##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2007
 Commission file number 001-15423
 Grant Prideco, Inc.
  Delaware
    
    76-0312499(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)400 N . Sam Houston Pkwy. EastSuite 900Houston, Texas
    
    77060(Address of Principal Executive Offices)
    
    (Zip Code)
 (281) 878-8000
 þ o
  þ o o
 o þ
  Title of Each Class
    
    Outstanding at May 2, 2007Common Stock, par value $0.01 per share
    
    127,450,068




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Market Risk DisclosuresITEM 4. Controls and ProceduresPART IIITEM 1A. Risk FactorsITEM 2. Unregistered Sales of Equity in Securities and Use of ProceedsITEM 6. ExhibitsSIGNATURESEXHIBIT INDEXCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 1350    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM
1. Financial Statements
 GRANT PRIDECO, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended March 31,2007
    
    
    2006(In thousands, except per share data)Revenues
    
    $
    496,463
    
    
    $
    414,425Operating Expenses:Cost of sales
    
    
    254,078
    
    
    
    228,529Sales and marketing
    
    
    45,587
    
    
    
    35,980General and administrative
    
    
    33,754
    
    
    
    27,840Research and engineering
    
    
    10,023
    
    
    
    7,696343,442
    
    
    
    300,045Operating Income
    
    
    153,021
    
    
    
    114,380Interest Expense
    
    
    (5,069
    )
    
    
    (3,831
    )Other Expense, Net
    
    
    (552
    )
    
    
    (260
    )Equity Income in Unconsolidated Affiliate
    
    
    44,613
    
    
    
    27,349Income Before Income Taxes and Minority
Interests
    
    
    192,013
    
    
    
    137,638Income Tax Provision
    
    
    (57,957
    )
    
    
    (43,064
    )Income Before Minority Interests
    
    
    134,056
    
    
    
    94,574Minority Interests
    
    
    (2,507
    )
    
    
    (2,144
    )Net Income
    
    $
    131,549
    
    
    $
    92,430Basic Net Income Per Share
    
    $
    1.03
    
    
    $
    0.70Basic Weighted Average Shares Outstanding
    
    
    128,085
    
    
    
    131,388Diluted Net Income Per Share
    
    $
    1.01
    
    
    $
    0.69Diluted Weighted Average Shares Outstanding
    
    
    129,928
    
    
    
    133,929
  2




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##### Table of Contents



GRANT PRIDECO, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent Assets:Cash
    
    $
    73,618
    
    
    $
    57,344Accounts receivable, net of allowance for doubtful
accounts
of $3,238 and $3,523 for 2007 and 2006, respectively
    
    
    380,502
    
    
    
    368,695Inventories
    
    
    489,100
    
    
    
    454,947Deferred charges
    
    
    3,091
    
    
    
    3,964Current deferred tax assets
    
    
    45,759
    
    
    
    48,101Other current assets
    
    
    23,106
    
    
    
    14,395Total Current Assets
    
    
    1,015,176
    
    
    
    947,446Property, Plant and Equipment, Net
    
    
    319,574
    
    
    
    305,524Goodwill
    
    
    523,186
    
    
    
    520,992Other Intangible Assets, Net
    
    
    88,908
    
    
    
    89,827Investment in Unconsolidated Affiliate
    
    
    183,995
    
    
    
    135,428Other Assets
    
    
    25,610
    
    
    
    22,850Total Assets
    
    $
    2,156,449
    
    
    $
    2,022,067LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    5,646
    
    
    $
    8,640Accounts payable
    
    
    140,322
    
    
    
    138,942Accrued payroll and benefits
    
    
    41,749
    
    
    
    74,952Deferred revenues
    
    
    20,211
    
    
    
    18,190Income taxes payable
    
    
    64,280
    
    
    
    33,039Other current liabilities
    
    
    28,047
    
    
    
    33,576Total Current Liabilities
    
    
    300,255
    
    
    
    307,339Long-Term Debt
    
    
    263,901
    
    
    
    237,212Deferred Tax Liabilities
    
    
    78,650
    
    
    
    68,310Other Long-Term Liabilities
    
    
    31,458
    
    
    
    28,801Commitments and ContingenciesMinority Interests
    
    
    21,048
    
    
    
    17,522Stockholders Equity:Preferred stock, $0.01 par value
    
    
    
    
    
    
    Common stock, $0.01 par value; issued 133,388
and 132,706 in 2007 and 2006, respectively
    
    
    1,334
    
    
    
    1,327Capital in excess of par value
    
    
    697,194
    
    
    
