UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-15423
Grant Prideco, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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76-0312499
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(State or Other Jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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400 N. Sam Houston Pkwy. East
Suite 900 Houston, Texas
(Address of Principal
Executive Offices)
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77060
(Zip Code)
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(281) 878-8000
(Registrants telephone
number, including area code)
Securities to be registered pursuant to Section 12(b) of
the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15 (d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting
company
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Indicate by check mark whether registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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Aggregate market value of the voting and non-voting common
equity held by nonaffiliates of the registrant: $5,693,505,920.
This figure is estimated as of June 30, 2007, at which date
the closing price of the registrants shares on the New
York Stock Exchange was $53.83 per share.
Number of shares of Common Stock outstanding as of
February 1, 2008: 125,056,427
DOCUMENTS
INCORPORATED BY REFERENCE
Listed below is the document parts of which are incorporated
herein by reference and the part of this report into which the
document is incorporated:
(1) Proxy Statement for 2008 Annual Meeting of
Stockholders Part III
Form 10-K
PART I
General
We are the world leader in drill stem technology development and
drill pipe manufacturing, sales and service; a global leader in
drill bit technology and specialty tools, manufacturing, sales
and service; and a provider of an integrated package of
large-bore tubular products and services. Our drill stem and
drill bit products are used to drill oil and gas wells while our
large-bore tubular products and services are primarily used in
completing offshore oil and gas wells. Our customers include oil
and gas drilling contractors; major, independent and state-owned
oil and gas companies; and other oilfield service companies. We
primarily operate through three business segments:
(1) Drilling Products and Services, (2) ReedHycalog
and (3) Other. Our Other segment includes the results of
our XL Systems and IntelliServ, Inc. (IntelliServ)
divisions. Additionally, our Corporate segment includes general
corporate overhead expenses.
On October 29, 2007, we entered into a definitive Purchase
and Sale Agreement with Vallourec S.A and Vallourec &
Mannesman Holdings, Inc. (collectively referred to as
Vallourec) to sell three of the divisions within our
former Tubular Technology and Services segment for
$800 million in cash, subject to a final working capital
adjustment and standard closing conditions (including regulatory
approval). We expect the transaction to close in the second
quarter of 2008. The divisions included in the sale are Atlas
Bradford Premium Threading and Services, TCA Premium Casing and
Tube-Alloy Accessories. In addition to the divisions being sold,
certain other divisions within our former Tubular Technology and
Services segment (located in Canada and Venezuela) have either
been sold, are planned to be disposed of, or are otherwise being
discontinued. All of these dispositions discussed above are
reflected as discontinued operations in our Statements of
Operations and prior periods have been revised to reflect this
presentation. As the remaining division in the former Tubular
Technology and Services segment, XL Systems, is not of
continuing significance to report alone as a segment and it does
not meet the quantitative thresholds established in Statement of
Financial Accounting Standards (SFAS) No. 131,
Disclosures About Segments of an Enterprise and Related
Information, we are discontinuing the Tubular Technology
and Services segment and XL Systems is now included in the
Other segment along with our IntelliServ division. We have
revised our prior period segment reporting to reflect this
change.
On December 16, 2007, we entered into an Agreement and Plan
of Merger with National Oilwell Varco, Inc. (National Oilwell
Varco) that will result in National Oilwell Varco acquiring all
of our outstanding shares in exchange for a combination of cash
and stock. Upon completion of the transaction, each stockholder
of Grant Prideco will receive 0.4498 of a share of National
Oilwell Varco common stock and $23.20 in cash for each share of
Grant Prideco common stock. All options to purchase Grant
Prideco common stock granted under our equity compensation plans
that are outstanding at the effective time of the merger will
vest and become fully exercisable upon the completion of the
merger and will be converted into options to purchase National
Oilwell Varco common stock. For shares of restricted Grant
Prideco common stock granted to our executive officers and
directors under our equity compensation plans that have not
vested prior to the merger will, pursuant to their terms, become
partially or fully vested upon the effective time of the merger.
For all other restricted Grant Prideco common stock that vests
based on the passage of time, they will be converted into rights
to receive equivalent restricted shares of National Oilwell
Varco common stock and will continue to vest based upon the
terms of the original grant. See Note 3 to the consolidated
financial statements for further discussion of our stock-based
compensation. The transaction is subject to shareholder and
regulatory approval and other customary terms and conditions. We
expect the transaction to close in the second quarter of 2008.
Our business depends primarily on the level of worldwide oil and
gas drilling activity, which is directly related to the level of
capital spending by major, independent and state-owned
exploration and production companies. Changes in the level of
capital spending by those exploration and production companies,
which is based on their expectation of future oil and gas
prices, create variability in drilling activity that results in
its commonly observed volatility and cyclicality. The revenues,
cash flows and profitability of our business segments generally
track the
3
level of domestic and international drilling activity, but the
timing of that effect is often different for each of our
segments. Along with drilling activity, drill pipe demand is
also a function of customer inventory levels. Typically, drill
pipe demand lags changes in the worldwide rig count.
Additionally, in a declining market, some customers may be
contractually required to purchase ordered drill pipe even if
they will no longer have an immediate need for pipe. This can
create a situation where some customers have excess inventory of
drill pipe that could delay their purchases of additional pipe
in the future. Drill bit demand and that segments earnings
and cash flows have more closely tracked the worldwide rig
count. In our Other segment, demand for our XL Systems products
generally follows the level of worldwide offshore drilling
activity.
Grant Prideco, Inc. is a Delaware corporation formed in 1990.
Additional information regarding our segments and our revenues
and long-lived assets by geographic region can be found in the
footnotes to our consolidated financial statements starting on
page 37 of this Annual Report on
Form 10-K.
Drilling
Products and Services Segment
Our Drilling Products and Services segment manufactures and
sells a variety of drill stem products used for the drilling of
oil and gas wells. The principal products sold by this segment
are: (1) drill pipe, (2) drill collars and heavyweight
drill pipe and (3) drill stem accessories.
Our drill stem products wear out through a combination of
friction and metal fatigue and generally are utilized by our
customers for a three to five year period assuming regular use.
Demand for our drill stem products is impacted primarily by
changes in drilling activity and worldwide rig activity.
However, since drill stem products are not consumables and
represent a capital investment by our customers, demand for
these products also is significantly impacted by the level of
inventory held by our customers and their perceptions as to
future activity and their near-term need for new drill stem
products. As a result, even in periods of rising or strong
drilling activity, our customers may elect to defer purchases
until their own inventory reaches levels at which additional
purchases are necessary to sustain their existing drilling
activities.
With the increased complexity of drilling activity, demand for
our proprietary line of
eXtreme
®
drilling and other premium drilling products has remained
strong. Our premium drilling products are specifically designed
for extreme drilling conditions such as extended reach,
directional, horizontal, deep gas, offshore and ultra-deepwater
drilling, as well as high-temperature, high-pressure and
corrosive well conditions. Operators and drilling contractors
have embraced our premium products as a way to improve their
efficiency and assure performance when drilling under extreme
conditions. We believe that our
eXtreme
®
product line offers some of the highest-performance drilling
products ever brought to market and provides our customers with
engineered solutions for some of their most challenging drilling
applications.
Our drill stem products are sold to a variety of customers,
including oil and gas drilling contractors, rental tool
companies and major, independent and state-owned oil and gas
companies. Our customers purchasing decisions are
generally based on operational requirements, quality, price and
delivery. The principal competitors for our drill stem products
include Smith International Inc., Texas Steel Conversion,
Vallourec and Mannesmann and various smaller local manufacturers
in the U.S. and worldwide. We typically compete on quality,
technology, price and delivery and we believe we are the
technological leader in our industry.
The following is a description of our principal drill stem
products:
Drill
Pipe
Drill pipe is the principal tool, other than the rig, required
for the drilling of an oil or gas well. Its primary purpose is
to connect the above-surface drilling rig to the drill bit. A
drilling rig will typically have an inventory of 10,000 to
30,000 feet of drill pipe depending on the size and service
requirements of the rig. Joints of drill pipe are connected to
each other with a welded-on tool joint to form what is commonly
referred to as the drill string or drill stem.
When a drilling rig is operating, motors mounted on the rig
rotate the drill pipe and drill bit. In addition to connecting
the drilling rig to the drill bit, drill pipe provides a
mechanism to steer the drill bit and serves as a conduit for
drilling fluids and cuttings. Drill pipe is a capital good that
can be used for the drilling of multiple wells. Once a
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well is completed, the drill pipe may be used again in drilling
another well until the drill pipe becomes damaged or wears out.
In recent years, the depth and complexity of the wells our
customers drill, as well as the specifications and requirements
of the drill pipe they purchase, have substantially increased. A
majority of the drill pipe we sell is required to meet
specifications exceeding minimum American Petroleum Institute
(API) standards. We offer a broad line of premium drilling
products designed for the offshore, international and domestic
drilling markets. Our premium drilling products include our
proprietary lines of
XT
®
and
TurboTorque
tm
connections and
5
7
/
8
-inch
drill pipe that delivers hydraulic performance superior to
standard
5
1
/
2
-inch
drill pipe and weight benefits superior to standard
6
5
/
8
-inch
drill pipe.
Drill
Collars
Drill collars are used in the drilling process to place weight
on the drill bit for better control and penetration. Drill
collars are located directly above the drill bit and are
manufactured from a solid steel bar to provide necessary weight.
Heavyweight
Drill Pipe and Other Drill Stem Products
Heavyweight drill pipe is a thick-walled seamless tubular
product that is less rigid than a drill collar. Heavyweight
drill pipe provides a gradual transition between the heavier
drill collar and the lighter drill pipe.
We also provide subs, pup joints (short and odd-sized tubular
products) and other drill stem accessories. These products all
perform special functions within the drill string as part of the
drilling process.
Voest-Alpine
Tubulars
Voest-Alpine Tubulars (VAT) is a joint venture between Grant
Prideco and the Austrian based Voestalpine Group. We have a
50.01% investment in the joint venture which is located in
Kindberg, Austria. VAT owns a tubular mill with an annual
capacity of approximately 380,000 metric tons and is the primary
supplier of green tubes for our U.S. based production. In
addition to producing green tubes, VAT produces seamless tubular
products for the Oil Country Tubular Goods (OCTG) market
and non-OCTG products used in the automotive, petrochemical,
construction, mining, tunneling and transportation industries.
Operations
Our major drill stem manufacturing plants are located in the
U.S., China, Italy, Mexico, Singapore and Indonesia. These
products are sold and serviced through over 16 sales and service
facilities located around the world. We are a fully vertically
integrated drill pipe manufacturer, controlling each facet of
the drill pipe manufacturing process. We manufacture (through
VAT) the green tube (drill pipe tube that has not been
heat-treated or processed), the tool joint and complete the
finishing and welding operations. We believe this manufacturing
strategy provides us with significant competitive advantages
over other drill pipe manufacturers. By controlling each facet
of the drill pipe manufacturing process, we are able to tailor
our processes and techniques to meet our customers
demanding product specifications, particularly with respect to
green drill pipe tubes with body wall thickness, wall uniformity
and other features that exceed minimum API standards and are not
readily available from third-party mills.
ReedHycalog
Segment
Our ReedHycalog segments products and services are
comprised primarily of the drill bit operations of ReedHycalog.
This segment is a leading global designer, manufacturer and
distributor of drill bits, hole-opening or hole enlarging tools,
coring services and other related technology to the oil and gas
industry. This segment also services its customer base through a
technical sales and marketing network in virtually every
significant oil and gas-producing region in the world. All of
the products and services are generally sold directly to the
upstream oil and gas operators and, to a lesser extent, drilling
contractors on turnkey and footage contracts. Competition is
based on technical performance, price and service.
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The drill bit market consists of two product types: fixed-cutter
bits and roller-cone bits. We manufacture and sell both product
types on a global basis.
Drilling through subsurface strata to locate oil and gas
requires a drill bit to be run on drill pipe or conveyed with
coiled tubing and rotated by surface rig equipment or downhole
motors and turbines. Selecting the optimal bit for a particular
application represents one of the many challenges faced by oil
and gas companies and drilling contractors in planning a well.
Similar to the drill stem market, the primary market driver is
worldwide drilling activity or, more specifically, total footage
drilled. In addition, demand is a function of well depth and
complexity with demand for fixed-cutter bits tied more strongly
to offshore, directional or horizontal drilling.
Drill bits constitute a very small percentage of total well
costs, but are a critical component of well-construction
economics. The time required to drill a well is directly related
to a drill bits rate of penetration and footage drilled
prior to becoming dull and requiring replacement. On a
cost-per-foot
basis, selecting the appropriate drill bit significantly reduces
drilling costs by decreasing drilling time and the number of
trips required in and out of a well. Both roller-cone and fixed
cutter bits can be used for shallow, land rig operations where
bit costs or bit rental rates are a more significant portion of
overall costs. Higher performance roller-cone or fixed-cutter
bits with better rates of penetration and longer lives offer the
most economic choice for offshore and deep wells where rig rates
and trip costs are high.
We provide a complete series of drill bits incorporating
advanced materials technology and a range of
performance-enhancing features. This broad product offering
provides customers with maximum flexibility in selecting drill
bits. In addition, we provide drill bit selection, well-planning
services and vibration monitoring and control through our field
sales and engineering organization.
Hole-opening tools are used to enlarge a well bore and have
found the most widespread application in those instances when
the operator wants to maximize well bore size below a cased
section of the hole. The most prevalent hole opening tools are
the bicenter bit and the adjustable string reamer tool. The
Bicenter bit is a PDC (polycrystalline diamond compact) bit
built such that it can be passed through a fixed inside diameter
casing without rotation, and once the bit exits the casing it
can be rotated for drilling a larger hole than would be possible
with a conventional bit. Bicenter bits are sold under the
ReedHycalog trademark
BiCentrix
®
.
Our acquisition in October 2006 of Andergauge Ltd. and related
companies (collectively, Andergauge) provides string
reamers under the trademark
Anderreamer
tm
.
An adjustable string reamer is a tool placed in the bottom-hole
assembly (BHA) which has deployable reaming blades on the
outside diameter of the tool. When the BHA reaches a point in
the wellbore where hole enlargement is required, the
Anderreamer
tm
blades can be deployed out of the tool to enlarge the hole to
the desired diameter and subsequently retracted as the BHA is
tripped out of the hole. Hole-opening tools are also used in a
variety of other situations where these tools may provide
improvements in well bore quality or increased flexibility in
well re-entry. Andergauge also offers a number of other
complimentary string tools for wellbore construction such as the
AG-itator
tm
used in drilling extended reach wells.
ReedHycalog Coring Services provide for the extraction of actual
geological formations from a drilled well bore to allow
geologists to examine the formations at the surface. During
2005, we acquired the assets of Corion Diamond Products, Ltd.
(Corion), the market leader in coring services in Canada. One of
the coring services utilized at ReedHycalog Coring Services is
the Corion
Express
®
system which allows the customer to drill and core a well
without tripping pipe. Corion Express utilizes wireline
retrievable drilling and coring elements which allow the system
to transform from a drilling assembly to a coring assembly and
also to wireline retrieve the geological core.
Our principal competitors are Hughes Christensen (a division of
Baker Hughes Inc.), Smith Bits (a division of Smith
International Inc.), and Security DBS (a division of Halliburton
Company), as well as numerous smaller competitors throughout the
world.
Fixed-Cutter
Bits
ReedHycalog first manufactured fixed-cutter natural diamond bits
in 1953 and synthetic PDC bits in 1974.
The predominant fixed-cutter bit used in the oil and gas
industry is the PDC bit. PDC bits have no moving parts and are
therefore intrinsically more reliable than roller-cone bits, but
they are generally more sensitive to geological changes. PDC
bits drill with a shearing action to remove rock by dragging the
diamond elements through the
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formation as the drill bit body rotates. PDC bits allow faster
rates of drilling penetration and can drill complete well
sections without the need for bit replacement. As a result, they
are used in high cost drilling locations (such as offshore or in
remote locations) where their technical advantages reduce
drilling time sufficiently to justify the higher cost product.
We provide fixed-cutter bit types and technology under various
brand names including
TReX
®
,
Raptor
tm
,
SystemMatched
tm
,
Rotary Steerable and many others. One of our most significant
drill bit innovations is our TReX and Raptor cutter technology,
which significantly increases abrasion resistance (wear life)
without sacrificing impact resistance (toughness). This
technology provides a diamond surface that maintains a sharp,
low-wear cutting edge that produces drilling results that exceed
conventional standards for PDC bit performance.
Roller-Cone
Bits
ReedHycalog has manufactured roller-cone bits since 1916 and
produces roller-cone bits for a wide variety of oil and gas
drilling applications. Roller-cone bits consist of three
rotating cones that have cutting teeth, which penetrate the
formation through a crushing action as the cones rotate in
conjunction with the rotation of the drill pipe. This cutting
mechanism, while less efficient than fixed-cutter bits, is more
versatile in harder formations, or where the geology is
changing. We manufacture roller-cone bits with milled teeth and
with tungsten carbide insert teeth, which have a longer life in
harder formations. We also manufacture a unique patented line of
bits using a powder-metal forging technology sold under the
brand
TuffCutter
tm
.
We market our roller-cone products and technology globally under
various brand names including
RockForce
tm
,
Titan
tm
and
TuffCutter
tm
.
Andergauge
Andergauge has designed, patented, rented and serviced downhole
tools since 1986 when Andergauge introduced a downhole
adjustable stabilizer (The Andergauge) which is still widely
used today for wellbore inclination control. Over the years,
Andergauge has continued to innovate and introduce new tools to
complement and enhance the drilling process. Those tools include
the Anderreamer mentioned above, the
Anderdrift
tm
,
a tool used to measure wellbore inclination and the DART 2D
rotary steerable tool. The Andergauge offering also includes the
unique
AG-itator
tm
tool which reduces drill string friction in many applications
allowing for improved weight transfer in an inclined wellbore.
Operations
We manufacture fixed-cutter bits in Stonehouse (U.K.) and in
Conroe, Texas and roller-cone bits in Singapore and in Conroe,
Texas. Our ReedHycalog Coring Services business is based near
Edmonton, Alberta, Canada. In January 2005, in connection with
an expansion of our Singapore operations, a significant portion
of the production of roller-cone bits was moved from Houston,
Texas to Singapore. In 2007, we completed the consolidation of
our four United States drill bit and diamond manufacturing
locations into a single location in Conroe, Texas, just north of
the Houston area.
We market our drill bits, hole opening, coring services and
downhole tools through a global sales and marketing network with
our employees strategically positioned around the world. Sales
people are located in North and South America, Europe, CIS,
Africa, Middle East and Asia. The sales force is technologically
sophisticated and has developed strong regional expertise.
Other
Segment
XL
Systems
Our XL Systems product line offers the customer an
integrated package of large-bore tubular products and services
for offshore wells. This product line includes our proprietary
line of wedge thread marine connections on large-bore tubulars
and related engineering and design services. We provide this
product line for drive pipe, jet strings and conductor casing.
We also offer weld-on connections and service personnel in
connection with the installation of these products. In early
2007, we completed development of our new high-strength
Viper
tm
weld-on
7
connector that we believe will permit us to penetrate
traditional markets that do not require the enhanced performance
of our proprietary wedge-thread design.
IntelliServ
In September 2005, we acquired full ownership of IntelliServ, a
company focused on the provision of well-site data transmission
services. IntelliServs core product, The
IntelliServ
®
Network, was commercialized in 2006 and incorporates
various proprietary mechanical and electrical components into
our premium drilling tubulars to allow bi-directional data
transfer via the drill string. This network functions at speeds
several orders of magnitude higher than current mud pulse and
electromagnetic transmission systems and will potentially
deliver significant improvements in drilling efficiency and well
placement. IntelliServ began its commercial operations in last
quarter of 2006 and offers its products and services on a rental
basis to oil and gas operators.
Corporate
Segment
This segment includes our general corporate overhead expenses.
Other
Business Data
Research
and Engineering
We maintain an active research and engineering program. The
program improves existing products and processes, develops new
products and processes and improves engineering standards and
practices that serve the changing needs of our customers. Our
expenditures for research and engineering activities totaled
$38.2 million, $33.6 million and $23.7 million in
2007, 2006 and 2005, respectively.
Patents
Many of our business lines rely on patents and proprietary
technologies. We currently have numerous patents issued or
pending. Many of our patents provide us with competitive
advantages in our markets. Although we consider our patents and
our patent protection to be important for our existing business
and for the development of new technologies and businesses, we
do not believe that the loss of one or more of our patents would
have a material adverse effect on our business as a whole.
Backlog
As of December 31, 2007, we had a product backlog of
$783.0 million, representing 41% of our revenues for the
year ended December 31, 2007, of which $778.5 million
we expect to complete during 2008. We had a product backlog as
of December 31, 2006 and 2005, of $1,157.9 million and
$732.1 million, respectively. These year-end backlog
amounts represented 76% and 67% of our revenues for those years,
respectively. The decrease in product backlog primarily reflects
a lower level of new land rigs entering the North American
market as compared to last year coupled with capacity additions
geared towards reducing customer lead times.
Insurance
We believe that we maintain insurance coverage that is adequate
for the risks involved. However, there is always a risk that our
insurance may not be sufficient to cover any particular loss or
that our insurance may not cover all losses. For example, while
we maintain product liability insurance, this type of insurance
is limited in coverage, and it is possible that an adverse claim
could arise that exceeds our coverage. Further, insurance rates
are subject to wide fluctuations, and changes in coverage could
result in increases in our cost or higher deductibles and
retentions.
Federal
Regulation and Environmental Matters
Our operations are subject to federal, state, local and foreign
laws and regulations relating to the energy industry in general
and the environment in particular. Environmental laws have over
the years become more stringent, and compliance with such laws
increases our overall cost of operations. In addition to
affecting our ongoing operations, applicable environmental laws
can require us to remediate contamination at our properties, at
8
properties formerly owned or operated by us, and at facilities
to which we sent waste materials for treatment or disposal and
impose liability for related damages of natural resources. 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 could arise with respect to one or more of
our current businesses or a business or property that one of our
predecessors owned or used that could have a material adverse
effect.
Our expenditures to comply with environmental laws and
regulations were not material in 2007, and are not expected to
be material in 2008. We also believe that we are in material
compliance with applicable environmental requirements and our
costs for compliance with environmental laws and regulations are
generally within the same range as those of our competitors.
However, we can offer no assurance that our costs to comply with
environmental laws will not be material in the future. Prior to
our acquisition of ReedHycalog from Schlumberger LTD
(Schlumberger) in 2002, it was conducting remediation of
groundwater at certain of its facilities. Based on currently
available information, the indemnification provided by
Schlumberger in the acquisition agreement and contractual
indemnities from other third parties, we do not believe that
these matters will result in any material effect on our capital
expenditures, earnings or competitive position. However, there
can be no guarantee that the indemnities will be available to
cover all costs or that material expenditures will not be
incurred.
Our operations are also affected by trade laws affecting the
import of OCTG, drill pipe and other products into the
U.S. Although the majority of our manufacturing operations,
including the capital investment, employees and costs and
expenses associated therewith, are located in the U.S., we have
key manufacturing facilities located outside the U.S., including
our drill bit operations in the U.K. and Singapore, our 50.01%
owned VAT subsidiary located in Austria and our tool joint
manufacturing operations in Mexico and Italy, that support our
domestic operations.
Imports of products from our foreign locations that are utilized
by our domestic manufacturing operations can be the subject of
investigations, including antidumping and countervailing duty
orders, into whether such products are unfairly priced at low
levels (
i.e.
, dumping) and causing material damage to the
domestic industry, as well as investigations under
Section 201 of the trade laws into whether such imports
have seriously damaged the domestic industry. Although we
believe we are the clear price leader for drill pipe and other
drill stem products and do not utilize imports from our foreign
facilities to dump our products, our products have
been, and may in the future be, the subject of such
investigations.
Employees
As of January 31, 2008, we had 5,070 employees.
Certain of our operations are subject to union contracts that
cover approximately 5% of our total employees. We believe our
relationship with our employees is good.
Available
Information
We file annual, quarterly, and other reports and other
information with the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934 (the Exchange
Act). You may read and copy any materials that we file
with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. You
may obtain additional information about the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC, including us.
We also make available free of charge on or through our Internet
site
(http://www.grantprideco.com)
our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and other information statements and, if applicable, amendments
to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
9
Risk
Factors and Exposures
The businesses in which we operate are subject to various risks
and uncertainties that could have adverse consequences on our
results of operations and financial condition and that could
cause actual results to be materially different from projected
results contained in the forward-looking statements in this
report and in our other disclosures. Investors should carefully
consider these risks and uncertainties when evaluating our
company and the forward-looking statements that we make. These
risks and uncertainties include, but are not limited to, the
following:
A
decline in domestic and worldwide oil and gas drilling activity
would adversely affect our results of operations.
Our forward-looking statements and projections of future results
assume increasing demand and prices for our products and
services. However, our businesses are materially dependent on
the level of oil and gas drilling activity in North America and
worldwide, which in turn depends on the level of capital
spending by major, independent and state-owned exploration and
production companies. This capital spending is driven by current
prices for oil and gas and the perceived stability and
sustainability of those prices. Oil and gas prices have been
subject to significant fluctuation in recent years in response
to changes in the supply and demand for oil and gas, market
uncertainty, world events, governmental actions and a variety of
additional factors that are beyond our control, including:
|
|
|
|
|
the level of North American and worldwide oil and gas
exploration and production activity;
|
|
|
|
worldwide economic conditions, particularly economic conditions
in North America;
|
|
|
|
oil and gas production costs;
|
|
|
|
the expected costs of developing new reserves;
|
|
|
|
national government political requirements and the policies of
the OPEC;
|
|
|
|
the price and availability of alternative fuels;
|
|
|
|
environmental regulation; and
|
|
|
|
tax policies.
|
Decreased demand for our products results not only from periods
of lower drilling activity, but also from the resulting build up
of customer inventory of drill pipe associated with idle rigs,
which can be used on active rigs in lieu of new purchases. The
time period during which drill pipe inventory is used is a
function of the number of rigs actively drilling and the
expected level of drilling activity. A decrease in the number of
rigs actively drilling results in a large amount of unused drill
pipe on idle rigs and a decrease in demand for new drill pipe.
An
economic downturn could adversely affect demand for our products
and services and our results of operations.
The U.S. and worldwide economies can be volatile, and their
future directions are naturally uncertain. If
North American or international economies decline
unexpectedly, our results of operations, stockholders
equity, cash flows and financial condition could be materially
adversely affected.
Increases
in the prices of our raw materials could affect our results of
operations.
We use large amounts of steel and alloy tubulars and bars in the
manufacture of our products. The price of steel and these alloy
raw materials has a significant impact on our cost of producing
products. If we are unable to pass future raw material price
increases on to our customers, our margins and results of
operations, stockholders equity, cash flows and financial
condition could be adversely affected.
Steel and alloy prices have increased significantly during the
past several years, caused primarily by significant increases in
the prices paid by our suppliers for scrap and coke and alloys
utilized in their operations.
10
In addition, rising alloy and steel costs also have the
potential to delay increases in demand for our drill stem
components. As drill stem products are not consumables, our
customers could elect to defer purchases until such time as they
determine that steel prices have stabilized or returned to more
normalized conditions. Our forward-looking statements do not
assume that there will be any reduced demand for our drill stem
products as a result of increased prices caused by the current
shortages being experienced in the worldwide steel and alloy
markets. Reduced demand could adversely affect our results of
operations, stockholders equity, cash flows and financial
condition.
Interruptions
of supply of raw materials could materially adversely affect our
results of operations.
We rely on various suppliers to supply the components utilized
to manufacture our drilling products. The availability of the
raw materials is not only a function of the availability of
steel, but also the alloy materials that are utilized by our
suppliers in manufacturing tubulars that meet our proprietary
chemistries. If material disruptions to raw materials
availability occur, it could adversely affect our results of
operations, stockholders equity, cash flows and financial
condition and our ability to increase our manufacturing
operations to meet the increased revenues upon which our
forward-looking statements are based. In this regard, we are
party to a green-tube supply agreement with VAT, a company in
which we beneficially own a 50.01% interest. This contract
currently expires in March 2009. If we or VAT fail to
perform under the terms of the contract, it could adversely
affect our results of operations, stockholders equity,
cash flows and financial condition and our ability to increase
our manufacturing operations to meet the increased revenues upon
which our forward-looking statements are based.
Due to
intense competition in our industry, our revenues may decline if
we do not develop, produce and commercialize new competitive
technologies and products or if we are unable to adequately
protect our current and future intellectual property rights
relating to our technologies and products.
The markets for our premium products and services are
characterized by continual developments. Substantial
improvements in the scope and quality of product function and
performance can occur over a short period of time. To remain
competitive, we must be able to develop commercially competitive
products in a timely manner in response to changes in
technology. Our ability to develop new products and maintain
competitive advantages depends on our ability to design and
commercially market products that meet the needs of our
customers, including delivery schedules and product
specifications.
Additionally, the time and expense invested in product
development may not result in commercially feasible applications
that provide revenues. We could be required to write-off our
entire investment in a new product that does not reach
commercial viability. Moreover, we may experience operating
losses after new products are introduced and commercialized
because of high
start-up
costs, unexpected manufacturing costs or problems or lack of
demand.
Many of our products and the processes we use to manufacture
them have been granted U.S. and international patent
protection, or have patent applications pending. Nevertheless,
patents may not be granted for our applications and, if patents
are issued, the claims allowed may not be sufficient to protect
our technology. If our patents are not enforceable, or if any of
our products infringe patents held by others, our financial
results may be adversely affected. Our competitors may be able
to independently develop technology that is similar to ours
without infringing on our patents, which is especially true
internationally where the protection of intellectual property
rights may not be as effective. In addition, obtaining and
maintaining intellectual property protection internationally may
be significantly more expensive than doing so domestically. We
may have to spend substantial time and money defending our
patents and, after our patents expire, our competitors will not
be legally constrained from developing products substantially
similar to ours.
11
Our
results of operations and financial condition are dependent upon
our ability to successfully increase and decrease, without
material disruption, our manufacturing capacity and expense in
response to changes in demand and to maintain prices for our
products, which can be adversely affected by changes in industry
conditions and competitive forces.
Our forward-looking statements assume we can increase or
decrease capacity with minimal operational disruption and
inefficiencies and costs. If this does not happen, or we
experience unexpected difficulties in this regard, our results
of operations could be adversely affected.
Our
results of operations can be adversely affected by adverse
weather conditions and unexpected stoppages in
production.
Our projections assume that there will not be any adverse
effects in demand for our products or our production capacity
from unexpected weather conditions such as hurricanes and other
natural disasters or other unforeseen events outside of our
control. In addition, our forward-looking statements assume that
we will not experience any material failures in our
manufacturing equipment that would reduce our manufacturing
capacity and efficiencies. If such unexpected weather conditions
or disruptions in operations occur, they could have a material
adverse effect on our results of operations.
Our
international operations may experience severe interruptions due
to political, economic or other risks, which could adversely
affect our results of operations and financial
condition.
For the year ended December 31, 2007, we derived
approximately 42% of our revenues from our facilities outside
the United States. In addition, a large part of sales from our
domestic locations were for use in foreign countries. Many of
our key manufacturing operations are outside of the United
States, including Mexico, Italy, United Kingdom, China,
Indonesia and Singapore. Our operations in certain international
locations are subject to various political and economic
conditions existing in those countries that could disrupt
operations. These risks include:
|
|
|
|
|
changes in foreign tax laws;
|
|
|
|
changes in regulations and labor practices;
|
|
|
|
currency fluctuations and devaluations;
|
|
|
|
currency restrictions, banking crises and limitations on
repatriation of profits; and
|
|
|
|
political instability or military conflict.
|
Our foreign operations may suffer disruptions, and we may incur
losses that will not be covered by insurance. We have not
historically carried political risk insurance. In particular,
terrorist attacks and other threats to U.S. national
security and resulting U.S. military activity throughout
the world increase the possibility that our operations could be
interrupted or adversely affected. Such disruption could result
in our inability to ship products in a timely and cost-effective
manner or our inability to place contractors and employees in
various countries or regions.
Any material currency fluctuations or devaluations, or political
events that disrupt oil and gas exploration and production or
the movement of funds and assets could materially adversely
affect our results of operations, stockholders equity,
cash flows and financial condition.
We manufacture and sell drill pipe locally through our Chinese
operations. As is customary in this country, our Chinese
operations may settle receivables and payables through bearer
bonds and notes. At December 31, 2007, we were holding no
such notes. To date, our Chinese operations have not experienced
significant losses as a result of such practice; however, there
can be no assurance that such losses would not occur in the
future. Any such losses could have a material adverse effect on
our results of operations in the period in which they occur.
We have an agreement with VAT, an entity of which we own 50.01%,
to purchase green tubulars. Our future results could be
adversely affected if we are unable to use or resell these
tubulars. In addition, we have agreed to be responsible for
paying any anti-dumping duties in the United States
on the resale of these tubulars, which could
12
affect our ability to resell the tubulars in the United States.
Further, our long-term supply contract with VAT is denominated
in Euros. Although we have hedged our foreign currency risk with
respect to this contract, there is no assurance our hedging
strategy will be effective or that we will continue hedging our
foreign currency exposure with respect to this contract. Thus, a
material long-term strengthening of the Euro versus the
U.S. dollar could materially adversely affect our results
of operations, stockholders equity, cash flows and
financial condition.
In
connection with our business operations, we could be subject to
substantial liability claims that adversely affect our results
of operations.
Our products are complex and the failure of this equipment to
operate properly or to meet specifications may greatly increase
our customers costs of drilling a well. In addition, many
of these products are used in hazardous drilling and production
applications where an accident or product failure can cause
personal injury or loss of life; damage to property, equipment
or the environment; regulatory investigations and penalties; and
the suspension of the end-users operations. If our
products or services fail to meet specifications or are involved
in accidents or failures, we could face warranty, contract or
other litigation claims for which we may be held responsible and
our reputation for providing quality products may suffer.
Our insurance may not be adequate in risk coverage or policy
limits to cover all losses or liabilities that we may incur or
for which we may be responsible. Moreover, in the future we may
not be able to maintain insurance at levels of risk coverage or
policy limits that we deem adequate or at premiums that are
reasonable for us, particularly in the recent environment of
significant insurance premium increases. Further, any claims
made under our policies will likely cause our premiums to
increase.
Any future damages deemed to be caused by our products or
services that are assessed against us and that are not covered
by insurance, or that are in excess of policy limits or subject
to substantial deductibles, could have a material adverse effect
on our results of operations and financial condition. Litigation
and claims for which we are not insured can occur, including
employee claims, intellectual property claims, breach of
contract claims and warranty claims. Our forward-looking
statements assume that such uninsured claims or issues will not
occur. We account for warranty reserves on a specific
identification basis. As a result, a significant unexpected
warranty issue during a particular quarter or year could cause a
material reduction in our results of operations,
stockholders equity, cash flows and financial condition in
the quarter or year in which the reserve for such warranty is
made.
We are
subject to environmental, health and safety laws and regulations
that expose us to potential financial liability.
Our operations are regulated under a number of federal, state,
local and foreign environmental laws and regulations, which
govern, among other things, the discharge of hazardous materials
into the air and water, as well as the handling, storage and
disposal of hazardous materials and the remediation of
contaminated sites. Compliance with these environmental laws is
a major consideration in the manufacturing of our products.
