##### 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 June 30, 2006
 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
 R £
 R £ £
 £ R
  Title of Each Class
    
    Outstanding at August 2, 2006Common Stock, par value $0.01 per share
    
    130,533,789




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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 4. Submission of Matters to a Vote of Security HoldersITEM 6. ExhibitsSIGNATURESEXHIBIT INDEXCertification of Michael McShaneCertification of Matthew D. FitzgeraldSection 1350 Certification    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 GRANT PRIDECO, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share data)Revenues
    
    $
    431,784
    
    
    $
    316,947
    
    
    $
    846,209
    
    
    $
    609,043Operating Expenses:Cost of sales
    
    
    227,365
    
    
    
    180,277
    
    
    
    455,894
    
    
    
    348,193Sales and marketing
    
    
    37,305
    
    
    
    34,654
    
    
    
    73,285
    
    
    
    66,358General and administrative
    
    
    28,490
    
    
    
    24,554
    
    
    
    56,330
    
    
    
    49,076Research and engineering
    
    
    8,561
    
    
    
    6,189
    
    
    
    16,257
    
    
    
    11,952301,721
    
    
    
    245,674
    
    
    
    601,766
    
    
    
    475,579Operating Income
    
    
    130,063
    
    
    
    71,273
    
    
    
    244,443
    
    
    
    133,464Interest Expense
    
    
    (3,587
    )
    
    
    (9,230
    )
    
    
    (7,418
    )
    
    
    (19,240
    )Other Income (Expense), Net
    
    
    (1,587
    )
    
    
    3,456
    
    
    
    (1,847
    )
    
    
    4,593Equity Income in Unconsolidated Affiliates
    
    
    37,312
    
    
    
    13,129
    
    
    
    64,661
    
    
    
    17,922Refinancing Charges
    
    
    
    
    
    
    (35,432
    )
    
    
    
    
    
    
    (35,432
    )Income Before Income Taxes and Minority
Interests
    
    
    162,201
    
    
    
    43,196
    
    
    
    299,839
    
    
    
    101,307Income Tax Provision
    
    
    (52,993
    )
    
    
    (14,724
    )
    
    
    (96,057
    )
    
    
    (34,193
    )Income Before Minority Interests
    
    
    109,208
    
    
    
    28,472
    
    
    
    203,782
    
    
    
    67,114Minority Interests
    
    
    (3,621
    )
    
    
    (2,644
    )
    
    
    (5,765
    )
    
    
    (4,620
    )Net Income
    
    $
    105,587
    
    
    $
    25,828
    
    
    $
    198,017
    
    
    $
    62,494Basic Net Income Per Share:Net income per share
    
    $
    0.80
    
    
    $
    0.21
    
    
    $
    1.51
    
    
    $
    0.50Basic weighted average shares outstanding
    
    
    131,472
    
    
    
    125,858
    
    
    
    131,444
    
    
    
    125,546Diluted Net Income Per Share:Net income per share
    
    $
    0.79
    
    
    $
    0.20
    
    
    $
    1.48
    
    
    $
    0.48Diluted weighted average shares outstanding
    
    
    133,659
    
    
    
    129,310
    
    
    
    133,765
    
    
    
    128,899
  2




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##### Table of Contents



GRANT PRIDECO, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash
    
    $
    86,426
    
    
    $
    28,164Short-term investments
    
    
    60,475
    
    
    
    Accounts receivable, net of allowance for uncollectible
accounts of $4,646 and $5,856 for 2006 and 2005, respectively
    
    
    302,632
    
    
    
    268,450Inventories
    
    
    427,744
    
    
    
    360,630Deferred charges
    
    
    7,761
    
    
    
    14,629Current deferred tax assets
    
    
    34,113
    
    
    
    39,957Prepaid expenses
    
    
    14,900
    
    
    
    13,197Other current assets
    
    
    928
    
    
    
    1,228934,979
    
    
    
    726,255Property, Plant and Equipment, Net
    
    
    246,249
    
    
    
    238,770Goodwill
    
    
    422,692
    
    
    
    421,627Other Intangible Assets, Net
    
    
    55,579
    
    
    
    58,181Investment in Unconsolidated Affiliate
    
    
    80,641
    
    
    
    84,547Other Assets
    
    
    10,434
    
    
    
    10,904$
    1,750,574
    
    
    $
    1,540,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of long-term debt
    
    $
    3,951
    
    
    $
    7,045Accounts payable
    
    
    115,775
    
    
    
    92,290Accrued payroll and benefits
    
    
    62,532
    
    
    
    61,863Deferred revenues
    
    
    10,109
    
    
    
    21,424Federal income taxes payable
    
    
    45,660
    
    
    
    24,708Current deferred tax liabilities
    
    
    2,455
    
    
    
    3,818Other accrued liabilities
    
    
    36,479
    
    
    
    35,498276,961
    
    
    
    246,646Long-Term Debt
    
    
    203,023
    
    
    
    217,484Deferred Tax Liabilities
    
    
    27,800
    
    
    
    38,171Other Long-Term Liabilities
    
    
    24,443
    
    
    
    29,365Commitments and Contingencies
    
    
    
    
    
    
    Minority Interests
    
    
    18,318
    
    
    
    12,463Stockholders Equity:Preferred stock, $0.01 par value
    
    
    
    
    
    
    Common stock, $0.01 par value; issued 132,586 and 130,927
in 2006 and 2005, respectively
    
    
    1,326
    
    
    
    1,309Capital in excess of par value
    
    
    691,922
    
    
    
    647,211Unearned compensation
    
    
    (9,699
    )
    
    
    (6,573
    )Retained earnings
    
    
    579,310
    
    
    
    381,293Accumulated other comprehensive loss
    
    
    (2,703
    )
    
    
    (19,496
    )Treasury stock, at cost
    
    
    (69,893
    )
    
    
    (17,862
    )Deferred compensation obligation
    
    
    9,766
    
    
    
    10,2731,200,029
    
    
    
    996,155$
    1,750,574
    
    
    $
    1,540,284
  3




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GRANT PRIDECO, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended June 30,2006
    
    
    2005(In thousands)Cash Flows From Operating Activities:Net income
    
    $
    198,017
    
    
    $
    62,494Adjustments to reconcile net income to net cash provided by operating activities:Gain on sale of business
    
    
    
    
    
    
    (1,577
    )Depreciation and amortization
    
    
    24,026
    
    
    
    22,206Debt refinancing costs
    
    
    