    687,384Retained earnings
    
    
    976,556
    
    
    
    845,877Accumulated other comprehensive income (loss)
    
    
    2,532
    
    
    
    (960
    )Treasury stock, at cost
    
    
    (228,434
    )
    
    
    (180,557
    )Deferred compensation obligation
    
    
    11,955
    
    
    
    9,812Total Stockholders Equity
    
    
    1,461,137
    
    
    
    1,362,883Total Liabilities and Stockholders Equity
    
    $
    2,156,449
    
    
    $
    2,022,067
  3




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GRANT PRIDECO, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended March 31,2007
    
    
    2006(In thousands)Cash Flows From Operating Activities:Net income
    
    $
    131,549
    
    
    $
    92,430Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    14,689
    
    
    
    12,099Deferred income tax
    
    
    11,717
    
    
    
    (7,529
    )Equity income in unconsolidated affiliate
    
    
    (44,613
    )
    
    
    (27,349
    )Stock-based compensation expense
    
    
    3,229
    
    
    
    3,428Excess tax benefits of stock option exercises
    
    
    (1,234
    )
    
    
    (5,010
    )Deferred compensation expense
    
    
    1,437
    
    
    
    1,274Minority interests in consolidated subsidiaries
    
    
    2,507
    
    
    
    2,144Gain on sale of fixed assets, net
    
    
    (55
    )
    
    
    (372
    )Change in operating assets and liabilities:Accounts receivable
    
    
    (11,320
    )
    
    
    (9,852
    )Inventories
    
    
    (33,867
    )
    
    
    (25,843
    )Other current assets
    
    
    (8,711
    )
    
    
    (5,101
    )Accounts payable
    
    
    1,882
    
    
    
    9,378Income taxes payable
    
    
    32,288
    
    
    
    42,834Other current liabilities
    
    
    (39,673
    )
    
    
    (24,344
    )Other, net
    
    
    3,289
    
    
    
    5,349Net cash provided by operating activities
    
    
    63,114
    
    
    
    63,536Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    (27,763
    )
    
    
    (9,967
    )Acquisition of businesses
    
    
    (3,394
    )
    
    
    Proceeds from sale of fixed assets
    
    
    542
    
    
    
    474Other, net
    
    
    
    
    
    
    (240
    )Net cash used in investing activities
    
    
    (30,615
    )
    
    
    (9,733
    )Cash Flows From Financing Activities:Borrowings (repayments) on credit facility, net
    
    
    26,900
    
    
    
    (11,200
    )Repayments on debt
    
    
    (3,220
    )
    
    
    (4,944
    )Excess tax benefits on stock option exercises
    
    
    1,234
    
    
    
    5,010Repurchases of common stock
    
    
    (47,118
    )
    
    
    (22,030
    )Proceeds from issuance of common stock
    
    
    5,416
    
    
    
    10,432Other, net
    
    
    900
    
    
    
    Net cash used in financing activities
    
    
    (15,888
    )
    
    
    (22,732
    )Effect of Exchange Rate Changes on Cash
    
    
    (337
    )
    
    
    183Net Increase in Cash
    
    
    16,274
    
    
    
    31,254Cash at Beginning of Period
    
    
    57,344
    
    
    
    28,164Cash at End of Period
    
    $
    73,618
    
    
    $
    59,418
  4




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GRANT PRIDECO, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. General
 Basis of Presentation
   Use of Estimates
  2. Income Taxes
    5




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3. Stock-Based Compensation
  Stock Options
  2007Valuation Assumptions:Expected Option Term (Years)
    
    
    5Expected Volatility
    
    
    40
    %Expected Dividend Rate
    
    
    Risk Free Interest Rate
    
    
    4.68
    %Weighted-Average Grant Date Fair Value
    
    $
    18.69
 Restricted Stock
   4. Comprehensive Income
  Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Net Income
    
    $
    131,549
    
    
    $
    92,430Foreign Currency Translation Adjustments
    
    
    736
    
    
    
    4,893Other Comprehensive Income for
Unconsolidated Affiliate, Net of Tax
    
    
    2,756
    
    
    
    2,686Total Comprehensive Income
    
    $
    135,041
    
    
    $
    100,009
 6




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5. Net Income Per Share
  6. Inventories
  March 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Raw Materials, Components and Supplies
    
    $
    216,647
    
    
    $
    203,368Work in Process
    
    
    146,171
    
    
    
    129,966Finished Goods
    
    
    106,081
    
    
    
