<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 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)
Delaware 76-0312499
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1450 Lake Robbins Drive, Suite 600, The Woodlands, Texas 77380
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(281) 297-8500
--------------
(Registrant's telephone number, include area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of Class Outstanding at August 8, 2000
-------------- -----------------------------
Common Stock, par value $0.01 108,466,416
<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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents ........................................ $ 4,799 $ 6,204
Restricted Cash .................................................. 4,396 3,658
Accounts Receivable, Net of Allowance for Uncollectible Accounts
of $427 and $500 at June 30, 2000 and December 31, 1999 ...... 96,363 77,650
Inventories ...................................................... 175,295 173,904
Current Deferred Tax Asset ....................................... 5,947 6,197
Other Current Assets ............................................. 6,724 4,425
--------- ---------
293,524 272,038
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Machinery and Equipment .......................................... 226,657 224,225
Land, Buildings and Other Property ............................... 82,700 81,390
--------- ---------
309,357 305,615
Less: Accumulated Depreciation ................................... 109,253 98,906
--------- ---------
200,104 206,709
--------- ---------
GOODWILL, NET ........................................................ 182,217 187,765
INVESTMENT IN UNCONSOLIDATED AFFILIATES .............................. 36,905 37,453
OTHER ASSETS ......................................................... 30,870 30,610
--------- ---------
$ 743,620 $ 734,575
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion of Long-Term Debt ....... $ 25,574 $ 14,710
Accounts Payable .................................................. 57,948 47,459
Current Deferred Tax Liability .................................... 7,144 7,144
Customer Advances ................................................. 1,452 18,503
Other Accrued Liabilities ......................................... 31,045 19,585
--------- ---------
123,163 107,401
--------- ---------
SUBORDINATED NOTE TO WEATHERFORD ..................................... 100,000 100,000
LONG-TERM DEBT ....................................................... 22,245 24,276
DEFERRED INCOME TAXES ................................................ 27,499 44,533
MINORITY INTEREST .................................................... 955 886
OTHER LONG-TERM LIABILITIES .......................................... 23,014 3,623
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 Par Value ...................................... 1,085 --
Capital in Excess of Par Value ..................................... 343,569 --
Predecessor Stockholder's Investment ............................... -- 353,617
Treasury Stock, at Cost ............................................ (283) --
Retained Earnings .................................................. 112,605 113,594
Deferred Compensation .............................................. 4,564 --
Accumulated Other Comprehensive Loss ............................... (14,796) (13,355)
--------- ---------
446,744 453,856
--------- ---------
$ 743,620 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES ....................................... $ 112,535 $ 56,622 $ 219,680 $ 137,925
COSTS AND EXPENSES:
Cost of Sales ................................ 93,803 49,338 188,226 119,282
Selling, General and Administrative
Attributable to Segments ................... 8,487 7,647 16,705 15,216
Corporate General and Administrative ......... 5,138 3,311 9,508 7,004
Equity Income in Unconsolidated Affiliates ... (1,483) -- (2,090) --
Weatherford Charges .......................... -- 250 500 500
--------- --------- --------- ---------
105,945 60,546 212,849 142,002
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ........................ 6,590 (3,924) 6,831 (4,077)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest Expense ............................. (3,814) (2,737) (7,310) (5,389)
Other, Net ................................... (175) 193 (390) 291
--------- --------- --------- ---------
(3,989) (2,544) (7,700) (5,098)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES .............. 2,601 (6,468) (869) (9,175)
INCOME TAX (PROVISION) BENEFIT ................. (988) 1,741 (51) 2,218
--------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ..... 1,613 (4,727) (920) (6,957)
MINORITY INTEREST .............................. (24) -- (69) --
--------- --------- --------- ---------
NET INCOME (LOSS) .............................. $ 1,589 $ (4,727) $ (989) $ (6,957)
========= ========= ========= =========
INCOME (LOSS) PER SHARE
(Pro forma prior to effective date of spinoff)
Basic ........................................ $ 0.01 $ (0.05) $ (0.01) $ (0.07)
========= ========= ========= =========
Diluted ...................................... $ 0.01 $ (0.05) $ (0.01) $ (0.07)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
(Pro forma prior to effective date of spinoff)
Basic ........................................ 108,415 97,586 108,584 97,451
========= ========= ========= =========
