10-Q 1 d10q.txt FOR THE QUARTER ENDED MARCH 31, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------- FORM 10-Q ---------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-13439 DRIL-QUIP, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2162088 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 13550 HEMPSTEAD HIGHWAY HOUSTON, TEXAS 77040 (Address of principal executive offices) (Zip Code) (713) 939-7711 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] As of May 14, 2001, the number of shares outstanding of the registrant's common stock, par value $.01 per share, was 17,291,748. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS DRIL-QUIP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, March 31, 2000 2001 ------------ --------- ASSETS ------ (In thousands) Current assets: Cash and cash equivalents............................. $ 5,870 $ 3,283 Trade receivables..................................... 63,345 59,377 Inventories........................................... 69,481 76,136 Deferred taxes........................................ 5,367 5,399 Prepaids and other current assets..................... 2,243 2,526 -------- -------- Total current assets................................ 146,306 146,721 Property, plant and equipment, net...................... 86,723 89,199 Other assets............................................ 312 301 -------- -------- Total assets........................................ $233,341 $236,221 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable...................................... $ 24,438 $ 21,799 Current maturities of long-term debt.................. 495 474 Accrued income taxes.................................. 857 2,331 Customer prepayments.................................. 7,251 1,689 Accrued compensation.................................. 4,185 5,235 Other accrued liabilities............................. 3,445 3,343 -------- -------- Total current liabilities........................... 40,671 34,871 Long-term debt.......................................... 28,440 36,318 Deferred taxes.......................................... 2,440 2,437 -------- -------- Total liabilities................................... 71,551 73,626 Stockholders' equity: Preferred stock: 10,000,000 shares authorized at $0.01 par value (none issued)............................................. -- -- Common stock: 50,000,000 shares authorized at $0.01 par value, 17,290,498 shares issued and outstanding............ 173 173 Additional paid-in capital............................ 64,660 64,660 Retained earnings..................................... 102,813 105,621 Foreign currency translation adjustment............... (5,856) (7,859) -------- -------- Total stockholders' equity.......................... 161,790 162,595 -------- -------- Total liabilities and stockholders' equity.......... $233,341 $236,221 ======== ========
The accompanying notes are an integral part of these statements. 2 DRIL-QUIP, INC. CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, ------------------------ 2000 2001 ----------- ----------- (In thousands except share amounts) Revenues.............................................. $ 35,008 $ 47,105 Cost and expenses: Cost of sales....................................... 23,394 32,506 Selling, general and administrative................. 5,189 6,355 Engineering and product development................. 2,803 3,340 ----------- ----------- 31,386 42,201 ----------- ----------- Operating income...................................... 3,622 4,904 Interest expense (income)............................. (55) 615 ----------- ----------- Income before income taxes............................ 3,677 4,289 Income tax provision.................................. 1,287 1,481 ----------- ----------- Net income............................................ $ 2,390 $ 2,808 =========== =========== Earnings per share: Basic............................................... $ 0.14 $ 0.16 =========== =========== Fully diluted....................................... $ 0.14 $ 0.16 =========== =========== Weighted average shares: Basic............................................... 17,260,000 17,291,000 =========== =========== Fully diluted....................................... 17,455,000 17,411,000 =========== ===========
The accompanying notes are an integral part of these statements. 3 DRIL-QUIP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, ---------------- 2000 2001 ------- ------- (In thousands) Operating activities Net income.................................................. $ 2,390 $ 2,808 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................. 1,751 2,094 Loss (gain) on sale of equipment........................... (3) 5 Deferred income taxes...................................... (129) (77) Changes in operating assets and liabilities: Trade receivables......................................... (2,589) 3,310 Inventories............................................... (1,615) (8,120) Prepaids and other assets................................. (209) (330) Trade accounts payable and accrued expenses............... (3,164) (5,247) ------- ------- Net cash used in operating activities.................... (3,568) (5,557) Investing activities Purchase of property, plant and equipment................... (4,794) (5,549) Proceeds from sale of equipment............................. 6 0 ------- ------- Net cash used in investing activities.................... (4,788) (5,549) Financing activities Proceeds from revolving line of credit and long-term borrowing.................................................. 1,400 8,149 Principal payments on long-term debt........................ (25) (62) Proceeds from stock options exercised....................... 447 0 ------- ------- Net cash provided by financing activities................ 1,822 8,087 Effect of exchange rate changes on cash activities........... 100 432 ------- ------- Decrease in cash............................................. (6,434) (2,587) Cash at beginning of period.................................. 10,456 5,870 ------- ------- Cash at end of period........................................ $ 4,022 $ 3,283 ======= =======