    97,565Rental Bits
    
    
    20,201
    
    
    
    24,048$
    489,100
    
    
    $
    454,947
 7. Property, Plant and Equipment
  March 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Land
    
    $
    24,912
    
    
    $
    24,915Buildings and Improvements
    
    
    101,858
    
    
    
    101,809Machinery and Equipment
    
    
    343,493
    
    
    
    332,401Furniture and Fixtures
    
    
    44,925
    
    
    
    44,267Construction in Progress
    
    
    55,498
    
    
    
    42,864570,686
    
    
    
    546,256Less: Accumulated Depreciation
    
    
    (251,112
    )
    
    
    (240,732
    )$
    319,574
    
    
    $
    305,524
 8. Goodwill and Other Intangible Assets
  Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    TechnologyServices
    
    
    ReedHycalog
    
    
    and Services
    
    
    Other
    
    
    Total(In thousands)Balance, December 31, 2006
    
    $
    132,203
    
    
    $
    275,928
    
    
    $
    97,153
    
    
    $
    15,708
    
    
    $
    520,992Acquisitions
    
    
    
    
    
    
    3,394
    
    
    
    
    
    
    
    
    
    
    
    3,394Translation and Other Adjustments
    
    
    175
    
    
    
    (1,281
    )
    
    
    (94
    )
    
    
    
    
    
    
    (1,200
    )Balance, March 31, 2007
    
    $
    132,378
    
    
    $
    278,041
    
    
    $
    97,059
    
    
    $
    15,708
    
    
    $
    523,186
  7




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9. Investments in Unconsolidated Affiliate
  Three Months EndedMarch 31,2007
    
    2006(In thousands)Net Sales
    
    $
    217,902
    
    
    $
    170,646Gross Profit
    
    
    86,965
    
    
    
    59,839Net Income
    
    
    88,566
    
    
    
    56,671Companys Equity Income
    
    $
    44,613
    
    
    $
    27,349
  10. Pension Plans
 U.S. Pension Plan
  Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Service Cost
    
    $
    102
    
    
    $
    101Interest Cost
    
    
    223
    
    
    
    222Expected Return on Plan Assets
    
    
    (275
    )
    
    
    (238
    )Amortization of Prior Service Cost
    
    
    6
    
    
    
    6Amortization of Loss
    
    
    
    
    
    
    4Administration Expenses
    
    
    25
    
    
    
    15Net Periodic Benefit Cost
    
    $
    81
    
    
    $
    110
  Non-U.S. Pension Plan
  Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Service Cost
    
    $
    4
    
    
    $
    Interest Cost
    
    
    244
    
    
    
    229Expected Return on Plan Assets
    
    
    (248
    )
    
    
    (226
    )Amortization of Prior Service Cost
    
    
    
    
    
    
    27Amortization of Gain
    
    
    
    
    
    
    (30
    )Net Periodic Benefit Cost
    
    $
    
    
    
    $
    
  8




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##### Table of Contents



11. Stockholders Equity
  12. Segment Information
 Business Segments
 ®
 Drilling
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    Technology
    
    CorporateServices
    
    ReedHycalog
    
    and Services
    
    and Other
    
    Total(In thousands)Three Months Ended:March 31, 2007Revenues from
Unaffiliated Customers
    
    $
    275,948
    
    
    $
    151,905
    
    
    $
    67,172
    
    
    $
    1,438
    
    
    $
    496,463Intersegment Revenues
    
    
    506
    
    
    
    
    
    
    
    3,119
    
    
    
    8
    
    
    
    3,633Operating Income (Loss)
    
    
    112,652
    
    
    
    45,801
    
    
    
    13,067
    
    
    
    (18,499
    )
    
    
    153,021Income (Loss) Before
Income Taxes and
Minority Interests
    
    
    156,228
    
    
    
    38,836
    
    
    
    12,537
    
    
    
    (15,588
    )
    
    
    192,013March 31, 2006Revenues from
Unaffiliated Customers
    
    $
    194,259
    
    
    $
    116,791
    
    
    $
    103,273
    
    
    $
    102
    
    
    $
    414,425Intersegment Revenues
    
    
    136
    
    
    
    
    
    
    
    701
    
    
    
    
    
    
    
    837Operating Income (Loss)
    
    
    65,012
    
    
    
    35,558
    
    
    
    31,243
    
    
    
    (17,433
    )
    
    
    114,380Income (Loss) Before
Income Taxes and
Minority Interests
    
    
    91,402
    
    
    
    34,371
    
    
    
    30,764
    
    
    