Diluted ...................................... 110,182 97,586 108,584 97,451
========= ========= ========= =========
</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>
SIX MONTHS
ENDED JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .................................................................. $ (989) $ (6,957)
Adjustments to Reconcile Net Loss to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization .......................................... 15,613 14,487
Deferred Income Tax Provision .......................................... 681 111
Equity Income in Unconsolidated Affiliates, Net of Dividends ........... (1,662) --
Other .................................................................. 200 --
Changes in Operating Assets and Liabilities, Net of Effect of Businesses
Acquired:
Accounts Receivable ................................................ (20,084) 49,880
Inventories ........................................................ (1,841) 5,362
Other Current Assets ............................................... (2,924) 10,888
Other Assets ....................................................... (672) (1,546)
Accounts Payable ................................................... 8,852 (17,684)
Other Current Liabilities .......................................... 1,923 (14,216)
Customer Advances .................................................. (17,051) 15,075
Purchase Credit .................................................... -- (4,588)
Other, Net ......................................................... (184) (3,732)
-------- --------
Net Cash (Used) Provided by Operating Activities ................... (18,138) 47,080
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of Cash Acquired ........................... (867) (6,040)
Capital Expenditures for Property, Plant and Equipment .................... (9,637) (7,883)
-------- --------
Net Cash Used by Investing Activities .............................. (10,504) (13,923)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Revolving Credit Facility ................................... 21,300 --
Repayments of Debt ........................................................ (12,232) (51,751)
Proceeds from Stock Option Exercises ...................................... 720 --
Purchases of Treasury Stock ............................................... (283) --
Predecessor Stockholder's Investment ...................................... 17,732 13,725
-------- --------
Net Cash Provided (Used) by Financing Activities ................... 27,237 (38,026)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................... (1,405) (4,869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............................. 6,204 6,070
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 4,799 $ 1,201
======== ========
</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 consolidated balance sheet as of December 31, 1999 and the
condensed consolidated 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 June 30, 2000 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
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) .......... $ 1,589 $(4,727) $ (989) $(6,957)
Foreign Currency Translation
Adjustments ............. (924) 971 (1,441) (1,240)
------- ------- ------- -------
Total Comprehensive Income
(Loss) .................. $ 665 $(3,756) $(2,430) $(8,197)
======= ======= ======= =======
</TABLE>
3. INVENTORIES
Inventories by category are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(in thousands)
<S> <C> <C>
Raw materials, components and supplies ...... $120,097 $ 93,980
Work in process ............................. 17,232 15,720
Finished goods .............................. 37,966 64,204
-------- --------
$175,295 $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
6
<PAGE> 7
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 June 30, 2000, the
Company had outstanding borrowings of $21.3 million under the revolving credit
facility and $5.3 million had been used to support outstanding letters of
credit. The average interest rate for the outstanding borrowings under the
Credit Facility was 9.6% at June 30, 2000. Additionally, at June 30, 2000, $3.3
million of outstanding letters of credit had been supported under available
letter of credit facilities.
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"). A
portion of the principle balance, $15.4 million, is payable over a 7.5-year
period out of the annual dividend payable to the Company as a shareholder of
Voest-Alpine. If this principal balance has not been repaid by July 2004, the
remaining unpaid principal 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.
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 consolidated 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 Company hedges certain exposures to fluctuations in foreign currency
exchange rates that occur prior to conversion of foreign currency denominated
monetary assets and liabilities into U.S. dollars. Prior to conversion to U.S.
dollars, these assets and liabilities are translated at spot rates in effect on
the balance sheet date and the effects of changes in spot rates are reported in
earnings. The Company hedges its exposure to changes in foreign exchange
principally with forward contracts.
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 June 30,
2000, the Company had open forward contracts to exchange U.S. dollars for
Austrian schillings totaling $5.2 million.
