENSE):
Interest Expense..................... (1,969) (907) (67) -- (2,943)
Equity in Subsidiaries, Net of
Taxes............................. (8,838) -- -- 8,838 --
Other, Net........................... -- 189 (80) -- 109
-------- ------- ------ ------ --------
(10,807) (718) (147) 8,838 (2,834)
-------- ------- ------ ------ --------
INCOME (LOSS) BEFORE INCOME TAXES...... (11,307) (9,820) (2,229) 8,838 (14,518)
INCOME TAX BENEFIT..................... 864 1,080 2,131 -- 4,075
-------- ------- ------ ------ --------
NET INCOME (LOSS)...................... $(10,443) $(8,740) $ (98) $8,838 $(10,443)
======== ======= ====== ====== ========
</TABLE>
14
<PAGE> 15
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS COMBINED
-------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
REVENUES............................... $ -- $168,318 $28,458 $ -- $196,776
-------- -------- ------- ------- --------
COSTS AND EXPENSES:
Cost of Sales........................ -- 152,258 25,419 -- 177,677
Selling, General and
Administrative.................... -- 27,908 5,952 -- 33,860
Weatherford Charges.................. 1,000 -- -- -- 1,000
-------- -------- ------- ------- --------
1,000 180,166 31,371 -- 212,537
-------- -------- ------- ------- --------
OPERATING LOSS......................... (1,000) (11,848) (2,913) -- (15,761)
-------- -------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest Expense..................... (5,594) (2,570) (168) -- (8,332)
Equity in Subsidiaries, Net of
Taxes............................. (13,114) -- -- 13,114 --
Other, Net........................... -- 331 69 -- 400
-------- -------- ------- ------- --------
(18,708) (2,239) (99) 13,114 (7,932)
-------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES...... (19,708) (14,087) (3,012) 13,114 (23,693)
INCOME TAX BENEFIT..................... 2,308 1,532 2,453 -- 6,293
-------- -------- ------- ------- --------
NET INCOME (LOSS)...................... $(17,400) $(12,555) $ (559) $13,114 $(17,400)
======== ======== ======= ======= ========
</TABLE>
15
<PAGE> 16
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES.............................. $ -- $118,928 $12,304 $ -- $131,232
------- -------- ------- ------- --------
COSTS AND EXPENSES:
Cost of Sales....................... -- 95,991 7,106 -- 103,097
Selling, General and
Administrative................... -- 12,307 1,726 -- 14,033
Equity Income in Unconsolidated
Affiliates....................... (1,801) -- -- -- (1,801)
------- -------- ------- ------- --------
(1,801) 108,298 8,832 -- 115,329
------- -------- ------- ------- --------
OPERATING INCOME...................... 1,801 10,630 3,472 -- 15,903
------- -------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest Expense.................... (2,673) (1,400) (189) -- (4,262)
Equity in Subsidiaries, Net of
Taxes............................ 6,934 -- -- (6,934) --
Other, Net.......................... -- (122) 165 -- 43
------- -------- ------- ------- --------
4,261 (1,522) (24) (6,934) (4,219)
------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES..... 6,062 9,108 3,448 (6,934) 11,684
INCOME TAX (PROVISION) BENEFIT........ 1,230 (4,185) (1,368) -- (4,323)
------- -------- ------- ------- --------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST............................ 7,292 4,923 2,080 (6,934) 7,361
MINORITY INTEREST..................... -- -- (69) -- (69)
------- -------- ------- ------- --------
NET INCOME (LOSS)..................... $ 7,292 $ 4,923 $ 2,011 $(6,934) $ 7,292
======= ======== ======= ======= ========
</TABLE>
16
<PAGE> 17
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES.............................. $ -- $318,536 $32,376 $ -- $350,912
------- -------- ------- ------- --------
COSTS AND EXPENSES:
Cost of Sales....................... -- 269,414 21,909 -- 291,323
Selling, General and
Administrative................... -- 34,717 5,529 -- 40,246
Equity Income in Unconsolidated
Affiliates....................... (3,891) -- -- -- (3,891)
Weatherford Charges................. 500 -- -- -- 500
------- -------- ------- ------- --------
(3,391) 304,131 27,438 -- 328,178
------- -------- ------- ------- --------
OPERATING INCOME...................... 3,391 14,405 4,938 -- 22,734
------- -------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest Expense.................... (8,156) (3,066) (350) -- (11,572)
Equity in Subsidiaries, Net of
Taxes............................ 7,206 -- -- (7,206) --
Other, Net.......................... -- (780) 433 -- (347)
------- -------- ------- ------- --------
(950) (3,846) 83 (7,206) (11,919)
------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES..... 2,441 10,559 5,021 (7,206) 10,815
INCOME TAX (PROVISION) BENEFIT........ 3,862 (6,042) (2,194) -- (4,374)
------- -------- ------- ------- --------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST............................ 6,303 4,517 2,827 (7,206) 6,441
MINORITY INTEREST..................... -- -- (138) -- (138)
------- -------- ------- ------- --------
NET INCOME (LOSS)..................... $ 6,303 $ 4,517 $ 2,689 $(7,206) $ 6,303
======= ======== ======= ======= ========
</TABLE>
17
<PAGE> 18
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS COMBINED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash (Used) Provided by
Operating Activities............. $(4,286) $ 14,295 $ 42,647 $-- $ 52,656
------- -------- -------- --- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of
Cash Acquired.................... (6,913) (1,723) (2,067) -- (10,703)
