-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PbNsB1JTFhMZHZdOrS9OgaznNvWRACfD0yrMd69VJEbpjWCgyds9IYJ7Gg98ArSS x/bmd75VY8hDdYhLe9uFNg== 0000899243-98-002123.txt : 19981116 0000899243-98-002123.hdr.sgml : 19981116 ACCESSION NUMBER: 0000899243-98-002123 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRIL-QUIP INC CENTRAL INDEX KEY: 0001042893 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 742162088 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13439 FILM NUMBER: 98748758 BUSINESS ADDRESS: STREET 1: 13550 HEMPSTEAD HIGHWAY CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7139397711 MAIL ADDRESS: STREET 1: 180 EAST FIFTH STREET CITY: HOUSTON STATE: TX ZIP: 77040 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 SEPTEMBER 30, 1998 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 13550 HEMPSTEAD HIGHWAY HOUSTON, TEXAS 77040 (713) 939-7711 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- 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 November 13, 1998, the number of shares outstanding of the registrant's common stock, par value $.01 per share, was 17,245,000. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DRIL-QUIP, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, ASSETS 1997 1998 ------ ------------ ------------- (IN THOUSANDS) Current assets: Cash and cash equivalents......................... $ 32,612 $ 14,641 Trade receivables................................. 27,336 41,417 Inventories....................................... 52,436 52,873 Deferred taxes.................................... 3,694 4,233 Prepaids and other current assets................. 657 1,420 -------- -------- Total current assets............................ 116,735 114,584 Property, plant and equipment, net.................. 35,814 56,108 Other assets........................................ 372 271 -------- -------- Total assets.................................... $152,921 $170,963 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable.................................. $ 15,354 $ 14,732 Current maturities of long-term debt.............. 210 156 Accrued income taxes.............................. 1,176 2,711 Customer prepayments.............................. 4,324 7,528 Accrued compensation.............................. 3,098 3,473 Other accrued liabilities......................... 3,200 2,705 -------- -------- Total current liabilities....................... 27,362 31,305 Long-term debt...................................... 308 211 Deferred taxes...................................... 1,090 1,168 -------- -------- Total liabilities............................... 28,760 32,684 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, 17,245,000 shares issued and outstanding....... 172 172 Additional paid-in capital........................ 63,291 63,291 Retained earnings................................. 62,590 75,736 Foreign currency translation adjustment........... (1,892) (920) -------- -------- Total stockholders' equity...................... 124,161 138,279 -------- -------- Total liabilities and stockholders' equity...... $152,921 $170,963 ======== ========
The accompanying notes are an integral part of these statements. 2 DRIL-QUIP INC. CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1998 1997 1998 ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT SHARE AMOUNTS) Revenues......................... $ 38,004 $ 47,125 $ 106,673 $ 132,829 Cost and expenses: Cost of sales.................. 25,468 31,925 73,193 89,482 Selling, general and administrative................ 4,125 5,397 11,964 15,556 Engineering and product development................... 2,451 3,174 6,560 8,728 ---------- ---------- ---------- ---------- 32,044 40,496 91,717 113,766 ---------- ---------- ---------- ---------- Operating income................. 5,960 6,629 14,956 19,063 Interest expense (income)........ 747 (305) 2,147 (1,005) ---------- ---------- ---------- ---------- Income before income taxes....... 5,213 6,934 12,809 20,068 Income tax provision............. 1,693 2,391 4,176 6,922 ---------- ---------- ---------- ---------- Net income....................... $ 3,520 $ 4,543 $ 8,633 $ 13,146 ========== ========== ========== ========== Earnings per share: Basic.......................... $ 0.24 $ 0.26 $ 0.60 $ 0.76 ========== ========== ========== ========== Fully diluted.................. $ 0.24 $ 0.26 $ 0.60 $ 0.76 ========== ========== ========== ========== Weighted average shares: Basic.......................... 14,370,000 17,245,000 14,370,000 17,245,000 ========== ========== ========== ========== Fully diluted.................. 14,370,000 17,245,000 14,370,000 17,285,000 ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. 3 DRIL-QUIP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ---------------- 1997 1998 ------ -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $8,633 $ 13,146 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 3,908 4,033 Gain on sale of equipment................................. (103) (3) Deferred income taxes..................................... (601) (452) Changes in operating assets and liabilities: Trade receivables........................................ (5,950) (13,817) Inventories.............................................. (1,846) 396 Prepaids and other assets................................ (360) (654) Trade accounts payable and accrued expenses.............. (1,118) 3,765 ------ -------- Net cash provided by operating activities.................... 2,563 6,414 INVESTING ACTIVITIES Purchase of property, plant, and equipment.................. (5,210) (24,063) Proceeds from sale of equipment............................. 192 190 ------ -------- Net cash used in investing activities....................... (5,018) (23,873) FINANCING ACTIVITIES Proceeds from revolving line of credit and long-term borrowings................................................. 4,373 0 Principal payments on long-term debt........................ (2,669) (135) ------ -------- Net cash provided by (used in) financing activities......... 1,704 ( 135) Effect of exchange rate changes on cash activities.......... (50) (377) ------ -------- Increase (decrease) in cash................................. ( 801) (17,971) Cash at beginning of period................................. 1,361 32,612 ------ -------- Cash at end of period....................................... $ 560 $ 14,641 ====== ========