7
<PAGE> 8
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 months
ended June 30, 2000, the Company had potentially dilutive common stock
equivalents of approximately 1.8 million 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 June 30, 2000, the
Company had $4.4 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 45,000 tonnes of
tubulars for the first twelve months of the agreement and 60,000 tonnes 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 consolidated
financial statements.
In connection with the Distribution, the Company entered into a preferred
supplier agreement with Weatherford pursuant to which Weatherford agreed for at
least a three-year period to purchase a minimum of 70% of its requirements of
drill stem products from Grant Prideco. The price for those products will be at
a price not greater than that which the Company sells to its best rental tool
customers for similar products. Weatherford will be entitled to apply against
its purchases a drill stem credit granted to it in the aggregate amount of $30
million, subject to a limitation of the application of the credit to no more
than 20% of any purchase. At June 30, 2000, the current portion of the drill
stem credit, $10 million, is included in "Other Current Liabilities," with
the remaining $20 million included in "Other Long-Term Liabilities," in the
accompanying Condensed Consolidated Balance Sheets.
8
<PAGE> 9
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 $2.8 million of costs related
to Weatherford's information systems function for the three and six months ended
June 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.
9
<PAGE> 10
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.
Financial information by industry segment for each of the three and six
months ended June 30, 2000 and 1999, is summarized below:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Drill Stem ..................... $ 48,666 $ 24,976 $ 96,522 $ 71,595
Premium Tubulars ............... 63,869 31,646 123,158 66,330
--------- --------- --------- ---------
$ 112,535 $ 56,622 $ 219,680 $ 137,925
========= ========= ========= =========
EBITDA (a):
Drill Stem ..................... $ 6,632 $ 6,766 $ 10,475 $ 16,023
Premium Tubulars ............... 12,614 (122) 21,775 1,344
Corporate ...................... (5,031) (3,288) (9,806) (6,957)
--------- --------- --------- ---------
$ 14,215 $ 3,356 $ 22,444 $ 10,410
========= ========= ========= =========
Depreciation and amortization:
Drill Stem ..................... $ 3,724 $ 3,476 $ 7,887 $ 6,928
Premium Tubulars ............... 3,794 3,531 7,524 7,012
Corporate ...................... 107 273 202 547
--------- --------- --------- ---------
$ 7,625 $ 7,280 $ 15,613 $ 14,487
========= ========= ========= =========
Operating income (loss):
Drill Stem ..................... $ 2,908 $ 3,290 $ 2,588 $ 9,095
Premium Tubulars ............... 8,820 (3,653) 14,251 (5,668)
Corporate ...................... (5,138) (3,561) (10,008) (7,504)
--------- --------- --------- ---------
$ 6,590 $ (3,924) $ 6,831 $ (4,077)
========= ========= ========= =========
Capital Expenditures for Property,
Plant and Equipment:
Drill Stem ..................... $ 3,351 $ 1,145 $ 6,567 $ 2,626
Premium Tubulars ............... 1,225 2,592 2,998 5,190
Corporate ...................... 5 40 72 67
--------- --------- --------- ---------
$ 4,581 $ 3,777 $ 9,637 $ 7,883
========= ========= ========= =========
</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 GAAP, in particular operating income and net income.
In addition, EBITDA calculations by one company may not be comparable to
another company.
10
<PAGE> 11
14. RECENT ACCOUNTING PRONOUNCEMENTS
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
evaluating the impact of SFAS No. 133 and SFAS No. 138 on its condensed
consolidated financial statements.
15. STOCKHOLDERS' EQUITY
At June 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 June 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 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". Grant
Prideco intends to satisfy this liability through the issuance of treasury
shares.
11
<PAGE> 12
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.
12
<PAGE> 13
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 six months ended June 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 an international manufacturer and supplier of products used for the
exploration and production of oil and gas. Our business is conducted through two
operating segments: (1) drill stem products and (2) engineered connections and
premium tubulars. We are the world's leading provider of drill pipe and other
drill stem products. We are also a leading provider in North America for
engineered connections used for casing, liners, tubing, marine conductors and
subsea structures. Our drilling products are designed and engineered for high
performance and include all components of a drill stem from the rig floor to the
drill bit. We have been innovators in the field of drill pipe and other drill
stem products for more than 20 years, and we are a leader in connection
technology used in critical well applications. Our Atlas Bradford division also
has been providing connection technology to the oil industry for approximately
50 years.