Capital Expenditures for Property,
Plant & Equipment................ -- (9,620) (5,175) -- (14,795)
------- -------- -------- --- --------
Net Cash Used by Investing
Activities................ (6,913) (11,343) (7,242) -- (25,498)
------- -------- -------- --- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on Debt, Net............. -- (6,207) (47,401) -- (53,608)
Predecessor Stockholder's
Investment....................... 11,199 -- 10,924 -- 22,123
------- -------- -------- --- --------
Net Cash Provided (Used) by
Financing Activities...... 11,199 (6,207) (36,477) -- (31,485)
------- -------- -------- --- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS......................... -- (3,255) (1,072) -- (4,327)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................. -- 4,113 1,957 -- 6,070
------- -------- -------- --- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................ $ -- $ 858 $ 885 $-- $ 1,743
======= ======== ======== === ========
</TABLE>
18
<PAGE> 19
GRANT PRIDECO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash (Used) Provided by Operating
Activities........................ $ (903) $(48,999) $ 11,562 $-- $(38,340)
------- -------- -------- --- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of
Cash Acquired..................... -- (867) -- -- (867)
Capital Expenditures for Property,
Plant & Equipment................. -- (13,358) (1,753) -- (15,111)
------- -------- -------- --- --------
Net Cash Used by Investing
Activities................. -- (14,225) (1,753) -- (15,978)
------- -------- -------- --- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Revolving Credit
Facility.......................... -- 45,100 2,359 -- 47,459
Repayments on Debt, Net.............. (3,548) (7,245) (3,750) -- (14,543)
Proceeds from Stock Option
Exercises......................... 1,036 -- -- -- 1,036
Purchases of Treasury Stock.......... (671) -- -- -- (671)
Predecessor Stockholder's
Investment........................ 4,086 21,583 (7,937) -- 17,732
------- -------- -------- --- --------
Net Cash Provided (Used) by
Financing Activities....... 903 59,438 (9,328) -- 51,013
------- -------- -------- --- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... -- (3,786) 481 -- (3,305)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR.............................. -- 4,998 1,206 -- 6,204
------- -------- -------- --- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................. $ -- $ 1,212 $ 1,687 $-- $ 2,899
======= ======== ======== === ========
</TABLE>
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of our results of operations for the three
and nine months ended September 30, 2000 and 1999, and our current financial
position. 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, 1999,
previously filed with the Securities and Exchange Commission in our Registration
Statement on Form 10, as amended.
Our discussion of our results of operations and financial condition
includes various forward-looking statements about our markets, the demand for
our products and services and our future results. These statements are based on
certain assumptions that we consider reasonable. For information about these
assumptions and other risks and exposures relating to our businesses and our
Company, you should refer to our section entitled "Forward-Looking Statements
and Exposures". 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
We are the world's largest manufacturer and supplier of drill pipe and
other drill stem products and are a leading North American provider of
high-performance engineered connections and premium tubing and casing used in
challenging onshore and offshore applications. Drill stem products are used in
drilling oil and gas wells while engineered connections and premium tubing and
casing are used to complete successful oil and gas wells and to facilitate
production. Our customers include major, independent and state-owned oil
companies, drilling contractors, oilfield service companies, rental tool
companies and North American oil country tubular goods (OCTG) distributors. We
operate through 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) drill stem products and (2)
engineered connections and premium tubulars.
Our drill stem products segment generates revenues through manufacturing
and selling drill pipe and other drill stem products and through licensing our
technology to third party repair and maintenance shops around the world.
Our engineered connections and premium tubulars segment generates revenues
by
- manufacturing and selling high-performance engineered connections and
premium tubing and casing and other products,
- developing customer-specified premium engineered connections and tubular
solutions for planned wells,
- providing field service personnel who assist rig operators at the rig
site in utilizing our connection technologies and other products and
- licensing our technologies.
For the nine months ended September 30, 2000, we derived 54% of our
revenues from our engineered connections and premium tubulars segment and 46% of
our revenues from our drill stem segment. For the same time period, 97% of our
revenues resulted from U.S. and Canadian sales and 3% of our revenues resulted
from sales outside the U.S. and Canada. As conditions in the oil and gas
industry continue to improve, we expect our drill stem revenues and
international revenues to represent a larger percentage of our revenue base.
20
<PAGE> 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.