Because we use and generate hazardous substances and wastes in
our manufacturing operations, we may be subject to material
financial liability for any investigation and clean up of such
hazardous materials, and any related personal injury damages or
toxic tort claims. We have not historically carried insurance
for such matters.
In addition, many of our current and former properties are or
have been used for industrial purposes. Accordingly, we also may
be subject to financial liabilities relating to the
investigation and remediation of hazardous materials resulting
from the action of previous owners or operators of industrial
facilities on those sites. Liability in many instances may be
imposed on us regardless of the legality of the original actions
relating to the hazardous or toxic substances or whether or not
we knew of, or were responsible for, the presence of those
substances.
We are also subject to various federal, state, local and foreign
laws and regulations relating to safety and health conditions in
our manufacturing facilities. Those laws and regulations may
subject us to material financial penalties or liabilities for
any noncompliance, as well as potential business disruption if
any of our facilities or a portion of any facility is required
to be temporarily closed as a result of any violation of those
laws and regulations. Any such financial liability or business
disruption could have a material adverse effect on our results
of operations, stockholders equity, cash flows and
financial condition.
13
Our
results of operations could be adversely affected by actions
under U.S. trade laws and new foreign entrants into U.S.
markets.
Although we are a
U.S.-based
manufacturing company, we do own and operate international
manufacturing operations that support our
U.S.-based
business. If actions under U.S. trade laws were instituted
that limited our access to these products, our ability to meet
our customer specifications and delivery requirements would be
reduced. Any adverse effects on our ability to import products
from our foreign subsidiaries could have a material adverse
effect on our results of operations, stockholders equity,
cash flows and financial condition.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
14
The following table describes the principal manufacturing, other
facilities and offices we currently own or lease that are being
utilized in our continuing operations. We believe that our
manufacturing facilities are well maintained and suitable for
their intended purpose.
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|
|
|
|
|
|
|
|
|
|
|
Facility Size
|
|
|
|
Location
|
|
Tenure
|
|
(Sq.Ft.)
|
|
|
Utilization
|
|
Drilling Products and Services
|
|
|
|
|
|
|
|
|
Navasota, Texas
|
|
Owned
|
|
|
347,000
|
|
|
Manufacture of drill stem products
|
Veracruz, Mexico
|
|
Leased
|
|
|
303,400
|
|
|
Manufacture of tool joints and processing of drill pipe
|
Baimi Town, Jiangyan, Jiangsu China
|
|
Leased
|
|
|
49,428
|
|
|
Manufacture of drill stem products
|
Tianjin, China
|
|
Leased
|
|
|
100,912
|
|
|
Manufacture of upset to grade and finished drill pipe
|
Turin, Italy
|
|
Owned
|
|
|
60,400
|
|
|
Manufacture of tool joints
|
Jurong, Singapore
|
|
Leased
|
|
|
33,600
|
|
|
Manufacture of drill collars, accessories and threading services
|
Batam Island, Indonesia
|
|
Owned
|
|
|
25,984
|
|
|
Manufacture of drill pipe
|
ReedHycalog
|
|
|
|
|
|
|
|
|
Conroe, Texas
|
|
Owned
|
|
|
348,288
|
|
|
Manufature of roller-cone, fixed-cutter and bi-center bits and
PDC cutters
|
Houston, Texas
|
|
Leased
|
|
|
11,095
|
|
|
Assembly and machining of downhole tools
|
|
|
Leased
|
|
|
33,800
|
|
|
Assembly and machining of downhole tools
|
Stonehouse, U.K
|
|
Owned
|
|
|
76,900
|
|
|
Manufacture of fixed-cutter bits
|
Jurong, Singapore
|
|
Leased
|
|
|
370,461
|
|
|
Manufacture of roller-cone bits
|
Aberdeen, Scotland
|
|
Owned
|
|
|
29,740
|
|
|
Assembly and machining of downhole tools
|
Other
|
|
|
|
|
|
|
|
|
Beaumont, Texas
|
|
Owned
|
|
|
39,877
|
|
|
Premium threading services and manufacture of conductors
|
Vlissingen, The Netherlands
|
|
Leased
|
|
|
71,344
|
|
|
Premium threading services and manufacture of conductors
|
Batam Island, Indonesia
|
|
Owned
|
|
|
14,761
|
|
|
Premium threading services and manufacture of conductors
|
Provo, Utah
|
|
Owned
|
|
|
105,604
|
|
|
Manufacture of IntelliServ
®
Network products
|
Corporate
|
|
|
|
|
|
|
|
|
Houston, Texas
|
|
Leased
|
|
|
42,534
|
|
|
Corporate headquarters
|
The Woodlands, Texas
|
|
Leased
|
|
|
61,831
|
|
|
Sales and administrative offices
|
|
|
Item 3.
|
Legal
Proceedings
|
In the ordinary course of business, we are the subject of
various claims and litigation. We maintain insurance to cover
many of our potential losses and we are subject to various
self-retentions and deductibles with respect to our insurance.
See Business Other Business Data
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 possible, however, that
an unexpected judgment could be rendered against us in the cases
in which we are involved that could be uninsured and beyond the
amounts that we currently have reserved or anticipate incurring
for that matter.
15
As of the date of this Annual Report on
Form 10-K,
we are aware of five shareholder lawsuits that have been filed
in connection with the proposed merger between us and National
Oilwell Varco. These lawsuits, each of which has been filed in
the District Court of Harris County, Texas, against us, our
board of directors and, in one case, National Oilwell Varco, are
as follows:
Mark Bornstein, On Behalf of Himself and All
Others Similarly Situated vs. Grant Prideco, Inc., et al.
,
Cause
No. 2007-76092,
In the District Court of Harris County, Texas, 269th Judicial
District;
Catholic Medical Mission Board, On Behalf of Itself
and All Others Similarly Situated vs. Grant Prideco, Inc.,
et al.
, Cause
No. 2007-76418,
In the District Court of Harris County, Texas, 55th Judicial
District;
Thomas Gray, On Behalf of Himself and All Others
Similarly Situated vs. Grant Prideco, Inc., et al.
,
Cause No. 2007-76419,
In the District Court of Harris County, Texas, 133rd Judicial
District;
Roslyn Feder, On Behalf of Herself and All Others
Similarly Situated vs. Grant Prideco, Inc., et al.
, In the
District Court of Harris County, Texas, 61st Judicial District;
and
Kenneth Engberg, On Behalf of Himself and All Others
Similarly Situated vs. Grant Prideco, Inc., et al.
,
Cause
No. 2008-02244,
In the District Court of Harris County, Texas,
281st Judicial District.
Each of the plaintiffs in these five lawsuits alleges that they
are stockholders of us and each of these five lawsuits is
brought as putative class action. Each of these lawsuits alleges
that the proposed merger consideration is inadequate and that we
and our individual directors breached fiduciary duties owed to
our stockholders in connection with the proposed merger.
Additionally, in the
Bornstein
suit, plaintiff alleges
that National Oilwell Varco aided and abetted the alleged breach
of fiduciary duty by us and our board of directors. The
plaintiffs in each of these actions seek certification of their
lawsuits as class actions, seek to enjoin the proposed merger
and also ask for other legal and equitable relief, including an
award of attorneys fees and costs of court. On
January 17, 2008, we filed a motion requesting that all of
these shareholder actions be consolidated with the
Bornstein
case in the 269th Judicial District Court of
Harris County, Texas. The Court has not yet ruled on this motion
to consolidate.
This litigation is in its very early stages; however, National
Oilwell Varco and us believe that each of these
five lawsuits is without merit and intend to defend them.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of the stockholders of the
Company during the fourth quarter of 2007.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock has a par value of $0.01 per share and is
listed and traded on the New York Stock Exchange (NYSE) under
the symbol GRP. The following table sets forth for
the periods indicated the high and low sales prices of our
common stock as reported on the NYSE:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
50.71
|
|
|
$
|
35.61
|
|
Second quarter
|
|
|
59.99
|
|
|
|
48.00
|
|
Third quarter
|
|
|
59.50
|
|
|
|
48.38
|
|
Fourth quarter
|
|
|
56.94
|
|
|
|
44.67
|
|
2006
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
51.47
|
|
|
$
|
35.67
|
|
Second quarter
|
|
|
55.43
|
|
|
|
39.70
|
|
Third quarter
|
|
|
48.33
|
|
|
|
34.32
|
|
Fourth quarter
|
|
|
45.32
|
|
|
|
33.11
|
|
16
We have not paid cash dividends on our common stock since
becoming a public company. We currently intend to retain any
earnings for use in our business and do not anticipate paying
cash dividends in the foreseeable future. In addition, our
credit facility and indenture governing our
6
1
/
8
% Senior
Notes Due 2015 contain restrictions on our ability to pay
dividends. Refer to Part II
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
further information.
At February 1, 2008, we had 2,321 record holders of our
common stock.
Share
Repurchases
Following is a summary of our repurchase activity, including
trustee purchases related to our executive deferred compensation
plan, for the three-month period ending December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Total Number of Shares
|
|
|
|
Shares
|
|
|
Average Price
|
|
|
Purchased as Part of a
|
|
Period
|
|
Purchased(a)
|
|
|
per Share
|
|
|
Publicly Announced Plan(b)
|
|
|
October 1 31, 2007
|
|
|
3,173
|
|
|
$
|
47.56
|
|
|
|
|
|
November 1 30, 2007
|
|
|
1,794,383
|
|
|
|
47.25
|
|
|
|
1,791,021
|
|
December 1 31, 2007
|
|
|
1,181,527
|
|
|
|
48.36
|
|
|
|
1,178,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,979,083
|
|
|
$
|
47.69
|
|
|
|
2,969,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Of the 2,979,083 shares purchased during the three-month
period ended December 31, 2007, 9,377 shares were
purchased by the trustee for our executive deferred compensation
plan for the benefit of the plan participants using funds
directed by the plan participants and funds matched by us as
provided in the plan. These share purchases were not part of a
publicly announced program to purchase common shares.
|
|
(b)
|
|
In 2006, our Board of Directors approved a stock repurchase
program that authorizes the repurchase of up to
$350 million of our common stock with no established
expiration date. In 2007, our Board of Directors approved an
increase in our stock repurchase program by $300 million
(to $650 million from $350 million). For the
three-month period ended December 31, 2007, we repurchased
3.0 million shares at a total cost of $141.6 million.
Such shares are reflected in the accompanying Consolidated
Balance Sheets as Treasury Stock. At
December 31, 2007, there was $244.0 million remaining
under this program for future repurchases.
|
17
Five-Year
Performance Graph
This graph compares the yearly cumulative return on the common
stock with the cumulative return on the S&P 500 and the
Philadelphia Oilfield Service Index (OSX) since
December 31, 2002. The graph assumes the value of the
investment in the common stock and each index was $100 on
December 31, 2002, and that all dividends are reinvested.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Grant Prideco, Inc., The S&P 500 Index
And The PHLX Oil Service Sector Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/02
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
Grant Prideco, Inc.
|
|
|
|
100.00
|
|
|
|
|
111.86
|
|
|
|
|
172.25
|
|
|
|
|
379.04
|
|
|
|
|
341.67
|
|
|
|
|
476.89
|
|
S & P 500
|
|
|
|
100.00
|
|
|
|
|
128.68
|
|
|
|
|
142.69
|
|
|
|
|
149.70
|
|
|
|
|
173.34
|
|
|
|
|
182.87
|
|
PHLX Oil Service Sector
|
|
|
|
100.00
|
|
|
|
|
116.44
|
|
|
|
|
157.54
|
|
|
|
|
236.42
|
|
|
|
|
267.49
|
|
|
|
|
395.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Item 6.
|
Selected
Financial Data
|
The following presents selected historical financial data
derived from our audited consolidated financial statements and
is not necessarily indicative of results to be expected in the
future. This information has been adjusted in all periods to
reflect the sale of our Atlas Bradford Premium Threading and
Services, TCA Premium Casing and and Tube-Alloy Accessories to
Vallourec, including the disposal of certain other divisions in
Canada and Venezuela, and the sale of our Texas Arai division in
2004 as discontinued operations. This information should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements included elsewhere in
this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007(a)
|
|
|
2006(a)(b)
|
|
|
2005(c)
|
|
|
2004(d)
|
|
|
2003(e)
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,908,634
|
|
|
$
|
1,530,259
|
|
|
$
|
1,089,266
|
|
|
$
|
767,572
|
|
|
$
|
628,481
|
|
Operating Income
|
|
|
580,729
|
|
|
|
470,724
|
|
|
|
233,929
|
|
|
|
121,340
|
|
|
|
36,174
|
|
Income (Loss) from Continuing Operations
|
|
|
478,197
|
|
|
|
404,106
|
|
|
|
139,553
|
|
|
|
50,849
|
|
|
|
(3,404
|
)
|
Net Income
|
|
|
519,236
|
|
|
|
464,584
|
|
|
|
189,004
|
|
|
|
55,266
|
|
|
|
5,190
|
|
Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3.73
|
|
|
|
3.10
|
|
|
|
1.10
|
|
|
|
0.41
|
|
|
|
(0.03
|
)
|
Diluted
|
|
|
3.69
|
|
|
|
3.05
|
|
|
|
1.07
|
|
|
|
0.40
|
|
|
|
(0.03
|
)
|
Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4.05
|
|
|
|
3.56
|
|
|
|
1.49
|
|
|
|
0.45
|
|
|
|
0.04
|
|
Diluted
|
|
|
4.01
|
|
|
|
3.50
|
|
|
|
1.45
|
|
|
|
0.44
|
|
|
|
0.04
|
|
Balance Sheet Data (At End of Period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,350,704
|
|
|
$
|
2,022,067
|
|
|
$
|
1,540,284
|
|
|
$
|
1,344,466
|
|
|
$
|
1,262,061
|
|
Long-Term Debt
|
|
|
176,095
|
|
|
|
237,212
|
|
|
|
217,484
|
|
|
|
377,773
|
|
|
|
426,853
|
|
Stockholders Equity
|
|
|
1,709,801
|
|
|
|
1,362,883
|
|
|
|
996,155
|
|
|
|
705,541
|
|
|
|
606,114
|
|
|
|
|
(a)
|
|
See discussion of other operating items related to 2007 and 2006
in Note 6 to the consolidated financial statements for
further discussion.
|
|
(b)
|
|
Includes a license and royalty payment in 2006 of
$20.0 million we received in exchange for the use of
ReedHycalogs patented technology for the shallow leaching
of PDC cutters (see Note 5 to the consolidated financial
statements for further discussion).
|
|
(c)
|
|
Includes total refinancing charges of $57.1 million in
2005, which includes $35.4 million related to replacing our
previous $190 million credit facility with a new
$350 million credit facility, and an early redemption of
our $200 million
9
5
/
8
% Senior
Notes due 2007 and $21.7 million related to the repurchase
of substantially all of our 9% Senior Notes.
|
|
(d)
|
|
Includes $9.0 million of charges in 2004, which include
$3.8 million related to the relocation of the
Companys Corporate offices, $2.0 million due to lease
termination, severance and other exit costs related to the
Drilling Products rationalization program and $3.2 million
of severance costs related to the Tubular Technology and
Services organizational restructuring.
|
|
(e)
|
|
Includes $37.8 million of charges in 2003, which includes
$24.9 million related to fixed asset write-downs,
$6.4 million related to inventory reserves for exited
product lines, $6.4 million related to asset impairments,
$1.5 million related to stock-based compensation expense
offset by a benefit of $1.4 million related to the
settlement of a contingent liability.
|
19
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion is intended to assist you in
understanding our financial position as of December 31,
2007 and 2006, and our results of operations for each of the
three years in the period ended December 31, 2007. This
discussion should be read with our consolidated financial
statements and their notes included elsewhere in this Annual
Report on
Form 10-K.
The discussion of our results of operations and financial
condition contains statements relating to our future results,
including certain projections and trends, which constitute
forward-looking statements. Certain risks and uncertainties may
cause actual results to be materially different from projected
results contained in these forward-looking statements and other
disclosures. These risks and uncertainties are more fully
described under Item 1A. Risk Factors
above. 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, are not
intended to be a precise description of corporate relationships.
General
We are the world leader in drill stem technology development and
drill pipe manufacturing, sales and service; a global leader in
drill bit technology and specialty tools, manufacturing, sales
and service; and a provider of an integrated package of
large-bore tubular products and services. We primarily operate
through three business segments: (1) Drilling Products and
Services, (2) ReedHycalog and (3) Other. Our Other
segment includes the results of our XL System, previously
reported under our former Tubular Technology and Services
segment (see Discontinued Operations below for
further discussion), and IntelliServ divisions. Additionally, we
have a Corporate segment which includes general corporate
overhead expenses.
Discontinued
Operations
On October 29, 2007, we entered into a definitive Purchase
and Sale Agreement with Vallourec to sell three of the divisions
within our former Tubular Technology and Services segment for
$800 million in cash, subject to a final working capital
adjustment and standard closing conditions (including regulatory
approval). We expect the transaction to close in the second
quarter of 2008. The divisions included in the sale are Atlas
Bradford Premium Threading and Services, TCA Premium Casing and
Tube-Alloy Accessories. These divisions provide a full range of
premium threaded connections for casing, production tubing and
other accessory equipment and also manufacture and sell premium
casing for use with third-party connections. In addition to the
divisions being sold, certain other divisions within our former
Tubular Technology and Services segment (located in Canada and
Venezuela) have either been sold, are planned to be disposed of,
or are otherwise being discontinued. All of these dispositions
discussed above are reflected as discontinued operations in our
Statements of Operations and prior periods have been revised to
reflect this presentation. As the remaining division in the
Tubular Technology and Services segment, XL Systems, is not of
continuing significance to report alone as a segment and it does
not meet the quantitative thresholds established in
SFAS No. 131, we are discontinuing the Tubular
Technology and Services segment and XL Systems is now included
in the Other segment along with our IntelliServ division. We
have revised our prior period segment reporting to reflect this
change. The pending sale to Vallourec does not impact the
pending merger with National Oilwell Varco discussed below
under Pending Merger.
Pending
Merger
On December 16, 2007, we entered into an Agreement and Plan
of Merger with National Oilwell Varco that will result in
National Oilwell Varco acquiring all of our outstanding shares
in exchange for combination of cash and stock. Upon completion
of the transaction, each stockholder of Grant Prideco will
receive 0.4498 of a share of National Oilwell Varco common stock
and $23.20 in cash for each share of Grant Prideco common
stock. All options to purchase Grant Prideco common stock
granted under our equity compensation plans that are outstanding
at the effective time of the merger will vest and become fully
exercisable upon the completion of the merger and will be
converted into options to purchase National Oilwell Varco common
stock. For shares of restricted Grant Prideco common stock
granted to our executive officers and directors under our equity
compensation plans that have not
20
vested prior to the merger will, pursuant to their terms, become
partially or fully vested upon the effective time of the merger.
For all other restricted Grant Prideco common stock that vests
based on the passage of time, they will be converted into rights
to receive equivalent restricted shares of National Oilwell
Varco common stock and will continue to vest based upon the
terms of the original grant. See Note 3 to the consolidated
financial statements for further discussion of our stock-based
compensation. The transaction is subject to shareholder and
regulatory approval and other customary terms and conditions. We
expect the transaction to close in the second quarter of 2008.
This merger does not impact the pending sale or disposition of a
significant portion of our tubular businesses as discussed above
under Discontinued Operations.
License
and Royalty Agreement
In September 2006, we entered into a technology licensing
agreement with a competitor to use ReedHycalogs patented
technology for the shallow leaching of PDC cutters in exchange
for $20.0 million, which is reflected as License and
Royalty Income in the accompanying Consolidated Statements
of Operations in 2006, and future royalty payments. Beginning on
April 1, 2008, we will be paid, on a quarterly basis, a
royalty determined on actual licensed drill bits invoiced by the
competitor. We will recognize these royalties as income in the
period the competitor sells our licensed drill bits.
Acquisition
On October 13, 2006, we acquired Andergauge for
approximately $117.7 million, including cash acquired, and
a non-interest bearing note payable of $5.0 million plus
the assumption of net debt of approximately $39.9 million
and related transaction expenses. Andergauge, based in Aberdeen,
Scotland, is a provider of specialized downhole drilling tools,
including the Anderreamer and
AG-itator
tm
,
and provides services related to these tools. Andergauges
results of operations are included in the ReedHycalog segment
from the date of acquisition.
Market
Trends
Our business depends primarily on the level of worldwide oil and
gas drilling activity, which is directly related to the level of
capital spending by major, independent and state-owned
exploration and production companies. Changes in the level of
capital spending by those exploration and production companies,
which is based on their expectation of future oil and gas
prices, create variability in drilling activity that results in
its commonly observed volatility and cyclicality. The revenues,
cash flows and profitability of our business segments generally
track the level of domestic and international drilling activity,
but the timing of that effect is often different for each of our
segments. Along with drilling activity, drill pipe demand is
also a function of customer inventory levels. Typically, drill
pipe demand lags changes in the worldwide rig count.
Additionally, in a declining market, some customers may be
contractually required to purchase ordered drill pipe even if
they will no longer have an immediate need for pipe. This can
create a situation where some customers have excess inventory of
drill pipe that could delay their purchases of additional pipe
in the future. Drill bit demand and that segments earnings
and cash flows have more closely tracked the worldwide rig
count. In our Other segment, demand for our XL Systems products
generally follows the level of worldwide offshore drilling
activity.
21
During the periods below, the revenues, profitability and cash
flows from each of our business segments were impacted by
changes in oil prices, gas prices and rig counts. The following
table sets forth certain information with respect to oil and gas
prices at the dates indicated and the North American
(U.S. and Canadian) and international rig counts for the
periods reflected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
WTI Oil(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
72.23
|
|
|
$
|
66.09
|
|
|
$
|
56.59
|
|
Ending
|
|
|
96.00
|
|
|
|
61.05
|
|
|
|
61.04
|
|
Henry Hub Gas(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
6.97
|
|
|
$
|
6.73
|
|
|
$
|
8.89
|
|
Ending
|
|
|
7.16
|
|
|
|
5.50
|
|
|
|
9.52
|
|
North American Rig Count(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
2,111
|
|
|
|
2,118
|
|
|
|
1,838
|
|
Ending
|
|
|
2,171
|
|
|
|
2,174
|
|
|
|
2,045
|
|
International Rig Count(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
1,005
|
|
|
|
925
|
|
|
|
908
|
|
Ending
|
|
|
1,036
|
|
|
|
951
|
|
|
|
948
|
|
|
|
|
(a)
|
|
Price per barrel of West Texas Intermediate (WTI) crude as of
the dates presented above. Source:
Bloomberg Energy/Commodity Service.
|
|
(b)
|
|
Price per MMBtu as of the dates presented above. Source:
Bloomberg Energy/Commodity Service.
|
|
(c)
|
|
Source: Baker Hughes Rig Count (International Rig Count excludes
China and the Former Soviet Union).
|
Future
Market Trends and Expectations
On December 16, 2007, we entered into an Agreement and Plan
of Merger with National Oilwell Varco that will result in
National Oilwell Varco acquiring all of our outstanding shares
in exchange for combination of cash and stock. The agreement
provides that until the effective time of the merger, Grant
Prideco will conduct its business in the ordinary course in all
material respects, in substantially the same manner as conducted
prior to the date of the merger agreement, subject to certain
conditions and restrictions. In addition, Grant Prideco has
agreed not to, except with prior written consent of National
Oilwell Varco, incur or commit to any capital expenditures other
than in the ordinary course of business or as contemplated by
the capital budget.
In the ordinary course of business, our business model strives
to position ourselves globally while remaining focused on
efficiencies so we can achieve industry leading returns as
compared to other oilfield service companies. This model
requires the continuous development of technology either through
new products or the enhancement of existing products, while
maintaining a rigorous focus on cost structure and capital
efficiency.
We anticipate future results will be based on the level of
drilling activity and our customers views regarding the
sustainability of that activity. These perceptions depend on
their views regarding oil and natural gas prices. When
forecasting our 2008 performance, we relied on assumptions about
the market for these commodities, our customers and suppliers,
our backlog and past results. We expect drilling activity in
2008 to approximate the average worldwide drilling activity
level experienced in 2007 and if this outlook continues so that
the expectation for 2009 is similar, then we expect earnings for
2008 to exceed that of 2007. Our results could materially differ
from what we anticipate if any of our assumptions, such as
customer expectations of commodity price strength or drilling
activity, prove to be incorrect. In addition, our
businesses operations, financial condition and results of
operations are subject to numerous risks and uncertainties that
if realized could cause our actual results to differ
substantially from our forward-looking statements. These risks
and uncertainties are further described in Item 1A. Risk
Factors of this report.
22
Results
of Operations
Year
Ended December 31, 2007 Compared to the Year Ended
December 31, 2006
The following table summarizes the results of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Products and Services
|
|
$
|
1,175,632
|
|
|
$
|
888,661
|
|
|
$
|
286,971
|
|
|
|
32
|
%
|
ReedHycalog
|
|
|
610,738
|
|
|
|
504,648
|
|
|
|
106,090
|
|
|
|
21
|
%
|
Other
|
|
|
122,264
|
|
|
|
136,950
|
|
|
|
(14,686
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
1,908,634
|
|
|
|
1,530,259
|
|
|
|
378,375
|
|
|
|
25
|
%
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Products and Services
|
|
|
470,142
|
|
|
|
323,189
|
|
|
|
146,953
|
|
|
|
45
|
%
|
ReedHycalog
|
|
|
169,567
|
(a)
|
|
|
185,087
|
(b)
|
|
|
(15,520
|
)
|
|
|
(8
|
)%
|
Other
|
|
|
3,878
|
|
|
|
9,018
|
|
|
|
(5,140
|
)
|
|
|
(57
|
)%
|
Corporate
|
|
|
(62,858
|
)(a)
|
|
|
(46,570
|
)(c)
|
|
|
(16,288
|
)
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
|
|
580,729
|
|
|
|
470,724
|
|
|
|
110,005
|
|
|
|
23
|
%
|
Interest Expense
|
|
|
(14,202
|
)
|
|
|
(16,021
|
)
|
|
|
1,819
|
|
|
|
(11
|
)%
|
Other Expense, Net
|
|
|
(1,641
|
)
|
|
|
(3,803
|
)
|
|
|
2,162
|
|
|
|
(57
|
)%
|
Equity Income in Unconsolidated Affiliate
|
|
|
124,332
|
|
|
|
125,597
|
|
|
|
(1,265
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Income Taxes and Minority Interests
|
|
|
689,218
|
|
|
|
576,497
|
|
|
|
112,721
|
|
|
|
20
|
%
|
Income Tax Provision
|
|
|
(201,088
|
)
|
|
|
(162,030
|
)
|
|
|
(39,058
|
)
|
|
|
24
|
%
|
Minority Interests
|
|
|
(9,933
|
)
|
|
|
(10,361
|
)
|
|
|
428
|
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
478,197
|
|
|
|
404,106
|
|
|
|
74,091
|
|
|
|
18
|
%
|
Discontinued Operations, Net of Tax
|
|
|
41,039
|
|
|
|
60,478
|
|
|
|
(19,439
|
)
|
|
|
(32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
519,236
|
|
|
$
|
464,584
|
|
|
$
|
54,652
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes $4.3 million of ReedHycalog plant relocation costs
and $2.1 million in legal and professional fees, included
in our Corporate segment, related to the pending merger with
National Oilwell Varco (see Note 6 to the consolidated
financial statements for further discussion).
|
|
(b)
|
|
Includes a license and royalty payment of $20.0 million we
received in exchange for the use of ReedHycalog patented
technology for the shallow leaching of PDC cutters (see
Note 5 to the consolidated financial statements for further
discussion).
|
|
(c)
|
|
Includes a $3.9 million benefit from the settlement of a
trade credit dispute (see Note 6 to the consolidated
financial statements for further discussion).
|
Consolidated revenues increased $378.4 million, or 25%,
while the worldwide average rig count increased 2%. Consolidated
operating income increased $110.0 million, or 23%, and
operating income margins decreased slightly to 30% from 31% in
the prior year. Operating income in 2006 includes a
$20.0 million license and royalty fee from a drill bit
license agreement with a competitor and a $3.9 million
benefit from the settlement of a trade credit dispute.
Other operating expenses (sales and marketing, general and
administrative and research and engineering) as a percentage of
revenues decreased from 19% to 18%. This improvement is
primarily due to increased revenue base.
23
Segment
Results
Drilling
Products and Services
Revenues for the Drilling Products and Services segment
increased $287.0 million, or 32%. Operating income
increased $147.0 million, or 45%, year-over-year and
operating income margin of 40% was up from 36%. These results
reflect increased volumes, improved pricing and a higher-margin
product mix as this segment benefited from strong product demand
and capacity additions completed since last year. Drill pipe
footage sold increased 2.0 million feet, or 14%, and
average sales price per foot increased by 21%. Additionally,
heavyweight drill pipe and drill collar sales increased
year-over-year due to overall increased activity and were
partially offset by lower tool joint sales due to this segment
shifting sales from third-party customers to internal use in
2007. Total backlog for this segment was $740.5 million at
December 31, 2007, which is down $369.3 million
compared to the same prior year period reflecting a lower level
of new land rigs entering the North American market coupled with
capacity additions during the year geared towards reducing
customer lead times.
ReedHycalog
Revenues for the ReedHycalog segment increased by 21% to
$610.7 million, operating income decreased by 8% to
$169.6 million and operating income margins decreased from
37% to 28%. The increase in revenues is due to incremental
revenues related to the acquisition of Andergauge coupled with
increased revenues outside North America, primarily in the
Middle East. These increases are partially offset by drill bit
revenue decreases in Canada due to lower drilling activity.
Additionally, revenues increased in coring services due to
increased activity related to heavy oil sands in the first part
of 2007. Operating income margins declined compared to the same
period in the prior year primarily due to $20.0 million in
license and royalty income in 2006 that was not repeated in
2007, manufacturing cost inefficiencies during the phase-out of
production at four of our existing facilities and the startup of
our new Conroe facility, an inventory valuation adjustment for
PDC cutters transferred from our Provo facility and direct costs
associated with moving equipment into the new Conroe facility.
Other
Revenues for the Other segment decreased by 11% to
$122.3 million. Operating income decreased 57% from
$9.0 million to $3.9 million year-over-year. These
decreases were primarily attributable to our XL Systems division
as 2006 included activity from large projects in Nigeria which
declined in 2007 due to the unstable political environment in
that region and rig availability. These decreases were partially
offset by increased activity at our IntelliServ division that
began commercial operations in 2006.
Corporate
Corporate operating loss increased to $62.9 million in 2007
from $46.6 million in 2006 due to increased legal costs
related to our patent litigation, stock-based incentive costs
and costs associated with the pending merger with National
Oilwell Varco.
Other
Items
Interest expense decreased $1.8 million in 2007 compared to
2006 due primarily to the capitalization of interest related to
significant capital expenditure projects during 2007.
Significant projects included the new ReedHycalog headquarters
and consolidated U.S. manufacturing facility located in
Conroe, Texas and two new weld lines in our Drilling Products
and Services segment.
Other expense, net decreased from $3.8 million to
$1.6 million due to increased interest income from
short-term investments we held throughout the year.
Equity income from unconsolidated affiliate decreased slightly
to $124.3 million from $125.6 million, which
represents equity earnings from our investment in Voest-Alpine
Tubulars (VAT), due to lower sales of its OCTG products.
24
The Companys effective tax rate was 29.2% in 2007 compared
to 28.1% for 2006. The increase in the annual rate from 28.1% to
29.2% results primarily from the release of a valuation
allowance related to foreign tax credits in the prior year.
Income from our discontinued operations, which primarily
includes the results from our Atlas Bradford Premium Threading
and Services, TCA Premium Casing and Tube-Alloy Accessories,
decreased by 32% to $41.0 million, net of tax. The decrease
is primarily attributable to decreased activity at our TCA
heat-treat facility due to destocking of distributor inventories
due to softer Gulf of Mexico activity and increased mill
capacity in 2007.
Year
Ended December 31, 2006 Compared to the Year Ended
December 31, 2005
The following table summarizes the results of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Products and Services
|
|
$
|
888,661
|
|
|
$
|
593,066
|
|
|
$
|
295,595
|
|
|
|
50
|
%
|
ReedHycalog
|
|
|
504,648
|
|
|
|
398,227
|
|
|
|
106,421
|
|
|
|
27
|
%
|
Other
|
|
|
136,950
|
|
|
|
97,973
|
|
|
|
38,977
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
1,530,259
|
|
|
|
1,089,266
|
|
|
|
440,993
|
|
|
|
40
|
%
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Products and Services
|
|
|
323,189
|
|
|
|
175,091
|
|
|
|
148,098
|
|
|
|
85
|
%
|
ReedHycalog
|
|
|
185,087
|
(a)
|
|
|
98,616
|
|
|
|
86,471
|
|
|
|
88
|
%
|
Other
|
|
|
9,018
|
|
|
|
7,396
|
|
|
|
1,622
|
|
|
|
22
|
%
|
Corporate
|
|
|
(46,570
|
)(b)
|
|
|
(47,174
|
)
|
|
|
604
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
|
|
470,724
|
|
|
|
233,929
|
|
|
|
236,795
|
|
|
|
101
|
%
|
Interest Expense
|
|
|
(16,021
|
)
|
|
|
(28,881
|
)
|
|
|
12,860
|
|
|
|
(45
|
)%
|
Other Income (Expense), Net
|
|
|
(3,803
|
)
|
|
|
7,036
|
|
|
|
(10,839
|
)
|
|
|
(154
|
)%
|
Equity Income in Unconsolidated Affiliates
|
|
|
125,597
|
|
|
|
58,259
|
|
|
|
67,338
|
|
|
|
116
|
%
|
Refinancing Charges
|
|
|
|
|
|
|
(57,086
|
)
|
|
|
57,086
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Income Taxes and Minority Interests
|
|
|
576,497
|
|
|
|
213,257
|
|
|
|
363,240
|
|
|
|
170
|
%
|
Income Tax Provision
|
|
|
(162,030
|
)
|
|
|
(63,755
|
)
|
|
|
(98,275
|
)
|
|
|
154
|
%
|
Minority Interests
|
|
|
(10,361
|
)
|
|
|
(9,949
|
)
|
|
|
(412
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
404,106
|
|
|
|
139,553
|
|
|
|
264,553
|
|
|
|
190
|
%
|
Discontinued Operations, Net of Tax
|
|
|
60,478
|
|
|
|
49,451
|
|
|
|
11,027
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
464,584
|
|
|
$
|
189,004
|
|
|
$
|
275,580
|
|
|
|
146
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes a license and royalty payment of $20.0 million we
received in exchange for the use of ReedHycalog patented
technology for the shallow leaching of PDC cutters (see
Note 5 to the consolidated financial statements for further
discussion).
|
|
(b)
|
|
Includes a $3.9 million benefit from the settlement of a
trade credit dispute (see Note 6 to the consolidated
financial statements for further discussion).
|
Consolidated revenues increased $441.0 million, or 40%,
while the worldwide average rig count increased 11%.
Consolidated operating income increased $236.8 million, or
101%, and operating income margins increased from 21% to 31%.
Operating income in 2006 includes a $20.0 million license
and royalty fee from a drill bit license
25
agreement with a competitor and a $3.9 million benefit from
the settlement of a trade credit dispute. Improved margins
reflect strong market activity and better pricing at all of our
segments.
Other operating expenses (sales and marketing, general and
administrative and research and engineering) as a percentage of
revenues decreased to 19% from 23%. This improvement is
primarily due to increased revenue base partially offset by
increased activity from IntelliServ, included in our Other
segment, as this division transitions from the product
development stage to an operational entity.