    
    
    
    30,180Deferred income tax
    
    
    (8,617
    )
    
    
    (8,696
    )Equity income in unconsolidated affiliates, net of dividends
    
    
    23,057
    
    
    
    (5,881
    )Stock-based compensation expense
    
    
    6,725
    
    
    
    3,847Deferred compensation expense
    
    
    1,626
    
    
    
    1,608Minority interests in consolidated subsidiaries, net of dividends
    
    
    5,765
    
    
    
    997(Gain) loss
on sale of fixed assets, net
    
    
    (493
    )
    
    
    992Change in operating assets and liabilities:Accounts receivable
    
    
    (33,128
    )
    
    
    (972
    )Inventories
    
    
    (67,701
    )
    
    
    (44,485
    )Deferred charges
    
    
    6,868
    
    
    
    (762
    )Other current assets
    
    
    (1,403
    )
    
    
    (124
    )Accounts payable
    
    
    24,615
    
    
    
    10,744Deferred revenues
    
    
    (11,315
    )
    
    
    2,783Federal
income taxes payable
    
    
    22,956
    
    
    
    27,252Other accrued liabilities
    
    
    (12,044
    )
    
    
    (20,976
    )Other, net
    
    
    7,499
    
    
    
    7,063Net cash provided by operating activities
    
    
    186,453
    
    
    
    86,693Cash Flows From Investing Activities:Proceeds from sale of business
    
    
    
    
    
    
    2,521Purchase of short-term investments
    
    
    (60,475
    )
    
    
    Investments in and advances to unconsolidated affiliates
    
    
    
    
    
    
    (3,406
    )Capital expenditures for property, plant and equipment
    
    
    (28,368
    )
    
    
    (13,963
    )Proceeds from sale of fixed assets
    
    
    658
    
    
    
    1,638Other, net
    
    
    (240
    )
    
    
    Net cash used in investing activities
    
    
    (88,425
    )
    
    
    (13,210
    )Cash Flows From Financing Activities:(Repayments)/borrowings on credit facility
    
    
    (11,200
    )
    
    
    119,000Debt redemption premium
    
    
    
    
    
    
    (25,356
    )Repayments on debt
    
    
    (6,448
    )
    
    
    (204,893
    )Debt issuance costs
    
    
    
    
    
    
    (2,432
    )Purchases of treasury stock
    
    
    (2,432
    )
    
    
    (2,405
    )Proceeds from stock option exercises
    
    
    16,772
    
    
    
    17,013Excess tax benefits on stock option exercises
    
    
    11,989
    
    
    
    Repurchase of common stock
    
    
    (51,455
    )
    
    
    Proceeds from employee stock purchase plan
    
    
    2,759
    
    
    
    1,896Net cash used in financing activities
    
    
    (40,015
    )
    
    
    (97,177
    )Effect of Exchange Rate Changes on Cash
    
    
    249
    
    
    
    (308
    )Net Increase (Decrease) in Cash
    
    
    58,262
    
    
    
    (24,002
    )Cash at Beginning of Period
    
    
    28,164
    
    
    
    47,552Cash at End of Period
    
    $
    86,426
    
    
    $
    23,550
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GRANT PRIDECO, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. General
 Basis of Presentation
    Use of Estimates
  Revenue Recognition
  5




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Deferred Revenues and Charges
  2. Stock-Based Compensation
    Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005(In thousands)Net Income As Reported
    
    $
    25,828
    
    
    $
    62,494Add: stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    2,109
    
    
    
    3,568Deduct: stock-based employee compensation expense
determined under the fair value method for all awards,
net of related tax effects
    
    
    (3,388
    )
    
    
    (5,918
    )Pro Forma Net Income
    
    $
    24,549
    
    
    $
    60,144Net Income Per Share:Basic, as reported
    
    $
    0.21
    
    
    $
    0.50Basic, pro forma
    
    
    0.20
    
    
    
    0.48Diluted, as reported
    
    
    0.20
    
    
    
    0.48Diluted, pro forma
    
    
    0.19
    
    
    
    0.47
  6




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Stock Option and Restricted Stock Plans
     Stock Option Plans
  7




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Six Months Ended June 30,2006
    
    
    2005(Actual)
    
    
    (Pro Forma)Valuation Assumptions -Expected Option Term (Years)
    
    
    5
    
    
    
    5Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.73
    %
    
    
    3.87
    %Weighted-Average Grant Date
Fair Value
    
    $
    15.50
    
    
    $
    9.10
   WeightedWeighted
    
    
    AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at the Beginning of the
Year
    
    
    4,747,388
    
    
    $
    12.91Options Granted During the Year
    
    
    304,750
    
    
    
    36.70Options Exercised
    
    
    (1,461,038
    )
    
    
    11.50Options Forfeited
    
    
    (36,373
    )
    
    
    23.16Outstanding at the End of the Period
    
    
    3,554,727
    
    
    $
    15.46
    
    
    
    8.06
    
    
    $
    104,120,111Exercisable at the End of the Period
    
    
    2,681,065
    
    
    $
    12.73
    
    
    
    7.69
    
    
    $
    85,850,915
   Restricted Stock Plans
   2004 and 2005 Restricted Stock Awards
 8




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006 Restricted Stock Award
  WeightedNumber
    
    
    Averageof
    
    
    Grant-DateShares
    
    
    Fair ValueOutstanding at the Beginning of
the Year
    
    
    585,550
    
    
    $
    16.56Awarded
    
    
    287,065
    
    
    
    41.05Vested
    
    
    (10,700
    )
    
    
    42.84Forfeited
    
    
    (25,875
    )
    
    
    17.16Outstanding at the End of the
Period
    
    
    836,040
    
    
    $
    24.62
  Employee Stock Purchase Plan
    2006
    
    
    2005(Actual)
    
    
    (Pro Forma)Valuation Assumptions -Expected Option Term (Years)
    
    
    1
    
    
    
    1Expected Volatility
    
    
    40
    %
    
    
    41
    %Expected Dividend Rate
    
    
    
    
    
    
    Risk Free Interest Rate
    
    
    4.74
    %
    
    
    2.79
    %Weighted-Average Grant Date
Fair Value
    
    $
    12.87
    
    
    $
    6.05
  9




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3. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net Income
    
    $
    105,587
    
    
    $
    25,828
    
    
    $
    198,017
    
    
    $
    62,494Foreign Currency Translation Adjustments
    
    
    2,132
    
    
    