    (18,899
    )
    
    
    137,638
 13. Recent Accounting Standards
  14. Subsidiary Guarantor Financial Information
  9




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GRANT PRIDECO, INC
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2007
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    366,423
    
    
    $
    229,698
    
    
    $
    (99,658
    )
    
    $
    496,463Operating Expenses:Cost of sales
    
    
    
    
    
    
    212,994
    
    
    
    123,513
    
    
    
    (82,429
    )
    
    
    254,078Selling, general and administrative
    
    
    57
    
    
    
    62,496
    
    
    
    26,811
    
    
    
    
    
    
    
    89,36457
    
    
    
    275,490
    
    
    
    150,324
    
    
    
    (82,429
    )
    
    
    343,442Operating Income (Loss)
    
    
    (57
    )
    
    
    90,933
    
    
    
    79,374
    
    
    
    (17,229
    )
    
    
    153,021Interest Expense
    
    
    (4,721
    )
    
    
    (71
    )
    
    
    (277
    )
    
    
    
    
    
    
    (5,069
    )Other Income (Expense), Net
    
    
    512
    
    
    
    5,863
    
    
    
    (6,927
    )
    
    
    
    
    
    
    (552
    )Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    44,267
    
    
    
    
    
    
    
    346
    
    
    
    44,613Equity in Subsidiaries, Net of Taxes
    
    
    136,023
    
    
    
    7,401
    
    
    
    
    
    
    
    (143,424
    )
    
    
    Income Before Income Taxes and Minority Interests
    
    
    131,757
    
    
    
    148,393
    
    
    
    72,170
    
    
    
    (160,307
    )
    
    
    192,013Income Tax Provision
    
    
    (208
    )
    
    
    (42,993
    )
    
    
    (14,756
    )
    
    
    
    
    
    
    (57,957
    )Income Before Minority Interests
    
    
    131,549
    
    
    
    105,400
    
    
    
    57,414
    
    
    
    (160,307
    )
    
    
    134,056Minority Interests
    
    
    
    
    
    
    
    
    
    
    (2,507
    )
    
    
    
    
    
    
    (2,507
    )Net Income
    
    $
    131,549
    
    
    $
    105,400
    
    
    $
    54,907
    
    
    $
    (160,307
    )
    
    $
    131,549
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GRANT PRIDECO, INC
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2007
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    9,832
    
    
    $
    63,786
    
    
    $
    
    
    
    $
    73,618Accounts receivable
    
    
    
    
    
    
    241,940
    
    
    
    138,562
    
    
    
    
    
    
    
    380,502Inventories
    
    
    
    
    
    
    371,784
    
    
    
    181,308
    
    
    
    (63,992
    )
    
    
    489,100Deferred charges
    
    
    
    
    
    
    3,091
    
    
    
    
    
    
    
    
    
    
    
    3,091Current deferred tax assets
    
    
    577
    
    
    
    25,697
    
    
    
    19,485
    
    
    
    
    
    
    
    45,759Other current assets
    
    
    
    
    
    
    9,461
    
    
    
    13,645
    
    
    
    
    
    
    
    23,106577
    
    
    
    661,805
    
    
    
    416,786
    
    
    
    (63,992
    )
    
    
    1,015,176Property, Plant and Equipment, Net
    
    
    
    
    
    
    181,703
    
    
    
    137,871
    
    
    
    
    
    
    
    319,574Goodwill
    
    
    
    
    
    
    252,670
    
    
    
    270,516
    
    
    
    
    
    
    
    523,186Investment In and Advances to Subsidiaries
    
    
    1,711,815
    
    
    
    86,586
    
    
    
    
    
    
    
    (1,798,401
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    183,995
    
    
    
    
    
    
    
    
    
    
    
    183,995Other Assets
    
    
    6,559
    
    
    
    60,865
    
    
    
    47,094
    
    
    
    
    
    
    
    114,518$
    1,718,951
    
    
    $
    1,427,624
    
    
    $
    872,267
    
    
    $
    (1,862,393
    )
    
    $
    2,156,449LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    5,000
    
    
    $
    646
    
    
    $
    
    
    
    $
    
    
    
    $
    5,646Accounts payable
    
    
    
    
    
    
    93,650
    
    
    
    46,672
    
    
    
    
    
    
    
    140,322Deferred revenues
    
    
    
    
    
    
    14,949
    
    
    
    5,262
    
    
    
    
    
    
    
    20,211Income taxes payable
    
    
    (50,536
    )
    
    
    90,106
    
    
    