Segment
Results
Drilling
Products and Services
Revenues for the Drilling Products and Services segment
increased $295.6 million, or 50%. Operating income
increased $148.1 million, or 85%, year-over-year and
operating income margin of 36% was up from 30%. These results
primarily reflect increased volumes and improved pricing related
to drill pipe sales. Drill pipe footage sold increased
3.3 million feet, or 30%, and average sales price per foot
increased by 17%. Additionally, heavyweight drill pipe, drill
collar and tool joints sales increased year-over-year due to
increased activity. Total backlog for this segment was
$1.1 billion at December 31, 2006 as compared to
$0.7 billion at December 31, 2005. This segment also
benefited from capacity additions in 2006 at its U.S. and
Mexico manufacturing facilities.
ReedHycalog
Revenues for the ReedHycalog segment increased
$106.4 million, or 27%. This increase was attributable to
increased revenues in U.S. and Canada reflecting the 15%
increase in the average North American rig count, increased
revenues at certain regions outside of North America due to
increased activity and focused sales programs and incremental
revenues from our acquisitions of Corion in July 2005 and
Andergauge in October 2006. Operating income increased
$86.5 million, or 88%, and operating income margins
increased from 25% to 37%. Operating income in 2006 includes a
$20.0 million royalty and license fee from a competitor for
the use of ReedHycalogs patented technology. Additionally,
the increase in margins also reflects improved pricing of its
fixed-cutter bits in the U.S. markets and better rental
fleet management.
Other
Revenues for the Other segment increased by 40% to
$137.0 million. Operating income increased 22% to
$9.0 million year-over-year, however, operating income
margins decreased slightly from 8% to 7% in 2006. The increase
in revenues and operating income is due to the increase in
international activity at this segments XL Systems
division coupled with favorable product mix as this
divisions margins increased from 15% to 21%
year-over-year. However, this margin increase was more than
offset by increased operating and research and engineering
expenses at IntelliServ as this division is transitioning from
product development to commercial activity in 2006.
Corporate
Corporate operating loss decreased to $46.6 million in 2006
from $47.2 million in 2005. Corporate operating losses
decreased primarily due to a $3.9 million benefit in 2006
related to a favorable trade credit settlement
(see Note 6 to the consolidated financial statements
for further discussion) partially offset by increased incentive
compensation costs.
Other
Items
Interest expense decreased $12.9 million due to lower
average debt balances year-over-year as a result of our
comprehensive debt restructuring during 2005.
Other income (expense), net decreased from income of
$7.0 million in 2005 to expense of $3.8 million in
2006 primarily due to foreign exchange losses from a weakened
U.S. dollar.
26
Equity income from unconsolidated affiliates increased to
$125.6 million from $58.3 million, which primarily
reflects increased earnings from VAT. VAT benefited from
increased volume and pricing for seamless OCTG products,
especially in international markets.
Refinancing charges of $57.1 million in 2005 were incurred
in connection with our debt restructuring program, which
includes $35.4 million related to replacing our previous
$190 million credit facility with a new $350 million
credit facility and an early redemption of our $200 million
9
5
/
8
% Senior
Notes due 2007 and $21.7 million related to the repurchase
of substantially all of our 9% Senior Notes.
The Companys effective tax rate was 28.1% in 2006 compared
to 29.9% for 2005. The reduction in the annual rate to 28.1%
results primarily from additional utilization of foreign tax
credit carryforwards, research and development credits, a
reduction in the tax rate in China and increased domestic
manufacturing deductions.
Income from our discontinued operations, which primarily
includes results from our Atlas Bradford Premium Threading and
Services, TCA Premium Casing and Tube-Alloy Accessories,
increased by 22% to $60.5 million, net of tax. The increase
reflects improved volumes and pricing across all these product
lines due to increased drilling activity year-over-year.
Additionally, the Tube-Alloy division had increased
international activity while TCA had strong results in the first
half of 2006 which slowed down in the second half of the year
due to available mill capacity and as distributors focused on
reducing inventory levels at year-end.
Liquidity
and Capital Resources
We believe that we are positioned to take advantage of the
strong market for our products and services, to take advantage
of strategic opportunities as they become available and to
maintain sufficient company liquidity in the event of a
downturn. In 2006, our Board of Directors approved a stock
repurchase program that authorized the repurchase of up to
$350 million of our common stock. In 2007, our Board of
Directors approved an increase in our stock repurchase program
by $300 million (to $650 million from
$350 million). For the year ended December 31, 2007,
we repurchased 5.2 million shares at a total cost of
$244.3 million. Such shares are reflected in the
accompanying Consolidated Balance Sheets as Treasury
Stock. At December 31, 2007, there was
$244.0 million remaining under this program for future
repurchases. We may repurchase our shares in the open market
based on, among other things, our ongoing capital requirements
and expected cash flows, the market price and availability of
our stock, regulatory and other restraints and general market
conditions. The repurchase program does not have an established
expiration date.
In 2007, our Singapore divisions entered into a
$20.0 million unsecured credit facility with Citibank, N.A.
Singapore Branch (see Singapore Credit Facility
below).
At December 31, 2007, we had cash of $161.0 million,
working capital of $978.6 million and unused borrowing
availability of $364.0 million under our credit facilities,
compared to cash of $57.3 million, working capital of
$640.1 million and unused borrowing availability under our
credit facility of $306.8 million at December 31, 2006.
The following table summarizes our cash flows provided by
operating activities, net cash used in investing activities and
net cash used in financing activities for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net Cash Provided by Operating Activities
|
|
$
|
488,291
|
|
|
$
|
394,100
|
|
|
$
|
194,676
|
|
Net Cash Used in Investing Activities
|
|
|
(116,361
|
)
|
|
|
(210,644
|
)
|
|
|
(69,672
|
)
|
Net Cash Used in Financing Activities
|
|
|
(269,057
|
)
|
|
|
(154,609
|
)
|
|
|
(144,180
|
)
|
Operating
Activities
Net cash flow provided by operating activities increased by
$94.2 million in 2007 compared to 2006 primarily due to
increased operating revenues and profits as a result of capacity
additions, prior year acquisitions and
27
additional dividends received from VAT, which was partially
offset by a use of cash of $16.8 million primarily related
to the timing of payments of accounts payable.
Net cash flow provided by operating activities increased by
$199.4 million in 2006 compared to 2005 primarily due to
improved operating results reflecting the continued
strengthening in the oil and gas drilling markets. Cash flow
before changes in operating assets and liabilities increased by
$248.8 million reflecting the increase in activity, which
was partially offset by a use of cash of $49.4 million
related to a net increase in operating assets. Due to the strong
market, sales have increased which is reflected in increased
accounts receivable coupled with a build up in inventory in
anticipation of sales. Additionally, tax payments during the
year were partially offset by cash provided by increased
accounts payable.
Investing
Activities
Net cash used in investing activities decreased by
$94.3 million in 2007 compared to 2006. Cash payments for
business acquisitions decreased $108.6 million as the
Company had no acquisitions in 2007. Capital expenditures in
2007 were $123.5 million compared to $100.2 million in
2006. The increase in capital expenditures primarily relates to
increased spending at our ReedHycalog segment due to the
consolidation of four U.S. drill bit and diamond
manufacturing locations into a new facility (expended
$24.7 million in 2007) in Conroe, Texas. Offsetting
the cash used in investing activities was a $9.0 million
increase in cash received from the sale of fixed assets
primarily due to the sale of land and buildings related to a
ReedHycalog manufacturing location and land and buildings
located in Canada.
Net cash used in investing activities increased by
$141.0 million in 2006 compared to 2005. Cash payments for
business acquisitions increased $72.8 million due to the
acquisition of Andergauge for $106.6 million in
October 2006. Additionally, 2005 included investments in
subsidiaries of $5.3 million related to IntelliServ, in
which we acquired the remaining 50% interest in September 2005.
Capital expenditures in 2006 were $100.2 million compared
to $29.5 million in 2005, an increase of
$70.7 million, and include costs related to our new
ReedHycalog facility, capital spending related to the
manufacture of IntelliServ drill strings and capital spending
related to capacity expansions and efficiency projects in our
Drilling Products and Services and Other segments.
Financing
Activities
Net cash used in financing activities increased by
$114.4 million in 2007 compared to 2006. This increase
reflects increased share repurchase activity of
$82.8 million and increased payments on debt in 2007 of
$43.8 million. Offsetting the increase in cash used in
financing activities is cash provided by financing activities of
$12.2 million, which primarily includes an
$8.0 million increase in excess tax benefits related to
stock option exercises and a $3.2 million increase in
proceeds received from the issuance of common stock.
Net cash used in financing activities increased by
$10.4 million in 2006 compared to 2005. This increase
reflects payments on Andergauge debt assumed in 2006 of
$46.2 million, lower proceeds from common stock issuances
of $56.4 million and share repurchases of
$161.7 million, partially offset by lower net payments on
debt and debt issue costs of $238.3 million in 2006
primarily in connection with our debt restructuring in 2005.
Additionally, due to the adoption of SFAS No. 123(R)
at January 1, 2006, excess tax benefits related to stock
option exercises are now reflected in financing activities,
which were $15.6 million for 2006.
Short-Term
Debt
Singapore
Credit Facility
In May 2007, our Singapore divisions entered into a
$20.0 million unsecured credit facility with Citibank,
N.A. Singapore Branch (Singapore Credit Facility). The
Singapore Credit Facility is to be used locally for working
capital or general operating purposes and also provides
availability for stand-by letters of credit and bank guarantees
up to $5.0 million. The Singapore Credit Facility has no
expiration date but borrowings are repayable upon demand and may
not be outstanding for more than a twelve-month period. The
Singapore Credit Facility is guaranteed by us.
28
Amounts outstanding under the Singapore Credit Facility accrue
interest at the Citibank prime rate on the borrowing date plus
0.75% and any unused portion of the credit facility is not
subject to a commitment fee. There are no financial covenants
associated with the Singapore Credit Facility.
As of December 31, 2007, we had no outstanding borrowings
under the Singapore Credit Facility and $0.5 million of
letters of credit and bank guarantees had been issued under the
Singapore Credit Facility, resulting in unused borrowing
availability of $19.5 million. We did not incur any
significant costs related to this facility.
Long-Term
Debt
Credit
Facility
We have a five-year $350 million revolving secured credit
facility (Credit Facility) with the option to increase aggregate
U.S. borrowing availability by an additional
$150 million in increments of $25 million, subject to
syndication.
The terms of the Credit Facility provided for financial
covenants that include maintenance at all times of a maximum
total debt to book capitalization ratio not to exceed 50% and
maintenance on a rolling four quarter basis of a minimum
interest coverage ratio (EBITDA/interest expense) of not less
than 2.50 to 1.00. The Credit Facility also contains covenants,
including restrictions to incur new debt, repurchase company
stock, pay dividends, sell assets, grant liens and other related
items. At December 31, 2007, we were in compliance with the
various covenants under the Credit Facility.
As of December 31, 2007, we had no outstanding borrowings
under the Credit Facility and $5.5 million of letters of
credit and bank guarantees that were issued under the Credit
Facility, resulting in unused borrowing availability of
$344.5 million.
6
1
/
8
% Senior
Notes Due 2015
In 2005, we issued $200 million of
6
1
/
8
% Senior
Notes due 2015
(6
1
/
8
% Senior
Notes) at par. Net proceeds from the issuance of approximately
$196.4 million were used to finance the repurchase of our
outstanding 9% Senior Notes due 2009 and to repay a
portion of the outstanding borrowings under our previous credit
facility. Interest is payable February 15 and August 15 of each
year. The
6
1
/
8
% Senior
Notes are guaranteed by all of our domestic subsidiaries.
The indenture governing the
6
1
/
8
% Senior
Notes contains various covenants including restrictions on
incurring new debt, repurchasing company stock, paying
dividends, selling assets, granting liens and other related
items. These restrictions include limiting the amount of
dividends and stock repurchases to a maximum amount determined
by a formula stipulated in the bond indenture. At
December 31, 2007, we were in compliance with the covenants
under the
6
1
/
8
% Senior
Note agreement. Debt fees capitalized in connection with the
6
1
/
8
% Senior
Notes totaled $3.6 million, which are being amortized as
interest expense, and are included in Other Assets
in the accompanying Consolidated Balance Sheets.
During the fourth quarter of 2007, we repurchased
$25.4 million of our outstanding $200 million
6
1
/
8
% Senior Notes.
Total cash paid for the repurchase was $26.1 million, of
which $25.4 million related to the principal amount of the
6
1
/
8
% Senior
Notes repurchased, $0.3 million related to a premium paid
to repurchase the notes and $0.4 million related to accrued
interest. We recorded total costs of approximately
$0.7 million, which included $0.3 million for premiums
paid and $0.4 million for the write-off of unamortized debt
costs related to the amounts repurchased, which are included in
Other Income (Expense), Net in the accompanying
Consolidated Statements of Operations.
Liquidity
Outlook
We estimate for 2008 our required principal and interest
payments for our outstanding debt to be approximately
$11 million and capital expenditures to be approximately
$100 million, which includes capital spending related to
production enhancements and efficiency projects at all of our
segments, capital spending related to the manufacture of
IntelliServ drill string expenditures and rental tool purchases
at our Andergauge division. We
29
currently expect to satisfy all required debt service and
capital expenditures during 2008 from operating cash flows,
existing cash balances and our credit facilities.
Based on our current required principal and interest payments
and projected capital expenditures, our operating cash flows,
existing cash balances and estimated availability under our
credit facilities, we believe we can satisfy all of our expected
commitments during the next 12 months and will have
sufficient liquidity in the event of a prolonged market downturn
to not only maintain our existing operations but to take
advantage of strategic opportunities that may present themselves
during any such period. Acquisitions and expansions will be
financed from operating cash flows, borrowings under our credit
facilities, or through a combination of the issuance of
additional equity and debt financing, as appropriate. Any future
financing will be arranged to meet our requirements, with the
timing, amount and form of issue dependent on the prevailing
market and general economic conditions.
The following table summarizes our contractual obligations and
commercial commitments at December 31, 2007:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-4 Years
|
|
|
5-6 Years
|
|
|
6 Years
|
|
|
|
(In thousands)
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt(a)
|
|
$
|
261,549
|
|
|
$
|
10,965
|
|
|
$
|
32,759
|
|
|
$
|
21,853
|
|
|
$
|
195,972
|
|
Capital Lease Obligations(a)
|
|
|
823
|
|
|
|
355
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
Non-Cancellable Operating Leases
|
|
|
49,909
|
|
|
|
10,284
|
|
|
|
16,279
|
|
|
|
6,021
|
|
|
|
17,325
|
|
Purchase Obligations(b)
|
|
|
242,198
|
|
|
|
242,187
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations(c)
|
|
$
|
554,479
|
|
|
$
|
263,791
|
|
|
$
|
49,517
|
|
|
$
|
27,874
|
|
|
$
|
213,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-4 Years
|
|
|
5-6 Years
|
|
|
6 Years
|
|
|
|
(In thousands)
|
|
|
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit(c)
|
|
$
|
6,649
|
|
|
$
|
6,063
|
|
|
$
|
586
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(a)
|
|
Long-term debt and capital lease obligations above include
estimated interest payments based on principal balances and
interest rates as of December 31, 2007.
|
|
(b)
|
|
Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding and that
specify all significant terms, including: fixed or minimum
quantities to be purchased, fixed, minimum or variable price
provisions, and the appropriate timing of the transaction.
|
|
(c)
|
|
Includes amounts related to our discontinued operations as we
are still contractually obligated at December 31, 2007.
|
The contractual obligations table above excludes our FIN 48
liabilities of $10.4 million as we cannot make a reliable
estimate of the timing of cash payments at this time.
Related-Party
Transactions
Our ReedHycalog segment sells drill bits worldwide to oil and
gas operators, including Newfield Exploration Company
(Newfield). In addition, certain divisions in our Discontinued
Operations (Atlas Bradford Premium Threading and Tube-Alloy
Accessories) also sell accessories directly to Newfield. Two of
our directors, Mr. Trice and Mr. Hendrix, are
directors of Newfield and Mr. Trice is Newfields
Chairman, President and Chief Executive Officer. During 2007,
2006 and 2005, Newfield purchased approximately
$3.6 million, $2.9 million and $2.3 million,
respectively, of products from us. We believe that the prices we
charge are on terms comparable to those that would be available
to other third parties.
Additionally, we also sell products and services to Weatherford
International Ltd. (Weatherford). Two of our Board members also
serve on the Board of Weatherford. During 2007, 2006 and 2005,
Weatherford purchased
30
approximately $100.2 million, $42.0 million and
$38.9 million, respectively, of products from us. We
believe that the prices we charge Weatherford are on terms
comparable to those that would be available to other third
parties.
In September 2007, we entered into a new green tube supply
agreement (Supply Agreement) with VAT, an entity of which we own
50.01%. The primary changes in the Supply Agreement from the
previous supply agreement relate to pricing and purchasing
requirements by us. Under the Supply Agreement, pricing is
market based thus eliminating price adjustments through
surcharges. For purchasing requirements, there is no longer a
penalty for failure to meet minimum annual purchase quantities
but instead we are required to provide purchase commitments five
months prior to production by VAT (Production Notice).
Quantities cancelled under the Production Notice will be subject
to up to a 200 Euro/metric ton penalty should VAT not be able to
sell the quantities elsewhere at a minimum market-based profit
margin. Terms of the new agreement are effective August 1,
2007 through March 31, 2009.
Off-Balance
Sheet Financing
We do not have any off-balance sheet hedging, financing
arrangements or contracts except those associated with our
investment in VAT, which is not consolidated in our financial
statements. This investment is accounted for under the
equity-method of accounting. The assets and liabilities of VAT
are summarized in Note 9. Additionally, VAT has entered
into forward contracts to cover its currency risk related to
accounts receivables and accounts payables, has entered into
interest rate swap agreements to reduce its exposure to changes
in floating interest rate payments of its long-term bonds and
has also entered into an agreement with a bank to sell a
significant portion of its accounts receivable.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141(R), Business
Combinations (SFAS No. 141(R)), which replaces
SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statement to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008.
Accordingly, any business combinations we engage in will be
recorded and disclosed following existing generally accepted
accounting principles (GAAP) until January 1, 2009. We
expect SFAS No. 141(R) will have an impact on our
consolidated financial statements when effective, but the nature
and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions we consummate after
the effective date. We are still assessing the impact of this
standard on our future consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS No. 160), which
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. The
statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the
non-controlling owners. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. We are
assessing the potential impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS No. 159) which is
effective for fiscal years beginning after November 15,
2007. This Statement permits an entity to choose to measure many
financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses
on items for which the fair value option has been elected will
be reported in earnings. We adopted SFAS No. 159 on
January 1, 2008; however it will not affect our financial
statements as we did not elect to measure any financial
instruments at fair value.
31
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157).
SFAS No. 157 establishes a framework for measuring
fair value and requires expanded disclosure about the
information used to measure fair value. This statement applies
whenever other statements require or permit assets or
liabilities to be measured at fair value. The statement does not
expand the use of fair value accounting in any new circumstances
and is effective for us for the year ended December 31,
2008 and for interim periods included in that year, with early
adoption encouraged. We adopted SFAS No. 157 on
January 1, 2008, for our financial assets and liabilities,
which primarily consist of derivatives we record in accordance
with SFAS No. 133, and on January 1, 2009, for
our non-financial assets and liabilities. For our financial
assets and liabilities, the adoption of SFAS No. 157
primarily impacts our disclosures and will not have a material
impact on our financial position, results of operations and cash
flows. We are currently evaluating the impact with respect to
our non-financial assets and liabilities.
Critical
Accounting Policies and Estimates
Our significant accounting policies are fully described in
Note 1 to our consolidated financial statements included in
this Annual Report on
Form 10-K.
Certain of our accounting policies require the application of
significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their
nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on our historical
experience, terms of existing contracts, our observance of
trends in the industry, information provided by our customers
and information available from other outside sources, as
appropriate. Actual results may differ from these judgments and
assumptions.
Revenue
Recognition
Our revenues are primarily comprised of product sales, rentals
and services. Revenues are recognized when all of the following
criteria have been met: a) evidence of an arrangement
exists, b) the price to the customer is fixed and
determinable, c) delivery to and acceptance by the customer
has occurred or services have been rendered, d) no
significant contractual obligations remain to be completed or
performed and e) collectibility is reasonably assured. We
recognize revenues associated with rebillable shipping costs.
Stock-Based
Compensation
Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based Payment, a
revised standard that establishes accounting for stock-based
payment transactions when a company receives employee services
in exchange for equity instruments. Prior to 2006, we accounted
for employee stock options using the intrinsic-value method of
accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees. We also complied with the pro forma disclosure
requirements of SFAS No. 123, Accounting for
Stock Based Compensation, as amended by
SFAS No. 148, Accounting for Stock Based
Compensation Transition and Disclosure
an amendment of FASB Statement No. 123. The
provisions of APB No. 25 required compensation expense to
be recognized in operations for restricted stock, but did not
require expense recognition for unvested stock options or for
awards granted under the employee stock purchase plan (ESPP) as
we issued options at exercise prices equal to the market value
of our common stock on the date of grant and because our ESPP
was noncompensatory. The pro forma effects on net income and
earnings per share for the stock options and ESPP awards were
instead disclosed in a footnote to the financial statements.
Under the new standard, companies are required to account for
stock-based compensation using the fair value of equity awards
at the grant date, with the fair value recognized in operations
during the employees requisite service period (typically
the vesting period). Additionally, compensation cost is
recognized based on awards that are ultimately expected to vest;
therefore, the compensation cost recognized on stock options is
reduced for estimated forfeitures based on our historical
forfeiture rates. We elected to use the modified prospective
application transition method set out in
SFAS No. 123(R). That method requires recognition of
compensation expense for stock-based payment awards that are
granted, modified, repurchased or cancelled after 2005.
Compensation expense for unvested stock options outstanding as
of January 1, 2006 for which the requisite service has not
been rendered is being recognized over the remaining service
period using the compensation cost previously calculated for pro
forma disclosure purposes under SFAS No. 123. As a
result of the adoption of SFAS 123(R), the balance in
unearned
32
compensation recorded in stockholders equity as of
January 1, 2006, of $6.6 million was reclassified to
and reduced the balance of Capital in Excess of Par
Value. Prior periods were not restated to reflect the
impact of adopting the new standard.
Total stock-based compensation expense recorded for all
share-based payment arrangements for the years ended
December 31, 2007, 2006 and 2005 was $14.7 million,
excluding a $5.1 million tax benefit, $13.4 million,
excluding a $4.7 million tax benefit, and
$10.1 million, excluding a $3.1 million tax benefit,
respectively. Stock-based compensation expense for all
share-based arrangements is primarily recorded in General
and Administrative expenses in the accompanying
Consolidated Statements of Operations. Additionally, no
stock-based compensation costs were capitalized.
There are various assumptions used when valuing stock options
such as volatility and expected option term. While we believe
the assumptions used are supportable and reasonable under
accounting standards applicable at that date, different
conditions or assumptions could have derived different fair
values for recognizing stock option expense.
Allowance
for Doubtful Accounts
We estimate our allowance for doubtful accounts based on
historical collection trends, type of customer, the age of
outstanding receivables and any specific customer collection
issues that we have identified. At December 31, 2007 and
2006, allowance for doubtful accounts totaled $2.8 million
and $3.5 million, respectively. The provision (benefit) for
bad debt expense including recoveries and other adjustments was
$0.3 million, ($1.0 million) and $1.7 million for
the years ended December 31, 2007, 2006 and 2005
respectively. We believe the allowance for doubtful accounts is
adequate to cover potential bad debt losses under current
conditions; however, uncertainties regarding changes in the
financial condition of our customers, either adverse or
positive, could impact the amount and timing of any additional
provisions for doubtful accounts that may be required.
Inventories
Inventory costs are stated at the lower of cost or market using
the
first-in,
first-out method. We value our inventories primarily using
standard costs, which approximate actual costs, that include raw
materials, direct labor and manufacturing overhead allocations.
We perform obsolescence reviews on our slow-moving and excess
inventories and establish reserves based on current assessments
of factors such as age of inventory, technology obsolescence,
future product demands, market conditions and related management
initiatives. If such factors are different than those projected
by management, additional inventory reserves may be required.
Business
Combinations
The cost of business acquisitions is allocated to the assets
acquired and liabilities assumed based on their estimated fair
values at the date of acquisition using third-party appraisals
and management estimates. Managements estimates of fair
value are based upon assumptions believed to be reasonable, but
which are inherently uncertain. In addition, estimated
liabilities to exit activities of an acquired operation or an
existing operation, including the exiting of contractual
obligations and the termination of employees, are subject to
change as management continues its assessment of operations and
finalizes its integration and exit plans.
Valuation
of Long-Lived Assets
A review for impairment of long-lived assets is performed
whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset group to expected
undiscounted future net cash flows to be generated by the asset
group. If such asset group is considered to be impaired, the
impairment loss to be recognized is measured by the amount by
which the carrying amount of the asset group exceeds fair value
based on expected discounted future cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value, less selling costs. While we believe no impairments
existed at December 31, 2007 under accounting standards
applicable at that date, different conditions or assumptions, or
changes in cash flows or profitability, if
33
significantly negative or unfavorable, could have a material
adverse effect on the outcome of our impairment evaluation and
our financial condition or future results of operations.
Goodwill
and Intangible Assets
Goodwill is subject to at least an annual impairment test and
more frequently if circumstances indicate its value may not be
recoverable. Goodwill is tested for impairment using a two-step
process that begins with an estimation of the fair value of each
of our reporting units compared with its carrying value. If the
carrying amount exceeds the fair value of a reporting unit, a
second step test is completed comparing the implied fair value
of the reporting units goodwill to its carrying value to
measure the amount of impairment. Other identifiable intangible
assets that are subject to amortization are amortized on a
straight-line basis over the years expected to be benefited.
These amortizable intangible assets are reviewed for impairment
if circumstances indicate their value may not be recoverable
based on a comparison of fair value to carrying value. Based on
our annual goodwill impairment test as of October 1, 2007,
we do not believe any of our goodwill was impaired as of
December 31, 2007. While we believe no impairment existed
at December 31, 2007 under accounting standards applicable
at that date, different conditions or assumptions, or changes in
cash flows or profitability, if significantly negative or
unfavorable, could have a material adverse effect on the outcome
of our impairment evaluation and our financial condition or
future results of operations.
Valuation
Allowance for Deferred Tax Assets
We record a valuation allowance to reduce our deferred tax
assets when it is more likely than not that some portion or all
of the deferred tax assets will expire before realization of the
benefit or that future deductibility is not probable. The
ultimate realization of the deferred tax assets depends on the
ability to generate sufficient taxable income of the appropriate
character in the future. This requires us to use estimates and
make assumptions regarding significant future events such as the
taxable profitability of entities operating in the various
taxing jurisdictions.
Contingent
Liabilities
We have contingent liabilities and future claims for which we
have made estimates of the amount of the actual costs of these
liabilities or claims. These liabilities and claims sometimes
involve threatened or actual litigation where damages have been
quantified and we have made an assessment of our exposure and
recorded a provision to cover an expected loss based on our
experience in these matters and, when appropriate, the advice of
outside counsel or other outside experts. Upon the ultimate
resolution of these uncertainties, our future reported financial
results will be impacted by the difference between our estimates
and the actual amounts paid to settle a liability. Examples of
areas where we have made important estimates of future
liabilities primarily include litigation, warranty claims,
environmental liabilities, contract claims and tax
contingencies. While management believes the recorded
liabilities are adequate, inherent limitations in the estimation
process may cause future actual losses to exceed expected losses.
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in a
multitude of jurisdictions. We recognize potential liabilities
and record tax liabilities for anticipated tax audit issues in
the U.S. and other tax jurisdictions based on our estimate
of whether, and the extent to which, additional taxes will be
due. We adjust these reserves in light of changing facts and
circumstances; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment
that is different from our current estimate of the tax
liabilities. If our estimate of tax liabilities proves to be
less than the ultimate assessment, an additional charge to
expense would result. If payment of these amounts ultimately
proves to be less than the recorded amounts, the reversal of the
liabilities may result in income tax benefits being recognized
in the period when we determine the liabilities are no longer
necessary. Substantially all of these potential tax liabilities
are recorded in Other Long-Term Liabilities on the
Consolidated Balance Sheets as payment is not expected within
one year.
34
Pension
Plans
We sponsor two defined benefit pension plans related to our
ReedHycalog segment that were assumed as part of our acquisition
of ReedHycalog in 2002. Several statistical and other factors
which attempt to anticipate future events are used in
calculating the costs and liabilities related to the plans.
These factors include assumptions about the discount rates and
expected returns on plan assets. In addition, we use actuarial
assumptions such as withdrawal and mortality rates to estimate
these factors. While we believe the assumptions used are
supportable and reasonable under applicable accounting
standards, different conditions or assumptions could have
derived different pension obligations and fair value of plan
assets.
A hypothetical 0.25% decrease in our discount rate would
have a minimal effect on our 2008 pension expense and our
combined projected benefit obligation would increase by
approximately $1.9 million. This information should not be
viewed as predictive of future amounts.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Financial
Instruments
We are subject to financial market risks, including fluctuations
in foreign currency exchange rates and interest rates. In order
to manage and mitigate our exposure to these risks, we may use
derivative financial instruments in accordance with established
policies and procedures. At December 31, 2007, our
derivative holdings consisted of foreign currency forward
contracts. Refer to Note 1 to the financial statements
included elsewhere in this Annual Report on
Form 10-K
for additional information on financial instruments.
Foreign
Currency Risk
The functional currency for the majority of our international
operations is the U.S. dollar. Adjustments resulting from
the remeasurement of the local currency financial statements
into the U.S. dollar functional currency, which uses a
combination of current and historical exchange rates, are
included in the Consolidated Statements of Operations in
Other Income (Expense), Net in the current period.
The functional currency of our Canadian, Venezuelan and Chinese
operations is the local currency in each of those jurisdictions.
Adjustments resulting from the translation of the local
functional currency financial statements to the
U.S. dollar, which is based on current exchange rates, are
included in the Consolidated Statements of Stockholders
Equity as a separate component of Accumulated Other
Comprehensive Income (Loss). In addition, our long-term
supply contract with VAT is denominated in Euros.
We transact business in various foreign currencies which
subjects our cash flows and earnings to exposure related to
changes in foreign currency exchange rates. We attempt to manage
this exposure through operational strategies and the use of
foreign currency forward exchange contracts. Our hedging policy
is designed to reduce the impact of foreign currency exchange
rate movements, and we expect any gain or loss on the foreign
currency forward exchange contract to be offset by a
corresponding gain or loss in the underlying exposure being
hedged. All foreign currency contracts are executed with banks
that we believe to be creditworthy and are denominated in
currencies of major industrial countries. We do not engage in
hedging activity for speculative or trading purposes.
We hedge recognized foreign currency assets and liabilities to
reduce the risk that our earnings and cash flows will be
adversely affected by changes in the foreign currency exchange
rates. Certain contracts are not designated as hedges;
therefore, the changes in fair value of these contracts are
recognized in earnings as they occur and generally offset gains
or losses on the remeasurement of the related asset or
liability. We also hedge firmly committed, anticipated
transactions in the normal course of business and these
contracts are designated and qualify as cash flow hedges.
Changes in the fair value of derivatives that are designated as
cash flow hedges are deferred in the Consolidated Statements of
Stockholders Equity as a separate component of
Accumulated Other Comprehensive Income (Loss) until
the underlying transactions are recognized in earnings. At such
time, the related deferred hedging gains or losses are recorded
in earnings on the same line as the hedged item.
Net foreign currency gains (losses), including derivative
activity, for the years ended December 31, 2007, 2006 and
2005 were ($6.4) million, ($6.2) million, and
$4.7 million, respectively.
35
Interest
Rates
We are and will be subject to market risk for changes in
interest rates related primarily to our long-term debt. The
following table, which presents principal cash flows by expected
maturity dates and weighted average interest rates, summarizes
our fixed rate debt obligations at December 31, 2007 and
2006 that are sensitive to changes in interest rates.
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|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
490
|
|
|
$
|
489
|
|
|
$
|
359
|
|
|
$
|
226
|
|
|
$
|
242
|
|
|
$
|
174,779
|
|
Average interest rate
|
|
|
6.14
|
%
|
|
|
6.13
|
%
|
|
|
6.13
|
%
|
|
|
6.13
|
%
|
|
|
6.12
|
%
|
|
|
6.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
8,640
|
|
|
$
|
535
|
|
|
$
|
530
|
|
|
$
|
484
|
|
|
$
|
294
|
|
|
$
|
201,034
|
|
Average interest rate
|
|
|
6.12
|
%
|
|
|
6.12
|
%
|
|
|
6.12
|
%
|
|
|
6.12
|
%
|
|
|
6.12
|
%
|
|
|
6.12
|
%
|
As of December 31, 2007, we had fixed rate debt aggregating
$176.6 million and no variable rate debt. Our fixed rate
Senior Notes outstanding at December 31, 2007 subject us to
risks related to changes in the fair value of the debt and
expose us to potential gains or losses if we were to repay or
refinance such debt. A 1% change in market interest rates would
increase or decrease the fair value of our fixed rate debt by
approximately $4.2 million.
The fair value of our
6
1
/
8
% Senior
Notes as compared to the carrying value at December 31,
2007 and 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
6
1
/
8
% Senior
Notes due 2015
|
|
$
|
174.6
|
|
|
$
|
180.3
|
|
|
$
|
200.0
|
|
|
$
|
194.8
|
|
36
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The following consolidated financial statements are filed in
this Item 8:
37
To Board of Directors and Stockholders of Grant Prideco, Inc.:
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
principal executive officer and principal financial officer, we
conducted an assessment, as of December 31, 2007, of the
effectiveness of our internal control over financial reporting
based on the framework in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We designed our internal control over financial reporting to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial
reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Based on our assessment we believe that, as of December 31,
2007, the Companys internal control over financial
reporting is effective based on the framework in
Internal
Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Our effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is
included herein.
Houston, Texas
February 28, 2008
38
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Grant Prideco, Inc.
Houston, Texas
We have audited the internal control over financial reporting of
Grant Prideco, Inc. and subsidiaries (the Company)
as of December 31, 2007, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based
upon the assessed risk, and performing such other procedures as
we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2007 of
the Company and our report dated February 28, 2008
expressed an unqualified opinion on those financial statements
and financial statement schedule and included an explanatory
paragraph regarding the Companys adoption of Statement of
Financial Accounting Standard No. 123(R),
Share-based
Payment,
on January 1, 2006.