Our company has grown substantially over the years through strategic
acquisitions and internal development. Our operations are conducted throughout
the world through manufacturing facilities located in the United States, Mexico,
Canada, Europe and Asia. We also have 19 sales, service and repair locations
around the world.
MARKET TRENDS AND OUTLOOK
Our business is materially dependent on drilling activity and the
associated demand for our drill stem products and production tubulars and
connections. Demand for our products also depends on a variety of economic and
political factors, including worldwide demand for oil and gas, the ability of
the Organization of Petroleum Exporting Countries ("OPEC") to set and maintain
production levels and pricing, the level of production of non-OPEC countries and
the policies of the various governments regarding exploration and development of
their oil and gas reserves.
13
<PAGE> 14
The following table sets forth certain information with respect to oil and
natural gas prices and the North American and international rig counts for the
periods reflected:
<TABLE>
<CAPTION>
HENRY HUB NORTH AMERICAN INTERNATIONAL
WTI OIL(1) GAS(2) RIG COUNT(3) RIG COUNT(3)
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
June 30, 2000 ........... $32.44 $ 4.34 1,169 657
December 31, 1999 ....... 25.60 2.33 1,183 574
June 30, 1999 ........... 17.89 2.39 745 602
</TABLE>
(1) Price per barrel of West Texas Intermediate crude oil as of June 30
and December 31 - Source: U.S. Energy Information Administration
(2) Price per MM/BTU as of June 30 and December 31 - Source: U.S. Energy
Information Administration
(3) Average rig count for the applicable month - Source: Baker Hughes Rig
Count
Prices for oil and natural gas have been and continue to be very volatile,
with material declines having adverse effects on the demand for our products and
services. During the last half of 1999 and first half of 2000, crude oil prices
increased due to members of OPEC reducing production in compliance with
production quotas. Crude oil prices moved above $30 per barrel in the first half
of 2000 due to reductions in output. With the increase in world oil prices
during the past few months, the average OPEC basket price over a 20-day period
began to exceed the $22 - $28 per barrel range that OPEC had set as its target
price during its March 2000 meeting. In June 2000 OPEC, excluding Iraq, agreed
to increase their production quotas by 708,000 barrels per day. However, Saudi
Arabia announced in early July 2000 that crude oil supplies would be increased
by an additional 500,000 barrels per day if oil prices remained above the range.
Due to these production quota changes, oil prices continue to be volatile and a
material decline would materially effect demand for our products and services.
U.S. natural gas prices remain high on the strength of increased demand, which
so far this year relates to the sharp increase in requirements from the electric
power sector. New supply in North America has not kept pace with incremental
demand, resulting in year-to-year declines in gas storage volumes dating back to
July 1999. However, natural gas prices have been and continue to be extremely
volatile, and we cannot predict when or if future declines will occur. Material
declines in natural gas prices would have a material adverse effect on demand
for our products and services.
As compared to the first quarter of 2000, revenues for the second quarter
of 2000 increased by $5.4 million. Based on macro fundamentals of the market,
such as the recently announced spending plans by major oil and gas companies,
the outlook for the second half of 2000 is expected to improve significantly.
Orders for drill stem products and premium tubular products are increasing, and
we expect that demand will continue to improve absent material declines in oil
or natural gas prices. Generally, improvements in demand for our drill stem
products lag improvements in demand for our premium tubular products by
approximately six to nine months.
We currently expect continued improvements in demand for our drill pipe and
other drill stem products during the third quarter of 2000, with further
improvements occurring during the fourth quarter of 2000 as we expect excess
drill pipe inventories will continue to deplete. However, the level of excess
drill pipe inventory is difficult to estimate and there can be no assurances
that the timing of depletion of such inventories will be 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 continue to be highly dependent upon drilling
activity and the price of oil and natural gas and any material decline in the
price of oil and natural gas or drilling activity could result in a further
delay in the 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.