MARKET FUNDAMENTALS
Our business is materially dependent on drilling and production activity
and the associated demand for our drill stem products and engineered connections
and premium tubulars. Generally, demand for our drill stem products and
engineered connections and premium tubulars closely follows the domestic and
international rig count, which closely follows the prices of oil and gas.
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:
<TABLE>
<CAPTION>
HENRY HUB NORTH AMERICAN INTERNATIONAL
WTI OIL(1) GAS(2) RIG COUNT(3) RIG COUNT(3)
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
September 30, 2000.......................... $30.87 $5.15 1,325 714
December 31, 1999........................... 24.79 2.29 1,183 574
September 30, 1999.......................... 24.51 2.35 971 557
</TABLE>
---------------
(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 MM/BTU as of the dates presented above -- Source: U.S. Energy
Information Administration
(3) Source: Baker Hughes Rig Count
In addition to changes in prices of oil and 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
results in 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.
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. The average working drilling rig uses more drill pipe per
month than the average rig ten years ago. 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.
FUTURE TRENDS AND EXPECTATIONS
Demand for our products has improved significantly over 1999 levels due to
improvements in the prices of oil and gas. We currently expect continued
improvements in demand for our drill pipe and other drill stem products during
the fourth quarter of 2000, with further improvements occurring in 2001. We
expect this trend to occur as excess drill pipe inventories that accumulated
following the decline in drilling in 1998 will continue to deplete. However, the
level of excess drill pipe inventory is difficult to estimate, and we cannot be
certain that those inventories will deplete in line with our expectations. We
expect demand for our engineered connections and premium tubular products to
remain strong during these periods as well. Nevertheless, demand for all of our
products continues to be highly dependent upon drilling activity and the price
of oil and
21
<PAGE> 22
gas, and any material decline in the price of oil and gas or drilling activity
could result in a further delay in, or lack of, a complete recovery in our
industry. In addition, international demand for our products and services has
not recovered as quickly as domestic demand for our products and services. We do
not expect a full market recovery until international rig counts and drilling
activity fully recover to peak 1997 levels and excess inventory levels are
depleted.
We expect our profitability will be favorably impacted by various strategic
actions that we took while market conditions remained depressed during 1998 and
1999. These actions included the following:
- In June 1998, we acquired T.F. de Mexico S.A. de C.V. for approximately
$59.0 million, a manufacturer of tool joints for our drill stem
operations, and in July 1999, we acquired a 50.01% interest in
Voest-Alpine Stahlrohr Kindberg GmbH & Co. KG for approximately $32.6
million, which owns a tubular mill in Austria with a capacity of
approximately 300,000 metric tons that is capable of supplying a large
portion of our green tube requirements. With the combination of the T.F.
de Mexico and Voest-Alpine acquisitions, we became the only
fully-integrated manufacturer of drill pipe in the world, which we
believe provides us with substantial cost savings as compared to our
competitors.
- During 1999, we consummated six other strategic acquisitions for $11.2
million in cash, $6.6 million in notes payable and assumed debt and 0.45
million shares of Weatherford common stock.
- During 1998, we acquired an additional manufacturer of drill pipe and
other drill stem products, for $29.0 million.
- During 1999, we instituted a manufacturing consolidation that we expect
to complete by early 2001.
We believe these strategic actions have the potential to significantly
reduce our costs through lower tubular purchase costs from Voest-Alpine, lower
tool joint costs from T.F. de Mexico and plant consolidations. Although we
already have realized some of the benefit of these strategic actions, we do not
expect to realize this full benefit unless and until we see a full recovery of
demand for our products.
Our expectations for future increased product demand and costs savings as
described above are forward-looking statements. While we believe these
expectations are reasonable, we encourage you to review the section entitled
"Forward Looking Statements" for a discussion of possible reasons we may not
experience this increased demand or why, even if we do, we may not realize the
full benefit in our revenues or profitability or from our expected cost savings
described above.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
GENERAL
Net income was $7.3 million, or $0.07 per diluted share, on operating
revenue of $131.2 million for the third quarter 2000, as compared to a net loss
of $10.4 million, or $0.10 per diluted share, on operating revenues of $58.9
million for the third quarter 1999.
22
<PAGE> 23
SEGMENT RESULTS
Drill Stem Products
The following table sets forth additional data regarding the results of our
drill stem products segment for the three months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $65,831 $17,305
Gross Profit................................................ 14,005 (1,322)
Gross Profit %.............................................. 21.3% (7.6)%
Selling, General and Administrative......................... $ 4,217 $ 3,739
Operating Income............................................ 11,589 (5,061)
EBITDA(a)................................................... 15,364 (1,258)
</TABLE>
---------------
(a) EBITDA is calculated by taking operating income (loss) and adding back
depreciation and amortization. We have included an EBITDA calculation here
because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be viewed
as a substitute to calculations under GAAP, in particular cash flows from
operations, operating income, income from continuing operations and net
income. In addition, EBITDA calculations by one company may not be
comparable to another company.
