<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-31579
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HYDRIL COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2777268
-------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3300 North Sam Houston Parkway East Houston, Texas 77032-3411
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 449-2000
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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 No *X
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*The registrant became subject to the reporting requirements of Section 13 of
the Securities Exchange Act of 1934 on September 26, 2000.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares outstanding at November 3, 2000:
Common stock, $.50 par value, 8,640,800 shares outstanding
Class B common Stock, $.50 par value, 13,410,908 shares outstanding
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HYDRIL COMPANY
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--September 30, 2000 (unaudited) and
December 31, 1999 3
Unaudited Consolidated Statement of Operations--For the Three and Nine
Months Ended September 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows--For the Nine Months Ended
September 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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HYDRIL COMPANY
PART I, ITEM 1: CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Information)
<TABLE>
<CAPTION>
September 30, December, 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 26,154 $ 26,275
Receivables:
Trade, less allowance for doubtful
accounts: 1999, $3,710; 2000, $3,274 35,683 31,387
Contract costs and estimated earnings in excess of billings 3,265 8,116
Other 1,402 1,507
------------ ------------
Total receivables 40,350 41,010
------------ ------------
Inventories:
Finished goods 22,899 24,669
Work-in-process 8,779 14,078
Raw Materials 6,115 6,664
------------ ------------
Total inventories 37,793 45,411
------------ ------------
Deferred tax asset 10,342 10,342
Other current assets 4,034 2,652
------------ ------------
Total current assets 118,673 125,690
------------ ------------
PROPERTY:
Land and improvements 18,327 17,732
Buildings and equipment 38,547 38,288
Machinery and equipment 124,813 127,535
Construction in progress 3,507 1,358
------------ ------------
Total 185,194 184,913
Less accumulated depreciation and amortization (109,605) (110,334)
------------ ------------
Property, net 75,589 74,579
------------ ------------
OTHER LONG-TERM ASSETS:
Deferred tax asset 5,587 7,318
Other assets 3,863 4,221
------------ ------------
TOTAL $ 203,712 $ 211,808
============ ============
CURRENT LIABILITIES:
Accounts payable $ 13,989 $ 14,324
Billings in excess of contract costs and estimated earnings 2,042 7,306
Accrued liabilities 19,067 20,769
Current portion of long-term debt 525 498
Current portion of capital leases 263 255
Income taxes payable 919 1,160
------------ ------------
Total current liabilities 36,805 44,312
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, excluding current portion 61,370 72,721
Capital lease obligations 120 318
Other 17,764 18,011
------------ ------------
Total long-term liabilities 79,254 91,050
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock:
Preferred Stock-authorized, 10,000,000 shares of $1 par
value; none issued or outstanding
Common stock-authorized 75,000,000 shares of $.50 par value; no shares
issued or outstanding at September 30, 2000 or December 31, 1999
Class B common stock-authorized, 32,000,000 shares of $.50 par value;
19,379,040 shares issued and outstanding at
September 30, 2000 and December 31, 1999 9,690 9,690
Retained earnings 77,963 66,756
------------ ------------
Total stockholders' equity 87,653 76,446
------------ ------------
TOTAL $ 203,712 $ 211,808
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
3
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HYDRIL COMPANY
PART I, ITEM 1: UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and 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 $ 44,643 $ 40,174 $ 134,899 $ 118,435
COST OF SALES 30,405 31,877 95,517 99,902
------------ ------------ ------------ ------------
GROSS PROFIT 14,238 8,297 39,382 18,533
------------ ------------ ------------ ------------
SELLING, GENERAL &
ADMINISTRATION EXPENSES:
Engineering 1,781 1,945 4,888 6,093
Sales and marketing 3,211 3,275 9,895 10,529
General and administration 3,526 3,104 10,208 9,185
------------ ------------ ------------ ------------
Total 8,518 8,324 24,991 25,807
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 5,720 (27) 14,391 (7,274)
INTEREST EXPENSE (1,171) (1,330) (3,908) (4,044)
INTEREST INCOME 471 343 1,156 904
OTHER INCOME (EXPENSE):
Rental income (76) 5 (66) 162
Gain on marketable securities 3,576 253
Other 1,890 (68) 1,831 546
------------ ------------ ------------ ------------
Total 1,814 (63) 5,341 961
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES 6,834 (1,077) 16,980 (9,453)
PROVISION (BENEFIT) FOR INCOME
TAXES 2,324 (366) 5,774 (3,214)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 4,510 $ (711) $ 11,206 $ (6,239)
============ ============ ============ ============
INCOME (LOSS) PER SHARE:
BASIC AND DILUTED $ 0.23 $ (0.04) $ 0.58 $ (0.32)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC AND DILUTED 19,379,040 19,379,040 19,379,040 19,379,040