    24,710
    
    
    
    
    
    
    
    64,280Intercompany liabilities (assets)
    
    
    112,559
    
    
    
    (344,421
    )
    
    
    231,862
    
    
    
    
    
    
    
    Other current liabilities
    
    
    1,844
    
    
    
    39,294
    
    
    
    28,658
    
    
    
    
    
    
    
    69,79668,867
    
    
    
    (105,776
    )
    
    
    337,164
    
    
    
    
    
    
    
    300,255Long-Term Debt
    
    
    200,000
    
    
    
    63,901
    
    
    
    
    
    
    
    
    
    
    
    263,901Deferred Tax Liabilities
    
    
    (11,053
    )
    
    
    50,723
    
    
    
    38,980
    
    
    
    
    
    
    
    78,650Other Long-Term Liabilities
    
    
    
    
    
    
    30,554
    
    
    
    904
    
    
    
    
    
    
    
    31,458Commitments and ContingenciesMinority Interests
    
    
    
    
    
    
    
    
    
    
    21,048
    
    
    
    
    
    
    
    21,048Stockholders Equity
    
    
    1,461,137
    
    
    
    1,388,222
    
    
    
    474,171
    
    
    
    (1,862,393
    )
    
    
    1,461,137$
    1,718,951
    
    
    $
    1,427,624
    
    
    $
    872,267
    
    
    $
    (1,862,393
    )
    
    $
    2,156,449
 11




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##### Table of Contents



GRANT PRIDECO, INC
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2007
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by operating activities
    
    $
    46,913
    
    
    $
    9,319
    
    
    $
    6,882
    
    
    $
    
    
    
    $
    63,114Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (20,718
    )
    
    
    (7,045
    )
    
    
    
    
    
    
    (27,763
    )Acquisition of businesses
    
    
    (3,394
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,394
    )Other, net
    
    
    
    
    
    
    365
    
    
    
    177
    
    
    
    
    
    
    
    542Net cash used in investing activities
    
    
    (3,394
    )
    
    
    (20,353
    )
    
    
    (6,868
    )
    
    
    
    
    
    
    (30,615
    )Cash Flows From Financing Activities:Borrowings on revolver debt, net
    
    
    
    
    
    
    26,900
    
    
    
    
    
    
    
    
    
    
    
    26,900Repayments on debt
    
    
    (3,000
    )
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    (3,220
    )Borrowings (repayments) on debt between subs, net
    
    
    (51
    )
    
    
    (18,343
    )
    
    
    18,394
    
    
    
    
    
    
    
    Excess tax benefits on stock option exercises
    
    
    1,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,234Repurchases of common stock
    
    
    (47,118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,118
    )Proceeds from issuance of common stock
    
    
    5,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,416Other, net
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    
    
    
    
    900Net cash (used in) provided by financing activities
    
    
    (43,519
    )
    
    
    8,337
    
    
    
    19,294
    
    
    
    
    
    
    
    (15,888
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    (337
    )
    
    
    
    
    
    
    (337
    )Net Increase (Decrease) in Cash
    
    
    
    
    
    
    (2,697
    )
    
    
    18,971
    
    
    
    
    
    
    
    16,274Cash at Beginning of Period
    
    
    
    
    
    
    12,529
    
    
    
    44,815
    
    
    
    
    
    
    
    57,344Cash at End of Period
    
    $
    
    
    
    $
    9,832
    
    
    $
    63,786
    
    
    $
    
    
    
    $
    73,618
 12




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##### Table of Contents



GRANT PRIDECO, INC
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    312,991
    
    
    $
    174,299
    
    
    $
    (72,865
    )
    
    $
    414,425Operating Expenses:Cost of sales
    
    
    
    
    
    
    198,186
    
    
    
    90,834
    
    
    
    (60,491
    )
    
    
    228,529Selling, general and administrative
    
    
    53
    
    
    
    51,395
    
    
    
    20,068
    
    
    
    
    
    
    
    71,51653
    
    
    
    249,581
    
    
    
    110,902
    
    
    
    (60,491
    )
    
    
    300,045Operating Income (Loss)
    
    
    (53
    )
    
    
    63,410
    
    
    
    63,397
    
    
    
    (12,374
    )
    
    
    114,380Interest Expense
    
    
    (3,546
    )
    
    
    (120
    )
    
    
    (165
    )
    
    
    
    
    
    
    (3,831
    )Other Income (Expense), Net
    
    
    527
    
    
    
    337
    
    
    
    (1,124
    )
    