/s/ DELOITTE &
TOUCHE LLP
Houston, Texas
February 28, 2008
39
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Grant Prideco, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of
Grant Prideco, Inc. and subsidiaries (the Company)
as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders
equity, and cash flows for the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15. These
consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Grant Prideco, Inc. and subsidiaries as of December 31,
2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Notes 1 and 2 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standard No. 123(R),
Share-based Payment,
on January 1, 2006
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2007, based on the
criteria established in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 28, 2008 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE LLP
Houston, Texas
February 28, 2008
40
GRANT
PRIDECO, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,908,634
|
|
|
$
|
1,530,259
|
|
|
$
|
1,089,266
|
|
License and royalty income
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,908,634
|
|
|
|
1,550,259
|
|
|
|
1,089,266
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
975,383
|
|
|
|
794,645
|
|
|
|
610,179
|
|
Sales and marketing
|
|
|
180,966
|
|
|
|
152,191
|
|
|
|
130,637
|
|
General and administrative
|
|
|
126,933
|
|
|
|
103,026
|
|
|
|
90,819
|
|
Research and engineering
|
|
|
38,177
|
|
|
|
33,573
|
|
|
|
23,702
|
|
Other operating items
|
|
|
6,446
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,327,905
|
|
|
|
1,079,535
|
|
|
|
855,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
580,729
|
|
|
|
470,724
|
|
|
|
233,929
|
|
Interest Expense
|
|
|
(14,202
|
)
|
|
|
(16,021
|
)
|
|
|
(28,881
|
)
|
Other Income (Expense), Net
|
|
|
(1,641
|
)
|
|
|
(3,803
|
)
|
|
|
7,036
|
|
Equity Income in Unconsolidated Affiliates
|
|
|
124,332
|
|
|
|
125,597
|
|
|
|
58,259
|
|
Refinancing Charges
|
|
|
|
|
|
|
|
|
|
|
(57,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Continuing Operations Before Income Taxes and
Minority Interests
|
|
|
689,218
|
|
|
|
576,497
|
|
|
|
213,257
|
|
Income Tax Provision
|
|
|
(201,088
|
)
|
|
|
(162,030
|
)
|
|
|
(63,755
|
)
|
Minority Interests
|
|
|
(9,933
|
)
|
|
|
(10,361
|
)
|
|
|
(9,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
478,197
|
|
|
|
404,106
|
|
|
|
139,553
|
|
Income from Discontinued Operations, Net of Tax
|
|
|
41,039
|
|
|
|
60,478
|
|
|
|
49,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
519,236
|
|
|
$
|
464,584
|
|
|
$
|
189,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3.73
|
|
|
$
|
3.10
|
|
|
$
|
1.10
|
|
Income from discontinued operations
|
|
|
0.32
|
|
|
|
0.46
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4.05
|
|
|
$
|
3.56
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
128,060
|
|
|
|
130,510
|
|
|
|
127,236
|
|
Diluted Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3.69
|
|
|
$
|
3.05
|
|
|
$
|
1.07
|
|
Income from discontinued operations
|
|
|
0.32
|
|
|
|
0.45
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4.01
|
|
|
$
|
3.50
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
129,610
|
|
|
|
132,674
|
|
|
|
130,467
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
GRANT
PRIDECO, INC.
(In thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
160,988
|
|
|
$
|
57,344
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,846 and $3,523 for 2007 and 2006, respectively
|
|
|
415,525
|
|
|
|
368,695
|
|
Inventories
|
|
|
471,357
|
|
|
|
454,947
|
|
Deferred charges
|
|
|
2,977
|
|
|
|
3,964
|
|
Current deferred tax assets
|
|
|
41,005
|
|
|
|
48,101
|
|
Prepaid expenses
|
|
|
40,136
|
|
|
|
13,364
|
|
Assets held for sale
|
|
|
186,558
|
|
|
|
|
|
Other current assets
|
|
|
2,081
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,320,627
|
|
|
|
947,446
|
|
Property, Plant and Equipment, Net
|
|
|
329,482
|
|
|
|
305,524
|
|
Goodwill
|
|
|
458,758
|
|
|
|
520,992
|
|
Other Intangible Assets, Net
|
|
|
81,958
|
|
|
|
89,827
|
|
Investment in Unconsolidated Affiliate
|
|
|
134,731
|
|
|
|
135,428
|
|
Other Assets
|
|
|
25,148
|
|
|
|
22,850
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,350,704
|
|
|
$
|
2,022,067
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
490
|
|
|
$
|
8,640
|
|
Accounts payable
|
|
|
127,536
|
|
|
|
138,942
|
|
Accrued payroll and benefits
|
|
|
58,819
|
|
|
|
74,952
|
|
Deferred revenues
|
|
|
20,893
|
|
|
|
18,190
|
|
Income taxes payable
|
|
|
77,915
|
|
|
|
33,039
|
|
Liabilities held for sale
|
|
|
16,477
|
|
|
|
|
|
Other current liabilities
|
|
|
39,872
|
|
|
|
33,576
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
342,002
|
|
|
|
307,339
|
|
Long-Term Debt
|
|
|
176,095
|
|
|
|
237,212
|
|
Deferred Tax Liabilities
|
|
|
72,705
|
|
|
|
68,310
|
|
Other Long-Term Liabilities
|
|
|
29,224
|
|
|
|
28,801
|
|
Commitments and Contingencies (Note 18 and 19)
|
|
|
|
|
|
|
|
|
Minority Interests
|
|
|
20,877
|
|
|
|
17,522
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; authorized
10,000 shares; no shares issued in 2007 or 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; authorized
300,000 shares; issued 134,733 and 132,706 in 2007 and
2006, respectively
|
|
|
1,347
|
|
|
|
1,327
|
|
Capital in excess of par value
|
|
|
748,435
|
|
|
|
687,384
|
|
Retained earnings
|
|
|
1,364,243
|
|
|
|
845,877
|
|
Accumulated other comprehensive income (loss)
|
|
|
11,798
|
|
|
|
(960
|
)
|
Treasury stock, at cost, 10,258 and 5,017 shares in 2007
and 2006, respectively
|
|
|
(426,617
|
)
|
|
|
(180,557
|
)
|
Deferred compensation obligation
|
|
|
10,595
|
|
|
|
9,812
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,709,801
|
|
|
|
1,362,883
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,350,704
|
|
|
$
|
2,022,067
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
GRANT
PRIDECO, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
519,236
|
|
|
$
|
464,584
|
|
|
$
|
189,004
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
58,786
|
|
|
|
50,255
|
|
|
|
46,632
|
|
Non-cash items
|
|
|
6,889
|
|
|
|
1,423
|
|
|
|
1,928
|
|
Debt refinancing charges
|
|
|
|
|
|
|
|
|
|
|
51,834
|
|
Deferred income tax
|
|
|
6,327
|
|
|
|
9,627
|
|
|
|
(12,769
|
)
|
Equity income in unconsolidated affiliates, net of dividends
|
|
|
20,279
|
|
|
|
(37,878
|
)
|
|
|
(46,218
|
)
|
Stock-based compensation expense
|
|
|
13,486
|
|
|
|
11,420
|
|
|
|
5,564
|
|
Excess tax benefits on stock option exercises
|
|
|
(23,597
|
)
|
|
|
(15,556
|
)
|
|
|
|
|
Deferred compensation expense
|
|
|
2,420
|
|
|
|
2,279
|
|
|
|
2,263
|
|
Minority interests in consolidated subsidiaries, net of dividends
|
|
|
1,704
|
|
|
|
4,726
|
|
|
|
3,688
|
|
(Gain) loss on sale of assets, net
|
|
|
(3,973
|
)
|
|
|
(363
|
)
|
|
|
1,338
|
|
Gain on sale of businesses, net
|
|
|
|
|
|
|
|
|
|
|
(1,577
|
)
|
Change in operating assets and liabilities, net of effects of
businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(70,114
|
)
|
|
|
(79,428
|
)
|
|
|
(68,638
|
)
|
Inventories
|
|
|
(58,041
|
)
|
|
|
(89,172
|
)
|
|
|
(68,192
|
)
|
Other current assets
|
|
|
(5,144
|
)
|
|
|
1,989
|
|
|
|
4,397
|
|
Other assets
|
|
|
(5,417
|
)
|
|
|
(6,086
|
)
|
|
|
(1,220
|
)
|
Accounts payable
|
|
|
6,421
|
|
|
|
45,041
|
|
|
|
18,320
|
|
Income taxes payable
|
|
|
30,772
|
|
|
|
23,080
|
|
|
|
61,558
|
|
Other current liabilities
|
|
|
(17,957
|
)
|
|
|
5,286
|
|
|
|
(4,636
|
)
|
Other, net
|
|
|
6,214
|
|
|
|
2,873
|
|
|
|
11,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
488,291
|
|
|
|
394,100
|
|
|
|
194,676
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(3,394
|
)
|
|
|
(111,998
|
)
|
|
|
(39,232
|
)
|
Proceeds from sale of short-term investments
|
|
|
523,495
|
|
|
|
|
|
|
|
2,521
|
|
Purchases of short-term investments
|
|
|
(523,545
|
)
|
|
|
|
|
|
|
|
|
Investments in and advances to unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
(5,273
|
)
|
Capital expenditures for property, plant and equipment
|
|
|
(123,512
|
)
|
|
|
(100,238
|
)
|
|
|
(29,501
|
)
|
Proceeds from sale of fixed assets
|
|
|
10,595
|
|
|
|
1,592
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(116,361
|
)
|
|
|
(210,644
|
)
|
|
|
(69,672
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) on credit facility, net
|
|
|
(34,600
|
)
|
|
|
23,400
|
|
|
|
11,200
|
|
Repayments on debt
|
|
|
(34,681
|
)
|
|
|
(48,139
|
)
|
|
|
(379,315
|
)
|
Debt refinancing costs
|
|
|
|
|
|
|
|
|
|
|
(43,778
|
)
|
Issuance of debt
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
Excess tax benefits on stock option exercises
|
|
|
23,597
|
|
|
|
15,556
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(247,890
|
)
|
|
|
(165,122
|
)
|
|
|
(3,385
|
)
|
Proceeds from issuance of common stock
|
|
|
23,953
|
|
|
|
20,728
|
|
|
|
77,139
|
|
Other, net
|
|
|
564
|
|
|
|
(1,032
|
)
|
|
|
(6,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(269,057
|
)
|
|
|
(154,609
|
)
|
|
|
(144,180
|
)
|
Effect of Exchange Rate Changes on Cash
|
|
|
771
|
|
|
|
333
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
103,644
|
|
|
|
29,180
|
|
|
|
(19,388
|
)
|
Cash at Beginning of Year
|
|
|
57,344
|
|
|
|
28,164
|
|
|
|
47,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Year
|
|
$
|
160,988
|
|
|
$
|
57,344
|
|
|
$
|
28,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
GRANT
PRIDECO, INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Unearned
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Compensation
|
|
|
|
|
|
|
Stock
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income(Loss)
|
|
|
Stock
|
|
|
Obligation
|
|
|
Total
|
|
|
Balance at January 1, 2005
|
|
$
|
1,245
|
|
|
$
|
528,188
|
|
|
$
|
(5,801
|
)
|
|
$
|
192,289
|
|
|
$
|
(12,291
|
)
|
|
$
|
(8,483
|
)
|
|
$
|
10,394
|
|
|
$
|
705,541
|
|
Components of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,004
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,233
|
)
|
Other comprehensive income for unconsolidated affiliate, net of
tax of ($2,610)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,847
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,847
|
)
|
Minimum pension liability, net of tax of ($606)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,799
|
|
Stock Options Exercised
|
|
|
56
|
|
|
|
75,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,243
|
|
Tax Benefit of Options Exercised
|
|
|
|
|
|
|
35,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,517
|
|
Compensation Expense for Accelerated Vesting
|
|
|
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,129
|
|
Issuance of Restricted Stock
|
|
|
5
|
|
|
|
5,202
|
|
|
|
(5,207
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,365
|
)
|
|
|
|
|
|
|
(5,365
|
)
|
Amortization of Restricted Stock, Net
|
|
|
|
|
|
|
|
|
|
|
4,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,435
|
|
Employee Stock Purchase Plan Issuance
|
|
|
2
|
|
|
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,896
|
|
Deferred Compensation Obligation
|
|
|
1
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(629
|
)
|
|
|
(3,506
|
)
|
|
|
(4,040
|
)
|
Purchase of Treasury Stock for Executive Deferred Compensation
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,385
|
)
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
1,309
|
|
|
$
|
647,211
|
|
|
$
|
(6,573
|
)
|
|
$
|
381,293
|
|
|
$
|
(19,496
|
)
|
|
$
|
(17,862
|
)
|
|
$
|
10,273
|
|
|
$
|
996,155
|
|
Components of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464,584
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,569
|
|
|
|
|
|
|
|
|
|
|
|
8,569
|
|
Other comprehensive income for unconsolidated affiliate, net of
tax of $3,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,638
|
|
|
|
|
|
|
|
|
|
|
|
6,638
|
|
Minimum pension liability, net of tax of $293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480,335
|
|
Adjustment to Initially Apply SFAS No. 158, net of tax
of $1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,785
|
|
|
|
|
|
|
|
|
|
|
|
2,785
|
|
Stock Options Exercised
|
|
|
16
|
|
|
|
17,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,969
|
|
Tax Benefit of Options Exercised
|
|
|
|
|
|
|
14,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,321
|
|
Share Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161,713
|
)
|
|
|
|
|
|
|
(161,713
|
)
|
Issuance of Restricted Stock
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
(185
|
)
|
Employee Stock Purchase Plan Issuance
|
|
|
2
|
|
|
|
2,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,759
|
|
Stock-Based Compensation
|
|
|
|
|
|
|
11,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,420
|
|
Adoption of SFAS 123 (R) (Note 1)
|
|
|
|
|
|
|
(6,573
|
)
|
|
|
6,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Obligation
|
|
|
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,661
|
|
|
|
(3,870
|
)
|
|
|
(963
|
)
|
Purchase of Treasury Stock for Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,409
|
)
|
|
|
3,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,327
|
|
|
$
|
687,384
|
|
|
$
|
|
|
|
$
|
845,877
|
|
|
$
|
(960
|
)
|
|
$
|
(180,557
|
)
|
|
$
|
9,812
|
|
|
$
|
1,362,883
|
|
Components of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519,236
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
369
|
|
Other comprehensive income for unconsolidated affiliate, net of
tax of $6,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,720
|
|
|
|
|
|
|
|
|
|
|
|
12,720
|
|
Defined benefit pension plans, net of tax of ($449)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
|
(834
|
)
|
Unrealized gains resulting from changes in fair values of
derivative instruments, net of tax of $468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
Realized gains on derivative instruments reclassified into
earnings, net of tax of ($197)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
531,994
|
|
Stock Options Exercised
|
|
|
15
|
|
|
|
21,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,042
|
|
Tax Benefit of Options Exercised
|
|
|
|
|
|
|
23,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,634
|
|
Share Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244,264
|
)
|
|
|
|
|
|
|
(244,264
|
)
|
Issuance of Restricted Stock
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(694
|
)
|
|
|
|
|
|
|
(694
|
)
|
Employee Stock Purchase Plan Issuance
|
|
|
1
|
|
|
|
2,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,911
|
|
Stock-Based Compensation
|
|
|
|
|
|
|
13,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,486
|
|
Adoption of FIN 48 (Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(870
|
)
|
Deferred Compensation Obligation
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,275
|
|
|
|
(3,161
|
)
|
|
|
(820
|
)
|
Issuance of Treasury Shares for Certain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plans
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249
|
|
|
|
318
|
|
|
|
499
|
|
Purchase of Treasury Stock for Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,626
|
)
|
|
|
3,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,347
|
|
|
$
|
748,435
|
|
|
$
|
|
|
|
$
|
1,364,243
|
|
|
$
|
11,798
|
|
|
$
|
(426,617
|
)
|
|
$
|
10,595
|
|
|
$
|
1,709,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
GRANT
PRIDECO, INC.
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Nature
of Operations
The Company is a world leader in drill stem technology
development and drill pipe manufacturing, sales and service; a
global leader in drill bit technology and specialty tools,
manufacturing, sales and service; and a provider of an
integrated package of large-bore tubular products and services.
The Companys drill stem and drill bit products are used to
drill oil and gas wells while The Companys large-bore
tubular products and services are primarily used in completing
offshore oil and gas wells. The Companys customers include
oil and gas drilling contractors; major, independent and
state-owned oil and gas companies; and other oilfield service
companies. The Company primarily operates through three business
segments: (1) Drilling Products and Services,
(2) ReedHycalog and (3) Other. The Companys
Other segment includes the results of XL Systems and
IntelliServ, Inc. (IntelliServ). Additionally, The
Companys Corporate segment primarily includes its
corporate overhead expenses.
Pending
Merger
On December 16, 2007, the Company entered into an Agreement
and Plan of Merger with National Oilwell Varco, Inc. (National
Oilwell Varco) that will result in National Oilwell Varco
acquiring all of the Companys outstanding shares in
exchange for combination of cash and stock. Upon completion of
the transaction, each stockholder of Grant Prideco will receive
0.4498 of a share of National Oilwell Varco common stock and
$23.20 in cash for each share of Grant Prideco common stock. All
options to purchase the Companys common stock granted
under its equity compensation plans that are outstanding
at the effective time of the merger will vest and become fully
exercisable upon the completion of the merger and will be
converted into options to purchase National Oilwell Varco common
stock. For shares of restricted Grant Prideco common stock
granted to Grant Pridecos executive officers and directors
under its equity compensation plans that have not vested
prior to the merger will, pursuant to their terms, become
partially or fully vested upon the effective time of the merger.
For all other restricted Grant Prideco common stock that
vests based on the passage of time, they will be converted into
rights to receive equivalent restricted shares of National
Oilwell Varco common stock and will continue to vest based upon
the terms of the original grant. See Note 3 for further
discussion of the Companys stock-based compensation. The
transaction is subject to shareholder and regulatory approval
and other customary terms and conditions and the Company expects
the transaction to close in the second quarter of 2008. This
merger does not impact the pending sale or disposition of a
significant portion of the Companys tubular businesses as
discussed below in Note 2 under Discontinued
Operations.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Grant Prideco, Inc. and its majority-owned subsidiaries (the
Company or Grant Prideco). The following table lists less than
100% owned consolidated subsidiaries as of December 31,
2007:
|
|
|
|
|
|
|
% Ownership
|
|
|
Tianjin Grant TPCO (TGP)
|
|
|
60
|
%
|
H-Tech
|
|
|
54
|
%
|
Tianjin Grant Prideco (GPT)
|
|
|
85
|
%
|
The minority interests of the above listed subsidiaries are
included in the Consolidated Balance Sheets and Statements of
Operations as Minority Interests. In January 2007,
the Company entered into a Chinese-Foreign Equity joint venture
with Tianjin Pipe (Group) Stock Company. The Tianjin Grant
Prideco (GPT) joint ventures primary business purpose is
the manufacture of drill pipe and related equipment. In October
2005, the Company purchased the remaining 30% interest in one of
its Chinese operations, Grant Prideco Jiangsu (GPJ). See
Note 7 for further discussion. Intercompany transactions
and balances between Grant Pridecos businesses have been
eliminated. The Company accounts for its 50% or less-owned
affiliates using the equity-method of accounting, as the
45
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company has a significant influence but not a controlling
interest (see Note 9). The Company does not have any
investments in entities it believes are variable-interest
entities for which the Company is the primary beneficiary.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities, disclosures
of contingent assets and liabilities at the date of the
consolidated financial statements and the related reported
amounts of revenues and expenses during the reporting period.
The significant estimates made by management in the accompanying
consolidated financial statements include reserves for inventory
obsolescence, self-insurance, valuation of goodwill and
long-lived assets, allowance for doubtful accounts, contingent
liabilities, pensions, useful lives used in depreciation and
amortization, stock-based compensation, derivatives and other
financial instruments and purchase accounting allocations.
Actual results could differ from those estimates. Additionally,
the Company re-evaluates its estimated annual effective tax rate
on a quarterly basis and the inherent judgments and assumptions
used may change during the course of the year depending on
actual results and the utilization of tax credits, as well as
changes in tax laws and regulations.
Revenue
Recognition
The Companys revenues are primarily comprised of product
sales, rentals and services. Revenues are recognized when all of
the following criteria have been met: a) evidence of an
arrangement exists, b) the price to the customer is fixed
and determinable, c) delivery to and acceptance by the
customer has occurred or services have been rendered, d) no
significant contractual obligations remain to be completed or
performed and e) collectibility is reasonably assured. The
Company recognizes revenues associated with rebillable shipping
costs.
If requested in writing by the customer, delivery may be
satisfied through delivery to the Companys customer
storage location or to a third-party storage facility. For sales
transactions where title and risk of loss has transferred to the
customer but the supporting documentation does not meet all of
the criteria for revenue recognition prior to the products being
in the physical possession of the customer, the recognition of
the revenues and related inventory costs from these transactions
are deferred until the customer takes physical possession. At
December 31, 2007, the Company had deferred revenues and
charges related to such transactions of $3.9 million and
$3.0 million, respectively. At December 31, 2006, the
Company had deferred revenues and charges related to such
transactions of $4.9 million and $4.0 million,
respectively. The Company also has deferred revenues related to
customer advances which were $17.0 million and
$13.3 million at December 31, 2007 and 2006,
respectively.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
Allowance
for Doubtful Accounts
The Company estimates its allowance for doubtful accounts based
on historical collection trends, type of customer, the age of
outstanding receivables and any specific customer collection
issues that it has identified. At December 31, 2007 and
2006, allowance for doubtful accounts totaled $2.8 million
and $3.5 million, respectively. The provision (benefit) for
bad debt expense including recoveries and other adjustments was
$0.3 million, ($1.0 million) and $1.7 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. The Company believes the allowance for doubtful
accounts is adequate to cover potential bad debt losses under
current conditions; however, uncertainties regarding changes in
the financial condition of its customers, either adverse or
positive, could impact the amount and timing of any additional
provisions for doubtful accounts that may be required.
46
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventory costs are stated at the lower of cost or market using
the
first-in,
first-out method. The Company values its inventories primarily
using standard costs, which approximate actual costs, and
includes raw materials, direct labor and manufacturing overhead
allocations. The Company performs obsolescence reviews on its
slow-moving and excess inventories and establishes reserves
based on current assessments of factors such as age of
inventory, technological obsolescence, future product demands,
market conditions and related management initiatives.
Inventories, net of reserves, by category are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw Materials, Components and Supplies
|
|
$
|
192,430
|
|
|
$
|
203,368
|
|
Work in Process
|
|
|
134,761
|
|
|
|
129,966
|
|
Finished Goods
|
|
|
111,809
|
|
|
|
97,565
|
|
Rental Bits(a)
|
|
|
32,357
|
|
|
|
24,048
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
471,357
|
|
|
$
|
454,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The Company manufactures its rental bit inventory and the cost,
which includes direct and indirect manufacturing costs, is
capitalized and carried in inventory. Prior to 2006, the Company
expensed the cost of rental bits upon the first rental and usage
of the bit. During the first quarter of 2006, the Company
completed an analysis of historical rental bit usage to
determine an estimate of rental bit useful life. Effective
January 1, 2006, manufactured rental bits are now
depreciated, based upon analysis of historical usage, over their
estimated useful life of approximately one year.
|
Reserves for excess and obsolete inventory included in the
Consolidated Balance Sheets at December 31, 2007 and 2006
were $23.5 million and $21.0 million, respectively.
The increase in reserves at December 31, 2007 relates
primarily to obsolete and slow-moving inventory at the
Companys ReedHycalog segment.
Property,
Plant and Equipment
Property, plant and equipment is carried at cost less
accumulated depreciation and includes capitalized interest of
$2.0 million during 2007. Maintenance and repairs are
expensed as incurred. The costs of replacements, betterments and
renewals are capitalized. When properties and equipment are
sold, retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the books and the
resulting gain or loss is recognized. Depreciation on fixed
assets, including those under capital leases, is computed using
the straight-line method over the estimated useful lives for the
respective categories. The useful lives of the major classes of
property, plant and equipment are as follows:
|
|
|
|
|
|
|
Life
|
|
|
Buildings and Improvements
|
|
|
15 30 years
|
|
Machinery and Equipment
|
|
|
2 15 years
|
|
Furniture and Fixtures
|
|
|
2 10 years
|
|
47
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
23,038
|
|
|
$
|
24,915
|
|
Buildings and Improvements
|
|
|
100,688
|
|
|
|
101,809
|
|
Machinery and Equipment
|
|
|
300,994
|
|
|
|
332,401
|
|
Furniture and Fixtures
|
|
|
47,759
|
|
|
|
44,267
|
|
Construction in Progress
|
|
|
59,831
|
|
|
|
42,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532,310
|
|
|
|
546,256
|
|
Less: Accumulated Depreciation
|
|
|
(202,828
|
)
|
|
|
(240,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,482
|
|
|
$
|
305,524
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $49.8 million, $44.0 million
and $41.9 million for the years ended December 31,
2007, 2006 and 2005, respectively, and includes depreciation of
assets related to capital leases.
Valuation
of Long-Lived Assets
The Company reviews long-lived asset groups for impairment
whenever events or changes in economic circumstances indicate
that the carrying amount of an asset group may not be
recoverable and when management determines it is more likely
than not that an asset group will be sold or otherwise disposed
of significantly before the end of its previously estimated
useful life. This review consists of comparing the carrying
amount of an asset group with its expected undiscounted future
net cash flows. If the asset groups carrying amount is
less than such cash flow estimate, the asset group is written
down to its fair value based on expected discounted future cash
flows. Any impairment recognized is permanent and may not be
restored.
Goodwill
and Identifiable Intangible Assets
Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible and
identifiable intangible assets of businesses acquired. The
Companys goodwill is subject to at least an annual
impairment test and more frequently if circumstances indicate
the value may not be recoverable. Goodwill is tested for
impairment using a two-step process that begins with an
estimation of the fair value of each of the Companys
reporting units compared with its carrying value. If the
carrying amount exceeds the fair value of a reporting unit, a
second-step test is completed comparing the implied fair value
of the reporting units goodwill to its carrying value to
measure the amount of impairment. Intangible assets that are not
amortized will be tested for impairment at least annually by
comparing the fair values of those assets to their carrying
values. Other identifiable intangible assets that are subject to
amortization are amortized on a straight-line basis over the
years expected to be benefited. These amortizable intangible
assets are reviewed for impairment if circumstances indicate
their value may not be recoverable based on a comparison of fair
value to carrying value. The Company completed its annual
testing for 2007 and 2006 and determined that its recorded
goodwill was not impaired. See Note 11 for further
discussion related to the Companys goodwill and other
identifiable intangible assets.
Derivative
Instruments
In 2007, the Company began a hedging program with the use of
derivative instruments. The Company accounts for all derivative
instruments under Statement of Financial Accounting Standards
No. 133,
Accounting for Derivative Instruments and
Hedging Activities
, as amended
(SFAS No. 133). This standard requires that derivative
instruments be recorded at fair value in the balance sheet as
either an asset or a liability, with classification as current
or non-current based upon the maturity of the derivative
instrument. Changes in the fair value of derivative
48
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
instruments are recorded in current earnings or deferred in
accumulated other comprehensive income (loss), depending on the
type of hedging transaction and whether a derivative is
designated as, and is effective as, a hedge. The Companys
policy is to execute such instruments with creditworthy banks
and, in order to minimize credit risk, the Company monitors the
credit ratings of these financial institutions on a continuing
basis.
At the inception of any new derivative, the Company designates
the derivative as an economic, cash flow or fair value hedge
and, as the facts dictate, the Company determines when the
derivative is to be de-designated as a hedging instrument. Hedge
accounting is only applied when the derivative is deemed to be
highly effective at offsetting changes in anticipated cash flows
or changes in fair values of the hedged item or transaction.
Changes in the fair value of derivatives that are designated as
cash flow hedges are deferred in accumulated other comprehensive
income (loss) until the underlying transactions are recognized
in earnings. At such time, the related deferred hedging gains or
losses are recorded in earnings on the same line as the hedged
item. Effectiveness is assessed at the inception of the hedge
and on a quarterly basis. Any ineffectiveness identified is
recorded in earnings as incurred.
The Company also uses forward contracts to hedge identified
foreign currency assets and liabilities. These contracts are not
designated as hedges; therefore, the changes in fair value of
these contracts are recognized in earnings as they occur and
generally offset gains or losses on the remeasurement of the
related asset or liability.
Cash flows from derivative contracts are reported in the
Consolidated Statements of Cash Flows in the same categories as
the cash flows from the underlying transactions.
Stock-Based
Compensation
On January 1, 2006 the Company adopted
SFAS No. 123(R), Share-Based Payment, a
revised standard that establishes accounting for stock-based
payment transactions when a company receives employee services
in exchange for equity instruments. Prior to 2006, the Company
accounted for employee stock options using the intrinsic-value
method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company also complied with the pro forma
disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation, as amended
by SFAS No. 148, Accounting for Stock Based
Compensation Transition and Disclosure
an amendment of FASB Statement No. 123. The
provisions of APB No. 25 required compensation expense to
be recognized in operations for restricted stock, but did not
require expense recognition for unvested stock options or for
awards granted under the employee stock purchase plan (ESPP) as
the Company issued options at exercise prices equal to the
market value of the Companys common stock on the date of
grant and because our ESPP was noncompensatory. The pro forma
effects on net income and earnings per share for the stock
options and ESPP awards were instead disclosed in a footnote to
the financial statements.
Under the new standard, companies are required to account for
stock-based compensation using the fair value of equity awards
at the grant date, with the fair value recognized in operations
during the employees requisite service period (typically
the vesting period). Additionally, compensation cost is
recognized based on awards that are ultimately expected to vest,
therefore, the compensation cost recognized on stock options is
reduced for estimated forfeitures based on the Companys
historical forfeiture rates. The Company elected to use the
modified prospective application transition method set out in
SFAS No. 123(R). That method requires recognition of
compensation expense for stock-based payment awards that are
granted, modified, repurchased or cancelled after 2005.
Compensation expense for unvested stock options outstanding as
of January 1, 2006 for which the requisite service has not
been rendered is being recognized over the remaining service
period using the compensation cost previously calculated for pro
forma disclosure purposes under SFAS No. 123. As a
result of the adoption of SFAS 123(R), the balance in
unearned compensation recorded in stockholders equity as
of January 1, 2006, of $6.6 million was reclassified
to and reduced the balance of Capital in Excess of Par
Value. Prior periods were not restated to reflect the
impact of adopting the new standard. See Note 3 for further
discussion of the Companys stock-based compensation plans.
49
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the Companys net income and
net income per share for December 31, 2005 as reported and
on a pro forma basis as if the fair value-recognition provisions
of SFAS No. 123 had been applied. For purposes of the
pro forma disclosure, the estimated fair values of options are
amortized to expense over the options vesting period.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
|
Net Income As Reported
|
|
$
|
189,004
|
|
Add: stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
6,806
|
|
Deduct: stock-based employee compensation expense determined
under the fair value method for all awards, net of related tax
effects
|
|
|
(11,370
|
)
|
|
|
|
|
|
Pro Forma Net Income
|
|
$
|
184,440
|
|
|
|
|
|
|
Net Income Per Share:
|
|
|
|
|
Basic, as reported
|
|
$
|
1.49
|
|
Basic, pro forma
|
|
|
1.45
|
|
Diluted, as reported
|
|
|
1.45
|
|
Diluted, pro forma
|
|
|
1.42
|
|
Pension
Plans
In September 2006, the FASB issued FASB Statement No. 158
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R) (SFAS No. 158).
SFAS No. 158 requires plan sponsors of defined benefit
pension plans to recognize the funded status of their defined
benefit pension plans in the statement of financial position,
measure the fair value of plan assets and benefit obligations as
of the date of the fiscal year-end statement of financial
position and provide additional disclosures. In 2006, the
Company adopted the recognition and disclosure provisions of
SFAS No. 158. The effect of adopting
SFAS No. 158 on the Companys financial
statements at December 31, 2006 has been included in the
accompanying consolidated financial statements.
SFAS No. 158s provisions regarding the change in
the measurement date of defined benefit pension plans are not
applicable as the Company already uses a measurement date of
December 31 for its defined benefit pension plans. See
Note 15 for further discussion concerning the impact of the
pension plans on the Companys consolidated financial
statements.
Contingent
Liabilities
The Company has contingent liabilities and future claims for
which it has made estimates of the amount of the actual costs of
these liabilities or claims. These liabilities and claims
sometimes involve threatened or actual litigation where damages
have been quantified and the Company has made an assessment of
its exposure and recorded a provision to cover an expected loss
based on its experience in these matters and, when appropriate,
the advice of outside counsel or other outside experts. Examples
of areas where the Company has made important estimates of
future liabilities primarily include litigation, warranty
claims, environmental liabilities, contract claims and tax
contingencies.
Foreign
Currency Translation
The functional currency for the majority of the Companys
international operations is the U.S. dollar. Adjustments
resulting from the remeasurment of the local currency financial
statements into the U.S dollar functional currency, which uses a
combination of current and historical exchange rates, are
included in the
50
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Statements of Operations in Other Income
(Expense), Net in the current period. The functional
currency of the Companys Canadian, Venezuelan and Chinese
operations is the local currency. Adjustments resulting from the
translation of the local functional currency financial
statements into the U.S dollar, which is primarily based on
current exchange rates, are included in the Consolidated
Statements of Stockholders Equity as a separate component
of Accumulated Other Comprehensive Income (Loss) in
the current period. Gains and losses from foreign currency
transactions, such as those resulting from the settlement of
foreign receivables or payables, are included in Other
Income (Expense), Net, which includes the Companys
long-term supply contract with Voest-Alpine Tubulars (VAT) that
is denominated in Euros. The Company hedges recognized foreign
currency assets and liabilities, including the VAT supply
contract, to reduce the risk that its earnings and cash flows
will be adversely affected by changes in the foreign currency
exchange rates. Certain contracts are not designated as hedges;
therefore, the changes in fair value of these contracts are
recognized in earnings as they occur and generally offset gains
or losses on the remeasurement of the related asset or
liability. Net foreign currency gains (losses), including
derivative activity, for the years ended December 31, 2007,
2006 and 2005 were ($6.4) million, ($6.2) million, and
$4.7 million, respectively.
Fair
Value of Financial Instruments Other Than
Derivatives
The Companys financial instruments other than derivative
instruments consist primarily of cash, trade receivables, trade
payables and debt. The book values of cash, trade receivables
and trade payables are considered to be representative of their
respective fair values due to the short-term maturity of those
instruments. The Company determined fair value for debt based on
the traded market quotes as of the applicable period. The
Company had approximately $176.6 million and
$245.9 million of debt at December 31, 2007 and 2006,
respectively. The fair value of the debt at December 31,
2007 and 2006 was $182.3 million and $240.7 million,
respectively.
Off-Balance
Sheet Financing
The Company does not have any off-balance sheet hedging,
financing arrangements or contracts except those associated with
its investment in VAT, which is not consolidated in the
Companys financial statements. This investment is
accounted for under the equity-method of accounting. The assets
and liabilities of VAT are summarized in Note 9.
Additionally, VAT has entered into forward contracts to cover
its currency risk related to accounts receivables and accounts
payables, has entered into interest rate swap agreements to
reduce its exposure to changes in floating interest rate
payments of its long-term bonds and has also entered into an
agreement with a bank to sell a significant portion of its
accounts receivable.
Accounting
for Income Taxes
The accompanying financial statements have been prepared under
SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. See Note 17 for further information.
Net
Income Per Share
Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential
dilution from the exercise or conversion of securities into
common stock which were 1.5 million and 2.2 million
shares for the years ended December 31, 2007 and 2006,
respectively. Common stock equivalent shares are excluded from
the computation if their effect was antidilutive. For the years
ended December 31, 2007 and 2006, an immaterial number of
outstanding stock option awards were excluded from the
computations of diluted net income per share because they were
antidilutive.
51
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reconciles basic and diluted weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Basic Weighted Average Number of Shares Outstanding
|
|
|
128,060
|
|
|
|
130,510
|
|
|
|
127,236
|
|
Dilutive Effect of Stock Options and Restricted Stock, Net of
Assumed Repurchase of Treasury Shares
|
|
|
1,550
|
|
|
|
2,164
|
|
|
|
3,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive Weighted Average Number of Shares Outstanding
|
|
|
129,610
|
|
|
|
132,674
|
|
|
|
130,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141(R), Business
Combinations (SFAS No. 141(R)), which replaces
SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statement to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008.