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 three 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. The consolidated financial statements included herein have been prepared by Dril-Quip and are unaudited, except for the balance sheet at December 31, 1997, which has been prepared from the audited financial statements at that date. In the opinion of management, the unaudited consolidated interim financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial position as of September 30, 1998, the results of operations for each of the three and nine-month periods ended September 30, 1998 and 1997 and the cash flows for each of the nine-month periods ended September 30, 1998 and 1997. 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 nine-month period ended September 30, 1998 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, 1997. 2. INVENTORIES Inventories consist of the following:
(UNAUDITED) DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- (IN THOUSANDS) Raw materials and supplies........................... $13,178 $11,353 Work in progress..................................... 14,766 19,942 Finished goods and purchased supplies................ 24,492 21,578 ------- ------- $52,436 $52,873 ======= =======
5 DRIL-QUIP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) 3. USE OF PROCEEDS On October 28, 1997, the Company sold 2,875,000 shares of common stock in an initial public offering (the "Offering"). The net proceeds to the Company from the Offering were approximately $63 million. The Company is using these proceeds for a three-year capital expansion program to increase manufacturing capacity, improve and expand facilities and manufacture additional running tools for rental. At the current time, the Company has made no changes to its capital expansion program. However, due to changes in overall market conditions, planned capital expenditures for 1999 are currently under review. Pending application of the proceeds for these purposes, the Company used approximately $30 million to repay its bank indebtedness in full during late October and November 1997. The balance of the proceeds will be used for working capital and excess cash is being invested in short-term investment grade securities. 4. 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 shareholders' 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 shareholders' equity. During the first nine months of 1998 and 1997, total comprehensive income amounted to $14.1 million and $6.4 million, respectively. For the three-month periods ended September 30, 1998 and 1997, total comprehensive income equaled $5.1 million and $2.3 million, respectively. 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, 1997. 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. The market for offshore drilling and production equipment and services is fundamentally driven by the exploration, development and production spending of oil and gas companies, particularly with respect to offshore activities worldwide. 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. In 1997, the Company derived 86% of its revenues from the sale of its products and 14% 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. Historically, Dril-Quip recognized revenues upon the delivery of completed product. Beginning in 1997, the Company has been involved with larger and more complex projects that have longer manufacturing times. The Company accounted for such projects on a percentage of completion basis. For the first nine months of 1998, three projects representing approximately 17% of the Company's revenues were accounted for using percentage of completion accounting. The Company expects that this percentage may increase 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. The Company historically has experienced some seasonality, with revenues and operating income slightly lower during the first and third quarters compared to the second and fourth quarters. The Company's revenues are affected by its customers' capital expenditure budgeting process, which generally results in lower revenues in the first quarter and higher revenues in the fourth quarter. The increase in revenues recognized using percentage of completion accounting may result in less fluctuation in revenues recognized from quarter to quarter. 7 Foreign sales represent a significant portion of the Company's business. In the nine months ended September 30, 1998, the Company generated approximately 66% of its revenues from foreign sales. In this period, approximately 68% (on the basis of revenues generated) of all products sold were manufactured in the United States. 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. The Company has experienced increased labor costs over the past few years due to the limited supply of skilled workers. 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. 8 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 NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1997 1998 1997 1998 ------ ------ ------ ------ Revenues: Product Group.................................... 85.8% 88.0% 85.7% 87.7% Service Group.................................... 14.2% 12.0% 14.3% 12.3% ------ ------ ------ ------ Total.......................................... 100.0% 100.0% 100.0% 100.0% Cost of sales...................................... 67.0% 67.7% 68.6% 67.4% Selling, general and administrative expenses....... 10.9% 11.5% 11.2% 11.7% Engineering and product development expenses....... 6.4% 6.7% 6.2% 6.6% ------ ------ ------ ------ Operating income................................... 15.7% 14.1% 14.0% 14.3% Interest expense................................... 2.0% -0.6% 2.0% -0.8% ------ ------ ------ ------ Income before income taxes......................... 