Form 10-Q

-----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, FS9I4M86zkrUfaZzjEE3m7/oiHZomXZ8B2kM+ogjsqh5GVOZYKl4IhDyltbrBw8D 1G71UfRYQfJpmjnzgCOROQ== 0001193125-05-160816.txt : 20050808 0001193125-05-160816.hdr.sgml : 20050808 20050808163429 ACCESSION NUMBER: 0001193125-05-160816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050808 DATE AS OF CHANGE: 20050808 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: 1934 Act SEC FILE NUMBER: 001-13439 FILM NUMBER: 051006310 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 d10q.htm FORM 10-Q 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 JUNE 30, 2005

¨	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

incorporation or organization)

(I.R.S. Employer

Identification No.)

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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes x No ¨

As of August 5, 2005, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 17,511,115.

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DRIL-QUIP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS


	December 31, 2004		June 30, 2005
			(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	5,159	$	8,469
Trade receivables		63,116		69,219
Inventories		110,763		131,131
Deferred taxes		7,231		7,680
Prepaids and other current assets		3,798		3,463

Total current assets		190,067		219,962

Property, plant and equipment, net		113,206		113,438
Other assets		292		407

Total assets	$	303,565	$	333,807

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,805	$	32,423
Current maturities of long-term debt		990		925
Accrued income taxes		2,982		3,700
Customer prepayments		8,311		11,720
Accrued compensation		6,296		7,491
Other accrued liabilities		6,967		8,055

Total current liabilities		52,351		64,314

Long-term debt		28,082		35,940
Deferred taxes		6,769		6,722

Total liabilities		87,202		106,976

Commitments and contingencies		—		—

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, 17,300,873 and 17,466,052 shares issued and outstanding at December 31, 2004 and June 30, 2005, respectively		173		174
Additional paid-in capital		64,889		69,001
Retained earnings		145,162		156,171
Foreign currency translation adjustment		6,139		1,485

Total stockholders’ equity		216,363		226,831

Total liabilities and stockholders’ equity	$	303,565	$	333,807

The accompanying notes are an integral part of these statements.

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three months ended June 30,				Six months ended June 30,
	2004		2005		2004		2005
	(In thousands except share data)
Revenues	$	52,921	$	80,616	$	106,299	$	150,620

Cost and expenses:
Cost of sales		36,625		55,783		74,130		104,727
Selling, general and administrative		8,171		9,459		15,567		18,952
Engineering and product development		3,989		5,689		8,261		10,698

		48,785		70,931		97,958		134,377

Operating income		4,136		9,685		8,341		16,243
Interest expense		248		410		558		774

Income before income taxes		3,888		9,275		7,783		15,469
Income tax provision		1,086		2,615		2,446		4,460

Net income	$	2,802	$	6,660	$	5,337	$	11,009

Earnings per share:
Basic	$	0.16	$	0.38	$	0.31	$	0.63

Diluted	$	0.16	$	0.37	$	0.31	$	0.62

Weighted average shares:
Basic		17,293,373		17,466,052		17,293,373		17,458,021

Diluted		17,325,669		17,817,188		17,330,122		17,817,498

The accompanying notes are an integral part of these statements.

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
	2004			2005
	(In thousands)
Operating activities
Net income	$	5,337		$	11,009
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		5,597			6,710
Gain on sale of equipment		(44	)		(54	)
Deferred income taxes		(91	)		(519	)
Changes in operating assets and liabilities:
Trade receivables		6,998			(8,091	)
Inventories, net		(1,304	)		(23,127	)
Prepaids and other assets		2,696			217
Trade accounts payable and accrued expenses		789			13,127

Net cash provided by (used in) operating activities		19,978			(728	)

Investing activities
Purchase of property, plant and equipment		(7,106	)		(8,845	)
Proceeds from sale of equipment		150			511

Net cash used in investing activities		(6,956	)		(8,334	)

Financing activities
Proceeds from revolving line of credit		—			8,600
Principal payments on revolving line of credit and long-term debt		(13,551	)		(482	)
Proceeds from sale of stock related to stock option plan		—			4,114

Net cash provided by (used in) financing activities		(13,551	)		12,232
Effect of exchange rate changes on cash activities		(106	)		140

Increase (decrease) in cash		(635	)		3,310
Cash at beginning of period		8,325			5,159

Cash at end of period	$	7,690		$	8,469

The accompanying notes are an integral part of these statements.

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’s operations are organized into three geographic segments—Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services and the Company has major manufacturing facilities in all three of its headquarter locations. The Company previously reported a single industry segment and disclosed certain geographic information. All prior periods presented herein have been revised to present geographic segment information. See note 4.

The condensed consolidated financial statements included herein have been prepared by Dril-Quip and are unaudited, except for the balance sheet at December 31, 2004, which has been derived 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 June 30, 2005, the results of operations for each of the three and six-month periods ended June 30, 2005 and 2004 and the cash flows for each of the six-month periods ended June 30, 2005 and 2004. 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 in the United States 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 six-month period ended June 30, 2005 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, 2004.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, inventories and contingent liabilities as discussed more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Cash and cash equivalents

Investments that have a maturity of three months or less from the date of purchase are classified as cash equivalents.

Inventories

Inventory costs are determined principally by the use of the first-in, first-out (FIFO) method, and are stated at the lower of cost or market. Inventory is valued principally using standard costs that are calculated based upon direct costs incurred and overhead allocations. Periodically, obsolescence reviews are performed on slow-moving inventories and reserves are established based on current assessments about future demands and market conditions. The inventory values have been reduced by a reserve for excess and obsolete inventories. Inventory reserves of $10.0 million and $8.9 million were recorded as of June 30, 2005 and 2004, respectively. If market conditions are less favorable than those projected by management, additional inventory reserves may be required.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost, with depreciation provided on a straight-line basis over their estimated useful lives.

Income Taxes

The Company accounts for income taxes using the liability method. Deferred income taxes are provided on income and expenses which are reported in different periods for income tax and financial reporting purposes.

Revenue Recognition

The Company delivers most of its products and services on an as-needed basis by its customers and records revenues as the products are shipped and as services are rendered. Allowances for doubtful accounts are determined generally on a case by case basis. Certain revenues are derived from long-term product contracts which generally require more than one year to fulfill. Revenues and profits on long-term product contracts are recognized under the percentage-of-completion method based on a cost-incurred basis. Losses, if any, on contracts are recognized when they become known. Contracts for long-term projects contain provisions for customer progress payments. Payments in excess of revenues recognized are included as a customer prepayment liability.

Foreign Currency

The financial statements of foreign subsidiaries are translated into U.S. dollars at current exchange rates except for revenues and expenses, which are translated at average rates during each reporting period. Translation adjustments are reflected as a separate component of stockholders’ equity and have no current effect on earnings or cash flows.

Foreign currency exchange transactions are recorded using the exchange rate at the date of the settlement. These amounts are included in selling, general and administrative costs in the consolidated statements of income.

DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Stock-Based Compensation

The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting For Stock Based Compensation” (“SFAS No. 123”). Accordingly, no compensation cost has been recognized for stock options granted under the Company’s incentive plan.

Under SFAS No. 123, pro forma information is required to reflect the estimated effect on net income and earnings per share as if the Company had accounted for the stock options using the fair value method. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:


	2002			2003			2004
Risk free interest rate		4.25	%		3.11	%	No grants
Volatility of the stock price		.649			.620
Expected life of options (in years)		5			5
Expected dividend		0.0	%		0.0	%
Calculated fair value per share	$	11.95		$	8.22

Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards consistent with the method available under SFAS No. 123, the Company’s net income and earnings per share for each of the three and six month periods ended June 30, 2004, and 2005 would have been reduced to the pro forma amounts listed below.