Accordingly, any business combinations the Company engages in
will be recorded and disclosed following existing GAAP until
January 1, 2009. The Company expects that
SFAS No. 141(R) will have an impact on its
consolidated financial statements when effective, but the nature
and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions the Company
consummates after the effective date. The Company is still
assessing the impact of this standard on its future consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS No. 160), which
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. The
statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the
non-controlling owners. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company
is assessing the potential impact on its financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115
(SFAS No. 159) which is effective for fiscal
years beginning after November 15, 2007. This Statement
permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified
election dates. Subsequent unrealized gains and losses on items
for which the fair value option has been elected will be
reported in earnings. The Company adopted SFAS No. 159
on January 1, 2008, however, it will not affect our
financial statements as the Company did not elect to measure any
financial instruments at fair value.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157).
SFAS No. 157 establishes a framework for measuring
fair value and requires expanded disclosure about the
information used to measure fair value. This statement applies
whenever other statements require or permit assets or
liabilities to be measured at fair value. The statement does not
expand the use of fair value accounting in any new circumstances
and is effective for the Company for the year ended
December 31, 2008 and for interim periods included in that
year, with early adoption encouraged. The Company adopted
SFAS No. 157 on January 1, 2008, for its
financial assets and liabilities, which primarily consist of
derivatives the Company records in accordance with
SFAS No. 133, and on January 1, 2009, for
its non-financial assets and liabilities. For its
financial assets and
52
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liabilities, the Companys adoption of
SFAS No. 157 primarily impacts its disclosures and
will not have a material impact on its financial position,
results of operations and cash flows. The Company is currently
evaluating the impact with respect to its non-financial assets
and liabilities.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. It prescribes a
recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for
fiscal years beginning after December 15, 2006. Consistent
with its requirements, the Company adopted FIN 48 on
January 1, 2007. For additional information on the impact
of FIN 48 see Note 17.
In March 2006, the FASB issued Emerging Issues Task Force
Abstract Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross versus Net Presentation)
(EITF 06-03)
. Taxes within the scope of EITF Issue
06-3
include
any taxes assessed by a governmental authority that are directly
imposed on a revenue-producing transaction between a seller and
a customer and may include, but are not limited to, sales taxes,
use taxes, value-added taxes, and some excise taxes. The EITF
concluded that the presentation of these taxes on either a gross
(included in revenues and costs) or a net (excluded from
revenue) basis is an accounting policy decision that should be
disclosed. For any such taxes that are reported on a gross
basis, a company should disclose the amounts of those taxes in
interim and annual financial statements. The provisions of
EITF 06-3
are effective for interim and annual reporting periods beginning
after December 15, 2006. The Company generally records its
tax-assessed revenue transactions on a net basis in its
consolidated statements of income and therefore,
EITF 06-3
did not have a material impact on its financial statements. For
additional information see Note 17.
|
|
2.
|
Discontinued
Operations
|
On October 29, 2007, the Company entered into a definitive
Purchase and Sale Agreement with Vallourec S.A and
Vallourec & Mannesman Holdings, Inc. (collectively
referred to as Vallourec) to sell three of the
divisions within the Companys former Tubular Technology
and Services segment for $800 million in cash, subject to a
final working capital adjustment and standard closing conditions
(including regulatory approval). The Company expects the
transaction to close in the second quarter of 2008. The
divisions included in the sale are Atlas Bradford Premium
Threading and Services, TCA Premium Casing and Tube-Alloy
Accessories. These divisions provide a full range of premium
threaded connections for casing, production tubing and other
accessory equipment and also manufacture and sell premium casing
for use with third-party connections. In addition to the
divisions being sold, certain other divisions within the
Companys former Tubular Technology and Services segment
(located in Canada and Venezuela) have either been sold, are
planned to be disposed of, or are otherwise being discontinued.
Consistent with SFAS No. 144, Accounting for the
Impairment or Disposal for Long-Lived Assets, all of these
dispositions discussed above are reflected as discontinued
operations in the Companys Statements of Operations and
prior periods have been revised to reflect this presentation. As
the remaining division, XL Systems, in the former Tubular
Technology and Services segment is not of continuing
significance to report alone as a segment and it does not meet
the quantitative thresholds established in
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Company is
discontinuing its Tubular Technology and Services segment and XL
Systems is now included in the Other segment along with the
Companys IntelliServ division (see Note 21 for
further discussion). The Company has revised its prior period
segment reporting to reflect this change. The pending sale to
Vallourec does not impact the pending merger with National
Oilwell Varco discussed above in Note 1 under Pending
Merger.
53
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following are the condensed statements of operations from
discontinued operations for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
210,028
|
|
|
$
|
285,434
|
|
|
$
|
260,731
|
|
Income Before Income Taxes
|
|
|
60,494
|
|
|
|
93,663
|
|
|
|
75,376
|
|
Income Tax Provision
|
|
|
(19,455
|
)
|
|
|
(33,185
|
)
|
|
|
(25,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations, Net of Tax
|
|
$
|
41,039
|
|
|
$
|
60,478
|
|
|
$
|
49,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a condensed summary balance sheet of the
Companys assets and liabilities held for sale related to
the divisions being sold to Vallourec and operations for sale in
Venezuela along with the goodwill allocated. Depreciation and
amortization associated with Assets Held for Sale was
discontinued once it meet the held for sale criteria established
under SFAS No. 144. Goodwill is allocated based on the
relative fair values of the portion of the reporting unit being
disposed of and the portion of the reporting unit remaining.
Additionally, property, plant and equipment, net includes
$1.7 million related to a ReedHycalog manufacturing
facility held for sale at December 31, 2007. All of these
assets and liabilities were classified as held for
sale and included in the Consolidated Balance Sheets as of
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts Receivable
|
|
$
|
28,494
|
|
|
$
|
35,585
|
|
Inventories
|
|
|
41,602
|
|
|
|
44,950
|
|
Other Current Assets
|
|
|
2,431
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
72,527
|
|
|
|
81,018
|
|
Property, Plant, and Equipment, Net
|
|
|
40,878
|
|
|
|
45,563
|
|
Goodwill
|
|
|
72,799
|
|
|
|
72,799
|
|
Other Assets
|
|
|
354
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
186,558
|
|
|
$
|
199,773
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
12,520
|
|
|
$
|
16,897
|
|
Accrued Payroll and Benefits
|
|
|
1,480
|
|
|
|
2,500
|
|
Other Current Liabilities
|
|
|
2,477
|
|
|
|
2,744
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
16,477
|
|
|
$
|
22,141
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Stock-Based
Compensation
|
SFAS No. 123(R) requires all stock-based compensation
related to unvested stock awards, including stock options and
the ESPP, to be recognized by the Company as an operating
expense. Total stock-based compensation expense recorded for all
share-based payment arrangements for the years ended
December 31, 2007, 2006 and 2005 was $14.7 million,
excluding a $5.1 million tax benefit, $13.4 million,
excluding a $4.7 million tax benefit, and
$10.1 million, excluding a $3.1 million tax benefit,
respectively. Stock-based compensation expense for all
share-based arrangements is primarily recorded in General
and Administrative expenses in the accompanying
Consolidated Statements of Operations. Additionally, no
stock-based compensation costs were capitalized.
SFAS No. 123(R) requires the excess tax benefit from
stock-option exercises tax deductions in excess of
compensation cost recognized to be classified as a
financing activity in the Consolidated Statements of Cash
54
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Flows. Previously, all tax benefits from stock option exercises
were classified as operating activities. The excess tax benefit
at December 31, 2007 and 2006 was $23.6 million and
$15.6 million, respectively, and are classified as
operating cash outflows and financing cash inflows.
Stock
Option and Restricted Stock Plans
The Company has stock option plans pursuant to which directors,
officers and other key employees may be granted stock options
and restricted stock to purchase shares of Grant Prideco common
stock (Common Stock). Stock options are typically granted at the
fair market value of the Common Stock on the date of grant with
graded vesting. Graded vesting stock options accrue to the
benefit of the option holder at established points during the
vesting period. The requisite service period for stock options
to vest is typically during a three-year period, with expiration
10 years subsequent to the grant date. Restricted stock is
subject to certain restrictions on ownership and transferability
when granted.
The Company has in effect the 2006 Grant Prideco Long-Term
Incentive Compensation Plan (the 2006 Plan). The
2006 Plan provides for awards of options, stock appreciation
rights, restricted stock, restricted stock units, performance
awards, other stock-based awards and cash-based awards to any
employee or non-employee director or consultant of the Company
or one of its affiliates. The provisions of each award will vary
based on the type of award granted and will be specified by the
Compensation Committee of the Board of Directors. The aggregate
number of shares of Common Stock authorized for grant under the
2006 Plan is 3.5 million. The Company may either reissue
treasury shares or issue new shares of its Common Stock in
satisfaction of these awards.
The Company also has in effect the 2000 Employee Stock Option
and Restricted Stock Plan, the 2000 Non-Employee Director Stock
Option Plan and the 2001 Employee Stock Option and Restricted
Stock Plan. With the adoption of the Companys 2006 Plan in
May 2006, no future grants will be made under these plans.
The Company also has stock options granted to employees and
directors of Weatherford International Ltd. (Weatherford) that
were granted prior to September 1998. Under the terms of the
Grant Prideco spinoff from Weatherford in April 2000, these
employees and directors were granted an equal number of options
to purchase Common Stock. As of December 31, 2007, options
outstanding related to the Weatherford grants prior to
September 1998 were 39,800.
Stock
Option Plans
The fair value of the Companys stock options was estimated
at the date of grant using the Black-Scholes option valuation
model using the weighted average assumptions set out below. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable and negotiable
in a free trading market. This model does not consider the
employment, transfer or vesting restrictions that are inherent
in the Companys stock options.
55
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of an option valuation model includes highly subjective
assumptions based on long-term predictions, including the
expected stock price volatility and expected option term of each
stock option grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Pro Forma)
|
|
|
Valuation Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Option Term (Years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Expected Volatility
|
|
|
40.00
|
%
|
|
|
40.02
|
%
|
|
|
41.00
|
%
|
Expected Dividend Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Free Interest Rate
|
|
|
4.66
|
%
|
|
|
4.72
|
%
|
|
|
3.87
|
%
|
Weighted-Average Grant Date Fair Value
|
|
$
|
18.82
|
|
|
$
|
15.61
|
|
|
$
|
9.10
|
|
The expected
5-year
term
of the options was determined by analyzing the historical
pattern of post-vesting exercise and abandonment behavior, with
consideration given to the
10-year
contractual term of the options and varying option grant
conditions. The following is a summary of the Companys
stock options, including the Weatherford grants made prior to
September 1998, as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at the Beginning of the Year
|
|
|
3,461,233
|
|
|
$
|
15.76
|
|
|
|
|
|
|
|
|
|
Options Granted During the Year
|
|
|
326,000
|
|
|
|
44.68
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
(1,521,383
|
)
|
|
|
13.90
|
|
|
|
|
|
|
|
|
|
Options Forfeited
|
|
|
(41,326
|
)
|
|
|
37.14
|
|
|
|
|
|
|
|
|
|
Options Expired
|
|
|
(3,546
|
)
|
|
|
18.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Period
|
|
|
2,220,978
|
|
|
$
|
20.88
|
|
|
|
6.85
|
|
|
$
|
76,917,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Period
|
|
|
1,606,295
|
|
|
$
|
14.29
|
|
|
|
6.22
|
|
|
$
|
66,210,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $5.9 million of
unrecognized compensation cost related to stock options that is
expected to be recognized over a weighted average period of
1.5 years. The total intrinsic value of stock options
(defined as the amount by which the market price of the Common
Stock on the date of exercise exceeds the exercise price of the
stock option) exercised during the years ended December 31,
2007, 2006 and 2005 was $63.0 million, $59.5 million
and $110.6 million, respectively. Cash received from stock
option exercises for the years ended December 31, 2007,
2006 and 2005, was $21.1 million, $18.0 million and
$75.2 million, respectively. The actual tax benefit
realized for the tax deductions from stock option exercises
totaled $20.1 million, $15.6 million and
$33.5 million for the years ended December 31, 2007,
2006 and 2005, respectively.
Additional compensation expense of $0.1 million and
$1.1 million was recognized for the years ended
December 31, 2006 and 2005, respectively, primarily related
to accelerated vesting for certain stock option awards.
Restricted
Stock Plans
At December 31, 2007, there were approximately
789,531 shares of restricted stock awards outstanding to
officers and other key employees of which 162,875 shares
vest with the passage of time between one and three years from
the date of grant. See discussion below on the characteristics
of other restricted stock awards.
The fair value of restricted stock awards is based on the market
price of the Common Stock on the date of grant. Compensation
expense related to all restricted stock awards, including the
tax
gross-up
bonus component described
56
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
below, was $9.7 million, $8.7 million and
$8.9 million for the years ended December 31, 2007,
2006 and 2005, respectively.
2005 Restricted Stock Award
With respect to
170,000 shares of outstanding restricted stock awarded in
2005, beginning with the third anniversary date of the grant
through the eighth anniversary date, the performance metrics are
evaluated annually and early vesting will occur when performance
goals are met. The Company compares its actual results to the
predetermined performance metrics on a periodic basis. If actual
cumulative results exceed the performance metrics and
accelerated vesting is determined to be probable, compensation
expense is increased to reflect the expected accelerated vesting
of the restricted stock.
2006 Restricted Stock Award
There are
approximately 199,832 shares of outstanding restricted
stock awards awarded in 2006. These awards, or a portion
thereof, vest three years from the date of grant based on the
outcome of a certain market condition. A lattice valuation model
was utilized to estimate the fair market value at the date of
grant, which is being used for expense recognition purposes. The
most significant assumption used in the valuation model is the
outcome of the market condition, which includes an evaluation of
the rolling historical three-year performance of the Company
within a defined peer group. If the market condition is not
achieved at the end of the three-year vesting period, the
restricted shares will expire unvested; however, in accordance
with SFAS No. 123(R), compensation expense related to
those restricted shares is not reversed.
2
007 Restricted Stock Award
In 2007, the
Company awarded approximately 381,199 shares of restricted
stock to officers, directors and other key employees. Of this
award, approximately 256,824 shares are a market-based
award and are eligible for full or partial vesting on the third,
fourth and fifth anniversary from the grant date based on a
rolling historical three-to-five year performance of the Company
within a defined peer group. A Monte Carlo valuation model
was utilized to estimate the fair market value at the date of
grant and the requisite service period, which are being used for
expense recognition purposes. If the market condition is not
achieved at the end of the five-year vesting period, the
restricted shares will expire unvested; however, in accordance
with SFAS No. 123(R), compensation expense related to those
restricted shares would not be reversed
Use of a Monte Carlo option valuation model includes highly
subjective assumptions based on long-term predictions, including
the probabilistic assessment of the Companys performance
relative to the performance of the Companys defined peer
group over a three-to-five year performance period. The
assumptions used in the Monte Carlo valuation model are as
follows:
|
|
|
|
|
|
|
2007
|
|
|
Valuation Assumptions
|
|
|
|
|
Expected Award Term (Years)
|
|
|
3-5
|
|
Expected Volatility
|
|
|
44.46
|
%
|
Expected Dividend Rate
|
|
|
|
|
Risk Free Interest Rate
|
|
|
4.71
|
%
|
Following is a summary of restricted stock as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at the Beginning of the Year
|
|
|
836,040
|
|
|
$
|
24.62
|
|
Awarded
|
|
|
381,199
|
|
|
|
37.97
|
|
Vested
|
|
|
(401,175
|
)
|
|
|
15.42
|
|
Forfeited
|
|
|
(26,533
|
)
|
|
|
25.53
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Period
|
|
|
789,531
|
|
|
$
|
35.71
|
|
|
|
|
|
|
|
|
|
|
57
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average grant-date fair value of restricted stock
awards granted for the years ended December 31, 2006 and
2005 was $41.05 and $22.51, respectively. The fair value of
restricted stock awards that vested during the years ended
December 31, 2007, 2006 and 2005 was $17.3 million,
$0.5 million and $13.2 million, respectively. During
the year ended December 31, 2007, the Company paid
approximately $8.4 million related to the tax
gross-up
liability on the 2004 restricted stock award that vested during
the period. At December 31, 2007, there was
$12.3 million of unrecognized compensation cost related to
restricted stock expected to be recognized over a
weighted-average period of 1.3 years.
Employee
Stock Purchase Plan
The Companys ESPP allows eligible employees to purchase
shares of Common Stock at 85% of the lower of the fair market
value on the first or last day of each one-year offering period
(January through December). Employees may authorize the Company
to withhold up to 10% of their compensation during any offering
period, subject to certain limitations. The Company has reserved
1.2 million shares to be granted under the ESPP.
There were approximately 86,100, 172,000 and 171,000 shares
issued at a price of $33.80, $16.05 and $11.08 during 2007, 2006
and 2005, respectively, and the intrinsic value of these shares
was $0.3 million, $5.3 million and $1.3 million,
respectively.
The fair value of ESPP shares was estimated using the
Black-Scholes option valuation model and the weighted average
assumptions set out below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
2007
|
|
|
2006
|
|
|
(Pro Forma)
|
|
|
Valuation Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Option Term (Years)
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Expected Volatility
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
41
|
%
|
Expected Dividend Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Free Interest Rate
|
|
|
5.38
|
%
|
|
|
4.74
|
%
|
|
|
2.79
|
%
|
Weighted-Average Grant Date Fair Value
|
|
$
|
9.73
|
|
|
$
|
12.07
|
|
|
$
|
6.05
|
|
Stock-based compensation expense related to the Companys
ESPP of $1.4 million and $1.1 million was recognized
as an operating expense for the years ended December 31,
2007 and 2006, respectively. There was no stock-based
compensation expense recognized in 2005 as the ESPP was
considered noncompensatory under the provisions of APB
No. 25.
|
|
4.
|
Accumulated
Other Comprehensive Income (Loss)
|
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The
Company presents accumulated other comprehensive income (loss)
in its Consolidated Statements of Stockholders Equity.
58
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the components of accumulated
other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Foreign Currency Translation Adjustments
|
|
$
|
(8,950
|
)
|
|
$
|
(9,319
|
)
|
|
$
|
(17,888
|
)
|
Other Comprehensive Income (Loss) for Unconsolidated Affiliate,
Net
|
|
|
18,877
|
|
|
|
6,157
|
|
|
|
(481
|
)
|
Gain on Derivative Instruments, Net
|
|
|
503
|
|
|
|
|
|
|
|
|
|
Unrecognized Pension Benefit (Cost), Net
|
|
|
1,368
|
|
|
|
2,202
|
|
|
|
(1,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
$
|
11,798
|
|
|
$
|
(960
|
)
|
|
$
|
(19,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
License
and Royalty Agreement
|
In September 2006, the Company entered into a technology
licensing agreement with a competitor to use ReedHycalogs
patented technology for the shallow leaching of PDC cutters in
exchange for $20 million in guaranteed non-refundable and
non-cancelable payments, which was recorded as License and
Royalty Income in the accompanying Consolidated Statements
of Operations in 2006, and future royalty payments. Beginning on
April 1, 2008, the Company will be paid, on a quarterly
basis, a royalty determined on actual licensed drill bits
invoiced by the competitor. The Company will recognize these
royalties as income in the period the competitor sells its
licensed drill bits.
2007
Charges
During 2007, the Company incurred $6.4 million of unusual
charges recorded in the Consolidated Statements of Operations as
Other operating items. These charges include
$4.3 million related to the relocation of
ReedHycalogs U.S. headquarters and certain
manufacturing facilities, of which $0.5 million was accrued
as of December 31, 2007, and $2.1 million for legal
and professional fees incurred related to the pending merger
between the Company and National Oilwell Varco. The Company will
substantially complete its relocation activities in the first
quarter of 2008 and expects to incur additional relocation
charges of approximately $1.8 million in 2008.
2006
Benefit
During 2006, the Company recognized a $3.9 million benefit
from the settlement of a trade credit dispute. The amounts
mentioned above are recorded in Other operating
items in the Companys Consolidated Statements of
Operations.
On October 13, 2006, the Company acquired Andergauge Ltd.
and related companies (collectively, Andergauge) for
approximately $117.7 million, including cash acquired, and
a non-interest bearing note payable of $5.0 million plus
the assumption of net debt of approximately $39.9 million
and related transaction expenses. The debt assumed was repaid in
connection with the acquisition with cash on hand and through
the use of a draw under the Companys credit facility. The
note payable of $5.0 million, due and paid in April 2007,
was discounted to $4.9 million based on our incremental
borrowing rate of 6.0%. Andergauge, based in Aberdeen, Scotland,
is a provider of specialized downhole drilling tools, including
the Anderreamer and
AG-itator
tm
,
and provides services related to these tools. The Company
recorded goodwill of $103.0 million, which is not
deductible for tax purposes, and intangible assets of
$26.8 million for customer relationships and
$12.6 million for patents, which includes final
59
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
valuation adjustments made in 2007. The customer relationships
and patents are being amortized over 10 and 12 years,
respectively. The purchase price for the Andergauge acquisition
has been allocated to the fair values of net assets acquired.
Andergauges results of operations are included in the
ReedHycalog segment from the date of acquisition.
In June 2006, in connection with the purchase of the remaining
interest of GPJ mentioned below, the Company created Jiangsu
Grant Prideco Oil and Gas Equipment Co., Ltd. (JGP), a
wholly-owned Chinese entity. During 2006, the Company funded
approximately $11.0 million into JGP for the purpose of
fulfilling its commitment to provide investments in China, of
which $5.2 million relates to the prepayment of a
20-year
land
use agreement. The prepayment amount is being amortized over the
life of the lease agreement.
The Company purchased the remaining 30% interest in GPJ
effective October 1, 2005 for $10.5 million in cash
and a commitment to make subsequent investments in China.
Additionally, the Company entered into a
5-year
non-compete agreement with one of the selling shareholders for
$0.5 million. Goodwill recorded was $2.3 million,
which is not tax deductible. GPJs results of operations
are included in the Drilling Products and Services segment.
On September 2, 2005, the Company acquired the remaining
50% interest in IntelliServ for $8.7 million in cash plus a
non-interest bearing note payable of $7.0 million which was
discounted to $6.8 million based on our incremental
borrowing rate of 4.9%, all of which has subsequently been paid.
Additional contingent consideration could be paid based on the
products adoption rate and revenues, and the purchase
agreement limits the total contingent consideration to
$85.0 million. As of December 31, 2007, no additional
contingent consideration has been paid. IntelliServ, located in
Provo, Utah, has developed a drill string telemetry network
embedded within drill pipe. The Company previously owned 50% of
IntelliServ and accounted for its investment under the
equity-method. Subsequent to acquiring a controlling interest,
the Companys consolidated financial statements include the
accounts of IntelliServ from the date of acquisition. Previously
recorded goodwill of $9.9 million, which is not deductible
for tax purposes, and intangible assets of $0.8 million
related to the Companys initial 50% investment have been
reclassified from Investment in Unconsolidated
Affiliate to Goodwill and Other
Intangible Assets, Net, respectively. The value of
intangible assets acquired was $13.9 million for patents,
which is being amortized over 14 years, and goodwill
recognized was approximately $5.7 million, which is not
deductible for tax purposes, related to the remaining 50%
interest purchase. The purchase price for the IntelliServ
acquisition has been allocated to the fair values of net assets
acquired. The step acquisition of IntelliServ is included in the
results of operations in the Other segment from the date of
acquisition.
On July 21, 2005, the Company acquired substantially all of
the assets of Corion Diamond Products, Ltd. (Corion), a coring
business headquartered in Edmonton, Alberta, Canada for
approximately $17.0 million in cash with up to an
additional $9.5 million payable upon achieving certain
performance benchmarks. As of December 31, 2007,
$3.0 million additional consideration has been paid and a
final payment of $6.5 million was paid in February 2008
based on certain performance benchmarks achieved by Corion in
2007. Corions flagship product is the Corion Express,
which allows an operator to drill and core without tripping the
pipe, providing substantial operational savings compared with
conventional coring techniques. Including the adjustments
mentioned above the Company recorded goodwill of
$15.1 million, which is deductible for tax purposes, and
intangible assets of $3.3 million for patents and customer
relationships, which are being amortized over 15 years and
20 years, respectively. The purchase price for the Corion
acquisition has been allocated to the fair values of net assets
acquired. Corions results of operations are included in
the ReedHycalog segment from the date of acquisition.
The acquisitions discussed above were accounted for using the
purchase method of accounting. The cost of business acquisitions
is allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition
using appraisals and management estimates. Managements
estimates of fair value are based upon assumptions believed to
be reasonable, but which are inherently uncertain. The results
of operations of all acquisitions are included in the
Consolidated Statements of Operations from their respective
dates of acquisition. See Note 13 for supplemental cash
flow information concerning acquisitions. Acquisitions discussed
above are not
60
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
material to the Company individually or in the aggregate for
each applicable year; therefore, pro forma information is not
presented.
In 2005, the Company received a payment of $2.5 million
related to a note receivable for the sale of Star Iron Works,
Inc. which the Company sold in 2003. The Company recognized a
gain of $1.6 million on the payment and recorded the gain
in Other Income (Expense), Net in the Companys
Consolidated Statements of Operations.
|
|
9.
|
Investment
in Unconsolidated Affiliate
|
The Companys 50.01% owned joint venture, VAT, is accounted
for under the equity-method of accounting due to the minority
owner having substantive participating rights. Under the limited
partnership operating agreement (1) the Company has no
rights to unilaterally take any action with respect to its
investment and (2) the day to day operations of VAT are
under the direction of a Management Board, whose members are
determined principally by the minority owner. The Management
Board is responsible for planning, production, sales and general
personal matters, which represent substantive participating
rights that overcome the presumption that the Company should
consolidate its 50.01% investment. The investment in VAT is
included in the Drilling Products and Services segment.
Summarized unaudited financial information for VAT is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current Assets
|
|
$
|
280,843
|
|
|
$
|
276,484
|
|
Other Assets
|
|
|
77,771
|
|
|
|
54,370
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358,614
|
|
|
$
|
330,854
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
$
|
89,959
|
|
|
$
|
64,602
|
|
Other Liabilities
|
|
|
34,341
|
|
|
|
28,283
|
|
Stockholders Equity
|
|
|
234,314
|
|
|
|
237,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358,614
|
|
|
$
|
330,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net Sales
|
|
$
|
755,983
|
|
|
$
|
721,880
|
|
|
$
|
537,865
|
|
Gross Profit
|
|
|
243,684
|
|
|
|
261,329
|
|
|
|
141,803
|
|
Net Income
|
|
|
248,597
|
|
|
|
250,753
|
|
|
|
127,101
|
|
Companys Equity Income
|
|
|
124,332
|
|
|
|
125,597
|
|
|
|
63,978
|
|
Dividends Received
|
|
|
144,611
|
|
|
|
87,719
|
|
|
|
12,041
|
|
The Companys equity in earnings differs from its
proportionate share of net income due to the elimination of
intercompany profit on VAT sales to the Company. At
December 31, 2007 and 2006, the Companys investment
in VAT differs from its equity in its net assets by
approximately $17.6 million and $16.4 million,
respectively, due to goodwill and timing differences. The
financial statements of VAT for its year ended March 31,
2008 are required by
Rule 3-09
of
Regulation S-X
and will be filed as an amendment to this
Form 10-K
no later than six months from VATs fiscal year end (March
31).
61
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2007, the Company entered into a new green tube
supply agreement (Supply Agreement) with VAT. The primary
changes in the Supply Agreement from the previous supply
agreement relate to pricing and purchasing requirements by the
Company. Under the Supply Agreement, pricing is market based
thus eliminating price adjustments through surcharges. For
purchasing requirements, there is no longer a penalty for
failure to meet minimum annual purchase quantities but instead
the Company is required to provide purchase commitments five
months prior to production by VAT (Production Notice).
Quantities cancelled under the Production Notice will be subject
to up to a 200 Euro/metric ton penalty should VAT not be able to
sell the quantities elsewhere at a minimum market-based profit
margin. Terms of the new agreement are effective August 1,
2007 through March 31, 2009.
Purchases of tubulars from VAT totaled $107.3 million,
$92.7 million and $70.0 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Trade
payables to VAT were $14.9 million and $18.2 million
at December 31, 2007 and 2006, respectively.
In September 2005, the Company acquired the remaining 50%
interest in IntelliServ. Prior to September 2005, IntelliServ
was accounted for under the equity-method of accounting.
IntelliServs equity loss for the year ended
December 31, 2005 was $5.7 million (see Note 7
for further discussion).
Short-Term
Debt
Singapore
Credit Facility
On May 28, 2007, the Companys Singapore divisions
entered into a $20.0 million unsecured credit facility with
Citibank, N.A. Singapore Branch (Singapore Credit Facility). The
Singapore Credit Facility is to be used locally for working
capital or general operating purposes and also provides
availability for stand-by letters of credit and bank guarantees
up to $5.0 million. The Singapore Credit Facility has no
expiration date but borrowings are repayable upon demand and may
not be outstanding for more than a twelve-month period. The
Singapore Credit Facility is guaranteed by the Company.
Amounts outstanding under the Singapore Credit Facility accrue
interest at the Citibank prime rate on the borrowing date plus
0.75% and any unused portion of the credit facility is not
subject to a commitment fee. There are no financial covenants
associated with the Singapore Credit Facility.
As of December 31, 2007, the Company had no outstanding
borrowings under the Singapore Credit Facility and
$0.5 million of letters of credit and bank guarantees had
been issued under the Singapore Credit Facility, resulting in
unused borrowing availability of $19.5 million. The Company
did not incur any significant costs related to this facility.
62
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Term
Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Credit Facility (7.4% at December 31, 2006)
|
|
$
|
|
|
|
$
|
34,600
|
|
6
1
/
8
% Senior
Notes due 2015
|
|
|
174,585
|
|
|
|
200,000
|
|
Capital Lease Obligations
|
|
|
747
|
|
|
|
1,311
|
|
Other
|
|
|
1,253
|
|
|
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,585
|
|
|
|
245,852
|
|
Less: Current Portion of Long-Term Debt
|
|
|
490
|
|
|
|
8,640
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
176,095
|
|
|
$
|
237,212
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of scheduled long-term debt
maturities by year (in thousands):
|
|
|
|
|
2008
|
|
$
|
490
|
|
2009
|
|
|
489
|
|
2010
|
|
|
359
|
|
2011
|
|
|
226
|
|
2012
|
|
|
242
|
|
Thereafter
|
|
|
174,779
|
|
|
|
|
|
|
|
|
$
|
176,585
|
|
|
|
|
|
|
Capital
Leases
In connection with the acquisition of IntelliServ in September
2005, the Company acquired fixed assets consisting primarily of
rental tools, machinery and equipment. A portion of these assets
were under capital leases which expire by 2010. The capital
lease obligation was recorded at fair market value as of the
acquisition date in the amount of $2.6 million. Minimum
lease payments are as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
355
|
|
2009
|
|
|
316
|
|
2010
|
|
|
152
|
|
|
|
|
|
|
Total Minimum Lease Payments
|
|
$
|
823
|
|
Less: Amounts Representing Interest
|
|
|
76
|
|
|
|
|
|
|
Present Value of Minimum Lease Payments
|
|
|
747
|
|
Less: Current Portion of Obligations Under Capital Lease
|
|
|
307
|
|
|
|
|
|
|
Long-Term Portion of Obligations Under Capital Lease
|
|
$
|
440
|
|
|
|
|
|
|
Credit
Facility
In August 2006, the Company replaced its existing credit
facility with an amended and restated five-year
$350 million revolving senior unsecured credit facility
(Credit Facility). Under the Credit Facility, the Company has
the option to increase aggregate U.S. borrowing
availability by an additional $150 million in increments of
$25 million, subject to syndication.
63
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with this Credit Facility, $2.7 million of
capitalized debt fees related to the previous credit facility
have been combined with $1.0 million of debt fees related
to the Credit Facility and will be amortized over the five-year
term of the Credit Facility. These capitalized debt fees are
being amortized as interest expense and are included in
Other Assets in the accompanying Consolidated
Balance Sheets. Unamortized capitalized debt fees of
$2.3 million related to the Companys previous credit
facility were written off in 2005 and are included in
Refinancing Charges in the accompanying Consolidated
Statements of Operations.
The U.S. portion of the Credit Facility is guaranteed by
the Company and its U.S. subsidiaries and the U.K. portion
of the Credit Facility is guaranteed by the Company and all of
its U.K. subsidiaries. The terms of the Credit Facility provided
for financial covenants that include maintenance at all times of
a maximum total debt to book capitalization ratio not to exceed
50%, and maintenance on a rolling four quarter basis of a
minimum interest coverage ratio (EBITDA/interest expense) of not
less than 2.50 to 1.00. The Credit Facility contains additional
covenants, including restrictions to incur new debt, repurchase
company stock, pay dividends, sell assets, grant liens and other
related items. At December 31, 2007 and 2006, the Company
was in compliance with the various covenants under the Credit
Facility.
Amounts outstanding under the U.S. portion of the Credit
Facility accrue interest, at the Companys option, at
either the base rate or Eurocurrency rate plus, in each case, an
applicable margin. The base rate is a fluctuating interest rate
based upon the higher of (a) the Wells Fargo prime rate or
(b) the Federal Funds rate plus 0.50%; the Eurocurrency
rate is a fluctuating interest rate based upon the British
Banking Association LIBOR. The applicable margin ranges from
0.00% to 0.375% for the base rate and from 0.30% to 1.375% for
the Eurocurrency rate, and the unused portion of the revolver is
subject to a commitment fee ranging from 0.065% to 0.30%. Each
of these ranges are based upon the Companys debt ratings.
Amounts outstanding under the U.K. portion accrue interest based
upon the base rate as determined by HSBC Bank, plus a margin
ranging from 0.00% to 0.375%. The Credit Facility also provides
the Company with availability for stand-by letters of credit and
bank guarantees.
As of December 31, 2007, the Company had no outstanding
borrowings under the Credit Facility and $5.5 million of
letters of credit and bank guarantees that were issued,
resulting in unused borrowing availability of
$344.5 million. As of December 31, 2006, the Company
had $34.6 million in outstanding borrowings under the
Credit Facility and $8.6 million of letters of credit and
bank guarantees that were issued, resulting in unused borrowing
availability of $306.8 million. The borrowings under the
Credit Facility is recorded as Long-Term Debt in the
accompanying Consolidated Balance Sheets as the Company has the
ability under the credit agreements and the intent to maintain
these obligations for longer than one year.
Additionally, at December 31, 2007 and 2006, the Company
had unsecured letters of credit of $1.6 million and
$3.5 million, respectively, that are not related to the
Credit Facility.