In July 1999, we acquired a 50.01% ownership interest in Voest-Alpine
Stahlrohr Kindberg GmbH & Co. KG ("Voest-Alpine") in Austria. Our investment in
Voest-Alpine is reported on the equity method of accounting. Voest-Alpine owns a
tubular mill in Austria with a capacity of approximately 300,000 metric tons
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<PAGE> 15
that is capable of supplying a large portion of our green tube requirements in
the United States. In addition, we entered into a long-term green tube supply
contract with Voest-Alpine. The impact of this investment and supply contract
has benefited us as the market recovers by providing us with a reliable source
of raw materials and provide us a 50% profit participation in Voest-Alpine's
business.
GROWTH STRATEGY
Our strategy for growth is to seek new opportunities in our drilling and
tubular segments. During the last year, we completed various acquisitions that
are important to our long-term growth. We intend to continue to actively pursue
acquisitions and other opportunities for growth. Our strategy for growth through
acquisitions and internal development focus on:
- Lowering costs through consolidations and investments similar to our
investment in Voest-Alpine in 1999.
- Introducing and acquiring new tubular and thread technologies.
- Expanding internationally.
- Adding new products and services that are complementary to our existing
products and services.
- Investing in new tubular and connection technologies, joint venture
projects and the development of connections for expandable tubing.
- Investing in additional subsea products and services.
- Maintaining manufacturing capacity for growth.
We intend to finance future acquisitions and growth opportunities through a
combination of internally generated capital, equity issuances and incurrences of
debt where we deem prudent or appropriate. Any issuances of equity will depend
upon the opportunity and circumstances. We will only incur debt where we
consider the terms to be appropriate.
15
<PAGE> 16
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
GENERAL
Net income was $1.6 million, or $0.01 per diluted share, on operating
revenue of $112.5 million for the second quarter 2000, as compared to a net loss
of $4.7 million, or $0.05 per diluted share, on operating revenues of $56.6
million for the second quarter 1999.
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 June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 1999
------- -------
(in thousands, except
percentages)
<S> <C> <C>
Revenues ............................... $48,666 $24,976
Gross Profit ........................... 5,162 6,917
Gross Profit % ......................... 10.6% 27.7%
Selling, General and Administrative .... $ 3,737 $ 3,627
Operating Income ....................... 2,908 3,290
EBITDA (a) ............................. 6,632 6,766
</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. Drill stem revenues increased $23.7 million, or 95%, in the
second quarter 2000 as compared to the same period in 1999. The increase was
attributable to continued improvements in the world wide rig count and oil and
gas drilling and completion activity coupled with the acquisition of an
additional 27% interest in H-Tech in October 1999. The rig count increased 56%
in Canada and 57% in the U.S. in the second quarter 2000 as compared to the same
period in 1999.
Gross Profit. Drill stem gross profit decreased $1.8 million in the second
quarter 2000 as compared to the second quarter 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
increased staffing levels to meet customers' growing demand for our products.
Results for 2000 have been favorably affected by reduced raw material costs as a
result of our 50.01% interest in Voest-Alpine, a producer of high-quality
seamless tubulars in Austria, which we acquired in July 1999.
Selling, General and Administrative. Drill stem selling, general and
administrative expenses decreased as a percentage of revenues from 15% in the
second quarter 1999 to 8% in the second quarter 2000. The decrease was due to a
higher revenue base related to the increased oil and gas drilling activity,
partially offset by increased staffing levels.
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<PAGE> 17
Operating Income. Drill stem operating income was $2.9 million for the
second quarter 2000 as compared to $3.3 million in the second quarter 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 increased staffing levels to meet customers'
growing demand for our products. Results for 2000 have been favorably affected
by reduced raw material costs as a result of our 50.01% interest in
Voest-Alpine, a producer of high-quality seamless tubulars in Austria, which we
acquired in July 1999. Additionally, operating income benefited $1.5 million
from equity earnings generated by our interest in Voest-Alpine.