    (2,066
    )
    
    
    7,025
    
    
    
    (2,528
    )Other Comprehensive Income (Loss) for
Unconsolidated Affiliate, Net of Tax
    
    
    7,082
    
    
    
    (1,639
    )
    
    
    9,768
    
    
    
    (1,948
    )Total Comprehensive Income
    
    $
    114,801
    
    
    $
    22,123
    
    
    $
    214,810
    
    
    $
    58,018
 4. Net Income Per Share
  5. Short-Term Investments
   6. Inventories
  June 30,
    
    
    December 31,2006
    
    

2005(In thousands)Raw Materials, Components and Supplies
    
    $
    197,088
    
    
    $
    169,966Work in Process
    
    
    117,869
    
    
    
    84,783Finished Goods
    
    
    91,956
    
    
    
    83,189Rental Bits (a)
    
    
    20,831
    
    
    
    22,692$
    427,744
    
    
    $
    360,630
 
 (a)
    
    The Company manufactures its rental bit inventory and the cost, which
includes direct and indirect manufacturing costs, is capitalized and carried in
inventory. Prior to 2006, the Company expensed the cost of rental bits upon the
first rental and usage of the bit. During the first quarter of 2006, the Company
completed an analysis of historical rental bit usage to determine an estimate of
rental bit useful life. Effective January 1, 2006, manufactured rental bits will
be amortized, based upon analysis of historical usage, over their estimated
useful life of approximately one year. The effect of this change was not
material to the condensed consolidated financial statements. 10




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7. Property, Plant and Equipment
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Land
    
    $
    22,466
    
    
    $
    21,534Buildings and Improvements
    
    
    87,230
    
    
    
    86,371Machinery and Equipment
    
    
    294,860
    
    
    
    287,008Furniture and Fixtures
    
    
    37,458
    
    
    
    35,362Construction in Progress
    
    
    28,501
    
    
    
    13,084470,515
    
    
    
    443,359Less: Accumulated Depreciation
    
    
    (224,266
    )
    
    
    (204,589
    )$
    246,249
    
    
    $
    238,770
 8. Goodwill and Other Intangible Assets
  Drilling
    
    
    
    
    
    
    TubularProducts
    
    
    
    
    
    
    Technologyand Services
    
    
    Drill Bits
    
    
    and Services
    
    
    Other
    
    
    Total(In thousands)Balance, December 31, 2005
    
    $
    130,885
    
    
    $
    174,769
    
    
    $
    97,133
    
    
    $
    18,840
    
    
    $
    421,627Translation and Other Adjustments
    
    
    402
    
    
    
    368
    
    
    
    275
    
    
    
    20
    
    
    
    1,065Balance, June 30, 2006
    
    $
    131,287
    
    
    $
    175,137
    
    
    $
    97,408
    
    
    $
    18,860
    
    
    $
    422,692
  11




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June 30, 2006
    
    
    December 31, 2005Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetIntangibles
    
    
    Amortization
    
    
    Intangibles
    
    
    Intangibles
    
    
    Amortization
    
    
    Intangibles(In thousands)Patents
    
    $
    59,562
    
    
    $
    (11,629
    )
    
    $
    47,933
    
    
    $
    58,367
    
    
    $
    (8,174
    )
    
    $
    50,193Technology Licenses
    
    
    1,675
    
    
    
    (838
    )
    
    
    837
    
    
    
    1,438
    
    
    
    (583
    )
    
    
    855Customer Relationships
    
    
    6,410
    
    
    
    (773
    )
    
    
    5,637
    
    
    
    6,410
    
    
    
    (612
    )
    
    
    5,798Trademarks
    
    
    1,610
    
    
    
    (1,147
    )
    
    
    463
    
    
    
    1,610
    
    
    
    (1,044
    )
    
    
    566Covenants Not To Compete
    
    
    2,300
    
    
    
    (1,813
    )
    
    
    487
    
    
    
    3,625
    
    
    
    (3,078
    )
    
    
    547Pension Asset (a)
    
    
    222
    
    
    
    
    
    
    
    222
    
    
    
    222
    
    
    
    
    
    
    
    222$
    71,779
    
    
    $
    (16,200
    )
    
    $
    55,579
    
    
    $
    71,672
    
    
    $
    (13,491
    )
    
    $
    58,181
 
 (a)
    
    The pension asset is a non-amortizing intangible asset.  9. Investments in Unconsolidated Affiliates
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net Sales
    
    $
    202,199
    
    
    $
    135,310
    
    
    $
    373,068
    
    
    $
    237,587Gross Profit
    
    
    74,030
    
    
    
    35,016
    
    
    
    134,945
    
    
    
    51,693Net Income
    
    
    71,493
    
    
    
    31,322
    
    
    
    130,169
    
    
    
    42,764Companys Equity Income
    
    $
    37,312
    
    
    $
    14,941
    
    
    $
    64,661
    
    
    $
    21,662Dividends Received
    
    
    87,719
    
    
    
    12,041
    
    
    
    87,719
    
    
    
    12,041
   12




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10. Segment Information
 Business Segments
  Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    Technology
    
    
    CorporateServices
    
    
    Drill Bits
    
    
    and Services
    
    
    and Other
    
    
    TotalThree Months Ended:
    
    (In thousands)June 30, 2006Revenues from Unaffiliated Customers
    
    $
    213,586
    
    
    $
    116,239
    
    
    $
    101,786
    
    
    $
    173
    
    
    $
    431,784Intersegment Revenues
    
    
    90
    
    
    
    40
    
    
    
    1,555
    
    
    
    
    
    
    
    1,685Operating Income (Loss)
    
    
    78,749
    
    
    
    40,814
    
    
    
    29,237
    
    
    
    (18,737
    )
    
    
    130,063Income (Loss) Before Income Taxes
and Minority Interests
    
    
    114,175
    
    
    
    38,809
    
    
    
    28,919
    
    
    
    (19,702
    )
    
    
    162,201June 30, 2005Revenues from Unaffiliated Customers
    
    $
    144,356
    
    
    $
    93,089
    
    
    $
    79,502
    
    
    $
    
    
    
    $
    316,947Intersegment Revenues
    
    
    7
    
    
    
    
    
    
    
    1,919
    
    
    
    
    
    
    
    1,926Operating Income (Loss)
    
    
    43,184
    
    
    
    20,568
    
    
    
    19,225
    
    
    
    (11,704
    )
    
    
    71,273Income (Loss) Before Income Taxes
and Minority Interests
    
    
    59,259
    
    
    