============ ============ ============ ============
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE> 5
HYDRIL COMPANY
PART I, ITEM 1: UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,206 $ (6,239)
----------- -----------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 6,398 5,632
Deferred income taxes 2,488 (5,528)
Provision for doubtful accounts 75 (274)
Gain on XLS/marketable securities (253)
Loss on asset disposition 626
Gain on sale of real estate holdings not used in operations (1,870) (649)
Gain on put mediation settlement (3,576)
Change in operating assets and liabilities:
Receivables (4,266) 17,189
Contract costs and estimated earnings in excess of billings 4,851 20,938
Inventories 7,618 5,200
Other current and noncurrent assets (2,602) 728
Accounts payable (335) (13,399)
Billings in excess of contract costs and estimated earnings (5,264) (4,530)
Accrued liabilities (1,702) (5,081)
Income taxes payable (241) (1,639)
Other long-term liabilities (246) 420
----------- -----------
Net cash provided by operating activities 13,160 12,515
----------- -----------
NET CASH FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 42
Proceeds from sale of real estate holdings not used in
operations 2,100 1,996
Proceeds from sale of marketable securities 13,108
Proceeds from put mediation settlement 3,576
Capital expenditures (7,485) (7,659)
----------- -----------
Net cash provided by (used in) investing activities (1,767) 7,445
----------- -----------
NET CASH FROM FINANCING ACTIVITIES:
Proceeds from borrowings 2,697
Repayment of debt (14,021) (9,110)
Repayment of capital leases (190) (171)
----------- -----------
Net cash used in financing activities (11,514) (9,281)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (121) 10,679
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,275 21,837
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,154 $ 32,516
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 3,961 $ 3,732
Income taxes paid:
Domestic 25 175
Foreign 2,041 2,686
</TABLE>
See notes to unaudited consolidated financial statements
5
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HYDRIL COMPANY
PART I, ITEM 1: NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF PRESENTATION
Principles of Consolidation- The consolidated financial statements
include the accounts of Hydril Company and its wholly owned subsidiaries.
Intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Recent Accounting Standards- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS"). SFAS 133 requires an entity to recognize all
derivatives as an asset or liability measured at its fair value. Depending on
the intended use of the derivative, changes in its fair value will be reported
in the period of change as either a component of earnings or a component of
other comprehensive income. SFAS 133 is effective for all fiscal years beginning
after June 15, 2000. Earlier application of SFAS 133 is encouraged, but not
prior to the beginning of any fiscal quarter that began after issuance of the
Statement. Retroactive application to periods prior to adoption is not allowed.
The Company is in the process of evaluating the impact that will result from
adopting SFAS 133 on January 1, 2001. While the evaluation is not yet complete,
the Company does not expect the adoption of SFAS 133 to materially affect its
results of operations or financial condition.
Reclassifications- Certain prior year amounts within the consolidated
financial statements have been reclassified to conform to the current year's
presentation.
Interim Presentation (Unaudited)- The accompanying consolidated interim
financial statements and disclosures have been prepared by the Company in
accordance with accounting principles generally accepted in the United States
and in the opinion of management reflect all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation in all material
respects of the financial position and results for the interim periods. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's prospectus dated
September 27, 2000, relating to its initial public offering. The results of
operations for the three and nine months ended September 30, 2000 are not
necessarily indicative of results to be expected for the full year.
6
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NOTE 2 -- LONG-TERM CONTRACTS
The components of long-term contracts as of September 30, 2000 and
December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ ------------------
<S> <C> <C>
Costs and estimated earnings on uncompleted
contracts $ 34,340 $ 39,450
Less: billings to date (33,117) (38,640)
------------ ------------
Excess of costs and estimated earnings over billings
$ 1,223 $ 810
============ ============
Included in the accompanying balance sheets under
the following captions:
Contract costs and estimated earnings in excess
of billings $ 3,265 $ 8,116
Billings in excess of contract costs and
estimated earnings (2,042) (7,306)
------------ ------------
Total $ 1,223 $ 810
============ ============
</TABLE>
From 1996 through 1999, the Company entered into 17 fixed-price
contracts to provide pressure control equipment and subsea control systems for
pressure control equipment. As of September 30, 2000, all of the subsea control
systems and, except in the case of one contract, all of the pressure control
equipment, for these contracts had been shipped.