Revenues. Revenues increased $48.5 million, or 280%, in the third quarter
2000 as compared to the same period in 1999 due primarily to significant
increases in oil and gas drilling and completion activity. The average North
American and International rig counts increased by 45% and 18%, respectively,
during the third quarter 2000 as compared to the same period in 1999.
Gross Profit. Gross profit increased $15.3 million in the third quarter
2000 as compared to the third quarter 1999. The increase was due to increased
sales reflecting primarily the strengthening demand for our products as oil and
gas production activity continues to recover from the low levels in 1999.
Results for 2000 were also favorably affected by reduced raw material costs as a
result of our investment in Voest-Alpine.
Selling, General and Administrative. Selling, general and administrative
expenses decreased as a percentage of revenues from 22% in the third quarter
1999 to 6% in the third quarter 2000. 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 Income. Operating income increased $16.7 million in the third
quarter 2000 as compared to the same period in 1999. The increase was due
primarily to increased sales reflecting the strengthening demand for our
products as oil and gas production activity continued to recover from the low
levels in 1999, coupled with reduced raw material costs and equity earnings
related to our investment in Voest-Alpine. This increase was partially offset by
our increased staffing levels in order to meet customers' growing demand for our
products.
23
<PAGE> 24
Engineered Connections and Premium Tubulars
The following table sets forth additional data regarding the results of our
engineered connections and premium tubulars segment for the three months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $65,401 $41,546
Gross Profit................................................ 14,130 1,778
Gross Profit %.............................................. 21.6% 4.3%
Selling, General and Administrative......................... $ 4,628 $ 4,226
Operating Income (Loss)..................................... 9,502 (2,448)
EBITDA...................................................... 13,391 1,150
</TABLE>
Revenues. Revenues increased $23.9 million, or 57%, in the third quarter
2000 as compared to the third quarter 1999 due primarily to significant
increases in oil and gas drilling and completion activity. The average North
American and International rig counts increased by 45% and 18%, respectively,
during the third quarter 2000 as compared to the same period in 1999. 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.
Gross Profit. Gross profit increased $12.4 million in the third quarter
2000 as compared to the third quarter 1999. The increase relates primarily to
growth in demand for our highly engineered tubing and casing products and price
increases we initiated in 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 decreased as a percentage of revenues from 10% in the third quarter of
1999 to 7% in the third quarter 2000. The decrease was due primarily to cost
reduction efforts implemented in 1999 coupled with a higher revenue base in
2000.
Operating Income (Loss). Engineered connections and premium tubulars
operating income increased $12.0 million in the third quarter 2000 as compared
to the third quarter 1999. The significant improvement in operating income
reflects the increase in demand for our premium tubular products driven by the
increased oil and gas drilling and completion activity.
Other Items
Corporate General and Administrative. Corporate general and administrative
expenses increased $1.0 million in the third quarter 2000 as compared to the
third quarter 1999. The increase is 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. Interest expense increased $1.3 million in the third
quarter 2000 as compared to the third quarter 1999. The increase was due to the
change in the Weatherford subordinated note rate from 7.25% in 1999 to 10% in
2000 coupled with interest related to the revolving credit and letter of credit
facility agreement which we entered into in April 2000.
Tax (Provision) Benefit. The effective tax rate in the third quarter 2000
was 37%, as compared to 28% in the third quarter 1999. The lower effective tax
rate for 1999 reflects the unfavorable impact of certain nondeductible expenses.
24
<PAGE> 25
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended
September 30, 1999
GENERAL
For the nine months ended September 30, 2000, net income was $6.3 million,
or $0.06 per diluted share, on operating revenues of $350.9 million, as compared
to a net loss of $17.4 million, or $0.18 per diluted share, on operating
revenues of $196.8 million for the nine months ended September 30, 1999.
Drill Stem Products
The following table sets forth additional data regarding the results of our
drill stem products segment for the nine months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $162,353 $88,900
Gross Profit................................................ 22,106 14,468
Gross Profit %.............................................. 13.6% 16.3%
Selling, General and Administrative......................... $ 11,820 $10,434
Operating Income............................................ 14,177 4,034
EBITDA...................................................... 25,839 14,765
</TABLE>
Revenues. Revenues increased $73.5 million, or 83%, for the nine months
ended September 30, 2000 as compared to the same period in 1999 due primarily to
significant increases in oil and gas drilling and completion activity. The
average North American and International rig counts increased by 34% and 16%,
respectively, during the nine months ended September 30, 2000 as compared to the
same period in 1999.
Gross Profit. Gross profit increased $7.6 million, or 53%, for the nine
months ended September 30, 2000 as compared to the same period in 1999. The
increase was due to increased sales primarily reflecting the strengthening
demand for our products as oil and gas production activity continues to recover
from the low levels in 1999. Results for 2000 were also favorably affected by
reduced raw material costs as a result of our investment in Voest-Alpine.