6
1
/
8
% Senior
Notes Due 2015
In 2005, the Company issued $200 million of
6
1
/
8
% Senior
Notes due 2015
(6
1
/
8
% Senior
Notes) at par. Net proceeds from the issuance of approximately
$196.4 million were used to finance the repurchase of the
Companys outstanding 9% Senior Notes due 2009 and to
repay a portion of the outstanding borrowings under the
Companys previous credit facility. Interest is payable
February 15 and August 15 of each year. The
6
1
/
8
% Senior
Notes are guaranteed by all of the Companys domestic
subsidiaries. After August 15, 2010, the Company may redeem
all or part of the
6
1
/
8
% Senior
Notes at the redemption prices set forth below (expressed as
percentages of principal amount), plus accrued interest, if any,
to the redemption date:
|
|
|
|
|
Year
|
|
Percentage
|
|
|
2010
|
|
|
103.063
|
%
|
2011
|
|
|
102.042
|
%
|
2012
|
|
|
101.021
|
%
|
2013 and thereafter
|
|
|
100.000
|
%
|
64
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The indenture governing the
6
1
/
8
% Senior
Notes contains various covenants including restrictions on
incurring new debt, repurchasing company stock, paying
dividends, selling assets, granting liens and other related
items. These restrictions include limiting the amount of
dividends and stock repurchases to a maximum amount determined
by a formula stipulated in the bond indenture. At
December 31, 2007 and 2006, the Company was in compliance
with the covenants under the
6
1
/
8
% Senior
Note agreement.
During the fourth quarter of 2007, the Company repurchased
$25.4 million of
6
1
/
8
% Senior
Notes. Total cash paid for the repurchase was
$26.1 million, of which $25.4 million related to the
principal amount of the
6
1
/
8
% Senior Notes
repurchased, $0.3 million related to a premium paid to
repurchase the notes and $0.4 million related to accrued
interest. The Company recorded total costs of approximately
$0.7 million, which included $0.3 million for premiums
paid and $0.4 million for the write-off of unamortized debt
costs related to the amounts repurchased, which are included in
Other Income (Expense), Net in the accompanying
Consolidated Statements of Operations.
Treasury
Rate Locks
In April 2005, the Company entered into two Treasury rate lock
agreements with an aggregate notional principal amount of
$150.0 million whereby the Company locked in
U.S. Treasury rates relating to an anticipated debt
securities issuance. These Treasury rate locks were initially
designated as cash-flow hedges of the forecasted semi-annual
interest payments associated with an anticipated debt issuance.
The Treasury rate locks matured and a loss of $5.2 million
was incurred, which is included in Refinancing
Charges in the accompanying Consolidated Statements of
Operations, as the Company changed the terms and type of debt
related to the anticipated offering.
|
|
11.
|
Goodwill
and Other Intangible Assets
|
The Company accounts for its goodwill and other intangible
assets under SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 provides for a
two-step transitional goodwill impairment test with respect to
existing goodwill. The Companys reporting units under
SFAS No. 142 are as follows: 1) Drilling Products
and Services, 2) ReedHycalog and 3) Other. In 2007,
the Company revised its reporting units due to the sale of
substantially all of the businesses within the Companys
former Tubular Technology and Services reporting unit. Any
remaining businesses previously reflected in the former Tubular
Technology and Services reporting unit are now reflected in the
Other reporting unit and prior periods have been revised. Also
included in the Other reporting unit is the allocation of
goodwill of $72.8 million to the businesses sold (see
Note 2 for further discussion). The goodwill was allocated
based on the relative fair values of the portion of the
reporting unit being disposed and the portion of the reporting
unit remaining.
The Company performs its annual test for potential goodwill
impairment as of October 1st of each year or when
events occur or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
amount. For 2007 and 2006, the Company completed its annual
assessment, which indicated no existence of impairment.
65
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying amount of goodwill by reporting unit was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
ReedHycalog
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
130,885
|
|
|
$
|
174,769
|
|
|
$
|
115,973
|
|
|
$
|
421,627
|
|
Acquisitions
|
|
|
201
|
|
|
|
100,996
|
|
|
|
20
|
|
|
|
101,217
|
|
Translation and Other Adjustments
|
|
|
1,117
|
|
|
|
163
|
|
|
|
(3,132
|
)
|
|
|
(1,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
132,203
|
|
|
|
275,928
|
|
|
|
112,861
|
|
|
|
520,992
|
|
Acquisitions
|
|
|
|
|
|
|
3,394
|
|
|
|
|
|
|
|
3,394
|
|
Discontinued Operations Allocation
|
|
|
|
|
|
|
|
|
|
|
(72,799
|
)
|
|
|
(72,799
|
)
|
Translation and Other Adjustments
|
|
|
1,055
|
|
|
|
4,826
|
|
|
|
1,290
|
|
|
|
7,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
133,258
|
|
|
$
|
284,148
|
|
|
$
|
41,352
|
|
|
$
|
458,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, ReedHycalog includes other adjustments of
$6.5 million that was accrued at December 31, 2007
related to the Companys acquisition of Corion where the
Company is obligated to pay additional consideration based upon
Corion achieving certain performance benchmarks,
$1.5 million related to a change in the Companys
estimate of the tax basis of assets at this segments
Andergauge division and ($4.3) million related to a change
in the Companys tax position related to the acquisition of
this segment. Under
EITF 93-7,
Uncertainties Related to Income Taxes in a Purchase
Business Combination, the change in the estimate of tax
basis of assets and the resolution of these tax uncertainties
are treated as adjustments of the goodwill originally recorded
in the acquisition. In 2006, the Other reporting unit includes a
goodwill adjustment totaling $3.1 million related to a
change in the Companys estimate of the tax basis of assets
at this segments IntelliServ division. These items are
reflected in Translation and Other Adjustments in their
respective years.
Intangible assets of $82.0 million and $89.8 million,
including accumulated amortization of $28.3 million and
$19.8 million, as of December 31, 2007 and 2006,
respectively, are recorded at cost and are amortized on a
straight-line basis over the years expected to be benefited,
ranging from 1.5 to 18 years. The Companys intangible
assets primarily consist of patents, customer relationships,
trademarks, covenants not to compete and technology licenses
that are amortized on a straight-line basis over the estimated
useful lives for the respective categories. The following table
shows the Companys intangible assets by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Intangibles
|
|
|
Amortization
|
|
|
Intangibles
|
|
|
Intangibles
|
|
|
Amortization
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
71,858
|
|
|
$
|
(19,622
|
)
|
|
$
|
52,236
|
|
|
$
|
71,843
|
|
|
$
|
(14,449
|
)
|
|
$
|
57,394
|
|
Customer Relationships
|
|
|
33,195
|
|
|
|
(4,533
|
)
|
|
|
28,662
|
|
|
|
32,410
|
|
|
|
(1,514
|
)
|
|
|
30,896
|
|
Trademarks
|
|
|
1,610
|
|
|
|
(1,456
|
)
|
|
|
154
|
|
|
|
1,610
|
|
|
|
(1,250
|
)
|
|
|
360
|
|
Covenants Not To Compete
|
|
|
2,285
|
|
|
|
(1,999
|
)
|
|
|
286
|
|
|
|
2,300
|
|
|
|
(1,890
|
)
|
|
|
410
|
|
Technology Licenses
|
|
|
1,308
|
|
|
|
(688
|
)
|
|
|
620
|
|
|
|
1,424
|
|
|
|
(657
|
)
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,256
|
|
|
$
|
(28,298
|
)
|
|
$
|
81,958
|
|
|
$
|
109,587
|
|
|
$
|
(19,760
|
)
|
|
$
|
89,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets for the years
ended December 31, 2007, 2006 and 2005 was
$9.0 million, $6.3 million, and $4.7 million,
respectively. Annual amortization expense related to existing
intangible assets for years 2008 through 2012 is expected to be
in the range of $8.2 million to $8.5 million.
66
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Derivative
Instruments
|
The Company enters into derivative financial instruments for the
purpose of hedging the risks of certain identifiable and
anticipated foreign currency transactions in the normal course
of business. In general, the types of risks hedged are those
related to the variability of future earnings and cash flows
caused by movements in foreign currency exchange rates. The
Company documents its risk management strategy and hedge
effectiveness at the inception of and during the term of each
hedge. The Company primarily utilizes forward exchange contracts
with maturities of less than 1 year.
The Companys policy is to hold derivatives only for the
purpose of hedging risks and not for speculative or trading
purposes where the objective is solely to generate profit.
Generally, the Company enters into hedging relationships such
that changes in the fair values or cash flows of items and
transactions being hedged are expected to be offset by
corresponding changes in the fair value of the derivatives. At
December 31, 2007, hedging relationships existed for
probable foreign-currency-denominated purchase commitments and
existing net foreign currency liability exposures.
Cash
Flow Hedges
The Company entered into several foreign currency forward
contracts designated as cash flow hedges for all or a portion of
anticipated inventory purchases through September 2008,
denominated in Euros, under our long-term supply contract with
VAT. Based on quoted market prices as of December 31, 2007
for contracts with similar terms and maturity dates, the Company
has recorded a net current asset of $0.4 million to adjust
these foreign currency forward contracts to their fair market
value. Net gains related to these contracts of
$0.5 million, net of tax, were deferred in Accumulated
Other Comprehensive Income (Loss), which the Company expects to
recognize in earnings over the next 12 months. For the year
ended December 31, 2007, the Company recognized
$0.6 million of gains related to these contracts in the
Consolidated Statements of Operations when the hedged item
affected earnings. There was no impact to the Companys
earnings related to ineffectiveness.
Other
Derivative Instruments
The Company entered into spot and forward contracts to hedge
against various foreign currency denominated liabilities,
including the Euro and the British Pound Sterling. These
derivative instruments were not designated as hedges and changes
in the fair value of these contracts are recognized through
earnings and the amounts generally offset foreign exchange gains
and losses included in Other Income (Expense), Net
in the Consolidated Statements of Operations. Based on quoted
market prices as of December 31, 2007 for contracts with
similar terms and maturity dates, the Company has a net current
asset of $0.2 million. For the year ended December 31,
2007, the Company recognized gains, in earnings, of
$1.3 million related to changes in the fair values of these
contracts.
|
|
13.
|
Supplemental
Cash Flow Information
|
Cash paid for interest and income taxes (net of refunds) was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Interest Paid
|
|
$
|
15,737
|
|
|
$
|
15,772
|
|
|
$
|
24,417
|
|
Income Taxes Paid, Net of Refunds
|
|
|
183,599
|
|
|
|
162,934
|
|
|
|
40,515
|
|
67
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes investing activities relating to
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Fair Value of Assets, Net of Cash Acquired
|
|
$
|
|
|
|
$
|
74,723
|
|
|
$
|
20,569
|
|
Goodwill
|
|
|
3,394
|
|
|
|
101,217
|
|
|
|
26,731
|
|
Fair Value of Liabilities Assumed
|
|
|
|
|
|
|
(63,942
|
)
|
|
|
(16,263
|
)
|
Minority Interests Acquired
|
|
|
|
|
|
|
|
|
|
|
8,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Consideration, Net of Cash Acquired
|
|
$
|
3,394
|
|
|
$
|
111,998
|
|
|
$
|
39,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, there were no significant non-cash transactions while
in 2006, the Company had remaining consideration due to the
selling shareholders of Andergauge in the amount of
$4.9 million and in 2005, the Company entered into a
$6.8 million non-interest bearing note in connection with
the remaining 50% interest purchase of IntelliServ (see
Note 7 for further discussion).
Stock
Repurchase Program
In 2006, the Companys Board of Directors approved a stock
repurchase program that authorizes the repurchase of up to
$350 million of the Companys Common Stock. In 2007,
the Board of Directors approved an additional increase in its
stock repurchase program by $300 million (to
$650 million from $350 million). The Company may
repurchase its shares in the open market based on, among other
things, its ongoing capital requirements and expected cash
flows, the market price and availability of its stock,
regulatory and other restraints and general market conditions.
The repurchase program does not have an established expiration
date.
At December 31, 2007, the Company had repurchased
5.2 million shares at a total cost of $244.3 million
and such shares are reflected in the accompanying Consolidated
Balance Sheets as Treasury Stock.
The Company sponsors two defined benefit pension plans related
to our ReedHycalog segment that were assumed as part of the
Companys acquisition of ReedHycalog in 2002.
On December 31, 2006, the Company adopted the recognition
and disclosure provisions of SFAS No. 158.
SFAS No. 158 requires companies to recognize the
funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its
pension plans in its balance sheet, with a corresponding
adjustment to accumulated other comprehensive income/loss, net
of tax. The adjustment to accumulated other comprehensive
income/loss at adoption represents the reclassification of
unrecognized actuarial gains/losses and unrecognized prior
service costs, all of which were previously netted against the
plans liabilities. The amounts related to the pensions in
accumulated other comprehensive income/loss will subsequently be
recognized as net periodic pension costs pursuant to the
Companys historical accounting policy for amortizing such
amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic
pension costs in the same periods will be recognized as a
component of other comprehensive income/loss. Those amounts will
be subsequently recognized as a component of net periodic
pension costs on the same basis as the amounts recognized in
accumulated other comprehensive income/loss at adoption of
SFAS No. 158.
The incremental effects of adopting the provisions of
SFAS No. 158 on the Companys Consolidated
Balance Sheet at December 31, 2006 are presented in the
following table. The adoption of SFAS No. 158 had no
effect on the Companys Consolidated Statement of
Operations for the year ended December 31, 2006, or for any
period prior to adoption, and it will not affect the
Companys operating results in future periods.
Additionally, due to the status of
68
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Companys plans, the actual benefit obligations equals
the projected benefit obligations; therefore, there was no
adjustment to the funded status of the Companys plans as a
result of adopting the provisions of SFAS No. 158.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
|
|
|
Effect of
|
|
|
As Reported
|
|
|
|
Adopting
|
|
|
Adopting
|
|
|
at
|
|
|
|
SFAS No. 158
|
|
|
SFAS No. 158
|
|
|
December 31, 2006
|
|
|
|
(In thousands)
|
|
|
Other Intangible Assets, Net
|
|
$
|
90,026
|
|
|
$
|
(199
|
)
|
|
$
|
89,827
|
|
Other Assets
|
|
|
22,054
|
|
|
|
796
|
|
|
|
22,850
|
|
Accrued Payroll and Benefits
|
|
|
78,639
|
|
|
|
(3,687
|
)
|
|
|
74,952
|
|
Deferred Tax Liabilities
|
|
|
66,810
|
|
|
|
1,500
|
|
|
|
68,310
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
(3,745
|
)
|
|
|
2,785
|
|
|
|
(960
|
)
|
Included in Accumulated Other Comprehensive Income (Loss) at
December 31, 2007 and 2006 are the following amounts that
have not yet been recognized in net periodic pension cost:
unrecognized net actuarial gains of $2.1 million
($1.4 million net of tax) and $3.6 million
($2.4 million net of tax), respectively. Also included in
Accumulated Other Comprehensive Income (Loss) at
December 31, 2006 are unrecognized prior service costs of
$0.3 million ($0.2 million net of tax); there were no
amounts included in Accumulated Other Comprehensive Income
(Loss) at December 31, 2007. The net actuarial gains
included in Accumulated Other Comprehensive Income (Loss)
expected to be recognized in net periodic pension costs during
the fiscal year-ended December 31, 2008 are
$0.1 million ($0.0 million net of tax). No plan assets
are expected to be returned to the Company during the fiscal
year-ended December 31, 2008.
U.S.
Pension Plan
As part of the purchase of ReedHycalog in 2002, Grant Prideco
acquired the Reed Hourly Pension Plan (the U.S. Plan). The
U.S. Plan covers approximately 114 employees, which
includes only union employees at our ReedHycalog Navigation
manufacturing facility in Houston, Texas, and provides a defined
benefit based on a fixed dollar amount per year of service. The
contract related to the U.S. Plan is facility specific and
due to the closure and relocation of the Navigation
manufacturing facility at the end of 2007, the U.S. Plan
was frozen as of December 31, 2007, as to both
participation and accruals, and no further benefits accrue to
the participants beyond this date.
69
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Obligations
and Funded Status
The following table reflects information concerning the change
in benefit obligation, change in plan assets and reconciliation
of funded status. The Companys benefits are presented and
computed as of and for the twelve-month period ended on the
December 31 measurement date.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
15,948
|
|
|
$
|
15,718
|
|
Service cost
|
|
|
381
|
|
|
|
408
|
|
Interest cost
|
|
|
991
|
|
|
|
844
|
|
Benefits paid
|
|
|
(906
|
)
|
|
|
(654
|
)
|
Actuarial (gain) loss
|
|
|
1,332
|
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
17,746
|
|
|
$
|
15,948
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
15,075
|
|
|
$
|
10,464
|
|
Actual return on plan assets
|
|
|
1,075
|
|
|
|
1,377
|
|
Employer contributions
|
|
|
1,000
|
|
|
|
3,986
|
|
Benefits paid
|
|
|
(906
|
)
|
|
|
(654
|
)
|
Administrative expenses
|
|
|
(98
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
16,146
|
|
|
$
|
15,075
|
|
|
|
|
|
|
|
|
|
|
Funded Status at End of Year
|
|
$
|
(1,600
|
)
|
|
$
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
|
|
$
|
(1,600
|
)
|
|
$
|
(873
|
)
|
Amounts Recognized in Accumulated Other Comprehensive Income
(Loss):
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,231
|
|
|
$
|
897
|
|
Prior sevice cost
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,231
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
The following table provides information related to the
accumulated benefit obligation in excess of the U.S. Plan
assets:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Projected Benefit Obligation
|
|
$
|
17,746
|
|
|
$
|
15,948
|
|
Accumulated Benefit Obligation
|
|
|
17,746
|
|
|
|
15,948
|
|
Fair Value of Plan Assets
|
|
|
16,146
|
|
|
|
15,075
|
|
70
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of Net Periodic Cost and Other Amounts
Recognized in Other Comprehensive Income (Loss):
Net Periodic Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Service Cost
|
|
$
|
381
|
|
|
$
|
408
|
|
|
$
|
382
|
|
Interest Cost
|
|
|
991
|
|
|
|
844
|
|
|
|
841
|
|
Expected Return on Plan Assets
|
|
|
(1,141
|
)
|
|
|
(895
|
)
|
|
|
(595
|
)
|
Amortization of Prior Service Cost
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
Amortization of Net Loss
|
|
|
65
|
|
|
|
25
|
|
|
|
11
|
|
Administration Expenses
|
|
|
98
|
|
|
|
60
|
|
|
|
108
|
|
Curtailment Loss Recognized
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Cost
|
|
$
|
592
|
|
|
$
|
465
|
|
|
$
|
747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized
in Other Comprehensive Income (Loss)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net (Gain) Loss
|
|
$
|
1,398
|
|
|
$
|
(812
|
)
|
|
$
|
1,741
|
|
Amortization of Net Loss
|
|
|
(65
|
)
|
|
|
(25
|
)
|
|
|
(11
|
)
|
Prior Service Cost
|
|
|
(199
|
)
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Other Comprehensive Income (Loss)
|
|
$
|
1,134
|
|
|
$
|
(638
|
)
|
|
$
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Net Periodic Cost and Other Comprehensive
Income (Loss)
|
|
$
|
1,726
|
|
|
$
|
(173
|
)
|
|
$
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
Assumptions used to determine net benefit obligations for the
fiscal year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
Assumptions used to determine net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
5.78
|
%
|
Expected return on plan assets
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
6.58
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
71
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
To develop the expected return on plan assets assumption, Grant
Prideco considered the current level of expected returns on
various asset classes. The expected return for each asset class
was then weighted based on the target asset allocation to
develop the expected return on plan assets assumption for the
portfolio. There is not an assumption for the rate of
compensation increase as the U.S. Plans benefit
formula is not related to compensation.
Asset
Categories
The following table provides the target and actual asset
allocations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
December 31,
|
|
Asset Category
|
|
Target
|
|
|
2007
|
|
|
2006
|
|
|
Equity Securities
|
|
|
50
|
%
|
|
|
58
|
%
|
|
|
58
|
%
|
Fixed Income
|
|
|
40
|
%
|
|
|
42
|
%
|
|
|
42
|
%
|
Other
|
|
|
10
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary investment objective is to ensure, over the
long-term life of the pension plans, an adequate pool of
sufficiently liquid assets to support the benefit obligations to
participants, retirees and beneficiaries. In meeting this
objective, the pension plan seeks to achieve a high level of
investment return consistent with a prudent level of portfolio
risk. Investment objectives are long-term in nature covering
typical market cycles of three to five years. Any shortfall of
investment performance compared to investment objectives should
be explainable in terms of general economic and capital market
conditions.
Cash
Flow
The Company has no minimum funding requirements for the
U.S. Plan in 2008.
The following table provides the expected benefit payments for
the next ten years:
|
|
|
|
|
Fiscal Year Ending
|
|
Payments
|
|
|
2008
|
|
$
|
958
|
|
2009
|
|
|
937
|
|
2010
|
|
|
963
|
|
2011
|
|
|
1,030
|
|
2012
|
|
|
1,097
|
|
Next 5 years
|
|
|
5,370
|
|
|
|
|
|
|
Total
|
|
$
|
10,355
|
|
|
|
|
|
|
Non-U.S.
Pension Plan
As part of the purchase of ReedHycalog in 2002, Grant Prideco
acquired the Hycalog Retirement and Death Benefit Scheme (the
Scheme). The Scheme covers approximately 135 employees and
provides pensions on a defined benefits basis. The Scheme was
frozen when acquired with no future benefits accruing.
72
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Obligations
and Funded Status
The following table reflects information concerning the change
in benefit obligation, change in plan assets and reconciliation
of funded status. The Companys benefits are presented and
computed as of and for the twelve-month period ended on the
December 31 measurement date.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
22,545
|
|
|
$
|
21,686
|
|
Service cost
|
|
|
|
|
|
|
17
|
|
Interest cost
|
|
|
1,080
|
|
|
|
940
|
|
Benefits paid
|
|
|
(337
|
)
|
|
|
(1,214
|
)
|
Actuarial gain
|
|
|
(355
|
)
|
|
|
(1,392
|
)
|
Exchange rate changes
|
|
|
213
|
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
23,146
|
|
|
$
|
22,545
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
23,340
|
|
|
$
|
21,388
|
|
Actual return on plan assets
|
|
|
764
|
|
|
|
(216
|
)
|
Employer contributions
|
|
|
2,656
|
|
|
|
838
|
|
Benefits paid
|
|
|
(337
|
)
|
|
|
(1,214
|
)
|
Exchange rate changes
|
|
|
143
|
|
|
|
2,545
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
26,566
|
|
|
$
|
23,341
|
|
|
|
|
|
|
|
|
|
|
Funded Status at End of Year
|
|
$
|
3,420
|
|
|
$
|
796
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Other Assets
|
|
$
|
3,420
|
|
|
$
|
796
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
(Loss):
|
|
|
|
|
|
|
|
|
Net gain
|
|
$
|
(4,336
|
)
|
|
$
|
(4,535
|
)
|
Prior sevice cost
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,336
|
)
|
|
$
|
(4,483
|
)
|
|
|
|
|
|
|
|
|
|
The following table provides information related to the
accumulated benefit obligation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accumulated Benefit Obligation
|
|
$
|
23,146
|
|
|
$
|
22,545
|
|
73
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of Net Periodic Benefit and Other Amounts
Recognized in Other Comprehensive Income (Loss):
Net Periodic Benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Service Cost
|
|
$
|
|
|
|
$
|
16
|
|
|
$
|
|
|
Interest Cost
|
|
|
1,081
|
|
|
|
941
|
|
|
|
917
|
|
Expected Return on Plan Assets
|
|
|
(1,211
|
)
|
|
|
(924
|
)
|
|
|
(939
|
)
|
Amortization of Prior Service Cost
|
|
|
53
|
|
|
|
118
|
|
|
|
235
|
|
Amortization of Net Actuarial Gain
|
|
|
(159
|
)
|
|
|
(151
|
)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit
|
|
$
|
(236
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized
in Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net Loss (Gain)
|
|
$
|
40
|
|
|
$
|
(4,535
|
)
|
Amortization of Net Actuarial Gain
|
|
|
159
|
|
|
|
|
|
Prior Service Cost
|
|
|
|
|
|
|
52
|
|
Amortization of Prior Sevice Cost
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Other Comprehensive Income (Loss)
|
|
$
|
147
|
|
|
$
|
(4,483
|
)
|
|
|
|
|
|
|
|
|
|
Total Recognized in Net Periodic Benefit and Other
Comprehensive Income (Loss)
|
|
$
|
(89
|
)
|
|
$
|
(4,483
|
)
|
|
|
|
|
|
|
|
|
|
There were no amounts recognized in other comprehensive income
(loss) related to the Scheme for 2005.
Additional
Information
The Company is currently in discussions with the Trustees of the
Scheme related to a dispute over the proper service accrual
date. The accruals currently on the books reflect the
Companys position as to what the Company believes is the
proper service accrual date and the most likely result if such
dispute were litigated. If a different service accrual date was
ultimately agreed upon or determined, the Company estimates the
potential exposure for additional accruals under the Scheme to
be up to $1.2 million.
Assumptions
Assumptions used to determine net benefit obligations for the
fiscal year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
4.80
|
%
|
|
|
4.65
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
Assumptions used to determine net periodic benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
4.65
|
%
|
|
|
4.25
|
%
|
|
|
4.75
|
%
|
Expected return on plan assets
|
|
|
4.65
|
%
|
|
|
4.25
|
%
|
|
|
4.75
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
74
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This Schemes assets are presently invested wholly in U.K.
Government Bonds, therefore the expected return on plan assets
was derived from the expected yield on those bonds. There is not
an assumption for the rate of compensation increase as the
Scheme was frozen in connection with the 2002 acquisition of
ReedHycalog.
Asset
Categories
The following table provides the target and actual asset
allocations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
December 31,
|
|
Asset Category
|
|
Target
|
|
|
2007
|
|
|
2006
|
|
|
Equity Securities
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Fixed Income
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Other
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow
The Company has no minimum funding requirements for the Scheme
in 2008.
The following table provides the expected benefit payments for
the next ten years:
|
|
|
|
|
Fiscal Year Ending
|
|
Payments
|
|
|
2008
|
|
$
|
280
|
|
2009
|
|
|
302
|
|
2010
|
|
|
319
|
|
2011
|
|
|
339
|
|
2012
|
|
|
357
|
|
Next 5 years
|
|
|
2,976
|
|
|
|
|
|
|
Total
|
|
$
|
4,573
|
|
|
|
|
|
|
|
|
16.
|
Other
Retirement and Employee Benefit Plans
|
Executive
Deferred Compensation Plan
The Company has Executive Deferred Compensation Stock Ownership
Plans (EDC Plans) in which certain Grant Prideco employees and
directors participate. Under the EDC Plans, a portion of the
compensation for certain key employees of the Company, including
directors, can be deferred for payment after retirement or
termination of employment. A separate trust (EDC Trust) has been
established by Grant Prideco to fund the benefits of certain EDC
Plans. The funds provided to the EDC Trust are invested in
Common Stock through open market purchases by a trustee
independent of the Company. The assets of the EDC Trust are
available to satisfy the claims of all general creditors of
Grant Prideco in the event of a bankruptcy or insolvency.
Settlements under the EDC Plans will be in Common Stock.
Accordingly, the Common Stock held by the EDC Trust is included
in Stockholders Equity as Treasury Stock, at
Cost. The compensation expense related to the EDC Plans
was $2.5 million, $2.4 million and $2.3 million
in 2007, 2006 and 2005, respectively.
In connection with the spin off of Grant Prideco from
Weatherford in April 2000, a portion of the deferred
compensation liability recorded by Weatherford was allocated to
Grant Prideco under the terms of the Weatherford Executive
Deferred Compensation Plans (Weatherford EDC Plans). As of
December 31, 2007, the remaining
75
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligation was $1.2 million and 135,558 shares.
Settlements under the Weatherford EDC Plans will be in
Weatherford common stock and the Companys Common Stock.
Non-Qualified
Deferred Compensation Plans
The Company maintains a non-qualified deferred compensation plan
(the NQDC Plan). The NQDC Plan is available to a select group of
management and highly-compensated employees of the Company. The
NQDC Plan allows participants to defer all or a portion of their
annual salaries and bonuses, as applicable, and permits the
Company to make discretionary contributions to the NQDC Plan. A
separate trust (NQDC Trust) was established by the Company to
hold the assets of the NQDC Plan and in the event of insolvency
or bankruptcy, NQDC Trust assets are available to satisfy the
claims of all general creditors of the Company. Participants
have the ability to direct the plan administrator to invest the
assets in their accounts, including any discretionary
contributions by the Company, in pre-approved mutual funds held
by the NQDC Trust. No shares of the Companys stock are
held by the NQDC Trust. Accordingly, the accompanying
Consolidated Balance Sheets reflect the aggregate participant
balances as both an asset and a liability of the Company. As of
December 31, 2007 and 2006, $6.5 million and
$4.8 million, respectively, are included in Other
Assets with a corresponding amount recorded in Other
Long-Term
Liabilities. During the years ended December 31,
2007, 2006 and 2005, Company contributions to the NQDC Plan
totaled $0.3 million, $0.2 million and
$0.3 million, respectively.
Defined
Contribution Plans
The Company has defined contribution plans covering certain of
its employees. The Companys expenses related to these
plans totaled $4.5 million, $4.1 million and
$3.5 million in 2007, 2006 and 2005, respectively.
The domestic and foreign components of income before income
taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
309,230
|
|
|
$
|
210,550
|
|
|
$
|
8,287
|
|
Foreign
|
|
|
379,988
|
|
|
|
365,947
|
|
|
|
204,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Before Income Taxes
|
|
$
|
689,218
|
|
|
$
|
576,497
|
|
|
$
|
213,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the (provision) benefit for income taxes are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state income taxes
|
|
$
|
(109,430
|
)
|
|
$
|
(60,956
|
)
|
|
$
|
(31,069
|
)
|
Foreign
|
|
|
(87,968
|
)
|
|
|
(93,164
|
)
|
|
|
(47,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197,398
|
)
|
|
|
(154,120
|
)
|
|
|
(78,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state income taxes
|
|
|
(929
|
)
|
|
|
(12,849
|
)
|
|
|
18,444
|
|
Foreign
|
|
|
(2,761
|
)
|
|
|
4,939
|
|
|
|
(3,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,690
|
)
|
|
|
(7,910
|
)
|
|
|
14,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Provision(a)
|
|
$
|
(201,088
|
)
|
|
$
|
(162,030
|
)
|
|
$
|
(63,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a)
|
|
Excludes discontinued operation amounts of $18.2 million,
$31.5 million and $24.1 million of current taxes for
the years ended December 31, 2007, 2006 and 2005,
respectively, and also excludes $1.3 million,
$1.7 million and $1.8 million of deferred taxes for
the years ended December 31, 2007, 2006 and 2005,
respectively (see Note 2 for further discussion).
|
The following is a reconciliation of income taxes at the
U.S. federal income tax rate of 35% to the effective
provision for income taxes reflected in the Consolidated
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Provision for Income Taxes at Statutory Rates
|
|
$
|
(241,226
|
)
|
|
$
|
(201,774
|
)
|
|
$
|
(74,640
|
)
|
Effect of Foreign Income Tax, Net
|
|
|
31,646
|
|
|
|
22,650
|
|
|
|
8,208
|
|
Change in Valuation Allowance
|
|
|
|
|
|
|
14,749
|
|
|
|
1,726
|
|
Increased Research Expenditures Credit
|
|
|
828
|
|
|
|
4,578
|
|
|
|
|
|
Preferred Supplier Credit
|
|
|
|
|
|
|
|
|
|
|
1,421
|
|
Extraterritorial Income and Manufacturing Deduction Benefit
|
|
|
5,635
|
|
|
|
4,200
|
|
|
|
1,157
|
|
Amortization of Restricted Stock Award
|
|
|
3,730
|
|
|
|
(3,887
|
)
|
|
|
(423
|
)
|
State and Local Income Taxes, Net of U.S. Federal Income Tax
Benefit
|
|
|
(2,426
|
)
|
|
|
(2,355
|
)
|
|
|
|
|
Tax Exempt Interest
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
Other Permanent Items
|
|
|
(485
|
)
|
|
|
(191
|
)
|
|
|
(1,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
$
|
(201,088
|
)
|
|
$
|
(162,030
|
)
|
|
$
|
(63,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recognized for the
estimated future tax effects of temporary differences between
the tax basis of an asset or liability and its reported amount
in the financial statements. The measurement of deferred tax
assets and liabilities is based on enacted tax laws and rates
currently in effect in each of the jurisdictions in which the
Company has operations. Additionally, applicable
U.S. income and foreign withholding taxes have been
provided on certain undistributed earnings of the Companys
international subsidiaries that are not intended to be
reinvested indefinitely outside of the U.S.
Deferred tax assets and liabilities are classified as current or
non-current according to the classification of the related asset
or liability for financial reporting.
77
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the net deferred tax assets (liabilities) and
the related valuation allowances were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Foreign tax credits
|
|
$
|
|
|
|
$
|
7,604
|
|
Domestic and foreign operating losses
|
|
|
963
|
|
|
|
3,034
|
|
Accrued liabilities and reserves
|
|
|
18,693
|
|
|
|
14,409
|
|
Inventory basis differences
|
|
|
5,945
|
|
|
|
24,347
|
|
Investments in unconsolidated subs
|
|
|
4,997
|
|
|
|
5,734
|
|
Tax on non-repatriated foreign income
|
|
|
13,315
|
|
|
|
3,209
|
|
Other
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
|
44,010
|
|
|
|
58,337
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
(30,740
|
)
|
|
|
(33,855
|
)
|
Property and equipment and other
|
|
|
(34,770
|
)
|
|
|
(25,048
|
)
|
Foreign taxes
|
|
|
(11,882
|
)
|
|
|
(18,243
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
|
(77,392
|
)
|
|
|
(77,146
|
)
|
|
|
|
|
|
|
|
|
|
Valuation Allowance:
|
|
|
|
|
|
|
|
|
Foreign net operating loss
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total valuation allowance
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$
|
(33,987
|
)
|
|
$
|
(18,809
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, the Company had foreign
net operating losses carryforwards net of valuation allowance
for tax purposes of approximately $1.3 million and
$9.8 million, respectively. At December 31, 2006,
the Company had foreign tax credit carryforward, net of
allowance, of $7.6 million which was utilized in 2007. At
December 31, 2006 the Company released all its valuation
allowance related to Foreign Tax Credits. During 2006, the
Company utilized a United States alternative minimum tax credit
of $0.7 million. The Company has not recorded a deferred
income tax liability that would result from the distribution of
earnings from certain foreign subsidiaries if those earnings
were actually repatriated. The Company intends to indefinitely
reinvest certain undistributed earnings of foreign subsidiaries
located in Italy, Canada, China, Mauritius, Mexico, Singapore,
Netherlands, Norway and Venezuela. In the event that the
balances of such earnings were to be distributed, a
one-time
tax
charge to the Companys consolidated results of operations
of approximately $67.7 million and $39.6 million could
occur for 2007 and 2006, respectively. At December 31, 2007
and 2006, the total amount of foreign earnings indefinitely
reinvested is approximately $279.2 million and
$165.4 million, respectively.
Certain subsidiaries operating in China and Singapore qualify
for a tax holiday. The tax holiday resulted in a
$19.1 million reduction in tax expense in 2007 or
approximately $0.15 per share and $14.7 million in 2006 or
$0.11 per share. The reductions expire in 2008 through 2014.
During 2007 and 2006, certain foreign countries in which the
Company has operations reduced their statutory tax rates. The
effect on the deferred tax balance was approximately
$1.9 million and $0.1 million, respectively.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109, Accounting for
Income Taxes (FIN 48). The Interpretation
78
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may
recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties on income taxes and
accounting in interim periods and requires increased disclosures.