    
    
    
    
    
    (260
    )Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    27,349
    
    
    
    
    
    
    
    
    
    
    
    27,349Equity in Subsidiaries, Net of Taxes
    
    
    104,238
    
    
    
    4,166
    
    
    
    
    
    
    
    (108,404
    )
    
    
    Income Before Income Taxes and Minority Interests
    
    
    101,166
    
    
    
    95,142
    
    
    
    62,108
    
    
    
    (120,778
    )
    
    
    137,638Income Tax Provision
    
    
    (8,736
    )
    
    
    (20,244
    )
    
    
    (14,084
    )
    
    
    
    
    
    
    (43,064
    )Income Before Minority Interests
    
    
    92,430
    
    
    
    74,898
    
    
    
    48,024
    
    
    
    (120,778
    )
    
    
    94,574Minority Interests
    
    
    
    
    
    
    
    
    
    
    (2,144
    )
    
    
    
    
    
    
    (2,144
    )Net Income
    
    $
    92,430
    
    
    $
    74,898
    
    
    $
    45,880
    
    
    $
    (120,778
    )
    
    $
    92,430
 13




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##### Table of Contents



GRANT PRIDECO, INC
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2006
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)ASSETSCurrent Assets:Cash
    
    $
    
    
    
    $
    12,529
    
    
    $
    44,815
    
    
    $
    
    
    
    $
    57,344Accounts receivable
    
    
    
    
    
    
    240,407
    
    
    
    128,288
    
    
    
    
    
    
    
    368,695Inventories
    
    
    
    
    
    
    334,242
    
    
    
    178,667
    
    
    
    (57,962
    )
    
    
    454,947Deferred charges
    
    
    
    
    
    
    3,712
    
    
    
    252
    
    
    
    
    
    
    
    3,964Current deferred tax assets
    
    
    131
    
    
    
    28,082
    
    
    
    19,888
    
    
    
    
    
    
    
    48,101Other current assets
    
    
    
    
    
    
    6,450
    
    
    
    7,945
    
    
    
    
    
    
    
    14,395131
    
    
    
    625,422
    
    
    
    379,855
    
    
    
    (57,962
    )
    
    
    947,446Property, Plant and Equipment, Net
    
    
    
    
    
    
    170,965
    
    
    
    134,559
    
    
    
    
    
    
    
    305,524Goodwill
    
    
    
    
    
    
    249,976
    
    
    
    271,016
    
    
    
    
    
    
    
    520,992Investment In and Advances to Subsidiaries
    
    
    1,569,776
    
    
    
    79,185
    
    
    
    
    
    
    
    (1,648,961
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    135,428
    
    
    
    
    
    
    
    
    
    
    
    135,428Other Assets
    
    
    6,830
    
    
    
    61,376
    
    
    
    44,471
    
    
    
    
    
    
    
    112,677$
    1,576,737
    
    
    $
    1,322,352
    
    
    $
    829,901
    
    
    $
    (1,706,923
    )
    
    $
    2,022,067LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    7,924
    
    
    $
    716
    
    
    $
    
    
    
    $
    
    
    
    $
    8,640Accounts payable
    
    
    
    
    
    
    94,649
    
    
    
    44,293
    
    
    
    
    
    
    
    138,942Deferred revenues
    
    
    
    
    
    
    14,259
    
    
    
    3,931
    
    
    
    
    
    
    
    18,190Income taxes payable
    
    
    (48,719
    )
    
    
    59,800
    
    
    
    21,958
    
    
    
    
    
    
    
    33,039Intercompany liabilities (assets)
    
    
    61,345
    
    
    
    (302,256
    )
    
    
    240,911
    
    
    
    
    
    
    
    Other current liabilities
    
    
    4,815
    
    
    
    70,031
    
    
    
    33,682
    
    
    
    
    
    
    
    108,52825,365
    
    
    
    (62,801
    )
    
    
    344,775
    
    
    
    
    
    
    
    307,339Long-Term Debt
    
    
    200,000
    
    
    
    37,212
    
    
    
    
    
    
    
    
    
    
    
    237,212Deferred Tax Liabilities
    
    
    (11,511
    )
    
    
    40,916
    
    
    
    38,905
    
    
    
    
    
    
    
    68,310Other Long-Term Liabilities
    
    
    
    
    
    
    28,151
    
    
    
    650
    
    
    
    
    
    
    
    28,801Commitments and Contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority Interests
    
    
    
    
    
    
    
    
    
    
    17,522
    
    
    
    
    
    
    