Losses incurred on these projects, including late delivery penalties,
were approximately $0 and $800, for the three months ended September 30, 2000
and 1999, and $1,500 and $2,900 for the nine months ended September 30, 2000 and
1999, respectively. Provisions for estimated losses are determined by comparing
total sales price to costs incurred plus estimated costs to complete the
contract. Provision for estimated losses have been made, to the extent
applicable, for all projects not completed as of September 30, 2000. As of
September 30, 2000 and December 31, 1999, the Company has accrued a reserve for
project losses of $5,726 and $7,478, respectively.
NOTE 3 -- CONTINGENCIES
The Company is involved in legal proceedings arising in the ordinary
course of business. In the opinion of management these matters are such that
their outcome will not have a material adverse effect on the financial position
or results of operations of the Company.
7
<PAGE> 8
The Company has been identified as a potentially responsible party at a
waste disposal site in California. Based on the number of other potentially
responsible parties, the total estimated site cleanup costs and its estimated
share of such costs, the Company does not expect this matter to materially
affect its results of operations or financial condition. The Company's
anticipated obligation with respect to the California site has been adequately
reserved for, in the opinion of management.
NOTE 4 -- LONG TERM DEBT
The Company's borrowings as of September 30, 2000 and December 31, 1999
were as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Senior notes $ 60,000 $ 60,000
Revolving lines of credit
U.S 1,000 11,954
IBM note financing 895 1,265
------------ ------------
Total 61,895 73,219
------------ ------------
Less current portion (525) (498)
------------ ------------
Total long-term debt $ 61,370 $ 72,721
============ ============
</TABLE>
The $60,000 senior secured notes bear interest at a rate of 6.85% per
annum, which is payable quarterly. The senior notes mature June 30, 2003 and may
not be prepaid prior to this date unless the Company pays the noteholders a
make-whole premium based on prevailing market interest rates. The long-term note
agreement for these notes has one financial event of default covenant, a minimum
tangible net worth test, which the Company was in compliance with at
September 30, 2000. Additional financial tests under the long-term note
agreement, if not passed, restrict the Company's ability to incur additional
indebtedness or make acquisitions, investments and restricted payments, such as
pay dividends and repurchase capital stock. At September 30, 2000, the Company
satisfied these financial incurrence tests.
On August 25, 2000, the U.S. revolving line of credit was amended to,
among other things, increase the amount available on the line from $15,000 to
$25,000. The amendment became effective October 2, 2000 upon completion of the
Company's initial public offering. The amended credit line will mature March 31,
2003. The Company may, at its election, borrow at either a prime or LIBOR based
interest rate. Interest rates under the amended line fluctuate depending on the
Company's leverage ratio and are prime plus a spread ranging from zero to 25
basis points or LIBOR plus a spread ranging from 125 to 225 basis points.
Additionally, there are covenants under this line which require the Company to
maintain certain financial ratios. The Company was in compliance with these
covenants at September 30, 2000. During the third quarter of 2000, cash
generated from operations was used to pay off substantially all of the
outstanding balance on this line of credit. At September 30, 2000, $1,000 was
outstanding and the weighted average interest rate was 10.25%.
The credit line and the senior notes are secured by a pledge of
accounts receivable, inventory, equipment, intellectual property, material real
property, and stock of subsidiaries.
The Company also has two foreign lines of credit, one committed and one
uncommitted, for a total of $13,000. The uncommitted line for $10,000 can be
terminated at the bank's discretion. The interest rate for this line of credit
is LIBOR plus 100 basis points. The committed line for $3,000, expires
February 28, 2001. The interest rate is the Bank of England's base rate plus 150
basis points. There were no borrowings under either line as of September 30,
2000.
8
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NOTE 5 -- STOCKHOLDERS' EQUITY
On September 25, 2000, the Company's charter was amended to increase
the authorized number of shares of common stock from 4,000,000 to 107,000,000,
with the increased amount divided into 75,000,000 shares of common stock, par
value $.50 per share and 32,000,000 shares of class B common stock, par value
$.50 per share. Under the charter amendment, each share of common stock
outstanding prior to the charter amendment was automatically converted into one
share of class B common stock. The options outstanding for the purchase of
702,000 shares of common stock were converted into options for the purchase of
702,000 shares of class B common stock. On September 25, 2000, the Company also
issued a stock dividend to the class B common stockholders consisting of five
additional shares of class B common stock for each share of class B common stock
outstanding. The holders of class B common stock are entitled to 10 votes per
share and the holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders generally, including the election of
directors. Shares of class B common stock automatically convert into the same
number of shares of common stock if (a) the class B common stock is transferred
other than to another holder of class B common stock or a person related to such
a holder or (b) the outstanding shares of class B common stock represent less
than 10% of the combined outstanding shares of class B common stock and common
stock.