	Three months ended June 30,						Six months ended June 30,
	2004			2005			2004			2005
	(In thousands, except share data)
Net Income
As reported	$	2,802		$	6,660		$	5,337		$	11,009
Less: Compensation expense per SFAS No. 123, net of tax		(562	)		(429	)		(1,124	)		(853	)

Pro forma net income	$	2,240		$	6,231		$	4,213		$	10,156

Earnings per share
Basic	$	0.16		$	0.38		$	0.31		$	0.63

Diluted	$	0.16		$	0.37		$	0.31		$	0.62

Pro forma earnings per share
Basic	$	0.13		$	0.36		$	0.24		$	0.58

Diluted	$	0.13		$	0.35		$	0.24		$	0.57

There were no option grants during the six months ended June 30, 2005.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates which approximate market rates.

DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Concentration of Credit Risk

Financial instruments which subject the Company to concentrations of credit risk consist principally of trade receivables. The Company grants credit to its customers, which operate primarily in the oil and gas industry. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains reserves for potential losses and such losses have historically been within management’s expectations.

Comprehensive Income

SFAS No. 130 establishes the rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires the Company to include unrealized gains or losses on foreign currency translation adjustments in other comprehensive income. Generally, gains are attributed to a weakening U.S. dollar and losses are the result of a strengthening U.S. dollar.

The following table provides comprehensive income for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
	2004			2005			2004		2005
	(In thousands)						(In thousands)
Net income	$	2,802		$	6,660		$	5,337	$	11,009
Foreign currency translation adjustment		(489	)		(3,570	)		855		(4,654	)

Comprehensive income	$	2,313		$	3,090		$	6,192	$	6,355

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed considering the dilutive effect of stock options.

The net income used in the basic and dilutive earning per share calculations is the same. The following table reconciles the number of common shares outstanding at June 30 of each year to the weighted average of common shares outstanding and the weighted average number of common and dilutive potential common shares outstanding for the purpose of calculating basic and diluted earnings per common share:


	Three months ended June 30,		Six months ended June 30,
	2004	2005	2004	2005
	(In thousands)		(In thousands)
Number of common shares outstanding at end of period	17,293	17,466	17,293	17,466
Effect of using weighted average common shares outstanding	—	—	—	(8	)

Weighted average basic common shares outstanding	17,293	17,466	17,293	17,458
Dilutive effect of common stock options	33	351	37	359

Weighted average diluted common shares outstanding	17,326	17,817	17,330	17,817

DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

New Accounting Standards

In December 2004, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share-Based Payments. This statement is a revision of SFAS Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R addresses all forms of share based payment (“SBP”) awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will be reflected as compensation expense in the financial statements. In addition, this statement will apply to unvested options granted prior to the effective date.

This new standard is currently effective at the beginning of the fiscal year that begins after December 15, 2005. Dril-Quip, Inc. is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations and cash flows.

3. INVENTORIES

Inventories consist of the following:


	December 31, 2004		June 30, 2005
	(In thousands)
Raw materials and supplies	$	17,815	$	14,682
Work in progress		16,247		32,072
Finished goods		76,701		84,377

	$	110,763	$	131,131

DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

4. GEOGRAPHIC AREAS


	Three months ended June 30,						Six months ended June 30,
	2004			2005			2004			2005
	(In thousands)						(In thousands)
Revenues
Western Hemisphere:
Products	$	17,586		$	27,903		$	37,928		$	56,896
Services		4,622			6,282			10,390			13,073
Intercompany		11,380			14,329			17,561			20,915

Total	$	33,588		$	48,514		$	65,879		$	90,884

Eastern Hemisphere
Products	$	19,881		$	31,420		$	38,663		$	52,668
Services		3,476			4,334			7,222			7,753
Intercompany		424			67			787			541

Total	$	23,781		$	35,821		$	46,672		$	60,962

Asia-Pacific
Products	$	6,539		$	9,658		$	10,252		$	18,498
Services		817			1,019			1,844			1,732
Intercompany		871			284			871			1,093

Total	$	8,227		$	10,961		$	12,967		$	21,323

Summary
Products	$	44,006		$	68,981		$	86,843		$	128,062
Services		8,915			11,635			19,456			22,558
Intercompany		12,675			14,680			19,219			22,549
Eliminations		(12,675	)		(14,680	)		(19,219	)		(22,549	)

Total	$	52,921		$	80,616		$	106,299		$	150,620

Income before taxes:
Western Hemisphere	$	998		$	5,051		$	1,424		$	9,536
Eastern Hemisphere		1,140			1,707			3,301			984
Asia-Pacific		2,367			3,000			3,319			5,418
Eliminations		(617	)		(483	)		(261	)		(469	)

Total	$	3,888		$	9,275		$	7,783		$	15,469


	June 30,
	2004			2005
	(In thousands)
Total Assets:
Western Hemisphere	$	157,960		$	202,017
Eastern Hemisphere		92,685			106,891
Asia-Pacific		25,198			29,195
Eliminations		(4,104	)		(4,296	)

	$	271,739		$	333,807

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 condensed consolidated financial statements. This discussion should be read in conjunction with the unaudited condensed 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, 2004.

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 from two sources: products and services. Product revenues are derived from the sale of offshore drilling and production equipment, and service revenues are earned when the Company provides installation and reconditioning services as well as rental running tools for installation and retrieval of its products. For the six months ended June 30, 2005, the Company derived 85% of its revenues from the sale of its products and 15% of its revenues from services. Service revenues 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 six months of 2005, four projects representing approximately 18% 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. Losses, if any, are recognized when they become known. Amounts billed to or 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 six months ended June 30, 2005, the Company generated approximately 68% of its revenues from sales outside the United States. In this period, approximately 60% (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. 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, foreign currency transaction gains and losses, 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 research and development expenditures, foreign sales and foreign income tax rate differentials.

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 June 30,				Six months ended June 30,
	2004		2005		2004		2005
Revenues:
Products	83.2	%	85.6	%	81.7	%	85.0	%
Services	16.8		14.4		18.3		15.0

Total	100.0		100.0		100.0		100.0
Cost of sales	69.2		69.2		69.7		69.5
Selling, general and administrative expenses	15.4		11.7		14.7		12.6
Engineering and product development expenses	7.5		7.1		7.8		7.1

Operating income	7.9		12.0		7.8		10.8
Interest expense	0.5		0.5		0.5		0.5

Income before income taxes	7.4		11.5		7.3		10.3
Income tax provision	2.1		3.2		2.3		3.0

Net income	5.3	%	8.3	%	5.0	%	7.3	%

Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004.

Revenues. Revenues increased by $27.7 million, or approximately 52.3%, to $80.6 million in the three months ended June 30, 2005 from $52.9 million in the three months ended June 30, 2004. The net increase resulted primarily from increased product revenues in the Western Hemisphere, Asia-Pacific and the Eastern Hemisphere of $10.3 million, $11.5 million and $3.1 million, respectively. Service revenues increased in the Western Hemisphere, Asia-Pacific and the Eastern Hemisphere by approximately $1.7 million, $900,000 and $200,000, respectively. In general, the increase in revenues resulted from increased demand for the Company’s products realized on a worldwide basis as oil and gas companies have increased their levels of capital expenditures on exploration, drilling and production operations offshore.

Cost of Sales. Cost of sales increased by $19.2 million, or approximately 52.3%, to $55.8 million for the three months ended June 30, 2005 from $36.6 million for the same period in 2004. As a percentage of revenues, cost of sales were approximately 69% for each of the three-month periods ending June 30, 2005 and 2004.

Selling, General and Administrative Expenses. For the three months ended June 30, 2005, selling, general and administrative expenses increased by $1.3 million or approximately 15.8%, to $9.5 million from $8.2 million in the 2004 period. The increase in selling, general and administrative expenses was primarily due to increased labor and overhead expenses resulting from increased staffing levels in the areas of sales, administration and finance. The Company experienced approximately $570,000 in foreign currency transaction gains in the second quarter of 2005 versus approximately $20,000 in foreign currency transaction losses in the second quarter of 2004. Selling, general and administrative expenses as a percentage of revenues declined from 15.4% in 2004 to 11.7% in 2005.

Engineering and Product Development Expenses. For the three months ended June 30, 2005, engineering and product development expenses increased by $1.7 million or approximately 42.6% to $5.7 million from $4.0 million in the same period of 2004. This was primarily due to increased headcount and the corresponding increased salary expenses related to new product development. Engineering and product development expenses as a percentage of revenues declined from 7.5% in 2004 to 7.1% in 2005.