However, gross profit as a percentage of revenue decreased 2.7% in 2000 as
compared to 1999. Results for 1999 benefited from favorable manufacturing
absorption related to significant production for an affiliated company coupled
with reduced staffing levels. During 2000, we have significantly increased
staffing levels to meet customers' growing demand for our products and have
incurred some inefficiencies and operational ramp up costs as these new
employees are hired and undergo training.
Selling, General and Administrative. Selling, general and administrative
expenses decreased as a percentage of revenues from 12% in the first nine months
of 1999 to 7% for the same period in 2000. The decrease was due primarily to a
higher revenue base related to increased oil and gas drilling activity,
partially offset by increased staffing levels.
Operating Income. Operating income increased $10.1 million for the nine
months ended September 30, 2000 as compared to the same period in 1999. The
increase was due primarily to increased sales reflecting the strengthening
demand for our products as oil and gas production activity continued to recover
from the low levels in 1999, coupled with reduced raw material costs and equity
earnings related to our investment in Voest-Alpine. This increase was partially
offset by our increased staffing levels in order to meet customers' growing
demand for our products.
25
<PAGE> 26
Engineered Connections and Premium Tubulars
The following table sets forth additional data regarding the results of our
engineered connections and premium tubulars segment for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $188,559 $107,876
Gross Profit................................................ 37,483 4,631
Gross Profit %.............................................. 19.9% 4.3%
Selling, General and Administrative......................... $ 13,730 $ 12,747
Operating Income (Loss)..................................... 23,753 (8,116)
EBITDA...................................................... 35,166 2,494
</TABLE>
Revenues. Revenues increased $80.7 million, or 75%, for the nine months
ended September 30, 2000 as compared to the same period in 1999 due primarily to
significant increases in oil and gas drilling and completion activity. The
average North American and International rig counts increased by 34% and 16%,
respectively, during the nine months ended September 30, 2000 as compared to the
same period in 1999. 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.
Gross Profit. Gross profit increased $32.9 million for the nine months
ended September 30, 2000 as compared to the same period in 1999. The increase
relates primarily to growth in demand for our highly engineered tubing and
casing products and price increases we initiated in 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 decreased as a percentage of revenues from 12% for the nine months
ended September 30, 1999 to 7% for the same period in 2000. The decrease was due
primarily to cost reduction efforts implemented in 1999 coupled with a higher
revenue base in 2000.
Operating Income (Loss). Operating income increased $31.9 million for the
nine months ended September 30, 2000 as compared to the same period in 1999. The
significant improvement in operating income primarily reflects the increase in
demand for our premium tubular products driven by the increased oil and gas
drilling and completion activity.
Other Items
Corporate General and Administrative. Corporate general and administrative
expenses increased $3.5 million for the nine months ended September 30, 2000 as
compared to the same period in 1999. 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. Interest expense increased $3.2 million for the nine
months ended September 30, 2000 as compared to the same period in 1999. The
increase was due to the change in the Weatherford subordinated note rate from
7.25% in 1999 to 10% in 2000 coupled with interest related to the revolving
credit and letter of credit facility agreement which we entered into in April
2000.
Tax (Provision) Benefit. The effective tax rate for the nine months ended
September 30, 2000 was 40%, as compared to 27% for the same period in 1999. The
lower effective tax rate for 1999 reflects the unfavorable impact of certain
nondeductible expenses.
26
<PAGE> 27
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 September 30, 2000, we had cash and cash equivalents of $2.9 million and
working capital of $177.7 million as compared to cash and cash equivalents of
$6.2 million and working capital of $164.6 million at December 31, 1999. At
September 30, 2000, we also had $4.9 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 provided (used) by operating
activities, net cash used by investing activities and net cash provided (used)
by financing activities for the periods presented (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Net Cash (Used) Provided by Operating Activities............ $(38,340) $ 52,656
Net Cash Used by Investing Activities....................... (15,978) (25,498)
Net Cash Provided (Used) by Financing Activities............ 51,013 (31,485)
</TABLE>
Net cash flow provided by operating activities decreased by $91.0 million
in 2000 due to increased working capital requirements to support the significant
increase in demand for our products. Net cash used by investing activities
decreased by $9.5 million in 2000 due primarily to reduced business acquisitions
activity. Net cash provided by financing activities increased by $82.5 million
due primarily to borrowings of $47.5 million on our revolving credit facility,
which we entered into on April 14, 2000, and lower principal payments on debt.
In March 1999, we repaid $48.5 million in debt related to our December 1998
acquisition of T.F. de Mexico.