The accompanying notes are an integral part of these statements. 4 DRIL-QUIP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION Dril-Quip, Inc., a Delaware corporation (the "Company" or "Dril-Quip"), manufactures highly engineered offshore drilling and production equipment which is well suited for use in deepwater, harsh environment and severe service applications. The Company's principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, wellhead connectors and diverters for use by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. Dril-Quip also provides installation and reconditioning services and rents running tools for use in connection with the installation and retrieval of its products. The Company has four subsidiaries that manufacture and market the Company's products abroad. Dril-Quip (Europe) Limited is located in Aberdeen, Scotland, with branches in Norway, Holland and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ Holdings PTY Ltd. is located in Perth, Australia and Dril-Quip do Brasil LTDA is located in Macae, Brazil. The condensed consolidated financial statements included herein have been prepared by Dril-Quip and are unaudited, except for the balance sheet at December 31, 2000, which has been prepared from the audited financial statements at that date. In the opinion of management, the unaudited condensed consolidated interim financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial position as of March 31, 2001, and the results of operations and the cash flows for each of the three-month periods ended March 31, 2001 and 2000. Although management believes the unaudited interim related disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and the cash flows for the three-month period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. INVENTORIES Inventories consist of the following:
(Unaudited) December 31, March 31, 2000 2001 ------------ ----------- (In thousands) Raw materials and supplies.......................... $13,728 $18,647 Work in progress.................................... 22,805 22,167 Finished goods and purchased supplies............... 32,948 35,322 ------- ------- $69,481 $76,136 ======= =======
3. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS No. 130 requires the Company to include unrealized gains or losses on foreign currency translation adjustments in other comprehensive income, which prior to adoption were reported separately in stockholders' equity. 5 DRIL-QUIP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) During the first three months of 2001 and 2000, total comprehensive income equaled approximately $805,000 and $1.7 million, respectively. 4. NEW ACCOUNTING STANDARDS Effective January 1, 2001, Dril-Quip adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("FAS 133"). This statement establishes accounting and reporting standards for derivative instruments and hedging activities. Under FAS 133, all derivatives must be recognized as assets or liabilities and measured at fair value. The adoption of this statement did not have a significant impact on Dril-Quip's financial position or results of operations. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected certain aspects of the Company's financial position and results of operations during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the unaudited consolidated financial statements included elsewhere herein, and with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the annual consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Overview Dril-Quip manufactures highly engineered offshore drilling and production equipment which is well suited for use in deepwater, harsh environment and severe service applications. The Company designs and manufactures subsea equipment, surface equipment and offshore rig equipment for use by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. The Company's principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, wellhead connectors and diverters. Dril-Quip also provides installation and reconditioning services and rents running tools for use in connection with the installation and retrieval of its products. Both the market for offshore drilling and production equipment and services and the Company's business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations offshore. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. Revenues. Dril-Quip's revenues are generated by its two operating groups: the Product Group and the Service Group. The Product Group manufactures offshore drilling and production equipment, and the Service Group provides installation and reconditioning services as well as rental running tools for installation and retrieval of its products. For the three months ended March 31, 2001, the Company derived 87.5% of its revenues from the sale of its products and 12.5% of its revenues from services. Revenues from the Service Group generally correlate to revenues from product sales because increased product sales generate increased revenues from installation services and rental running tools. Substantially all of Dril-Quip's sales are made on a purchase order basis. Purchase orders are subject to change and/or termination at the option of the customer. In case of a change or termination, the customer is required to pay the Company for work performed and other costs necessarily incurred as a result of the change or termination. The Company accounts for larger and more complex projects that have relatively longer manufacturing time frames on a percentage of completion basis. For the first three months of 2001, nine projects representing approximately 21% of the Company's revenues were accounted for using percentage of completion accounting. This percentage may fluctuate in the future. Revenues accounted for in this manner are generally recognized on the ratio of costs incurred to the total estimated costs. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage of completion are reflected in the period when such estimates are revised. Amounts received from customers in excess of revenues recognized are classified as a current liability. Foreign sales represent a significant portion of the Company's business. In the three months ended March 31, 2001, the Company generated approximately 54.4% of its revenues from foreign sales. In this period, approximately 74% (on the basis of revenues generated) of all products sold were manufactured in the United States. 7 Cost of Sales. The principal elements of cost of sales are labor, raw materials and manufacturing overhead. Variable costs, such as labor, raw materials, supplies and energy, generally account for approximately two-thirds of the Company's cost of sales. Fixed costs, such as the fixed portion of manufacturing overhead, constitute the remainder of the Company's cost of sales. Cost of sales as a percentage of revenues is also influenced by the product mix sold in any particular quarter and market conditions. The Company's costs related to its foreign operations do not significantly differ from its domestic costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, compensation expense, legal expenses and other related administrative functions. Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing, as well as application engineering related to customized products. Income Tax Provision. Dril-Quip's effective tax rate has historically been lower than the statutory rate due to benefits from its foreign sales corporation. Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of revenues:
Three months ended March 31, ------------- 2000 2001 ----- ----- Revenues: Product Group............................................... 87.8% 87.5% Service Group............................................... 12.2% 12.5% ----- ----- Total..................................................... 100.0% 100.0% Cost of sales................................................. 66.9% 69.0% Selling, general and administrative expenses.................. 14.8% 13.5% Engineering and product development expenses.................. 8.0% 7.1% ----- ----- Operating income.............................................. 10.3% 10.4% Interest expense (income)..................................... (0.2)% 1.3% ----- ----- Income before income taxes.................................... 10.5% 9.1% Income tax provision.......................................... 3.7% 3.1% ----- ----- Net income.................................................... 6.8% 6.0% ===== =====
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000. Revenues. Revenues increased by $12.1 million, or 35%, to $47.1 million in the three months ended March 31, 2001 from $35.0 million in the three months ended March 31, 2000. The net increase resulted from increased domestic sales from the United States of $7.1 million, increased sales of $2.8 million in the Asia-Pacific area and $3.6 million in the European area, offset by decreased export sales in the United States of $1.4 million. The overall increase in revenues was primarily attributable to increased demand for Dril-Quip products resulting from increased exploration and development activities by oil companies around the world, primarily due to improved worldwide oil and natural gas prices. Cost of Sales. Cost of sales increased $9.1 million, or 39%, to $32.5 million for the three months ended March 31, 2001 from $23.4 million for the same period in 2000. As a percentage of revenues, cost of sales were 69% and 67% for the three-month periods ending March 31, 2001 and 2000, respectively. This increase in cost of sales as a percentage of revenues was attributed to increases in costs of raw material, labor, energy, and outside 8 services; competitive pricing pressure; and factors associated with the move of the Company's Houston, Texas, manufacturing operations from its Hempstead Road location to its larger Eldridge Parkway facility. Selling, General and Administrative Expenses. In the three months ended March 31, 2001, selling, general and administrative expenses increased by $1.2 million, or approximately 23%, to $6.4 million from $5.2 million in the 2000 period The increase in selling, general and administrative expenses was primarily due to increased expenditures made for the purposes of expanding the Company's worldwide sales force and increasing its proposal and project management capabilities. Selling, general and administrative expenses decreased as a percentage of revenues to 13.5% from 14.8%. Engineering and Product Development Expenses. In the three months ended March 31, 2001, engineering and product development expenses increased by approximately 18% to $3.3 million from $2.8 million for the same period in 2000. This increase was primarily due to costs related to the development of new products. Engineering and product development expenses decreased as a percentage of revenues to 7.1% from 8%. Interest Income and Expense. Interest expense for the three months ended March 31, 2001 was $615,000 as compared to interest income of $55,000 for the three-month period ended March 31, 2000. This change resulted primarily from borrowings