Interest Expense. Interest expense for the three months ended June 30, 2005 was $410,000 as compared to interest expense of $248,000 for the three-month period ended June 30, 2004. This change resulted primarily from higher interest rates and additional borrowing during the period ended June 30, 2005 under the Company’s unsecured revolving line of credit as compared to borrowings during the period ended June 30, 2004.

Net Income. Net income was approximately $6.7 million for the three months ended June 30, 2005 and $2.8 million for the same period in 2004, for the reasons set forth above.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004.

Revenues. Revenues increased by $44.3 million, or approximately 41.7%, to $150.6 million in the six months ended June 30, 2005 from $106.3 million in the six months ended June 30, 2004. The net increase resulted primarily from increased product revenues in the Western Hemisphere, Asia-Pacific and the Eastern Hemisphere of $19.0 million, $14.0 million and $8.2 million, respectively. Service revenues increased by approximately $3.1 million with increased service revenues in the Western Hemisphere of $2.7 million and in the Eastern Hemisphere of $500,000, offset by decreased revenues in Asia-Pacific of $100,000. In general, the increase in revenues resulted from increased demand for the Company’s products realized on a worldwide basis as oil and gas companies have increased their levels of capital expenditures on exploration, drilling and production operations offshore.

Cost of Sales. Cost of sales increased by $30.6 million, or approximately 41.3%, to $104.7 million for the six months ended June 30, 2005 from $74.1 million for the same period in 2004. As a percentage of revenues, cost of sales were approximately 70% for each of the six-month periods ending June 30, 2005 and 2004.

Selling, General and Administrative Expenses. For the six months ended June 30, 2005, selling, general and administrative expenses increased by approximately $3.4 million or 21.7%, to $19.0 million from $15.6 million in the 2004 period. The increase in selling, general and administrative expenses was primarily due to increased labor and overhead expenses resulting from increased staffing levels in the areas of sales, administration and finance. The Company experienced approximately $350,000 in foreign currency transaction gains during the six months ended June 30, 2005 versus approximately $320,000 in foreign currency transaction gains during the six months ended June 30, 2004. Selling, general and administrative expenses as a percentage of revenues declined from 14.7% in 2004 to 12.6% in 2005.

Engineering and Product Development Expenses. For the six months ended June 30, 2005, engineering and product development expenses increased by $2.4 million, or approximately 29.5% to $10.7 million from $8.3 million in the same period of 2004. This was primarily due to increased headcount and the corresponding increased salary expenses related to new product development. Engineering and product development expenses as a percentage of revenues declined from 7.8% in 2004 to 7.1% in 2005.

Interest Expense. Interest expense for the six months ended June 30, 2005 was $774,000 as compared to interest expense of $558,000 for the six-month period ended June 30, 2004. This change resulted primarily from higher interest rates and additional borrowing during the period ended June 30, 2005 under the Company’s unsecured revolving line of credit as compared to borrowings during the period ended June 30, 2004.

Net Income. Net income was approximately $11.0 million for the six months ended June 30, 2005 and $5.3 million for the same period in 2004, for the reasons set forth above.

Liquidity and Capital Resources

The primary liquidity needs of the Company are (i) to fund capital expenditures to 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 provided by (used in) operating activities was approximately ($700,000) and $20.0 million for the six months ended June 30, 2005 and 2004, respectively. The decline in cash flow from operating activities was principally due to increased working capital requirements attributable to inventory and trade receivables offset by net income, trade accounts payable and accrued expenses.

Capital expenditures by the Company were $8.8 million and $7.1 million for the six months ended June 30, 2005 and 2004, respectively. This increase was primarily due to expenditures for land and facilities at the Company’s wholly owned subsidiary in Macae, Brazil and cost associated with running tools. Principal payments on long term debt were $482,000 and borrowing on the Company’s revolving line of credit was $8.6 million for the six month period ending June 30, 2005, compared to payments on long-term debt of $551,000 and payments of $13.0 million on the Company’s revolving line of credit for the same period in 2004.

The Company has a credit facility with Guaranty Bank, FSB providing an unsecured revolving line of credit of up to $65 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 1.5% or the Guaranty Bank base rate. The facility calls for quarterly interest payments and terminates on June 1, 2009. The facility also contains certain covenants including maintaining minimum tangible net worth levels and not exceeding specified funded debt amounts. The Company is in compliance with all loan covenants. As of June 30, 2005, the Company had drawn down $32.5 million under this facility for operating activities and capital expenditures.

Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland dated March 21, 2001 in the original amount of U.K. Pounds Sterling 3.7 million (approximately U.S. $6.6 million). Borrowing under this facility bears interest at the Bank of Scotland base rate, which was 4.75% at June 30, 2005, plus 1%, and is repayable in 120 equal monthly installments, plus interest. Substantially all of this facility was used to finance capital expenditures in Norway. The outstanding balance of this facility at June 30, 2005 was approximately U.S. $4.2 million. The facility is secured by land and buildings in Aberdeen, Scotland and contains no restrictive financial covenants.

The Company believes that cash generated from operations plus cash on hand and its existing line of credit will be sufficient to fund operations, working capital needs and anticipated capital expenditure requirements in 2005. However, any significant future declines in hydrocarbon prices could have a material adverse effect on the Company’s liquidity. 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is currently exposed to certain market risks related to interest rate changes and fluctuations in foreign exchange rates. The Company does not believe that these risks are material. 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.

Foreign Exchange Rate Risk

Through its subsidiaries, the Company conducts a portion of its business in currencies other than the United States dollar, principally the British pound sterling. The Company generally attempts to minimize the associated currency exchange risks by seeking international contracts payable in local currency and in U.S. dollars. Because of this strategy, the Company has not experienced significant transaction gains or losses associated with changes in currency exchange rates and does not anticipate such exposure to be material in the future. There is no assurance that the Company will be able to protect itself against currency fluctuations in the future.

Interest Rate Risk

As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” the Company has entered into two credit facilities or loans that require the Company to pay interest at a floating rate. These floating-rate obligations expose the Company to the risk of increased interest expense in the event of increases in the short-term interest rates. Based upon the June 30, 2005 balance of approximately $36.7 million related to these floating rate obligations, each 1.0% rise in interest rates would result in additional annual interest expense to the Company of approximately $368,000, or $92,000 per quarter.

Item 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Co-Chief Executive Officers and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005 to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

“Management’s Annual Reports on Internal Control over Financial Reporting” appears on page 22 of the 2004 annual report on Form 10-K.

There has been no change in the Company’s internal controls over financial reporting that occurred during the six months ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is involved in a number of legal actions arising in the ordinary course of business. Although no assurance can be given with respect to the ultimate outcome of such legal actions, in the opinion of management, the ultimate liability with respect thereto will not have a material adverse effect on the Company’s financial position.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

Dril-Quip’s annual meeting of stockholders was held on May 12, 2005 for the purpose of electing two directors to serve for three-year terms and approving the appointment of BDO Seidman, LLP as independent public accountants of the Company for 2005.

1. Election of Directors

Stockholders elected J. Mike Walker and John V. Lovoi, each for a three-year term expiring at the 2008 annual meeting. The vote tabulation was as follows:


Director	Votes Cast For	Votes Cast Against Or Withhold
J. Mike Walker	13,886,879	2,690,167
John V. Lovoi	16,429,266	147,780

Directors continuing in office were Larry E. Reimert, Gary D. Smith, Alexander P. Shukis and Gary L. Stone.

2. Proposal approving the appointment of BDO Seidman, LLP as independent public accountants of the Company for 2005.


For		16,565,698
Against		5,246
Abstain		6,102

Item 5. Other Information.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 Dril-Quip’s control. You can identify the Company’s forward looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions. 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 Company products;

•

statements regarding the exploration and production activities of Company customers; and

•

all statements regarding future operations, financial results, business plans and cash needs.

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 the 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, political developments and instability, acts of terrorism or war and other factors detailed in 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.