The Company adopted the provisions of FIN 48 effective
January 1, 2007. On adoption, the Company recognized a
$1.1 million increase in the liability for unrecognized tax
benefits. This increase in the liability resulted in a decrease
to the January 1, 2007 balance of retained earnings of
$0.9 million and an increase in goodwill of
$0.2 million. As of January 1 and December 31, 2007,
the Company had unrecognized tax benefits in the amount of
$12.7 million and $9.1 million respectively, and if
recognized, $12.4 million and $8.9 million would
reduce our income tax expense and effective tax rate. A
reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
12,657
|
|
Additions based on tax positions related to the current year
|
|
|
281
|
|
Additions for tax positions of prior year
|
|
|
311
|
|
Reductions for tax positions of prior year
|
|
|
(2,326
|
)
|
Settlements
|
|
|
(1,800
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
9,123
|
|
|
|
|
|
|
The Company recognizes interest expense as well as potential
penalties related to unrecognized income tax matters in income
tax expense in the Consolidated Statements of Operations. As of
January 1, 2007 and December 31, 2007, the balance of
accrued interest and penalties related to uncertain tax
positions are $0.8 million and $1.3 million,
respectively. The Company incurred approximately
$0.5 million and $0.7 million of interest and
penalties expense at December 31, 2007 and 2006,
respectively.
The Companys U.S. subsidiaries join in the filing of
a U.S. federal consolidated income tax return. Major
jurisdictions including the U.S., Canada, China and the United
Kingdom have statutes of limitations generally ranging from 3 to
6 years. The Companys Canadian subsidiary is
currently under audit by the Canadian Revenue Agency and no
significant adjustments have been proposed.
It is expected that the amount of unrecognized tax benefits will
change in the next 12 months; however, the Company does not
expect the change to have a significant impact on the financial
statements of the Company.
The Company records its tax-assessed revenue transactions on a
net basis in its Consolidated Statements of Operations.
|
|
18.
|
Disputes,
Litigation and Contingencies
|
Litigation
and Other Disputes
The Company is aware of various disputes and potential claims
and is a party in various litigation involving claims against
the Company. The Company maintains insurance coverage against
such claims to the extent deemed prudent by Management. The
Company records accruals for the uninsured portion of losses
related to these types of claims. The accruals for losses are
calculated by using the Companys best estimate of its
portion of future costs to be incurred. Based on facts currently
known, the Company believes that the ultimate liability, if any,
which may result from known claims, disputes, and pending
litigation would not have a material adverse effect on the
Companys results of operations, stockholders equity,
cash flows or financial condition with or without consideration
of insurance coverage.
79
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of the date of this Annual Report on
Form 10-K,
the Company is aware of five shareholder lawsuits that have been
filed in connection with the proposed merger between the Company
and National Oilwell Varco. These lawsuits, each of which has
been filed in the District Court of Harris County, Texas,
against the Company, its board of directors and, in one case,
National Oilwell Varco, are as follows:
Mark Bornstein, On
Behalf of Himself and All Others Similarly Situated vs. Grant
Prideco, Inc., et al.
, Cause
No. 2007-76092,
In the District Court of Harris County, Texas, 269th Judicial
District;
Catholic Medical Mission Board, On Behalf of Itself
and All Others Similarly Situated vs. Grant Prideco, Inc., et
al.
, Cause
No. 2007-76418,
In the District Court of Harris County, Texas, 55th Judicial
District;
Thomas Gray, On Behalf of Himself and All Others
Similarly Situated vs. Grant Prideco, Inc., et al.
, Cause
No. 2007-76419,
In the District Court of Harris County, Texas, 133rd Judicial
District;
Roslyn Feder, On Behalf of Herself and All Others
Similarly Situated vs. Grant Prideco, Inc., et al.
, In the
District Court of Harris County, Texas, 61st Judicial District;
and
Kenneth Engberg, On Behalf of Himself and All Others
Similarly Situated vs. Grant Prideco, Inc., et al.
, Cause
No. 2008-02244,
In the District Court of Harris County, Texas, 281st Judicial
District.
Each of the plaintiffs in these five lawsuits alleges that they
are stockholders of the Company and each of these five lawsuits
is brought as putative class action. Each of these lawsuits
alleges that the proposed merger consideration is inadequate and
that the Company and its individual directors breached fiduciary
duties owed to the stockholders of the Company in connection
with the proposed merger. Additionally, in the
Bornstein
suit, plaintiff alleges that National Oilwell Varco aided and
abetted the alleged breach of fiduciary duty by the Company and
its board of directors. The plaintiffs in each of these actions
seek certification of their lawsuits as class actions, seek to
enjoin the proposed merger and also ask for other legal and
equitable relief, including an award of attorneys fees and
costs of court. On January 17, 2008, the Company filed a
motion requesting that all of these shareholder actions be
consolidated with the
Bornstein
case in the 269th
Judicial District Court of Harris County, Texas. The Court has
not yet ruled on this motion to consolidate.
This litigation is in its very early stages; however, National
Oilwell Varco and the Company believe that each of these five
lawsuits is without merit and intend to defend them.
Insurance
The Company is predominantly self-insured through an insurance
policy for employee health insurance claims and is self-insured
for workers compensation claims for certain of its
employees. The amounts in excess of the self-insured levels are
fully insured. Self-insurance accruals are based on claims filed
and an estimate for significant claims incurred but not
reported. Although the Company believes that adequate reserves
have been provided for expected liabilities arising from its
self-insured obligations, it is reasonably possible that
managements estimates of these liabilities could change
over the near term as circumstances develop.
Operating
Leases
The Company is committed under various operating leases, which
primarily relate to office space and equipment. Total lease
expense incurred under operating leases was approximately
$12.5 million, $12.8 million and $10.9 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
80
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum rental commitments under non-cancellable
operating leases are as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
10,284
|
|
2009
|
|
|
6,663
|
|
2010
|
|
|
5,629
|
|
2011
|
|
|
3,987
|
|
2012
|
|
|
3,376
|
|
Thereafter
|
|
|
19,970
|
|
|
|
|
|
|
|
|
$
|
49,909
|
|
|
|
|
|
|
Other
Commitments
In addition to the VAT purchase commitment discussed in
Note 9, the Company is also party to a
30-year
supply contract with Tubos de Acero de Mexico, S.A. (TAMSA).
Under the supply contract, TAMSA has been given the right to
supply tubulars for the Companys drill pipe operations
located in Mexico as long as the prices are on a competitive
basis. This supply agreement does not obligate the Company to
make purchases from TAMSA for any location other than Mexico.
The supply agreement also does not restrict the Companys
ability to utilize tubulars manufactured by its affiliates,
including VAT.
The Companys ReedHycalog segment sells drill bits
worldwide to oil and gas operators, including
Newfield Exploration Company (Newfield). In addition,
certain divisions in the Companys Discontinued Operations
(Atlas Bradford Premium Connections and Tube-Alloy Accessories)
also sell accessories directly to Newfield. Two of the
Companys directors, Mr. Trice and Mr. Hendrix,
are directors of Newfield and Mr. Trice is Newfields
Chairman, President and Chief Executive Officer. During 2007,
2006 and 2005, Newfield purchased approximately
$3.6 million, $2.9 million and $2.3 million,
respectively, of products from the Company. The Company believes
that the prices it charges to Newfield are on terms comparable
to those that would be available to other third parties.
Additionally, the Company also sells products and services to
Weatherford. Two of our Board members also serve on the Board of
Weatherford. During 2007, 2006 and 2005 Weatherford purchased
approximately $100.2 million, $42.0 million and
$38.9 million, respectively, of products from the Company.
The Company believes that the prices it charges to Weatherford
are on terms comparable to those that would be available to
other third parties.
Business
Segments
The Company operates through three primary business segments:
Drilling Products and Services, ReedHycalog and Other. The
Companys products are used in the exploration and
production of oil and natural gas. Segment information below has
been prepared in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related
Information. The accounting policies of the segments are
the same as those described in the Summary of Significant
Accounting Policies, except that income tax (provision)
benefit is allocated to the segments by an application of the
Company-wide effective rate to the net income (loss) of each
segment. Intersegment revenues, which have been eliminated at
the segment level, are recorded at cost plus an agreed upon
intercompany profit.
In October 2007, the Company entered into an agreement to sell
three of the divisions within the Companys Tubular
Technology and Services segment (see Note 2 for further
discussion). In addition to the divisions being
81
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sold, certain other divisions within the Companys Tubular
Technology and Services segment (located in Canada and
Venezuela) have either been sold, are planned to be disposed of,
or are otherwise being discontinued. All of the dispositions
discussed above are reflected as discontinued operations in the
Companys Statements of Operations and prior periods have
been revised to reflect this presentation and, accordingly,
discontinued operations are excluded from segment reporting. As
the remaining division, XL Systems, in the Tubular Technology
and Services segment is not of continuing significance to report
alone as a segment and it does not meet the quantitative
thresholds established in SFAS No. 131, the Company is
discontinuing its Tubular Technology and Services segment and XL
Systems is now included in the Other segment along with the
Companys IntelliServ division. The Company has revised its
prior period segment reporting to reflect this change and Total
Assets related to discontinued operations is now reflected in
Other.
The Companys Drilling Products and Services segment
manufactures and sells a full range of proprietary and API drill
pipe, drill collars, heavyweight drill pipe and accessories. The
ReedHycalog segment designs, manufactures and distributes
fixed-cutter and roller-cone drill bits and provides coring
services and downhole tools. The Companys Other segment
includes its XL Systems and Intelliserv divisions. The
Companys XL Systems division is a provider of an
integrated package of large-bore tubular products and services
primarily used in offshore applications and the IntelliServ
division provides well-site data transmission services.
Corporate includes general corporate expenses.
82
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Services
|
|
|
ReedHycalog
|
|
|
Other
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Unaffiliated Customers
|
|
$
|
1,175,632
|
|
|
$
|
610,738
|
|
|
$
|
122,264
|
|
|
$
|
|
|
|
$
|
1,908,634
|
|
Intersegment Revenues
|
|
|
3,333
|
|
|
|
10
|
|
|
|
586
|
|
|
|
|
|
|
|
3,929
|
|
Depreciation and Amortization(f)
|
|
|
15,124
|
|
|
|
27,150
|
|
|
|
5,441
|
|
|
|
4,824
|
|
|
|
52,539
|
|
Other Operating Items
|
|
|
|
|
|
|
4,341
|
(a)
|
|
|
|
|
|
|
2,105
|
(a)
|
|
|
6,446
|
|
Operating Income (Loss)(b)
|
|
|
470,142
|
|
|
|
169,567
|
|
|
|
3,878
|
|
|
|
(62,858
|
)
|
|
|
580,729
|
|
Interest Expense
|
|
|
137
|
|
|
|
289
|
|
|
|
186
|
|
|
|
13,590
|
|
|
|
14,202
|
|
Equity Income in Unconsolidated Affiliate
|
|
|
124,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,332
|
|
Income (Loss) from Continuing Operations(b)
|
|
|
400,563
|
|
|
|
93,028
|
|
|
|
1,007
|
|
|
|
(16,401
|
)
|
|
|
478,197
|
|
Capital Expenditures for Property, Plant and Equipment(f)
|
|
|
33,732
|
|
|
|
55,145
|
|
|
|
28,108
|
|
|
|
5,380
|
|
|
|
122,365
|
|
Total Assets
|
|
|
927,672
|
|
|
|
847,558
|
|
|
|
416,499
|
|
|
|
158,975
|
|
|
|
2,350,704
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Unaffiliated Customers
|
|
$
|
888,661
|
|
|
$
|
504,648
|
|
|
$
|
136,950
|
|
|
$
|
|
|
|
$
|
1,530,259
|
|
Intersegment Revenues
|
|
|
671
|
|
|
|
91
|
|
|
|
4,895
|
|
|
|
|
|
|
|
5,657
|
|
Depreciation and Amortization(f)
|
|
|
13,495
|
|
|
|
18,620
|
|
|
|
6,031
|
|
|
|
3,937
|
|
|
|
42,083
|
|
Other Operating Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900
|
(c)
|
|
|
3,900
|
|
Operating Income (Loss)(b)
|
|
|
323,189
|
|
|
|
185,087
|
(d)
|
|
|
9,018
|
|
|
|
(46,570
|
)
|
|
|
470,724
|
|
Interest Expense
|
|
|
(87
|
)
|
|
|
354
|
|
|
|
326
|
|
|
|
15,428
|
|
|
|
16,021
|
|
Equity Income in Unconsolidated Affiliate
|
|
|
125,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,597
|
|
Income (Loss) from Continuing Operations(b)
|
|
|
295,761
|
|
|
|
118,866
|
(d)
|
|
|
(1,035
|
)
|
|
|
(9,486
|
)
|
|
|
404,106
|
|
Capital Expenditures for Property, Plant and Equipment(f)
|
|
|
28,019
|
|
|
|
24,847
|
|
|
|
25,661
|
|
|
|
4,398
|
|
|
|
82,925
|
|
Total Assets
|
|
|
801,830
|
|
|
|
780,635
|
|
|
|
376,860
|
|
|
|
62,742
|
|
|
|
2,022,067
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Unaffiliated Customers
|
|
$
|
593,066
|
|
|
$
|
398,227
|
|
|
$
|
97,973
|
|
|
$
|
|
|
|
$
|
1,089,266
|
|
Intersegment Revenues
|
|
|
17
|
|
|
|
99
|
|
|
|
4,878
|
|
|
|
|
|
|
|
4,994
|
|
Depreciation and Amortization(f)
|
|
|
13,248
|
|
|
|
15,939
|
|
|
|
5,042
|
|
|
|
3,462
|
|
|
|
37,691
|
|
Operating Income (Loss)
|
|
|
175,091
|
|
|
|
98,616
|
|
|
|
7,396
|
|
|
|
(47,174
|
)(e)
|
|
|
233,929
|
|
Interest Expense
|
|
|
342
|
|
|
|
240
|
|
|
|
185
|
|
|
|
28,114
|
|
|
|
28,881
|
|
Equity Income (Loss) in Unconsolidated Affiliates
|
|
|
63,977
|
|
|
|
|
|
|
|
(5,718
|
)
|
|
|
|
|
|
|
58,259
|
|
Income (Loss) from Continuing Operations
|
|
|
159,161
|
|
|
|
60,258
|
|
|
|
(7,037
|
)
|
|
|
(72,829
|
)(e)
|
|
|
139,553
|
|
Capital Expenditures for Property, Plant and Equipment(f)
|
|
|
10,456
|
|
|
|
6,224
|
|
|
|
4,408
|
|
|
|
2,972
|
|
|
|
24,060
|
|
Total Assets
|
|
|
592,054
|
|
|
|
538,734
|
|
|
|
354,500
|
|
|
|
54,996
|
|
|
|
1,540,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes $4.3 million of ReedHycalog relocation costs and
$2.1 million in legal and professional fees related to the
pending merger. See Note 6 for further discussion.
|
|
(b)
|
|
Includes non-cash items of $13.5 million and
$11.4 million in 2007 and 2006, respectively, related to
stock-based
compensation.
|
|
(c)
|
|
Includes a $3.9 million benefit from the settlement of a
trade credit dispute.
|
|
(d)
|
|
Includes a license and royalty payment in ReedHycalog of
$20.0 million the Company received in exchange for the use
of ReedHycalog patented technology for the shallow leaching of
PDC cutters. See Note 5 for further discussion.
|
83
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(e)
|
|
Includes non-cash items in Corporate and Other of
$57.1 million related refinancing charges and
$5.6 million related to stock-based compensation.
|
|
(f)
|
|
Reconciliation to the Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Depreciation and Amortization-
|
|
|
|
|
|
|
|
|
|
|
|
|
From Continuing Operations
|
|
$
|
52,539
|
|
|
$
|
42,083
|
|
|
$
|
37,691
|
|
From Discontinued Operations
|
|
|
6,247
|
|
|
|
8,172
|
|
|
|
8,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Consolidated Statements of Cash Flows
|
|
$
|
58,786
|
|
|
$
|
50,255
|
|
|
$
|
46,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Capital Expenditures for -
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Plant and Equipment from Continuing Operations
|
|
$
|
122,365
|
|
|
$
|
82,925
|
|
|
$
|
24,060
|
|
Property Plant and Equipment from Discontinued Operations
|
|
|
1,147
|
|
|
|
17,313
|
|
|
|
5,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Consolidated Statements of Cash Flows
|
|
$
|
123,512
|
|
|
$
|
100,238
|
|
|
$
|
29,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Operations and Export Sales
Financial information by geographic segment for each of the
three-years ended December 31, 2007 is summarized below.
Revenues are attributable to countries based on the location of
the entity selling products rather than ultimate use. Long-lived
assets represent long-term assets excluding deferred tax assets.
The following table presents consolidated revenues by country
based on the location of the sale of the products or services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
1,104,446
|
|
|
$
|
843,939
|
|
|
$
|
616,541
|
|
Canada
|
|
|
57,811
|
|
|
|
65,554
|
|
|
|
55,940
|
|
Italy
|
|
|
22,987
|
|
|
|
55,834
|
|
|
|
39,561
|
|
China
|
|
|
134,108
|
|
|
|
110,895
|
|
|
|
69,382
|
|
Singapore
|
|
|
186,132
|
|
|
|
161,406
|
|
|
|
99,361
|
|
Other Countries
|
|
|
403,150
|
|
|
|
292,631
|
|
|
|
208,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,908,634
|
|
|
$
|
1,530,259
|
|
|
$
|
1,089,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents long-lived assets by country based
on the location:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
530,312
|
|
|
$
|
614,392
|
|
Canada
|
|
|
44,804
|
|
|
|
33,250
|
|
Mexico
|
|
|
91,522
|
|
|
|
79,363
|
|
Italy
|
|
|
40,069
|
|
|
|
40,533
|
|
China
|
|
|
42,887
|
|
|
|
38,756
|
|
Singapore
|
|
|
49,318
|
|
|
|
49,496
|
|
United Kingdom
|
|
|
186,953
|
|
|
|
183,925
|
|
Other Countries
|
|
|
42,964
|
|
|
|
33,506
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,028,829
|
|
|
$
|
1,073,221
|
|
|
|
|
|
|
|
|
|
|
Major
Customers and Credit Risk
Substantially all of the Companys customers are engaged in
the exploration and development of oil and gas reserves. The
Companys drill pipe, drill bit products and other related
products are sold primarily to rig contractors, distributors and
rental companies. This concentration of customers may impact the
Companys overall exposure to credit risk, either
positively or negatively, in that customers may be similarly
affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers and
does not generally require collateral in support of its trade
receivables. The Company maintains reserves for potential credit
losses, and actual losses have historically been within the
Companys expectations. Foreign sales also present various
risks, including risks of war, civil disturbances and
governmental activities that may limit or disrupt markets,
restrict the movement of funds, or result in the deprivation of
contract rights or the taking of property without fair
consideration. Most of the Companys foreign sales,
however, are to large international companies, in-country
national oil companies, or are secured by a letter of credit or
similar arrangements.
In the three years ended December 31, 2007, there were no
individual customers who accounted for 10% or more of total
revenues.
85
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
22.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table presents unaudited quarterly financial data
for 2007 and 2006, which have been restated for discontinued
operations presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
456,115
|
|
|
$
|
460,466
|
|
|
$
|
486,637
|
|
|
$
|
505,416
|
|
Gross Profit
|
|
|
229,919
|
|
|
|
235,998
|
|
|
|
226,010
|
|
|
|
241,324
|
|
Selling, General and Administrative and Research and Engineering
|
|
|
85,564
|
|
|
|
85,428
|
|
|
|
80,630
|
|
|
|
94,454
|
|
Other Operating Items(a)
|
|
|
602
|
|
|
|
534
|
|
|
|
1,286
|
|
|
|
4,024
|
|
Operating Income
|
|
|
143,753
|
|
|
|
150,036
|
|
|
|
144,094
|
|
|
|
142,846
|
|
Income from Continuing Operations
|
|
|
125,091
|
|
|
|
122,536
|
|
|
|
114,279
|
|
|
|
116,291
|
|
Income from Discontinued Operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
6,458
|
|
|
|
12,416
|
|
|
|
9,960
|
|
|
|
12,205
|
|
Net Income
|
|
$
|
131,549
|
|
|
$
|
134,952
|
|
|
$
|
124,239
|
|
|
$
|
128,496
|
|
Basic Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
0.98
|
|
|
$
|
0.95
|
|
|
$
|
0.89
|
|
|
$
|
0.91
|
|
Income from Discontinued Operations
|
|
|
0.05
|
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1.03
|
|
|
$
|
1.05
|
|
|
$
|
0.97
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
128,085
|
|
|
|
128,434
|
|
|
|
128,585
|
|
|
|
127,155
|
|
Diluted Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
0.96
|
|
|
$
|
0.94
|
|
|
$
|
0.88
|
|
|
$
|
0.91
|
|
Income from Discontinued Operations
|
|
|
0.05
|
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1.01
|
|
|
$
|
1.04
|
|
|
$
|
0.96
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
129,928
|
|
|
|
130,071
|
|
|
|
129,818
|
|
|
|
128,161
|
|
|
|
|
(a)
|
|
Includes $4.3 million of ReedHycalog relocation costs and
$2.1 million in legal and professional fees related to the
pending merger. See Note 6 for further discussion.
|
86
GRANT
PRIDECO, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
340,406
|
|
|
$
|
355,616
|
|
|
$
|
382,028
|
|
|
$
|
452,209
|
|
Gross Profit
|
|
|
155,606
|
|
|
|
175,412
|
|
|
|
186,929
|
(a)
|
|
|
217,667
|
|
Selling, General and Administrative and Research and Engineering
|
|
|
67,246
|
|
|
|
70,055
|
|
|
|
67,370
|
|
|
|
84,119
|
|
Operating Income
|
|
|
88,360
|
|
|
|
105,357
|
|
|
|
139,559
|
(a)
|
|
|
137,448
|
(b)
|
Income from Continuing Operations
|
|
|
75,705
|
|
|
|
89,558
|
|
|
|
113,055
|
|
|
|
125,788
|
|
Income from Discontinued Operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
16,725
|
|
|
|
16,029
|
|
|
|
13,417
|
|
|
|
14,307
|
|
Net Income
|
|
$
|
92,430
|
|
|
$
|
105,587
|
|
|
$
|
126,472
|
(a)
|
|
$
|
140,095
|
(b)
|
Basic Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
0.58
|
|
|
$
|
0.68
|
|
|
$
|
0.87
|
|
|
$
|
0.98
|
|
Income from Discontinued Operations
|
|
|
0.13
|
|
|
|
0.12
|
|
|
|
0.10
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
0.70
|
|
|
$
|
0.80
|
|
|
$
|
0.97
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
131,388
|
|
|
|
131,472
|
|
|
|
130,606
|
|
|
|
128,615
|
|
Diluted Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
0.57
|
|
|
$
|
0.67
|
|
|
$
|
0.85
|
|
|
$
|
0.96
|
|
Income from Discontinued Operations
|
|
|
0.12
|
|
|
|
0.12
|
|
|
|
0.10
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
0.69
|
|
|
$
|
0.79
|
|
|
$
|
0.95
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
133,929
|
|
|
|
133,659
|
|
|
|
132,649
|
|
|
|
130,658
|
|
|
|
|
(a)
|
|
Includes a license and royalty payment of $20.0 million the
Company received from a competitor in exchange for the use of
ReedHycalogs patented technology for the shallow leaching
of PDC cutters (see Note 5 for further discussion).
|
|
(b)
|
|
Includes a $3.9 million benefit from the settlement of a
trade credit dispute (see Note 6 for further discussion)
|
|
|
23.
|
Subsidiary
Guarantor Financial Information
|
The following condensed consolidating statements of operations
for the three-year periods ended December 31, 2007,
condensed consolidating balance sheets as of December 31,
2007 and 2006, and condensed consolidating statements of cash
flows for the three-year periods ended December 31, 2007
are provided for the Companys domestic subsidiaries that
are guarantors of debt securities issued by the Company. The
Companys obligations to pay principal and interest under
the
6
1
/
8
% Senior
Notes are guaranteed on a joint and several basis by all of the
Companys domestic subsidiaries. The guarantees are full
and unconditional and the guarantor subsidiaries are 100% owned
by Grant Prideco, Inc.
87
GRANT
PRIDECO INC.
CONDENSED
STATEMENT OF OPERATIONS
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,364,328
|
|
|
$
|
929,638
|
|
|
$
|
(385,332
|
)
|
|
|
1,908,634
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
823,273
|
|
|
|
487,390
|
|
|
|
(335,280
|
)
|
|
|
975,383
|
|
Selling, general and administrative and research and engineering
|
|
|
229
|
|
|
|
235,558
|
|
|
|
110,289
|
|
|
|
|
|
|
|
346,076
|
|
Other operating items
|
|
|
|
|
|
|
5,844
|
|
|
|
602
|
|
|
|
|
|
|
|
6,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
1,064,675
|
|
|
|
598,281
|
|
|
|
(335,280
|
)
|
|
|
1,327,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(229
|
)
|
|
|
299,653
|
|
|
|
331,357
|
|
|
|
(50,052
|
)
|
|
|
580,729
|
|
Interest Expense
|
|
|
(15,619
|
)
|
|
|
1,864
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
(14,202
|
)
|
Other Income (Expense), Net
|
|
|
4,753
|
|
|
|
30,884
|
|
|
|
(37,278
|
)
|
|
|
|
|
|
|
(1,641
|
)
|
Equity Income in Unconsolidated Affiliate
|
|
|
|
|
|
|
123,983
|
|
|
|
|
|
|
|
349
|
|
|
|
124,332
|
|
Equity in Subsidiaries, Net of Taxes
|
|
|
557,026
|
|
|
|
28,691
|
|
|
|
|
|
|
|
(585,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546,160
|
|
|
|
185,422
|
|
|
|
(37,725
|
)
|
|
|
(585,368
|
)
|
|
|
108,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes and Minority Interest
|
|
|
545,931
|
|
|
|
485,075
|
|
|
|
293,632
|
|
|
|
(635,420
|
)
|
|
|
689,218
|
|
Income Tax Provision
|
|
|
(26,695
|
)
|
|
|
(121,126
|
)
|
|
|
(53,267
|
)
|
|
|
|
|
|
|
(201,088
|
)
|
Minority Interests
|
|
|
|
|
|
|
|
|
|
|
(9,933
|
)
|
|
|
|
|
|
|
(9,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
519,236
|
|
|
|
363,949
|
|
|
|
230,432
|
|
|
|
(635,420
|
)
|
|
|
478,197
|
|
Income from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
39,353
|
|
|
|
1,686
|
|
|
|
|
|
|
|
41,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
519,236
|
|
|
$
|
403,302
|
|
|
$
|
232,118
|
|
|
$
|
(635,420
|
)
|
|
$
|
519,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
GRANT
PRIDECO INC.
CONDENSED
BALANCE SHEET
As of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
82,319
|
|
|
$
|
78,669
|
|
|
$
|
|
|
|
$
|
160,988
|
|
Accounts receivable, net
|
|
|
|
|
|
|
249,221
|
|
|
|
166,304
|
|
|
|
|
|
|
|
415,525
|
|
Inventories
|
|
|
|
|
|
|
310,379
|
|
|
|
217,649
|
|
|
|
(56,671
|
)
|
|
|
471,357
|
|
Deferred charges
|
|
|
|
|
|
|
2,977
|
|
|
|
|
|
|
|
|
|
|
|
2,977
|
|
Current deferred tax assets
|
|
|
101
|
|
|
|
37,664
|
|
|
|
3,240
|
|
|
|
|
|
|
|
41,005
|
|
Assets held for sale
|
|
|
|
|
|
|
182,059
|
|
|
|
4,499
|
|
|
|
|
|
|
|
186,558
|
|
Other current assets
|
|
|
|
|
|
|
17,502
|
|
|
|
24,715
|
|
|
|
|
|
|
|
42,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
882,121
|
|
|
|
495,076
|
|
|
|
(56,671
|
)
|
|
|
1,320,627
|
|
Property, Plant and Equipment, Net
|
|
|
|
|
|
|
177,492
|
|
|
|
151,990
|
|
|
|
|
|
|
|
329,482
|
|
Goodwill
|
|
|
|
|
|
|
187,041
|
|
|
|
271,717
|
|
|
|
|
|
|
|
458,758
|
|
Investment In and Advances to Subsidiaries
|
|
|
2,141,713
|
|
|
|
120,113
|
|
|
|
|
|
|
|
(2,261,826
|
)
|
|
|
|
|
Investment In Unconsolidated Affiliate
|
|
|
|
|
|
|
134,731
|
|
|
|
|
|
|
|
|
|
|
|
134,731
|
|
Other Assets
|
|
|
5,331
|
|
|
|
46,036
|
|
|
|
55,739
|
|
|
|
|
|
|
|
107,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,147,145
|
|
|
$
|
1,547,534
|
|
|
$
|
974,522
|
|
|
$
|
(2,318,497
|
)
|
|
$
|
2,350,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
|
|
|
$
|
490
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
490
|
|
Accounts payable
|
|
|
146
|
|
|
|
77,029
|
|
|
|
50,361
|
|
|
|
|
|
|
|
127,536
|
|
Deferred revenues
|
|
|
|
|
|
|
19,095
|
|
|
|
1,798
|
|
|
|
|
|
|
|
20,893
|
|
Income taxes payable
|
|
|
(87,263
|
)
|
|
|
165,833
|
|
|
|
(655
|
)
|
|
|
|
|
|
|
77,915
|
|
Intercompany liabilities (assets)
|
|
|
343,317
|
|
|
|
(546,308
|
)
|
|
|
202,991
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale
|
|
|
|
|
|
|
15,792
|
|
|
|
685
|
|
|
|
|
|
|
|
16,477
|
|
Other current liabilities
|
|
|
4,189
|
|
|
|
59,940
|
|
|
|
34,562
|
|
|
|
|
|
|
|
98,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,389
|
|
|
|
(208,129
|
)
|
|
|
289,742
|
|
|
|
|
|
|
|
342,002
|
|
Long-Term Debt
|
|
|
174,585
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
176,095
|
|
Deferred Tax Liabilities
|
|
|
2,370
|
|
|
|
28,736
|
|
|
|
41,599
|
|
|
|
|
|
|
|
72,705
|
|
Other Long-Term Liabilities
|
|
|
|
|
|
|
28,372
|
|
|
|
852
|
|
|
|
|
|
|
|
29,224
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interests
|
|
|
|
|
|
|
|
|
|
|
20,877
|
|
|
|
|
|
|
|
20,877
|
|
Stockholders Equity
|
|
|
1,709,801
|
|
|
|
1,697,045
|
|
|
|
621,452
|
|
|
|
(2,318,497
|
)
|
|
|
1,709,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,147,145
|
|
|
$
|
1,547,534
|
|
|
$
|
974,522
|
|
|
$
|
(2,318,497
|
)
|
|
$
|
2,350,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
GRANT
PRIDECO INC.
CONDENSED
STATEMENT OF CASH FLOWS
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
236,490
|
|
|
$
|
169,013
|
|
|
$
|
99,118
|
|
|
$
|
(16,330
|
)
|
|
$
|
488,291
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(3,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,394
|
)
|
Proceeds from sale of short-term investments
|
|
|
|
|
|
|
523,495
|
|
|
|
|
|
|
|
|
|
|
|
523,495
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(523,545
|
)
|
|
|
|
|
|
|
|
|
|
|
(523,545
|
)
|
Capital expenditures for property, plant and equipment
|
|
|
|
|
|
|
(93,728
|
)
|
|
|
(29,784
|
)
|
|
|
|
|
|
|
(123,512
|
)
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
4,776
|
|
|
|
5,819
|
|
|
|
|
|
|
|
10,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,394
|
)
|
|
|
(89,002
|
)
|
|
|
(23,965
|
)
|
|
|
|
|
|
|
(116,361
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments on credit facility, net
|
|
|
|
|
|
|
(34,600
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,600
|
)
|
Repayments on debt
|
|
|
(33,415
|
)
|
|
|
(1,266
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,681
|
)
|
Borrowings (repayments) on debt between subs, net
|
|
|
995
|
|
|
|
25,645
|
|
|
|
(26,640
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefits on stock option exercises
|
|
|
23,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,597
|
|
Repurchase of common stock
|
|
|
(247,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(247,890
|
)
|
Proceeds from issuance of common stock
|
|
|
23,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,953
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(16,330
|
)
|
|
|
16,330
|
|
|
|
|
|
Other, net
|
|
|
(336
|
)
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(233,096
|
)
|
|
|
(10,221
|
)
|
|
|
(42,070
|
)
|
|
|
16,330
|
|
|
|
(269,057
|
)
|
Effect of Exchange Rate Changes on Cash
|
|
|
|
|
|
|
|
|
|
|
771
|
|
|
|
|
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash
|
|
|
|
|
|
|
69,790
|
|
|
|
33,854
|
|
|
|
|
|
|
|
103,644
|
|
Cash at Beginning of Period
|
|
|
|
|
|
|
12,529
|
|
|
|
44,815
|
|
|
|
|
|
|
|
57,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$
|
|
|
|
$
|
82,319
|
|
|
$
|
78,669
|
|
|
$
|
|
|
|
$
|
160,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
GRANT
PRIDECO INC.
CONDENSED
STATEMENT OF OPERATIONS
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,074,947
|
|
|
$
|
781,922
|
|
|
$
|
(326,610
|
)
|
|
|
1,530,259
|
|
License and royalty income
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,074,947
|
|
|
|
801,922
|
|
|
|
(326,610
|
)
|
|
|
1,550,259
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
660,090
|
|
|
|
407,006
|
|
|
|
(272,451
|
)
|
|
|
794,645
|
|
Selling, general and administrative and research and engineering
|
|
|
220
|
|
|
|
202,078
|
|
|
|
86,492
|
|
|
|
|
|
|
|
288,790
|
|
Other operating items
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
858,268
|
|
|
|
493,498
|
|
|
|
(272,451
|
)
|
|
|
1,079,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(220
|
)
|
|
|
216,679
|
|
|
|
308,424
|
|
|
|
(54,159
|
)
|
|
|
470,724
|
|
Interest Expense
|
|
|
(15,394
|
)
|
|
|
(428
|
)
|
|
|
(199
|
)
|
|
|
|
|
|
|
(16,021
|
)
|
Other Income (Expense), Net
|
|
|
5,219
|
|
|
|
7,380
|
|
|
|
(16,402
|
)
|
|
|
|
|
|
|
(3,803
|
)
|
Equity Income in Unconsolidated Affiliates
|
|
|
|
|
|
|
125,772
|
|
|
|
|
|
|
|
(175
|
)
|
|
|
125,597
|
|
Equity in Subsidiaries, Net of Taxes
|
|
|
533,385
|
|
|
|
24,275
|
|
|
|
|
|
|
|
(557,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523,210
|
|
|
|
156,999
|
|
|
|
(16,601
|
)
|
|
|
(557,835
|
)
|
|
|
105,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes and Minority Interest
|
|
|
522,990
|
|
|
|
373,678
|
|
|
|
291,823
|
|
|
|
(611,994
|
)
|
|
|
576,497
|
|
Income Tax Provision
|
|
|
(58,406
|
)
|
|
|
(47,520
|
)
|
|
|
(56,104
|
)
|
|
|
|
|
|
|
(162,030
|
)
|
Minority Interests
|
|
|
|
|
|
|
|
|
|
|
(10,361
|
)
|
|
|
|
|
|
|
(10,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
464,584
|
|
|
|
326,158
|
|
|
|
225,358
|
|
|
|
(611,994
|
)
|
|
|
404,106
|
|
Income from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
58,879
|
|
|
|
1,599
|
|
|
|
|
|
|
|
60,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
464,584
|
|
|
$
|
385,037
|
|
|
$
|
226,957
|
|
|
$
|
(611,994
|
)
|
|
$
|
464,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
GRANT
PRIDECO INC.