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
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
2000 1999
-------- --------
(in thousands, except
percentages)
<S> <C> <C>
Revenues ............................... $ 63,869 $ 31,646
Gross Profit ........................... 13,570 367
Gross Profit % ......................... 21.2% 1.2%
Selling, General and Administrative .... $ 4,750 $ 4,020
Operating Income (Loss) ................ 8,820 (3,653)
EBITDA ................................. 12,614 (122)
</TABLE>
Revenues. Engineered connections and premium tubulars revenues increased
$32.2 million, or 102%, in the second quarter 2000 as compared to the second
quarter 1999. The increase in revenues was driven by a 57% increase in the
average North American rig count for the second quarter 2000 as compared to the
same period in 1999.
Gross Profit. Engineered connections and premium tubulars gross profit
increased $13.2 million in the second quarter 2000 as compared to the second
quarter 1999. The significant increase relates to pricing improvements initiated
in the first quarter 2000 as well as increased production volume of premium
tubular products that provided better utilization of manufacturing facilities
and the reduction of certain fixed costs.
Selling, General and Administrative. Engineered connections and premium
tubulars selling, general and administrative expenses decreased as a percentage
of revenues from 13% in the second quarter of 1999 to 7% in the second quarter
2000. The decrease was due primarily to cost reduction efforts implemented in
1999 coupled with a higher revenue base. This decrease was partially offset by
an increase in costs relating to the acquisition of Petro-Drive in August 1999.
Operating Income (Loss). Engineered connections and premium tubulars
operating income increased $12.5 million for the second quarter 2000 as compared
to the second quarter 1999. The significant improvement in operating income
reflects the increase in demand for our premium tubular products driven by the
increased drilling activity in North America.
OTHER ITEMS
Corporate General and Administrative. Corporate general and administrative
expenses increased $1.6 million for the second quarter 2000 as compared to the
second 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 company.
17
<PAGE> 18
Interest Expense. Interest expense increased $1.1 million in the second
quarter 2000 as compared to the second 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 $100 million revolving credit and
letter of credit facility which we entered into in April 2000.
Tax (Provision) Benefit. The effective tax rate for the second quarter 2000
was 38%, as compared to 27% in the second quarter 1999. The lower effective tax
rate for 1999 reflects the unfavorable impact of certain nondeductible expenses.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
GENERAL
Net loss was $1.0 million, or $0.01 per diluted share, on operating
revenues of $219.7 million for the six months ended June 30, 2000, as compared
to a net loss of $7.0 million, or $0.07 per diluted share, on operating revenues
of $137.9 million for the six months ended June 30, 1999.
DRILL STEM PRODUCTS
The following table sets forth additional data regarding the results of our
drill stem products segment for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
------- -------
(in thousands, except
percentages)
<S> <C> <C>
Revenues ............................... $96,522 $71,595
Gross Profit ........................... 8,101 15,790
Gross Profit % ......................... 8.4% 22.1%
Selling, General and Administrative .... $ 7,603 $ 6,695
Operating Income ....................... 2,588 9,095
EBITDA ................................. 10,475 16,023
</TABLE>
Revenues. Drill stem revenues increased $24.9 million, or 35%, for the six
months ended June 30, 2000 as compared to the same period in 1999. The increase
was attributable to increased North American drilling activity. The rig count
increased 56% in Canada and 57% in the U.S. for the six months ended June 30,
2000 as compared to the same period in 1999.
Gross Profit. Drill stem gross profit decreased $7.7 million for the six
months ended June 30, 2000 as compared to the same period in 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 increased staffing levels to meet customers' growing demand
for our products. Results for 2000 have been favorably affected by reduced raw
material costs as a result of our 50.01% interest in Voest-Alpine, a producer of
high-quality seamless tubulars in Austria, which we acquired in July 1999.
Selling, General and Administrative. Drill stem selling, general and
administrative expenses decreased as a percentage of revenues from 9% in the
first six months of 1999 to 8% for the same period in 2000. The decrease was due
to a higher revenue base related to the increased oil and gas drilling activity,
partially offset by increased selling efforts and the introduction of new
products.
Operating Income. Drill stem operating income was $2.6 million for the six
months ended June 30, 2000 as compared to operating income of $9.1 million for
the same period in 1999. The decrease was primarily
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<PAGE> 19
attributable to plant inefficiencies and operational ramp up costs in 2000,
partially offset by equity earnings of $2.1 million related to our 50.01%
interest in Voest-Alpine, which was acquired in July 1999.