The following exhibits are filed herewith:


Exhibit No.		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 3.3 to the Company’s Report on Form 10-Q for the Quarter ended September 30, 1997. (SEC File No. 1-13439))

*4.2	—	Form of certificate representing Common Stock (Incorporated herein by reference to Exhibit 4.1 the Company’s Registration Statement on Form S-1 (Registration No. 333-33447)).

*4.3	—	Registration Rights Agreement among the Company 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)).

*4.4	—	Rights Agreement between the Company and ChaseMellon Shareholders 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)).

4.5	—	First Amendment to Credit Agreement between Dril-Quip, Inc. and Guaranty Bank, FSB effective November 19, 2001.

4.6	—	Second Amendment to Credit Agreement between Dril-Quip, Inc. and Guaranty Bank, FSB effective May 16, 2003.

4.7	—	Third Amendment to Credit Agreement between Dril-Quip, Inc. and Guaranty Bank, FSB effective June 1, 2005.

31.1	—	Rule 13a-14(a)/15d-14(a) Certification of Larry E. Reimert.

31.2	—	Rule 13a-14(a)/15d-14(a) Certification of Gary D. Smith.

31.3	—	Rule 13a-14(a)/15d-14(a) Certification of J. Mike Walker.

31.4	—	Rule 13a-14(a)/15d-14(a) Certification of Jerry M. Brooks.

32.1	—	Section 1350 Certification of Larry E. Reimert.

32.2	—	Section 1350 Certification of Gary D. Smith.

32.3	—	Section 1350 Certification of J. Mike Walker.

32.4	—	Section 1350 Certification of Jerry M. Brooks.

*	Incorporated herein by reference as indicated.

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.

By:		/S/ JERRY M. BROOKS
		Jerry M. Brooks, Chief Financial Officer (Principal Accounting Officer and Duly Authorized Signatory)

Date: August 8, 2005

EX-4.5 2 dex45.htm FIRST AMENDMENT TO CREDIT AGREEMENT First Amendment to Credit Agreement

Exhibit 4.5

FIRST AMENDMENT TO CREDIT AGREEMENT

BETWEEN

DRIL-QUIP, INC.

AND

GUARANTY BANK, FSB

AS LENDER

Effective as of November 19, 2001

REVOLVING LINE OF CREDIT OF UP TO $60,000,000

TABLE OF CONTENTS


		PAGE
ARTICLE I	DEFINITIONS	1
1.01	Terms Defined Above	1
1.02	Terms Defined in Agreement	1
1.03	References	1
1.04	Articles and Sections	1
1.05	Number and Gender	1
ARTICLE II	AMENDMENTS	2
2.01	Amendment of Section 1.2	2
2.02	Amendment of Exhibit I	2
ARTICLE III	CONDITIONS	2
3.01	Receipt of Documents	2
3.02	Accuracy of Representations and Warranties	2
3.03	Matters Satisfactory to Lender	2
ARTICLE IV	REPRESENTATIONS AND WARRANTIES	2
ARTICLE V	RATIFICATION	3
ARTICLE VI	MISCELLANEOUS	3
6.01	Scope of Amendment	3
6.02	Agreement as Amended	3
6.03	Parties in Interest	3
6.04	Rights of Third Parties	3
6 05	ENTIRE AGREEMENT	3
6.06	GOVERNING LAW	3
6.07	JURISDICTION AND VENUE	4

FIRST AMENDMENT TO CREDIT AGREEMENT

This FIRST AMENDMENT TO CREDIT AGREEMENT (this “First Amendment”) is made and entered into effective as of November 19, 2001, between DRIL-QUIP, INC., a Delaware corporation, (the “Borrower”), and GUARANTY BANK, FSB, a federal savings bank (the “Lender”).

W I T N E S S E T H

WHEREAS, the above named parties did execute and exchange counterparts of that certain Credit Agreement dated May 18, 2001 (the “Agreement”), to which reference is here made for all purposes;

WHEREAS, the parties subject to and bound by the Agreement are desirous of amending the Agreement in the particulars hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties to the Agreement, as set forth therein, and the mutual covenants and agreements of the parties hereto, as set forth in this First Amendment, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.01 Terms Defined Above. As used herein, each of the terms “Agreement,” “Borrower,” “First Amendment,” and “Lender” shall have the meaning assigned to such term hereinabove.

1.02 Terms Defined in Agreement. As used herein, each term defined in the Agreement shall have the meaning assigned thereto in the Agreement, unless expressly provided herein to the contrary.

1.03 References. References in this First Amendment to Article or Section numbers shall be to Articles and Sections of this First Amendment, unless expressly stated herein to the contrary. References in this First Amendment to “hereby,” “herein,” hereinafter,” hereinabove,” “hereinbelow,” “hereof,” and “hereunder” shall be to this First Amendment in its entirety and not only to the particular Article or Section in which such reference appears.

1.04 Articles and Sections. This First Amendment, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties, and other legal relations of the parties hereto shall be determined from this First Amendment as an entirety and without regard to such division into Articles and Sections and without regard to headings prefixed to such Articles and Sections.

1.05 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the

general, but shall be construed as cumulative. Definitions of terms defined in the singular and plural shall be equally applicable to the plural or singular, as the case may be.

ARTICLE II

AMENDMENTS

The Borrower and the Lender hereby amend the Agreement in the following particulars:

2.01 Amendment of Section 1.2. Section 1.2 of the Agreement is hereby amended as follows:

The following definitions are amended to read as follows:

“Available Commitment” shall mean, at any time, an amount equal to the remainder, if any, of (a) $60,000,000 minus (b) the Loan Balance at such time.

2.02 Amendment of Exhibit I. Exhibit I, i.e. the Form of Promissory Note, is as set forth on Exhibit I to this First Amendment.

ARTICLE III

CONDITIONS

The obligation of the Lender to amend the Agreement as provided herein is subject to the fulfillment of the following conditions precedent:

3.01 Receipt of Documents. The Lender shall have received, reviewed, and approved the following documents and other items, appropriately executed when necessary and in form and substance satisfactory to the Lender:

(a) multiple counterparts of this First Amendment and the Note, as requested by the Lender;

(b) Upfront Fee in the amount of $25,000 and

(c) such other agreements, documents, items, instruments, opinions, certificates, waivers, consents, and evidence as the Lender may reasonably request.

3.02 Accuracy of Representations and Warranties. The representations and warranties contained in Article IV of the Agreement and this First Amendment shall be true and correct.

3.03 Matters Satisfactory to Lender. All matters incident to the consummation of the transactions contemplated hereby shall be satisfactory to the Lender.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

The Borrower hereby expressly re-makes, in favor of the Lender, all of the representations and warranties set forth in Article IV of the Agreement, and represents and warrants that all such representations and warranties remain true and unbreached.

ARTICLE V

RATIFICATION

Each of the parties hereto does hereby adopt, ratify, and confirm the Agreement and the other Loan Documents, in all things in accordance with the terms and provisions thereof, as amended by this First Amendment.

ARTICLE VI

MISCELLANEOUS

6.01 Scope of Amendment. The scope of this First Amendment is expressly limited to the matters addressed herein and this First Amendment shall not operate as a waiver of any past, present, or future breach, Default, or Event of Default under the Agreement, except to the extent, if any, that any such breach, Default, or Event of Default is remedied by the effect of this First Amendment.

6.02 Agreement as Amended. All references to the Agreement in any document heretofore or hereafter executed in connection with the transactions contemplated in the Agreement shall be deemed to refer to the Agreement as amended by this First Amendment.

6.03 Parties in Interest. All provisions of this First Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Lender and their respective successors and assigns.

6.04 Rights of Third Parties. All provisions herein are imposed solely and exclusively for the benefit of the Lender and the Borrower, and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms and any or all of such provisions may be freely waived in whole or in part by the Lender at any time if in its sole discretion it deems it advisable to do so.

6.05 ENTIRE AGREEMENT. THIS FIRST AMENDMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL, BETWEEN SUCH PARTIES REGARDING THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS FIRST AMENDMENT, THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER WRITTEN DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN CONNECTION WITH OR AS SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

6.06 GOVERNING LAW. THIS FIRST AMENDMENT, THE AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO THE STATE OF TEXAS.