    20,489
    
    
    
    19,161
    
    
    
    (55,713
    )
    
    
    43,196
 Drilling
    
    
    
    
    
    
    TubularProducts and
    
    
    
    
    
    
    Technology
    
    
    CorporateServices
    
    
    Drill Bits
    
    
    and Services
    
    
    and Other
    
    
    TotalSix Months Ended:
    
    (In thousands)June 30, 2006Revenues from Unaffiliated
Customers
    
    $
    407,845
    
    
    $
    233,030
    
    
    $
    205,059
    
    
    $
    275
    
    
    $
    846,209Intersegment Revenues
    
    
    226
    
    
    
    40
    
    
    
    2,256
    
    
    
    
    
    
    
    2,522Operating Income (Loss)
    
    
    143,761
    
    
    
    76,372
    
    
    
    60,480
    
    
    
    (36,170
    )
    
    
    244,443Income (Loss) Before Income Taxes
and Minority Interests
    
    
    205,577
    
    
    
    73,180
    
    
    
    59,683
    
    
    
    (38,601
    )
    
    
    299,839June 30, 2005Revenues from Unaffiliated
Customers
    
    $
    272,706
    
    
    $
    183,715
    
    
    $
    152,622
    
    
    $
    
    
    
    $
    609,043Intersegment Revenues
    
    
    131
    
    
    
    
    
    
    
    3,278
    
    
    
    
    
    
    
    3,409Operating Income (Loss)
    
    
    79,551
    
    
    
    42,190
    
    
    
    34,486
    
    
    
    (22,763
    )
    
    
    133,464Income (Loss) Before Income Taxes
and Minority Interests
    
    
    102,902
    
    
    
    39,640
    
    
    
    33,605
    
    
    
    (74,840
    )
    
    
    101,307
 13




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##### Table of Contents



11. Pension Plans
 U.S. Pension Plan
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Service Cost
    
    $
    101
    
    
    $
    122
    
    
    $
    202
    
    
    $
    196Interest Cost
    
    
    222
    
    
    
    237
    
    
    
    445
    
    
    
    380Expected Return on Plan Assets
    
    
    (238
    )
    
    
    (193
    )
    
    
    (476
    )
    
    
    (310
    )Amortization of Prior Service Cost
    
    
    6
    
    
    
    
    
    
    
    12
    
    
    
    Amortization of Loss
    
    
    4
    
    
    
    
    
    
    
    8
    
    
    
    Administration Expenses
    
    
    15
    
    
    
    55
    
    
    
    30
    
    
    
    88Net Periodic Benefit Cost
    
    $
    110
    
    
    $
    221
    
    
    $
    221
    
    
    $
    354
  Non-U.S. Pension Plan
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Interest Cost
    
    $
    229
    
    
    $
    250
    
    
    $
    458
    
    
    $
    494Expected Return on Plan Assets
    
    
    (226
    )
    
    
    (250
    )
    
    
    (452
    )
    
    
    (513
    )Amortization of Prior Service
Cost/(Benefit)
    
    
    27
    
    
    
    (56
    )
    
    
    54
    
    
    
    19Amortization of (Gain)/Loss
    
    
    (30
    )
    
    
    136
    
    
    
    (60
    )
    
    
    136Net Periodic Benefit Cost
    
    $
    
    
    
    $
    80
    
    
    $
    
    
    
    $
    136
  12. Stock Repurchase Program
  13. Recent Accounting Standards
  14




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##### Table of Contents



14. Subsidiary Guarantor Financial Information
  CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    337,600
    
    
    $
    181,487
    
    
    $
    (87,303
    )
    
    $
    431,784Operating Expenses:Cost of sales
    
    
    
    
    
    
    206,623
    
    
    
    91,134
    
    
    
    (70,392
    )
    
    
    227,365Selling, general and administrative
    
    
    55
    
    
    
    54,413
    
    
    
    19,888
    
    
    
    
    
    
    
    74,35655
    
    
    
    261,036
    
    
    
    111,022
    
    
    
    (70,392
    )
    
    
    301,721Operating Income (Expense)
    
    
    (55
    )
    
    
    76,564
    
    
    
    70,465
    
    
    
    (16,911
    )
    
    
    130,063Interest Expense
    
    
    (3,519
    )
    
    
    (129
    )
    
    
    61
    
    
    
    
    
    
    
    (3,587
    )Other Income (Expense), Net
    
    
    526
    
    
    
    
    
    
    
    (2,113
    )
    
    
    
    
    
    
    (1,587
    )Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    37,312
    
    
    
    
    
    
    
    
    
    
    
    37,312Equity in Subsidiaries, Net of Taxes
    
    
    116,328
    
    
    
    3,918
    
    
    
    
    
    
    
    (120,246
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    113,280
    
    
    
    117,665
    
    
    
    68,413
    
    
    
    (137,157
    )
    
    
    162,201Income Tax Provision
    
    
    (7,693
    )
    
    
    (30,939
    )
    
    
    (14,361
    )
    
    
    
    
    
    
    (52,993
    )Income Before Minority Interests
    
    
    105,587
    
    
    
    86,726
    
    
    
    54,052
    
    
    
    (137,157
    )
    
    
    109,208Minority Interests
    
    
    
    
    
    
    
    
    
    
    (3,621
    )
    
    
    
    
    
    
    (3,621
    )Net Income
    
    $
    105,587
    
    
    $
    86,726
    
    
    $
    50,431
    
    
    $
    (137,157
    )
    
    $
    105,587
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    650,591
    
    
    $
    355,786
    
    
    $
    (160,168
    )
    
    $
    846,209Operating Expenses:Cost of sales
    
    
    
    
    
    
    404,809
    
    
    
    181,968
    
    
    
    (130,883
    )
    
    
    455,894Selling, general and administrative
    
    
    108
    
    
    
    105,808
    
    
    
    39,956
    
    
    
    
    
    
    
    145,872108
    
    
    
    510,617
    
    
    
    221,924
    
    
    
    (130,883
    )
    
    
    601,766Operating
Income (Loss)
    
    
    (108
    )
    
    
    139,974
    
    
    
    133,862
    
    
    
    (29,285
    )
    
    
    244,443Interest Expense
    
    
    (7,065
    )
    
    
    (249
    )
    
    
    (104
    )
    
    
    
    
    
    
    (7,418
    )Other Income (Expense), Net
    
    
    1,053
    
    
    