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 six months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
-------- --------
(in thousands, except
percentages)
<S> <C> <C>
Revenues ............................... $123,158 $ 66,330
Gross Profit ........................... 23,353 2,853
Gross Profit % ......................... 19.0% 4.3%
Selling, General and Administrative .... $ 9,102 $ 8,521
Operating Income (Loss) ................ 14,251 (5,668)
EBITDA ................................. 21,775 1,344
</TABLE>
Revenues. Engineered connections and premium tubulars revenues increased
$56.8 million, or 86%, for the six months ended June 30, 2000 as compared to the
same period in 1999. The increase in revenues was driven by a 57% increase in
the average North American rig count for the six months ended June 30, 2000 as
compared to the same period in 1999.
Gross Profit. Engineered connections and premium tubulars gross profit
increased $20.5 million for the six months ended June 30, 2000 as compared to
the same period in 1999. The increase relates to increased production volume of
premium tubular products that provided better utilization of manufacturing
facilities and higher profitability.
Selling, General and Administrative. Engineered connections and premium
tubulars selling, general and administrative expenses decreased as a percentage
of revenues from 13% for the six months ended June 30, 1999 to 7% for the same
period in 2000. The decrease was due primarily to a higher revenue base,
partially offset by an increase in costs relating to the Petro-Drive acquisition
in August 1999.
Operating Income (Loss). Engineered connections and premium tubulars
operating income increased $19.9 million for the six months ended June 30, 2000
as compared to the same period in 1999. The significant improvement in operating
income reflects the increase in demand for our premium tubular products driven
by the increased drilling activity in North America.
OTHER ITEMS
Corporate General and Administrative. Corporate general and administrative
expenses increased $2.5 million for the six months ended June 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 company.
Interest Expense. Interest expense increased $1.9 million for the six
months ended June 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 $100 million revolving
credit and letter of credit facility agreement which we entered into in April
2000.
Tax (Provision) Benefit. Income tax expense for the six months ended June
30, 2000 was $51,000, on a net loss before taxes of $0.9 million, as compared to
a tax benefit of $2.2 million, on a net loss before taxes of $9.2 million, for
the same period in 1999. The income tax expense for 2000 reflects the
unfavorable impact of certain nondeductible expenses.
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<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As a wholly-owned subsidiary of Weatherford prior to our Distribution 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 Distribution, our liquidity and capital
resources now depend upon our cash flow from operations and our ability to raise
capital from third parties.
At June 30, 2000, we had cash and cash equivalents of $4.8 million and
working capital of $170.4 million as compared to cash and cash equivalents of
$6.2 million and working capital of $164.6 million at December 31, 1999. At June
30, 2000, we also had $4.4 million in restricted cash related to our 54%
interest in H-Tech that is subject to dividend and distribution restrictions.
For the six months ended June 30, 2000, our net cash flow used by operations was
$18.1 million and reflected an increase in working capital needs to support
increased demand for our products.
Capital expenditures totaled $9.6 million and $7.9 million for the six
months ended June 30, 2000 and 1999, respectively. We currently expect to expend
approximately $11.5 million for non-acquisition related capital expenditures
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 $2.5 million for the
remainder of 2000. We currently expect to satisfy all required capital
expenditures and debt service requirements over the remainder of 2000 from
operating cash flows, existing cash balances and/or available lines of credit.
Acquisitions and expansions will be financed from cash flow from operations due
to improved market conditions, borrowings under our Credit Facility or through a
combination of the issuance of additional equity and debt financing.
CREDIT FACILITY AND LONG-TERM DEBT
On April 14, 2000, we entered into a $100 million revolving credit and
letter of credit facility with a syndicate of U.S. banks (the "Credit
Facility"). 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 incur new debt, engage in certain acquisitions and
investments, grant liens, pay dividends and make distributions to our
stockholders. As of July 31, 2000, we had borrowed $34.3 million under the
Credit Facility and $6.5 million had been used to support outstanding letters of
credit. At July 31, 2000, additional borrowings of approximately $57.0 million
were available under the Credit Facility. Additionally, at July 31,2000, $3.0
million of outstanding letters of credit had been supported under available
letter of credit facilities.