6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS FIRST AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND THE LENDER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE BORROWER OR THE LENDER IN ACCORDANCE WITH THIS SECTION.

IN WITNESS WHEREOF, this First Amendment to Credit Agreement is executed effective the date first hereinabove written.


BORROWER

DRIL-QUIP, INC.

By:		/s/ J. Mike Walker
		J. Mike Walker
		Co-Chairman

LENDER

GUARANTY BANK, FSB

By:		/s/ Arthur R. Gralla, Jr.
		Arthur R. Gralla, Jr.
		Senior Vice President

PROMISSORY NOTE


$60,000,000		Houston, Texas		November 19, 2001

FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned (“Maker”) promises to pay to the order of GUARANTY BANK, FSB (“Payee”), at its banking quarters in Houston, Harris County, Texas, the sum of SIXTY MILLION DOLLARS ($60,000,000), or so much thereof as may be advanced against this Note pursuant to the Credit Agreement dated of even date herewith by and between Maker and Payee (as amended, restated, or supplemented from time to time, the “Credit Agreement”), together with interest at the rates and calculated as provided in the Credit Agreement.

Reference is hereby made to the Credit Agreement for matters governed thereby, including, without limitation, certain events which will entitle the holder hereof to accelerate the maturity of all amounts due hereunder. Capitalized terms used but not defined in this Note shall have the meanings assigned to such terms in the Credit Agreement.

This Note is issued pursuant to, is the “Note” under, and is payable as provided in the Credit Agreement. Subject to compliance with applicable provisions of the Credit Agreement, Maker may at any time pay the full amount or any part of this Note without the payment of any premium or fee, but such payment shall not, until this Note is fully paid and satisfied, excuse the payment as it becomes due of any payment on this Note provided for in the Credit Agreement.

THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY TO THIS NOTE.


DRIL-QUIP, INC.

By:		/s/ J. Mike Walker
		J. Mike Walker
		Co-Chairman

EX-4.6 3 dex46.htm SECOND AMENDMENT TO CREDIT AGREEMENT Second Amendment to Credit Agreement

Exhibit 4.6

SECOND AMENDMENT TO CREDIT AGREEMENT

BETWEEN

DRIL-QUIP, INC.

AND

GUARANTY BANK, FSB

AS LENDER

Effective as of May 16, 2003

REVOLVING LINE OF CREDIT OF UP TO $65,000,000

TABLE OF CONTENTS


		PAGE
ARTICLE I	DEFINITIONS	1
1.01	Terms Defined Above	1
1.02	Terms Defined in Agreement	1
1.03	References	1
1.04	Articles and Sections	1
1.05	Number and Gender	1
ARTICLE II	AMENDMENTS	2
2.01	Amendment of Section 1.2	2
2.02	Amendment of Section 2.2	3
2.03	Addition of Section 2.16	3
2.04	Addition of Section 2.17	3
2.05	Amendment to Preamble to Article III	4
2.06	Amendment of Section 3.2	4
2.07	Amendment of Article IV	4
2.08	Amendment of Section 5.14	5
2.09	Amendment of Section 8.7	5
ARTICLE III	CONDITIONS	6
3.01	Receipt of Documents	6
3.02	Accuracy of Representations and Warranties	6
3.03	Matters Satisfactory to Lender	6
ARTICLE IV	REPRESENTATIONS AND WARRANTIES	7
ARTICLE V	RATIFICATION	7
ARTICLE VI	MISCELLANEOUS	7
6.01	Scope of Amendment	7
6.02	Agreement as Amended	7
6.03	Parties in Interest	7
6.04	Rights of Third Parties	7
6.05	ENTIRE AGREEMENT	7
6.06	GOVERNING LAW	8
6.07	JURISDICTION AND VENUE	8

SECOND AMENDMENT TO CREDIT AGREEMENT

This SECOND AMENDMENT TO CREDIT AGREEMENT (this “Second Amendment”) is made and entered into effective as of May 16, 2003, between DRIL-QUIP, INC., a Delaware corporation, (the “Borrower”), and GUARANTY BANK, FSB, a federal savings bank (the “Lender”).

W I T N E S S E T H

WHEREAS, the above named parties did execute and exchange counterparts of that certain Credit Agreement dated May 18, 2001, as amended by First Amendment to Credit Agreement dated November 19, 2001 (the “Agreement”), to which reference is here made for all purposes;

WHEREAS, the parties subject to and bound by the Agreement are desirous of amending the Agreement in the particulars hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties to the Agreement, as set forth therein, and the mutual covenants and agreements of the parties hereto, as set forth in this Second Amendment, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.01 Terms Defined Above. As used herein, each of the terms “Agreement,” “Borrower,” “Lender,” and “Second Amendment,” shall have the meaning assigned to such term hereinabove.

1.02 Terms Defined in Agreement. As used herein, each term defined in the Agreement shall have the meaning assigned thereto in the Agreement, unless expressly provided herein to the contrary.

1.03 References. References in this Second Amendment to Article or Section numbers shall be to Articles and Sections of this Second Amendment, unless expressly stated herein to the contrary. References in this Second Amendment to “hereby,” “herein,” hereinafter,” hereinabove,” “hereinbelow,” “hereof,” and “hereunder” shall be to this Second Amendment in its entirety and not only to the particular Article or Section in which such reference appears.

1.04 Articles and Sections. This Second Amendment, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties, and other legal relations of the parties hereto shall be determined from this Second Amendment as an entirety and without regard to such division into Articles and Sections and without regard to headings prefixed to such Articles and Sections.

general, but shall be construed as cumulative. Definitions of terms defined in the singular and plural shall be equally applicable to the plural or singular, as the case may be.

ARTICLE II

AMENDMENTS

The Borrower and the Lender hereby amend the Agreement in the following particulars:

2.01 Amendment of Section 1.2. Section 1.2 of the Agreement is hereby amended as follows:

The following definitions are added and/or amended to read as follows:

“Available Commitment” shall mean, at any time, an amount equal to the remainder, if any, of (a) $65,000,000 minus (b) the sum of the Loan Balance at such time plus the L/C Exposure at such time.

“Commitment Termination Date” shall mean May 18, 2006.

“Final Maturity” shall mean May 18, 2006.

“L/C Exposure” shall mean, at anytime, the aggregate maximum amount available to be drawn under outstanding Letters of Credit at such time.

“Letter of Credit” shall mean any standby letter of credit issued by the Lender for the account of the Borrower pursuant to Section 2.16.

“Letter of Credit Application” shall mean the standard letter of credit application employed by the Lender from time to time in connection with letters of credit.

“Letter of Credit Fee” shall mean each fee payable to the Lender by the Borrower pursuant to Section 2.17 upon or in connection with the issuance of a Letter of Credit.

“Loan” shall mean any loan made by the Lender to or for the benefit of the Borrower pursuant to this Agreement and any payment made by the Lender under a Letter of Credit.

“Loan Balance” shall mean, at any time, the outstanding principal balance of the Note plus the L/C Exposure at such time.

“Loan Documents” shall mean this Agreement, the Note, the Letter of Credit Applications, the Letters of Credit and all other documents and instruments now or hereafter delivered pursuant to the terms of or in connection with this Agreement, the Note, the Letter of Credit Applications, the Letters of Credit and all renewals and extensions of, amendments and supplements to, and restatements of, any or all of the foregoing from time to time in effect.

“Obligations” shall mean, without duplication, (a) all Indebtedness evidenced by the Note, (b) the Reimbursement Obligations, (c) the undrawn, unexpired amount of all outstanding Letters of Credit, (d) the obligation of the Borrower for the payment of Commitment Fees, Facility Fees and Letter of Credit Fees, (e) all other obligations and liabilities of the Borrower to the Lender, now existing or hereafter incurred, under, arising out of or in connection with any Loan Document, and to the extent that any of the foregoing includes or refers to the payment of amounts deemed or constituting interest, only so much thereof as shall have accrued, been earned and which remains unpaid at each relevant time of determination.