during the period ended March 31, 2001 under the Company's unsecured revolving line of credit. Net Income. Net income increased by approximately $400,000, or 17%, to $2.8 million in the three months ended March 31, 2001 from $2.4 million for the same period in 2000, for the reasons set forth above. Liquidity and Capital Resources The primary liquidity needs of the Company are (i) to fund capital expenditures to increase manufacturing capacity, improve and expand facilities and manufacture additional rental running tools and (ii) to fund working capital. The Company's principal sources of funds are cash flows from operations and bank indebtedness. Net cash used in operating activities was approximately $5.6 million and $3.6 million for the three months ended March 31, 2001 and 2000, respectively. The decrease in cash flow from operating activities was principally due to increased working capital requirements attributable to trade payables, accrued liabilities, and inventories. Capital expenditures by the Company were $5.5 million and $4.8 million for the three months ended March 31, 2001 and 2000, respectively. Principal payments on long-term debt were approximately $62,000 and $25,000 for the three months ended March 31, 2001 and 2000, respectively. The Company has a credit facility with Bank One, Texas, N.A. providing unsecured revolving line of credit of up to $40 million. At the option of the Company, borrowing under this facility bears interest at either a rate equal to LIBOR (London Interbank Offered Rate) plus 1.75% or the Bank One base rate. In addition, the facility calls for quarterly interest payments and terminates on June 30, 2003. As of March 31, 2001, the Company had drawn down $32.1 million under this facility for operating activities and capital expenditures. Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland which provides for a secured line of credit of up to U.K. Pounds Sterling 4.0 million (approximately U.S. $5.7 million). Borrowing under this facility bears interest at the Bank of Scotland base rate, currently 5.5%, plus 1%. As of March 31, 2001, Dril-Quip (Europe) Limited had drawn down approximately U.S. $4.5 million under this facility to finance capital expenditures in Norway. The Company believes that cash generated from operations plus cash on hand and its existing lines of credit will be sufficient to fund operations, working capital needs and anticipated capital expenditure requirements. However, should market conditions result in unexpected cash requirements, the Company believes that additional borrowing from commercial lending institutions would be readily available and more than adequate to meet such requirements. 9 Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not engage in any material hedging transactions, forward contracts or currency trading which could be subject to market risks inherent to such transactions. PART II--OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. Forward Looking Statements. Statements contained in all parts of this document that are not historical facts are forward looking statements that involve risks and uncertainties that are beyond the Company's control. These forward-looking statements include the following types of information and statements as they relate to the Company: . scheduled, budgeted and other future capital expenditures; . working capital requirements; . the availability of expected sources of liquidity; . statements regarding the market for Dril-Quip products; . statements regarding the exploration and production activities of Dril- Quip customers; . all statements regarding future operations, financial results, business plans and cash needs; and . the use of the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expressions intended to identify uncertainties. These statements are based upon certain assumptions and analyses made by management of the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including but not limited to, those relating to the volatility of oil and natural gas prices and cyclicality of the oil and gas industry, the Company's international operations, operating risks, the Company's dependence on key employees, the Company's dependence on skilled machinists and technical personnel, the Company's reliance on product development and possible technological obsolescence, control by certain stockholders, the potential impact of governmental regulation and environmental matters, competition, reliance on significant customers and other factors detailed in the Company's filings with the Securities and Exchange Commission. Prospective investors are cautioned that any such statements are not guarantees of future 10 performance, and that, should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. Item 6. Exhibits and Reports on Form 8-K.
Exhibit Number Description ------- ----------- *3.1 --Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *3.2 --Bylaws of the Company (Incorporated herein by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *4.1 --Certificate of Designations for Series A Junior Participating Preferred Stock (Incorporated herein by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *4.2 --Form of certificate representing Common Stock (Incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *4.3 --Rights Agreement between Dril-Quip, Inc. and Chase Mellon Shareholder Services, L.L.C., as rights agent (Incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). 10.1 --Second Amendment to Credit Agreement between the Company and Bank One, Texas, N.A. dated January 24, 2001. 10.2 --Credit Agreement between Dril-Quip (Europe) Limited and Bank of Scotland dated March 21, 2001.
-------- * Incorporated herein by reference as indicated. Reports on Form 8-K None. 11