Additionally, on September 25, 2000, the Company's charter was amended
to increase the authorized number of shares of preferred stock from 1,000,000 to
10,000,000. At September 30, 2000 and December 31, 1999, there were no shares of
preferred stock issued or outstanding.
All share and per share amounts in the consolidated financial
statements have been retroactively restated for the increase in authorized
shares of common stock and preferred stock and the creation of class B common
stock, the conversion of outstanding common stock into class B common stock and
the five-for-one stock dividend of class B common stock, which was accounted for
as a stock split.
In October 2000, the Company completed an initial public offering in
which 8,600,000 shares of common stock were sold at $17.00 per share. Of the
8,600,000 shares, 2,672,668 shares were sold by the Company and 5,927,332 shares
were sold by existing stockholders. The Company received net proceeds from the
offering of approximately $40,000 after underwriting discounts and commissions
and other related expenses. All transactions related to the offering will be
reflected in the fourth quarter financial information.
In connection with the offering, the Company granted a nonqualified
option to each nonemployee director to purchase 4,412 shares of common stock,
for an aggregate of 26,472 shares of common stock. These nonqualified stock
options which have an exercise price of $17.00 per share, were granted under
Hydril Company's 2000 Incentive Plan (the "2000 Plan") which allows for grants
to officers, employees, and nonemployee directors of stock based awards covering
a maximum of 1,950,000 shares of common stock. Each nonemployee director will
automatically be granted a nonqualified stock option each year following the
annual meeting of stockholders on that number of shares of the Company's common
stock such that the aggregate fair market value of such shares equals
approximately $75. Options granted to nonemployee directors under the 2000 Plan
have a term of ten years, are fully vested upon the completion of one year of
service as a nonemployee director, have an exercise price equal to the fair
market value of the Company's common stock on the date of grant, and become
exercisable in cumulative annual installments of one-third each, beginning on
the first anniversary of the date of grant.
Also in connection with the offering, the Company granted options for
the purchase of 444,000 shares of common stock at an exercise price of $17.00
per share, to officers and key employees under the 2000 Plan. Such options have
a term of ten years, and vest and become exercisable in cumulative annual
installments of one-fifth each beginning on the first anniversary of the date of
grant.
In July and August 2000, the Company's Board of Directors and
stockholders, respectively approved the Hydril Company Employee Stock Purchase
9
<PAGE> 10
Plan (the "Stock Purchase Plan"), which was implemented November 1, 2000. The
Stock Purchase Plan is a plan under which all employees may purchase shares of
the Company's common stock at the lower of 85% of market value at the closing
price on the first or last business day of each six month period beginning on
each July 1 and January 1. However, the first offering period is an eight month
period commencing on November 1, 2000 and ending on June 30, 2001. Such
purchases are limited to 10% of the employee's regular pay. A maximum aggregate
of 220,000 shares of common stock have been reserved under the Stock Purchase
Plan. Management expects that the shares sold under the terms of the Stock
Purchase Plan will be authorized shares that are newly issued.
NOTE 6 -- OTHER INCOME
Other income for the three months ended September 30, 2000 includes a
$1,870 gain from the sale of real property not used in operations. Additionally,
the nine months ended September 30, 2000, includes a $3,576 gain from a legal
settlement with a financial institution from which the Company purchased put
options related to an investment in marketable securities, while the nine months
ended September 30, 1999 includes $902 in gains from the sale of real property
not used in operations and the sale of marketable securities.
NOTE 7 -- EARNINGS PER SHARE
The income (loss) per share shown on the Consolidated Statements of
Operations reflects net income (loss), divided by the weighted average number of
shares outstanding during the respective periods. The only potentially dilutive
securities are 702,000 options outstanding under the Company's 1999 Stock Option
Plan. In calculating diluted income (loss) per share, shares issuable under
stock options are added to the weighted average shares outstanding when
dilutive. For the three and nine months ended September 30, 2000 and 1999, all
potentially dilutive securities are anti-dilutive and therefore are not included
in the Earnings per Share calculations.