“Reimbursement Obligation” shall mean the obligation of the Borrower to provide to the Lender or reimburse the Lender for any amounts payable, paid, or incurred by the Lender with respect to Letters of Credit.

2.02 Amendment of Section 2.2. Section 2.2 of the Agreement is hereby amended to read as follows:

“2.2 Use of Loan Proceeds. (a) Proceeds of all Loans shall be used solely for capital expenditures, for general corporate purposes and for working capital needs.

(b) Letters of Credit shall be used solely for general corporate purposes; provided, however, no Letter of Credit may be used in lieu or in support of stay or appeal bonds.”

2.03 Amendment of Section 2.9. Section 2.9 of the Agreement is hereby amended to read as follows:

“2.9 Facility Fee. In addition to interest on the Note as provided herein and all other fees payable hereunder and to compensate the Lender for the costs of the extension of credit hereunder, the Borrower shall pay to the Lender on May 16, 2003, in immediately available funds, a facility fee in the amount of $162,500.

2.04 Addition of Section 2.16. A new section designated “Section 2.16” is hereby added to the Agreement to read as follows:

“2.16 Letter of Credit Facility. (a) Upon the terms and conditions (including, without limitation, the right of the Lender to decline to issue any Letter of Credit so long as any Default or Event of Default exists) and relying on the representations and warranties contained in this Agreement, the Lender agrees, during the Commitment Period, to issue Letters of Credit following the receipt not less than two Business Days prior to the requested date for issuance of the relevant Letter of Credit, of a Letter of Credit Application executed by the Borrower; provided, however, (a) no Letter of Credit shall have an expiration date which is more than 365 days after the issuance thereof or subsequent to the Commitment Termination Date, and (b) the Lender shall not be obligated to issue any Letter of Credit if (i) the face amount thereof would exceed the Available Commitment, or (ii) after giving effect to the issuance thereof, the L/C Exposure would exceed $5,000,000.

(b) Should the Lender be called upon by the beneficiary of any Letter of Credit to honor all or any portion of the commitment thereunder, whether upon the presentation of drafts or otherwise, such payment by the Lender on account of such Letter of Credit shall be treated, for all purposes, as a Floating Rate Loan and an advance against the Note.”

2.05 Addition of Section 2.17. A new section designated “Section 2.17” is hereby added to the Agreement to read as follows:

“2.17 Letter of Credit Fee. In addition to interest on the Note as provided herein and all other fees payable hereunder, the Borrower agrees to pay to the Lender, on the date of issuance of each Letter of Credit, a fee equal to the greater of $500 or one and three-fourths percent (1.75%) per annum, calculated on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first day but excluding the last day), on the face amount of such Letter of Credit during the period for which such Letter of Credit is issued; provided, however, in the event such Letter of Credit is canceled prior to its original expiry date or a payment is made by the Lender with respect to such Letter of Credit, the Lender shall, within 30 days after such cancellation or the making of such payment, rebate to the Borrower the unearned portion of such fee. The Borrower also agrees to pay to the Lender on demand its customary letter of credit transactional fees, including, without limitation, amendment fees, payable with respect to each Letter of Credit.”

2.06 Amendment to Preamble to Article III. The preamble to Article III is hereby amended to read as follows:

“The obligations of the Lender to enter into this Agreement and to make Loans and issue Letters of Credit are subject to the satisfaction of the following conditions precedent:”

2.07 Amendment of Section 3.2. Section 3.2 of the Agreement is hereby amended to read as follows:

“3.2 Each Loan and Letter of Credit. In addition to the conditions precedent stated elsewhere herein, the Lender shall not be obligated to make any Loan or issue any Letter of Credit unless:

(a) the Borrower shall have delivered to the Lender a Borrowing Request at least the requisite time prior to the requested date for the relevant Loan, or a Letter of Credit Application at least two Business Days prior to the requested issuance date for the relevant Letter of Credit and each statement or certification made in such Borrowing Request or Letter of Credit Application, as the case may be, shall be true and correct in all material respects on the requested date for such Loan or the issuance of such Letter of Credit;

(b) no Event of Default or Default shall exist or will occur as a result of the making of the requested Loan or the issuance of the requested Letter of Credit;

(c) if requested by the Lender, the Borrower shall have delivered evidence satisfactory to the Lender substantiating any of the matters contained in this Agreement which are necessary to enable the Borrower to qualify for such Loan or the issuance of such Letter of Credit;

(d) the Lender shall have received, reviewed, and approved such additional documents and items as described in Section 3.1 as may be requested by the Lender with respect to such Loan or Letter of Credit;

(e) each of the representations and warranties contained in this Agreement shall be true and correct in all material respects and shall be deemed to be repeated by the Borrower as if made on the requested date for such Loan or Letter of Credit (except that the representation in the last sentence of Section 4.5 shall not be deemed to have been repeated upon the requested date for such Loan).

(f) neither the consummation of the transactions contemplated hereby nor the making of such Loan the issuance of such Letter of Credit shall contravene, violate, or conflict with any Requirement of Law;

(g) the Lender shall have received the payment of all Commitment Fees, Facility Fees, Letter of Credit Fees, and other fees payable to the Lender hereunder and reimbursement from the Borrower, or special legal counsel for the Lender shall have received payment from the Borrower, for all reasonable fees and expenses of counsel to the Lender for which the Borrower is responsible pursuant to applicable provisions of this Agreement and for which invoices have been presented as of or prior to the date of the relevant Loan or Letter of Credit Application; and

(h) all matters incident to the consummation of the transactions hereby contemplated shall be satisfactory to the Lender.”

2.08 Amendment of Article IV. The preamble to Article IV of the Agreement is hereby amended to read as follows:

“To induce the Lender to enter into this Agreement and to make the Loans and issue Letters of Credit, the Borrower represents and warrants to the Lender (which representations and warranties shall survive the delivery of the Note) that:”

2.09 Amendment of Section 6.7. Section 6.7 of the Agreement is hereby amended to read as follows:

“6.7 Tangible Net Worth. Permit Tangible Net Worth as of the close of any fiscal quarter to be less than $156,273,000 for all periods beginning with the March 31, 2003 Financial Statements, plus 75% of positive Net Income.”

2.10 Amendment of Section 8.7. Section 8.7 of the Agreement is hereby amended to read as follows:

“8.7 No Waiver; Rights Cumulative. No course of dealing on the part of the Lender, its officers or employees, nor any failure or delay by the Lender with respect to exercising any of its rights under any Loan Document shall operate as a waiver thereof. The rights of the Lender under the Loan Documents shall be cumulative and the exercise or partial exercise of any such right shall not preclude the exercise of any other right. Neither the making of any Loan nor the issuance of a Letter of Credit shall constitute a waiver of any of the covenants, warranties, or conditions of the Borrower contained herein. In the event the Borrower is unable to satisfy any such covenant, warranty, or condition, neither the making of any Loan nor the issuance of a Letter of Credit shall have the effect of precluding the Lender from thereafter declaring such inability to be an Event of Default as hereinabove provided.”

2.11 Amendment of Exhibit I. Exhibit I, i.e. the “Form of Promissory Note” is as set forth on Exhibit I to this Second Amendment.

2.12 Amendment of Exhibit III. Exhibit III, i.e. the “Form of Compliance Certificate” is as set forth on Exhibit III to this Second Amendment.

ARTICLE III

CONDITIONS

The obligation of the Lender to amend the Agreement as provided herein is subject to the fulfillment of the following conditions precedent:

(a)

multiple counterparts of this Second Amendment and the Note, as requested by the Lender;

(b)

Facility Fee in the amount of $162,500;

(c)

Note; and

(d)

such other agreements, documents, items, instruments, opinions, certificates, waivers, consents, and evidence as the Lender may reasonably request.

3.02 Accuracy of Representations and Warranties. The representations and warranties contained in Article IV of the Agreement and this Second Amendment shall be true and correct.