    17,522Stockholders Equity
    
    
    1,362,883
    
    
    
    1,278,874
    
    
    
    428,049
    
    
    
    (1,706,923
    )
    
    
    1,362,883$
    1,576,737
    
    
    $
    1,322,352
    
    
    $
    829,901
    
    
    $
    (1,706,923
    )
    
    $
    2,022,067
 14




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##### Table of Contents



GRANT PRIDECO, INC
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by operating activities
    
    $
    5,407
    
    
    $
    25,367
    
    
    $
    42,726
    
    
    $
    (9,964
    )
    
    $
    63,536Cash Flows From Investing Activities:Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (7,849
    )
    
    
    (2,118
    )
    
    
    
    
    
    
    (9,967
    )Other, net
    
    
    (39
    )
    
    
    471
    
    
    
    (198
    )
    
    
    
    
    
    
    234Net cash used in investing activities
    
    
    (39
    )
    
    
    (7,378
    )
    
    
    (2,316
    )
    
    
    
    
    
    
    (9,733
    )Cash Flows From Financing Activities:Repayments on revolver debt, net
    
    
    
    
    
    
    
    
    
    
    (11,200
    )
    
    
    
    
    
    
    (11,200
    )Repayments on debt
    
    
    
    
    
    
    (4,944
    )
    
    
    
    
    
    
    
    
    
    
    (4,944
    )Borrowings (repayments) on debt between subs, net
    
    
    1,220
    
    
    
    4,909
    
    
    
    (6,129
    )
    
    
    
    
    
    
    Excess tax benefits on stock option exercises
    
    
    5,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,010Repurchases of common stock
    
    
    (22,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,030
    )Proceeds from issuance of common stock
    
    
    10,432
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,432Dividends paid
    
    
    
    
    
    
    
    
    
    
    (9,964
    )
    
    
    9,964
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (5,368
    )
    
    
    (35
    )
    
    
    (27,293
    )
    
    
    9,964
    
    
    
    (22,732
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    
    
    
    
    183Net Increase in Cash
    
    
    
    
    
    
    17,954
    
    
    
    13,300
    
    
    
    
    
    
    
    31,254Cash at Beginning of Period
    
    
    
    
    
    
    13,088
    
    
    
    15,076
    
    
    
    
    
    
    
    28,164Cash at End of Period
    
    $
    
    
    
    $
    31,042
    
    
    $
    28,376
    
    
    $
    
    
    
    $
    59,418
 15




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   General
 ®
 Critical Accounting Policies and Estimates
  Market Trends
  16




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##### Table of Contents



Three Months Ended March 31,2007
    
    2006WTI Oil(a)Average
    
    $
    58.10
    
    
    $
    63.34Ending
    
    
    65.87
    
    
    
    66.63Henry Hub Gas(b)Average
    
    $
    7.19
    
    
    $
    7.66Ending
    
    
    7.50
    
    
    
    6.98North American Rig Count(c)Average
    
    
    2,265
    
    
    
    2,184Ending
    
    
    2,141
    
    
    
    2,171International Rig Count(c)Average
    
    
    982
    
    
    
    896Ending
    
    
    994
    
    
    
    898
 
 (a)
    
    Price per barrel of West Texas Intermediate (WTI) crude. Source: Bloomberg Energy/Commodity
Service.(b)
    
    Price per MMBtu. Source: Bloomberg Energy/Commodity Service.(c)
    
    Source: Baker Hughes Rig Count (International Rig Count excludes China and the former Soviet
Union). Future Market Trends and Expectations
       17




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##### Table of Contents



Results of Operations
  Three Months Ended March 31,2007
    
    
    2006
    
    
    % Change(In thousands)Revenues:Drilling Products and
Services
    
    $
    275,948
    
    
    $
    194,259
    
    
    
    42
    %ReedHycalog
    
    
    151,905
    
    
    
    116,791
    
    
    
    30
    %Tubular Technology and
Services
    
    
    67,172
    
    
    
    103,273
    
    
    
    (35
    %)Corporate and Other
    
    
    1,438
    
    
    
    102
    
    
    
    1310
    %Total Revenues
    
    $
    496,463
    
    
    $
    414,425
    
    
    
    20
    %Operating Income (Loss):Drilling Products and
Services
    
    $
    112,652
    
    
    $
    65,012
    
    
    
    73
    %ReedHycalog
    
    
    45,801
    
    
    
    35,558
    
    
    
    29
    %Tubular Technology and
Services
    
    
    13,067
    
    
    