NOTE 8 -- SEGMENT AND RELATED INFORMATION
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", the Company has identified the following
reportable segments: Premium Connections and Pressure Control.
The Company's premium connections segment manufactures premium
connections that are used in harsh drilling environments. Hydril applies premium
threaded connections to tubulars owned by its customers and purchases pipe in
certain international markets for threading and resale. Hydril manufactures
premium threaded connections and provides services at facilities located in
Houston, Texas; Westwego, Louisiana; Bakersfield, California; Nisku, Alberta,
Canada; Aberdeen, Scotland; Veracruz, Mexico; Batam, Indonesia; Port Harcourt
and Warri, Nigeria.
The Company's pressure control segment manufactures a broad range of
pressure control equipment used in oil and gas drilling, and well completion
typically employed in harsh environments. The Company's pressure control
products are primarily safety devices that control and contain fluid and gas
pressure during drilling, completion and maintenance in oil and gas wells. The
Company also provides replacement parts, repair and field services for its
installed base of pressure control equipment. Hydril manufactures pressure
control products at three plant locations in Houston, Texas.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on operating income or loss.
10
<PAGE> 11
Financial data for the business segments for the three and nine months
ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Premium Connections $ 24,821 $ 19,156 $ 70,823 $ 56,546
Pressure Control 19,822 21,018 64,076 61,889
------------ ------------ ------------ ------------
Total $ 44,643 $ 40,174 $ 134,899 $ 118,435
============ ============ ============ ============
OPERATING INCOME (LOSS)
Premium Connections $ 6,597 $ 3,952 $ 19,804 $ 13,629
Pressure Control 2,219 (1,043) 3,541 (12,384)
Corporate Administration (3,096) (2,936) (8,954) (8,519)
------------ ------------ ------------ ------------
Total $ 5,720 $ (27) $ 14,391 $ (7,274)
============ ============ ============ ============
DEPRECIATION EXPENSE
Premium Connections $ 1,431 $ 1,141 $ 3,835 $ 2,819
Pressure Control 437 523 1,343 1,442
Corporate Administration 377 410 1,220 1,371
------------ ------------ ------------ ------------
Total $ 2,245 $ 2,074 $ 6,398 $ 5,632
============ ============ ============ ============
CAPITAL EXPENDITURES
Premium Connections $ 2,878 $ 1,251 $ 5,736 $ 6,858
Pressure Control 656 157 1,092 704
Corporate Administration 511 62 657 97
------------ ------------ ------------ ------------
Total $ 4,045 $ 1,470 $ 7,485 $ 7,659
============ ============ ============ ============
</TABLE>
11
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PART I, ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report on Form 10-Q contains forward-looking statements.
These statements relate to future events or our future financial performance,
including our business strategy and product development plans, and involve known
and unknown risks and uncertainties. These risks and uncertainties and
assumptions, which are more fully described in Hydril Company's prospectus dated
September 27, 2000 filed with the Securities and Exchange Commission, include
the impact of oil and natural gas prices and worldwide economic conditions on
drilling activity and the demand for and pricing of Hydril's products and
Hydril's assumptions relating thereto. These factors may cause our company's or
our industry's actual results, levels of activity, performance or achievements
to be materially different from those expressed or implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"intends," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue," or the negative of these terms or other comparable
terminology.
These statements are only projections, based on anticipated industry
activity. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
OVERVIEW
Hydril Company is engaged worldwide in engineering, manufacturing and
marketing premium connections and pressure control products used for oil and gas
drilling and production. Our premium connections are used in drilling
environments where extreme pressure, temperature, corrosion and mechanical
stress are encountered, as well as in environmentally sensitive drilling. These
harsh drilling conditions are typical for deepwater, deep-formation and
horizontal wells. Our pressure control products are primarily safety devices
that control and contain fluid and gas pressure during drilling, completion and
maintenance of oil and gas wells in the same environments. We also provide
aftermarket replacement parts, repair and field services for our installed base
of pressure control equipment. These products and services are required on a
recurring basis because of the impact of the extreme conditions in which
pressure control products are used.
Demand for our products and services is cyclical and substantially
dependent on the activity levels in the oil and gas industry and its willingness
to spend capital on the exploration and development of oil and gas reserves. The
level of these capital expenditures is highly sensitive to current and expected
oil and gas prices. Our premium connections are marketed primarily to oil and
gas operators. Sales of premium connections are driven by the level of worldwide
drilling activity, in particular deep-formation drilling and deepwater drilling.