Capital Expenditures
Capital expenditures for property, plant and equipment totaled $15.1
million and $14.8 million for the nine months ended September 30, 2000 and 1999,
respectively. We currently expect to expend approximately $6.0 million for
capital expenditures for property, plant and equipment during the remainder of
2000 related to our manufacturing consolidation projects, maintaining the
existing equipment base and for improvements to our various facilities. We also
estimate that our required principal and interest payments for our outstanding
debt to be approximately $4.1 million for the remainder of 2000. We currently
expect to satisfy all required capital expenditures and debt service
requirements during the remainder of 2000 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
On April 14, 2000, we entered into a $100.0 million revolving credit and
letter of credit facility with a syndicate of U.S. banks. The credit facility is
secured by our U.S. and Canadian inventories, equipment and receivables and is
guaranteed by our domestic subsidiaries. Borrowings under the credit facility
are based on the lender's determination of the collateral value of the
inventories and receivables securing the credit facility. The credit facility
also provides us with availability for stand-by letters of credit and bid and
performance bonds. We are 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 our ability to
27
<PAGE> 28
incur new debt, engage in certain acquisitions and investments, grant liens, pay
dividends and make distributions to our stockholders. As of September 30, 2000,
we had borrowed $47.5 million under the credit facility, $6.3 million had been
used to support outstanding letters of credit, and $46.2 million were available
for borrowing under the credit facility. As of October 31, 2000, we had borrowed
$63.3 million under the credit facility, with an average interest rate of 9.1%.
Additionally, at September 30, 2000, $0.8 million of outstanding letters of
credit had been supported under various available letter of credit facilities
that are not related to the revolving credit and letter of credit facility.
In connection with the spinoff, we issued a $100.0 million unsecured
subordinated note to Weatherford with an annual interest rate of 10%. Interest
payments are due quarterly and principal and all unpaid interest is due no later
than March 31, 2002.
In connection with our July 1999 investment in Voest-Alpine, we incurred
debt denominated in Austrian schillings for 319.8 million Austrian schillings.
As of September 30, 2000, principal of $5.0 million is payable over two years in
four equal installments in each January and July until July 2002. Additionally,
remaining principal of $12.4 million is payable over the next 6 1/2 years out of
the annual dividend payable to us as a shareholder of Voest-Alpine. Any
remaining principal balance that has not been repaid by July 2004, is payable in
five equal semi-annual installments beginning on December 1, 2004. Beginning May
2000, Voest-Alpine changed their functional currency from Austrian schillings to
Euros; therefore, our debt to Voest-Alpine is now payable in Euros.
Voest-Alpine's change in functional currency to Euros had no material effect on
our financial condition or results of operations. Interest on the Voest-Alpine
debt is payable every six months beginning January 2000. The interest rate as of
September 30, 2000 was 4.9% 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 agreed to
purchase a minimum of 45,000 metric tons of tubulars for the first twelve months
of the agreement and 60,000 metric tons per year for the next three years at a
negotiated third party price that we believe to be beneficial. The volume
requirements fixed in the supply agreement were based on our anticipated needs
for tubulars of the type manufactured by Voest-Alpine and represented less than
half of our normal worldwide requirements for this type of tubular. 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 will 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.
We intend to pursue a private placement of $200 million of senior debt
securities. Proceeds from this private placement would be used primarily to
refinance our subordinated note to Weatherford as well as debt outstanding under
our credit facility and for general working capital purposes.
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 our exposure to
changes in foreign exchange principally with forward contracts.
28
<PAGE> 29
Forward contracts designated as hedges of foreign currency transactions are
marked to spot with the resulting gains and losses similarly recognized in
earnings, offsetting losses and gains on the transactions hedged. Gains and
losses on forward contracts designated as hedges of identifiable foreign
currency firm commitments are not recognized until the underlying transaction is
recorded. We enter into foreign exchange contracts only as a hedge against
existing economic exposures and not for speculative or trading purposes. The
counterparties to our foreign exchange contracts are creditworthy multinational
commercial banks. We believe that the risk of counterparty nonperformance is
immaterial. At September 30, 2000, we had open forward contracts to exchange
U.S. dollars for Euros and Austrian schillings totaling $31.1 million.
Gains and losses attributable to the translation of the Voest-Alpine Debt
are included as a separate component of Stockholders' Equity since the
Voest-Alpine Debt, is designated as, and is effective as, a partial economic
hedge of the net investment in Voest-Alpine.
If a 10% devaluation in the Austrian schilling and the Euro compared to the
U.S. dollar were to occur subsequent to September 30, 2000, the fair value of
the open forward contracts would be $28.0 million.
INTEREST RATES
We are and will be subject to interest rate risk on our long-term fixed
interest rate debt. We believe that significant interest rate changes will not
have a material near-term impact on our future earnings or cash flows. Excluding
the Weatherford note, most of our borrowings are at variable rates and therefore
the fair value of these borrowings approximates book value. As of September 30,
2000, it is not practical to estimate the fair market value of the Weatherford
note as our borrowing rates have not yet been determined.