13.7% 14.7% 12.0% 15.1% Income tax provision............................... 4.4% 5.1% 3.9% 5.2% ------ ------ ------ ------ Net income......................................... 9.3% 9.6% 8.1% 9.9% ====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997. Revenues. Revenues increased by $9.1 million, or 24%, to $47.1 million in the three months ended September 30, 1998 from $38.0 million in the three months ended September 30, 1997. This increase resulted from increased domestic sales in the United States of $1.3 million, increased export sales from the United States of $9.9 million, increased European sales of $1.1 million and decreased sales of $3.2 million in the Asia-Pacific area. In general, revenue increases were the result of increased manufacturing capacity and increased sales of new products related to larger and longer-term projects. Decreased revenues, based upon a quarter-to-quarter comparison, in the Asia-Pacific area resulted from an unusually large shipment which occurred in the third quarter of 1997. Cost of Sales. Cost of sales increased $6.4 million, or 25%, to $31.9 million for the three months ended September 30, 1998 from $25.5 million for the same period in 1997. As a percentage of revenues, cost of sales was 67% and 68% for the three-month periods ending September 30, 1997 and 1998. Selling, General and Administrative Expenses. In the three months ended September 30, 1998, selling, general and administrative expenses increased by $1.3 million, or 32%, to $5.4 million from $4.1 million in the 1997 period. The increase was due to an increased number of personnel to support higher sales volumes and increased labor costs. Selling, general and administrative expenses increased as a percentage of revenues from 11% to 12%. Engineering and Product Development Expenses. In the three months ended September 30, 1998, engineering and product development expenses increased by $723,000, or 29% to $3.2 million from $2.5 million in the same period in 1997. The increase reflects an increased number of personnel and increased development testing related to new products. Interest Expense. Interest expense for the three months ended September 30, 1997 was $747,000 as compared to interest income of $305,000 for the three- month period ended September 30, 1998. This fluctuation of approximately $1.05 million resulted from the repayment of substantially all of the Company's bank debt during the fourth quarter of 1997. Net Income. Net income increased by approximately $1.0 million, or 29%, from $3.5 million in the three months ended September 30, 1997 to $4.5 million for the same period in 1998 for the reasons set forth above. 9 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997. Revenues. Revenues increased by $26.1 million, or 24%, to $132.8 million in the nine months ended September 30, 1998 from $106.7 million in the nine months ended September 30, 1997. This increase resulted from increased domestic sales in the United States of $8.7 million, increased export sales from the United States of $15.8 million, increased European sales of $2.1 million and decreased sales of $500,000 in the Asia-Pacific area. In general, these revenue increases were the result of increased manufacturing capacity and an increase in sales of new products related to larger and longer-term projects. Cost of Sales. Cost of sales increased $16.3 million, or 22%, to $89.5 million for the nine months ended September 30, 1998 from $73.2 million for the same period in 1997. As a percentage of revenues, cost of sales was 69% and 67% for the nine-month periods ending September 30, 1997 and 1998, respectively. This improvement in cost of sales was mainly due to changes in the Company's overall product mix. Selling, General and Administrative Expenses. In the nine months ended September 30, 1998, selling, general and administrative expenses increased by $3.6 million, or 30%, to $15.6 million from $12.0 million in the 1997 period. The increase was due to an increased number of personnel to support higher sales volumes and increased labor costs. Selling, general and administrative expenses increased as a percent of revenues from 11% to 12%. Engineering and Product Development Expenses. In the nine months ended September 30, 1998, engineering and product development expenses increased by $2.1 million, or 32%, to $8.7 million from $6.6 million in the same period in 1997. The increase reflects an increased number of personnel and increased development testing related to new products. Interest Expense. Interest expense for the nine months ended September 30, 1997 was approximately $2.1 million as compared to interest income of $1.0 million for the nine-month period ended September 30, 1998. This fluctuation of approximately $3.1 million resulted from the repayment of substantially all of the Company's bank debt during the fourth quarter of 1997. Net Income. Net income increased by approximately $4.5 million, or 52%, from $8.6 million in the nine months ended September 30, 1997 to $13.1 million for the same period in 1998 for the reasons set forth above. LIQUIDITY AND CAPITAL RESOURCES The primary liquidity needs of the Company are to fund capital expenditures and to fund working capital. Historically, the Company's principal sources of funds have been cash flow from operations and bank indebtedness. However, in October of 1997, the Company sold 2,875,000 shares of common stock in an initial public offering (the "Offering") which resulted in net proceeds to the Company of approximately $63 million. The Company is using the proceeds from the Offering for a three-year capital expansion program to increase manufacturing capacity, improve and expand facilities and manufacture additional running tools for rental. At the current time, the Company has made no changes to its capital expansion program. However, due to changes in overall market conditions, planned capital expenditures for 1999 are currently under review. Pending application of the proceeds for these purposes, the Company used approximately $30 million to repay its bank indebtedness in full during late October and November 1997. The balance of the proceeds will be used for working capital and excess cash is being invested in short-term investment grade securities. Net cash provided by operating activities was approximately $2.6 million and $6.4 million for the nine months ended September 30, 1997 and 1998, respectively. Improvements in cash flow from operating activities are principally due to improved operating results, offset by increased working capital requirements attributable to increases in accounts receivable due to increased revenues and project sales. 