We sell our pressure control products primarily to drilling contractors. The
main drivers for sales of pressure control products are the level of
construction of new drilling rigs and the rate at which existing rigs are
refurbished. Demand for our pressure control aftermarket replacement parts,
repair and field services is driven by the level of worldwide drilling activity.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total revenues increased $4.4 million, or 11%, to $44.6 million for the
three months ended September 30, 2000 compared to $40.2 million for the three
months ended September 30, 1999. Our premium connections revenues increased $5.6
million, or 29%, to $24.8 million for the three months ended September 30, 2000
as compared to $19.2 million for the prior year period. This increase reflects
an expanding market in North America (United States and Canada) for premium
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<PAGE> 13
connections. This expansion is primarily attributable to an increase in the
level of deepwater drilling activity and drilling for deep gas in the U.S.
Although demand in the North American premium connection market improved in the
third quarter, demand in the international market remains at levels
substantially the same as for the 1999 period. Pressure control revenues
decreased slightly by $1.2 million, or 6%, to $19.8 million for the three months
ended September 30, 2000 as compared to the same period in 1999. This decline
was primarily due to a decrease in revenue from the sale of pressure control
capital equipment of 32% due to the completion of long-term capital projects.
This decrease was partially offset by a 22% increase in aftermarket product
revenues, which generated higher gross margins.
GROSS PROFIT
Gross profit increased $5.9 million to $14.2 million for the three
months ended September 30, 2000 from $8.3 million for the three months ended
September 30, 1999. The increase is primarily due to a shift in product sales
mix in pressure control from lower margin capital equipment to higher margin
aftermarket spare parts. Gross profit also improved as a result of increased
sales volumes and price increases in the U.S. market for premium connections.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the third quarter of
2000, increased slightly over the prior year period. For the three months ended
September 30, 2000, these expenses were $8.5 million compared to $8.3 million
for the same period in 1999. The increase was due to higher management incentive
plan expense accruals resulting from improved performance. As a percentage of
sales, selling, general, and administrative expenses decreased from 21% for the
third quarter of 1999, to 19% for the third quarter of 2000.
OPERATING INCOME
Operating income was $5.7 million for the three months ended
September 30, 2000, compared to an operating loss of $0.1 million for the same
period in 1999. Operating income for our premium connections segment increased
65% to $6.6 million for the third quarter of 2000 compared to $4.0 million for
the third quarter of 1999. Operating income for our pressure control segment
increased to $2.2 million for the quarter ended September 30, 2000 from a loss
of $1.0 million for the same period in 1999. Corporate and administration
expenses were $3.1 million and $2.9 million for the three months ended
September 30, 2000 and 1999, respectively.
INTEREST EXPENSE
Interest expense was $1.2 million for the third quarter of 2000
compared to $1.3 million for the prior year quarter. This decline represents
lower average outstanding bank debt during the quarter.
OTHER INCOME AND EXPENSE
Other income was $1.8 million for the three months ended September 30,
2000, and consists primarily of a $1.9 million gain recorded from the sale of
real estate not used in operations. Other expense for the three months ended
September 30, 1999 was $.1 million.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total revenues increased $16.5 million, or 14%, to $134.9 million for
the nine months ended September 30, 2000 from $118.4 million for the nine months
ended September 30, 1999. Premium connections revenue rose 25% to $70.8 million
and pressure control revenue increased 4% to $64.1 million. The increase in
premium connections revenue is due to the expansion of the North American
market, for which sales revenues increased 66% compared to the prior year
period. The increase in pressure control revenue is attributable to a 14%
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<PAGE> 14
increase in revenues from sales of aftermarket products which was partially
offset by a 6% decrease in revenues from the sale of capital equipment due to
completion of long-term capital projects.
GROSS PROFIT
Gross profit increased $20.9 million to $39.4 million for the nine
months ended September 30, 2000 from $18.5 million for the nine months ended
September 30, 1999. The increase in gross profit was due in part to a $9.0
million charge in the first half of 1999 to replace some of our pressure control
equipment due to welds that did not meet company standards. Also contributing to
the higher gross margin was a shift in the pressure control product sales mix
from lower margin capital equipment to higher margin aftermarket spare parts.