CONDENSED
BALANCE SHEET
As of
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
12,529
|
|
|
$
|
44,815
|
|
|
$
|
|
|
|
$
|
57,344
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
240,407
|
|
|
|
128,288
|
|
|
|
|
|
|
|
368,695
|
|
Inventories
|
|
|
|
|
|
|
334,242
|
|
|
|
178,667
|
|
|
|
(57,962
|
)
|
|
|
454,947
|
|
Deferred charges
|
|
|
|
|
|
|
3,712
|
|
|
|
252
|
|
|
|
|
|
|
|
3,964
|
|
Current deferred tax assets
|
|
|
131
|
|
|
|
28,082
|
|
|
|
19,888
|
|
|
|
|
|
|
|
48,101
|
|
Other current assets
|
|
|
|
|
|
|
6,450
|
|
|
|
7,945
|
|
|
|
|
|
|
|
14,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
625,422
|
|
|
|
379,855
|
|
|
|
(57,962
|
)
|
|
|
947,446
|
|
Property, Plant and Equipment, Net
|
|
|
|
|
|
|
170,965
|
|
|
|
134,559
|
|
|
|
|
|
|
|
305,524
|
|
Goodwill
|
|
|
|
|
|
|
249,976
|
|
|
|
271,016
|
|
|
|
|
|
|
|
520,992
|
|
Investment In and Advances to Subsidiaries
|
|
|
1,569,776
|
|
|
|
79,185
|
|
|
|
|
|
|
|
(1,648,961
|
)
|
|
|
|
|
Investment In Unconsolidated Affiliate
|
|
|
|
|
|
|
135,428
|
|
|
|
|
|
|
|
|
|
|
|
135,428
|
|
Other Assets
|
|
|
6,830
|
|
|
|
61,376
|
|
|
|
44,471
|
|
|
|
|
|
|
|
112,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,576,737
|
|
|
$
|
1,322,352
|
|
|
$
|
829,901
|
|
|
$
|
(1,706,923
|
)
|
|
$
|
2,022,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
7,924
|
|
|
$
|
716
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,640
|
|
Accounts payable
|
|
|
|
|
|
|
94,649
|
|
|
|
44,293
|
|
|
|
|
|
|
|
138,942
|
|
Deferred revenues
|
|
|
|
|
|
|
14,259
|
|
|
|
3,931
|
|
|
|
|
|
|
|
18,190
|
|
Income taxes payable
|
|
|
(48,719
|
)
|
|
|
59,800
|
|
|
|
21,958
|
|
|
|
|
|
|
|
33,039
|
|
Intercompany liabilities (assets)
|
|
|
61,345
|
|
|
|
(302,256
|
)
|
|
|
240,911
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
4,815
|
|
|
|
70,031
|
|
|
|
33,682
|
|
|
|
|
|
|
|
108,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,365
|
|
|
|
(62,801
|
)
|
|
|
344,775
|
|
|
|
|
|
|
|
307,339
|
|
Long-Term Debt
|
|
|
200,000
|
|
|
|
37,212
|
|
|
|
|
|
|
|
|
|
|
|
237,212
|
|
Deferred Tax Liabilities
|
|
|
(11,511
|
)
|
|
|
40,916
|
|
|
|
38,905
|
|
|
|
|
|
|
|
68,310
|
|
Other Long-Term Liabilities
|
|
|
|
|
|
|
28,151
|
|
|
|
650
|
|
|
|
|
|
|
|
28,801
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interests
|
|
|
|
|
|
|
|
|
|
|
17,522
|
|
|
|
|
|
|
|
17,522
|
|
Stockholders Equity
|
|
|
1,362,883
|
|
|
|
1,278,874
|
|
|
|
428,049
|
|
|
|
(1,706,923
|
)
|
|
|
1,362,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,576,737
|
|
|
$
|
1,322,352
|
|
|
$
|
829,901
|
|
|
$
|
(1,706,923
|
)
|
|
$
|
2,022,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
GRANT
PRIDECO INC.
CONDENSED
STATEMENT OF CASH FLOWS
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
285,420
|
|
|
$
|
143,919
|
|
|
$
|
50,750
|
|
|
$
|
(85,989
|
)
|
|
$
|
394,100
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(111,797
|
)
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
(111,998
|
)
|
Capital expenditures for property, plant and equipment
|
|
|
|
|
|
|
(76,103
|
)
|
|
|
(24,135
|
)
|
|
|
|
|
|
|
(100,238
|
)
|
Other, net
|
|
|
|
|
|
|
1,462
|
|
|
|
130
|
|
|
|
|
|
|
|
1,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(111,797
|
)
|
|
|
(74,641
|
)
|
|
|
(24,206
|
)
|
|
|
|
|
|
|
(210,644
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) on revolver debt, net
|
|
|
|
|
|
|
34,600
|
|
|
|
(11,200
|
)
|
|
|
|
|
|
|
23,400
|
|
Repayments on debt, net
|
|
|
(46,272
|
)
|
|
|
(1,867
|
)
|
|
|
|
|
|
|
|
|
|
|
(48,139
|
)
|
Borrowings (repayments) on debt between subs, net
|
|
|
2,519
|
|
|
|
(102,570
|
)
|
|
|
100,051
|
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
|
(1,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,032
|
)
|
Excess tax benefits on stock option exercises
|
|
|
15,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,556
|
|
Repurchase of common stock
|
|
|
(165,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165,122
|
)
|
Proceeds from issuance of common stock
|
|
|
20,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,728
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(85,989
|
)
|
|
|
85,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(173,623
|
)
|
|
|
(69,837
|
)
|
|
|
2,862
|
|
|
|
85,989
|
|
|
|
(154,609
|
)
|
Effect of Exchange Rate Changes on Cash
|
|
|
|
|
|
|
|
|
|
|
333
|
|
|
|
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash
|
|
|
|
|
|
|
(559
|
)
|
|
|
29,739
|
|
|
|
|
|
|
|
29,180
|
|
Cash at Beginning of Period
|
|
|
|
|
|
|
13,088
|
|
|
|
15,076
|
|
|
|
|
|
|
|
28,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$
|
|
|
|
$
|
12,529
|
|
|
$
|
44,815
|
|
|
$
|
|
|
|
$
|
57,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
GRANT
PRIDECO INC.
CONDENSED
STATEMENT OF OPERATIONS
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
817,866
|
|
|
$
|
539,972
|
|
|
$
|
(268,572
|
)
|
|
$
|
1,089,266
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
551,676
|
|
|
|
276,523
|
|
|
|
(218,020
|
)
|
|
|
610,179
|
|
Selling, general and administrative and research and engineering
|
|
|
|
|
|
|
168,950
|
|
|
|
76,208
|
|
|
|
|
|
|
|
245,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
720,626
|
|
|
|
352,731
|
|
|
|
(218,020
|
)
|
|
|
855,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
97,240
|
|
|
|
187,241
|
|
|
|
(50,552
|
)
|
|
|
233,929
|
|
Interest Expense
|
|
|
(27,284
|
)
|
|
|
(1,175
|
)
|
|
|
(422
|
)
|
|
|
|
|
|
|
(28,881
|
)
|
Other Income (Expense), Net
|
|
|
2,269
|
|
|
|
61,540
|
|
|
|
(56,773
|
)
|
|
|
|
|
|
|
7,036
|
|
Equity Income in Unconsolidated Affiliates
|
|
|
|
|
|
|
58,259
|
|
|
|
|
|
|
|
|
|
|
|
58,259
|
|
Refinance Charges
|
|
|
(49,541
|
)
|
|
|
(7,545
|
)
|
|
|
|
|
|
|
|
|
|
|
(57,086
|
)
|
Equity in Subsidiaries, Net of Taxes
|
|
|
281,213
|
|
|
|
17,400
|
|
|
|
|
|
|
|
(298,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes and Minority Interest
|
|
|
206,657
|
|
|
|
225,719
|
|
|
|
130,046
|
|
|
|
(349,165
|
)
|
|
|
213,257
|
|
Income Tax Provision
|
|
|
(17,653
|
)
|
|
|
(9,911
|
)
|
|
|
(36,191
|
)
|
|
|
|
|
|
|
(63,755
|
)
|
Minority Interests
|
|
|
|
|
|
|
|
|
|
|
(9,949
|
)
|
|
|
|
|
|
|
(9,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
189,004
|
|
|
|
215,808
|
|
|
|
83,906
|
|
|
|
(349,165
|
)
|
|
|
139,553
|
|
Income from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
48,098
|
|
|
|
1,353
|
|
|
|
|
|
|
|
49,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
189,004
|
|
|
$
|
263,906
|
|
|
$
|
85,259
|
|
|
$
|
(349,165
|
)
|
|
$
|
189,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
GRANT
PRIDECO INC.
CONDENSED
STATEMENT OF CASH FLOWS
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
172,285
|
|
|
$
|
297
|
|
|
$
|
37,094
|
|
|
$
|
(15,000
|
)
|
|
$
|
194,676
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(28,725
|
)
|
|
|
|
|
|
|
(10,507
|
)
|
|
|
|
|
|
|
(39,232
|
)
|
Proceeds from sale of businesses, net of cash disposed
|
|
|
|
|
|
|
2,521
|
|
|
|
|
|
|
|
|
|
|
|
2,521
|
|
Investment in unconsolidated affiliates
|
|
|
|
|
|
|
(5,273
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,273
|
)
|
Capital expenditures for property, plant and equipment
|
|
|
|
|
|
|
(18,806
|
)
|
|
|
(10,695
|
)
|
|
|
|
|
|
|
(29,501
|
)
|
Other, net
|
|
|
|
|
|
|
1,682
|
|
|
|
131
|
|
|
|
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(28,725
|
)
|
|
|
(19,876
|
)
|
|
|
(21,071
|
)
|
|
|
|
|
|
|
(69,672
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolver debt, net
|
|
|
|
|
|
|
|
|
|
|
11,200
|
|
|
|
|
|
|
|
11,200
|
|
Repayments on debt, net
|
|
|
(174,905
|
)
|
|
|
(4,410
|
)
|
|
|
|
|
|
|
|
|
|
|
(179,315
|
)
|
Borrowings (repayments) between subsidiaries, net
|
|
|
7,410
|
|
|
|
6,356
|
|
|
|
(13,766
|
)
|
|
|
|
|
|
|
|
|
Debt refinancing costs
|
|
|
(43,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,778
|
)
|
Debt issue costs
|
|
|
(6,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,041
|
)
|
Repurchases of common stock
|
|
|
(3,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,385
|
)
|
Proceeds from stock option exercises
|
|
|
77,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,139
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(143,560
|
)
|
|
|
1,946
|
|
|
|
(17,566
|
)
|
|
|
15,000
|
|
|
|
(144,180
|
)
|
Effect of Exchange Rate Changes on Cash
|
|
|
|
|
|
|
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
|
|
|
|
|
|
|
(17,633
|
)
|
|
|
(1,755
|
)
|
|
|
|
|
|
|
(19,388
|
)
|
Cash at Beginning of Period
|
|
|
|
|
|
|
30,721
|
|
|
|
16,831
|
|
|
|
|
|
|
|
47,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$
|
|
|
|
$
|
13,088
|
|
|
$
|
15,076
|
|
|
$
|
|
|
|
$
|
28,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants On Accounting and
Financial Disclosure
|
In 2007, the Company had no changes in or disagreements with its
accountants on accounting or financial disclosure.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have performed an evaluation under the supervision and with
the participation of our management, including our principal
executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as
defined in
Rule 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934 (the Exchange
Act), as of December 31, 2007. Based on that
evaluation, our management, including our principal executive
officer and principal financial officer, concluded that, as of
the end of the period covered by this report
95
(December 31, 2007), our disclosure controls and procedures
were effective in providing reasonable assurance that
information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to the
Companys management, including our principal executive
officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
Design
and Evaluation of Internal Control Over Financial
Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
our management included a report of their assessment of the
design and effectiveness of our internal controls as part of
this
Form 10-K
for the fiscal year ended December 31, 2007. Based on this
evaluation, management concluded that our internal control over
financial reporting was effective as of December 31, 2007.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is
included herein. Managements report and the independent
registered public accounting firms attestation report are
included in Item 8 under the captions entitled
Managements Annual Report on Internal Control Over
Financial Reporting and Report of Independent
Registered Public Accounting Firm on Internal Control Over
Financial Reporting and are incorporated herein by
reference.
Changes
in Internal Control Over Financial Reporting
There has been no change in our internal control over financial
reporting during the quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance of the
Registrant
|
The information required by this item is incorporated by
reference from Grant Pridecos Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
December 31, 2007.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference from Grant Pridecos Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
December 31, 2007.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference from Grant Pridecos Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
December 31, 2007.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference from Grant Pridecos Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
December 31, 2007.
96
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from Grant Pridecos Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the SEC within
120 days after the end of the fiscal year ended
December 31, 2007.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)
The following documents are filed as a part of this
report or incorporated herein by reference:
1. Our consolidated financial statements are listed on
page 37 of this report.
2. Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts
for the three years ended December 31, 2007.
Note: All financial statement schedules not filed with this
report required by
Regulation S-X
have been omitted as not applicable or not required or the
information required has been included in the notes to financial
statements.
3. Our exhibits are listed below under Item 15(b).
(b)
Exhibits:
|
|
|
|
|
|
2
|
.1
|
|
Distribution Agreement, dated as of March 22, 2000, between
Weatherford and Grant Prideco, Inc. (incorporated by Reference
to Exhibit 2.1 to Grant Prideco, Inc.s Registration
Statement on
Form S-3,
Reg.
No. 333-35272).
|
|
2
|
.2
|
|
Purchase Agreement, dated as of October 25, 2002, among
Grant Prideco, Inc., as purchaser, and Schlumberger Technology
Corporation, as seller, (incorporated by reference to
Exhibit 2.1 to Grant Prideco, Inc.s Current
Report on
Form 8-K,
File
No. 001-15423,
filed on October 28, 2002).
|
|
2
|
.3
|
|
Plan of Merger Agreement, dated as of December 16, 2007, by
and between National Oilwell Varco, Inc., NOV Sub, Inc. and
Grant Prideco, Inc. (incorporated by reference to
Exhibit 2.1 of Grant Prideco, Inc.s Quarterly Report
on
Form 8-K
filed December 17, 2007, File
No. 1-15423).
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of Grant Prideco, Inc.
(incorporated by reference to Exhibit 3.1 to Grant Prideco,
Inc.s Registration Statement on
Form S-3,
Reg.
No. 333-35272)
|
|
3
|
.2
|
|
Restated Bylaws of Grant Prideco, Inc. (incorporated by
reference to Exhibit 3.2 to Grant Prideco, Inc.s
Registration Statement on Form 10, File
No. 1-15423,
as amended).
|
|
4
|
.1
|
|
Indenture for
9
5
/
8
% Senior
Notes due 2007 (incorporated by Reference to Exhibit 4.7 to
Grant Prideco, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2000, File
No. 1-15423).
|
|
4
|
.2
|
|
Form of
9
5
/
8
% Senior
Notes due 2007 (included as part of Exhibit 4.1 above).
|
|
4
|
.3*
|
|
Grant Prideco, Inc. 2000 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.6 to Grant
Prideco, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2000, File
No. 1-15423).
|
|
4
|
.4*
|
|
Grant Prideco, Inc. 2000 Employee Stock Option and Stock Plan
(incorporated by reference to Exhibit 10.5 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
4
|
.5*
|
|
Grant Prideco, Inc. Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.9 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
4
|
.6*
|
|
Grant Prideco, Inc. Foreign Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
4
|
.7*
|
|
Grant Prideco, Inc. Deferred Compensation Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.10 to
Grant Prideco, Inc.s Registration Statement on
Form 10, File
No. 1-15423,
as amended).
|
|
4
|
.8*
|
|
Grant Prideco, Inc. 401(k) Savings Plan (incorporated by
reference to Exhibit 10.11 to Grant Prideco, Inc.s
Registration Statement on Form 10, File
No. 1-15423,
as amended).
|
97
|
|
|
|
|
|
4
|
.9*
|
|
Grant Prideco, Inc. 2001 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.16 to Grant
Prideco, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2001, File
No. 1-15423).
|
|
4
|
.10
|
|
Indenture relating to the 61/8% Senior Notes due 2015,
dated as of July 27, 2005, among Grant Prideco, Inc.,
certain subsidiary guarantors and Wells Fargo Bank, N.A., as
Trustee (including form of note) (incorporated by reference to
Exhibit 4.1 to Grant Prideco, Inc.s Current Report on
Form 8-K,
filed on July 29, 2005).
|
|
4
|
.11
|
|
Supplemental Indenture relating to the 9% Senior Notes due
2009, dated as of July 27, 2005, among Grant Prideco,
Inc., certain subsidiary guarantors and Wells Fargo Bank, N.A.,
as Trustee (incorporated by reference to Exhibit 4.3 to
Grant Prideco, Inc.s Current Report on
Form 8-K,
filed on July 29, 2005).
|
|
4
|
.12
|
|
Credit Facility, dated as of May 12, 2005, among Grant
Prideco, Inc., certain subsidiaries of Grant Prideco, Inc. party
thereto, each lender from time to time party thereto, Bank of
America, N.A., as Syndication Agent, Wells Fargo Bank, National
Association, as Administrative Agent, US Swing Line Lender and
an L/C Issuer, HSBC Bank Plc, as UK Swing Line Lender and an L/C
Issuer, and Deutsche Bank Securities Inc., as Documentation
Agent (incorporated by reference to Exhibit 99.2 to Grant
Prideco, Inc.s Current Report on
Form 8-K,
filed on May 23, 2005).
|
|
4
|
.13
|
|
Form of Subsidiary Guarantee by certain of Grant Prideco,
Inc.s subsidiaries in favor of Deutsche Bank
Trust Company Americas, as agent (incorporated by reference
to Exhibit 4.10 to Grant Prideco, Inc.s Current
Report on
Form 8-K,
File
No. 1-15423,
filed on January 3, 2003).
|
|
4
|
.14*
|
|
Employee Stock Purchase Plan (incorporate by reference to
Exhibit 4.21 of Grant Pridecos Annual Report on
Form 10K for the year ended December 31, 2003, File
No. 1-15423).
|
|
4
|
.15*
|
|
Grant Prideco 2006 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.1 to Grant Pridecos Current
Report on
Form 10-K,
File
No. 1-5423,
filed on May 11, 2006).
|
|
10
|
.1
|
|
See Exhibits 2.1 and 4.1 through 4.24 for certain items
material contracts.
|
|
10
|
.2*
|
|
Employment Agreement with Michael McShane dated June 26,
2002 (incorporated by reference to Exhibit 10.1 to Grant
Prideco, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2002, File
No. 1-15423).
|
|
10
|
.3*
|
|
Employment Agreement with Matthew Fitzgerald dated
January 12, 2004 (incorporated by reference from
Exhibit 10.3 to the Grant Prideco Annual Report on
Form 10-K
for the year ended December 31, 2004).
|
|
10
|
.4*
|
|
Employment Agreement with Philip Choyce dated April 14,
2000 (incorporated by reference to Exhibit 10.26 to Grant
Prideco, Inc.s Registration Statement on
Form S-4,
Reg.
No. 333-102635).
|
|
10
|
.5*
|
|
Form of Change of Control Agreement with Philip Choyce
(incorporated by reference to Exhibit 10.6 to Grant
Prideco, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2000,
File No. 1-15423).
|
|
10
|
.6*
|
|
Form of Change of Control Agreement with David Black, Jim
Breihan, Greg Boane, and John Deane (incorporated by reference
to Exhibit 10.12 to Grant Prideco, Inc.s Annual
Report on
10-K
for the
year ended December 31, 2001, File
No. 1-15423)
|
|
10
|
.7
|
|
Tax Allocation Agreement dated April 14, 2000 between Grant
Prideco, Inc. and Weatherford (incorporated by reference to
Exhibit 10.13 to Weatherford International, Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2000, File
No. 1-13086).
|
|
10
|
.8
|
|
Investment Agreement, dated as of April 29, 1999, by and
between Grant Prideco, Inc. and VAT Schienen GmbH & Co
KG (incorporated by reference to Exhibit 10.12 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
10
|
.9
|
|
Operating Agreement, dated as of July 23, 1999, by and
Grant Prideco, Inc. and VAT Schienen GmbH & CoKG
(incorporated by reference to Exhibit 10.13 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File No. 1 -15423, as amended).
|
|
10
|
.10
|
|
Master Technology License Agreement, dated as of June 19,
1998, by and between Grant Prideco, Inc. and DST Distributors of
Steel Tubes Limited (incorporated by reference to
Exhibit 10.17 to Grant Prideco, Inc.s
Registration Statement on Form 10, File
No. 1-15423,
as amended).
|
|
10
|
.11*
|
|
Nonqualified Deferred Compensation Plan (incorporated by
reference to Exhibit 10.17 of Grant Pridecos Annual
Report on Form 10K for the year ended December 31,
2003, File
No. 1-15423).
|
98
|
|
|
|
|
|
10
|
.12
|
|
Supply Agreement, dated as of September 13, 2007, by and
between voestalpine Tubulars GmbH & Co KG and Grant
Prideco, Inc. (incorporated by reference to Exhibit 10.1 to
Grant Prideco, Inc.s Current Report on
Form 10-Q
for the quarter ended September 30, 2007, File
No. 1-15423).
|
|
10
|
.13
|
|
Purchase and Sale Agreement, dated as of October 29, 2007,
by and among Vallourec S.A. and Vallourec & Mannesmann
Holdings, Inc. and Grant Prideco, Inc. (incorporated by
reference to Exhibit 10.2 to Grant Prideco, Inc.s
Current Report on
Form 10-Q
for the quarter ended September 30, 2007, File
No. 1-15423).
|
|
10
|
.14*
|
|
Change of Control Agreement, dated April 16, 2007, with
Quintin Kneen (incorporated by reference to Exhibit 99.1 to
Grant Prideco, Inc.s Current Report on
Form 8-K,
File
No. 1-15423,
filed on April 20, 2007).
|
|
10
|
.15*
|
|
Grant Prideco, Inc. Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 99.1 to Grant
Prideco, Inc.s Current Report on
Form 8-K,
File
No. 1-15423,
filed on April 3, 2007).
|
|
21
|
.1
|
|
Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 of Grant Pridecos Annual Report on
Form 10-K for the year ended December 31, 2003, File
No. 1-15423)..
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
31
|
.1
|
|
Certification of Michael McShane.
|
|
31
|
.2
|
|
Certification of Matthew D. Fitzgerald.
|
|
32
|
.1
|
|
Section 906 Certification.
|
|
|
|
*
|
|
Designates a management or compensatory plan or arrangement.
|
99
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
Other
|
|
|
|
|
|
at End
|
|
Descriptions
|
|
of Year
|
|
|
Expenses
|
|
|
Accounts(a)
|
|
|
Deductions(b)
|
|
|
of Year
|
|
|
|
(In thousands)
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
3,523
|
|
|
$
|
2,349
|
|
|
$
|
90
|
|
|
$
|
3,116
|
(c)
|
|
$
|
2,846
|
|
Inventory Reserves
|
|
|
20,995
|
|
|
|
5,749
|
|
|
|
|
|
|
|
3,243
|
(c)
|
|
|
23,501
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
5,856
|
|
|
$
|
1,805
|
|
|
$
|
135
|
|
|
$
|
4,273
|
|
|
$
|
3,523
|
|
Inventory Reserves
|
|
|
17,600
|
|
|
|
8,514
|
|
|
|
|
|
|
|
5,119
|
|
|
|
20,995
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
$
|
8,024
|
|
|
$
|
1,682
|
|
|
$
|
210
|
|
|
$
|
4,060
|
|
|
$
|
5,856
|
|
Inventory Reserves
|
|
|
13,013
|
|
|
|
9,572
|
|
|
|
6
|
|
|
|
4,991
|
|
|
|
17,600
|
|
|
|
|
(a)
|
|
Represents currency translation adjustments and reclasses.
|
|
(b)
|
|
Primarily represents the elimination of accounts receivable and
inventory deemed uncollectible or worthless and, for accounts
receivable, represents reversals of prior accruals as
receivables are collected or deemed collectible.
|
|
(c)
|
|
Includes $0.1 million and $1.7 million in the
Allowance for Doubtful Accounts and Inventory Reserves,
respectively, as amounts related to Discontinued Operations. See
Note 2 for further discussion.
|
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Michael Mcshane
Chief Executive Officer, President,
and Chairman of the Board
Date: February 28, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
individuals on behalf of the registrant and in the capacities
and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity in Which Signed
|
|
Date
|
|
|
|
|
|
|
/s/
MICHAEL
MCSHANE
Michael
McShane
|
|
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
MATTHEW
D. FITZGERALD
Matthew
D. Fitzgerald
|
|
Sr. Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
GREG
L. BOANE
Greg
L. Boane
|
|
Vice President and Controller
(Principal Accounting Officer)
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
DAVID
J. BUTTERS
David
J. Butters
|
|
Director
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
DENNIS
R. HENDRIX
Dennis
R. Hendrix
|
|
Director
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
HAROLD
E. LAYMAN
Harold
E. Layman
|
|
Director
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
GORDON
T. HALL
Gordon
T. Hall
|
|
Director
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
ROBERT
K. MOSES, JR.
Robert
K. Moses, Jr.
|
|
Director
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
JOSEPH
E. REID
Joseph
E. Reid
|
|
Director
|
|
February 28, 2008.
|
|
|
|
|
|
/s/
DAVID
A. TRICE
David
A. Trice
|
|
Director
|
|
February 28, 2008
|
101
Exhibit Index
|
|
|
|
|
|
2
|
.1
|
|
Distribution Agreement, dated as of March 22, 2000, between
Weatherford and Grant Prideco, Inc. (incorporated by Reference
to Exhibit 2.1 to Grant Prideco, Inc.s Registration
Statement on
Form S-3,
Reg.
No. 333-35272).
|
|
2
|
.2
|
|
Purchase Agreement, dated as of October 25, 2002, among
Grant Prideco, Inc., as purchaser, and Schlumberger Technology
Corporation, as seller, (incorporated by reference to
Exhibit 2.1 to Grant Prideco, Inc.s Current
Report on
Form 8-K,
File
No. 001-15423,
filed on October 28, 2002).
|
|
2
|
.3
|
|
Plan of Merger Agreement, dated as of December 16, 2007, by
and between National Oilwell Varco, Inc., NOV Sub, Inc. and
Grant Prideco, Inc. (incorporated by reference to
Exhibit 2.1 of Grant Prideco, Inc.s Quarterly Report
on
Form 8-K
filed December 17, 2007, File
No. 1-15423).
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of Grant Prideco, Inc.
(incorporated by reference to Exhibit 3.1 to Grant Prideco,
Inc.s Registration Statement on
Form S-3,
Reg.
No. 333-35272)
|
|
3
|
.2
|
|
Restated Bylaws of Grant Prideco, Inc. (incorporated by
reference to Exhibit 3.2 to Grant Prideco, Inc.s
Registration Statement on Form 10, File
No. 1-15423,
as amended).
|
|
4
|
.1
|
|
Indenture for
9
5
/
8
% Senior
Notes due 2007 (incorporated by Reference to Exhibit 4.7 to
Grant Prideco, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2000, File
No. 1-15423).
|
|
4
|
.2
|
|
Form of
9
5
/
8
% Senior
Notes due 2007 (included as part of Exhibit 4.1 above).
|
|
4
|
.3*
|
|
Grant Prideco, Inc. 2000 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.6 to Grant
Prideco, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2000, File
No. 1-15423).
|
|
4
|
.4*
|
|
Grant Prideco, Inc. 2000 Employee Stock Option and Stock Plan
(incorporated by reference to Exhibit 10.5 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
4
|
.5*
|
|
Grant Prideco, Inc. Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.9 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
4
|
.6*
|
|
Grant Prideco, Inc. Foreign Executive Deferred Compensation Plan
(incorporated by reference to Exhibit 10.8 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
4
|
.7*
|
|
Grant Prideco, Inc. Deferred Compensation Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.10 to
Grant Prideco, Inc.s Registration Statement on
Form 10, File
No. 1-15423,
as amended).
|
|
4
|
.8*
|
|
Grant Prideco, Inc. 401(k) Savings Plan (incorporated by
reference to Exhibit 10.11 to Grant Prideco, Inc.s
Registration Statement on Form 10, File
No. 1-15423,
as amended).
|
|
4
|
.9*
|
|
Grant Prideco, Inc. 2001 Stock Option and Restricted Stock Plan
(incorporated by reference to Exhibit 10.16 to Grant
Prideco, Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2001, File
No. 1-15423).
|
|
4
|
.10
|
|
Indenture relating to the 61/8% Senior Notes due 2015,
dated as of July 27, 2005, among Grant Prideco, Inc.,
certain subsidiary guarantors and Wells Fargo Bank, N.A., as
Trustee (including form of note) (incorporated by reference to
Exhibit 4.1 to Grant Prideco, Inc.s Current Report on
Form 8-K,
filed on July 29, 2005).
|
|
4
|
.11
|
|
Supplemental Indenture relating to the 9% Senior Notes due
2009, dated as of July 27, 2005, among Grant Prideco,
Inc., certain subsidiary guarantors and Wells Fargo Bank, N.A.,
as Trustee (incorporated by reference to Exhibit 4.3 to
Grant Prideco, Inc.s Current Report on
Form 8-K,
filed on July 29, 2005).
|
|
4
|
.12
|
|
Credit Facility, dated as of May 12, 2005, among Grant
Prideco, Inc., certain subsidiaries of Grant Prideco, Inc. party
thereto, each lender from time to time party thereto, Bank of
America, N.A., as Syndication Agent, Wells Fargo Bank,
National Association, as Administrative Agent, US Swing Line
Lender and an L/C Issuer, HSBC Bank Plc, as UK Swing Line Lender
and an L/C Issuer, and Deutsche Bank Securities Inc., as
Documentation Agent (incorporated by reference to
Exhibit 99.2 to Grant Prideco, Inc.s Current Report
on
Form 8-K,
filed on May 23, 2005).
|
|
4
|
.13
|
|
Form of Subsidiary Guarantee by certain of Grant Prideco,
Inc.s subsidiaries in favor of Deutsche Bank
Trust Company Americas, as agent (incorporated by reference
to Exhibit 4.10 to Grant Prideco, Inc.s Current
Report on
Form 8-K,
File
No. 1-15423,
filed on January 3, 2003).
|
|
4
|
.14*
|
|
Employee Stock Purchase Plan (incorporate by reference to
Exhibit 4.21 of Grant Pridecos Annual Report on
Form 10K for the year ended December 31, 2003, File
No. 1-15423).
|
102
|
|
|
|
|
|
4
|
.15*
|
|
Grant Prideco 2006 Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.1 to Grant Pridecos
Current Report on
Form 10-K,
File
No. 1-5423,
filed on May 11, 2006).
|
|
10
|
.1
|
|
See Exhibits 2.1 and 4.1 through 4.24 for certain items
material contracts.
|
|
10
|
.2*
|
|
Employment Agreement with Michael McShane dated June 26,
2002 (incorporated by reference to Exhibit 10.1 to Grant
Prideco, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2002, File
No. 1-15423).
|
|
10
|
.3*
|
|
Employment Agreement with Matthew Fitzgerald dated
January 12, 2004 (incorporated by reference from
Exhibit 10.3 to the Grant Prideco Annual Report on
Form 10-K
for the year ended December 31, 2004).
|
|
10
|
.4*
|
|
Employment Agreement with Philip Choyce dated April 14,
2000 (incorporated by reference to Exhibit 10.26 to Grant
Prideco, Inc.s Registration Statement on
Form S-4,
Reg.
No. 333-102635).
|
|
10
|
.5*
|
|
Form of Change of Control Agreement with Philip Choyce
(incorporated by reference to Exhibit 10.6 to Grant
Prideco, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2000,
File No. 1-15423).
|
|
10
|
.6*
|
|
Form of Change of Control Agreement with David Black, Jim
Breihan, Greg Boane, and John Deane (incorporated by reference
to Exhibit 10.12 to Grant Prideco, Inc.s Annual
Report on
10-K
for the
year ended December 31, 2001, File
No. 1-15423)
|
|
10
|
.7
|
|
Tax Allocation Agreement dated April 14, 2000 between Grant
Prideco, Inc. and Weatherford (incorporated by reference to
Exhibit 10.13 to Weatherford International, Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2000, File
No. 1-13086).
|
|
10
|
.8
|
|
Investment Agreement, dated as of April 29, 1999, by and
between Grant Prideco, Inc. and VAT Schienen GmbH & Co
KG (incorporated by reference to Exhibit 10.12 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File
No. 1-15423,
as amended).
|
|
10
|
.9
|
|
Operating Agreement, dated as of July 23, 1999, by and
Grant Prideco, Inc. and VAT Schienen GmbH & CoKG
(incorporated by reference to Exhibit 10.13 to Grant
Prideco, Inc.s Registration Statement on Form 10,
File No. 1 -15423, as amended).
|
|
10
|
.10
|
|
Master Technology License Agreement, dated as of June 19,
1998, by and between Grant Prideco, Inc. and DST Distributors of
Steel Tubes Limited (incorporated by reference to
Exhibit 10.17 to Grant Prideco, Inc.s Registration
Statement on Form 10, File
No. 1-15423,
as amended).
|
|
10
|
.11*
|
|
Nonqualified Deferred Compensation Plan (incorporated by
reference to Exhibit 10.17 of Grant Pridecos Annual
Report on Form 10K for the year ended December 31,
2003, File
No. 1-15423).
|
|
10
|
.12
|
|
Supply Agreement, dated as of September 13, 2007, by and
between voestalpine Tubulars GmbH & Co KG and Grant
Prideco, Inc. (incorporated by reference to Exhibit 10.1 to
Grant Prideco, Inc.s Current Report on
Form 10-Q
for the quarter ended September 30, 2007, File
No. 1-15423).
|
|
10
|
.13
|
|
Purchase and Sale Agreement, dated as of October 29, 2007,
by and among Vallourec S.A. and
Vallourec & Mannesmann Holdings, Inc. and Grant
Prideco, Inc. (incorporated by reference to Exhibit 10.2 to
Grant Prideco, Inc.s Current Report on
Form 10-Q
for the quarter ended September 30, 2007, File
No. 1-15423).
|
|
10
|
.14*
|
|
Change of Control Agreement, dated April 16, 2007, with
Quintin Kneen (incorporated by reference to Exhibit 99.1 to
Grant Prideco, Inc.s Current Report on
Form 8-K,
File
No. 1-15423,
filed on April 20, 2007).
|
|
10
|
.15*
|
|
Grant Prideco, Inc. Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 99.1 to Grant
Prideco, Inc.s Current Report on
Form 8-K,
File
No. 1-15423,
filed on April 3, 2007).
|
|
21
|
.1
|
|
Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 of Grant Pridecos Annual Report on
Form 10-K for the year ended December 31, 2003, File
No. 1-15423).
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
31
|
.1
|
|
Certification of Michael McShane.
|
|
31
|
.2
|
|
Certification of Matthew D. Fitzgerald.
|
|
32
|
.1
|
|
Section 906 Certification.
|
|
|
|
*
|
|
Designates a management or compensatory plan or arrangement.
|
103
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