    337
    
    
    
    (3,237
    )
    
    
    
    
    
    
    (1,847
    )Equity Income in Unconsolidated Affiliate
    
    
    
    
    
    
    64,661
    
    
    
    
    
    
    
    
    
    
    
    64,661Equity in Subsidiaries, Net of Taxes
    
    
    220,566
    
    
    
    8,084
    
    
    
    
    
    
    
    (228,650
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    214,446
    
    
    
    212,807
    
    
    
    130,521
    
    
    
    (257,935
    )
    
    
    299,839Income Tax Provision
    
    
    (16,429
    )
    
    
    (51,183
    )
    
    
    (28,445
    )
    
    
    
    
    
    
    (96,057
    )Income Before Minority Interests
    
    
    198,017
    
    
    
    161,624
    
    
    
    102,076
    
    
    
    (257,935
    )
    
    
    203,782Minority Interests
    
    
    
    
    
    
    
    
    
    
    (5,765
    )
    
    
    
    
    
    
    (5,765
    )Net Income
    
    $
    198,017
    
    
    $
    161,624
    
    
    $
    96,311
    
    
    $
    (257,935
    )
    
    $
    198,017
 15




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2006
(Unaudited)
 ASSETS
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Current Assets:Cash
    
    $
    
    
    
    $
    50,083
    
    
    $
    36,343
    
    
    $
    
    
    
    $
    86,426Short-term investments
    
    
    
    
    
    
    60,475
    
    
    
    
    
    
    
    
    
    
    
    60,475Accounts receivable, net
    
    
    
    
    
    
    194,301
    
    
    
    108,331
    
    
    
    
    
    
    
    302,632Inventories
    
    
    
    
    
    
    329,202
    
    
    
    143,102
    
    
    
    (44,560
    )
    
    
    427,744Deferred charges
    
    
    
    
    
    
    7,763
    
    
    
    (2
    )
    
    
    
    
    
    
    7,761Current deferred tax assets
    
    
    22
    
    
    
    27,357
    
    
    
    6,734
    
    
    
    
    
    
    
    34,113Other current assets
    
    
    
    
    
    
    7,014
    
    
    
    8,814
    
    
    
    
    
    
    
    15,82822
    
    
    
    676,195
    
    
    
    303,322
    
    
    
    (44,560
    )
    
    
    934,979Property, Plant and Equipment, Net
    
    
    
    
    
    
    136,593
    
    
    
    109,656
    
    
    
    
    
    
    
    246,249Goodwill
    
    
    
    
    
    
    229,872
    
    
    
    192,820
    
    
    
    
    
    
    
    422,692Investment In and Advances to Subsidiaries
    
    
    1,242,824
    
    
    
    80,368
    
    
    
    
    
    
    
    (1,323,192
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    80,641
    
    
    
    
    
    
    
    
    
    
    
    80,641Other Assets
    
    
    6,354
    
    
    
    45,850
    
    
    
    13,809
    
    
    
    
    
    
    
    66,013$
    1,249,200
    
    
    $
    1,249,519
    
    
    $
    619,607
    
    
    $
    (1,367,752
    )
    
    $
    1,750,574LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    3,951
    
    
    $
    
    
    
    $
    
    
    
    $
    3,951Accounts payable
    
    
    
    
    
    
    77,439
    
    
    
    38,336
    
    
    
    
    
    
    
    115,775Deferred revenues
    
    
    
    
    
    
    10,112
    
    
    
    (3
    )
    
    
    
    
    
    
    10,109Federal income taxes payable
    
    
    (38,607
    )
    
    
    66,543
    
    
    
    17,724
    
    
    
    
    
    
    
    45,660Current deferred tax liabilities
    
    
    
    
    
    
    8
    
    
    
    2,447
    
    
    
    
    
    
    
    2,455Intercompany liabilities (assets)
    
    
    (106,128
    )
    
    
    (46,466
    )
    
    
    152,594
    
    
    
    
    
    
    
    Other accrued liabilities
    
    
    4,838
    
    
    
    63,053
    
    
    
    31,120
    
    
    
    
    
    
    
    99,011(139,897
    )
    
    
    174,640
    
    
    
    242,218
    
    
    
    
    
    
    
    276,961Long-Term Debt
    
    
    200,095
    
    
    
    2,928
    
    
    
    
    
    
    
    
    
    
    
    203,023Deferred Tax Liabilities
    
    
    (11,027
    )
    
    
    13,816
    
    
    
    25,011
    
    
    
    
    
    
    
    27,800Other Long-Term Liabilities
    
    
    
    
    
    
    23,363
    
    
    
    1,080
    
    
    
    
    
    
    
    24,443Commitments and Contingencies
Minority Interests
    
    
    
    
    
    
    
    
    
    
    18,318
    
    
    
    
    
    
    
    18,318Stockholders Equity
    
    
    1,200,029
    
    
    
    1,034,772
    
    
    
    332,980
    
    
    
    (1,367,752
    )
    
    
    1,200,029$
    1,249,200
    
    
    $
    1,249,519
    
    
    $
    619,607
    
    
    $
    (1,367,752
    )
    
    $
    1,750,574
 16




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2006
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by operating activities
    
    $
    19,986
    
    
    $
    112,116
    
    
    $
    65,072
    
    
    $
    (10,721
    )
    
    $
    186,453Cash Flows From Investing Activities:Purchase of short-term investments
    
    
    
    
    
    
    (60,475
    )
    
    
    
    
    
    
    
    
    
    
    (60,475
    )Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (19,407
    )
    
    
    (8,961
    )
    
    
    
    
    
    
    (28,368
    )Other, net
    
    
    (39
    )
    
    
    552
    
    
    
    (95
    )
    
    
    
    
    
    
    418Net cash used in investing activities
    
    
    (39
    )
    
    
    (79,330
    )
    
    
    (9,056
    )
    
    
    
    
    
    
    (88,425
    )Cash Flows From Financing Activities:Repayments on revolver debt
    
    
    
    
    
    
    
    
    
    
    (11,200
    )
    
    
    
    
    
    
    (11,200
    )Repayments on debt
    
    
    
    
    
    
    (6,448
    )
    
    
    
    
    
    
    
    
    
    
    (6,448
    )Purchases of treasury stock
    
    
    (2,432
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,432
    )Borrowings (repayments) on debt between subs, net
    
    
    2,420
    
    
    
    10,652
    
    
    
    (13,072
    )
    
    
    
    
    