For premium connections, higher gross margins resulted from higher plant
production and sales volumes in the U.S. and Canada, and price increases in the
U.S. during 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling , general and administrative expenses declined $.8 million to
$25 million for the nine months ended September 30, 2000 as compared to $25.8
million for the prior year period. The decrease is due to lower engineering
requirements resulting from the completion of long-term pressure control
projects, which was partially offset by higher professional services and
management incentive expense accruals resulting from improved performance. As a
percentage of sales, selling, general and administrative expenses decreased from
22% for the nine months ended September 30, 1999 to 19% for the same period this
year.
OPERATING INCOME
Operating income was $14.4 million for the nine months ended
September 30, 2000, compared to an operating loss of $7.3 million for the same
period in 1999. Operating income for our premium connections segment increased
46% to $19.8 million for the nine months ended September 30, 2000 compared to
the same period in 1999. Operating income for our pressure control segment
increased to $3.5 million for the nine months ended September 30, 2000 from a
loss of $12.4 million for the same period in 1999. Corporate and administration
expenses were $9.0 million for the first nine months of 2000 as compared with
$8.5 million for the same period in 1999.
INTEREST EXPENSE
Interest expense was $3.9 million and $4.0 million for the nine months
ended September 30, 2000 and 1999, respectively.
OTHER INCOME AND EXPENSE
For the nine months ended September 30, 2000, other income was $5.3
million which includes a $3.6 million gain from a legal settlement related to
the purchase of put options to sell marketable securities, and a $1.9 million
gain recorded from the sale of real estate not used in operations. For the nine
months ended September 30, 1999, other income was $1 million, and includes a
$0.6 million gain on the sale of real property not used in operations, $0.2
million of rental real estate income, and $0.2 million from the sale of
marketable securities.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, such as
expanding and upgrading manufacturing facilities and capacity, to fund new
product development and to provide additional working capital. Our primary
source of funds has been cash flow from operations, proceeds from borrowings
under our bank facilities, a private placement of senior secured notes, and
reimbursement of costs related to the joint industry project in which we are
participating and government-funded research projects.
For the nine months ended September 30, 2000 cash provided by operating
activities was $13.2 million compared to $12.5 million for the nine months ended
September 30, 1999.
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<PAGE> 15
Cash provided by operations in 2000 was the result of improved operating
results and partially offset by increased working capital requirements. Cash
provided by operations in 1999 was primarily the result of a reduction in
working capital needs due to the downturn in the market.
Net cash used in investing activities was $1.8 million for the nine
months ended September 30, 2000, which includes $7.5 million in capital
expenditures. Capital expenditures for the nine month period ending
September 30, 2000 consisted of $5.7 million for premium connections related to
North America plant capacity expansion, $1.1 million for pressure control and
$.7 million for corporate purposes. In May 2000, we settled through mediation, a
dispute with a financial institution related to our purchase of put options on
marketable securities. As a result of this settlement, we received, after
expenses, approximately $3.6 million. In July 2000, we sold certain real
property not used in our operations for proceeds of approximately $2.1 million,
net of expenses from the sale.
Cash provided by investing activities for the nine months ended
September 30, 1999 was $7.4 million which included $13.1 million in proceeds
from the sale of marketable securities. Capital expenditures for the nine months
ended September 30, 1999, were $7.7 million which consisted of $6.9 million for
premium connections, $.7 million for pressure control and $.1 million for
corporate purposes.
On August 25, 2000, the U.S. revolving line of credit was amended to,
among other things, increase the amount available on the line from $15 million
to $25 million. The amendment became effective October 2, 2000 upon completion
of the Company's initial public offering. The amended credit line will mature
March 31, 2003. During the third quarter of 2000, cash generated from operations
was used to pay off substantially all of the outstanding balance on this line of
credit. At September 30, 2000, $1.0 million was outstanding and the weighted
average interest rate was 10.25%.
The Company also has a committed foreign line of credit for $3,000 and
an uncommitted foreign line of credit for $10,000. There were no borrowings
under either line as of September 30, 2000.
In October 2000, the Company completed an initial public offering in
which 8,600,000 shares of common stock were sold at $17.00 per share. Of the
8,600,000 shares, 2,672,668 shares were sold by the Company and 5,927,332 shares
were sold by existing stockholders. The Company received net proceeds from the
offering of approximately $40,000 after underwriting discounts and commissions
and other related expenses.
BACKLOG
Pressure control capital equipment backlog at September 30, 2000 and
1999 was $18.2 million and $35.9 million, respectively. We include in this
backlog orders for pressure control capital equipment and projects. Backlog of
premium connections and pressure control aftermarket parts and service are not a
meaningful measure of business prospects due to the quick turnover of such
orders. Pressure control capital equipment backlog at September 30, 2000
includes a $10 million order for a subsea multiplex BOP control system received
by the Company during the third quarter of 2000. We expect to deliver this order
in the second half of 2001. The revenue and gross profit from this order will be
recognized using the percentage of completion accounting method.