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 No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarized the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. We are required to
apply SAB 101 in the fourth quarter of 2000, retroactive to the first quarter of
2000. We believe that the adoption of this statement will not have a material
impact on our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133 has been amended by SFAS No. 137, which delays
the effective date to fiscal years beginning after June 15, 2000. In May 2000,
the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities". SFAS No. 138
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. We are currently
completing an assessment of our derivative instruments as well as a plan for
implementation. We do not believe that the adoption of SFAS No. 133 and SFAS No.
138 will have a material impact on our financial position or results of
operations.
29
<PAGE> 30
FORWARD-LOOKING STATEMENTS AND EXPOSURES
This report and our other filings with the Securities and Exchange
Commission and public releases contain statements relating to our future
results, including certain projections and business trends. We believe these
statements constitute "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Certain risks and uncertainties may
cause actual results to be materially different from projected results contained
in forward-looking statements in this report and in our other disclosures. These
risks and uncertainties include, but are not limited to, the following:
A Downturn or Stagnation in Market Conditions Could Affect Projected
Results. Our forward-looking statements assume improvements in demand for our
products and services during the fourth quarter of 2000 and in 2001 and any
unexpected material declines in oil and gas prices or other market trends or
stagnation in demand would likely affect the forward-looking information
contained in this report. Our estimates as to future results and industry trends
make assumptions regarding the future prices of oil and gas and their effect on
the demand and pricing of our products and services. In analyzing the market and
its impact on us for the remainder of 2000, we have made the following
assumptions:
- The recent increases in the price of oil and demand for natural gas will
result in stronger improvements in our businesses in the fourth quarter
of 2000.
- Excess drill stem inventories will continue to fall during the fourth
quarter of 2000.
- Oil prices will not fall below $25 per barrel for the remainder of 2000.
Average natural gas prices for the remainder of 2000 will remain at or
near their current levels. Drilling activity will increase stronger
beyond normal demand as oil companies seek to replace and produce
reserves that were not replaced or produced in 1999 or the first three
quarters of 2000.
Labor Shortages 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 has improved during 2000 we have increased
headcount and are continuing to recruit qualified individuals to satisfy this
increased demand as well as the increases in demand we expect during the
remainder of 2000. This has become 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. Any failure or difficulty in retaining and
recruiting such individuals could adversely affect our results of operations.
Our forward-looking statements assume no material difficulties in retaining and
hiring qualified personnel or any material increases in labor rates.
A Decline or Stagnation in Rig Count Could Adversely Affect the Demand for
Our Products and Services. Our operations were materially affected by the
decline in the rig count during 1998 and 1999. Although rig counts have improved
from historical lows during this period, a decline or stagnation in the North
American and international rig counts would adversely affect our results. Our
forward-looking statements assume an improvement in the rig count during the
remainder of 2000 and, in 2001, including international rig count.
Projected Cost Savings Could Be Insufficient. During 1999 and the first
half of 2000, we implemented a number of programs intended to reduce costs and
align our cost structure with the current market environment. Our
forward-looking statements regarding cost savings and their impact on our
business assume these measures will generate the savings expected. However, if
the markets decline or remain stagnant, additional actions may be necessary to
achieve the desired savings.
Integration of Acquisitions. During the last year, we consummated various
acquisitions of businesses. The success of these acquisitions is dependent on
our ability to integrate these businesses with our existing businesses,
eliminate duplicative costs and enjoy expected cost savings from vertical
integration. In particular, we expect significant cost savings due to our
acquisition of 50.01% of Voest-Alpine and the related tubular supply agreement
that we have entered into with Voest-Alpine. Our forward-looking statements
assume the successful integration of the acquired businesses and the realization
of expected costs savings and their contribution to our income during the
remainder of 2000. Integration of acquisitions is something that cannot
30
<PAGE> 31
occur overnight and is something that requires constant effort at the local
level to be successful. Accordingly, there can be no assurance as to the
ultimate success of our integration efforts.
Our Success is Dependent upon Technological Advances. Our ability to
succeed with our long-term growth strategy is dependent on the technological
competitiveness of our product and service offerings. A central aspect of our
growth strategy is to enhance the technology of our products and services, to
expand the markets for many of our products through the leverage of our
worldwide infrastructure and to enter new markets and expand in existing markets
with technologically advanced value-added products. Our forward-looking
statements have assumed gradual growth from these new products during 2000.
Economic Downturn Could Adversely Affect Demand for Products and
Services. 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. Although the economy in the United States also has
experienced one of its longest periods of growth in recent history, the
continued strength of the United States economy cannot be assured. If the United
States or European economies were to begin to decline or if the economies of
South America or Asia were to experience further material problems, the demand
and price for oil and gas and our products and services could again adversely
affect our revenues and income. Our forward-looking statements have assumed that
a worldwide recession or a material downturn in the United States or European
economies will not occur.