    
    Proceeds from stock option exercises
    
    
    16,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,772Excess tax benefits on stock option exercises
    
    
    11,989
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,989Repurchase of common stock
    
    
    (51,455
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,455
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (10,721
    )
    
    
    10,721
    
    
    
    Proceeds from employee stock purchase plan
    
    
    2,759
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,759Net cash (used in) provided by financing activities
    
    
    (19,947
    )
    
    
    4,204
    
    
    
    (34,993
    )
    
    
    10,721
    
    
    
    (40,015
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    249Net Increase in Cash
    
    
    
    
    
    
    36,990
    
    
    
    21,272
    
    
    
    
    
    
    
    58,262Cash at Beginning of Period
    
    
    
    
    
    
    13,093
    
    
    
    15,071
    
    
    
    
    
    
    
    28,164Cash at End of Period
    
    $
    
    
    
    $
    50,083
    
    
    $
    36,343
    
    
    $
    
    
    
    $
    86,426
 17




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    245,693
    
    
    $
    90,830
    
    
    $
    (19,576
    )
    
    $
    316,947Operating Expenses:Cost of sales
    
    
    
    
    
    
    162,586
    
    
    
    27,618
    
    
    
    (9,927
    )
    
    
    180,277Selling, general and administrative
    
    
    
    
    
    
    46,784
    
    
    
    18,613
    
    
    
    
    
    
    
    65,397
    
    
    
    209,370
    
    
    
    46,231
    
    
    
    (9,927
    )
    
    
    245,674Operating Income
    
    
    
    
    
    
    36,323
    
    
    
    44,599
    
    
    
    (9,649
    )
    
    
    71,273Interest Expense
    
    
    (8,081
    )
    
    
    (971
    )
    
    
    (178
    )
    
    
    
    
    
    
    (9,230
    )Other Income (Expense), Net
    
    
    516
    
    
    
    (753
    )
    
    
    3,693
    
    
    
    
    
    
    
    3,456Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    13,129
    
    
    
    
    
    
    
    
    
    
    
    13,129Refinance Charges
    
    
    (27,887
    )
    
    
    (7,545
    )
    
    
    
    
    
    
    
    
    
    
    (35,432
    )Equity in Subsidiaries, Net of Taxes
    
    
    63,928
    
    
    
    2,036
    
    
    
    
    
    
    
    (65,964
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    28,476
    
    
    
    42,219
    
    
    
    48,114
    
    
    
    (75,613
    )
    
    
    43,196Income Tax (Provision) Benefit
    
    
    (2,648
    )
    
    
    (2,210
    )
    
    
    (9,866
    )
    
    
    
    
    
    
    (14,724
    )Income Before Minority Interests
    
    
    25,828
    
    
    
    40,009
    
    
    
    38,248
    
    
    
    (75,613
    )
    
    
    28,472Minority Interests
    
    
    
    
    
    
    
    
    
    
    (2,644
    )
    
    
    
    
    
    
    (2,644
    )Net Income
    
    $
    25,828
    
    
    $
    40,009
    
    
    $
    35,604
    
    
    $
    (75,613
    )
    
    $
    25,828
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    479,172
    
    
    $
    218,326
    
    
    $
    (88,455
    )
    
    $
    609,043Operating Expenses:Cost of sales
    
    
    
    
    
    
    323,967
    
    
    
    90,341
    
    
    
    (66,115
    )
    
    
    348,193Selling, general and administrative
    
    
    (3
    )
    
    
    89,827
    
    
    
    37,562
    
    
    
    
    
    
    
    127,386(3
    )
    
    
    413,794
    
    
    
    127,903
    
    
    
    (66,115
    )
    
    
    475,579Operating Income
    
    
    3
    
    
    
    65,378
    
    
    
    90,423
    
    
    
    (22,340
    )
    
    
    133,464Interest Expense
    
    
    (17,988
    )
    
    
    (1,052
    )
    
    
    (200
    )
    
    
    
    
    
    
    (19,240
    )Other Income, Net
    
    
    1,103
    
    
    
    684
    
    
    
    2,806
    
    
    
    
    
    
    
    4,593Equity Income in Unconsolidated Affiliates
    
    
    
    
    
    
    17,922
    
    
    
    
    
    
    
    
    
    
    
    17,922Refinance Charges
    
    
    (27,887
    )
    
    
    (7,545
    )
    
    
    
    
    
    
    
    
    
    
    (35,432
    )Equity in Subsidiaries, Net of Taxes
    
    
    113,172
    
    
    
    4,808
    
    
    
    
    
    
    
    (117,980
    )
    
    
    Income Before Income Taxes and Minority Interest
    
    
    68,403
    
    
    
    80,195
    
    
    
    93,029
    
    
    
    (140,320
    )
    
    
    101,307Income Tax (Provision) Benefit
    
    
    (5,909
    )
    
    
    (9,103
    )
    
    
    (19,181
    )
    
    
    
    
    
    
    (34,193
    )Income Before Minority Interests
    
    
    62,494
    
    
    
    71,092
    
    
    
    73,848
    
    
    
    (140,320
    )
    
    
    67,114Minority Interests
    
    
    
    
    
    
    
    
    
    
    (4,620
    )
    
    
    
    
    
    
    (4,620
    )Net Income
    
    $
    62,494
    
    
    $
    71,092
    
    
    $
    69,228
    
    
    $
    (140,320
    )
    
    $
    62,494
 18




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2005
 ASSETS
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Current Assets:Cash
    
    $
    
    
    
    $
    13,093
    
    
    $
    15,071
    
    
    $
    
    
    
    $
    28,164Accounts receivable, net
    
    
    
    
    
    
    164,439
    
    
    
    104,011
    
    
    
    
    
    
    
    268,450Inventories
    
    
    
    
    
    
    272,914
    
    
    
    140,256
    
    
    
    (52,540
    )
    
    
    360,630Deferred charges
    
    
    
    
    
    
    14,397
    
    
    
    232
    
    
    
    
    
    
    
    14,629Current deferred tax assets
    
    
    (2,671
    )
    
    
    30,721
    
    
    
    11,907
    
    
    
    
    
    
    
    39,957Other current assets
    
    
    
    
    
    
    4,971
    
    
    
    9,454
    
    
    
    
    
    
    
    14,425(2,671
    )
    
    
    500,535
    
    
    
    280,931
    
    
    
    (52,540
    )
    
    
    726,255Property, Plant and Equipment, Net
    
    
    
    
    