10 Capital expenditures by the Company were $5.2 million and $24.1 million for the nine months ended September 30, 1997 and 1998, respectively. Principal payments on long-term debt were approximately $2.7 million and $135,000 for the nine months ended September 30, 1997 and 1998, respectively. The Company believes that the remaining proceeds from the Offering and cash generated from operations will be sufficient to fund operations, working capital needs and anticipated capital expenditure requirements. YEAR 2000 The Company has undertaken a compliance program which includes a comprehensive review of its computer systems and operational equipment to identify the systems that may be impacted by the Year 2000 problem. The Year 2000 problem is a result of computer codes being written using two digits, rather than four, to define the applicable year. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's Year 2000 compliance program has been initiated to ensure that all of the critical systems and processes under its direct control remain operational. This program will focus on the Company's information technology systems and software, embedded systems in production control equipment, and third party readiness in the supply of products and services. Upon completion of the assessment phase of the program, the Company plans to remediate or replace all systems, equipment and products that are negatively affected by the Year 2000 problem. The Company is currently implementing the program and anticipates completion of remediation and testing prior to July 1, 1999. The Company does not anticipate that its products will be affected by Year 2000 issues because its products are mechanical and structural in nature and do not include integrated circuitry requiring data input. Although the Company is attempting to determine the readiness of third parties, there may be certain interactive or interdependent systems or processes outside the control of the Company, and there can be no assurance that these systems or processes will remain functional. Non-compliance by key third parties could have a material effect on the operations of the Company, causing shutdowns or other significant business interruptions. To date, costs incurred by the Company related solely to the Year 2000 problem have been minimal. In the opinion of management, the costs to complete the Year 2000 compliance program will not have a material effect on the Company's financial position, cash flows or consolidated results of operations. 11 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Use of Proceeds. In October 1997 the Company sold 2,875,000 shares of Common Stock in the Offering. The net proceeds to the Company from the Offering were $63.3 million. As of September 30, 1998, the Company had used such net proceeds as follows: (i) to repay $30 million of indebtedness outstanding under the Company's credit facilities and term loans, which constitutes repayment of such facilities in full, (ii) $27.5 million for the purchase of buildings, machinery and equipment and (iii) $5.8 million in temporary investments. None of such payments was a direct or indirect payment to directors or officers of the Company or their associates, to persons owning 10% or more of any class of equity securities of the Company or to affiliates of the Company. 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; . use of Offering proceeds; . working capital requirements; . the availability of expected sources of liquidity; . the impact of the Year 2000 problem; . all statements regarding future operations, financial results, business plans and cash needs; and . the use of any 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, 12 reliance on significant customers and other factors detailed in the Registration Statement on Form S-1 (Registration No. 333-33447) filed in connection with the Offering and the Company's other filings with the Securities and Exchange Commission. Prospective investors are cautioned that any such statements are not guarantees of future 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 ------- ----------- *2.1 --Agreement and Plan of Merger by and Between Dril-Quip, Inc., a Texas corporation, and Dril-Quip, Inc., a Delaware corporation (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33447)). *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)). *3.3 --Certificate of Designations for Series A Junior Participating Preferred Stock. *4.1 --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)). *4.2 --Registration Rights Agreement among Dril-Quip, Inc. and certain stockholders (Incorporated herein by reference to Exhibit 4.2 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)). 27.1 --Financial Data Schedule.
- -------- * Incorporated herein by reference as indicated. REPORTS ON FORM 8-K None. 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DRIL-QUIP, INC. Date: November 13, 1998 /s/ Larry E. Reimert _____________________________________ Principal Financial Officer and Duly Authorized Signatory 14 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 9-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 SEP-30-1998 32,612 14,641 0 0 27,336 41,417 0 0 52,436 52,873 116,735 114,584 69,049 93,744 (33,235) (37,636) 152,921 170,963 27,362 31,305 0 0 0 0 0 0 172 172 123,989 138,107 152,921 170,963 146,823 132,829 146,823 132,829 99,800 89,482 125,271 113,766 0 0 0 0 2,027 (1,005) 19,525 20,068 6,587 6,922 12,938 13,146 0 0 0 0 0 0 12,938 13,146 0.87 0.76 0.87 0.76
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