Currency Fluctuations Could Have a Material Adverse Financial Impact. A
material decline in currency rates in our markets could affect our future
results as well as affect the carrying values of our assets. World currencies
have been subject to much volatility. Our forward-looking statements assume no
material impact from changes in currencies because our financial position is
generally U.S. dollar based or hedged with forward contracts. For those revenues
denominated in local currency the effect of foreign currency fluctuations is
largely mitigated because local expenses are denominated in the same currency.
Our long-term supply contract with Voest-Alpine, however, is denominated in
Euros with no 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 have assumed no such material changes will occur.
Changes in Global Trade Policies Could Adversely Impact
Operations. Changes in global trade policies in our markets could impact our
operations in these markets. We have assumed that there will be no material
changes in global trading policies.
International Exposures Could Adversely Impact Operations. Our operations
in certain locations outside the United States, including Mexico, Austria, China
and Indonesia, are subject to various political and economic conditions existing
in such countries that could disrupt operations. These risks include (1)
currency fluctuations and potential devaluations in most countries, in
particular those in South America and Asia, (2) currency restrictions in China
and limitations on repatriation of profits in various countries in South America
and Asia and (3) political instability in countries such as Indonesia, Austria,
Mexico, Venezuela, the former Soviet Union and China. Disruptions may occur in
our foreign operations and losses may occur 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 will adversely affect the accuracy of our forward-looking
statements. Our forward-looking statements assume there will be no such events.
Unexpected Litigation and Legal Disputes Could Have a Material Adverse
Financial Impact. In the ordinary course of business, we become the subject of
various claims and litigation. We maintain insurance to cover many of our
potential losses and we are subject to various self-retention limits and
deductibles with respect to our insurance. Although we are subject to various
ongoing items of litigation, we do not believe that any of the items of
litigation that we are currently subject to will result in any material
uninsured losses to us. It is, however, possible that an unexpected judgment
could be rendered against us in existing cases in which we could be uninsured
and beyond the amounts that we currently have reserved or anticipate incurring
for that matter. We are also subject to various federal, state and local laws
and regulations relating to the energy industry in general and the environment
in particular. Environmental laws have in recent years become more
31
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stringent and have generally sought to impose greater liability on a larger
number of potentially responsible parties. While we are not currently aware of
any situation involving an environmental claim that would likely have a material
adverse effect on our business, it is always possible that an environmental
claim with respect to one or more of our current businesses or a business or
property that one of our predecessors owned or used could arise that could
involve the expenditure of a material amount of funds. If we experience
unexpected litigation or unexpected results in our existing litigation having a
material effect on results, the accuracy of the forward-looking statements would
be affected. Our forward-looking statements assume that there will be no such
unexpected litigation or results.
Manufacturing Consolidation Could Adversely Impact Operations. During 1999
and 2000, we have consolidated various manufacturing operations to reduce costs
and improve efficiencies. Such consolidation is ongoing and involves the
relocation and refurbishment of machines, equipment and buildings utilized in
our operations. Such relocation and refurbishment can result in unexpected
downtime or delays in bringing machines and equipment online. Our
forward-looking statements assume no material downtime or delays will occur.
A Write-off of Our Investment in India Could Adversely Affect our Results
of Operations. In 1999 we decided to terminate our manufacturing arrangement
with Oil Country Tubular Limited ("OCTL") in India. This decision was made in
light of the existing market and difficulties arising from the political
situation between India and countries where OCTL's principal customers reside.
This decision resulted in our need to write off a $7.8 million deposit
previously paid to OCTL for future products and $1.7 million of our equipment
located in India in the fourth quarter of 1999. We are currently seeking to
collect approximately $17.6 million in receivables and advances provided by us
to OCTL through a combination of cash, equity of OCTL and products from OCTL. We
are in discussions with OCTL regarding this matter and are unable to predict the
outcome of these discussions.
Based on financial information of OCTL known to us and our general
knowledge of the business and assets of OCTL, OCTL would appear to have a
sufficient asset and equity value to allow for a restructuring of its remaining
$17.6 million in debt owed to us. There is, however, uncertainty as to how much,
if any, of the amounts owed to us by OCTL will ultimately be collected.
Accordingly, there can be no assurance that we will be able to fully realize the
amounts owed to us by OCTL or that additional charges relating to India will not
be required in the near term as the negotiation and collection process
continues. Our forward-looking statements assume we will not be required to
write-off all or a portion of our India investment.
In addition, our future results will depend upon various other risks and
uncertainties, including, but not limited to, those detailed in our other
filings with the Securities and Exchange Commission. For additional information
regarding risks and uncertainties, see our other current year filings with the
Commission under the Securities Exchange Act of 1934, as amended, and the
Securities Act of 1933, as amended. We will generally update our assumptions in
our filings, as circumstances require.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
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.
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Financial
Instruments".
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<PAGE> 33
PART II
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER ITEMS.
None.
ITEM 6. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial Data Schedule.
</TABLE>
33
<PAGE> 34
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
Date: November 9, 2000
34
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial Data Schedule.
</TABLE>