PART I, ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes since December 31, 1999 in the
Company's exposure to market risk.
PART II, ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2000, the Company completed an initial public offering of
8,600,000 shares of common stock, $0.50 par value, which were sold at $17.00 per
share.
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<PAGE> 16
Of the 8,600,000 shares, 2,672,668 shares were sold by the Company and
5,927,332 shares were sold by existing stockholders. Gross proceeds to the
Company were approximately $45.5 million and gross proceeds to the selling
stockholders were approximately $100.8 million. The managing underwriters in the
offering were Salomon Smith Barney, Credit Suisse First Boston, Dain Rauscher
Wessels, and Simmons & Company International. The shares of common stock sold in
the offering were registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement on Form S-1 (registration number 333-38954)
that was declared effective September 26, 2000. The offering commenced on
September 27, 2000.
In connection with this offering, the Company incurred $3.2 million in
underwriting discounts and commissions, and approximately $2.2 million in other
related expenses. The net proceeds to the Company from the offering, after
deducting the foregoing expenses, were approximately $40 million. We intend to
use the proceeds as well as cash generated from operations to expand our
capacity to produce premium connections in the United States and Canada, to
upgrade machine tools that we use in the manufacturing of our pressure control
products, and to finance the continued development and commercialization of new,
advanced technologies and products.
PART II, ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit No.
3.1 -- Restated Certificate of Incorporation of the Company.
3.2* -- Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of Amendment No. 1 to the Registration
Statement on Form S-1 of the Company filed with the
Commission on July 31, 2000).
4.1* -- Form of Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).
4.2* -- Registration Rights Agreement among the Company and the
stockholders named therein (incorporated by reference to
Exhibit 4.2 of Amendment No. 1 to the Registration
Statement on Form S-1 of the Company filed with the
Commission on July 31, 2000).
10.1* -- Hydril Company 2000 Incentive Plan (incorporated by
reference to Exhibit 10.3 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).
10.2* -- Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.5 of Amendment No. 1 to the
Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).
10.3* -- Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.6 of Amendment No. 1 to the Registration
Statement on Form S-1 of the Company filed with the
Commission on July 31, 2000).
10.4* -- Second Amended and Restated Loan Agreement dated as of
August 25, 2000 among Hydril Company and Bank One, Texas,
N.A. (incorporated by reference to Exhibit 10.7 of
Amendment No. 2 to the Registration Statement on Form S-1
of the Company filed with the Commission on September 5,
2000).
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27 -- Financial Data Schedule
----------
*Incorporated by reference as indicated.
Reports on Form 8-K:
During the quarter ended September 30, 2000, no reports were filed on
Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HYDRIL COMPANY
Date: November 9, 2000 By: /s/ Michael C. Kearney
-----------------------------
Michael C. Kearney
Chief Financial Officer and Vice
President- Administration
(Authorized officer and principal
accounting and financial officer)
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<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company.
3.2* Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 of Amendment No. 1 to the Registration Statement on Form S-1 of
the Company filed with the Commission on July 31, 2000).
4.1* Form of Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to the Registration Statement on
Form S-1 of the Company filed with the Commission on July 31, 2000).
4.2* Registration Rights Agreement among the Company and the stockholders
named therein (incorporated by reference to Exhibit 4.2 of Amendment
No. 1 to the Registration Statement on Form S-1 of the Company filed
with the Commission on July 31, 2000).
10.1* Hydril Company 2000 Incentive Plan (incorporated by reference to
Exhibit 10.3 of Amendment No. 1 to the Registration Statement on Form
S-1 of the Company filed with the Commission on July 31, 2000).
10.2* Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.5 of Amendment No. 1 to the Registration Statement on Form
S-1 of the Company filed with the Commission on July 31, 2000).
10.3* Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.6 of Amendment No. 1 to the Registration Statement on Form S-1 of
the Company filed with the Commission on July 31, 2000).
10.4* Second Amended and Restated Loan Agreement dated as of August 25,
2000 among Hydril Company and Bank One, Texas, N.A. (incorporated by
reference to Exhibit 10.7 of Amendment No. 2 to the Registration
Statement on Form S-1 of the Company filed with the Commission on
September 5, 2000).
27 Financial Data Schedule
</TABLE>
----------
*Incorporated by reference as indicated.