    31,243
    
    
    
    (58
    %)Corporate and Other
    
    
    (18,499
    )
    
    
    (17,433
    )
    
    
    6
    %Total Operating Income
    
    $
    153,021
    
    
    $
    114,380
    
    
    
    34
    %
 Consolidated Revenues and Operating Income
 Results for the three -month periods ended March 31, 2007 and 2006
 ®
  Drilling Products and Services
 Results for the three -month periods ended March 31, 2007 and 2006
  ReedHycalog
 Results for the three -month periods ended March 31, 2007 and 2006
 ®
 18




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##### Table of Contents



Tubular Technology and Services
 Results for the three -month periods ended March 31, 2007 and 2006
  Corporate and Other
 Results for the three -month periods ended March 31, 2007 and 2006
  Other Items
    Liquidity and Capital Resources
 Overview
  Historical Cash Flows
  Thre Months EndedMarch 31,2007
    
    2006(In thousands)Net Cash Provided by Operating Activities
    
    $
    63,114
    
    
    $
    63,536Net Cash Used in Investing Activities
    
    
    (30,615
    )
    
    
    (9,733
    )Net Cash Used in Financing Activities
    
    
    (15,888
    )
    
    
    (22,732
    )
 Operating Activities
  19




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##### Table of Contents



Investing Activities
  Capital Expenditures
  Financing Activities
  Long-Term Debt
    Recent Accounting Pronouncements
  Forward-Looking Statements and Exposures
  20




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##### Table of Contents



Risk Factors and Exposures
  Off-Balance Sheet Financing
  
 ITEM 3. Quantitative and Qualitative Market Risk Disclosures
 Foreign Currency Risk
  Interest Rates
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  21




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##### Table of Contents



PART II
 
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity in Securities and Use of Proceeds
  Number of
    
    
    
    
    
    
    Total Number of SharesShares
    
    
    Average Price
    
    
    Purchased as Part of aPeriod
    
    Purchased (a)
    
    
    Per Share
    
    
    Publicly Announced Plan (b)January 1 - 31, 2007
    
    
    803,795
    
    
    $
    37.28
    
    
    
    800,000February 1 - 28, 2007
    
    
    338,253
    
    
    
    39.70
    
    
    
    300,000March 1 - 31, 2007
    
    
    84,675
    
    
    
    43.96
    
    
    
    79,500Total
    
    
    1,226,723
    
    
    $
    38.41
    
    
    
    1,179,500
 
 (a)
    
    Of the 1,226,723 shares purchased during the three-month period ended March 31, 2007,
47,223 shares were purchased by the trustee for our executive deferred compensation plan for the
benefit of the plan participants using funds directed by the plan participants and funds matched by
us as provided in the plan. These share purchases were not part of a publicly announced program to
purchase common shares.(b)
    
    Our Board of Directors approved a stock repurchase program that authorizes the repurchase of up
to $350 million of our common stock with no established expiration date. For the three-month period
ended March 31, 2007, we repurchased 1.2 million shares at a total cost of $45.0 million. Such
shares are reflected in the accompanying Condensed Consolidated Balance Sheets as Treasury Stock.
At March 31, 2007, there was $143.3 million remaining under this program for future repurchases. 22




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##### Table of Contents



ITEM 6. Exhibits
 Exhibit Number
    
    Description10.1
    
    Grant Prideco, Inc. Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 99.1 to
Grant Prideco, Inc.s Current Report on Form 8-K, filed
on April 3, 2007).10.2
    
    Change of Control Agreement, dated April 16, 2007, with
Quintin Kneen (incorporated by reference to Exhibit
99.1 to Grant Prideco, Inc.s Current Report on Form
8-K, filed on April 20, 2007).31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification
 23




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##### Table of Contents



SIGNATURES
  GRANT PRIDECO, INC.By:
    /s/ MATTHEW D. FITZGERALDMatthew D. FitzgeraldSr. Vice President, Chief Financial Officer and TreasurerBy:
    /s/ GREG L. BOANEGreg L. BoaneVice President and Controller  24




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##### Table of Contents



Exhibit Number
    
    Description10.1
    
    Grant Prideco, Inc. Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 99.1 to
Grant Prideco, Inc.s Current Report on Form 8-K, filed
on April 3, 2007).10.2
    
    Change of Control Agreement, dated April 16, 2007, with
Quintin Kneen (incorporated by reference to Exhibit
99.1 to Grant Prideco, Inc.s Current Report on Form
8-K, filed on April 20, 2007).31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification
 25