In connection with the Distribution, we issued an unsecured subordinated
note to Weatherford 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 we
complete 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, we 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 we complete that financing. The Weatherford note is subordinated to
indebtedness outstanding under our Credit Facility.
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 tonnes of tubulars for the
20
<PAGE> 21
first twelve months of the agreement and 60,000 tonnes per year for the next
three years at a negotiated third party price that we believe to be attractive.
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.
FINANCIAL INSTRUMENTS
We hedge certain exposures to fluctuations in foreign currency exchange
rates that occur prior to conversion of foreign currency denominated monetary
assets and liabilities into U.S. dollars. Prior to conversion to U.S. dollars,
these assets and liabilities are translated at spot rates in effect on the
balance sheet date and the effects of changes in spot rates are reported in
earnings. We hedge our exposure to changes in foreign exchange principally with
forward contracts.
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. 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 June 30, 2000, we had open
forward contracts to exchange U.S. dollars for Austrian schillings totaling $5.2
million.
In July 2000, the Company entered into forward contracts to exchange U.S.
dollars for Euros totaling approximately $22.6 million. Of this amount, $6.9
million was designated as a hedge of the Voest-Alpine Debt and $15.7 million was
designated as a hedge of identifiable foreign currency firm commitments.
TAX MATTERS
As a result of the separation 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 Distribution, except to
the extent the taxes arise solely as a result of a change of control of
Weatherford.
RECENT ACCOUNTING PRONOUNCEMENTS
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
evaluating the impact of SFAS No. 133 and SFAS No. 138 on our condensed
consolidated financial statements.
21
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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 second half of 2000 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 second half of
2000, with the strongest improvements expected to incur in the fourth
quarter of 2000.
- Excess drill stem inventories will continue to fall during the second half
of 2000, with customer inventories stabilizing during the third 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. World demand for oil will be up only marginally
or flat. 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 half of 2000.
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, 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 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
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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 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.
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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.
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 $17.3 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
$17.3 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.
We hedge certain exposures to fluctuations in foreign currency exchange
rates that occur prior to conversion of foreign currency denominated monetary
assets and liabilities into U.S. dollars. Prior to conversion to U.S. dollars,
these assets and liabilities are translated at spot rates in effect on the
balance sheet date and the effects of changes in spot rates are reported in
earnings. We hedge our exposure to changes in foreign exchange principally with
forward contracts.
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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. 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 June 30, 2000, we had open
forward contracts to exchange U.S. dollars for Austrian schillings totaling $5.2
million. If a 10% devaluation in the Austrian schilling compared to the U.S.
dollar were to occur, the fair value of the open forward contracts would be $4.7
million.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Effective April 14, 2000, Grant Prideco was spunoff by Weatherford
International, Inc. into a stand-alone public company pursuant to a distribution
by Weatherford to its stockholders of one share of Grant Prideco common stock
for each share of Weatherford common stock owned by such stockholders. In
connection with this spinoff, Grant Prideco amended its certificate of
incorporation to increase its authorized common stock to 300 million shares and
to authorize up to 10 million shares of preferred stock. Grant Prideco also
adopted new bylaws as a result of it becoming a stand-alone public company.
(b), (c) In connection with Grant Prideco's spinoff from Weatherford, Grant
Prideco issued to Weatherford a $100 million subordinated promissory note. The
terms of the Weatherford note restrict Grant Prideco's ability to declare and
make dividends and other distributions to Grant Prideco's stockholders. The
Weatherford Note was issued without registration in compliance with Section 4(2)
of the Securities Act of 1933 in consideration for the forgiveness of
intercompany debt owed by Grant Prideco to Weatherford at the time of the
spinoff. The distribution of Grant Prideco shares issued in connection with the
spinoff was not registered because such distribution did not constitute a sale
under the Securities Act of 1933.
In addition, on April 14, 2000, Grant Prideco entered into a $100 million
secured credit facility that restricts the Company's ability to declare and make
dividends and other distributions to its stockholders.
(d) Not applicable.
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
27.1 Financial Data Schedule.
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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: August 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