    
    133,677
    
    
    
    105,093
    
    
    
    
    
    
    
    238,770Goodwill
    
    
    
    
    
    
    229,837
    
    
    
    191,790
    
    
    
    
    
    
    
    421,627Investment In and Advances to Subsidiaries
    
    
    1,063,749
    
    
    
    101,751
    
    
    
    
    
    
    
    (1,165,500
    )
    
    
    Investment In and Advances to Unconsolidated Affiliates
    
    
    
    
    
    
    84,547
    
    
    
    
    
    
    
    
    
    
    
    84,547Other Assets
    
    
    6,630
    
    
    
    48,192
    
    
    
    14,263
    
    
    
    
    
    
    
    69,085$
    1,067,708
    
    
    $
    1,098,539
    
    
    $
    592,077
    
    
    $
    (1,218,040
    )
    
    $
    1,540,284LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Short-term borrowings and current portion of
long-term debt
    
    $
    
    
    
    $
    7,045
    
    
    $
    
    
    
    $
    
    
    
    $
    7,045Accounts payable
    
    
    
    
    
    
    64,343
    
    
    
    27,947
    
    
    
    
    
    
    
    92,290Deferred revenues
    
    
    
    
    
    
    21,060
    
    
    
    364
    
    
    
    
    
    
    
    21,424Federal income taxes payable
    
    
    9,573
    
    
    
    (7,704
    )
    
    
    22,839
    
    
    
    
    
    
    
    24,708Current deferred tax liabilities
    
    
    
    
    
    
    (11
    )
    
    
    3,829
    
    
    
    
    
    
    
    3,818Intercompany liabilities (assets)
    
    
    (147,863
    )
    
    
    47,631
    
    
    
    93,455
    
    
    
    6,777
    
    
    
    Other accrued liabilities
    
    
    5,512
    
    
    
    62,525
    
    
    
    29,324
    
    
    
    
    
    
    
    97,361(132,778
    )
    
    
    194,889
    
    
    
    177,758
    
    
    
    6,777
    
    
    
    246,646Long-Term Debt
    
    
    200,095
    
    
    
    6,189
    
    
    
    11,200
    
    
    
    
    
    
    
    217,484Deferred Tax Liabilities
    
    
    4,236
    
    
    
    9,031
    
    
    
    24,904
    
    
    
    
    
    
    
    38,171Other Long-Term Liabilities
    
    
    
    
    
    
    28,071
    
    
    
    1,294
    
    
    
    
    
    
    
    29,365Commitments and ContingenciesMinority Interests
    
    
    
    
    
    
    
    
    
    
    12,463
    
    
    
    
    
    
    
    12,463Stockholders Equity
    
    
    996,155
    
    
    
    860,359
    
    
    
    364,458
    
    
    
    (1,224,817
    )
    
    
    996,155$
    1,067,708
    
    
    $
    1,098,539
    
    
    $
    592,077
    
    
    $
    (1,218,040
    )
    
    $
    1,540,284
 19




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2005
(Unaudited)
 Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    Total(In thousands)Cash Flows From Operating Activities:Net cash provided by (used in) by operating activities
    
    $
    87,831
    
    
    $
    (29,153
    )
    
    $
    32,040
    
    
    $
    (4,025
    )
    
    $
    86,693Cash Flows From Investing Activities:Proceeds from sale of businesses, net of cash disposed
    
    
    
    
    
    
    2,521
    
    
    
    
    
    
    
    
    
    
    
    2,521Capital expenditures for property, plant and equipment
    
    
    
    
    
    
    (8,714
    )
    
    
    (5,249
    )
    
    
    
    
    
    
    (13,963
    )Other, net
    
    
    
    
    
    
    (1,895
    )
    
    
    127
    
    
    
    
    
    
    
    (1,768
    )Net cash used in investing activities
    
    
    
    
    
    
    (8,088
    )
    
    
    (5,122
    )
    
    
    
    
    
    
    (13,210
    )Cash Flows From Financing Activities:Borrowings on revolver debt
    
    
    119,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,000Debt redemption make-whole premium
    
    
    (25,356
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,356
    )Repayments on debt
    
    
    (200,000
    )
    
    
    (4,893
    )
    
    
    
    
    
    
    
    
    
    
    (204,893
    )Borrowings (Repayments) between subsidiaries, net
    
    
    4,453
    
    
    
    17,386
    
    
    
    (21,839
    )
    
    
    
    
    
    
    Dividends paid
    
    
    
    
    
    
    
    
    
    
    (4,025
    )
    
    
    4,025
    
    
    
    Proceeds from stock option exercises
    
    
    17,013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,013Other, net
    
    
    (2,941
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,941
    )Net cash (used in) provided by financing activities
    
    
    (87,831
    )
    
    
    12,493
    
    
    
    (25,864
    )
    
    
    4,025
    
    
    
    (97,177
    )Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    
    
    
    
    (308
    )
    
    
    
    
    
    
    (308
    )Net Increase (Decrease) in Cash
    
    
    
    
    
    
    (24,748
    )
    
    
    746
    
    
    
    
    
    
    
    (24,002
    )Cash at Beginning of Period
    
    
    
    
    
    
    30,721
    
    
    
    16,831
    
    
    
    
    
    
    
    47,552Cash at End of Period
    
    $
    
    
    
    $
    5,973
    
    
    $
    17,577
    
    
    $
    
    
    
    $
    23,550
 20




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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
  Revenue Recognition
  Deferred Revenues and Charges
  Stock-Based Compensation
  21




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##### Table of Contents



Market Trends
  22




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##### Table of Contents



Three Months Ended June 30,2006
    
    2005WTI Oil(a)Average
    
    $
    70.51
    
    
    $
    53.11Ending
    
    
    73.93
    
    
    
    56.50Henry Hub Gas(b)Average
    
    $
    6.51
    
    
    $
    6.95Ending
    
    
    5.83
    
    
    
    7.00North American Rig Count(c)Average
    
    
    1,914
    
    
    
    1,577Ending
    
    
    2,073
    
    
    
    1,648International Rig Count(c)Average
    
    
    913
    
    
    
    916Ending
    
    
    906
    
    
    
    932
 
 (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, the former Soviet
Union and certain embargoed countries). Future Market Trends and Expectations
    23




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeRevenues:
    
    (In thousands)Drilling Products and Services
    
    $
    213,586
    
    
    $
    144,356
    
    
    
    48
    %
    
    $
    407,845
    
    
    $
    272,706
    
    
    