3.03 Matters Satisfactory to Lender. All matters incident to the consummation of the transactions contemplated hereby shall be satisfactory to the Lender.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

ARTICLE V

RATIFICATION

ARTICLE VI

MISCELLANEOUS

6.01 Scope of Amendment. The scope of this Second Amendment is expressly limited to the matters addressed herein and this Second Amendment shall not operate as a waiver of any past, present, or future breach, Default, or Event of Default under the Agreement, except to the extent, if any, that any such breach, Default, or Event of Default is remedied by the effect of this Second Amendment.

6.03 Parties in Interest. All provisions of this Second Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Lender and their respective successors and assigns.

6.05 ENTIRE AGREEMENT. THIS SECOND AMENDMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL, BETWEEN SUCH PARTIES REGARDING THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS SECOND AMENDMENT, THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER WRITTEN DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN CONNECTION WITH OR AS SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

6.06 GOVERNING LAW. THIS SECOND AMENDMENT, THE AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO THE STATE OF TEXAS.

6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS SECOND AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND THE LENDER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE BORROWER OR THE LENDER IN ACCORDANCE WITH THIS SECTION.

IN WITNESS WHEREOF, this Second Amendment to Credit Agreement is executed effective the date first hereinabove written.


BORROWER

DRIL-QUIP, INC.

By:		/s/ J. Mike Walker
		J. Mike Walker
		Co-Chairman

LENDER

GUARANTY BANK, FSB

By:		/s/ Jonathan Gregory
		Jonathan Gregory
		Senior Vice President

PROMISSORY NOTE


$65,000,000		Houston, Texas		May 16, 2003

FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned (“Maker”) promises to pay to the order of GUARANTY BANK, FSB (“Payee”), at its banking quarters in Houston, Harris County, Texas, the sum of SIXTY-FIVE MILLION DOLLARS ($65,000,000), or so much thereof as may be advanced against this Note pursuant to the Credit Agreement dated of even date herewith by and between Maker and Payee (as amended, restated, or supplemented from time to time, the “Credit Agreement”), together with interest at the rates and calculated as provided in the Credit Agreement.


DRIL-QUIP, INC.

By:
		J. Mike Walker
		Co-Chairman

EXHIBIT III

FORM OF COMPLIANCE CERTIFICATE

, 2003

Guaranty Bank, FSB

333 Clay Street, Suite 4400

Houston, Texas 77002

Attention: A. R. Gralla, Jr.

Re:

Credit Agreement dated as of May 18, 2001, by and between GUARANTY BANK, FSB and DRIL-QUIP, INC. (as amended, restated, or supplemented from time to time, the “Credit Agreement”)

Ladies and Gentlemen:

Pursuant to applicable requirements of the Credit Agreement, the undersigned, as a Responsible Officer of the Borrower, hereby certifies to you the following information as true and correct as of the date hereof or for the period indicated, as the case may be:

1. To the best of the knowledge of the undersigned, no Default or Event of Default exists as of the date hereof or has occurred since the date of our previous certification to you, if any.

1. To the best of the knowledge of the undersigned, the following Defaults or Events of Default exist as of the date hereof or have occurred since the date of our previous certification to you, if any, and the actions set forth below are being taken to remedy such circumstances:

2. The compliance of the Borrower with the financial covenants of the Credit Agreement, as of the close of business on , is evidenced by the following:

(a) Section 6.7: Tangible Net Worth. Permit Tangible Net Worth as of the close of any fiscal quarter to be less than $156,273,000 for all periods beginning with the March 31, 2003, Financial Statements, plus 75% of positive Net Income.

Actual

(b) Section 6.8: Funded Debt to EBITDA. Permit the ratio of Funded Debt to EBITDA, at the close of any fiscal quarter, beginning with the March 31, 2001 Financial Statements, for the previous four quarters to be more than the Permitted Ratio (herein defined). This ratio shall be calculated on a

rolling four quarter basis. As used herein, the term “Permitted Ratio” shall mean (i) 3.00 to 1.00 for each quarter ending on March 31, 2002 or before and (ii) 2.75 to 1.00 for each quarter ending June 30, 2002 or later.

Actual

to 1.0

(c) Section 6.9: EBIT to Interest Expense. Permit the ratio of EBIT to Interest Expense, at the close of any fiscal quarter, beginning with the March 31, 2001 Financial Statements for the previous four quarters to be less than 2.50 to 1.00. This ratio shall be calculated on a rolling four quarter basis.

Actual

to 1.0

Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Credit Agreement.


Very truly yours,

DRIL-QUIP, INC.

By:
		Jerry Brooks
		Chief Financial Officer

iii

EX-4.7 4 dex47.htm THIRD AMENDMENT TO CREDIT AGREEMENT Third Amendment to Credit Agreement

Exhibit 4.7

THIRD AMENDMENT TO CREDIT AGREEMENT

BETWEEN

DRIL-QUIP, INC.

AND

GUARANTY BANK, FSB

AS LENDER

Effective as of June 1, 2005

REVOLVING LINE OF CREDIT OF UP TO $65,000,000

TABLE OF CONTENTS


		PAGE
ARTICLE I	DEFINITIONS	1
1.01	Terms Defined Above	1
1.02	Terms Defined in Agreement	1
1.03	References	1
1.04	Articles and Sections	1
1.05	Number and Gender	1
ARTICLE II	AMENDMENTS	2
2.01	Amendment of Section 1.2	2
2.02	Amendment of Section 6.7	2
2.03	Amendment of Exhibit III	2
ARTICLE III	CONDITIONS	2
3.01	Receipt of Documents	2
3.02	Accuracy of Representations and Warranties	3
3.03	Matters Satisfactory to Lender	3
ARTICLE IV	REPRESENTATIONS AND WARRANTIES	3
ARTICLE V	RATIFICATION	3
ARTICLE VI	MISCELLANEOUS	3
6.01	Scope of Amendment	3
6.02	Agreement as Amended	3
6.03	Parties in Interest	3
6.04	Rights of Third Parties	3
6.05	ENTIRE AGREEMENT	4
6.06	GOVERNING LAW	4
6.07	JURISDICTION AND VENUE	4

THIRD AMENDMENT TO CREDIT AGREEMENT

This THIRD AMENDMENT TO CREDIT AGREEMENT (this “Third Amendment”) is made and entered into effective as of June 1, 2005, between DRIL-QUIP, INC., a Delaware corporation, (the “Borrower”), and GUARANTY BANK, FSB, a federal savings bank (the “Lender”).

W I T N E S S E T H

WHEREAS, the above named parties did execute and exchange counterparts of that certain Credit Agreement dated May 18, 2001, as amended by First Amendment to Credit Agreement dated November 19, 2001, and as further amended Second Amendment to Credit Agreement dated May 16, 2003 (the “Agreement”), to which reference is here made for all purposes;

WHEREAS, the parties subject to and bound by the Agreement are desirous of amending the Agreement in the particulars hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties to the Agreement, as set forth therein, and the mutual covenants and agreements of the parties hereto, as set forth in this Third Amendment, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.01 Terms Defined Above. As used herein, each of the terms “Agreement,” “Borrower,” “Lender,” and “Third Amendment,” shall have the meaning assigned to such term hereinabove.

1.02 Terms Defined in Agreement. As used herein, each term defined in the Agreement shall have the meaning assigned thereto in the Agreement, unless expressly provided herein to the contrary.

1.03 References. References in this Third Amendment to Article or Section numbers shall be to Articles and Sections of this Third Amendment, unless expressly stated herein to the contrary. References in this Third Amendment to “hereby,” “herein,” hereinafter,” hereinabove,” “hereinbelow,” “hereof,” and “hereunder” shall be to this Third Amendment in its entirety and not only to the particular Article or Section in which such reference appears.

1.04 Articles and Sections. This Third Amendment, for convenience only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties, and other legal relations of the parties hereto shall be determined from this Third Amendment as an entirety and without regard to such division into Articles and Sections and without regard to headings prefixed to such Articles and Sections.

1.05 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural and likewise the plural shall be

understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. Definitions of terms defined in the singular and plural shall be equally applicable to the plural or singular, as the case may be.