    50
    %Drill Bits
    
    
    116,239
    
    
    
    93,089
    
    
    
    25
    %
    
    
    233,030
    
    
    
    183,715
    
    
    
    27
    %Tubular Technology and Services
    
    
    101,786
    
    
    
    79,502
    
    
    
    28
    %
    
    
    205,059
    
    
    
    152,622
    
    
    
    34
    %Corporate and Other
    
    
    173
    
    
    
    
    
    
    
    100
    %
    
    
    275
    
    
    
    
    
    
    
    100
    %Total Revenues
    
    $
    431,784
    
    
    $
    316,947
    
    
    
    36
    %
    
    $
    846,209
    
    
    $
    609,043
    
    
    
    39
    %Operating Income (Loss):Drilling Products and Services
    
    $
    78,749
    
    
    $
    43,184
    
    
    
    82
    %
    
    $
    143,761
    
    
    $
    79,551
    
    
    
    81
    %Drill Bits
    
    
    40,814
    
    
    
    20,568
    
    
    
    98
    %
    
    
    76,372
    
    
    
    42,190
    
    
    
    81
    %Tubular Technology and Services
    
    
    29,237
    
    
    
    19,225
    
    
    
    52
    %
    
    
    60,480
    
    
    
    34,486
    
    
    
    75
    %Corporate and Other
    
    
    (18,737
    )
    
    
    (11,704
    )
    
    
    60
    %
    
    
    (36,170
    )
    
    
    (22,763
    )
    
    
    59
    %Total Operating Income
    
    $
    130,063
    
    
    $
    71,273
    
    
    
    82
    %
    
    $
    244,443
    
    
    $
    133,464
    
    
    
    83
    %
 Consolidated Revenues and Operating Income
 Results for the three- and six-month periods ended June 30, 2006 and 2005
    Drilling Products and Services
 Results for the three and six-month periods ended June 30, 2006 and 2005
  24




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##### Table of Contents



Drill Bits
 Results for the three- and six-month periods ended June 30, 2006 and 2005
  Tubular Technology and Services
 Results for the three- and six-month periods ended June 30, 2006 and 2005
  Corporate and Other
 Results for the three- and six-month periods ended June 30, 2006 and 2005
  Other Items
      25




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##### Table of Contents



Liquidity and Capital Resources
 Overview
  Historical Cash Flows
  Six Months EndedJune 30,2006
    
    2005(In thousands)Net Cash Provided by Operating Activities
    
    $
    186,453
    
    
    $
    86,693Net Cash Used in Investing Activities
    
    
    (88,425
    )
    
    
    (13,210
    )Net Cash Used in Financing Activities
    
    
    (40,015
    )
    
    
    (97,177
    )
 Operating Activities
  Investing Activities
  Capital Expenditures
  Financing Activities
  Long-Term Debt
  26




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##### Table of Contents



Stock Repurchase Program
  Recent Accounting Pronouncements
  Forward-Looking Statements and Exposures
  Risk Factors and Exposures
  Off-Balance Sheet Financing
  27




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##### Table of Contents



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
  28




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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)April 1 - 30, 2006
    
    
    3,900
    
    
    $
    47.22
    
    
    
    May 1 - 31, 2006
    
    
    417,305
    
    
    
    44.89
    
    
    
    409,600June 1 - 30, 2006
    
    
    303,382
    
    
    
    43.19
    
    
    
    300,000Total
    
    
    724,587
    
    
    $
    44.19
    
    
    
    709,600
   29




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##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    The election of nine directors to hold office for a one-year term;(2)
    
    Approval of the 2006 Grant Prideco Long-Term Incentive Compensation Plan (2006 Plan); and(3)
    
    Approval of the material terms of the performance criteria for performance awards under the 2006 Plan.
  (1)
    
    Election of Directors:
 Votes For
    
    Votes WithheldDavid J. Butters
    
    
    117,049,756
    
    
    
    2,949,244Eliot M. Fried
    
    
    118,784,638
    
    
    
    1,214,362Dennis R. Hendrix
    
    
    119,055,011
    
    
    
    943,989Harold E. Layman
    
    
    113,282,383
    
    
    
    6,716,617Sheldon B. Lubar
    
    
    116,595,921
    
    
    
    3,403,079Michael McShane
    
    
    117,788,022
    
    
    
    2,210,978Robert K. Moses, Jr.
    
    
    117,043,252
    
    
    
    2,955,748Joseph E. Reid
    
    
    119,515,179
    
    
    
    483,821David A. Trice
    
    
    87,230,428
    
    
    
    32,768,572
 (2)
    
    Proposal to approve the 2006 Plan:
 Number of Votes For
    
    
    93,282,895Number of Votes Against
    
    
    10,254,844Number of Votes Abstain
    
    
    87,552Number of Broker Non-Votes
    
    
    16,373,709
 (3)
    
    Proposal to approve the material terms of the performance criteria for performance
awards under the 2006 Plan:
 Number of Votes For
    
    
    100,987,808Number of Votes Against
    
    
    2,354,622Number of Votes Abstain
    
    
    282,853Number of Broker Non-Votes
    
    
    16,373,717
 30




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##### Table of Contents



ITEM 6. Exhibits
 Exhibit Number
    
    Description4.01*
    
    Grant Prideco, Inc. 2006 Long-Term Incentive Plan
(incorporated by reference to Exhibit 99.1 to Grant
Prideco, Inc.s Current Report on Form 8-K, File No.
1-15423, filed on May 11, 2006).31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification
 
 *
    
    Designates a management or compensatory plan or agreement. 31




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##### Table of Contents



SIGNATURES
  GRANT PRIDECO, INC.By:
    /s/ MATTHEW D. FITZGERALDMatthew D. FitzgeraldSr. Vice President and Chief Financial OfficerBy:
    /s/ GREG L. BOANEGreg L. BoaneCorporate Controller and Principal Accounting Officer  32




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##### Table of Contents



Exhibit Number
    
    Description4.01*
    
    Grant Prideco, Inc. 2006 Long-Term Incentive Plan
(incorporated by reference to Exhibit 99.1 to Grant
Prideco, Inc.s Current Report on Form 8-K, File No.
1-15423, filed on May 11, 2006).31.1
    
    Certification of Michael McShane31.2
    
    Certification of Matthew D. Fitzgerald32.1
    
    Section 1350 Certification
 
 *
    
    Designates a management or compensatory plan or agreement. 33