ARTICLE II

AMENDMENTS

The Borrower and the Lender hereby amend the Agreement in the following particulars:

2.01 Amendment of Section 1.2. Section 1.2 of the Agreement is hereby amended as follows:

The following definitions are added and/or amended to read as follows:

“Applicable Margin” shall mean, as to each LIBO Rate Loan, one and one-half percent (1¹/2%).

“Commitment Termination Date” shall mean June 1, 2009.

“Final Maturity” shall mean June 1, 2009.

2.02 Amendment of Section 6.7. Section 6.7 of the Agreement is hereby amended to read as follows:

“6.7 Tangible Net Worth. Permit Tangible Net Worth as of the close of any fiscal quarter to be less than $172,341,000 beginning with the December 31, 2004 Financial Statements, plus 75% of positive Net Income thereafter.”

Deletion of Section 6.9. Section 6.9 of the Agreement is hereby deleted.

2.03 Amendment of Exhibit III. Exhibit III, i.e. the “Form of Compliance Certificate” is as set forth on Exhibit III to this Third Amendment.

2.04 Amendment of Exhibit IV. Exhibit IV, i.e. “Disclosures” is as set forth on Exhibit IV to this Third Amendment.

ARTICLE III

CONDITIONS

The obligation of the Lender to amend the Agreement as provided herein is subject to the fulfillment of the following conditions precedent:

(a)

multiple counterparts of this Third Amendment, as requested by the Lender;

(b)

Facility Fee in the amount of $81,250; and

(c)

such other agreements, documents, items, instruments, opinions, certificates, waivers, consents, and evidence as the Lender may reasonably request.

3.02 Accuracy of Representations and Warranties. The representations and warranties contained in Article IV of the Agreement and this Third Amendment shall be true and correct.

3.03 Matters Satisfactory to Lender. All matters incident to the consummation of the transactions contemplated hereby shall be satisfactory to the Lender.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

ARTICLE V

RATIFICATION

ARTICLE VI

MISCELLANEOUS

6.01 Scope of Amendment. The scope of this Third Amendment is expressly limited to the matters addressed herein and this Third Amendment shall not operate as a waiver of any past, present, or future breach, Default, or Event of Default under the Agreement, except to the extent, if any, that any such breach, Default, or Event of Default is remedied by the effect of this Third Amendment.

6.03 Parties in Interest. All provisions of this Third Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Lender and their respective successors and assigns.

6.04 Rights of Third Parties. All provisions herein are imposed solely and exclusively for the benefit of the Lender and the Borrower, and no other Person shall have standing to

require satisfaction of such provisions in accordance with their terms and any or all of such provisions may be freely waived in whole or in part by the Lender at any time if in its sole discretion it deems it advisable to do so.

6.05 ENTIRE AGREEMENT. THIS THIRD AMENDMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL, BETWEEN SUCH PARTIES REGARDING THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS THIRD AMENDMENT, THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER WRITTEN DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN CONNECTION WITH OR AS SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

6.06 GOVERNING LAW. THIS THIRD AMENDMENT, THE AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO THE STATE OF TEXAS.

6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS THIRD AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND THE LENDER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE BORROWER OR THE LENDER IN ACCORDANCE WITH THIS SECTION.

IN WITNESS WHEREOF, this Third Amendment to Credit Agreement is executed effective the date first hereinabove written.


BORROWER

DRIL-QUIP, INC.

By:		/s/ J. Mike Walker
		J. Mike Walker
		Co-Chairman

LENDER

GUARANTY BANK, FSB

By:		/s/ Arthur R. Gralla, Jr.
		Arthur R. Gralla, Jr.
		Managing Director

EXHIBIT III

[FORM OF COMPLIANCE CERTIFICATE]

, 2005

Guaranty Bank, FSB

333 Clay Street, Suite 4400

Houston, Texas 77002

Attention: A. R. Gralla, Jr.

Re:

Credit Agreement dated as of May 18, 2001, by and between GUARANTY BANK, FSB and DRIL-QUIP, INC. (as amended, restated, or supplemented from time to time, the “Credit Agreement”)

Ladies and Gentlemen:

1. To the best of the knowledge of the undersigned, no Default or Event of Default exists as of the date hereof or has occurred since the date of our previous certification to you, if any.

2. The compliance of the Borrower with the financial covenants of the Credit Agreement, as of the close of business on , is evidenced by the following:

(a) Section 6.7: Tangible Net Worth. Permit Tangible Net Worth as of the close of any fiscal quarter to be less than $172,341,000 for all periods beginning with the December 31, 2004 Financial Statements, plus 75% of positive Net Income.

Actual

III-i

calculated on a rolling four quarter basis. As used herein, the term “Permitted Ratio” shall mean (i) 3.00 to 1.00 for each quarter ending on March 31, 2002 or before and (ii) 2.75 to 1.00 for each quarter ending June 30, 2002 or later.

Actual

to 1.0

Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Credit Agreement.


Very truly yours,

DRIL-QUIP, INC.

By:
		Jerry Brooks
		Chief Financial Officer

III-ii

EXHIBIT IV

DISCLOSURES


Section 4.7		Liabilities

		None

		Litigation

		None

Section 4.11		Environmental Matters

		None

Section 4.16		Casualties

		None

Section 4.18		Subsidiaries

		Dril-Quip (Europe), Limited
		Dril-Quip Asia Pacific P.T.E., Ltd.
		DQ Holding PTY, Ltd.
		Dril-Quip do Brasil, Ltda.
		Dril-Quip France SARL
		Dril-Quip (Nigeria) Ltd.
		Dril-Quip (Angola) Lda.
		Dril-Quip de Mexico, S. de R.L. de C.V.
		Servicios Dril-Quip de Mexico, S. de R.L. de C.V.

IV-i

EX-31.1 5 dex311.htm 302 CERTIFICATION OF LARRY E. REIMERT 302 Certification of Larry E. Reimert

Exhibit 31.1

CERTIFICATION

I, Larry E. Reimert, certify that:

I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005

/s/ Larry E. Reimert

Larry E. Reimert

Co-Chief Executive Officer

EX-31.2 6 dex312.htm 302 CERTIFICATION OF GARY D. SMITH 302 Certification of Gary D. Smith

Exhibit 31.2

CERTIFICATION

I, Gary D. Smith, certify that:

I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005

/s/ Gary D. Smith

Gary D. Smith

Co-Chief Executive Officer

EX-31.3 7 dex313.htm 302 CERTIFICATION OF J. MIKE WALKER 302 Certification of J. Mike Walker

Exhibit 31.3

CERTIFICATION

I, J. Mike Walker, certify that:

I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005

/s/ J. Mike Walker

J. Mike Walker

Co-Chief Executive Officer

EX-31.4 8 dex314.htm 302 CERTIFICATION OF JERRY M. BROOKS 302 Certification of Jerry M. Brooks

Exhibit 31.4

CERTIFICATIONS

I, Jerry M. Brooks, certify that:

I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005

/s/ Jerry M. Brooks

Jerry M. Brooks

Chief Financial Officer

EX-32.1 9 dex321.htm 906 CERTIFICATION OF LARRY E. REIMERT 906 Certification of Larry E. Reimert

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2005 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Larry E. Reimert, Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Larry E. Reimert

Larry E. Reimert

Co-Chief Executive Officer

August 8, 2005

EX-32.2 10 dex322.htm 906 CERTIFICATION OF GARY D. SMITH 906 Certification of Gary D. Smith

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2005 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Gary D. Smith, Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gary D. Smith

Gary D. Smith

Co-Chief Executive Officer

August 8, 2005

EX-32.3 11 dex323.htm 906 CERTIFICATION OF J. MIKE WALKER 906 Certification of J. Mike Walker

Exhibit 32.3

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2005 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, J. Mike Walker, Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. Mike Walker

J. Mike Walker

Co-Chief Executive Officer

August 8, 2005

EX-32.4 12 dex324.htm 906 CERTIFICATION OF JERRY M. BROOKS 906 Certification of Jerry M. Brooks

Exhibit 32.4

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2005 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Jerry M. Brooks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jerry M. Brooks

Jerry M. Brooks

Chief Financial Officer

August 8, 2005

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